Can Rhode Island Really Eliminate the Car Tax?

We tried to phase out the much-maligned tax before and failed.
car tax
Illustration by Ryan Peltier.

As part of the budget that phased-out the tax, the legislature directed Governor Gina Raimondo to find $25 million in savings. The biggest chunk — $15 million — will come from a reduction in the state workforce through attrition and a retirement incentive program launched in October. With payouts as high as $40,000, about 50 percent of 940 eligible workers were expected to take early retirement.

Another $5 million would come through management efficiencies — re-negotiating energy contracts and shifting personnel, for example — and the remainder from cuts to Medicaid.

“We have real concerns about how the state is going to pay for this going forward,” says Rachel Flum, executive director of the Economic Progress Institute, a non-partisan research and public policy group that advocates for low-income Rhode Islanders. “This was not vetted. While the cuts are to small programs, we are concerned about a ripple effect. It’s not just where we are but where we are headed, which is unknown.”

Brian Daniels, executive director of the Rhode Island League of Cities and Towns, echoed Flum’s caution while praising the structure of the phase-out.

“It makes the system fairer over time, with less variation. And, a better system would improve compliance; people would be more inclined to register a car where they live,” he says. “The long-term sustainability is a concern.”

University of Rhode Island economics professor Leonard Lardaro, a fierce critic of the state’s penchant for pass-it-now, worry-about-it-later policymaking, was blunter in his assessment.

“They have no idea where the money is coming from; they never did,” he says. “One of the most important criteria for fiscal policy is affordability, and there’s no way we can sustain this. This is a big mistake, and we will come to regret it.”

That was the case in 2010, when a 1998 law to gradually rid the state of the car tax died. The repeal had been buoyed by an improving economy and budget surpluses welcomed after the credit union crisis, says Antonio J. Pires, who championed the measure as then-chairman of the House Finance Committee. But the plan was delayed, then scaled back. In 2010, after the tough back-to-back budget years of the Great Recession, the effort stalled.

“I understood the math,” says Pires. “If it happened once, it can happen again. My only regret is that I could have been a little smarter about making it harder to repeal. Once we had given the taxpayers a taste of relief, it would have been wise to put the initiative on a referendum and lock it in, so only the voters could be the ones to kill it.”

Twenty years later, state officials are headed into the second round of car tax repeal with the same confidence about the economy’s ability to replace the lost car tax revenues. For one, eliminating the car tax will reduce Rhode Island’s property tax burden, making it more competitive with other states.

“The money will come from the economy,” says Mattiello. “We have hope that we have economic growth. The economy is not stagnant. If we control expenses and if we manage the government properly, the implementation [of the repeal] is not the biggest challenge we face.”

Some of the initial signs have been less than positive. The September Revenue Assessment Report, a monthly snapshot of adjusted general revenues, posted a 1.2 percent dip of $9.2 million. The construction of Twin River’s Tiverton casino — expected to bring in up to $55 million in tax revenues — is behind schedule. And then there is the specter of the Trump administration and U.S. House budget, with deep cuts to Medicaid, and a shifting of federal programs like Supplemental Nutrition Assistance Programs (SNAP) to the states.

Raimondo’s Deputy Chief of Staff Kevin Gallagher brushes those concerns aside: the 1 percent dip was not significant; he expects revenue projections to be on target; Twin River’s Tiverton
casino opening was only delayed by three months; the riven Congress hadn’t passed a budget in years, relying on short-term continuing resolutions to see the federal government through to the next patch. The state is enjoying an

improved labor market, and the state is in a position to boost its sales tax revenues now that it has collection and remittance agreements with 120 online retailers, including Amazon.
“We are optimistic,” he says.

Ellen Liberman is an award-winning journalist who has commented on politics and reported on government affairs for more than two decades.