Sam Zurier: No Quick Fix for the Capital City
Friday, March 08, 2013
Restoring Balance to Providence’s Taxes: Potential Solutions
Last week, I described how Providence’s tax system fell out of balance during the past 25 years. Over that time, the City made a series of decisions that responded to short-term issues, while worsening a long-term problem. Today, our commercial tax rate today is $36.75 per thousand, one of the country’s highest, and also 2.3 times as high as our homeowner rate of $15.95. The $27.11 tax rate for landlords also is out of balance, due to a sudden increase in 2010.
Any realistic solution must comply with a few key rules. The City is required by law to balance its budget. This administration negotiated concessions of up to 10% from the major unions, so future cost savings likely will be incremental while those contracts remain in effect. As a result, the most effective route for the City to reform its property tax structure is to develop a new revenue stream outside of property taxes.
The Revenue Study Commission Report set a long-term goal of reducing the commercial rate to twice that charged to homeowners, and reducing the landlord rate to 1.1 times the homeowners’ rate. The report estimated these reforms to cost between $35-40 million in lost revenue. The report set an interim goal costing $15-18 million in new revenues. If we met this target, we could reduce the commercial rate by 13% and the apartment rate by 37%, while holding constant the residential rate of $15.95.
To raise the additional $15-18 million, the report offered two main ideas, namely (1) adding two percentage points to the local beverage and meals tax, and (2) negotiating PILOT agreements with major nonprofits to pay the City between 16% and 22%.
Unfortunately, neither of these opportunities came to pass. In 2011, the General Assembly rejected the State’s proposal to increase the meals tax. Also, the Mayor’s negotiated new agreements with the major nonprofits that met the budget’s targets, but did not yield a surplus to fund tax reform.
The report considered and rejected other ideas including (1) a City income or sales tax (which could harm the local business climate), (2) selling naming rights (which is difficult to count on), and (3) increasing fines and fees, much of which already has been done. In these ways, the Report provided a valid diagnosis of the problem, but could not prescribe a cure.
To move forward, I will discuss four different cases the City of Providence can make for further assistance from the State of Rhode Island. The City has made some of these before; however, they remain valid today.
1. The Water Supply
The City of Providence built the Scituate Reservoir for its own residents, but soon sold the water to other communities. By 1967, the Water Supply Board retired its debt, and began to remit its surplus to the City. In 1980, the General Assembly passed a law terminating the City’s ability to benefit from Water Supply Board operations. While this produced a windfall for people outside of Providence, it effectively appropriated a City asset without compensation. If the State chose to allow Providence, like any private utility owner, to receive a reasonable rate of return on its investment, the income could support tax reform. If the State refuses, then it in effect would be asking Providence to sell the water system to a private party. Rather than contemplate such a desperate measure, it would be far better for the State to recognize the City’s right to derive a reasonable rate of return from the magnificent water system it built with its own funds.
2. The PILOT Program
Tax-exempt property owners benefit the State treasury with revenue from sales and income taxes, but have an impact on host communities. Recognizing this, the State reimburses host communities between 20%-25% of what they would receive if the properties were taxable. This helps, but in Connecticut the State reimbursement rate is 55%. Changing to the Connecticut formula would increase Providence’s revenues by approximately $30 million.
3. Education Aid
The General Assembly enacted an education aid formula in 2010 that was a step forward, but fell short of one it developed in 2007 you can read by clicking here.
The 2007 Formula called for Providence to spend $2,000 per student in local funds, rather than the current $5,500. The 2007 Formula funded the difference (plus an additional $2,000 per student) with State aid. The case for the 2007 Formula goes beyond today’s discussion, but it would increase resources for Providence students while saving the City’s taxpayers more than $60 million.
4. Incremental State Income Tax Sharing
Council President Michael Solomon recently proposed that Providence receive a share of State income tax revenue generated by new jobs in Providence (such as on the I-195 parcel). This approach would not impact the State budget as significantly as the three others just discussed.
In my opinion, the City has a meritorious case for the State to fund each and every one of these four programs completely. Even if the State chose to provide partial funding for one or more of these programs, any combination that produced $15-$18 million would help support meaningful tax reform. The tax reductions could help to grow the commercial tax base to fund further reductions. The administration may have other cases it can make to the State to reach the same result. While this piece expresses my personal views only, I am confident that many or most of my colleagues on the City Council are ready to help in this effort.
To conclude, the City’s taxes fell out of balance over 25 years. The Revenue Study Commission Report presented a formula to restore that balance and calculated its cost, but its proposed solutions were not practicable. Today, we have at least four cases we can make to the State, either individually or in combination. The State’s success depends upon a thriving Capital City, and the City’s successful future depends upon developing new revenue, and dedicating it to restoring balance to its property tax system.
Sam Zurier is a Providence City Councilman serving the 2nd Ward.