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The Providence Journal, Editorial Page, March, 1998

Now that our state’s economy is doing so well, we are finally in a position to make some pleasant choices. The most pressing of these at the present time concerns what to do with the "excess" proceeds derived from the portion of the sales tax dedicated to the repayment of DEPCO debt. Noting that property taxes in this state are too high, Governor Almond has proposed returning the excess to homeowners, resulting in per-residence savings of approximately $135 to $150 annually. Others, most notably the Rhode Island Public Expenditure Council, have indicated their preference to use these funds to pay off the DEPCO debt off as soon as possible.

Both sides in this debate have made valid points. Property tax rates in this state are far too high. Re-directing sales tax revenue, derived from a highly regressive tax, to homeowners improves fairness. On the other hand, paying off the DEPCO debt allows us to reduce our state’s already high debt burden -- according to Moody’s, Rhode Island ranks third nationally in terms of tax-supported debt.

What should we do with the excess sales tax revenue? What I am about to propose has, up to now, failed to emerge as part of this debate. It explicitly links fiscal policy in the short-run and the long-run, while addressing one of Rhode Island’s most pressing problems at the present time: the lack of educational quality and a mechanism to assure the adequacy of funding in the future.

In the short-run we should use the excess funds to pay off the remaining DEPCO debt. Once this has been repaid, the entire 0.6 percent of the sales tax formerly directed to DEPCO should be allocated to educational funding at all levels. Consider the benefits of following this approach. First, even in bad times, there would be a fairly sizeable amount of funding generated for education. These funds would make it far easier for the state to move the proportion of funding for primary and secondary education back towards the 60 percent it once comprised. As the state’s percent contribution rises, it will then be easier for towns and cities to reduce their property tax rates. If necessary, legislation could be passed that mandates a tradeoff between increases in the state’s funding proportion and percentage declines in property tax rates. Second, this could be a critical element in the long overdue process of modifying the pervasive view of persons in state government that we can only afford to spend more on public higher education in good times, when we have extra money. Finding a way to sustain the current quality of public higher education in this state is critical to our future since the external benefits generated by public higher education are so substantial. The Economic Policy Council’s (EPC) report recognized this fact. Its recommendations call for our state’s higher education system to assist in research, development and partnerships with business. Unfortunately, the EPC overlooked the fact that successfully attaining these goals cannot occur unless we assure sufficient funding for public higher education. Third, the proposed policy will allow us to speed up what is currently viewed as a savior of educational quality here in the future, Article 31. While Article 31 introduces much welcome change to our educational system, it does not deal with the adequacy of overall educational funding. Implementing curriculum reform and accountability without simultaneously attacking the problem of funding in a state as political as Rhode Island means that it will take probably 3-5 years before we begin to realize substantial improvements in educational quality. Unfortunately, it is quite possible that a national recession will occur before the five-year period has elapsed. How far will we be able to progress if, just as we finally arrive at a way to implement quality and determine the required funding, our economy slows and our ability to afford that funding is diminished? The additional funding that will result from the implementation of my proposal might end up being one of the final pieces required before Article 31 can be truly successful. As such, it can potentially play a meaningful role in improving the overall educational quality of primary and secondary education in this state.

The downside to my recommendation is that sales tax revenue is highly cyclical. When our economy slows, tax revenue will either decline or begin to grow more slowly than the rate of inflation, resulting in a decline in the real funds it generates. But hasn’t the growth in educational funding historically slowed along with our economy anyway? Actually, there is even an offset to this downside. In "exceptional" years such as 1997, where sales tax generated educational revenues grow faster than needs dictate, part of the "excess" can be used for the "pay as you go" financing of maintenance, avoiding the issuance of new debt for these purposes. This will allow us to institutionalize this practice, something Governor Almond is working very hard to do at the present time.

I believe very strongly that the advantages of this policy recommendation far outweigh its downside risk. More importantly, my proposal will finally provide Rhode Island with an explicit link between consumption spending, which we do a great deal of, and investment expenditure, which we tend to do too little of. Think about it: buy a $20,000 car and contribute $120 to public education in this state. Sure beats the heck out of cake sales!

by Leonard Lardaro

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