13% tax hike targets vacation rentalsUpdate: local affordable housing funding in jeopardy
A new budget proposal by Governor Lincoln Chafee (I) would hit almost a third of the housing stock on Block Island — already one of the state's most expensive communities to maintain a home thanks to sky-high utilities — with a whopping 13-percent tax increase if his 2013 budget, which includes an additional $91 million in taxes, goes through.
A number of proposals in the governor's budget hit the tourism industry, which is already taxed hard — tourism makes up 5 percent of the state's economy, but pays 8.4 percent of the tax levy, according to a 2010 study prepared for the RI State Division of Tourism.
Chafee is proposing raising the restaurant meal tax from 8 percent to 10 percent, and levying a 7 percent tax on taxi cab rides. These taxes would have a disproportionately strong impact on Block Island, where tourism is the biggest industry. But raising eyebrows here the most this week was a proposal to extend the 13-percent lodging tax, now levied on hotels and larger B&Bs, to include all vacation rentals of homes and condos, as well as B&Bs with three bedrooms or fewer.
Home rentals in the state do not currently pay sales or lodging tax, although Block Island, alone among Rhode Island towns, has a local tax on vacation rentals. The 1-percent tax, which was pushed through in 2005 with the support of island officials and realtors, goes to help fund affordable housing on the island.
That 1-percent tax raises almost $100,000 a year, and this winter the town's housing board is constructing two affordable homes with the money raised. But the local funding would be jeopardized by the new 13-percent state tax. The remittance form for the local tax says it is not levied on properties already paying the state room tax. Under the governor's proposal, all island rentals would pay the state tax, so none would qualify.
That, acknowledged Paul L. Dion, chief of the Governor's Office of Revenue Analysis, would be an unintended consequence of the budget proposal — the governor's office didn't know about the local ordinance before speaking with the BITimes this week.
Dion also told the Times that the figures his office has released for how much the 13-percent tax would raise — $3.1 million in all, with $1.9 million going to the state — are probably unrealistically low. The state estimated that the island has a $1-million rental housing market, when the actual market is closer to $10 million. That would mean the 13-percent tax would levy more than $1 million on the island alone.
The 13 percent would be a combination of the state's 7-percent sales tax and a 6-percent lodging tax. It would apply to any home rented more than 15 days a year, but applies only to the first 30 days of any tenant's stay.
An estimated 450 homes on Block Island, or almost a third of the housing stock of 1,500, are rented out for at least a couple of weeks a summer, according to Town of New Shoreham tax records. Far fewer homes are rented out on a year-round basis.
“This proposal is coming out of left field and everyone feels blindsided by it,” said Cindy Pappas of Sullivan Realty. The new tax would be a burden on both tenants and homeowners, she added. “Rhode Island is noted for its tourism, and I think the governor is sending the wrong message with this proposal.”
The Rhode Island Association of Realtors has come out against the extension of the lodging tax, saying it would lead to “more distressed properties on the market.”
“Neither Connecticut nor Massachusetts charge hotel or sales taxes on individual homes and condominiums,” the association writes on its website. “If passed, this legislation would hurt R.I. property owners already crippled by the economy by putting R.I. vacation destinations at a competitive disadvantage to neighboring states.”
The governor's Director of Legislative Affairs, Christine Hunsinger, characterized the vacation rental tax as an issue of fairness. She said that the proposal would level the playing field between hotels and larger B&Bs that are charged the tax, and individual rental homes that are exempt. Hunsinger also noted that all proceeds from the lodging tax go to promoting tourism in the state and that the Rhode Island Hospitality Association supports the tax extension.
State Senator Susan Sosnowski (D), who represents Block Island, did not return calls for comment.
Pappas said that she plans to contact her rental customers to inform them about the tax and said she hopes a letter signed by all the Block Island realtors could be drafted and sent to the governor’s office. Several Block Island realtors joined her in voicing opposition to the rental tax, fearing it would harm the island’s $220 million tourism industry.
Realtors on Block Island manage vacation home rentals for homeowners like Marilyn Geti, who says she needs the income from renting her property to keep it in her family, which has had a presence on the island for generations. Geti’s home was built in 1973 by her parents and was later passed on to her.
She said that her rental income is critical to keep up with the costs of owning the home, from the property taxes — Block Island pays the most per capita in property taxes in the state — to the utility bills — electricity rates here, which fluctuate wildly, can often be several times the state average and are among the highest in the nation.
“What a discouragement,” Geti said when she learned of the tax. “We need the money we get from rent to support that house, and it's already a problem without the tax.”
Island business owner Jerry Zarrella, who also owns vacation rental homes, said he has spoken to several realtors to try and organize a combined effort opposing the tax increases. Zarrella notes that Block Island is in a different situation from the other areas, like South County and Newport, most affected by this tax because of high utility costs.
“We already give more to the state in taxes than we get back,” Zarrella said. “This is going to hurt the people who have to rent their houses to afford to live here.”
Edie Blane of Offshore Property says the many taxes levied on the tourism industry hurt the people who visit the state. Blane mentioned the creeping nature of taxes in the state, especially the 7-percent sales tax instituted in 1990 during the Rhode Island Credit Union crisis, when the Rhode Island Share and Depositors Insurance Corporation failed, leading to the closure of 45 local credit unions and banks.
“I think this is going to have a terrible effect,” Blane said. “This is the wrong approach for Chafee to take — he’s killing the goose that laid the golden egg.”
Meal and taxi taxes
In another tax that would hit the island's economy hard, Chafee's budget proposal would increase the meal and beverage tax from 8 percent to 10 percent. Meal taxes were hiked from the basic 7 percent sales tax to 8 percent in 2003, when the legislature added a 1-percent meal tax.
Rhode Island restaurants already face higher tax rates than in neighboring states — meal and beverage taxes are 7 percent in Massachusetts and 6.35 percent in Connecticut.
Finally, taxi cabs would be charged the 7-percent state sales tax. There are 34 cab licenses on Block Island, restricted to island residents, and the licenses often serve as small businesses that provide retirement income for the people who hold them.