Block: Chafee plan will decimate RI manufacturing

By Ken Block

Among the many shocking facts that I learned on the campaign trail last year was the fact that there are more than 100,000 illiterate adults in Rhode Island (data from The Poverty Institute).

Rhode Island desperately needs manufacturing jobs to provide employment to our seriously undereducated work force. Governor Chafee’s proposed tax scheme is certain to cause our already decimated manufacturing base to shrink further as some of our remaining manufacturing businesses bolt for less expensive locales.

It is important to remember that Rhode Island’s once vibrant manufacturing industry has withered away due to competition from other regions of our country, and competition from around the world.

Governor Chafee’s tax increases will further deteriorate our already decimated manufacturing industry. To illustrate how the Chafee tax scheme will hurt manufacturing businesses, I will use my traffic-signal manufacturing business as an example.

For starters, Governor Chafee is proposing a 1% tax on “purchases for manufacturing purposes.” Everything that goes into my traffic signals is sourced from other companies. My business assembles the final product and ships the signals out around the country. So, my margins will now shrink by 1% – a huge competitive disadvantage in a highly competitive market.

This 1% tax has a more sinister aspect to it. I source the printed circuit boards for my traffic signals from a Rhode Island-based company. This company has to buy a lot of small electronic components then mounts those components on a circuit board – they are manufacturing my boards for me.

So, the cost of my in-state-purchased, made-to-order circuit boards will go up by 1% because the manufacturer will pass the cost of the 1% materials on to me – and then I will have to pay a 1% tax on the finished circuit board because my business integrates the board into a larger assembly.

I now have a powerful incentive to look for a manufacturer for my circuit boards outside of Rhode Island. I can save 1% on the cost of my boards by doing so and I can save 2% on the boards by moving my manufacturing business out of the state!

The majority of states do not tax the raw materials used in manufacturing. More importantly – our immediate neighbors do not have this tax.

If Rhode Island has a stated goal to increase the number of manufacturing jobs in the state, the proposed Chafee tax scheme takes the entire industry in the opposite direction.

We know that consumer behavior can be modified through tax policy. Witness the existing tobacco taxes and the proposed tax on sugary drinks for prime examples. We aren’t going to get new manufacturing businesses to locate in Rhode Island by increasing the cost of doing business in the state. We have already witnessed a mass exodus of vital manufacturing businesses to lower cost regions. Why can’t our leaders see that by increasing costs further that we will only cause more of these businesses to leave our state?

Additionally, other elements of Governor Chafee’s tax plan will result in a significant increase in the cost and headache attached to doing business in Rhode Island.

For example, the governor proposes taxing a whole range of goods and services used by businesses. Some of these goods and services are provided by Rhode Island-based companies, and some not. Where the company providing the good or the service is not based in the state, it would be up to the purchasing Rhode Island-based company to track, file paperwork and pay a “use tax.”  This is a substantial new regulatory burden to place on Rhode Island businesses (although it may stimulate some additional spending on accounting services).

Business owners have a choice on where to locate their businesses. Ultimately, most owners will choose a location that provides their business with the best chance of achieving long-term success. Rhode Island, which has for years been suffering from not being competitive in terms of the cost of doing business, will become substantially less competitive with the Chafee tax scheme.

Tax policy and regulatory burdens absolutely drive business decisions regarding where to locate a business.

Governor Chafee has to decide if he wants to encourage the creation of manufacturing jobs or the destruction of manufacturing jobs in Rhode Island. In the same way that you cannot lose weight while gobbling every sweet and fatty food in sight, you cannot encourage the creation of manufacturing jobs in Rhode Island while making Rhode Island’s manufacturing industry even less cost competitive than it is today. •

Ken Block is founder of the Moderate Party of Rhode Island and a former candidate for governor.

Ted Nesi will return on Friday.

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