Democrats propose raising capital gains tax

PROVIDENCE—Capital gains taxes would rise and Rhode Island motorists would pay a higher gasoline tax under a budget plan that Democratic lawmakers unveiled Wednesday to close a massive budget deficit opened by soaring unemployment and plummeting tax revenues.

The House Finance Committee voted 16-1 to approve the plan Wednesday afternoon. A full floor vote was scheduled for June 24.

The plan tries to close a $590 million deficit for the fiscal year that begins July 1, a gap equal to about 17 percent of expected state spending.

“We need to raise some revenue, and we are cutting some expenses,“ said Rep. Steven Costantino, D-Providence, chairman of the House Finance Committee, of the capital gains tax hike. “This was seen as the less onerous in terms of a tax increase.“

Democrats hold a veto-proof majority in the Legislature, meaning their budget plans can survive objections from Republican Gov. Don Carcieri. Carcieri had not seen the plan and could not immediately comment on it, said his spokeswoman, Amy Kempe.

Rep. Robert Watson, the Republican minority leader, complained that lawmakers were voting on a document before getting a chance to read it. The budget plan was still being photocopied as lawmakers debated it. He faulted the bill for raising taxes and fees.

“It’s a step in the wrong direction,“ Watson said. “It’s a mistake.“

Under the proposal, income earned from certain investments known as capital gains would be treated as regular income. Right now, investments held more than five years are currently taxed at a discounted rate of 1.67 percent for most taxpayers. If the budget plan is approved, those capital gains would be taxed at a rate of 3.75 percent to 9.9 percent, depending on a person’s annual income.

Democrats rejected a Carcieri proposal that would have eventually eliminated the state’s corporate income tax and reduced personal income tax rates. Their plan would allow people to inherit up to $850,000 before being required to pay the estate tax. The current threshold is now set at $675,000.

The state’s gasoline tax would increase by 2 cents to 33 cents per gallon. The additional money would be reserved for the cash-strapped Rhode Island Public Transit Authority, which runs a statewide bus service.

Cities and town governments will lose $55 million in state funding after absorbing a lesser cut earlier this year.

Part of the plan includes reduced pension benefits for state workers, a proposal sure to encounter fierce opposition from state employee unions.

Under the proposal, state employees and teachers would have to be at least 62 to retire. The value of their pensions would be calculated by averaging their five highest consecutive years of pay, instead of the current three.

Employees eligible to retire by Sept. 30 would not be affected by the changes.