You asked for a description of Rhode Island's property tax cap law and recent legislative changes in it. You also asked what the ramifications of adopting a similar property tax cap law in Connecticut would be.

SUMMARY

The Rhode Island property tax cap law is classified as a “levy limit” type of property tax restriction. Levy limits cap annual allowable revenue growth from local property taxes at a fixed annual percentage. Rhode Island's current limit is 5. 5% annually, but a 2006 law gradually reduces the limit to 4% per year over five years starting in FY 2008. The law allows towns to override or waive the limits in certain situations.

Town revenue losses from property tax levy limits must be absorbed through spending reductions, additional non-property tax revenues such as increased state aid, or a combination of the two. To illustrate the impact of 5. 5% and 4% levy limits in Connecticut, we applied them to FY 03 and 04 property tax revenues for each Connecticut town as reported in the Office of Policy and Management's Municipal Fiscal Indicators report. If the 5. 5% revenue limit had been in effect in Connecticut in 2003, it would have reduced allowable 2004 property tax revenues for 110 of 169 towns by a total of $ 102. 26 million. A 4% limit would have affected 138 towns and reduced aggregate revenue by $ 162. 4 million. Although these aggregate dollar savings appear large, the 5. 5% and 4% property tax caps would have reduced statewide property tax revenues by only 1. 5% and 2. 4%, respectively.

RHODE ISLAND PROPERTY TAX CAP

Original Law

In 1985, Rhode Island adopted a law intended to both limit the growth in local property taxes and expand the state's role in funding public education. The law limits annual increases in the amount of local property taxes each town can raise to 5. 5%. The 5. 5% cap could apply to either property tax rates (mill rates) or to total property tax revenues raised. The law allows a town to exceed the cap if it:

Towns can also increase property taxes by more than the cap if the increase is approved by a majority vote of the town's governing body and, if the town has a financial town meeting (17 of the state's 37 towns require voters in a financial town meeting to approve local budgets), a majority of voters present at the meeting (RI Gen. Laws, § 44-5-2).

2006 Changes

In the 2006 session, the Rhode Island General Assembly made several changes to tighten the tax cap law. The changes were approved by the governor on July 3, 2006. The law takes effect January 1, 2007 (SB 3050, as amended).

The changes make the law more of a pure “levy limit” by requiring the cap to apply only to increases in property tax revenues. It eliminates the option for towns to comply by keeping mill rate increases below the percentage limit, regardless of the amount of taxes they raise. This reduces the cap's flexibility because towns will no longer be allowed to increase property tax revenues by more than the capped amounts through growth in their grand lists, while keeping their mill rate increases under the cap.

In addition, the new law reduces the allowable annual increases from a maximum of 5. 5% to a maximum 4% between 2008 and 2013 according to the following schedule:

FY 2008 – 5. 25%

FY 2009 – 5. 0%

FY 2010 – 4. 75%

FY 2011 – 4. 50%

FY 2012 – 4. 25%

FY 2013 and after – 4. 0%

The new law specifies that a town can take advantage of emergency exceptions to the cap when it experiences or anticipates increases in costs for health insurance, retirement contributions, or utility expenses that are more than three times the allowable cap increase. It also adds an exception to allow a town to exceed the annual cap if it experiences a substantial growth in its tax base because of major new construction that necessitates spending increases for significant infrastructure, schools, or because of increased demand for municipal services, as certified by the Department of Administration.

The law increases the margin by which a town's governing body must approve increases over the cap from a simple majority of those present and voting to a 4/5ths majority of the body's full membership.

The new law also bars school district committees from proposing annual school budgets that require municipal appropriations for education that are greater than amounts appropriated in the previous year plus a percentage equal to the cap percentage.

POTENTIAL IMPACT OF LEVY LIMIT CAP IN CONNECTICUT

To the extent that levy limits are effective in reducing the growth in property tax revenues, they require (1) reduced local spending; (2) increased revenues from sources other than the property tax, such as increased state or federal aid; or (2) a combination of these two.

Table 1 attached illustrates the impact of a Rhode Island-style levy limit on local property tax revenues in Connecticut using town-by-town property tax revenue figures for FYs 03 and 04, as reported by the Office of Policy and Management in its most recent Municipal Fiscal Indicators report. Of the 169 Connecticut towns, 110 had 2003 to 2004 property tax revenue increases exceeding 5. 5%. An additional 21 towns increased their revenues by between 4. 0% and 5. 5% and would thus be affected by

a 4% levy limit. The aggregate statewide property tax revenue losses would have been $ 102, 261,416 (1. 54%) for a 5. 5% limit and $ 162,405,502 (2. 4%) for a 4% limit.

The towns highlighted in blue on the attached table are those that would not have been affected by either cap in 2004 (i. e. , those with property tax revenue increases less than 4%). Towns highlighted in yellow are those that would not have been affected by a 5. 5% cap but would have lost revenue with a 4% cap in 2004 (i. e. , those whose revenue increased by between 4% and 5. 5%).

Table 1: Impact of 5. 5% and 4% Levy Limits on Connecticut Town FY 04 Property Tax Revenues

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