PROVIDENCE, R.I. (WPRI) — Rhode Island lawmakers on Thursday night unveiled a $13.1 billion proposed state budget for the 2021-22 fiscal year that mostly eschews tax increases while increasing spending on social services and education.
The final budget plan is almost $2 billion bigger than the $11.2 billion proposal that Gov. Dan McKee put forward in March. Legislative leaders said the lion’s share of that increase represents federal money from recent stimulus laws, with only about $180 million of the increase funded by state general revenue.
“Whenever I can use a federal dollar instead of a state dollar, I want to use a federal dollar,” House Speaker Joe Shekarchi, D-Warwick, told reporters at a briefing.
Rhode Island’s budget picture has changed drastically over the last 15 months. Initial forecasts projected the state would face large deficits due to the pandemic, but a rebounding economy and federal largesse have now transformed those deficits into surpluses.
The state’s final pre-pandemic budget totaled $9.4 billion in 2018-19, but the budget for the current fiscal year has now been revised up to $14.3 billion — a 52% increase in just two years. Legislative leaders emphasized that most of the increase was paid for by the federal government, on everything from unemployment benefits to support for COVID-19 testing.
Democratic legislative leaders sided with the business community over progressives on tax policy in the new budget plan released Thursday, declining to increase income taxes on the wealthy or impose a new tax on sugary drinks. The sales and corporate tax rates will remain the same.
“I’m cognizant of the fact we have to be competitive with our neighbors,” Shekarchi said. “We don’t have the same supercharged economy as Massachusetts, and if we raise our taxes too high we will lose out on people and businesses.”
Business leaders only won a partial victory, however, on the much-discussed issue of whether the proceeds of forgiven loans from the federal Paycheck Protection Program (PPP) should be taxed, raising the threshold for the tax to kick in from $150,000 to $250,000.
Christopher Carlozzi, state director for the National Federation of Independent Business, called the decision to tax any PPP loans at all “tone deaf.”
“Rhode Island will, once again, serve as a tax outlier as virtually every other state moved to prevent these loans from facing taxation,” Carlozzi said in a statement. “It is actions like this from state lawmakers that repeatedly positions Rhode Island at the bottom of national rankings on business friendliness.”
On the other side of the ledger, Shekarchi touted a long list of additional spending items. They include the first increase in decades for Rhode Island Works cash benefits recipients; budget increases for Rhode Island College and the R.I. Department of Children, Youth and Families; and rate hikes for child-care workers. Housing, one of the speaker’s top policy priorities, is also a notable focus of the budget.
The budget bill released Thursday night is a revised version of the tax-and-spending plan that McKee put forward in March, barely a week after he took over from Gina Raimondo. It follows months of public hearings as well as private horse-trading between the governor, the House and the Senate.
“It is a responsible budget that makes strategic investments to position the state for long-term fiscal, economic and operational health,” Senate Finance Committee Chairman Ryan Pearson, D-Cumberland, said in a statement.
The House Finance Committee approved the budget on a party-line vote of 12-3 almost immediately after its release, sending it to the full House floor for a debate and vote next week.
Additional changes to the budget, sometimes minor and sometimes significant, are usually made by House leadership during the floor debate. Once the budget passes the House it will head to the Senate, which in most years makes no further changes before sending it on to the governor for his signature.
The new fiscal year begins July 1.
Here is a rundown of some key policy issues tackled — or not tackled — in the final budget plan, based on a briefing by Shekarchi and House aides.
• Federal money: Congress has passed trillions of dollars in stimulus and relief funding since the pandemic began, most recently in President Biden’s American Rescue Plan Act. That law directs $1.1 billion to Rhode Island through its State Coronavirus Fiscal Recovery Fund — none of which is included in the new budget plan. Lawmakers say they want to hold hearings in the coming months to decide how to spend the money. The budget does appropriate hundreds of millions of dollars from the American Rescue Plan that will be passed on to municipalities and school districts. (It also includes language reestablishing the legislature’s power to appropriate funds, after Raimondo and McKee made major spending decisions unilaterally during the pandemic state of emergency, and says the legislature must vote on emergency actions after 180 days.)
• Eleanor Slater Hospital: Lawmakers largely kicked the can down the road on the problem-plagued state-run hospital system, with Shekarchi saying they are waiting for the governor to provide a detailed plan, expected by the end of the month. Here’s a full recap of how the budget deals with the issues at Eleanor Slater.
• PPP loans tax: Democratic Gov. Dan McKee originally proposed taxing all PPP loan proceeds over $150,000, saying it would only affect companies that turned a profit. Business groups urged lawmakers not to tax the money at all, but it stayed in the final budget, with the threshold raised to $250,000. “PPP loans were a lifeline during the pandemic for many businesses,” Shekarchi said. “However, some recipients accepted PPP loans and then profited from them.” The $250,000 threshold will apply to about 2,000 of the 30,000 Rhode Island businesses that got a PPP loan, he said. The House Fiscal Office estimates it will bring in about $54 million in revenue, down from $67.7 million under McKee’s proposal.
• Social Services: The budget increases spending in a number of areas for programs that serve needy or vulnerable Rhode Islanders. The Rhode Island Works cash-benefit program is getting a major revamp, with benefits increasing 30% and changes made to expand eligibility; it current serves about 2,400 families. Nursing homes are getting a funding bump, with some of the money expected to cover the cost of the new state’s minimum-staffing law. The rates paid to child-care providers are being raised, and parents’ copays are being capped at 7% of income. DCYF is getting a $10 million budget boost, as well as authorization to pay its next director up to $200,000 in an effort to help with recruitment for that position. It adds about $40 million to fund services for the developmentally disabled; state lawyers have been struggling to convince a federal judge that they are complying with a 2014 consent decree. A new “Pay for Success” program, funded with $6 million over five years, will test the value of providing wraparound services to homeless individuals.
• Education: The budget continues to fully fund the state’s K-12 funding formula. In an effort to reduce opposition to charter schools, districts that see a student leave a traditional school for a charter school would get $500 per student in the first year after the student switches. Rhode Island College is getting a major budget increase, pegged at $5.9 million above what the governor proposed.
• Housing: Shekarchi says it’s “not a sexy problem,” but addressing the state’s housing crisis is a top priority in the budget and more broadly this year. The budget creates and funds a new housing “czar,” reporting directly to Commerce Secretary Stefan Pryor, who would focus entirely on making housing more accessible to people from different socioeconomic backgrounds; the role is modeled on a similar job in Massachusetts, lawmakers said. The budget also increases the conveyance tax on all home sales over $800,000, with the revenue generated going toward expanding affordable housing for low- and moderate-income Rhode Islanders. Shekarchi said the $800,000 threshold – which is slightly higher than the was proposed by McKee and his predecessor, Raimondo – represents a more “progressive tax” in nature, adding that $800,000 is “not going to be first-time homebuyers, even in this market.” Until now Rhode Island has been the only state without a dedicated funding stream for housing development.
• Car Tax: The budget fully funds the fifth year of the six-year phaseout of the municipal car tax, further reducing the number of cars that are taxed and the amount owed. “That’s extremely popular and that is popular across the spectrum,” Shekarchi said.
• Tax Credits: The budget allocates $20 million more to the Historic Preservation Tax Credit program and $10 million more to the film tax credit program. In the latter case, Shekarchi said there are rumors that Disney or Netflix may be looking to make a new production in Rhode Island.
• Marijuana: As expected, the revised budget does not include McKee’s plan to legalize, tax and regulate recreational marijuana. While the Senate is poised to vote on a legalization bill next week, an agreement hasn’t been reached between the House, Senate and McKee over how to structure a legal cannabis market. Shekarchi has said the matter may be taken up in a special session later this year.
• Miscellaneous: The budget allocates $67 million to an IT fund that pays for technology projects, including an upgrade to DCYF’s computer system. There is $4.7 million to fund a settlement with the Laborers’ International Union of North America regarding back pay. The attorney general’s program to fund body cameras for uniformed police officers across the state is included. A new Rhode Island State Police barracks will be built in East Greenwich at a cost of $28.1 million to replace the North Kingstown and Richmond barracks, while the Portsmouth barracks will be renovated. The state will not be joining interstate compacts to license physicians, psychologists, physical therapists and EMTs, requiring them to keep getting licensed in Rhode Island. A new $82 million state health laboratory was not funded, but lawmakers said they will look to use federal funding to build one later. The $120 million taken out of the state’s “rainy day” fund during the pandemic will be restored.
Ted Nesi (firstname.lastname@example.org) is a Target 12 investigative reporter and 12 News politics/business editor. He co-hosts Newsmakers and writes Nesi’s Notes on Saturdays. Connect with him on Twitter and Facebook
Steph Machado contributed to this report.