VP's economist: Don't raise sales tax

PROVDIENCE, R.I. (WPRI) - Gov. Lincoln Chafee may be risking Rhode Island's economic recovery by pushing a sales tax increase and should look at the income tax for revenue instead, a former top Obama administration official said Thursday.

"It’s very important not to whack your consumer base at a time like this," Jared Bernstein, who was Vice President Joe Biden’s chief economist and economic adviser until last year, told WPRI.com.

A self-sustaining recovery will flow from workers getting larger paychecks, which lets them consume more, which leads businesses to spend more to meet demand, said Bernstein, who left the administration in 2011 and is now a fellow at the Center on Budget and Policy Priorities, a liberal think tank in Washington.

"That’s the way recoveries evolve," he said. "If you go after your consumption base right now, you could jam that system."

Chafee's proposed budget for 2012-13 for $93 million in tax increases and other new revenue, including a rise in the meals and beverage tax from 1% to 3% and an expansion of the 7% sales tax to cover more items, including clothing that costs more than $175.

Bernstein suggested a better option for increasing state revenue would be to raise income taxes on wealthier Rhode Islanders. A bill introduced in the General Assembly would raise the income tax rate by 3% on residents who make over $250,000, but Chafee and House Speaker Gordon Fox have basically ruled that idea out.

"Those folks are less liquidity-constrained," Bernstein said. "It’s not that they won’t object or they won’t feel it ... but it is true that the marginal dollar to a middle-class person is more likely to enter that virtuous cycle than the marginal dollar of someone at the very high end of the scale."

"If you were looking for a way to raise tax revenue that was least injurious to growth you’d go to the high end for those reasons," he said.

In an extended interview with WPRI.com's Ted Nesi, Bernstein offered his thoughts about Medicaid, the stimulus law, why Rhode Island's economic recovery is lagging the nation's and what the state can do to catch up. Click here to read the full interview.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi's Notes blog. Follow him on Twitter: @tednesi