PROVIDENCE, R.I. – Rhode Island struggles with large imbalances in property wealth, as well as striking differences among the tax burdens of resident homeowners, nonresident homeowners, and businesses, according to a report released today by the Rhode Island Public Expenditure Council (RIPEC). The report, “A System Out of Balance: Property Taxation Across Rhode Island,” found that these imbalances affect the equity of municipal services, specifically K-12 education, while hindering economic development and affordable housing.
“Property taxes are by far the largest source of local revenue in Rhode Island, making them essential to municipal services,” said Michael DiBiase, RIPEC’s President and CEO. “However, there are significant imbalances in our system that lead to serious consequences for some communities and the people who live and own businesses there.”
“The imbalance in Rhode Island’s property tax systems also has a negative impact on larger priorities such as housing and education,” DiBiase added. “Rhode Island’s least affluent communities simply do not have the property wealth to adequately fund municipal services—particularly K-12 education,” he continued. “This severe lack of property wealth has led these communities to impose relatively high taxes on residents, and particularly on renters, least able to afford to pay. They also levy even higher tax rates on business, which discourages economic development.”
Layered over wide disparities of property wealth between communities are tax policy choices—chiefly classification differences and homestead exemptions—that effectively shift the tax burden away from resident homeowners and toward businesses and renters. Higher nonresident tax burdens and commercial rates applied to apartment buildings make housing less affordable to those most in need of it. They also discourage the development of more affordable, higher-density housing.
RIPEC also found that tax burdens have shifted to businesses, raising additional equity issues.
“Significantly, higher tax burdens for businesses can discourage economic development, especially in a post-industrial society where they have more options as to where to locate and expand their business,” DiBiase said. “Business property tax incentives for specific projects have sought to provide relief but have failed to address the core issue—the high tax burden imposed on businesses.”
In addition to taxes on commercial real estate, businesses face taxes on tangible property in Rhode Island. These are often levied at rates even higher than those applied to commercial real estate and are self-reported, resulting in a significant tax compliance burden and disincentives for investment. The bulk of tangible property taxes are paid by a small number of taxpayers, in particular large utilities, and so the tangible property tax imposes a burden on many taxpayers who actually generate relatively little tax revenue. Nine municipalities have provided financial and administrative relief to these small taxpayers through exemptions on a portion of assessed value, thereby removing a sizable number of accounts from their tax rolls.
Given these findings, RIPEC offers the following recommendations for state and local policymakers:
- State policymakers should consider how the state’s education funding formula may be reformed to better respond to disparities in property wealth.
- Municipalities should seek to minimize the use and impact of property tax classification and homestead exemptions.
- The state should promote tangible tax reform, reducing municipal reliance on tangible property tax collections.
The report, the second in a series on municipal finance, also provides an analysis of Rhode Island’s property taxation systems in national, regional, and historical context. In addition, the report breaks down the differences in property tax policies and collections among Rhode Island’s 39 municipalities and analyzes what those differences mean for municipal finance, different classes of taxpayers, and economic development.
An executive summary is available here. Interactive data sets that correspond with this report are available here.