PROVIDENCE – Higher projected revenues mean the state can afford to pay out more money in aid to cities and towns to phase out the much-maligned car tax, according to analysis by the R.I. Department of Revenue.
The analysis published on Dec. 31 estimates that the state will have to pay an increasing percentage of its annual revenue – maxing out at 5.13% in fiscal years 2025 and 2026 – over the next five fiscal years to offset the losses in municipal revenue from the continued phaseout of the motor vehicle excise tax.
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One important caveat: the analysis is based on projected budget deficits when Gov. Gina M. Raimondo released her proposed fiscal 2021 budget last January – before the onset of the COVID-19 pandemic, which has since drained state coffers significantly more than originally anticipated.
“The world is clearly a different place in January 2021 than it was in January 2020,” the report stated. “It is fair to say that consideration of the projected budget deficits for the FY 2022-FY 2026 period should be incorporated into any policy decision regarding the fiscal impact of the continuation of the motor vehicle and trailer excise tax phaseout.”
The report stopped short of recommending exactly how the financial strain brought on by the pandemic should factor into policy decisions. However, it noted that even the millions of dollars in state revenue that would need to be funneled to cities and towns to proceed with the planned tax phaseout “remain at the margin of the overall revenue structure of the state.”
Raimondo’s original fiscal 2021 budget included $100.7 million in local aid, with a more modest phaseout of the car tax slated to end in 2029. The final budget passed by the legislature in December, however, allocates an additional $37.7 million in motor vehicle excise tax payments to cities and towns.
The Department of Revenue report, based on Raimondo’s original phaseout plan, projects a $129.6 million reimbursement aid in the fiscal year that starts July 1, representing 3.09% of the expected $4.2 billion in general revenue. By fiscal year 2026, the reimbursement aid would increase to $237.7 million, or 5.13% of a projected $4.6 billion in general revenue.
While the report did not weigh in on whether the cost to continue the planned phaseout of the car tax was a best use of state revenues, especially in the current cash-strapped environment, it did note that the current amount of variance in how cities and towns calculate and charge car taxes “violates the good tax policy principal of horizontal equity” and recommended a standard tax applied universally across municipalities.
The state sets a maximum tax rate – at $35 per $1,000 of assessed value in fiscal 2020 – and a minimum exemption of $3,000. The rates across municipalities, even for a car of the same make, model and year, can differ dramatically based on factors such as whether and how the car is garaged. The owner of the same car in the same condition would pay $409.90 in Woonsocket, $163 in Cumberland and $129.28 in Portsmouth, based on fiscal 2019 rates, according to the report. The report recommended a standard tax applied statewide to eliminate this inequity.
Because of the wide spectrum in how cities and towns apply car taxes, not all would lose revenue if the tax rate was cut. About half of the 39 cities and towns would lose revenue under a standard rate similar to what is used in Maine or Massachusetts, but the other half would collect more than they do under the current law. However, the report notes that without state intervention to offset both the lost revenue for cities and towns, as well as the higher bills some taxpayers would pay, it is “probably not likely” that a standard statewide calculation method could be implemented.
Nancy Lavin is a staff writer for the PBN. Contact her at Lavin@PBN.com.
