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From Governing’s
But doing well in New England is a relative achievement. The state still suffered a shrinkage of capital gains revenue last year. It responded with some significant moves, raising the cigarette tax from 71 cents to $1 a pack; spending a chunk of its tobacco settlement money; and decoupling its personal income tax from the federal system. This was a sensible move. Now, if Congress continues to cut taxes, Rhode Island won’t have to follow suit. “We’re not as subject to the federal whims as we were before,” says R. Gary Clark, state tax administrator.
Still, Rhode Island faces some knotty problems. Its gasoline tax, for example, is the major source of money for transportation, as well as a few other programs in the general fund. But even though this is the highest gas tax in the country, it’s far from adequately funding the state’s transportation needs. Even more worrisome is the dependence of Rhode Island localities on high property taxes. The locals here get about twice as much of their revenue from property tax receipts as the national average. “Everywhere you look at Rhode Island’s tax system, you come to the conclusion that it’s out of balance, because it’s overly weighted on the property tax,” says Gary Sasse, president of the Rhode Island Public Expenditures Council. In the past couple of years, the legislature took two steps to address that long-term problem. It mandated a 10-year phase-out of the local taxes on business inventory, and it began a seven-year phase-out of the car tax. The revenue loss from both of these actions was to be made up by the state. But with the exemption on automobiles set to jump from $3,500 to $5,000 last year, it became clear that the state didn’t have enough money coming in to cover the shortfall. So the legislature took the sensible step of halting the phase-out at the first $4,500 of an automobile’s value. “There was no major screaming,” says one close observer. “And now it’s not a priority to move it up again. It can be moved up whenever there’s extra money.” Even with the less ambitious car-tax cut, the state is paying $100 million to localities to make up for the forgone revenues. Coincidentally, that’s about the same as the current year’s deficit. Could the state simply decide to stop reimbursing its localities? Highly unlikely. Legislators know that they will lose credibility with local leaders if they renege on this commitment. In 2001, Rhode Island promised another piece of tax relief that it may have to reconsider. It decided to follow the lead of neighboring Massachusetts and eliminate capital gains liability on assets held more than five years. That change is supposed to take effect in 2005. It may or may not. “It was something they could afford at the time, especially since it was out five years in the future,” says Clark. “So it was easy to pass. Now, the date is getting closer and budgets are tighter.” The state’s sales tax, meanwhile, is at 7 percent. That’s a relatively high rate, even with local add-ons prohibited, but it doesn’t bring in as much as it might because it’s collected on a relatively narrow base. Not only does Rhode Island fail to tax most services, it has passed a broad array of exemptions that make the revenues even smaller. In an apparently successful effort to rescue the state’s boating industry, it eliminated all sales taxes on boats. It helped its car dealers by exempting cars (although not trucks or motorcycles) if they are traded in. And it is one of only a few states to entirely exempt all taxes on footwear and clothing. “A bunch of clothing retailers worked harder and harder and harder, and they were finally able to get that through,” says Clark. “It seems that we’ve done a lot of the exemptions because there was tremendous lobbying.” Unfortunately, when it comes time to ask detailed questions about Rhode Island’s taxes, the information available to the legislature is often less than adequate. “There should really be more emphasis on tax research,” says Russell Dannecker, the state Senate’s fiscal adviser for the past 16 years. “They often don’t have all the necessary data available.” The state does some good data matching — as with child support payments — to catch tax evaders. It also makes sure that vendors who sell to the state pay every tax dollar owed, by subtracting that money from the payments due them when necessary. But Rhode Island needs an updated collections system that will allow its tax managers to focus their efforts on the most fruitful areas for bringing in more tax dollars. Tax administrator Clark argues that his staff is doing a reasonable job given the tools it has, but the tools are more like steak knives than lasers. Rhode Island is way behind the curve for online filing, for example. “It’s very difficult for us to get money,” he says. “We’re lost in a sea of paper. We’re still almost in a manual stage.” Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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hode Island’s tax structure is under less immediate pressure than most of its New England counterparts. The state is struggling to close a fiscal hole between $100 million and $150 million (about 4 to 6 percent of the state’s budget), but that’s a drop in the bucket compared with neighboring Connecticut or Massachusetts, particularly since Rhode Island revenues are starting to come in on target again.