Rhode Island FY 2010 Budget to Include Major Tax Reforms Amendments to FY 2009 Budget

Partially Restores Local Aid and Averts Reductions to Critical Social Programs

March 11, 2009 -- Rhode Island Governor Donald L. Carcieri today released his FY 2010 budget, as well as amendments to the Governor’s FY 2009 Supplemental. The Governor’s revised FY 2009 budget is $3.064 billion in general revenue, a $204 million reduction in general revenues expenditures as compared to FY 2008, excluding the impact of funds from the American Recovery & Reinvestment Act of 2009. General revenue expenditures for FY 2010 are $3.079 billion.

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“As a state, we are facing a very challenging time, perhaps the most challenging of our lifetime,” said Governor Donald L. Carcieri. “The decisions we make today will have long lasting impact on the future of Rhode Island. We must, as elected leaders, and as Rhode Islanders, make responsible decisions that protect our citizens and strengthen our state.”

“The budget I am proposing reflects my commitment to provide sustainable government services in an efficient and responsible manner. My budget uses the federal stimulus money as it was intended – to preserve and create jobs. It includes tax reform policies that will make Rhode Island more tax friendly, competitive and will grow our economy. And, finally, this budget creates a solid foundation upon which our state can move forward.”

“By making these structural changes now, we are ensuring a stronger Rhode Island for the future,” said Carcieri. “With changes to our pension system, encouraging local government efficiencies, and reducing our tax burden, we are putting the building blocks in place for a stronger, more competitive Rhode Island when the state, and the nation, recovers from this economic recession.”

American Recovery & Reinvestment Act of 2009

Under the American Recovery & Reinvestment Act of 2009 (ARRA), Rhode Island is expected to receive $252 million in federal stimulus dollars for FY 2009 and $529 million for FY 2010 across all state spending programs.

Under ARRA, Rhode Island will receive $137.3 million in enhanced Medicaid match, allowing the state to apply those savings for other budget uses. The availability of these funds allow the state to account for unachieved cost savings associated with pension reform, the delayed implementation of the Medicaid Waiver, restoration of reductions in the Mental Health Retardation & Hospitals related to the developmentally disabled, restoration in the Department of Human Services related to nursing homes and hospitals, as well as partial restoration of local aid. For 2010, Rhode Island will receive $184.2 million in enhanced Medicaid match.

Pension Reform

“For too long, our pension system has been unrealistic, out of sync with the private sector, and is surpassing our ability to sustain it in the future. We must address these issues now.”

Under the proposed amendment to Article 32 of the FY 09 supplemental related to pension reform, the amendment “grandfathers” those employees eligible to retire as of July 1, 2009. Cost savings for the State and local school districts for pension reform total $42.1 million in FY 2009 and $76.4 million in FY 2010.

Local Aid/General Revenue Sharing/Education Aid

The American Recovery & Reinvestment Act of 2009 (ARRA) provides funds to state governors for fiscal relief including funding for local schools and higher education, public safety, social programs and other government services.

In FY 2009, federal stabilization funds available for education total $45 million ($38.3 million for K-12, $6.7 million for Higher Education). In FY 2010, the Governor recommends that $45 million for education ($37.2 for K-12, $7.8 million for Higher Education).

In the revised 2009 supplemental, the Governor is proposing the restoration of $31 million in local aid, offset by a reduction of $31 million in education aid, taking into account the availability of federal stimulus dollars. Under the amendments to the Governor’s FY 2009 supplemental, cities/towns will be required to allocate $12.6 million of general revenue sharing back to school districts based on past support of the schools.

“My FY 09 supplemental budget included a series of reforms to relieve our cities and towns of burdensome and expensive mandates, and gives them the tools they need to reduce costs at the local level to relieve the pressure to increase property taxes,” continued Governor Carcieri. “Restoring some local aid gives the cities and towns more time to adjust their budgets accordingly, saving jobs and critical services. But, it does not eliminate the need for cities and towns to make significant reforms in government operations as we have done on the state level.” The FY 2010 budget does not include any monies in general revenue sharing aid to cities and towns.

The increase funding in Title I and Special Education under the ARRA represents a 5.9 percent increase in total education funding in 2010.

Tax Reform

The Governor proposes major tax reforms to the corporate tax, personal income tax and the estate tax over the next several years. “For too long, Rhode Island has been at a competitive disadvantage. That must end if we are to grow our economy and create good-paying quality jobs,” continued Carcieri. “By lowering both personal and corporate tax burdens, we are sending a clear message that Rhode Island is open for business. It’s private business that creates jobs and wealth in this nation, and we need a tax policy that encourages businesses to locate and expand in Rhode Island.”

Under the Governor’s FY 2010 Budget, the corporate income tax will be reduced from 9.0 percent to 7.5 percent, effective January 1, 2010. The corporate tax rate will continue to be phased out in stages, with the complete elimination of the tax by January 1, 2014.

* Phase Out of Corporate Income Tax
o 6.0 percent effective January 1, 2011
o 4.0 percent effective January 1, 2012
o 2.0 percent effective January 1, 2013
o Eliminate the Business Corporation Tax effective January 1, 2014
o No combined reporting

The Governor’s FY 2010 budget also calls for the increase in the exemption for the estate tax. Currently, Rhode Island has the lowest exemption, at $675,000, in the country. Neighboring Massachusetts allows for $1,000,000 estate tax exemption.

* Increase in Estate Tax Exemption
o The Governor is seeking to increase the exemption amount for Rhode Island Estate Tax from $675,000 to $1,000,000, effective January 1, 2010.

The Governor’s 2010 budget also includes personal income tax reform to make Rhode Island’s tax system competitive with those in Connecticut and Massachusetts. Under the Governor’s proposal, Rhode Island would have four taxable income brackets, ranging from 3.5 percent to 5.5 percent. The Governor’s reform of the personal income tax will take effect January 1, 2011.

“We have to grow our economic base if we are to grow revenues,” continued Carcieri. “The only way to grow our economic base is to become business friendly and encourage robust economic development and job creation.”

Personnel

The Administration proposes an increase of 363.1 full time equivalent positions above the FY 2009 supplemental budget plan. Employment directly related to the administration of the stimulus package total 136 full-time – 89 for Transportation, 33 for Administration, 8 for Environmental Management, 5 for Education, 1 for Public Safety. The administration anticipates increasing the workforce by an additional 57 positions related to the implementation of the Global Medicaid Waiver; and an additional 170 positions to restore appropriate levels in social services and public safety.

Non-Critical Spending

“As we have seen a deterioration of revenues over the past year, we must be realistic that things may get worse before they are better. We may face an even greater than anticipated shortfall by the end of the fiscal year. As I told the Rhode Island public in my address in January, if things continue to deteriorate, we will have to make even tougher choices, including possibly shut down days and additional personnel reforms.”

In anticipation of a further erosion of state revenues, the Governor has authorized the Department of Administration to restrict all discretionary spending, restrict all non-critical travel and limit personnel increases to those funded by greater than 75 percent federal/restricted receipt funds or absolute critical to the agency.

Source: Rhode Island Governor