PROVIDENCE, R.I. (WPRI) – The McKee administration on Thursday unveiled a sweeping budget proposal for the upcoming fiscal year, calling for a small cut to the state sales tax, a shift in how public education is funded and new investments in economic projects.

The $13.7 billion tax-and-spending plan proposed for the fiscal 2023-24 year beginning July 1 represents a $148.6 million increase – or 0.7% – from the $13.6 billion budget enacted last legislative session.

The plan – which will next be vetted and tweaked by the General Assembly – would require an additional $260 million in general revenue. That increase would largely be offset by an $182 million loss of federal relief funds compared to prior years.

“This is the biggest day of the year for us,” said Jim Thorsen, director of the R.I. Department of Administration, the agency that oversees the budget process on behalf of Gov. Dan McKee.

“It’s the governor’s specific plan on how to deliver on these priorities to make Rhode Island a better place to live, raise a family and do business,” he added.  

In addition to the $13.7 billion proposed for next fiscal year, McKee is also seeking a supplemental budget of $535 million for the current fiscal year – which would bring that tax-and spending plan to $14.1 billion. This would be the first time a state budget has exceeded the $14 billion mark.

A large amount of the additional funds would go toward infrastructure and capital improvement projects, along with $24 million to cancel the 3-cent gas tax increase that’s scheduled for July. Another $70 million would go to backfill revenue lost after a federal judge ruled last year that the state’s truck tolls on highways were unconstitutional.  

The McKee administration is appealing the court decision and budget officials said Thursday the $70 million would cover losses for the current and next fiscal year, and that they would tweak their plans for fiscal year 2024-25 depending on the outcome of the legal dispute.

Tax relief

The McKee budget proposal that has caught the most attention so far is his plan to cut the state sales tax from 7% to 6.85%, marking the first time the rate would be reduced since it increased to its current level in 1990.

Budget officials estimate the 15-basis point cut would save each Rhode Island household about $77 per year and cost the state $25.8 million in annual revenue.

Office of Management and Budget director Brian Daniels said they decided to lower the sales tax rather than offer refunds to taxpayers – like what happened in Massachusetts last year – because the cut represented a long-term benefit and it would make Rhode Island more competitive with neighboring states.

Yet the reduced rate would still be higher than Connecticut (6.35%) and Massachusetts (6.25%). And while McKee has said he’d like to lower the rate further down the road, state officials said that decision would be based off how healthy the budget looks in future years. There was no plan detailed in the budget documents for future cuts.

Halting the gas tax hike, meanwhile, would end up costing the state – and saving people at the pump – about $24.6 million over the next two fiscal years. McKee is also proposing canceling a gross receipt tax on electricity and natural gas for four of the six winter months – averaging out to $30 for about 250,000 gas customers and $24 for about 450,000 electric customers, according to budget documents.

For businesses, McKee is proposing a few different relief initiatives, including lower the corporate minimum tax to $375 per year compared to its current $400 per year. The move would save roughly 70,000 entities about $1 million combined next fiscal year, according to budget documents.

McKee made the same proposal last year and it was rejected by the General Assembly.

K-12 education

Another key part of the governor’s proposed budget is changes to the state funding formula for public schools, which would result in cuts to some districts and increases to others, if approved.

The state for the past three years has held districts harmless for enrollment losses, appropriating more money to make up for cuts that would have happened due to enrollment drops, since money is allocated per pupil.

McKee is now proposing to phase-in those cuts, reimbursing districts for 60% of their losses due to students going to charter schools in the first year, and then 30% the second year.

The idea is modeled off of a Massachusetts program. (The governor also proposed a separate one-time $8.5 million fund for districts losing students for other reasons such as private schools.)

The governor is then proposing an increase in formula funding for districts with students in poverty, students experiencing homelessness, multilingual learners and special education students.

The changes — in concert with funding for multilingual learners and high-cost special education — would result in about $2.8 million more for Providence, which had a net loss of 3,000 students since before the pandemic.

Other districts getting an increase under the proposal included Barrington ($1.9 million), Cumberland ($1.9 million) and Cranston ($1.8 million).

The public school districts will the biggest losses included Pawtucket ($1.3 million), Middletown ($531,000) and East Providence ($481,000).

The changes to the funding formula would also result in changes to how the state funds public charter schools, with Achievement First leading the way with a $10 million increase compared to last year’s enacted budget. The others to receive the most money include Excel Academy ($2.3 million), Nuestro Mundo ($1.7 million) and Providence Prep ($1.3 million).

Revamping the funding formula has been named as a top priority of the R.I. Senate this legislative session, as Senate Majority Leader Ryan Pearson has examined its effectiveness for several years.

“At first glance, I am pleased that many of the initiatives proposed in the governor’s budget align with Senate priorities, including investment in education, providing tax relief for Rhode Island residents and small businesses, and taking fiscally responsible steps to ensure we are prepared for predicted economic downturns,” Senate Finance Chairman Louis DiPalma said in a statement.

“Over the course of the next several months, the Senate Finance Committee will rigorously review every aspect of the budget proposal through a thorough and transparent public hearing process,” he added.

Housing

There has been no bigger issue in the news recently than housing and homelessness, which has also been named a top priority of House Democrats.

The McKee administration this year created a new Department of Housing and he tapped former Commerce Secretary Stefan Pryor to head the agency after former housing secretary Josh Saal decided to resign amid mounting criticism earlier this month. (Pryor left state government last year to make a failed bid for general treasurer.)

McKee has proposed an additional $2.7 million in general revenue to add 21 more full-time employees for the new department, which would bring the total up to 38, according to budget documents.

The agency will oversee the state’s effort to spend $250 million of federal relief money on housing projects — an initiative that’s come under scrutiny in recent months as Rhode Island continues to grapple with housing affordability and homelessness challenges.

McKee is also proposing another $30 million in federal relief funds to expand shelter capacity for homeless people, as nonprofit and advocacy groups continue to report there aren’t enough beds for the state’s homeless population for a second winter in a row.

“I have been briefed on some of the major proposals in the governor’s budget and look forward to seeing more details and how we can find common ground on shared priorities,” House Speaker Joe Shekarchi said in a statement.

“As always, we will rely on a thorough vetting of proposals through the House Finance Committee process,” he added. “I am confident that effort will yield a final product we can all be proud of.”

Economy

McKee is proposing a slate of additional funds for existing economic development programs, including $2.6 million for the Small Business Assistance Program, $15 million more for Rebuild Rhode Island and $20 million to the First Wave Closing Fund.

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The governor is also seeking an additional $25 million for the South Quay Marine Terminal, an East Providence project designed to augment the state’s offshore wind industry. The state has already allocated $35 million for the project and none of that money has been spent yet, according to budget documents.

Shekarchi earlier this month alluded to the idea that the project — along with others around the state — is grappling with labor and construction cost increases. But Commerce Secretary Liz Tanner told Target 12 on Thursday the extra money is required because the state failed to win a bid for a federal grant that would have helped pay for the second phase of the project.

The McKee administration is also budgeting for a general revenue loss of $2.9 million per year for the so-called Tidewater Landing project in Pawtucket.

The development — which was once billed as a project that would pay for itself with tax revenue generated on-site — is anchored by a minor-league soccer stadium that ballooned in cost after the developer faced its own battle with inflation last year.

Elsewhere, the McKee administration has proposed reallocating State Fiscal Recovery Funds that don’t currently have a home to fund a $45 million bioscience project that would include a wet-lab incubator space and wraparound services, according to budget officials.

Abortion

As promised, McKee is proposing to expand abortion coverage to state employees and for low-income Rhode Islanders covered by Medicaid.

The issue became a hot topic on the campaign trail last year and McKee pledged he would propose legislation to fund the initiatives this year. According to budget documents, McKee is proposing an increase of $29,500 in state health insurance expenditures to add abortion coverage for state employees.

In another section of the budget, he’s proposing an increase of $592,000 in general revenue to expand the Reproductive Privacy Act of 2019 and ensure abortion coverage for low-income Rhode Islanders covered by Medicaid.

Other odds and ends

Budget officials outlined a slew of other budget proposals that they argue would improve Rhode Island’s economy and help shore up the state’s budget to stabilize finances for the long-term.

The proposals include:

• Allocating $88 million for transportation projects to make the state eligible for a federal match through the Infrastructure Investment and Jobs Act
• $20 million for sidewalk and budget projects at the local level where cities and towns would be required to put up matching funds
• $55 million for the rainy day fund, which is supposed to help the state make ends meet in tough budget years. (Budget officials highlighted that the state’s statutorily required 5% cap is far lower than the 15% seen in other states, including Massachusetts and Connecticut.)
• $60 million for the Rhode Island Capital Plan Fund to build a new wing at the Davies Career and Technical High School and to increase funding for renovations at the State House
• $35 million in surplus funds to retire existing debt that budget officials estimate could save the state $4.5 million per year moving forward

Financial outlook

While state budget officials acknowledge Rhode Island could experience a recession in 2023, they are nonetheless bullish the state’s structural deficit will be less acute than projections of the past.

Thanks largely to higher-than-expected revenue and federal aid programs over the past few years, Daniels said they project the deficit will balloon to about $116 million next fiscal year, but then slowly decrease to about $41 million by 2028.

And while that still means the state will operate with a structural deficit for years to come, it’s far less daunting than projections from fiscal year 2021-22 when budget officials expected there to be a $364 million budget deficit next fiscal year. In fiscal year 2022-23, the projections improved slightly to $206 million for next year.

Editor’s note: The Department of Administration corrected the total amount of proposed state aid to public school districts after publication of this report, adding funding for high-cost special education and multilingual learners.

Sarah Guernelli contributed to this report.