House budget: Flat-tax option preserved

Published June 24, 2009 at 11:03 p.m.
PROVIDENCE, R.I. -- In what some state lawmakers described as one of their toughest votes of the day, the House voted to keep a high-profile tax break that benefits 2,267 Rhode Island taxpayers.To funnel more state aid to cities and town reeling from the elimination of a $55-million revenue-sharing program, Rep. Scott Guthrie, D-Coventry, proposed to freeze -- at its current level -- Rhode Island's flat-tax alternative, a tax break for high earners adopted in 2006. After lengthy debate, his proposal failed on a 52-to-23 vote.In tax year 2009, the flat-tax rate is scheduled to drop from 7 to 6.5 percent. If frozen at the current rate, the state could hold onto $12.2 million in tax revenue it would otherwise lose, according to the state budget office. Guthrie argued that this is not the time to make such a major cut in local aid, because it will force property tax hikes and layoffs in communities like his own, that is on the verge of laying off municipal workers. Nearby West Warwick has announced it can't make its teachers' payroll.Responding to critics, he said: "I don't want to soak the rich...I am asking them to sacrifice a little bit, like we have to sacrifice.''He also stressed: "This is not a tax increase,'' but rather a tax freeze for one small group of taxpayers to help avert property tax hikes for thousands more."Politics is local. Don't forget.'' Guthrie said. "I can go back to Coventry and say I fought for you...I hope I can say I won.''But House Finance Chairman Steven Costantino, D-Providence, said the state needs this tax option to make Rhode Island competitive with neighboring states, keep the high-earners here who pay 39 percent of Rhode Island's income taxes, position Rhode Island to climb out of the recession when the economy turns around and "not be bogged down by tax policy that drives business away.''He called the flat-tax vote a "litmus test on where we want this state to go.''The proposed budget eliminates the special treatment of capital gains. But "when you talk to executives, this is the one that matters,'' Costantino said of the flat-tax."If we freeze it, it will never be unfrozen,'' chimed Rep. Michael Marcelo, D-Scituate, adding "we can't run a state when more than half [the] state taxpayers make $30,000 or less. That is unsustainable.''On this issue, House Republicans agreed with Rep. Joseph Trillo of Warwick, who is weighing a run for governor. "The way to get money from the rich is not to rob them,'' he said.But Rep. Raymond Sullivan, D-Coventry, said: "Representative Guthrie has identified a revenue source for our cities and towns that are staring at the end of a loaded gun. For what...1,200 people that make over $250,000? With all due respect...This is about your community. This is about your backyards. This is about the services that the people, the taxpayers in your district have come to rely on...and when you go door to door and when you talk to our constituents about what we did for them, know that the cut in general revenue sharing is going to equate to a property tax increase.''As they debated, House pages handed out cups of frozen Del's Lemonade.Most Rhode Island taxpayers have low or middle incomes. As a result, their Rhode Island tax rate is typically 3.75 percent. But for higher-income taxpayers, a portion of their taxable income may be taxed at 7 percent, 7.75 percent, 9 percent, or even 9.9 percent, depending on their circumstances. If they opt to use the flat-tax system instead, they cannot claim deductions, exemptions and credits, and do not receive favorable capital-gains treatment. But they get to use a single, flat-tax rate -- initially 8 percent -- and scheduled to drop to 5.5 percent for 2011 and later years. The flat-tax option is appealing mainly to certain higher-income taxpayers who would otherwise face higher tax rates under the regular system, said Patricia A. Thompson, former president of the Rhode Island Society of Certified Public Accountants.Without the $55 million in revenue-sharing, the state municipal aid is dropping from $210.8 million this year to $186.9 million.Costantino said he doesn't believe property tax hikes are the only option for cities and towns, because in past years, "we've increased local aid and the taxes have gone up...Don't fall into that trap that this is a cut to locals and that's going to increase taxes for our constituents. They don't believe that. They are smarter than that. They know what is driving the cost of property taxes,'' said Costantino. He did not elaborate, but mentioned the "difficult labor negotiations'' in many communities.


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