PROVIDENCE, R.I. (WPRI) — Gov. Dan McKee on Thursday unveiled an $11.2 billion state budget plan for the upcoming fiscal year, even as he acknowledged it could be moot now that President Biden has signed a relief bill containing a windfall for Rhode Island.
McKee, a Democrat who took office last week, was required by law to submit a balanced budget plan to the General Assembly by Thursday. Lawmakers had already pushed back the usual January deadline for the budget to be submitted due to the pandemic.
“This budget, as presented today, has the potential to evolve,” McKee told reporters during a briefing Thursday afternoon, alluding to the bill Biden was about to sign in Washington.
The next fiscal year begins July 1. Lawmakers will begin holding hearings on McKee’s plan shortly, with passage of a final budget bill expected by June.
The new governor proposes no increases in the rates for broad-based state taxes such as the income or sales tax. But he does seek to raise additional revenue by taxing larger Paycheck Protection Program (PPP) loans that have been forgiven, as well as by increasing beach fees in Westerly and Galilee and by legalizing recreational marijuana.
Other revenue-raising proposals in McKee’s budget include increasing the real-estate conveyance tax for residential property sales over $700,000 and raising the license fee paid by local hospitals. But he would maintain the current six-year phaseout of the car tax on schedule.
In explaining his overall priorities, McKee said, “In order to meet this moment head-on we need a strong focus on fiscal responsibility, equity, education and reopening our economy.”
Officials said McKee began the budget process needing to close a roughly $336 million deficit. While significant, that amount was lower than what had been feared in mid-2020, according to Jonathan Womer, director of the R.I. Office of Management and Budget.
“It certainly is not a budget without sacrifices, but the worst that we had feared early on hasn’t come to pass,” Womer said.
More than half the deficit was covered when the Biden administration took office and quickly moved to increase federal FEMA and Medicaid funding for states. McKee is also proposing to delay repaying $70 million to the state’s rainy-day fund, pushing that off to 2022-23.
Rhode Islanders can be forgiven if they’ve experienced budget-induced whiplash over the last year. The pandemic upended financial projections a year ago, initially raising the specter of huge deficits. But Congress quickly began to approve trillions of dollars to shore up the economy and state budgets.
To put the impact of that federal firehose in perspective, total spending out of Rhode Island’s state budget is now expected to balloon from $9.4 billion in 2018-19 to $13.8 billion in 2020-21. That’s an increase of $4.8 billion, or 47%, in just two years — most of it funded by Washington.
And that is before enactment of Biden’s American Rescue Plan Act, which the president signed Thursday. The $1.9 trillion law includes well over $1 billion in direct aid for Rhode Island’s state government, hundreds of millions for cities and towns, a wide variety of other targeted grants, and direct payments to households.
Under state law, McKee was not allowed to account for the financial benefits of the Biden bill in the budget plan announced Thursday. But in a cover letter to lawmakers, the new governor urged them to use the expected windfall in order to avoid taxing forgiven PPP loans and to boost education spending, among other ideas.
“Not only are we going to work collaboratively with the General Assembly to produce the best possible budget for Rhode Islanders, but we will also be intentional about how we spend the next round of stimulus in a way that moves Rhode Island forward,” McKee said.
House Speaker Joe Shekarchi, who is overseeing his first budget process since becoming Rhode Island’s top lawmaker, praised McKee for his efforts so far. He also expressed optimism about the amount of money Rhode Island’s congressional delegation has secured for the state under the Biden relief measure.
“The most recent package will give the administration and the legislature some flexibility to work together and address long-term structural deficiencies and make other important policy decisions that put Rhode Island on the path for a robust and sustainable post-COVID recovery,” Shekarchi, D-Warwick, said in a statement.
He added, “I am ever mindful that these one-time funds will not be there to support the ongoing costs of new or expanded programs and we must be prudent in order to emerge from this crisis stronger.”
The PPP changes in McKee’s budget were triggered by the interaction between federal and state tax law.
Rhode Island generally follows federal rules to determine taxable income. In December, however, Congress surprised state officials by passing a law that exempted business expenses paid for with PPP proceeds from taxation — after already declaring that the PPP loans proceeds themselves were exempt if forgiven.
The two changes would cost the state of Rhode Island an estimated $133 million in personal and corporate income tax revenue. To recoup about half of that, McKee is proposing to tax any forgiven PPP loan amount over $150,000. However, he urged lawmakers to remove that provisions once the Biden relief money comes in.
Yet McKee ignored proposals from left-leaning Democrats in the General Assembly to raise income taxes on higher-income Rhode Islanders. “We didn’t think it was necessary to raise taxes,” said Womer, the OMB director.
That stance drew praise from a coalition of more than 20 business groups, which issued a public letter thanking him just before the budget was released. “Tax hikes have a chilling effect on small businesses in Rhode Island,” said Melissa Travis, president and CEO of the Rhode Island Society of Certified Public Accountants, which signed on to the letter.
Eleanor Slater Hospital is also a focus in the budget amid ongoing financial problems there.
The budget proposes a new $65 million long-term care facility on the hospital’s Zambarano campus in Burrillville, which would be part of a larger consolidation plan that includes eliminating 100 full-time positions. The massive overhaul of the state-run hospital system would also entail shutting down Slater’s Adolf Meyer and Regan units and creating a standalone Institute for Mental Disease, or IMD, at the hospital’s Benton facility in Cranston.
Small businesses, long a priority for the new governor, could benefit from some of the budget proposals.
McKee proposes using previous federal relief money to create a new $30 million grant program for those small businesses that would go into effect soon. He also wants to eliminate the $10 fee that retailers have to pay to remit sales tax, noting that neighboring states do not impose such a fee.
Legalization of marijuana was already on the State House agenda before McKee succeeded former Gov. Gina Raimondo, but the new budget plan includes his own alternative for an adult-use system. Unlike the high-profile Senate proposal released earlier in the week, McKee would keep marijuana oversight inside the R.I. Department of Business Regulation rather than creating a Cannabis Control Commission.
On the spending side, McKee proposes various policy changes that he said would address “issues that existed long before COVID-19 began … from the opioid epidemic and gaps in mental health services, to the disproportionate impact on communities of color.”
Those changes include new spending on various addiction treatment programs, including those at the Adult Correctional Institutions in Cranston, and tweaks to social services programs such as Rhode Island Works.
Housing is highlighted in the budget plan, as well, partly driven by $200 million in federal rental assistance dollars that were sent to the state under the appropriations bill President Trump signed last December. McKee wants to create a permanent stream of state funding to promote housing development, partly funded by the increase in the conveyance tax on higher-priced properties.
Jim Thorsen, acting director of the R.I. Department of Administration, said while there was significant continuity between the budget priorities of the Raimondo administration and the McKee administration, the new governor made his presence felt on issues such as small-business funding, PPP loan taxation, the car tax phaseout, and taxing higher-income residents.
“Those were big things to consider,” Thorsen said, adding, “I think Governor McKee was very reluctant to raise taxes … particularly when there is a big stimulus designed to get the economy going. So Governor McKee looked at that very carefully.”
Still, the financial outlook for the state remains challenging once one-time federal money disappears. Budget documents project an annual deficit of $374 million in the 2022-23 fiscal year, with similarly sized holes in the three years that follow.
As part of Thursday’s rollout, state budget officials provided an updated accounting for all the federal money that has come into the state to address the pandemic — now over $2.3 billion and still rising.
The money has been put toward everything from testing and field hospitals to grants for businesses, and McKee said he expects significant spending on coronavirus response efforts to continue into the new fiscal year.
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, Facebook, LinkedIn and Instagram
Eli Sherman and Shiina LoSciuto contributed to this report.