Gov. Lincoln Chafee '75 P'14 proposed imposing new taxes on textbooks and taxi fares, while increasing funding for the state's public universities and slashing spending on government services, in his address last night.
Chafee laid out measures to rein in Rhode Island's $295 million budget deficit and put the state on a path to economic growth in his address to state legislators. The fiscal road map offers an array of new taxes, targeted tax breaks and investments that Chafee said are intended to return Rhode Island to its past greatness.
Chafee proposed a two-tiered sales tax that would lower the state's existing 7 percent rate — which Chafee called the highest in New England and one of the narrowest in the country — to 6 percent and would extend that rate to certain services not currently taxed. Under the plan, the state would also levy a 1 percent sales tax on currently exempt items like coffins, heating fuel and renewable energy products. The new tax would not extend to food, gasoline, prescription drugs or medical devices.
Invoking Rhode Island's legacy as a "beehive of entrepreneurial activity," Chafee said the sacrifice necessary to resolve its current challenges must be shared.
"We have those hard decisions before us, but I believe our better future starts today," Chafee said. "By directly confronting our challenges, we may take the first steps on a path to prosperity."
Projected revenue from new taxes in Chafee's budget total $157 million. But, Chafee said, closing the state's gaping deficit cannot come from tax increases alone.
By eliminating waste and streamlining the way the state provides health care and other services, Chafee projected the state could slash $60 million in the coming fiscal year and more in the following year. His budget also calls for $20 million in cuts to other departments "as a first step in a larger review of their operations and management."
Chafee's budget would provide the money called for under the education funding formula passed by the state legislature last year. Before the law's passage, Rhode Island was the only state without such a formula.
"That's good for Providence and good for our students," said Rep. Edith Ajello, D-Providence, who represents the district that includes the University. Ajello was a leading advocate for legislation establishing a formula that would redirect state aid from wealthier school districts to historically underfunded urban areas like Providence.
Chafee's budget would also increase funding for state public institutions of higher education — which currently serve over 40,000 students — to the tune of $10 million.
Citing a business climate that "has been targeted toward individual companies instead of creating an environment that fosters broad economic growth," Chafee proposed eliminating a tax credit intended for companies that created jobs in the state. Revenue from the elimination of the tax credit combined with the closing of corporate tax loopholes would allow the state to lower its corporate minimum tax from $500 to $250 for small businesses and reduce its corporate tax rate from 9 percent to 7.5 percent. Chafee contended the move would make Rhode Island competitive with neighboring states Connecticut and Massachusetts.
Chafee's budget also addresses the state's underfunded public pension system, which faces an unfunded liability between $5 billion and $10 billion. The state pension system provides retirement benefits to public employees including teachers, police and firefighters.
Rhode Island's pension woes have even garnered the attention of national regulators. The Securities and Exchange Commission opened an investigation into the state's reporting of its pension obligations Feb. 3.
The governor called for all state employees to put the cost-of-living adjustment they would have received under their contract this year towards the state's pension system. He asked for the nearly 25,000 state employees covered in the largest pension plan in the state to increase their pension contributions to 11.75 percent of their pay, from 8.75 percent from state workers and 9.5 percent from teachers.
But many municipal pension systems also face staggering unfunded liabilities. Due to declining state aid and tax revenue, many of the state's 39 cities and towns failed to make annual contributions to their pension plans, shortchanging a system intended to fund benefits negotiated between local governments and public employee unions. Chafee's budget would offer additional state funding for municipalities that work to reduce their unfunded liabilities through the creation of a "Municipal Accountability, Stability and Transparency Fund."
While the governor's proposed sales tax increase and cuts to state services may face opposition in the General Assembly — which must ultimately pass the budget — Chafee's tone represents a welcome change, Ajello said.
Chafee's collaborative message has "made him an easier person to work with," she said. "It's easier to sit down and talk with someone about something when they're not going after making points and drawing lines in the sand."