Chafee proposes tax hikes to boost aid to schools

PROVIDENCE – In a state of the state speech promising “the future is today for our cities and towns,” Gov. Lincoln D. Chafee Tuesday unveiled a $7.94 billion state budget for fiscal 2013 that boosts spending on local schools by extending the reach of the state sales tax and cutting spending on areas including health care services.

The budget, which represents a $241.5 million, or 3.1 percent, spending increase from the fiscal 2012 budget, would tax transactions now exempt from the 7 percent sales tax, such as pet supplies, taxi rides, freight shipments, car washes, warehousing, storage and clothing items worth more than $175. The combined sales tax increases are projected to contribute $27.1 million to state coffers.

To pay for a $38.2 million increase in school aid – including $11 million above the current education aid funding schedule – Chafee’s budget would raise $39.5 million by hiking the tax on restaurant bills from 1 to 3 percent. Added to the sales tax, the total tax rate for food and drink purchases would rise to 10 percent.

“Cuts in state aid to cities and towns have not only led to higher property taxes and stifled job creation, it has also drawn resources from our schools,” Chafee told lawmakers gathered at the Statehouse. “If we want our children to compete for the jobs of the future, they must have good schools. I am proud to announce tonight that my budget maintains my commitment to education, while also reducing the financial burden on Rhode Island property taxpayers.”

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Taxes on tobacco would also rise, from $3.46 to $3.50 for a pack of cigarettes and from 50 cents to $1 per cigar. Small cigars would be charged as cigarettes and four new tobacco tax investigators would be hired, bringing a combined boost in smoking-related revenue to $7.2 million

Vacation room rentals at bed and breakfasts and other establishments with less than three rooms, now exempt from state hotel tax, would be subject to the tax, bringing in an estimated $1.9 million. $300,000 will go to the R.I Economic Development Corporation’s tourism-promotion campaign.

“I know that this will be controversial, but the money we raise will go to the most important investments we can make: educating our young people and helping the property taxpayer,” Chafee said.

Central to Chafee’s campaign to help cities and towns has been an effort to help solve the budget crises in many of the state’s larger communities resulting from unfunded and burgeoning local pension plan liabilities.

While the budget did not contain any provisions relating to the locally run pension plans, Chaffee in his speech promised again to file separate legislation on the issue “soon.”

“I will soon introduce legislation that provides a path to solvency for our underfunded local plans,” Chafee said. “My budget provides revenue to cities and towns, but at the same time we must empower these municipalities through legislation that strengthens their abilities to make reforms. The fiscal health of our state relies on the well-being of our cities and towns, and I urge you to join me in this effort.”

Chafee’s focus on raising revenue by broadening sales and use taxes in the budget proposal, his second as governor, echoes the tax proposals in his first budget, most of which were not approved by the General Assembly. Like last year, the sales tax proposals are expected to face rugged opposition from the hospitality sector and other affected industries.

In a briefing on the budget Monday night, Chafee administration officials pointed out that charging sales tax to clothes and shoes worth more than $175 matched current rules in Massachusetts, although the sales tax rate there is 6.25 percent.

“Much of the money is paid by people from outside the state,” said Director of Administration Richard Licht about the proposed meals tax hike. “We’re talking about 2 cents on a pizza. I don’t think this is going to make restaurants uncompetitive.”

Along with education, another major focus in Chafee’s budget is fixing a long-standing structural deficit in the department of transportation caused by flat gas-tax collections and increasing roadway maintenance costs.

In the budget, Chafee proposes an end to the transportation department borrowing money each year to match federal highway dollars.

Instead, the budget calls for refinancing transportation debt and moving to a pay-as-you-go system.

To pay for this, Chafee would put in place immediately a series of driver’s license and vehicle-registration fee increases lawmakers intended to phase in over three years. Instead, under the proposed budget, the full $30 hike in the biannual registration fee would take effect Jan. 1, 2013, as would the full $30 increase in driver’s license fees. Speeding up the increases would bring in an additional $13.6 million, budget writers estimated.

The state has been aggressively looking to institute new highway tolls, and as part of the budget would transfer the Sakonnet River Bridge and Jamestown-Verrazano Bridge to the turnpike and bridge authority. Under the plan tolls would be charged on the Sakonnet River Bridge.

On the spending side, the budget has identified approximately $25 million in cost savings in human services and medical assistance, led by a 4.14 percent across-the-board cut in payments to Medicaid providers.

To bolster the incentives available to the EDC to lure businesses to the state, the budget proposes bringing back the “project status” program that provides expanding companies sales tax breaks on their building-material purchases. The program, which was eliminated last year, is estimated to cost the state $1 million. The program would be revised so retail projects would not be eligible and would be funded through the sales tax.

Other budget highlights include:

  • A proposed ballot question on borrowing $65.2 million for a new joint University of Rhode Island and Rhode Island College nursing school, plus $44.7 million for new Rhode Island College buildings.
  • $20 million for the installation of wireless Internet in public school classrooms.
  • $1.5 million in savings from eliminating the Bureau of Audits.
  • $2.7 million in savings from eliminating Medicaid dental services for those older than 21.
  • $234,000 in a supplemental 2012 budget to pay for the state’s half of studies of municipally run pension plans.
  • $770,000 in a supplemental 2012 budget for work on the America’s Cup World Series Regatta in Newport.
  • $150,000 in a supplemental 2012 budget for implementation of the new voter-identification law.

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