While the rest of the country braces for a possible recession this year, Gov. Dan McKee’s proposed budget is at odds with the doom and gloom of economic forecasts. The state is heading into the 2023-24 fiscal year on track for a $610 million surplus, and the budget proposal contains several tax cuts, including energy rebates and a reduction in state sales tax for Rhode Islanders.
The proposed budget aims to support citizens who have been struggling with the increasing cost of living and inflation, according to state Sen. Louis DiPalma MSc’89 P’08 (D-12), chairman of the Senate Committee on Finance. Earlier this year, utility rates rose almost 50% in Rhode Island, and increased gas and grocery prices have affected people worldwide.
DiPalma said the budget reflects the priorities of the Senate: monitoring the economic impact of inflation on Rhode Island residents and businesses.
He added that the budget is likely to change after it passes through the numerous legislative hoops standing in its way.
“In my 15 years, no budget that’s come to the General Assembly came out the way it went in,” DiPalma said. “The committee … (is) gonna go back and look at what the residents want.”
In an email to The Herald, Rhode Island House Speaker K. Joseph Shekarchi (D-23) said the budget would undergo a “thorough vetting of proposals through the House Finance Committee process,” adding that he felt “confident that effort will yield a final product we can all be proud of.”
How the surplus came to be
This marks the second straight year that Rhode Island will be left with an excess of money. Rhode Island finished the last fiscal year with a surplus of $480 million, part of which will carry over to this year’s budget surplus. Much of that surplus was due to pandemic-related federal aid and was padded by income tax and sales tax revenue that, according to DiPalma, exceeded all forecasts.
Robert Hackey, adjunct lecturer in international and public affairs, said that recent COVID-19 relief from the federal government and higher-than-expected tax revenue has made state surpluses quite common throughout the country.
“Rhode Island has been very conservative in how it used the COVID stimulus funds,” Hackey said. But he noted that the onset of a recession might quickly change the state’s economic situation.
“In a recession, your (state) income drops because fewer people are working, but conversely, your expenditures rise,” Hackey said, referencing Medicaid and other cash assistance programs that more people qualify for in times of economic stress.
Effective relief, or easy way out?
The governor’s budget focuses on providing Rhode Islanders with immediate financial relief, but Hackey said the government may be making a mistake by not considering long-term solutions.
“I don’t think there’s anything, on the one hand, wrong with a tax relief approach,” Hackey said. “But on the other hand, I think some of the things that we’re talking about don’t make a whole lot of sense in terms of a long-term investment.”
Hackey pointed to McKee’s proposed reduction in the Rhode Island sales tax from 7% to 6.85%. While the governor’s press release promises this change will save residents $35 million annually, Hackey said he doesn’t see the reduction as sustainable.
“Rhode Island has historically had some significant structural deficits where we have a mismatch between the revenues that are coming in and our expenditures,” he said. “By cutting the sales tax, you're essentially limiting your revenues going forward,” a change that would have a “multiplier effect” in the future.
Derek Gomes, chief public affairs officer for the Department of Administration’s Office of Management and Budget, wrote in an email to The Herald that the tax cuts keep Rhode Island “competitive” with nearby states. Rhode Island has the highest sales tax in New England, with Connecticut and Massachusetts having sales taxes of 6.35% and 6.25% respectively.
“Approximately one-third of Rhode Islanders live within three miles of the Connecticut or Massachusetts border,” he added. “The Governor is proposing a phased-in reduction to the sales tax rate when economic conditions allow to ensure it is sustainable,” according to the budget’s executive summary.
DiPalma views the state tax reduction as an effort to address what he sees as one of the most pressing concerns in the state: the high cost of living. He said that Rhode Islanders expected a larger reduction than what the budget proposed.
Hackey said that the move doesn’t make the state’s tax climate any more competitive with Massachusetts, though that may have been an aim of the reduction. “If the goal is to try to get more folks to spend more money in Rhode Island versus other states, I don’t think we really accomplish that,” Hackey said.
Hackey also took issue with McKee’s plans to pause the three-cent per gallon increase in the gas tax. He said gas tax revenue pays for the state’s “big to-do list of projects … when it comes to infrastructure, and if we’re not going to generate more state-sourced funds, I think that’s problematic.”
Per the budget proposal, $24.6 million of the state’s surplus will be used to help cover the costs of infrastructure projects while providing Rhode Islanders with tax relief, according to Gomes.
Alternative options, looking ahead
Camilo Viveiros, executive director of the George Wiley Center, challenged the budget for its failure to address the structural and systemic changes he said Rhode Island needs to make. He expressed frustration that the government isn’t focusing on what he sees as key issues: building more government-owned housing, restructuring taxation to be more equitable and funding transportation and education.
“If there’s more resources, there’s also more responsibility to make sure those resources are spent in a way that addresses our basic human needs,” Viveiros said. “It shouldn’t be up to just a small group of people (to) decide how these resources are spent.” He advocated for the government to solicit public input on what they’d most like to see the money spent on.
Viveiros said that he views tax cuts as especially ineffective when it comes to addressing the needs of low-income and working-class people. Viveiros said the lowest bracket of low-income households doesn’t pay taxes due to earned income programs and thus doesn’t stand to benefit from tax reductions.
The George Wiley Center supports a Percentage of Income Payment Program rather than sweeping rebates, according to Viveiros. The model would allow Rhode Islanders to pay bills proportionate to their actual earnings, rather than flat rates that might be affordable for one household but unsustainable for another.
Gomes explained that the budget’s inclusion of measures beyond tax reductions will ensure that Rhode Islanders will receive economic aid. He cited budget initiatives aimed at “raising income for all Rhode Islanders, improving educational outcomes that meet Massachusetts’ levels by 2030 and creating a healthier state where we reduce chronic illness and improve health outcomes.”
The budget proposal’s plan to increase K-12 education funding by $57.8 million, as well as its investment in small businesses and infrastructure improvement projects, will also help make progress towards Gov. McKee’s Rhode Island 2030 goals, according to Gomes.
“Additionally, the State is using the $1.13 billion in State Fiscal Recovery Funds on a number of projects to increase the affordable housing stock, assist sectors that were negatively impacted by the pandemic and support disproportionately impacted communities,” Gomes said.
To Hackey, surplus funds should go towards addressing issues that aren’t typically budget items, such as homelessness, affordable housing and climate change.
“I’d like to see us invest it in ways that pay dividends going forward,” Hackey said.