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Friday, August 31, 2012

Accountability needed for corporate tax welfare

New report highlights necessity of tax expenditure evaluation, Tanzi says
by the Legislative Press and Public Information Bureau

STATE HOUSE – More than $1.73 billion of state revenue was given up through tax expenditures in 2009, according to the 2012 Tax Expenditures Report published recently by the Office of Revenue Analysis, all without regular review to determine the state’s benefit, said Rep. Teresa Tanzi.

“Tax expenditures are just another way the state spends money,” said Representative Tanzi (D-Dist. 34, Narragansett, Wakefield and Peace Dale), who has introduced legislation that would help lawmakers begin to evaluate the effectiveness of tax expenditures. “Every year state legislators are asked to approve a budget that outlines how the state will spend its limited resources, but no one is looking at the nearly $2 billion we are foregoing annually in tax expenditures.”

Rep. Teresa Tanzi
The report issued by the Department of Revenue’s Office of Revenue Analysis on Aug. 16 attempts to estimate the cost of each of the 235 tax expenditure programs in Rhode Island, although in 80 cases, the state could not calculate any cost, stating “no reliable data exists from which to derive an estimate.” The information – and in some cases the lack of information – should be of concern to citizens and state leaders, said Representative Tanzi, because it represents a huge sum of money that the state is spending through the tax code.

Once a tax expenditure is added to the tax code, it can remain there indefinitely without any scrutiny or evaluation of whether it is necessary or yielding a positive return for the state’s economy or taxpayer.

For the past two years Representative Tanzi has introduced legislation with strong bipartisan support requiring any new tax break to include a statement about what it is supposed to accomplish, ways to measure outcomes, and expiration dates that would provide the General Assembly with an opportunity to positively reaffirm its effectiveness on a systematic basis.

She has also submitted and will continue to introduce legislation creating a commission to review all existing tax expenditures and make recommendations over time as to whether to maintain, strengthen or eliminate the 235 preferences that currently exist.

“We need a formal process that will require state leaders to ‘prove it or lose it’ when it comes to the long list of tax expenditure that already exist,” said Representative Tanzi.

The term “tax expenditure” encompasses many forms of tax breaks, including credits, deductions, exemptions, preferential rates and others. While some have obvious value (like the sales tax exemptions for food and most clothing, which help make those necessities more affordable) most are never evaluated by the state to see whether the investment is paying dividends for the state or its citizens.

Representative Tanzi said her interest is not eliminating tax credits and exemptions, many of which provide obvious benefits that sustain citizens, workers and small businesses, but refining them and making sure they are performing as effectively as possible for the benefit of Rhode Islanders and the state’s economy.

“Some of these expenditures were written 10 or 20 years ago and are in desperate need of review. No company I know of would write a business plan and not change it for a decade or even five years and expect to stay competitive in today’s marketplace. Why would we expect our tax code to be any less nimble in times of rapid changes in the business landscape?” she said. “It’s actually not a break but a disservice to businesses that we do not respond more systematically and comprehensively to the changing markets by updating the tax code more thoroughly.”

That lack of comprehensive evaluation also means that the state may have inaccurate information on the cost of some expenditures, resulting in significant errors and assumptions, Representative Tanzi said. For example, the 2012 report revealed that the amount of revenue being forfeited for a tax exemption that prevents elements of a product manufactured in the state from being subjected to sales tax both as a component and as a finished product was $305 million in the 2012 report. But modeling software significantly underestimated it at only $27 million in 2010. While Representative Tanzi doesn’t deny the legitimacy and usefulness of that particular exemption, she pointed to the lack of information about its true cost that year as an example of why the state needs to thoroughly evaluate each tax expenditure.

“Rhode Islanders are rightfully upset about a poorly vetted $75 million loan guarantee for 38 Studios, but in this case we essentially spent $305 million on a tax exemption that modeling software projected would cost $27 million. That’s a much bigger figure and a clear sign that these preferences need to be reviewed, evaluated and updated often. It’s a good program, certainly, but the state needs to plan accurately for its true cost, and should be positive it and all other tax expenditure programs are working the way they were projected,” she said.

The full report is available on the Department of Revenue’s website at