PROVIDENCE, R.I. (WPRI) – Like many other new small business owners, Adam Lastrina says he had never heard of the tangible tax before he opened a downtown doughnut shop on Custom House Street in 2016.
Lastrina, the owner of Knead Doughnuts, said he got a letter in a mail asking him to list the value of the items inside his shop, so that the city of Providence could levy its 5.6% tangible property tax.
Lastrina said the items quickly added up: “Mixers, sheeters, dishwashers, fryers, proof boxes, tables, chairs, coffee equipment, brewers, refrigeration,” he listed off.
Unlike real estate property taxes and the motor vehicle excise tax (commonly known as the car tax), the tangible tax is not as widely known among the general public. Non-businesses are exempt from paying it, so the public focus is often on taxes that homeowners pay on their real estate property.
But among business owners, the tangible tax is oft-lamented and widely reviled.
“That one is a tough one to swallow,” Lastrina said in an interview. “It feels very business unfriendly.”
Business owners sometimes refer to it as a “double tax,” since sales tax is paid on the price of the items, and then the tangible property tax is also levied each year on the same items.
“Imagine if somebody knocked on your front door and said, ‘Hey, I’m just going to do a tour of your house,’ and they started checking boxes, ‘Alright, two beds, a dresser, pots and pans, a table,’ and every year you get a tax bill on that,” Lastrina said.
In an effort to improve the business climate, Gov. Gina Raimondo’s administration is hoping to convince cities and towns to cut the unpopular tax. But her proposal — which would provide some state aid to municipalities who voluntarily cut their tangible tax rates — could face a steep uphill climb in communities with little wiggle-room in their budgets and even less of a desire to transfer more of their tax burdens to residents.
The tangible tax isn’t exactly putting Knead out of business, nor is it driving them out of Providence; the doughnut shop now has three locations in the city. But Lastrina said it does factor into the calculation of whether the business can hire more employees, or offer health insurance to the ones already employed.
Knead’s tangible tax bill last year was $5,340 at their downtown Custom House location, and $941 at its second location on Elmgrove Avenue, where the value of its assets is much less because they don’t have doughnut-making equipment there. But Lastrina expects Knead’s brand-new third location – on Cromwell Street – to get its first bill this year, topping $5,000. In all, he estimates the business will be paying between $10,000 to $12,000 in tangible taxes alone in 2020.
According to a recent analysis commissioned by the state and conducted by firm Ernst & Young, Rhode Island has the highest tangible tax rate per capita in the Northeast.
Inside Rhode Island, the rates vary wildly from town to town; Central Falls has the highest rate, at $73 per $1,000 of tangible property, or 7.3%. On the other end of the spectrum, the towns of Jamestown, Charlestown and New Shoreham have rates below 1%.
The highest rates after Central Falls are North Providence (6.9%), Johnston (6.4%), Smithfield (6%), East Providence (5.6%), Providence (5.6%), Pawtucket (5.2%), Woonsocket (4.7%), West Warwick (4.5%) and North Smithfield (4.3%), according to the analysis. (Ernst & Young was paid $43,000 for analysis and consulting, according to a spokesperson.)
“It’s the kind of tax that really irritates and can burden smaller businesses,” said Raimondo’s Commerce Secretary Stefan Pryor, who is pushing for the proposal.
The program, tucked into the governor’s expansive $10 billion budget proposal, would invite cities and towns to apply for state aid in exchange for cutting their tax rates.
The state would reimburse the municipalities for a portion of their revenue losses, in a tiered fashion, providing a 50% reimbursement with state tax dollars to the municipalities with the highest tax rates above 6.5%. The cities and towns with rates above 5% would get a 25% reimbursement, while cities and towns with rates about 2.15% would get a 10% reimbursement. In all, 21 of Rhode Island’s 39 municipalities would qualify for the funds, which would be available for five years.
While the program is proposed to begin accepting applications in the upcoming budget year, the state would not begin providing aid until the 2021-22 fiscal year.
“There’s added incentive for a town that has an especially burdensome tangible tax rate to bring it down,” Pryor said.
The second part of Raimondo’s proposal is enabling legislation that would allow cities and towns to create an exemption or a minimum filing threshold for the tangible tax by ordinance. There’s no state aid tied to that portion of the proposal, which is aimed at helping smaller businesses. (Currently, towns and cities have to individually ask the General Assembly for permission to do this; a bill was introduced last month to allow the Bristol Town Council to exempt property from the tangible tax in that town.)
“We want to make it something that a town can do because it feels it’s the right thing it do, and it can afford doing so,” Pryor said.
Raimondo’s proposal is easier said than done in some cash-strapped cities like Providence, which is already considering changing its residential property tax structure this year. Providence raised $55 million in revenue from the tangible tax last year, with more than $11 million coming in from the highest tangible taxpayer, National Grid.
Patricia Socarras, the press secretary for Providence Mayor Jorge Elorza, said the city has had “preliminary” talks with state officials about implementing a tangible tax exemption.
“We are currently in the process of doing a deeper review to better determine the overall effect,” Socarras said.
Johnston Mayor Joseph Polisena, whose town has one of the highest rates, says even if the program becomes law he does not plan on taking Raimondo up on her offer.
“I don’t see it as a problem,” Polisena said in an interview. “I don’t see it as we’re gouging the businesses.”
He said businesses still come to Johnston despite the higher tangible tax, pointing to the new Citizens Bank headquarters that recently opened there.
His concern with Raimondo’s program is that the state aid would only last for five years, leaving the municipalities to close the budget hole.
“Where do you make that up? You still have to make it up, and you don’t want to put it on the homeowners,” Polisena said.
In Central Falls, where the tax rate is highest — but brings in just about $1.4 million in the square-mile city — Mayor James Diossa was noncommittal while praising Raimondo for proposing to cut the tax.
“We are always looking for new ways to promote economic development in Central Falls, and we appreciate the governor’s interest in reducing the tangible tax for small businesses,” Diossa said in a statement. “We look forward to learning more about the governor’s proposal and seeing how we can partner with the state to grow the economy in Central Falls.”
Mayor Charlie Lombardi, a Democrat of North Providence and a business owner himself, also said he would look into the proposal.
“We’re always concerned about any taxing of our residents,” Lombardi said in an interview.
“I know the council, along with myself is concerned about this,” Lombardi said. “We will be researching it, and if we can afford our taxpayers any relief we would do it.”
The Rhode Island League of Cities and Towns has not yet taken a stance on Raimondo’s plan, which would transfer some tax burden from businesses to statewide taxpayers. Unlike the car tax phaseout that’s currently underway, the state would not be giving towns and cities a full reimbursement for their losses – but the tangible tax cut would be voluntary, while the car tax cut is mandatory.
The House Finance Committee started vetting Raimondo’s massive budget proposal Tuesday night, and will hear the tangible tax proposal on Thursday. House leadership has not yet indicated support or opposition to the plan.
“All of the governor’s new proposals … will be heard by the House Finance Committee in the coming weeks. Speaker Mattiello and [House Finance] Chairman [Marvin] Abney are not going to weigh in at this time,” spokesperson Larry Berman said.
Senate President Dominick Ruggerio signaled more openness to the plan.
“Rhode Island’s state tax structure is very competitive,” Ruggerio said. “However, the local tax burden is among the worst in the nation. The Senate Finance Committee will be examining the governor’s proposal, but generally speaking I encourage cities and towns to do all they can to reduce their local tax burdens.”