Executive Summary

Collections from the property tax in Rhode Island continue to represent the single largest revenue source for local government services in the Ocean State. In FY 2000 property tax levies statewide are estimated to total $1.338 billion. The following report - Property Taxes 2000 - Next Steps - updates information related to Rhode Island's property tax characteristics and trends, summarizes recent administrative reforms and outlines a series of recommendations for the next steps in property tax reform.

How Rhode Island Compares

Rhode Islanders pay more in property taxes than they pay in any other single tax, including personal income, general sales and all business-specific taxes.

Rhode Island's local governments collected approximately 58.0 percent of their FY 1996 revenues from property taxes (New England states averaged 51.0 percent and the U.S. average was 28.0 percent.

Rhode Island's FY 1996 property tax collections per $1,000 of personal income of $48.75 ranked 5th highest nationally, exceeding the U.S. average by 42.0 percent.

Rhode Island's FY 1996 per capita property tax collections of $1,162 ranked 5th highest nationally, exceeding the U.S. average by 47.3 percent.

The Minnesota Taxpayers Association prepared a measure to compare the property tax burden for four types of property - residential, commercial, industrial and apartments. Rhode Island's property tax burdens for each class of property ranked among the ten highest except for homes valued at $200,000 (ranked 12th).

Property Tax Trends in Rhode Island

From FY 1990 to FY 2000, total full property value in Rhode Island increased by 1.8 percent. However, if one adjusts for inflation, there was a 19.2 percent decline in values over this ten-year period.

In 1990 approximately 51.5 percent of the total property value was located in the State's ten urban communities with the 48.5 percent balance in non-urban communities. In FY 2000, 46.4 percent of the statewide-full value is estimated to be located in the urban communities and 53.6 percent in non-urban communities.

Based on the estimated full value of property and the FY 2000 levy, FY 2000 effective tax rates ranged from $8.05 in Little Compton to $44.84 in Providence.

Of the ten highest effective property tax rates in Rhode Island, eight were in urban communities.

Eleven Rhode Island communities demonstrated at least some level of local fiscal stress (measured by the Equity Index) in terms of their ability to generate property tax revenues relative to the rest of the State.

Four communities (Central Falls, Pawtucket, Providence and Woonsocket) had an Equity Index of less than 0.50, indicating significant fiscal stress relative to the rest of the State.

RIPEC Comments

Over the past couple of years, there has been significant progress in reforming property tax administration and replacing revenues previously raised through property taxes with broad-based revenue sources. Examples of these reforms include replacing the ten-year revaluation cycle with two statistical updates between each nine-year revaluation cycle and phasing out auto and inventory taxes.

However, there are several areas where additional attention will prove valuable. The following recommendations stem from RIPEC research and a series of recommendations to improve the administration of the property tax in Rhode Island outlined in a 1996 Report - Toward a Fairer, More Understandable and Less Costly Property Tax for Rhode Island (Almy, Gloudemans & Jacobs).

Continue Property Tax Replacement Programs - A high fiscal priority should be to continue implementing recently enacted property tax reduction programs to bring balance into the State-local fiscal system and to reduce the reliance on funding public schools through the property tax. Therefore, RIPEC encourages the Governor and the General Assembly to ensure that existing property tax reduction programs are implemented, which will result in shifting how local services are financed, improving property tax fairness and enhancing competitiveness.

Implementing a New Education Funding System - Rhode Island currently lacks a comprehensive school finance system that can support the financial needs of the local community and the educational needs of all students. One cannot continue to tackle the State's over-reliance on the property tax without dealing with the manner by which public education is financed.

Enforcing the New Revaluation Cycle - While the new revaluation cycle is in place, ensuring that all communities comply with the law is critical to both the equity of property taxation within and among jurisdictions and property tax administration.
RIPEC recommends that the General Assembly consider (on a go-forward basis) a process by which the State would conduct (through contracted services) either the revaluation or the statistical update should a municipality intend to delay its revaluation or update.

Standardizing Property Tax Administration - Previous studies have shown that Rhode Island's current property tax administration structure is complex. Given the increasing need to ensure the tax is administered fairly and efficiently, the State should assume a leadership role in defining and managing the rules of property tax administration.

For example, in order to avoid further balkanization of the property tax structure in Rhode Island, State and local officials need to develop and implement classification and homestead parameters and standards for property tax classification systems.

Providing Resource Support - In order for the State to take a leadership position in the administration of the property tax, develop accurate data and analysis and ensure local communities have access to appropriate support, the State should evaluate the resources and authority of the Office of Municipal Affairs. This should include a review of its data collection and assessing standards as well as the development and publication of objective analysis of assessment results.

Modernizing Data Collection and Reporting - Closely related to the above recommendations is to take advantage of the available technology to provide uniform methods of collecting and reporting property-related data.

II. Overview of Property Tax Burdens

Local revenue from all sources in Rhode Island increased from $1,917.6 million in FY 1995 to $1,973.8 million in FY 1996, representing a 2.9 percent increase ($56.2 million). Local revenue collections from all sources in New England increased by 6.8 percent during the same period compared to the national average increase of 4.9 percent.

Property Tax Collections: Estimated 1996 property tax collections in Rhode Island grew by 1.1 percent from FY 1995. However, property tax collections in New England increased by 3.1 percent and national collections increased by 2.9 percent during the same period.

The level of dependence on the property tax for Rhode Island communities is significantly higher than the United States even when all local government resources, such as federal and state funds, are taken into consideration. Nearly 58.0 percent ($1,141.4 million) of all Rhode Island local revenues in FY 1996 were derived from property taxes. Among the six New England states, property taxes generated 51.0 percent of local revenues, while across the U.S. localities derived 28.1 percent of their revenues from local property taxes.

Conversely, Rhode Island localities received 28.0 percent of their revenues from state sources, while the New England states on average received 31.0 percent and the national average was approximately 34.0 percent. This is primarily a function of how public elementary and secondary education is financed across the country. New England States derived more of their education funding from the property tax than most of the country.

Rhode Island and New England local governments did not derive a significant portion of their revenue from locally levied non-property taxes (income, sales and others). The six New England states did not levy local income or sales taxes, while throughout the United States, municipalities, counties and school districts generated approximately 10.0 percent of their own revenues from these resources in FY 1996.

It should be noted that Rhode Island's municipalities depend less on fees and charges than other New England States and the nation as a whole. While Rhode Island derived approximately 8.3 percent of its revenue from charges and fees, the New England average was 12.4 percent and the national average was 23.7 percent. This is due primarily to revenue associated with municipal and county hospitals, which do not exist in Rhode Island to the extent they do in other states.

State Share of State-local Tax Revenue Collected: Table 2 compares the state's share of all state-local revenues collected from 1970 to 1996 (most recent data available). These figures are a function of public schools financing, local property tax limitations and other economic patterns experienced in each state. On average, a state's percentage of all state-local revenue collections increased from 55.3 percent to 60.7 percent during this 26-year period

Among the New England states, Connecticut, Maine and Massachusetts have all seen the state's share of state-local revenues increase, while New Hampshire, Rhode Island and Vermont have shown decreases in the state's share of state-local tax revenues. This means that local governments were providing a greater portion of the total state-local tax revenue collected in their respective states in FY 1996 - primarily through the property tax. The State of Rhode Island's share of state-local tax revenue collections decreased from 59.0 percent to 57.3 percent. This is primarily due to local communities financing nearly 60.0 percent of public school expenditures through the local property tax.

Property Tax Collections Per $1,000 of Personal Income: Table 3 shows property tax collections per $1,000 of personal income from FY 1990 to FY 1996. Property tax collections per $1,000 of personal income is calculated by dividing the total property taxes collected by the total personal income of the state.

Rhode Island's FY 1996 property tax collections per $1,000 of personal income of $48.75 ranked 5th highest nationally, exceeding the national average of $34.35 by 42.0 percent and was 10.5 percent above the New England average of $44.11 per $1,000 personal income. Property taxes collected per $1,000 of personal income were higher in New Hampshire ($60.10), Vermont ($54.80) and Maine ($54.18). Rhode Island's FY 1996 property tax collections per $1,000 personal income were 28.1 percent higher than in Massachusetts.

It is interesting to note that the national FY 1996 property tax collections per $1,000 of personal income was lower than FY 1990. The New England average has shown a similar decline. While Rhode Island's property tax collections per $1,000 have shown a slight decline from FY 1995, they were still higher than its FY 1990 collections per $1,000. This was partially due to the different levels of economic activity, various property tax limitations and levels of state aid in each state.

Property Tax Collections Per Capita: Table 4 displays how Rhode Island's property tax burden per capita compares to the nation and other New England states. Property tax collections per capita is calculated by dividing the total property taxes collected by the total population of the state.

Rhode Island's FY 1996 per capita property tax collections of $1,162 ranked 5th highest nationally, exceeding the national average of $789 by 47.3 percent. However, Rhode Island's FY 1996 per capita property tax collections were 3.6 percent less than the New England average ($1,205 per capita), with the per capita property tax burden higher in Connecticut ($1,422) and New Hampshire ($1,520). In FY 1996 all six New England States were ranked among the ten highest property tax collections per capita in the country. Rhode Island's FY 1996 property tax collections per capita were 9.3 percent higher than Massachusetts.

Representative Tax System - RIPEC published a report in January 2000 that measured each state's tax capacity and tax effort - The Representative Tax System -Tax Capacity and Tax Effort in the Ocean State. The analysis defines the tax capacity of a state and its local governments as the amount of revenue they would raise if national average tax rates were applied to each state's tax base. The tax effort index compares the actual revenue raised by state and local governments against the hypothetical, uniform representative tax system using national average tax rates. In short, tax effort measures the extent to which a state utilizes its available tax base.

The report suggested that Rhode Island's overall capacity to raise tax revenues was 9.0 percent below the U.S. average, ranking 38th among the states and Rhode Island's tax effort was 17.0 percent above the U.S. average, ranking 2nd highest in the country.

Table 5 shows the relative tax capacity and effort for the New England States for each of the three major state and local tax revenue sources. Rhode Island ranked relatively low in terms of tax capacity for all three categories, while its 4th place property tax effort ranking (63.5% greater than the National average) revealed the Ocean State's over-reliance on property taxes. The Ocean State's personal income tax effort is 16.7% above the U.S. average, which placed the State 19th overall. The State's general sales tax effort is low compared to other states - 19.5% below the U.S. average (ranked 35th).

Effective Property Tax Rates (ETR) - The Minnesota Taxpayers Association in cooperation with the National Taxpayers Conference prepared a measure to compare the relative property tax burden for four types of property - residential, commercial, industrial and apartments - for the largest urban area of each state and Washington DC.

Rhode Island's property tax burden ranks in the top ten for all classes of property except homes valued at $200,000. It should be noted that Rhode Island's relative property tax burden for commercial and industrial property is higher than the burden for residential property. The following details how Rhode Island ranks among New England States relative to their property tax burdens by class of property.

Homesteads - As shown in Table 6, Rhode Island's 1998 net property tax of $1,549 on an $80,000 home (includes fixtures) was 51.4 percent above the U.S. average. Rhode Island's effective tax rate of 1.9 percent ranked 10th highest in the country, and ranked third among the New England States. Rhode Island's 1998 net property tax of $3,319 on a $200,000 home was 43.6 percent higher than the national mean. The effective tax rate of 1.7 percent ranked 12th highest in the country.

Apartments - Rhode Island's 1998 net property tax of $23,302 on a $630,000 apartment building (includes fixtures) was 86.7 percent higher than the national average ($12,419). Rhode Island ranked 5th highest among the 50 states.

Commercial -Rhode Island's net property tax on commercial property (includes fixtures) valued at $120,000 ranked 3rd highest among the 50 states, with an estimated $4,725 in net property taxes resulting in an effective property tax rate of 3.9 percent. Rhode Island was 77.0 percent higher than the U.S. average and clearly outpaced the other New England States. As Table 6 shows, a similar trend was reflected when the total value of commercial property was increased to $1.2 million and $30.0 million.

Industrial - Rhode Island's property tax on industrial property (includes machinery, equipment and fixtures) valued at $200,000 ranked 6th highest in the Nation, as $5,147 in net property taxes resulted in an effective property tax rate of 2.6 percent. Rhode Island was 50.8 percent higher than the U.S. average and above all New England States.

III. Property Taxes in Rhode Island

It is clear that Rhode Island's dependence on the property tax is significantly greater than most states. While the overall property tax burden in the State is well documented, there are significant differences in property tax burdens among Rhode Island's 39 municipalities. The following section focuses the discussion on what is happening to the property tax within Rhode Island's borders.

Statewide Property Value: If tax rates remain constant, growth in property tax revenue can result from increased property values within the jurisdiction and/or new construction that adds value to the jurisdiction's tax base.

One should note that the Rhode Island Office of Municipal Affairs (Department of Administration) calculates the estimated full value of property in each community based on recent sales data and market conditions. Because the Office of Municipal Affairs has yet to calculate full value figures for FY 1999 and FY 2000, RIPEC estimated full value based on the most recent ratios of assessment available and general market trends.

From FY 1990 to FY 2000 estimated full value increased by 1.8 percent. If one adjusts full value by inflation (1999 dollars), there was a 19.2 percent decline in property value over this ten-year period. This translates into a $14.1 billion decrease statewide in adjusted full value (1999 dollars). During this ten year period, the State experienced its largest decrease in full value between FY 1992 and FY 1993 (Certified as of 12/31/91). According to the Office of Municipal Affairs, a significant portion of the decline in statewide values was attributable to declines in commercial property. Since urban communities typically have a higher concentration of commercial property, the decline in commercial property affects them more than suburban and rural communities. While the overall adjusted full property value in the State declined by 19.2 percent over a ten-year period, urban communities experienced a 27.2 percent decline in adjusted full value while non-urban communities experienced a 10.8 percent decline during this ten-year period. In other words, while the adjusted full value in urban communities declined by nearly $10.3 billion, non-urban property value declined by $3.8 billion during the same period.

Therefore, while both urban and non-urban communities experienced declines in the overall tax-base, the rate of decline has resulted in a shift in the location of property wealth in the State. In 1990 approximately 51.5 percent of the total value was located in the State's ten urban communities and the 48.5 percent balance was in non-urban communities. In FY 2000, 46.4 percent of the statewide-full value is estimated to be located in the urban communities and 53.6 percent in non-urban communities.

Statewide Property Tax Levy: Table 8 shows the statewide tax levy needed to support local programs. It should be noted that Table 8 does not include levies associated with special purpose districts (fire, water, etc.). Therefore, the property tax levy shown understates property taxes actually paid by some Rhode Island property owners. From FY 1990 to FY 2000, the statewide levy increased by 61.0 percent ($505.9 million).

Adjusting for inflation (1999 dollars), property tax levies increased by 27.8 percent ($290.3 million) during this ten-year period. Therefore, while statewide-adjusted full values declined over the past decade, the local levies have continued to grow.

In 1990 approximately 51.3 percent of the property tax levy statewide was allocated to support schools and the 48.7 percent balance supported municipal services. However, in FY 2000 there has been a slight shift in how the local property tax levy is allocated. Nearly 54.0 percent of the FY 2000 local property tax levy was allocated to support schools and the 46.0 percent balance was allocated to support municipal services.

As part of the 1985 Omnibus Property Tax Relief and Replacement Act, Rhode Island established a property tax cap. The property tax cap requires that no city or town levy a tax in excess of 5.5 percent of the amount levied the prior year. Although the cap is placed on municipal tax levies, the municipality may choose to apply the cap to its prior year's tax rate. A community is permitted to exceed the cap if the municipality forecasts or experiences a loss in non-property tax revenues (requires Department of Administration certification); the municipality experiences the need for emergency expenditures (requires Auditor General certification); or if the municipality experiences debt service expenditures that exceed the 5.5 percent cap (requires Department of Administration certification). According to the Office of Municipal Affairs, four communities exceeded the cap - Johston, Lincoln, New Shoreham and North Providence (FY 1999).

Current Property Tax Rates: Table 9 shows which communities have homestead provisions and the FY 2000 tax rates by class for each community. Residential tax rates per $1,000 assessed valuation ranged from $10.96 per $1,000 of assessed value in New Shoreham to $44.72 per $1,000 of assessed value in Pawtucket. Because of classification, homestead exemptions and recent initiatives to phase-out certain property taxes (motor vehicles and inventory), all 39 municipalities essentially have some form of classified property tax structure.

Thirty-five municipalities apply the same property tax rate for all real property (residential, commercial and industrial). Central Falls, North Providence, Pawtucket and Warwick apply a different rate for commercial and industrial than for residential property. In addition, eight communities employ a homestead exemption as part of their property tax structure. Eight communities also apply a different rate for personal and tangible property than for commercial and industrial property.

The General Assembly also enacted multi-year programs to phase-out inventory and motor vehicle taxes. All communities previously used the same rate for tangible property and wholesale and retail inventories. However, the ten-year phase out of the inventory tax requires each community to reduce its property tax rate on inventories by 10 percent each year until completely phased-out. Therefore, there now exist separate rates for inventory and tangible property.

The phase-out of the motor vehicle tax requires that the tax rates imposed by communities in FY 1998 remain frozen. As discussed later in this report, the program eliminates a greater portion of an automobile's value in each year of the seven-year phase-out program.

Fire Districts: In addition to the municipal property tax rates discussed above, residents in certain communities also have fire districts that apply an additional property tax rate to support fire and rescue services. As Table 10 shows, tax rates on residential property ranged from a high of $2.50 per $1,000 of value in Tiogue (Coventry) to a low of $0.30 per $1,000 of value in Charlestown. There were four fire districts that had a classified property tax system to finance their services - two fire districts in Cumberland and two in Lincoln.

Effective Property Tax Rates: Even with all the changes occurring in the property tax structure, one is able to estimate the effective property tax rates for all municipalities for FY 2000. These rates reflect what each community's tax rate would have been if all property were assessed at 100 percent of its full value as estimated by RIPEC based on recent data provided by the Office of Municipal Affairs. The effective tax rate is the total levy divided by the estimated full market value of property within the community, adjusting for various exemptions and credits provided by the community. The effective tax rate provides a tool to compare the overall property tax burden in each community.

Based on the estimated full value of property and the FY 2000 levy, FY 2000 effective tax rates ranged from $8.05 in Little Compton to $44.84 in Providence. As shown on Table 11, eight of the ten urban communities are among those with the highest effective tax rates in the State.

The effective tax rate and the associated rankings only compare the overall effective property tax rate by community, not taking into account the classification systems, homestead exemptions and other taxing authorities (e.g., fire districts) levying property taxes in Rhode Island. All these factors impact property tax burden and rate comparisons among the communities. Therefore, effective tax rates should be considered among several tools to evaluate relative property tax burdens.

Rhode Island Equity Index: Another method to evaluate relative property tax burdens in each of Rhode Island's 39 cities and towns was recently developed by the Office of Municipal Affairs. The analysis considers the property tax base of each municipality and the tax levied in each community relative to the State average. The results produce an "Equity Index" for each municipality. It should be noted that a portion of the education aid distributed by the State in fiscal years 1998 through 2000 was based on this "Equity Index."

Methodology - The Index is a calculation of the relative tax effort each community makes towards raising local resources and the relative tax capacity each community has to raise local resources. The Index uses the adjusted equalized assessed value (EWAV includes an adjustment for Median Family Income) of each community as estimated by the Office of Municipal Affairs and the gross levy reported by each community. The Index calculates the average state property tax rate and uses the rate to generate a hypothetical per capita tax yield for each community. The Index then compares the actual per capita property tax yield by community with the hypothetical per capita tax yield using the state average rate.

The Index then estimates the "gap" between the actual yield and the potential yield if the state average tax rate were used, based on each community's tax base. The following outlines the differences in relative capacity and effort and the composite index based on these factors (Table 12).

Tax Capacity - Tax capacity is based on the State average of 100, in which the higher the community's relative capacity, the higher the number. In FY 2000 tax capacity ranged from 1,073 in New Shoreham to18 in Central Falls. Twelve communities demonstrated relative property tax capacity that was more limited than the State average. As shown on Table 11, it is clear that the majority of urban communities have relatively limited tax capacity when compared to the State average. Eight of the ten urban communities ranked among the ten lowest tax capacity communities.

Tax Effort - Tax effort is also based on the State average of 100, where the higher the Community's property tax effort relative to the State average, the higher the number. In FY 2000 tax effort among the communities ranged from a high in Providence (247) to a low in Little Compton (30). Ten communities demonstrated tax efforts that were higher than the State average. In other words, those communities that had a relative property tax effort higher than the 100 percent benchmark were those that tax their property base to a greater extent relative to the rest of the State.

Composite Equity Index - The Index is calculated by dividing each community's relative capacity by its relative effort. In general, those communities that have an Equity Index of 1.00 or less are considered to evidence some level of fiscal stress relative to the rest of the State because of their relative fiscal capacity and tax effort. Those communities with an Index from 1.10 to 2.00 are considered to reflect the typical or average condition among Rhode Island municipalities. Those with an Index of 2.00 or more have a fiscal capacity at least adequate to meet their needs.

FY 2000 Indices ranged from 0.08 in Central Falls to 32.71 in New Shoreham. Eleven communities had Indices less than 1.00, 16 communities had Indices between 1.00 and 2.00, and the remaining twelve communities had Indices of 2.00 or higher. Many communities with Indices of less than 1.00 are also the same communities with high effective property tax rates. In particular, there are four communities (Central Falls, Providence, Woonsocket and Pawtucket) that have an Equity Index of less than 0.50. These four communities demonstrate that they require a high level of tax effort to derive resources from a rather limited amount of tax capacity.

This type of analysis shows that there is a significant gap between communities with adequate tax capacity and low tax effort and those with limited tax capacity and high tax effort. The index demonstrates that many of the State's urban communities continue to exhibit limited fiscal capacity and excessive tax effort relative to the State average, impacting their ability to provide the necessary resources to deliver public services.

IV. Administration of the Property Tax in Rhode Island

Rhode Island's property tax base includes real property and tangible personal property. Real property is primarily land and improvements to the land, such as buildings. Tangible personal property is primarily office equipment and business inventories. Rhode Island also permits localities to tax motor vehicles (an excise tax). In practice, taxes on motor vehicles are an integral part of Rhode Island's property tax system. As discussed later in this report, the FY 1999 State Budget included a program to phase-out the taxation of motor vehicles in Rhode Island. Intangible personal property, such as patents and stocks, are exempt from the property tax in Rhode Island.

Exemptions: Rhode Island General Laws permit localities to tax property that State statutes do not expressly exempt. Exemptions are designed assist the elderly, support education and encourage business investment. It should be noted that according to a recent report - Property Tax Assessment Practices in Rhode Island - by Almy, Gloudemans and Jacobs (1996), "no state is believed to have the diversity among cities and towns in exemptions and other tax relief measures than Rhode Island".

Rhode Island General Laws mandate exemptions for specific types of real property, such as property owned by the Federal and State governments, hospitals, nonprofit and educational institutions. In addition, State statutes mandate individual exemptions for veterans ($1,000), totally disabled veterans who also received housing assistance through the veterans administration ($10,000), blind persons ($6,000) and gold star parents ($3,000). State statutes allow localities to expand individual exemptions as well as establish other local exemptions, such as exemptions for the elderly (aged 65 and older).

There are a number of exemptions related to tangible personal property in Rhode Island, such as household furniture, farm machinery and livestock. Additional exemptions for tangible personal property typically target businesses and investments.

In Rhode Island, manufacturers' raw materials, work in progress and unsold finished products are exempt from the property tax. Wholesaler and retailer inventories can only be exempted by local option. As discussed later in this report, the FY 1999 State Budget included a program to phase-out the taxation of wholesale, retail and auto dealers' inventories. Rhode Island exempts industrial machinery but taxes other forms of industrial personal property.

Therefore, there are essentially two levels of property exemptions - those determined by the State and those determined by each municipality. Unfortunately, the figures reported for State-required property exemptions are not complete. However, the values provided by municipalities regarding their exemptions are available and accurate. In FY 1990 Rhode Island's 39 cities and towns exempted approximately $2.1 billion in property value ($2.7 billion adjusted for inflation). In FY 2000 the 39 cities and towns exempted approximately $5.0 billion in property value. Of this amount, approximately 64.0 percent ($3.2 billion) was directly related to residential homestead exemptions.

Assessment: The majority of communities select a local tax assessor through traditional civil service procedures, while some elect assessors (Exeter, Little Compton, New Shoreham and Tiverton). The local assessor prepares a grand list of properties and their associated value. Because the property tax is administered locally, the burden of assuring that the assessment of property is uniform rests with the local tax assessor. Assessors determine assessed value by comparing recent sales of similar property, the cost of replacing the property and/or the income that is derived from the property. Rhode Island assessors have access to a voluntary professional certification program.

All real and tangible property, regardless of classification, must be assessed at a uniform percentage within a locality. Motor vehicles may be assessed at different rates than real or tangible property. Assessed value is the value of a parcel of property used for taxing purposes. Once the value of the property is determined, the value is multiplied by an assessment ratio to determine the taxable value of the property.

Revaluation: In Rhode Island, when new construction or improvements to property are assessed, they are assessed based on an index related to the most recent revaluation performed by that community. Personal property is valued at the current replacement cost, typically calculated as the original cost of acquiring the property minus depreciation. However, each community determines the methods used to assess personal property. Motor vehicle values are established annually by the State Motor Vehicle Valuation Commission using data provided by the NADA (National Automobile Dealers Association).

The frequency of real property revaluation is set by statewide legislation. Until recently, Rhode Island had a ten-year revaluation cycle. However, legislation enacted in 1997 advanced the ten-year cycle by one year, requiring a revaluation every nine years. In addition, in order to maintain assessments that reflect market changes, Rhode Island communities are required to conduct two statistical updates during each nine-year cycle. Communities are required to conduct a statistical update in the third and sixth year after each revaluation.

Three communities currently have revaluation extensions - Pawtucket, Providence and Woonsocket. Pawtucket is approaching its 18th year since its last revaluation and is implementing its new values for its FY 2001 budget (12/31/99). Providence is expected to implement its revaluation for its FY 2002 budget (12/31/00), resulting in a 13-year period between revaluations. The City of Woonsocket has conducted its revaluation and is implementing the new values for its FY 2001 budget (12/31/99). This represents 12 years since its last revaluation. Once these communities implement their respective revaluations, they will be required to conduct a statistical update in three years.

Revaluation is necessary because the values of the property within localities change over time. Therefore, the more time between revaluation, the greater the potential for inequities among types and classes of property. More frequent revaluation results in greater equity within and among jurisdictions. Uniform assessments due to more frequent revaluation ensures that assessed values reflect the current market.

Classification: A classification system either taxes different types (or classes) of property at different tax rates or uses different assessment ratios for various classes of property. Although each classification system may be unique, varying in terms of the number of classes, the composition of classes and the relative treatment of classes, there are essentially two categories of classification systems - classified assessments and classified tax rates. A number of states implement classified assessments by dividing property into different classes and assigning each class of property a different assessment ratio.

However, Rhode Island requires that all property, regardless of class, be assessed using the same assessment ratio. Therefore, Rhode Island communities must apply different tax rates to the various classes of property or use homestead exemptions for residential property to implement a classification program.

Because of previous classification efforts, homestead exemptions and recent initiatives to phase-out certain property taxes (motor vehicles and inventory), all 39 municipalities essentially have some form of classified property tax structure. While some classification systems are more complicated than others, the basic system in place in the majority of communities applies a different rate on inventories, tangibles and motor vehicles than the rates applied to real property. In addition, certain communities apply a different real estate rate for commercial and industrial property than they do for residential property. As shown on Table 13, there are also eight communities that have the authority to provide a homestead exemption as part of their property tax structure - which translates into a different property tax rate for residential property than for commercial property. While all eight communities have the authority for the provision, not all communities actually use the homestead exemption provision (East Greenwich).

How does a homestead exemption work? Table 14 provides an example of the estimated impact the homestead exemption has on the calculation of real estate property taxes in Providence. The City of Providence applies the same property tax rate ($33.44 per $1,000 of value) on all classes of real estate property (residential, commercial and industrial). As Table 14 shows, a residential property-owner with a $100,000 home will pay approximately $2,175 in Providence real estate taxes in FY 2000. However, the commercial property-owner with an office building worth $100,000 will owe the City of Providence about $3,345 in real estate taxes in FY 2000. The property taxes owed on the commercial property are approximately $1,170 more than those owed on the residential property even though the same tax rate is applied. This is due to the homestead exemption on residential property, essentially eliminating a portion of the property value from taxation.

V. Recent Property Tax Reform in Rhode Island

Over the past two legislative sessions, the General Assembly has enacted a number of key initiatives to improve the administration of the property tax and begin to address the high property tax burden in Rhode Island.

Revaluation Cycle: Legislation enacted in 1997 established a nine-year revaluation cycle, requiring two statistical updates during each nine-year cycle in lieu of the requirement to perform a revaluation once every ten years. The law defines what constitutes a statistical update and outlines appropriate update methods.

To ensure a smooth transition to the new revaluation schedule, the legislation outlines a schedule for the nine-year revaluation. Those communities that conducted a revaluation after 1992 must conduct a statistical update prior to their next scheduled revaluation. Once these communities conduct their scheduled revaluation, they will be required to begin the nine-year revaluation cycle from that point forward. Those communities that conducted a revaluation in 1992 or before will not be required to conduct a statistical update prior to their next scheduled full revaluation.

The legislation also outlined a State-local cost-sharing program for statistical updates. The first statistical update for each municipality will be 100 percent funded by the State, up to $15.00 per parcel. The second statistical update for each municipality will be 80 percent funded by the State, up to $10.00 per parcel, based on an average cost per parcel of $12.00. Local communities would make up the balance. The third statistical update and those thereafter will be 60 percent funded by the State, up to $6.00 per parcel, based on an average cost per parcel of $10.00. Again, local communities would make up the balance. Communities that qualify as distressed communities (under R.I.G.L. 45-13-12) will receive from the State 80 percent of the cost to conduct statistical updates the third time and thereafter (no more than $8.00 per parcel).

Motor Vehicle Excise Tax: Property taxes generated by motor vehicles in Rhode Island represent nearly 7.5 percent of total property taxes generated in the State. The State Budget includes a program to phase-out the motor vehicle excise tax over seven years.

The program requires that all communities freeze motor vehicle excise tax rates at the FY 1998 level, and that no vehicle would have a greater value net of the exemption than it had the prior year before. Johnston was permitted to freeze its motor vehicle rate at the FY 1999 level due to a State Commission recommendation to balance the Town's budget. Although the phase-out of the tax would lower taxes on all vehicles, it would first phase out the lowest valued vehicles from the tax rolls.

The program increases the amount of vehicle value exempt from taxation until all vehicle value is exempt in FY 2006. In making up the lost revenues generated by the tax, the State will hold communities harmless through advance reimbursements. The State reimbursement will also include adjustments for inflation based on the consumer price index - all urban consumers (CPI-U), which is published by the US Department of Labor.

As shown on Table 15, the State provided $25.3 million in the FY 1999 State Budget for the anticipated local revenue losses in FY 2000. In FY 2000 the State appropriated $48.2 million to fund the second year of the program, and will have to include an additional $23.4 million in FY 2001 for a total appropriation of $71.6 million. The estimated annual cost for fully implementing the plan to eliminate the vehicle excise tax totals approximately $195.4 million.

Inventory Tax: The FY 1999 Budget also included an initiative to eliminate retail, wholesale and auto dealers' inventory taxes over a ten-year period, beginning in FY 2000. The program freezes FY 1999 rates and requires the localities to reduce rates annually by 10 percent. The plan requires the State to hold communities harmless by increasing the amount distributed through the General Revenue Sharing Program. The percentage of total state tax collections dedicated to the General Revenue Sharing Program will increase from 1.3 percent in FY 1999 to 4.7 percent in FY 2009.

Real Estate Circuit Breaker: In 1997 the General Assembly expanded the program to provide tax relief for owners and renters of real property through credits on state income tax liability. The initiative increased the maximum income range to be eligible for the program from $12,500 to $18,000, and the maximum credit was increased from $200 to $250 commencing in July 1997. The FY 1999 Budget as Enacted again expanded the upper income limit to $25,000 but continued the maximum credit of $250.

Real Estate Conveyance Tax: Rhode Island has a real estate conveyance tax of $1.40 for each $500 paid for the purchase of property. Of the tax assessed in FY 1998, local communities retained $0.25 of every $1.40 collected, and the balance went to the State general fund. However, the FY 1999 Budget requires that $0.30 of the $1.40 tax is used by the State to support the Distressed Communities Relief Program and the $1.10 balance of the tax will remain with the local communities. This is a transfer of revenue from the State to the localities of $4.8 million.

Fire Districts: A second initiative enacted in 1997 that should improve the administration of the property tax is the additional reporting requirements for Rhode Island fire districts. This legislation requires fire districts to report tax rates, budgets, assessed valuations and other related data to Municipal Affairs. Municipal Affairs is required to include this data in its annual state report on local government finances and tax equalization. This change would enhance the data available to taxpayers and policy makers, and provide a more complete picture of the local property tax burdens in Rhode Island.

VI. RIPEC Comments

Collections from the property tax in Rhode Island represent the single largest revenue source for government services in the Ocean State. Approximately $1,338 million in local property taxes will be collected in FY 2000. This is slightly less than the $1,395 million in combined State income and sales taxes estimated to be collected in FY 2000 ($786.7 million in income and $608.0 million in sales taxes). As a result, the State ranks among the top in the nation in property tax collections on both a per capita and per $1,000 of personal income basis (FY 1996 Census Data).

RIPEC believes there are six key areas that the State can move forward with to improve the property tax system. In addition to the RIPEC recommendations discussed below, there are additional insights on the State's property tax system included in the 1996 Property Tax Study prepared by Almy, Gloudemans & Jacobs (Toward a Fairer, More Understandable and Less Costly Property Tax for Rhode Island-August, 1996).

Continue Property Tax Replacement Programs

Rhode Island's property tax burden exceeds the national average by over 40.0 percent (Massachusetts and Connecticut exceed the U.S. average by 11.0 and 30.0 percent respectively). A high fiscal priority should be to continue implementing recently enacted property tax reduction programs to bring balance into the State-local fiscal system and to reduce the reliance on funding public schools through the property tax. Therefore, RIPEC encourages the Governor and the General Assembly to ensure that existing property tax reduction programs are implemented, which will result in shifting how local services are financed, improving property tax fairness and enhancing competitiveness.

Implement a New Education Funding System

Rhode Islanders make a significant investment in public education, ranking sixth in the nation in per pupil spending. More than $1.2 billion was spent on public schools in Rhode Island in FY 1999, with local property taxes supporting nearly 60 percent of the costs (excludes the State contribution to the teacher retirement fund and Housing Aid). The balance of the funding was made up primarily through State aid.

Rhode Island school district data demonstrate that communities endowed with a strong property tax base outpace those districts less wealthy, in both school expenditures and overall student performance. In addition, there is a growing socio-economic gap in which students with additional educational needs (e.g., economically disadvantaged and limited English proficiency) are concentrated in communities with limited fiscal capacity.

In 1996 Rhode Island abandoned its formula-based method of funding schools and adopted a practice of annually distributing only "new" school aid identified by the State. Therefore, Rhode Island lacks a school finance system that can support the fiscal needs of the local community while meeting the education needs of all students. There is a need to develop a specific method of financing public schools in Rhode Island that addresses student need and municipal capacity and tax effort.

Policy makers should consider the following principles while developing a new funding formula:

• Establish a distribution formula that is student need driven;
• Provide a predictable amount and source of funding;
• Limit the portion of school budgets financed by the local property tax and assure that the balance comes from the State;
• Provide equitable treatment of property taxpayers in all cities and towns;
• Focus equity on student achievement and opportunities;
• Integrate Goals 2000 and other reforms into educational programs;
• Establish least cost options in school district budgeting process; and
• Establish statewide parameters and benchmarks for teacher compensation.

Enforce the New Revaluation Cycle

The Governor and General Assembly should ensure that communities implement the nine-year revaluation cycle. The further away from the new revaluation cycle, the more disruptive it may be on property tax administration and the integrity of assessed values. Therefore, the more time between each revaluation cycle the greater the potential for inequities between types and classes of property. Unfortunately, every request to date for an extension to the current ten-year revaluation cycle has been granted.

More frequent revaluation results in greater equity within and among jurisdictions. The new legislation not only outlines the dates by which each municipality must conduct its next revaluation, it also outlines the timeline for statistical updates. Holding municipalities to these timelines is critical to improving the administration of the property tax. The State must also do its part by ensuring that the State's share of the costs for statistical updates are sufficient and are included in the annual budget. The Office of Municipal Affairs must also have the appropriate staff, training and resources to monitor the process and advise local assessors.

Therefore, RIPEC recommends that the General Assembly consider (on a go-forward basis) a process by which the State would conduct (through contracted services) either the revaluation or the statistical update should a municipality intend to delay its revaluation or update. Since the municipality has to pay for the entire cost of a revaluation, the State should bill the municipality for all related costs. Because of the cost-sharing arrangement for the statistical updates, the State should only bill the municipality for the local portion of the costs associated with the statistical update. Should the municipality fail to reimburse the State for the related costs, the State should have the authority to reduce the community's non-school state aid by the amount owed.

In addition, the State should consider encouraging joint assessment districts for both revaluation and statistical updates. Municipalities would remain autonomous regarding tax and other policy matters while achieving some economies of scale with regard to administering the tax.

Standardize Property Tax Administration

With the range of changes occurring in the State's property tax structure, there is a need to clarify both the process and administration of these complicated taxing systems. There has been growth in the use of classification systems, homestead provisions, personal exemptions and other programs that directly affect the administration of the property tax. The complexity of the property tax makes it increasingly difficult to ensure that the property tax system is effectively and fairly administered.

For example, while classification systems are often designed to provide property tax relief to different classes of property, they do not prevent shifts within classes of property after revaluation. In addition to making revenue estimates increasingly difficult, classification systems complicate the assessor's job and potentially fractionalize assessments. Should one class of property be significantly favored in one jurisdiction but not in another, there may be a tendency for that class of property to be drawn into the more favorable jurisdiction at the expense of the other.

The State does not have any standards regarding a classification plan that a community may choose to adopt. In order to avoid further balkanization of the property tax structure in Rhode Island, state and local officials need to develop and implement classification and homestead parameters and standards for property tax classification systems.

Further, RIPEC encourages policy makers to consider several recommendations outlined in the 1996 Property Tax Study prepared by Almy, Gloudemans & Jacobs (Toward a Fairer, More Understandable and Less Costly Property Tax for Rhode Island-August 1996). While the following only highlights some of the Report's recommendations, it does provide a picture of the need to re-define how Rhode Island administers the property tax:

• Re-codify Rhode Island's property tax law to clarify language and eliminate duplicative and irrelevant laws;
• Create and maintain standard documents, forms and manuals for assessors and taxpayers;
• Establish a permanent committee of State and local officials to review administrative procedures and filing dates, to include recommendations for sanctions and penalties for non-compliance; and
• Re-examine assessment caps, freezes and other local option exemptions to develop Statewide, uniform, more narrowly defined local option exemptions.

Provide Resource Support

Closely related to enforcing the revaluation cycle and improving overall property tax administration is building an effective state-local partnership. An effective system of joint state-local administration of the property tax can work if a state agency, such as the Department of Administration's Office of Municipal Affairs, has the resources, authority and professional stature to assist local officials in administering the property tax. This agency should provide local assessing officials with technical assistance and publish guidelines that specify standards and procedures for effective and consistent assessing practices.

The 1996 Property Tax Study prepared by Almy, Gloudemans & Jacobs (Toward a Fairer, More Understandable and Less Costly Property Tax for Rhode Island-August 1996) concluded that the resources in the Office of Municipal Affairs were not adequate for the State to effectively lead and modernize property tax administration. The Study recommended that there was a need for additional expertise and resources in the Office of Municipal Affairs to provide technical assistance to assessors and to conduct appropriate analysis as needed to monitor the accuracy of property values over time.

Therefore, in order for the State to take a leadership position in the administration of the property tax, develop accurate data and analysis, and ensure local communities have access to appropriate support, the State should evaluate the resources and authority of the Office of Municipal Affairs. This should include a review of its data collection and assessing standards as well as the development and publication of objective analysis of assessment results.

Modernize Data Collection and Reporting

The method of collecting and reporting critical property-related data needs to be strengthened. According to Municipal Affairs, the flow of information both within local jurisdictions and between municipalities and the State is often done manually, such as the collection of data related to sales and tax rolls. Given the changes in revaluation and the increasing demand for detailed, user-friendly data, State and local officials should design methodologies to effectively share information and take advantage of available technology.

The changes in the revaluation cycle and the phase-out of the motor vehicle and inventory taxes will require communities to use new technologies. The State can and should play an active role in assisting communities to develop information technology. For example, Rhode Island General Laws permit the Department of Administration to establish a local grant-in-aid program to purchase microcomputers for the purpose of property tax administration (R.I.G.L. 44-5-11.4). Communities participating in the program and their sub-contractors should be required to implement a uniform software application. Coupling this assistance with the new revaluation cycle would not only improve the flow of information within and among state and local governments, but would improve the overall quality of information needed for a range of state aid programs and policy analysis.