2002 No Action
2001 No Action
2000 No Action
1998 No Action
1995 No Action
June 11, 2002 TO THE HONORABLE, THE SENATE:
In accordance with the provisions of Rhode Island General Laws § 43-1-4, I am transmitting herewith, with my disapproval, 2002-S 2522, As Amended, "An Act Relating to Taxation."
This bill would allow certain financially distressed communities to establish municipal economic development zones (MEDs) to obtain exemptions for businesses in those zones from collecting half of Rhode Island's 7% sales and use tax, effectively charging the consumer a 3.5% sales tax rate. Excluded from the sales tax exemption are sales of motor vehicles; furniture; home furnishings, including mattresses and oriental rugs, tobacco products and packaged alcoholic beverages. The other half of the sales tax actually collected and turned over to the State would be returned to the municipality for use solely in the MED. As such, the State would keep no sales tax generated in the MED. Existing Rhode Island businesses could open a branch in the MED, but could only relocate and benefit from the exemption by increasing total employment by 50%. The bill authorizes a defined MED district in West Warwick.
I vetoed a substantially similar bill last year. For the same reasons I disapprove of this one. If allowed to become law, this bill would open up a can of worms. 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. Undesirable consequences would result. If one or more communities are allowed to welcome businesses that charge consumers a discounted sales tax, it would put all other Rhode Island municipalities and businesses without a branch in the MED at a competitive disadvantage.
The incentive for businesses to open a branch in the MED would be irresistible, especially as its competitors did so. Indeed, this is the very purpose of the legislation. The extensive catalog of goods exempted by the bill are in part a result of objections raised by those businesses who learned of the bill and did not want to be put at a 2002-S competitive disadvantage. The bill also penalizes businesses already in the MED by denying them the lower sales tax unless they undertake "new construction," assuming they even have land available to do so.
This bill has the further potential to wreak havoc with Rhode Island's sales tax collections. Businesses located in the MED would be able to sell their products for 3.5% less than the same product purchased anywhere else in the State. For moderate to high-ticket items such as jewelry, furs, computers and appliances, this price difference to the consumer could be substantial, in the hundreds of dollars. As consumers flock to purchase goods at the discounted tax rate in the MED, other communities will seek the same reduced tax MED to spur economic growth in blighted areas. As more communities obtain MED status, a significant drain on Rhode Island's sales tax coffers would occur, potentially imperiling that vital source of State revenue.
The preface of the bill claims that the Providence Place Mall legislation and the Fidelity project, among others, serve as precedent for this bill. They do not. Unlike the proposal in this bill, no goods and services in the mall subject to the State sales tax are exempt from any part of the tax, nor is any of the multi-million dollar annual sales tax revenue to the State returned directly to the City. The mall has no competitive sales tax advantage over any other Rhode Island business. Likewise, no employee at Fidelity is exempt from the State income tax, so no other business is at a competitive disadvantage with respect to income taxes paid by its employees. Only this bill cuts the State sales tax in half and returns the other half to the selected municipality.
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 Stare's policy of using tax incentives as investments to spur business development statewide. We have reduced the State's personal income tax rate by 10%, we have the nation's highest research and development tax credit, we have reduced the inventory tax, and we have attractive investment tax credits. These tax structure changes have benefited the State as whole, and therefore each and every one of our communities.
I have and will continue to work with elected officials from the cities and towns to help spur economic development opportunities for our communities. This bill, however, represents an unsound public policy of playing favorites both as to municipalities and the businesses affected.
For the forgoing reasons, I disapprove of this legislation and respectfully urge your support of this veto.