Understanding the next Providence budget and property tax increase

"The budget crisis has pushed us to do a top to bottom review of every fine and fee the city assesses, both in how much we charge and how frequently we assess it."

Providence Mayor Brett Smiley

I attended a Ward 13 community meeting in the Bell Street Chapel on Wednesday. City Council President Rachel Miller and Providence Mayor Brett Smiley answered questions on various subjects, but mainly about the tax increase every city resident will soon be facing. We will all get a preview of that tax increase on April 16, when Mayor Smiley unveils his budget proposal.

The community meeting lasted well over two hours, so what follows is based on my notes. I’m no expert in tax policy, but I did my best to explain the situation in as plain language as I could muster.

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Property taxes pay for education, parks, public safety, and other city services, such as libraries and trash pickup. In Rhode Island, like most states, cities and towns rely on property taxes to pay for these services. It is the most significant chunk of revenue for cities and towns. The city and town governments set the property tax rate yearly as part of the budget process.

Property values change over time, driven by inflation and our current housing shortage. Property taxes also go up over time, driven by reevaluation and changes in the tax rate. By law, cities and towns are required to reevaluate property values every three years. Every nine years, inspectors are sent to a property to reevaluate. Otherwise, a statistical reevaluation, which looks at the sales prices of similarly situated homes in the immediate area, is done.

Many property owners have seen significant increases in their property values. This is driven, in part, by the housing crisis. Fewer houses are for sale, which drives up rent and sale prices - and the reevaluation is based on sale prices. When you hear stories about massive tax increases, they’re based on the reevaluation of the properties, not on any proposed changes to the tax rate.

Property taxes are classified as owner-occupied, non-owner occupied, commercial, and tangible business tax. In Providence, rental properties are divided into four classifications: owner-occupied properties with two to five apartments, non-owner occupied with two to five apartments, buildings with five to 11 apartments, and buildings with 12 or more apartments. The tangible tax is on all the shelving, equipment, office furniture, and anything else inside a business that isn’t for sale. (Note that a new state law exempts most small businesses from the tangible tax.)

Property tax exemptions are available to seniors, people with disabilities, and veterans. These exemptions are not granted automatically; they must be applied for.

Increases in property taxes can be a burden for property owners, and that burden is often passed on to renters. Last year, the Providence City Council found that property taxes drove up rent in some residential buildings. It is important to note that property taxes are not the only thing driving up rent. A shortage of rental units, out-of-state companies buying up properties, and landlord greed contribute as much as, if not more than, property tax increases.

After the reevaluations, the mayor (or the town council in smaller municipalities) proposes the tax rate, which is debated and passed by the city or town council. In Providence, the process must be completed before July 1.

Taken together, commercial, residential, and tangible taxes are called the levy. By state law, the levy can grow by 4% every year. In some years, a city or town may increase this by the full 4%, in other years by less than 4%, or not at all. In Providence, because the city lost a lawsuit over school funding brought by the state, Mayor Smiley and the City Council went to the Rhode Island General Assembly to ask for a one-time exception and raise the levy by 8%. At 8%, the average homeowner will see a monthly tax increase of about $30.

In addition to the one-time levy cap exception, the City of Providence has asked the state to allow it two new tax streams, a sales tax on paid parking and a two-dollar surcharge on large venue admissions. Under the newly proposed taxes, a $20 parking spot will cost $21.40, and a $50 ticket to PPAC will cost $52.

Providence’s levy last year was $396 million. If the city took the full 4% increase, it would generate an additional $15.8 million. This doesn’t take into account what is referred to as natural growth. In recent history, the city has grown, new things have been constructed, and new people have started paying taxes, so the levy has grown. Last year, for example, there was no tax increase, yet the levy increased by 2.5%.

This year, however, because the state successfully sued Providence—more on that in a moment—city expenses are going up $21.9 million, a $7 million shortfall. Mayor Smiley has said that this budget is more difficult than any budget since the 2008 financial crisis. Providence could cut its way out of the deficit, but cutting popular services will not be popular. The city is bound by court order and contract to prioritize pensions, salary increases, and health insurance premiums. In ordinary times, the natural growth of the levy would absorb these increases.

The state sued Providence under the Crowley Act, the same law that allowed the state to take over Providence Schools. The Crowley Act requires that when the state gives more money to a district that it’s running, the local community must do the same. The amount of money Providence owed was disputed, and the case was in court for five years. In November of last year, Providence lost and was required to make up 15 years of funding shortfalls immediately, in one year.

City leaders can use four strategies to balance the budget: cutting services, raising property taxes, increasing fines (such as traffic tickets), and finding new revenue streams. The two new proposed taxes—the parking tax and the ticket fee—are attempts to tax people visiting Providence. Hundreds of thousands of people visit the city and use city services each year. Taxing visitors is an attempt to take some of the burden off residents’ shoulders. However, Providence residents also pay for downtown parking and visit PPAC.

City leaders will also review all fines and fees, such as parking tickets. Right now, a parking ticket costs less than a full day of parking in a lot. The other side of this is enforcement. Expect more overnight parking tickets in Providence.

“The budget crisis has pushed us to do a top to bottom review of every fine and fee the city assesses, both in how much we charge and how frequently we assess it,” said Mayor Smiley.

Libraries, community centers, and the zoo in Roger Williams Park are the city services most vulnerable to cuts. Other proposals include cutting the snow removal budget, eliminating trash pickup every other week, and reducing the city’s workforce by 10%.

On Wednesday, Mayor Smiley will present his budget to the Providence City Council. The Mayor’s budget will incorporate the levy increase, the two new proposed taxes, and cuts to city services to be balanced, as required by law. From April 22 to May 10, the City Council Finance Committee will review and amend the budget. The City Council will hold two public meetings on the budget, the first on May 6 and the second on June 6, where people will have a chance to comment and provide input. The City Council will propose changes to the budget by June, the Mayor and the City Council will finalize the budget, the budget will be passed by the City Council, signed by the Mayor, and tax bills will go out. Property owners will have 90 days to dispute the bill to the tax assessor. If they don’t like the assesor’s answer, they can go to the Board of Tax Assessment and Review. If they don’t like their answer, they can bring it to Superior Court. To do that, you will probably need a lawyer.

Ways of avoiding tax increases like this in the future have been suggested. The city could tax private colleges and universities such as Brown, but if such a thing is possible, it will take changes in federal and state law and a lot of time.

The state PILOT program reimburses communities for tax-exempt properties. 48% of land in Providence cannot be taxed—it’s owned by non-profits or the government. The state PILOT program reimburses communities 27% of what the tax bill would be. That number could be higher. The State of Connecticut, for instance, reimburses its host communities 80% of what the tax bill would be. City officials advocate for an increase in the state PILOT program every year.

As noted earlier, a different concern is how this coming tax increase will affect renters. Providence has experienced some of the most dramatic rent increases in the country. The occupancy rate of apartments in Providence is around 97%. Is there a way to mitigate the effect of this tax increase on renters? Yes, it’s called rent control or rent stabilization.

Mayor Smiley has repeatedly stated that he opposes rent stabilization. He believes that it will discourage housing production, that properties under rent stabilization are under-invested in, and that the quality of that housing will deteriorate.

He believes that the only way rent will come down is if we build more housing. He favors building housing at all levels, permanently subsidized affordable housing, and unrestricted market-rate housing. Of course, this solution will take years, and people are financially struggling in the short term. A recent report from RIPEC flatly states that Rhode Island can’t build its way out of this problem.

Mayor Smiley knows that some landlords use tax increases as a pretense and increase rents at a higher rate than the tax increase. “We can’t stop that,” said the Mayor.

Council President Miller has a different view. She agrees that more rental properties must be constructed but also believes that the housing market can’t correct itself. Forty percent of Providence residents are renters, and recently, Providence was identified as the most expensive city for renters. Rent stabilization is on track to be explored by the Providence City Council this year.