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Unpublished preferred version of article appearing in The Providence Journal, Editorial Page, February, 2000

(Want to look at one major reason why property taxes in RI are high and are likely to remain so for a long time?)

By now, just about everyone in this state is aware of the fact that Rhode Island's current economic performance is the best it has been in a decade. Examples of economic strength abound: retail sales continue to be "off the chart"; existing home sales just set their fifth annual record; and Rhode Island is currently at full employment.

Rhode Island has now been a service and information based economy for more than a decade. The rapid pace of technological advance and heightened globalism that have accompanied this structural transformation have redefined what we must do to survive and flourish in this type of economic climate. Fortunately, or unfortunately, the prerequisites for success today are very different and far more demanding than they were back in the good old days when Rhode Island was a manufacturing-based economy. One of the reasons for this concerns the ever-present structural changes that we face: as businesses continue to introduce labor-saving technology and "state of the art" managerial methods that are beneficial to us in the long-term, we experience the persistent negative of layoffs that slow our momentum in the short-term. As a result, judging where we are at any point in time and the appropriate policies that we need to adopt to get where we want to be in the future has evolved into a far more complicated exercise. Education, educational funding, and a viable tax system have moved to center stage.

How well has Rhode Island performed in this climate? The answer to that question depends greatly on the perspective one takes. When I first began to analyze and forecast Rhode Island's economy in the early 1990s, I felt that it was appropriate for me to adopt a parochial perspective, based on the mitigating circumstances of major defense cutbacks and the lingering effects of a serious banking crisis. As the justification for continuing that perspective faded, I moved toward what I feel very strongly is the most appropriate way to view Rhode Island at present, comparing it to both New England and the US.

This has brought about a very noticeable change in the tone of my comments about the Rhode Island economy. Why? Because Rhode Island's economic performance is as different as is possible when viewed in terms of these alternative perspectives. Based on a parochial view, we should break out the champagne, since Rhode Island is performing the best it has in a decade. But, from a comparative view, maybe we should get the Excedrin: not only does Rhode Island continue to lag both the nation and New England in terms of job growth, it is projected to have the slowest job growth of any state through the year 2003!

Until today, any in-depth analysis of Rhode Island's fundamentals that I undertook caused me to become ever more pessimistic about Rhode Island's future. After all, we have finally arrived at the window of opportunity we were dreaming about back in 1991, a strong economy and full employment, and yet we seemed to lack the mindset and the political will to make the most important changes needed to assure our success as a service based economy. The "prime time players" for success in this era, educational quality, a mechanism for funding education that is independent of the whims of the business cycle, and a viable tax system, seemed more like wishes than anything that we could expect to attain any time soon.

As I said, that was until today. Governor Almond, I applaud you for having the courage to propose several critical steps that are necessary for Rhode Island to progress more rapidly toward success in the service era. Hopefully, as the result of your leadership, Rhode Island 's investment in education will be increased at the expense of the consumption-oriented auto excise tax whose phaseout was not only unaffordable, but whose continued funding would have claimed virtually all of our budget surpluses in just a few years.

Ending the phase-out now is the correct thing to do. I honestly can't think of any program here that has produced so few tangible benefits (aside from the persistent hype) to individuals at so great a cost. The suggestion by some that Rhode Island could avert a property tax revolt at the same time the "giant sucking sound" of the auto tax phase-out is taking its toll is little more than public relations folly. The auto excise tax phase-out is a classic example of treating symptoms and not problems. The driving force behind property tax increases here is educational funding, something that will become ever more demanding as we progress further into the implementation of Article 31.

The good news is that our ability to provide a funding mechanism for education that is immune to the business cycle is also attainable, even in the short term. Not only can we claim the ill-directed resources that would have gone to the auto tax phase-out, but, with the DEPCO debt just about paid off, about $40-$50 million from the excess sales tax revenue will soon be available annually. As I stated in an editorial back in 1998 (Use "Excess" Sales Tax Revenue for Education), diverting this excess tax revenue to education will provide Rhode Island with a direct link between consumption and investment (in education). So, in good times like now, when sales tax receipts are high, some of the funds generated will permit us to afford quality education in lean times. More importantly, this added funding will allow our state to more closely approximate the 60 percent educational funding rate that it aspires to without the need to add a state property tax. And, the leverage of providing these funds to cities and towns can be used to impose restrictions on their ability to increase property tax rates. This leads me to pose the following question: when the excess sales tax revenue is added to the discussion of property tax reforms, how necessary or inevitable is a property tax revolt?

Governor Almond, if we fail to suspend the auto excise tax phaseout, the soon to be available excess sales tax revenue will more than likely be diverted to that phaseout -- a travesty that your proposal will hopefully allow us to avoid. If nothing else, your proposed actions will liberate all of those who have bemoaned the lack of educational funding while at the same time supporting continued funding for the auto excise tax phase-out from their persistent bouts with hypocrisy.

Once again, let me applaud you Governor Almond for proposing the critical first steps needed to move Rhode Island along the path it can and should go. It is not inevitable for Rhode Island's economy to continually lag the nation or the region. Your proposed actions today hold the promise of once again restoring my faith in Rhode Island's economic future. I can't thank you enough for that.

by Leonard Lardaro


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