Header, the Administration of the Honorable Lincoln C. Almond
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July 11, 2001


In accordance with the provisions of Rhode Island General Laws § 43-1-4, I am transmitting herewith, with my disapproval, 2001-S 0829, Substitute B2, As Amended, "An Act Relating to Taxation."

This bill would establish an exemption for ten years from Rhode Island's 7% sales and use tax for municipal economic development zones (MED) and designate an area in the town of West Warwick as such a development zone. Excluded from the sales tax exemption are sales of automobiles, furniture, home furnishings, including mattresses and oriental rugs, tobacco products and packaged alcoholic beverages. An amendment limited qualifying sales to those actually made in the MED, but delivery could be at any location in West Warwick. Existing Rhode Island businesses could open a branch in the MED, but could only relocate and leave their existing location by increasing total employment by 50%.

This bill requires that a business must be located within the MED to qualify for the sales tax exemption. A business may, however, have its warehouse and storage facilities located anywhere within West Warwick. Thus, any business would be able to establish a store front for sales within the MED, but have its inventory located anywhere else in the entire town of West Warwick. This is a great advantage to all of West Warwick, not just the MED, and it would certainly lead to existing businesses in the state opening branch offices in this area.

If allowed to become law, this bill would open up a pandora's box. Presently, Rhode Island's sales and use tax (with respect to all goods subject to it), applies uniformly throughout the State, regardless of where the goods are sold. This bill, for the first time, would eliminate that uniformity. Bad consequences would result. If one community is allowed to welcome businesses which do not charge consumers sales taxes, that puts all other Rhode Island municipalities and businesses without a branch in the MED at a competitive disadvantage. That is because the total cost to consumers for the same product will be 7% less for a business with a branch in the West Warwick MED, than the same product sold by the same company anywhere else in the state. Businesses would therefore be strongly inclined to open a branch in the MED, especially as their competitors did so. Indeed, this is the very purpose of the legislation. In fact, the laundry list of exceptions added to the bill by amendment "automobiles, furniture, home furnishings, including mattresses and oriental rugs, tobacco products and packaged alcoholic beverages" are in part the result of complaints from businesses who learned of the bill and did not want to be put at a competitive disadvantage.

As consumers flocked to purchase tax free goods in the MED, other communities would no doubt seek the same tax free MED to spur economic growth in their blighted areas. As more communities received MED status, a significant drain on Rhode Island's sales tax coffers would occur, potentially imperiling that vital source of state revenue.

Even if no other community were ever allowed MED status (a situation I find hard to imagine), this bill would still be highly problematic. For moderate to high ticket items such as jewelry, furs, computers and appliances, the price difference to the consumer could be substantial, in the hundreds of dollars. As long as the business had a storefront in the MED and warehoused the product somewhere in West Warwick, its sale would be tax exempt to the consumer. The potential exists for such stores to locate in the MED and sell the products purchased there at 7% less than the same product purchased anywhere else. As such, even limiting the MED for all time 10 this one MED (something this bill does not attempt to do) has the potential to wreak havoc with Rhode Island's sales tax collections.

The principal goal of my Administration has been economic development for Rhode Island. We have had tremendous success in this area, and much of it is owed to the state's policy of using tax incentives as investments to spur business development. We have reduced the state's personal income tax rate, we have the nation's highest research and development tax credit, we have reduced the inventory tax, we have attractive investment tax credits, and I am pleased to add that this year we are embarking upon a program to eliminate the state's tax on capital gains. These tax structure changes have benefited the state as a whole, and each of our communities.

I have and will continue to work with elected officials from West Warwick to help spur economic development opportunities for the community. This bill, however, represents unsound public policy when viewed on a statewide basis.

For the foregoing reasons, I disapprove of this legislation and respectfully urge your support of this veto.


Lincoln Almond