Letter to the Editor: Make Sure Tax Reform Doesn’t Fade

Last year, Rhode Island’s lawmakers very wisely chose to remove a large number of tax breaks from the state’s Swiss cheese tax code.  Now Ocean State lawmakers have an opportunity to shore up that newly reformed code against the inevitable flood of special interest tax breaks that’s sure to come.
 
The lifecycle of most tax systems follows a predictable pattern.  Start with a relatively simple system that’s efficient and easy to understand.  Then, introduce a bevy of tax breaks and giveaways, and watch the calls for comprehensive tax reform begin to pile up as a result.  Finally, after years of lengthy debates, numerous special commissions, and plenty of horse-trading, a tax reform package is enacted that wipes out a significant number of those tax breaks.
 
But the story doesn’t end there.  Every tax break that’s been eliminated has a supporter that will begin working to restore it the very next day.  And lobbyists pushing for new and original tax breaks certainly don’t care that the state’s tax system has just received a makeover.  Given enough time, the lobbyists are usually met with success.
 
In this sense, “tax reform” is little more than a Band Aid on a system that’s hopelessly biased in favor of the opposite outcome – call it “tax deform.”  Fortunately, there are simple steps that can be taken to reduce this bias, and bipartisan legislation before the Rhode Island House Finance Committee seeks to do exactly that.
 
Tax deform occurs so easily in part because tax break provisions are usually written to continue indefinitely.  If the government tries to reduce unemployment through a direct spending program – like a job-training initiative – that program will come up for review each year as part of the normal budget process.  Periodic reviews of this type are incredibly important, since there’s no guarantee that a program created years in the past is still appropriate today, or that the program was even effective in the first place.
 
But a tax break with an identical purpose – reducing unemployment – is generally an open-ended commitment, and doesn’t come up for periodic review.  So if the legislature can be convinced in any one year that a particular tax break should exist, that break will be allowed to continue indefinitely, without any requirement that it be brought up for a vote, or even a debate, at some point in the future.
 
Fortunately, a handful of Democrats and Republicans in the House – including Rep. Savage (Republican - East Providence) – have come together to address this bias by proposing legislation that would require any new tax break to “sunset” (or expire) within seven years of its creation.  At the end of those seven years, lawmakers would be able to debate and vote on whether to extend the break.  This reform is an important step forward, and also a very moderate one: after all, seven years is a long time to wait between votes, and the bill wouldn’t apply to tax breaks already on the books.
 
Also contained in this legislation are reforms designed to fill the startling informational void that surrounds far too much of Rhode Island’s tax code.  Recently, the Rhode Island Department of Revenue released a report revealing that it was incapable of estimating the cost of nearly 40% of the state’s tax breaks.  Even worse, the Department couldn’t even find an explanation of what 90% of Rhode Island’s tax breaks were intended to accomplish.
 
The issue here isn’t a lack of effort or skill – the Department is undoubtedly doing the best it can with available data and resources.  Rather, Rhode Island’s lawmakers need to do a better job of laying out clear objectives for each tax break they create, and of setting measurable standards of success so we can know whether those objectives are being met.  This new legislation would require lawmakers to do both of these things.

Rhode Island has an opportunity to make real progress on reining in the unfortunate tendency toward “tax deform.”  Slowing the growth of unwarranted tax giveaways – while allowing tax breaks that work to continue – will pay great dividends for Rhode Island in the form of a simpler, fairer, and more efficient tax system in the years ahead.
 
Carl Davis is a senior analyst at the Institute on Taxation and Economic Policy (ITEP).