Key Facts

• Rhode Islanders pay more in property taxes than they pay in any other single tax, including personal income, general and selective sales and all business-specific taxes.

• Rhode Island’s local governments collected approximately 58.0% of their FY 1996 revenues from property taxes (New England States averaged 51.0% and the U.S. average was 28.0%).

• Rhode Island's FY 1996 property tax collections per $1,000 of personal income of $48.75 ranked 5th highest nationally, exceeding the U.S. average of $34.35 by 42.0%.

• Rhode Island property taxes currently support nearly 60.0% of elementary and secondary education spending Statewide.

• From 1978 to 1988 State aid funded approximately 73.0% of the increase in public education expenditures and local property taxes made up the 27.0% balance. From 1988 to 1998 State aid supported 28.4% of the increase in education expenditures while local property taxes supported 71.6%.

• From FY 1990 to FY 2000 total full property value in Rhode Island increased by 1.8%. However, adjusted for inflation, there was a 19.2% decline in values over this ten-year period.

• In FY 2000, 46.4% of the Statewide full property value is estimated to be located in the urban communities and 53.6% in non-urban communities, compared to the FY 1990 ratio of 51.5% urban and 48.5% non-urban.

Overview

Property taxes represent the largest single source of tax revenue generated in Rhode Island and are a critical source of financing public services - especially public education. The FY 2000 property tax levy statewide ($1.3 billion) is expected to generate approximately the same amount of revenues as the State sales and income taxes combined.

The level of dependence on the property tax for Rhode Island communities is significantly higher than it is for the vast majority of U.S. cities and towns. Nearly 58.0% ($1,141.4 million) of all Rhode Island local revenues in FY 1996 were derived from property taxes. Among all six New England States, property taxes generated 51.0% of local revenues, while across the U.S. localities derived 28.1% of their revenues from local property taxes.

Measurements

Property Tax Collections Per $1,000 of Personal income and Per Capita

Rhode Island's FY 1996 property tax collections per $1,000 of personal income of $48.75 ranked 5th highest nationally, exceeding the national average of $34.35 by 42.0% and the New England average of $44.11 by 10.5%.

Rhode Island's FY 1996 per capita property tax collections of $1,162 ranked 5th highest nationally, exceeding the national average of $789 by 47.3%. However, Rhode Island's FY 1996 per capita property tax collections were 3.6% less than the New England average ($1,205), with the per capita property tax burden higher in Connecticut ($1,422) and New Hampshire ($1,520).

Representative Tax System

As discussed in more detail in Section V (pages 14 to 16) and in the Appendix (A-1 to A-5), the Representative Tax System evaluates a state’s tax capacity and tax effort. Table VII - 3 shows the relative property tax capacity and tax effort for the New England States. Rhode Island's 4th place property tax effort ranking (63.5% greater than the National average) reveals the Ocean State’s over-reliance on property taxes.

Property Taxes as a Percentage of Income

Citizens for Tax Justice's (CTJ) report on Rhode Island's tax burden by income class shows that property taxes constitute the greatest portion of most Rhode Islander’s State and local tax burden. For example, as Table VII-4 shows on the following page, people represented in the lowest income quintile pay, on average, 5.7% of their income towards property taxes. A similar trend holds true throughout for all income classes but the top 1.0% of income earners. Property taxes as a percent of income for the top 1.0% of income earners represent 1.7% of income.

Effective Property Tax Rates (ETR)

The Minnesota Taxpayers Association in conjunction with the National Taxpayers Conference prepared a study that compared the relative property tax burden for four types of property – residential, commercial, industrial and apartments – for the largest urban area of each state and Washington DC.

According to this study, (Providence) Rhode Island’s property tax burden ranked in the top ten for all classes of property except homes valued at $200,000. Rhode Island’s property tax burden for commercial and industrial property was estimated to be higher than the tax burden for residential property. The following details how Rhode Island ranks among New England States as measured by the estimated property tax burdens for three classes of property.

Homesteads - As shown in Table VII-5, Rhode Island’s 1998 net property tax of $1,549 on an $80,000 home was 51.4% above the U.S. average. Rhode Island’s effective tax rate of 1.9% ranked 10th highest in the country, and ranked third among the New England States. Rhode Island’s 1998 net property tax of $3,319 on a $200,000 home was 43.6% higher than the national mean. The effective tax rate of 1.7% ranked 12th highest in the country and third highest in New England.

Commercial - Rhode Island’s net property tax on commercial property valued at $120,000 ranked 3rd highest among the 50 states and the District of Columbia, with an estimated $4,725 in net property taxes resulting in an effective property tax rate of 3.9%. Rhode Island was 77.0% higher than the U.S. average and clearly outpaced the other New England States. As Table VII - 6 shows, a similar trend was reflected when the total value of commercial property was increased to $1.2 million and $30.0 million.

Industrial – As shown on Table VII – 7, Rhode Island’s property tax on industrial property (includes machinery, equipment and fixtures) valued at $200,000 ranked 6th highest in the Nation, as $5,147 in net property taxes resulted in an effective property tax rate of 2.6%. Rhode Island was 50.8% higher than the U.S. average and above all other New England States.

Property Tax Trends in Rhode Island

It is clear that Rhode Island’s dependence on the property tax is significantly greater than most states. While the overall property tax burden in the State is well documented, there are significant differences in property tax burdens among Rhode Island’s 39 municipalities.

Statewide Property Value

As Table VII - 8 shows, there have been two distinct periods of change in the State’s property base. First, the 1980s evidenced significant growth in the Ocean State’s property value base. In FY 1980 property value (measured in 1999 dollars) was estimated at $30.6 billion. Within a ten-year period, property wealth increased to $73.5 billion in adjusted value. This represented a $43.0 billion increase – an increase of nearly 150.0%. It is estimated that property value in the State peaked in FY 1991 (December 31, 1989) at $77.5 billion statewide (adjusted).

However, since 1991 there has been a significant decline in the value of property in Rhode Island, declining from $77.5 billion in FY 1991 to $59.4 billion in FY 2000. This represents a decrease in value of nearly $18.1 billion, or 23.4%. Even unadjusted figures show that that there has been stagnation in the State’s property value base during the 1990s. FY 2000 estimates indicate that property value Statewide will grow for the first time since FY 1991.

Property Values by Class

Table VII - 9 displays the estimated share of property value for each major class of property – residential, commercial, industrial, utilities and rail, and motor vehicles. In FY 1970 residential property represented approximately 56.0% of the State’s total property value. However, the residential property share of total property wealth has increased to approximately 70.5% in FY 2000.

Commercial property as a percentage of total property has remained relatively stable, although the share of property wealth considered industrial has declined from nearly 10.0% of total property value in Rhode Island in FY 1970 to 3.0% in FY 2000.

Statewide Property Tax Levy

Table VII – 10 shows the statewide tax levy generated to support local programs. It should be noted that Table VII – 10 does not include levies associated with special purpose districts (fire, water, etc.). Therefore, the property tax levy shown understates property taxes actually paid by some Rhode Island property owners. From FY 1990 to FY 2000 the statewide unadjusted levy increased by 61.0% ($505.9 million).

Adjusting for inflation (1999 dollars), property tax levies increased by 27.8% ($290.3 million) during this ten-year period. Therefore, while statewide-adjusted full values declined over the past decade, as discussed above, the local levies have continued to grow.

In FY 1990 approximately 51.3% of the property tax levy statewide was allocated to support schools and the 48.7% balance supported municipal services. In FY 2000 there has been a slight shift in how the local property tax levy is allocated. Nearly 54.0% of the FY 2000 local property tax levy was allocated to support schools and the 46.0% balance was allocated to support municipal services.

Effective Property Tax Rates

Effective property tax rates reflect what each community's tax rate would have been if all property were assessed at 100% of its full value as estimated by RIPEC based on data provided by the Rhode Island Department of Administration's Office of Municipal Affairs. The effective tax rate is the total levy divided by the estimated full market value of property within the community, adjusting for various exemptions and credits provided by the community. The effective tax rate provides a tool to compare the overall property tax burden in each community.

Based on the estimated full value of property and the FY 2000 levy, FY 2000 effective tax rates ranged from $8.05 in Little Compton to $44.84 in Providence. As shown on Table VII – 11, eight of the ten urban communities are among those with the highest effective tax rates in the State.

Although Table VII - 11 is useful in providing a general idea of property tax burden differences among communities, it has limited utility. The effective tax rate and the associated rankings only compare the overall effective property tax rate by community, not taking into account the classification systems, homestead exemptions and other taxing authorities (e.g., fire districts) levying property taxes in Rhode Island. All these factors affect property tax burdens and rate comparisons. Therefore, effective tax rates should be considered one of several tools to evaluate relative property tax burdens.

Rhode Island Equity Index

The Equity Index is a calculation of the relative tax effort each community makes towards raising local resources and the relative tax capacity (or wealth) each community has to raise local resources. The Index then estimates the gap between the actual yield and the potential yield if the State average tax rate were used, based on each community’s tax base. In general, those communities that have an Equity Index of 1.00 or less are considered to evidence some level of fiscal stress relative to the rest of the State because of their relative tax capacity and tax effort. Those communities with an Index from 1.00 to 2.00 are considered to reflect the typical or average condition among Rhode Island municipalities. Those with an Index of 2.00 or more are considered to have a fiscal capacity sufficient to meet their needs.

As shown on Table VII – 12, FY 2000 Indices ranged from 0.08 in Central Falls to 34.87 in New Shoreham. Ten communities had Indices less than 1.00, 17 communities had Indices between 1.00 and 2.00, and the remaining 12 communities had Indices of 2.00 or higher. Many communities with Indices of less than 1.00 are also the same communities with high effective property tax rates. In particular, there are four communities (Central Falls, Providence, Woonsocket and Pawtucket) that have an Equity Index of less than 0.50. These four communities demonstrate that they require a high level of tax effort to derive resources from a rather limited amount of tax capacity.

This type of analysis shows that there is a significant gap between communities with adequate tax capacity and low tax effort and those with limited tax capacity and high tax effort. The index demonstrates that many of the State’s urban communities continue to exhibit limited fiscal capacity and excessive tax effort relative to the State average, impacting their ability to provide the necessary resources to deliver public services.

Property Taxes and School Finance

Because property taxes play a critical role in how Rhode Island funds its public education system, the following outlines where Rhode Island stands relative to other states in terms of public education finance.

Per Pupil Expenditures

Table VII – 13 shows that Rhode Island’s 1977 adjusted per pupil expenditure of $4,304 ranked 18th highest in the country, while Rhode Island’s 1997 per pupil expenditure of $7,876 ranked 5th highest. Connecticut, Massachusetts and Vermont were also in the top 10 among the 50 states. The 1997 average per pupil expenditure level across the United States was $6,327.

Education Revenue Sources

Funding for schools is derived from three sources – Federal, state and local funds. As Table VII - 14 shows, there has been a slight change in the national average composition in revenues to support public elementary and secondary education from 1977 to 1997. In 1977 schools received 48.1% of their revenues from local sources, 43.6% from the state and 8.3% from Federal sources. In 1997 schools received 44.2% from local sources, 48.9% from the State and the 6.9% balance from the Federal government.

Rhode Island’s revenue source mix has remained essentially unchanged over this 20-year period. In 1977 Ocean State public schools received 53.4% of their education resources from local sources, 40.4% from the State and the balance from Federal funds. In 1997 Rhode Island schools received 54.3% from local sources, 40.7% from State sources and the balance from the Federal government.

School Expenditures - Statewide

As shown on Table VII - 15, from FY 1988 to FY 1998 total adjusted education expenditures increased from $832.5 million to $1,157.0 million, representing an increase of $324.5 million (39.0%). State aid adjusted for inflation increased from $345.6 million in 1988 to $437.8 million in 1998 – a $92.2 million increase (26.7%).

From FY 1978 to FY 1988 education expenditures increased by $144.7 million. State aid funded approximately 73.0% of this increase while local property taxes made up the 27.0% balance. From FY 1988 to FY 1998 State aid provided 28.4% of the $324.5 million increase in education expenditures and local property taxes supported 71.6% of the increase.

Table VII – 15 displays the State share of education expenditures, excluding housing assistance and teacher retirement contributions provided by the State. In FY 1998 State aid of $437.8 million represented 37.8% of FY 1998 expenditures of $1,157 million. State aid in FY 1991 ($403.2 million) represented 42.9% of FY 1991 education expenditures, the highest State share over this 20-year period. Since FY 1992 the State share has remained essentially the same.

Property Value Per Pupil

Using community property values adjusted to 1998 dollars, the average property value per pupil in Rhode Island increased from $210,721 in 1978 to $398,409 in 1988 to $346,268 in 1998. In 1978 the property value per pupil in the ten urban districts was 1.0% higher than the State average and 2.4% higher than the non-urban average. However, in 1998 the property value per pupil in the ten urban communities ($274,311) was 20.8% below the State average and 37.2% below the non-urban average ($436,618 per pupil).

Table VII - 16 shows how the urban communities compare with the State average and the non-urban communities. Property value per pupil in the urban communities decreased from $374,702 in 1988 to $274,311 in 1998, representing a 26.8% decrease over this ten-year period. This is due to both a significant decline in overall property value and increasing enrollments in the urban communities. Conversely, property value per pupil in non-urban communities increased from $428,210 to $436,618 over the same period (a 2.0% increase).

A significant portion of the State’s property wealth has shifted from the urban communities to non-urban communities. In addition, the influx of students to several of the urban communities has had an adverse impact on the amount of property value behind each student.

Property Tax Limits

Rhode Island

The Omnibus Property Tax Relief and Replacement Act (1985) was designed to restrict the growth in property taxes and to expand the State’s role in funding public education.

As part of this Act, the State established two initiatives to increased State aid to local communities. The first increased the amount of general municipal aid provided by the State, from 1.2% of general revenue tax collections to 2.0%. In addition, the State embarked on a six-year plan to provide 50.0% of public education funding. This was later increased to a 60.0% target for the State share. The State, however, has never achieved even a 50.0% share of school funding.

As a quid pro quo for the additional State aid, the Act placed a 5.5% 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. 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).

From FY 1990 through FY 1999 the number of communities complying with the cap has ranged from 14 municipalities in FY 1991 to 36 municipalities in FY 1998. In FY 1999, four communities exceeded the cap - Johnston, Lincoln, New Shoreham and North Providence. In complying with the cap over the past nine fiscal years, the majority of communities met the 5.5% cap on the growth in the levy.

Massachusetts

In 1980 Massachusetts voters approved an initiative designed to reduce property taxes by 40.0%. Proposition 2_ had a number of provisions worth noting:

•Prohibited property tax levies from exceeding 2_% of the full and fair cash value of the local tax base;
•Required communities that exceeded the 2_% levy limit to reduce their property tax levy by 15.0% a year until they complied with the cap;
•Established a 2_% cap on annual growth of property tax levies once communities reached the above target - with no exceptions for population growth, inflation or additions to the local tax base; and
•Permitted an override of the limit by 2/3-voter approval in biennial general elections.

Part of requiring communities to use full and fair cash value of property, or full value assessment, was the need for all communities to conduct revaluations of property. The State then required that revaluations be conducted every three years.

In order to soften the impact of Proposition 2_, Massachusetts established a number of municipal aid programs designed to moderate the overall level of property taxation and to reduce disparities in tax rates. In addition, there were a number of amendments made to Proposition 2_ that had varying degrees of impact on the level of flexibility of the cap, including:

•Simplifying the override provision to permit votes at regular or special municipal elections;
•Permitting municipalities, through majority vote, to add the cost of debt service to the total property tax limit (freeing up tax capacity);
•Creating a procedure to capture property tax revenue from growth in the tax base (expanding taxing capacity); and
•Permitting municipalities to carry-forward unused taxing capacity into the next fiscal year.

Using the Massachusetts Standard

The Massachusetts program was designed to reduce property taxes by 40.0%. While Proposition 2_ had a number of provisions worth noting, the key to the program was to prohibit property tax levies from exceeding 2_% of the full and fair cash value of the local tax base.

There is currently no such provision in Rhode Island’s property tax cap structure. Should such a provision exist, Table VII – 17 displays how communities would fair if a provision that prohibited property tax levies from exceeding 2_% of estimated full and fair cash value was in place.

In FY 1985, eight communities would have exceeded the cap. By FY 1990 the property tax base in each community had shown considerable growth due to a real estate boom. As a result, no community would have met or exceeded the cap. However, many communities’ property tax bases began to reflect the impact of the recession of the early 1990s. While only three communities exceeded the cap in FY 1995 (Central Falls, Providence and Woonsocket), six others began to move beyond 2.0%.

In FY 2000 Providence, Central Falls, West Warwick, Pawtucket and Johnston will likely exceed this 2_ cap. The City of Providence’s levy as a percentage of full value (3.6%) is the highest among the 39 cities and towns. Cranston, Warwick and North Providence also show signs of fiscal stress and may bump up against the cap in the same year. Twenty Rhode Island communities have property tax levies that are below 2.0% of full market value.

Those communities with levies as a percentage of their full market value of property at or exceeding the 2_% threshold are also those that have among the highest effective property tax rates. These same communities are those that rank among the highest when using the Rhode Island tax capacity and tax effort indices as well. The majority of these communities are those considered to be urban in nature.

If the State were to initiate a program to move these communities from their current position to no more than the 2_% cap, there would be costs associated with it. For example, bringing the five communities’ levies to the 2_% cap in FY 2000 would require a reduction in property tax levies of approximately $72.1 million. Of this amount, $63.7 million would be attributed to the City Providence.

Providence would have to reduce its property tax levy from $210.2 million to $146.5 million – a 30.3% reduction. Central Falls would have to reduce its property tax levy by 16.3% ($1.5 million); West Warwick would have to reduce its levy by 10.6% ($3.7 million); Pawtucket would need to reduce its levy by 3.0% ($2.0 million); and Johnston would need to reduce its levy by 2.5% ($1.1 million).

Administration of the Property Tax

Rhode Island's property tax base includes real property and tangible personal property. Real property is primarily land and improvements to the land, such as buildings. Tangible personal property is primarily office equipment and business inventories. While Rhode Island permits localities to tax motor vehicles, the General Assembly enacted a seven-year program to phase-out the excise tax on motor vehicles.

Exemptions

Rhode Island General Laws permit localities to tax property that State statutes do not expressly exempt. Exemptions are designed to assist the elderly, support education and encourage business investment. A 1996 report on Rhode Island’s property tax system noted that "no state is believed to have the diversity among cities and towns in exemptions and other tax relief measures than Rhode Island" .

Rhode Island General Laws mandate exemptions for specific types of real property, such as property owned by the Federal and State governments, hospitals, nonprofits and educational institutions. In addition, State statutes mandate individual exemptions for veterans, disabled veterans, blind persons and gold star parents. State statutes allow localities to expand individual exemptions as well as establish other local exemptions, such as exemptions for the elderly (aged 65 and older).

There are a number of exemptions related to tangible personal property, such as household furniture, farm machinery and livestock. Additional exemptions typically target businesses and investments. In Rhode Island, manufacturers' raw materials, work in progress and unsold finished products are exempt from the property tax. Wholesaler and retailer inventories can only be exempted by local option.

Assessment

Because the property tax is administered locally, the burden of assuring that the assessment of property is uniform rests with the local tax assessor. Assessors determine assessed value by comparing recent sales of similar property, the cost of replacing the property and/or the income that is derived from the property.

All real and tangible property, regardless of classification, must be assessed at a uniform percentage within a locality. Motor vehicles may be assessed at different rates than real or tangible property. Assessed value is the value of a parcel of property used for taxing purposes. Once the value of the property is determined, the value is multiplied by an assessment ratio to determine the taxable value of the property.

Revaluation

New construction or improvements to property are assessed based on an index related to the most recent revaluation performed by the community. Personal property is valued at the current replacement cost, typically calculated as the original cost of acquiring the property minus depreciation. Each community determines the methods used to assess personal property. Motor vehicle values are established annually by the State Motor Vehicle Valuation Commission using data provided by the National Automobile Dealers Association (NADA).

The frequency of real property revaluation is set by the State. Until recently, Rhode Island had a ten-year revaluation cycle. Legislation enacted in 1997 advanced the ten-year cycle by one year, requiring a revaluation every nine years. In addition, in order to maintain assessments that reflect market changes, Rhode Island communities are required to conduct a statistical update in the third and sixth year after each revaluation.

Revaluation is necessary because property values within localities change over time. Therefore, the more time between revaluation, the greater the potential for inequities among types and classes of property. More frequent revaluation results in greater equity within and among jurisdictions.

Classification

A classification system either taxes different types (or classes) of property at different tax rates or uses different assessment ratios for various classes of property. Although each classification system may be unique, varying in terms of the number of classes, the composition of classes and the relative treatment of classes, there are essentially two categories of classification systems - classified assessments and classified tax rates. A number of states implement classified assessments by dividing property into different classes and assigning each class of property a different assessment ratio.

Rhode Island requires that all property, regardless of class, be assessed using the same assessment ratio. Therefore, to implement a classification program, Rhode Island communities must apply different tax rates to the various classes of property or use homestead exemptions for residential property to implement a classification program.

Because of previous classification efforts, homestead exemptions and recent initiatives to phase-out certain property taxes (motor vehicles and business inventory), all 39 municipalities essentially have some form of classified property tax structure. While some classification systems are more complicated than others, the basic system in place in the majority of communities applies a different tax rate to inventories, tangibles and motor vehicles than the tax rates that are applied to real property. In addition, certain communities apply a different real estate tax rate for commercial and industrial property than they do for residential property.

Eight communities have the authority to provide a homestead exemption as part of their property tax structure – which translates into a different property tax rate for residential property than for commercial property. In FY 2000 approximately $3.2 billion in property value was exempted from property taxation through the various homestead exemption provisions. While all eight communities have the authority, seven communities currently use a homestead exemption.

Recent Changes to the Property Tax System

There have been a number of attempts at reforming various aspects of the Rhode Island property tax. These include how schools are financed, changes to the revaluation process and initiatives to phase-out the taxation of certain classes of property. The following highlights some of the major initiatives over the past couple of years.

Revaluation Cycle

Legislation enacted in 1997 established a nine-year revaluation cycle, requiring two statistical updates during each nine-year cycle in lieu of the requirement to perform a revaluation once every ten years. The law defines what constitutes a statistical update and outlines appropriate update methods. To ensure a smooth transition to the new revaluation schedule, the legislation outlines a schedule for the nine-year revaluation. In addition, the legislation outlined a State-local cost-sharing program for statistical updates.

Motor Vehicle Excise Tax

Property taxes generated by motor vehicles in Rhode Island represent nearly 7.5% of total property tax revenues. The General Assembly enacted a program in 1998 to phase-out the motor vehicle excise tax over seven years, as shown in Table VII-18.

The program requires that communities freeze motor vehicle excise tax rates at the FY 1998 level, and that no vehicle would have a greater value net of the exemption than it had the prior year.

The program increases the amount of vehicle value exempt from taxation until all vehicle value is exempt in FY 2006. In making up the lost revenues previously generated by the tax, the State will hold communities harmless through advance reimbursements. The State reimbursement will also include adjustments for inflation.

The estimated annual cost for fully implementing the plan to eliminate the vehicle excise tax is approximately $195.4 million. The Governor’s FY 2001 Budget Request would freeze the phase-out of the motor vehicle tax at the $2,500 level. The Governor’s proposal also permits communities to increase taxes on motor vehicles so long as the tax rate on motor vehicles does not exceed 50% of any other property tax rate.

Business Inventory Tax

The FY 1999 Budget included an initiative to eliminate retail, wholesale and auto dealers’ inventory taxes over a ten-year period, beginning in FY 2000. The program freezes FY 1999 rates and requires the localities to reduce rates annually by 10%. The plan requires the State to hold communities harmless by increasing the amount distributed through the General Revenue Sharing Program. The percentage of total State tax collections dedicated to the General Revenue Sharing Program is scheduled to increase from 1.3% in FY 1999 to 4.7% in FY 2009.

Real Estate Circuit Breaker

In 1997 the General Assembly expanded the program to provide tax relief for owners and renters of real property through credits on State income tax liability. The initiative increased the maximum income range to be eligible for the program from $12,500 to $18,000, and the maximum credit was increased from $200 to $250 commencing in July 1997. The FY 1999 Budget expanded the upper income limit to $25,000, but continued the maximum credit of $250.

Real Estate Conveyance Tax

Rhode Island has a real estate conveyance tax of $1.40 for each $500 paid for the purchase of property. Of the tax assessed in FY 1998, local communities retained $0.25 of every $1.40 collected and the balance went to the State general fund. The FY 1999 Budget requires that $0.30 of the $1.40 tax be used by the State to support the Distressed Communities Relief Program and the $1.10 balance of the tax will remain with the local communities. This is a transfer of revenue from the State to the localities of $4.8 million.

Fire Districts

A second initiative enacted in 1997 that should improve the administration of the property tax is the additional reporting requirements for Rhode Island fire districts. This legislation requires fire districts to report tax rates, budgets, assessed valuations and other related data to the State's Office of Municipal Affairs.

Issues, Analysis and Recommendations

•Should the State increase its involvement in the assessment and administration of the property tax, thereby decreasing local autonomy in the process?

•Should the State consider establishing Statewide standards for property tax classification?

•Should the State consider stronger methods to ensure that communities perform revaluations and statistical updates on time?

•Should the State require uniform data collection and reporting methods?

•Should the State limit the latitude and flexibility of local communities to determine personal exemptions and other tax relief measures?

•Should the State revisit its 5.5% cap on the property tax levy or rate and give consideration to more stringent controls on property tax levy growth?

•Should the State consider a Statewide property tax to fund education rather than the 39 different property tax rates across the State? Or should the State consider freezing local property tax rates and have the State fund the balance needed to support a certain level of public education?

RIPEC recommends the following actions to improve the property tax system:

1. Continue Property Tax Replacement Programs
2. Implement a New Education Funding System
3. Enforce the New Revaluation Cycle
4. Standardize Property Tax Administration
5. Modernize Resource Support, Data Collection and Reporting

1. Continue Property Tax Replacement Programs
Rhode Island’s property tax burden exceeds the national average by over 40.0%. A high priority should be to continue implementing recently enacted property tax reduction programs to bring balance into the State-local fiscal system and to reduce the reliance on property taxes to fund public schools. Therefore, RIPEC recommends that the existing property tax reduction programs (motor vehicle and business inventory tax phase-outs) be implemented according to the enacted schedule. These phase-outs will reduce overall property taxes and improve property tax fairness.

2. Implement a New Education Funding System
Rhode Islanders make a significant investment in public education, ranking 6th in the nation in per pupil spending. More than $1.2 billion will be spent on public schools in Rhode Island in FY 2000, with local property taxes supporting nearly 60% of the costs (excluding the State contribution to the teacher retirement fund and housing aid). The balance of the funding was made up primarily through State aid.

In 1996 Rhode Island abandoned its formula-based method of funding schools and adopted a practice of only developing distribution programs for the annual increase in State school aid. However, Rhode Island school district data demonstrates that communities endowed with a strong property tax base outpace those districts less wealthy, in both general instruction expenditures and overall student performance. In addition, there is a growing trend in which students with additional educational needs (e.g. economically disadvantaged, limited English proficiency) are concentrated in communities with limited fiscal capacity.

Therefore, there is a need to develop a specific method of financing public schools in Rhode Island that addresses student need, municipal property tax capacity and tax effort. The following outlines the direction RIPEC recommends given the State’s resources and local communities’ abilities to continue providing the majority of funds for public education.

Immediate Actions: The first priority should be to build confidence and predictability in the method of funding public education. This should include stabilizing local property taxes, increasing State funding for schools, and distributing most of the State’s resources based on multiple measures of equity.

The following program is designed to provide a four-year planning period that provides a direct method of distributing State school aid to local communities while providing enough time for the State to begin restricting the use of the property tax to fund schools. There are two critical components to the proposal – a guaranteed level of State aid and a corresponding reduction in the property tax levy cap. Each component is discussed below in greater detail. Table VII – 19 provides district by district distributions based on this program.

Annual Distribution of State Aid: The State should provide at least a 7.0% Statewide annual increase in school aid beginning in FY 2001 and continuing through FY 2004. Each year the State should distribute new school aid based on the following formula:

•25.0% through a Foundation Fund (based on fall head counts);
•25.0% through an Equity Fund (based on free and reduced lunch counts – excluding milk);
•5.0% through the Index Fund for Urban Ring communities (based on an index between 0.50 and 1.00); and
•45.0% through an Equity Index Fund (based on an index of 0.50 or less).

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The following details the FY 2001 distribution for illustrative purposes.

•State Aid Base: Guarantee of FY 2001 State school aid base of $514.9 million, with each school district receiving the exact amount it received in FY 2000. The State would allocate these funds as if it were one lump sum – no longer restricting any portion of these funds for a specific use. In addition, each school district would receive its share of the following:

•Foundation Fund: Distribute 25.0% of new State aid based on 1999 head counts (fall enrollment), with each community's share of the Foundation Fund equal to their proportion of students to the total student enrollment in the State.

For example, Cranston has 7.0% of the statewide head count and would receive 7.0% of all funds distributed through this Fund.

•Equity Fund: Distribute 25.0% of new State aid based on the percentage of 1999 children eligible for free and reduced lunch. Each community's share of the Equity Fund would be equal to their proportion of students eligible for free and reduced lunch programs to the total number of students eligible in the State.

For example, East Providence has 4.1% of the total number of children eligible for lunch programs Statewide, and would therefore receive 4.1% of all funds distributed through the Equity Fund.

•Urban Ring Index Fund: Distribute 5.0% of new State aid based on the FY 2001 Equity Index. Eligible communities would be those that have an Equity Index between 0.50 and 1.00. Distribution is then based on head count. Communities that meet the index threshold would share in the Fund based on their proportion of students to the total head count among those communities that are eligible. For FY 2001, six communities would be eligible.

For example, West Warwick has 12.0% of the students among the six eligible communities, and therefore would receive 12.0% of the pool of funds allocated to the Urban Ring Index Fund.

•Urban Core Index Fund: Distribute 45.0% of new State aid based on the FY 2001 Equity Index. Eligible communities would be those that have an Equity Index of 0.50 or less. Distribution is then based on head count. Communities that meet the index threshold would share in the Fund based on their proportion of students to the total among those communities that are eligible.

For example, Woonsocket has 14.3% of the students among the four eligible communities, and therefore would receive 14.3% of the pool of funds allocated to the Urban Core Index Fund.

For school aid in fiscal years 2002 – 2004, the State would guarantee each district no less aid than was provided in the previous fiscal year and provide for a Statewide increase of no less than 7.0%. The new State school aid would be allocated to the same four Funds using the same percentages – 25.0% for the Foundation Fund, 25.0% for the Equity Fund, 5.0% for the Urban Ring Index Fund and 45.0% for the Urban Core Index Fund. The State would continue the same methodology for distributing the new school aid, only updating the data used for distribution annually – head count, children eligible for free and reduced lunch programs and the Equity Index.

Distribution of State Education Aid in this manner would result in the following:

•Of the new school aid, 50.0% would be shared among all 36 school districts (Foundation and Equity Funds);
•Ten communities would receive 50.0% of targeted aid due to the limited ability to raise resources to finance schools;
•Approximately 83.0% of all new State education aid would be distributed to the ten urban school districts – the 17.0% balance is distributed among the 26 non-urban school districts;
•Overall, urban school districts would receive an 8.4% increase in State aid, while non-urban school districts would receive a 3.8% increase;
•The ten urban communities’ share of all education aid would increase from 69.8% in FY 2000 to 70.7% in FY 2001; and
•The core urban communities’ (Central Falls, Pawtucket, Providence and Woonsocket) share of all State education aid would increase from 47.6% in FY 2000 to 49.2% in FY 2001.

Property Tax Cap Reduction

Concurrent with the State school aid program, the State should also tighten the current property tax cap. This is designed to begin controlling the growth of property taxes in the State through increased State assistance in funding schools and a program to dampen expenditure growth to a level that is more consistent with regional patterns of inflation.

As described earlier in this section, Rhode Island established a property tax cap in 1985 that limits growth in property tax levies and tax rates to no more than 5.5% from the previous year. The following proposal would tighten the cap on local property tax levies.

•FY 2002: The property tax cap is applicable only to the levy, eliminating a municipality's ability to circumvent growth restrictions by applying the cap to the tax rate. In addition, the property tax cap on the local levy is reduced from 5.5% to 5.0%.
•FY 2003: The property tax cap on the local levy is reduced from 5.0% to 4.5%.
•FY 2004: The property tax cap on the local levy is reduced from 4.5% to 4.0%.
•An additional over-ride provision should be added to the program to allow communities to exceed the property tax cap (perhaps through a 2/3 vote of the local appropriating authority or a public referenda) in a given year should the community’s school enrollment grow by more than 2.0%.

Future Action: While a program similar to the one described above may end up being the permanent method of funding schools, there should be serious deliberation over the next few years to determine the feasibility of a school aid structure that includes a Statewide property tax and standard per pupil spending.

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RIPEC recommends that any school financing system should consider the following principles:

• Be student need driven;
• Be predictable in both amount and source of funding;
• Limit the portion of school budgets financed by the local property tax;
• Equitably treat property taxpayers in all cities and towns;
• Include a focus on student achievement and opportunities;
• Integrate Goals 2000 and other reforms into educational programs;
• Encourage least cost options in the school district budgeting process; and
• Establish Statewide parameters and benchmarks for teacher compensation.

The following outlines a possible path for the State to take to accomplish this task:

1. Establish a working committee that includes key State and local policymakers to develop, test and evaluate multiple distribution scenarios using techniques observed in other states. This committee should consider various options, such as the strengths and weaknesses of a Statewide property tax to fund schools. The Committee should report its recommended method of funding schools no later than the 2001 legislative session.

2. The mechanics of a new funding system should consider standard levels of per pupil spending (based on enrollment and student need), additional restrictions on property tax levy growth (with appropriate over-ride provisions), and governance reform to hold appropriate levels of government accountable for effective use of funding.

3. Establish a reasonable transition plan to an agreed upon school funding program that is sensitive to the needs and characteristics of Rhode Island’s cities and towns and the State’s fiscal capacity.

4. There should be ample time for public scrutiny of the proposal to evaluate its fairness and responsiveness to the principles discussed above.

3. Enforce the New Revaluation Cycle
The Governor and General Assembly should ensure that communities implement the nine-year revaluation cycle. The more time between each revaluation the greater the potential for inequities between types and classes of property. To date, every request for an extension to the current ten-year revaluation cycle has been granted by the General Assembly.

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The new legislation not only outlines the dates by which each municipality must conduct its next revaluation; it also outlines the timeline for statistical updates. Holding municipalities to these timelines is critical to improving the administration of the property tax. The State must also do its part by ensuring that the State’s share of the costs for statistical updates are sufficient and are included in the annual budget. The Office of Municipal Affairs must also have the appropriate staff, training and resources to monitor the process and advise local assessors.

RIPEC recommends that the General Assembly consider a process by which the State would conduct, through contracted services, either the revaluation or the statistical update should a municipality delay its revaluation or update. Since the municipality has to pay for the entire cost of a revaluation, the State should bill the municipality for all related costs if it conducts a full revaluation on behalf of the community. However, if the State must conduct a statistical update on behalf of the community, the State should only bill the municipality for the local portion of the costs associated with the statistical update. This is due to the State-local cost-sharing arrangement for the statistical updates in law. Should the municipality fail to reimburse the State for the related costs, the State should have the authority to reduce the community’s non-school State aid by the amount owed.

In addition, the State should consider encouraging joint assessment districts for both revaluation and statistical updates. Municipalities would remain autonomous regarding tax and other policy matters while achieving some economies of scale with regard to administering the tax.

4. Standardize Property Tax Administration
With the range of changes occurring in the State's property tax structure, there is a need to clarify both the process and administration of these complicated taxing systems. There has been growth in the use of classification systems, homestead provisions, personal exemptions and other programs that directly affect the administration of the property tax. The complexity of the property tax makes it increasingly difficult to ensure that the property tax system is effectively and fairly administered.

The State does not have any standards regarding a classification plan that a community may choose to adopt. In order to avoid further balkanization of the property tax structure in Rhode Island, RIPEC recommends that State and local officials develop and implement classification and homestead parameters and standards for property tax classification systems.

The Governor included a proposal in his FY 2001 Budget Request to establish parameters for future classification plans in the State as each municipality completes its next revaluation. First, the Governor’s proposal designates that there be no more than four classes of property (residential, commercial/industrial, tangible and motor vehicles). Second, the Governor’s proposal requires that the effective tax rate applied to any class of property cannot exceed the tax rate applied to any other class of property by more than 50.0%. Third, should a community adjust its tax rate for any reason, the same percentage change has to be applied to the tax rates for all other classes of property.

The Governor should be commended for drawing attention to the property tax classification issue. While the proposal will require further analysis to understand the impact it may have on Rhode Island communities, it does serve as a much needed catalyst for policymakers to address this critical issue.

Further, RIPEC encourages policy makers to consider several recommendations outlined in the 1996 Property Tax Study prepared by Almy, Gloudemans & Jacobs. While the following only highlights some of the Report’s recommendations, it does provide a picture of the need to re-define how Rhode Island administers the property tax:

•Re-codify Rhode Island’s property tax law to clarify language and eliminate duplicative and irrelevant laws;
•Create and maintain standard documents, forms and manuals for assessors and taxpayers;
•Establish a permanent committee of State and local officials to review administrative procedures and filing dates, to include recommendations for sanctions and penalties for non-compliance; and
•Re-examine assessment caps, freezes and other local option exemptions to develop Statewide, uniform, more narrowly defined local option exemptions.

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5. Modernize Resource Support, Data Collection and Reporting
Closely related to enforcing the revaluation cycle and improving overall property tax administration is building an effective State-local partnership. An effective system of joint State-local administration of the property tax can work if a State agency, such as the Department of Administration's Office of Municipal Affairs, has the resources, authority and professional stature to assist local officials in administering the property tax. This agency should provide local assessors with technical assistance and publish guidelines that specify standards and procedures for effective and consistent assessments.

In order for the State to take a leadership position in the administration of the property tax, develop accurate data and analysis, and ensure local communities have access to appropriate support, the State should evaluate the resources and authority of the Office of Municipal Affairs. This should include a review of its data collection and assessing standards as well as the development and publication of objective analyses of assessment results.

The collection and reporting of critical property-related data requires strengthening. The flow of information both within local jurisdictions and between municipalities and the State is often done manually, such as the collection of data related to sales and property tax rolls. Given the changes in revaluation and the increasing demand for detailed, user-friendly data, State and local officials should design methodologies to effectively share information and take advantage of available technology.

The changes in the revaluation cycle and the phase-out of the motor vehicle and inventory taxes will require communities to use new technologies. The State can and should play an active role in assisting communities to develop information technology. For example, Rhode Island General Laws permit the Department of Administration to establish a local grant-in-aid program to purchase microcomputers for the purpose of property tax administration (R.I.G.L. 44-5-11.4). Communities participating in the program and their sub-contractors should be required to implement a uniform software application. Coupling this assistance with the new revaluation cycle would not only improve the flow of information within and among State and local governments, but would improve the overall quality of information needed for a range of State aid programs and policy analysis.