House passes $7.8 billion budget proposal

PROVIDENCE—The state House of Representatives passed a $7.8 billion budget proposal early Thursday that would increase taxes on gasoline and investment incomes while cutting funding for local governments.

The bill easily passed in the House with a 69-to-5 vote.

The plan, backed by Democratic legislative leaders, attempts to make up a $590 million deficit for the fiscal year starting in July. The funding gap is equivalent to 17 percent of what state authorities expected to spend on their share of the budget.

Early in the hours-long debate, several Democrats proposed raising the state’s flat tax to 7 percent to help compensate for $55 million in funding cuts that have city and town governments laying off employees, cutting back on library services and have threatened school funding.

The flat tax now stands at 6.5 percent and is to drop to 5.5 percent by 2011. People paying the flat tax escape Rhode Island’s top tax rate of 9.9 percent but cannot take any deductions or credits.

Rep. Raymond Sullivan Jr., D-Coventry, said local residents are likely to see their property tax bills rising as the state scales back its support.

“I can’t look at them in the eye and say, ‘I voted to raise your property taxes, but I voted to protect the privilege of the flat tax for those who make $250,000 or more,“‘ Sullivan said.

Rep. Thomas Slater, D-Providence, said the flat tax was necessary to keep high-income taxpayers from leaving Rhode Island, resulting in less tax revenue and more state spending cuts.

“We have to keep the flat tax, even though I never did like it, because I see it improves our social service programs,“ Slater said.

The budget raises the state’s gasoline tax from 31 cents to 33 cents per gallon to help close a budget deficit at the Rhode Island Public Transit Authority, which operates a statewide bus network. The transit agency gets most of its funding from the state gas tax, a diminishing source of revenue as motorists cut back on driving during the recession.

The budget also eliminates discounted tax rates on income made from selling certain investments, commonly called capital gains. Right now, income from investments held five years or more are taxed at a rate of 2.3 percent or less. The budget taxes those investment profits as regular income at rates of 3.75 percent to 9.9 percent, depending on the investor’s annual income.

The spending plan includes a proposal to cut retirement benefits for state workers and teachers. New state employees would have to be at least 62 to retire. Those already working for the state would have new retirement dates set based on their ages and lengths of state service.

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

Currently, some state employees can retire with as little 28 years of service.

The budget now heads to the state Senate. Republican Gov. Don Carcieri has criticized the spending proposal, but Democrats hold a veto-proof majority.