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How does the Phase-out of the Motor Vehicle Excise Tax Program Work?

As part of the State's FY 1998 Appropriations Bill, the General Assembly embarked on a seven-year program to eliminate excise taxes on motor vehicles. The program was later amended to extend the period of phasing-out the tax to over eight years (FY 2000 - FY 2007). The General Assembly also eliminated the motor vehicle excise tax levied by local fire districts.

The program to eliminate the motor vehicle tax is designed to phase-out the tax by reducing vehicle values subject to motor vehicle excise taxes over an eight-year period. This was done because each community had different tax rates for motor vehicles. As the table to the right shows, the plan would increase the amount of vehicle value exempt from taxation until all vehicle value is exempt in FY 2007. In FY 2008 and thereafter, the State will appropriate funding for the program based on the FY 2007 appropriation as a percentage of Rhode Island Sales Tax revenues.

In order to ensure that local communities did not raise additional motor vehicle taxes during this period, the program requires communities to freeze motor vehicle excise tax rates at the FY 1998 level.

In making up the lost revenues generated by the tax, the State holds communities harmless through advance reimbursements. For example, in FY 2001, the Governor’s Revised Budget includes $68.7 million to reimburse local revenues foregone due to exempting $3,500 in motor vehicle value in FY 2002.

The motor vehicle excise tax has been a source of growing revenue for many municipalities. Therefore, the State has included two provisions that attempt to accommodate this issue. First, the program assumes a 100 percent collection rate on motor vehicles taxes. However, all communities historically have not collected 100 percent of the taxes levied due to slippage.

Second, because municipalities lose the option of increasing the motor vehicle tax in the future, the General Assembly included an inflation adjustment that is applied annually to the FY 1998 motor vehicle tax rate. Therefore, the plan not only replaces all lost revenues due to the elimination of the excise tax, it provides an annual increase in revenues that communities may or may not have realized if the State had not begun phasing out the tax.