Sam Zurier: Restoring Balance To Providence’s Taxes
Friday, March 01, 2013
The Problem And How We Got There
In his February 22 list of “Who’s Hot and Who’s Not” in Rhode Island, Mindsetter Dan Lawlor called out the Providence commercial property tax rate, noting that “making our commercial property tax rate competitive is a key tool to promoting business.” Although Providence’s tax structure is hardly the news of the week, he is entirely correct in noting its drag on economic development in the Capital City. For more than a decade, the general level of business development in Providence has been weak; far too often, the only two places in our City where you can find working cranes are at the Port of Providence and in the wetlands exhibit at the Roger Williams Park Zoo. Also, Providence’s commercial tax rate is indisputably high. In 2011, the Lincoln Land Institute performed a national survey of 53 major urban areas, and found that the commercial tax rate in Providence trails only the City of Detroit, hardly a promising sign.
The Providence City Council formed a Revenue Study Commission in 2011 to look at the City’s tax policy, generating a 2012 report called “A System Out of Balance” which affirms the connection between the City’s tax rate and its constricted economic development. A century ago, Providence was an economic powerhouse. Since that time, Providence lost most of its industrial base, watched much of its middle class move to the suburbs, and faced increasing levels of poverty. Others (such as Tom Sgouros) have reviewed and analyzed these broader trends and their impact on municipal economies. In this piece, I will describe more specifically how Providence’s commercial tax rate became so high (both in relative and absolute terms) over the past quarter century. Next week, I will describe the options Providence has to address this difficult fiscal challenge.
For many years, Providence charged the same tax rate for residential and commercial property. This changed in the late 1980's, in the wake of a City-wide property revaluation. Prior to the revaluation, the City’s tax burden was divided almost equally between commercial property owners as one group, and residential property owners as the other. In the 1988 revaluation, however, residential property values shot up, while commercial values stayed relatively flat. If the City kept the same tax rate for both classes of property, the revaluation would shift a significant tax burden from commercial property owners to residential ones. At the urging of Providence and other cities and towns, the General Assembly approved a law permitting municipalities to grant partial tax exemptions to homeowners. Providence kept a single tax rate, but approved the City’s first homestead exemption, which helped to preserve the roughly 50/50 balance between commercial and residential taxpayers. In the years that followed, the exemption rose to 50%, meaning commercial property owners were paying an effective rate that was twice that of homeowners, even though the nominal rate was the same.
As time went on, however, the upward pressures on the commercial rate continued to build. Valuations of residential and commercial property diverged further over time, and the commercial tax base shrunk as more and tax-exempt institutions grew. (According to the November 18, 2010 Hummel Report, the value of tax exempt real estate doubled over the previous decade.) In 2004, the City broke new ground by combining the 50% homestead exemption with a higher tax rate on commercial property ($37.00 for commercial, $29.65 for residential). As a result, the effective rate for businesses increased beyond twice that of homeowners to a new ratio of 2.5:1. In fact, Providence and Burrillville had to change the State law to gain permission to do this, as the State’s law for every other Rhode Island city limits effective commercial tax rates to twice that paid by homeowners.
Since 2004, Providence has maintained a higher commercial rate that is effectively between 2.3 and 2.4 times as high as that paid by homeowners. In 2010, a new problem arose, when the General Assembly stopped funding the program that provided motor vehicle owners with a state-wide exemption of $6,000 against local excise tax, while reimbursing local communities for the lost revenue. For Providence, this created a $20 million revenue hole. Some communities immediately reduced the motor vehicle tax exemption below $6,000 to make up for the lost revenue, but Providence did not. Instead, it eliminated a 33% exemption for non-resident apartment owners, causing their effective tax rate to increase by 50% without meaningful notice. This created a new set of problems, raising rents for many tenants while exposing more properties to foreclosure. In 2011, the City Council restored almost half of the apartment owners’ exemption; however, their effective tax rate remains 27% higher than it was prior to the 2010 crisis.
Were these challenges not enough, Providence discovered in early 2011 that its overall finances were badly out of balance. A fiscal review panel revealed structural deficits of $70 million for the current fiscal year and $110 million for the following year. With the City on the brink of bankruptcy, it was hardly a propitious time to lower tax rates.
During the past two years, the City has come close to balancing its budget through a combination of expenditure reductions and tax increases. In this climate, it has been difficult to find time or resources to address the long-term issue of the commercial tax rate. With that said, the City Council developed some ideas in its Revenue Study Commission Report, which provide a starting point for a discussion of possible solutions. I will turn to that subject next week.
Sam Zurier is a Providence City Councilman serving the 2nd Ward.