A Simple Message for Governor Raimondo

I'm excited to be meeting next week with the policy team of Governor Gina Raimondo to outline a plan for what the governor should do for the car tax. Politicians want a simple message that they can give the public, so this is my attempt to capture the "One State, One Rate" message so that every voter understand it:

Give everyone in RI a 3.7% car tax.
56% of Rhode Islanders would live somewhere with a lower rate if the rate was 3.7%.
Everyone would pay the same amount.
Increase RIPTA funding-- $47 million a year would double state aid.
Increase the state match to the federal Earned Income Tax Credit by 50%.

Here are the wonky details that back that up.

Problem: Cutting Car Taxes Gives More to the Wealthy

Knocking 30% off of the car tax gives the most money to the wealthy. Here are the breakdowns for urban Providence and suburban Cranston:

30% cut to car tax (Providence-- from 6% on cars > $2,000 to 4.2% on cars >$2,000)

Car Value                  Tax at 6%                         Tax at 4.2% (70% of 6%)                   Tax Cut       
$100,000                   $5,880                                                            $4,116                      $1,764
$30,000                     $1,680                                                            $1,176                       $  504
$10,000                     $  480                                                              $   336                      $  144
$  3,000                     $    60                                                               $     42                      $    18

30% cut to car tax (Cranston-- from 4.2% on all cars to 2.94%)
Car Value                  Tax at 4.2%                      Tax at 2.94% (70% of 4.2%)                   Tax Cut       
$100,000                   $4,200                                                            $2,940                       $1,260
$30,000                     $1,260                                                             $  882                        $  378
$10,000                     $   420                                                             $  294                        $  126
$  3,000                     $   126                                                              $    88~~                   $    38

One thing people say which is partially true is that $144 makes more difference to the budget of a person with a $10,000 car than $1,764 makes to the budget of a person with two $50,000 BMWs in the driveway. And that's true, but the problem with that logic is a) Why are we giving such a large tax cut to the $100,000 car owner in order to achieve that? and b) Why did we choose the car tax as the locus of our tax cuts in the first place?

People who own the most expensive cars get by far the most tax cut. For reference, cities like Providence have a 22% non-car household rate. Neighborhoods like Olneyville are above 40% non-car owning. So though some poor people struggle with the car tax, cutting the car tax is a poor way to reach all poor people, and manages to give a disproportionate amount of money to the well-off.

Problem: Lowering the car tax especially leaves out RIPTA users or other non-drivers.

RIPTA trip                          Cost with monthly pass      Cost by cash    Tax cut if car tax is cut
2-way trip w/o transfers                        $840/year                    $1,460                                    $0
2-way trip w/ 1 transfer                         $840/year                    $2,190                                     $0

Basic RIPTA fare is $2, and a transfer is $1. It's important to note that having transfers gives the user freedom to go to a lot of places (Jarrett Walker talks a lot about this). If you've never taken a bus, think of a plane trip: When you fly direct to London, do you pay more or less than if you have to stop in Atlanta first and have a layover? The direct flight costs more. The reason the airline uses transfers (or "connections") is to facilitate many trips without having empty planes, but they reward you for your trouble of having the transfer by giving you a better price.

With transit it's the opposite.

If you have the wherewithal to get a monthly pass at Kennedy Plaza or one of the scattered and random locations where they are available, $840 a year is still more than the tax on a $20,000 car in Cranston, or the same as the tax on a $16,000 car in Providence. But if you have to pay cash, which many of us do, then your trip is way, way, way more expensive. The two-way trip to work with 1 transfer-- basically the trip anyone has to do unless they either live or work in downtown Providence-- would cost a person taking the bus as much as the Cranston tax on a $95,000 $45,000 car (see correction). It's the same as the Providence (highest tax in the state) car tax on a $38,500 car.

Problem: Different places in Rhode Island pay different car taxes.

The highest car tax in Rhode Island is Providence's, at 6%, although with a tax-free rate for cars under $2,000, Providence's is cheaper for inexpensive cars than the nominally cheaper Pawtucket tax (which has no tax-free exemption for cars at the low end of the spectrum). 

The lowest car tax is in New Shoreham (Block Island) at 0.75%.

There are a whole range of rates, and you can check them out in the chart in this article I wrote at RI Future. The rates are from a few years ago but appear to be accurate still. 

The Governor and the Speaker of the House both propose reducing the car tax. In a sense, either plan gives more money to communities that have higher car taxes (but of course, as stated, the people who get the most out of that policy are wealthy people in those cities--- for instance, an East Sider with three BMWs is more likely to benefit from a low car tax than a South Sider with a $3,000 junker).

Solution: Make the car tax one rate.

It's not feasible (politically) to tell everyone they need to have a Providence car tax rate. How can we get everyone on the same, statewide rate, but convince enough people that this is a good deal to make it palatable? 

Set the rate to the East Providence rate of 3.7%. 

3.7% as a car tax rate would cost less than Governor Raimondo's proposal of a 30% reduction of the car tax. If we wanted to spend 30% of the car tax revenue on a tax cut, we could take the effective rate of 4.8% statewide and multiply that by 0.7, to get 3.36%.  A 3.7% rate would be higher-- and thus cheaper-- than the 3.36% rate, but would be more equitable. Everyone in the state would pay the same percentage.

Communities that would pay less:

North Providence
Central Falls
North Smithfield

East Providence would of course pay the same rate.

Some people's car tax would have to go up to make this policy work, while others' tax would go down, but at a 3.7% rate, 56% of Rhode Island would live in a community with a lower rate.

So although some people would pay more in the car tax and complain, a strong majority would pay less, and the whole project would cost less and be more equitable than the 30% flat reduction. And remember: some people pay the car tax but are mature adults (yes, I'm citing the Projo comments section for "mature adults". Really!) who realize driving is expensive. So we can also count on that from time to time.

Solution: Improve transit to offer other options.

The Rhode Island Speaker of the House, Nicholas Mattiello, proposes a particularly expensive solution: he calls for getting rid of the car tax entirely. Based on current year revenue, that would cost $215 million a year.

Doubling RIPTA's state operational funding* would cost $47 million a year. We could quintuple (x5) the state aid to RIPTA using less funding than the Speaker's car tax proposal. We'd have enough to fund Governor Raimondo's free college plan and the quintupling, and we'd still be cheaper than the RI Speaker's plan.

But even Governor Raimondo's plan comes in at almost $70 million (take $215 million and multiply by 0.3, get $64.5 million). 

77% of Rhode Islanders live within a ten minute walk of a bus, but most bus trips suck in Rhode Island. By making buses more frequent, and by modifying RIPTA's service map so that it has an everywhere-to-everywhere grid, we can allow far more people in Rhode Island to use transit. Right now we're below the national average (and the U.S. is a not very transit-y country to begin with) despite being the second densest state in the country.

Rhode Island spends less than a quarter per person what Massachusetts spends on transit, according to AASHTO statistics. 

If Houston can do it, then we can do it better.

Solution: Expand the Earned Income Tax Credit.

Rhode Island receives $190 million from the federal government for low- and lower-middle income households who have the Earned Income Tax Credit (i.e., a negative income tax for people who work). My family got this growing up, and I got it a lot as an adult, and so I feel near and dear to this tax credit. In addition to the $190 million the federal government gives us, Rhode Island matches that funding with a 15% match: that's $28.5 million. Just using the small dividend from my car tax plan, we can up that return by 50% per person who gets the EITC. We could also choose to use that money to expand the number of people who get some money from the EITC, going further up the middle-income scale.

How do I get that number?

The car tax brings in $215 million. The Speaker's plan would lose all of that funding. The Governor's plan would lose 30% of it. My plan would lose 23%. Take 4.8%, which is today's statewide effective rate according the ABC 6 reporting, and multiply that by 0.7. You get 3.36. Take $215 million and multiply that by 0.7. You get $64.5. Now, using my rate of 3.7%, divide 3.7 by 4.8. You get 77, meaning the ratio is 77% of the original rate. If you take the complimentary number, 23% and multiply that by $215 million. We end up with close to $15 million to play with, which is enough to increase the EITC by the amount I mentioned.


* (add together the columns that are from gas tax and miscellaneous state funding, exclude federal funding an fare revenue)

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