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RIPEC Comments

RIPEC continues to support the phase-out of the excise tax on motor vehicles in Rhode Island and calls upon the General Assembly to restore and fully fund the program. As the analysis above demonstrates, the program provides permanent property tax relief through eliminating a tax, representing 11.0 percent of the property tax levy in the State. Using State resources derived from broad-based tax sources to replace property taxes is critical to improving the State’s intergovernmental fiscal relations by reducing over-dependence on the property tax to fund public schools and other municipal services. For example, if the State had eliminated the tax as of FY 1999, the State would have effectively replaced over $74.3 million in school expenditures supported with property taxes with State funds, thereby improving the State-local funding ratio for schools.

There is a need to ensure consistent tax policy over a period of time. Should the General Assembly retract this initiative, it will be increasingly difficult to convince local officials, taxpayers and businesses that future multi-year tax reduction and reform initiatives will continue until fully implemented. In addition, the elimination of the motor vehicle excise tax addresses issues of horizontal inequity, particularly as it affects lower-income families and urban communities, and benefits businesses whose vehicles represent almost one-quarter of the taxable value of motor vehicles.

Continuing the phase-out of the motor vehicle excise tax can also be an effective way to encourage fiscal discipline. Continuing the scheduled phase-out of the motor vehicle tax would represent approximately 13.9 percent of the State Budget growth between FY 2000 and FY 2002. This share of growth in general revenue expenditures is lower than entitlement spending (34.4 percent), school aid expenditures (22.4 percent) and personnel expenditures (18.4 percent). From these trends it is fair to conclude that if the program to provide permanent property tax relief were to cease, the resources available to the State would be spent elsewhere. Therefore, it is incumbent upon the State’s leaders to stay the course and ensure that permanent property tax relief remains a high priority.

While the State should fully implement the phase-out of the motor vehicle excise tax, policies should also be considered to enhance property tax relief and control costs. Therefore, the State should consider the following questions:

Can the State’s property tax cap be tightened? In 1985, the State enacted the Omnibus Property Tax Relief and Replacement Act, which was designed to restrict the growth in property taxes and to expand the State’s role in funding public education. As a quid pro quo for additional State aid, the Act placed a 5.5 percent cap on property tax levy growth in each city or town. Although the cap is placed on municipal tax levies, the municipality may choose to apply the cap to growth in tax rates. This permits communities to meet the cap while generating property tax levy increases greater than 5.5 percent. A community is permitted to exceed the cap if:

The municipality forecasts or experiences a loss in non-property tax revenues (requires Department of Administration certification);

The municipality experiences the need for emergency expenditures (requires Auditor General certification); or

The municipality experiences debt service expenditures that exceed the 5.5% cap (requires Department of Administration certification).

Given the State’s investment in the phase-out of the motor vehicle excise tax, the elimination of the inventory tax and increased education aid, the State should consider tightening the current property tax cap. Tightening the cap could begin to dampen growth in the property tax levy and encourage local communities to seek efficiencies in delivering public services, including school programs.

Tightening the property tax cap should begin with having the cap apply to the levy only, eliminating a municipality's ability to circumvent growth restrictions by applying the cap to the tax rate.

Should the inflation adjustment factor applied to local motor vehicle tax rates included in the formula be eliminated? In developing the methodology for reimbursing municipalities for revenues foregone due to the phase-out of the motor vehicle excise tax, the General Assembly included an inflation adjustment that is applied annually to the FY 1998 motor vehicle tax rate. The General Assembly included this measure primarily to address the concern local officials raised that local governments would no longer have the option to increase the motor vehicle excise tax in the future. As discussed below, approximately one-third of the levy growth from FY 1989 through FY 1999 was due to motor vehicle tax rate increases.

To explore this component of the program, one has to look at several aspects of the motor vehicle tax to understand the behavior of communities over time - the tax base, the tax rates, and the actual levies.

Based on trend data from certified values for motor vehicles from FY 1989 to FY 1999, motor vehicle values tend to reflect general trends in the economy over time. As noted on Table 5 of this report (page 6), motor vehicle values have increased from $2.6 billion in FY 1989 to $4.1 billion in FY 1999 — a 59.0 percent increase over this ten-year period. This translates into an average annual rate of growth of 5.9 percent. If one adjusts these figures to 1999 dollars, motor vehicle values grew from $3.5 billion in FY 1989 to $4.1 billion in FY 1999 — an 18.2 percent increase over the ten-year period. This translates into an average annual rate of growth of 1.8 percent.

While these figures reflect general statewide growth in motor vehicle values, there is variance among local communities that are partially influenced by population and income trends. Adjusting for inflation, Rhode Island’s urban communities experienced net growth in their motor vehicle tax base of 0.65 percent — increasing from $1.9 billion to $2.0 billion over this period of time. The increase in urban communities represented 19.2 percent of the net increase Statewide. The City of Providence actually experienced a net decline in adjusted motor vehicle values over this ten-year period. Conversely, non-urban communities experienced net growth in their motor vehicle tax base of 3.15 percent — increasing from $1.6 billion to $2.2 billion over this period of time. The increase in non-urban communities represented 80.8 percent of the net increase Statewide.

What is also interesting to note is that in FY 1989, urban communities had 53.3 percent of the total motor vehicle value in the State. This has since declined to 48.1 percent in FY 1999. The four communities experiencing the slowest growth or net loss in adjusted motor vehicle values have the highest motor vehicle tax rates in the State (Central Falls, Pawtucket, Providence, and Woonsocket).

Up until FY 2000, the Rhode Island Vehicle Value Commission (VVC) estimated motor vehicle values (passenger and light trucks) through a series of steps. The VVC started the process of assessment using retail values based on NADA (North American Dealers Association) information. Because of a court order, the VVC was required to adjust NADA values to estimate motor vehicle values within Rhode Island. Therefore, the VVC adjusted NADA retail values with actual dealer-documented sales in Rhode Island. This resulted in annual estimated values for motor vehicles upon which communities levied local excise taxes. Therefore, it should be noted that the VVC’s methodology to determine vehicle values in Rhode Island had a number of inherent flaws, such as relying on a limited number of sales to determine the percentages applied to used cars.

Since the State began to eliminate the motor vehicle excise tax, the State froze the VVC’s FY 1999 (12/31/97 certified tax roll) methodology. The following table displays the technique for determining motor vehicle assessments for tax purposes based on this methodology. As the table shows, the techniques used in FY 1999 (12/31/97) have been continued, with the adjustment each year to reflect the new model years added to the rolls, therefore aging this method each year by one year.

As noted above, adjusting the assessed values determined by the Rhode Island Vehicle Value Commission for inflation (1999 dollars), vehicle values increased by 18.2 percent from FY 1989 through FY 1999 in Rhode Island. This trend is consistent with national data concerning new and used vehicle retail selling prices. The average retail-selling price for new vehicles in the United States has increased from $15,400 in 1989 to $24,450 in 1999, representing a 59.0 percent increase over this ten-year period. Adjusting for inflation (1999 dollars), the average retail-selling price has increased from $20,691 to $24,450, representing an 18.2 percent increase over this ten-year period.

Average used vehicle prices demonstrated greater growth over this period of time. The average retail-selling price for used vehicles increased from $7,430 in 1989 to $13,200 in 1999, representing a 77.7 percent increase over this ten-year period. Adjusting for inflation (1999 dollars), the average retail-selling price increased from $9,983 to $13,200, representing a 32.2 percent increase over this ten-year period.

Given that the thrust of the State’s program to phase-out the motor vehicle tax is to replace the revenues foregone through the elimination of the tax, it is important to understand the behavior of municipalities and how they raised motor vehicle excise taxes prior to enactment of the program. Levies collected from the taxation of motor vehicles are a function of local budget needs, the amount of revenues raised from other property taxes and other sources, taxable motor vehicle values, and the rates needed to raise the funds.

It is interesting to note how local motor vehicle tax levies increased over a ten-year period — FY 1989 — FY 1999. A portion of the net increase in motor vehicle levies is due to growth in the taxable base and a portion is due to increases in motor vehicle tax rates. Over the ten-year period statewide, RIPEC estimates that nearly 70.0 percent of every additional net $1.00 raised was derived from growth in the motor vehicle taxable base. Conversely, approximately 30.0 percent of every additional net $1.00 raised was through increases in motor vehicle tax rates. Table 13 below shows the relative contribution to the net increase in motor vehicle levies from changes in the motor vehicle tax base and changes to local tax rates. In FY 1992, most municipalities offset declining motor vehicle values with tax increases. However, since FY 1995, the majority of the growth in the local tax levy derived from motor vehicle taxation has been due to growth in the taxable value.

It should be noted that while motor vehicle values are determined annually, real estate values are only updated when a community performs a revaluation. Most communities implemented revaluations during this ten-year period. In many instances, the revaluations resulted in significant growth in real estate values, which in turn permitted many communities to reduce their tax rates, including motor vehicle tax rates. Because motor vehicle values are determined annually, reductions in the motor vehicle rates resulted in a reduction in motor vehicle levies collected in years where revaluations were completed.

Given the Rhode Island motor vehicle value trend data noted above and the national data on growth in new car values, it is reasonable to assume that the motor vehicle tax base will continue to reflect general economic trends.

The General Assembly designed the program to phase-out the motor vehicle tax so that the reimbursement to communities is based on the most recent certified tax roll. Therefore, the methodology for calculating the reimbursement of revenues foregone due to the phase-out of the excise tax on motor vehicles appears to accommodate growth in the base by reimbursing communities based on the most recent actual values and a 100 percent collection rate. In other words, the State ensures that communities are "held harmless" in revenues foregone, accounting for growth in each community’s motor vehicle taxable base over time.

The methodology used to reimburse local government does raise the question of whether the State should continue to include an inflation adjustment on top of the reimbursement of revenues foregone based on FY 1998 tax rates. Clearly there are some arguments in favor of continuing the inflation factor. For example, historically, almost one-third of the growth in State’s motor vehicle levies resulted from tax rate increases. Additional reimbursement could be viewed as necessary to effectively address the State’s over-reliance on property taxes, and that the inflation factor is necessary to recognize varying fiscal circumstances in Rhode Island’s 39 cities and towns.

On the other hand, the inflation adjustment translates into State aid to local communities above and beyond the actual cost of replacing motor vehicle excise taxes foregone due to the phase-out of the program. Therefore, given competing demands for finite resources, should the State distribute additional aid to local communities beyond the revenues municipalities will lose based on FY 1998 tax rates and the most recent certified tax roll?

According to the Governor’s FY 2002 proposed budget, there is an inflation adjustment of approximately $4.2 million. For FY 2000 through and including FY 2007 (the year the program is fully implemented), the State will have provided an additional $30.0 to $35.0 million in funds related to the inflation adjustment. This is in addition to the State reimbursing 100 percent of the revenues foregone due to the phase-out of the tax over this period of time.

Furthermore, given that the State will link FY 2008 and future appropriations for the motor vehicle phase-out to a percentage of sales tax revenues, what is the long-term fiscal consequence of increasing the base by an inflation factor upon which this calculation will be derived?