Tax economist and CEO of The Maine Heritage Policy Center J. Scott Moody testified Wednesday before the Rhode Island House of Representatives in support of a proposal to eliminate entirely that state’s sales tax.
As Maine’s own Legislature debates the so-called Gang of Eleven’s proposal to expand the sales tax base and increase the sales tax rate, Moody shared with a fellow New England state how high sales taxes undermine economic growth.
“Increasing taxes on the private sector has two consequences,” said Moody. “First, higher taxes will mean less money in the pockets of individuals and businesses which will reduce their ability to invest for the future. Second, greater public spending will crowd-out the private sector in competition for scarce labor and capital.”
Using the example of New Hampshire and Maine, Moody showed how differing tax strategies have allowed the former state to prosper while the latter state struggles. This, said Moody, is due to three reasons:
“First, the sales tax is a tax on investment. The sales tax is inherently flawed because it can never be fully eliminated on business investments. It is especially detrimental to the manufacturing and construction industries where their equipment and material costs are subject to the sales tax. According to a recent analysis by the Council on State Taxation, in FY 2011 businesses paid an estimated 55 percent of all sales taxes—in Maine it was approximately 40 percent and in Rhode Island it was approximately 49 percent.
“Secondly, a significant part of New Hampshire’s private sector is actually derived from Mainers who cross-border shop at New Hampshire stores. According to my analysis of data from the U.S. Census Bureau, Mainers are spending up to $2.2 billion per year in New Hampshire. This is entirely driven by higher sales and excise taxes in Maine. A similar analysis was done on the Vermont-New Hampshire border and showed Vermont losing up to $540 million in retail sales.
“Thirdly, the sales tax imposed higher tax compliance costs on Maine businesses that drain away much needed money and time.”
Moody urged Rhode Island lawmakers to vote in favor of eliminating the state’s sales tax, a move he says will portend dramatic economic benefits.
“Overall, eliminating Rhode Island’s sales tax offers the best “bang for the buck” when it comes to economic development by putting money back directly into the hands of entrepreneurs ranging from small, mom-and-pop retailers to large, high-tech industries.”