Proposed tax hikes that would have made it more costly for people to sell real estate, obtain new mortgages or refinance existing ones failed to become law in Rhode Island this year, but Governor Carcieri has signed legislation that will affect one group of homeowners.

The new law, designed to phase out cesspools, is a boon for public health and the environment, but the cost of replacing these archaic private waste disposal systems could be a financial burden for individual homeowners, especially those living in coastal areas.

The law has two levels of regulation: one specifically for cesspools located within 200 feet of coastal areas or public water supplies, deemed as a more immediate threat to public health, and another for the remainder of cesspools.

When the law goes into effect next year on June 1, cesspools near water supplies will have to be tested, and replaced within one year if they are failing. This will affect an estimated 2,000 owners. Replacement will mean installation of a modern private septic system, or a tie-in to a public sewer system, if one is available. Private septic systems can cost from $3,000 to $5,000 for lower-end systems, up to $30,000, or more, for the preferred “innovative/alternative” systems that do a better job of treating wastewater. Cesspools in high-risk areas that pass inspection will still need to be upgraded by 2013. Regulation of cesspools in areas that are not defined as high-risk — the vast majority — will be linked to the sale of property.

Buyers of real estate will have to be notified about cesspools and their risks on a disclosure form, and given the opportunity to conduct inspections. Buyers may opt to waive these inspections. The new state law doesn’t immediately force replacement of failing systems in these cases, but some communities, including Charlestown and South Kingstown, have adopted their own local ordinances that are stricter than the new state law.

Rhode Island banned cesspools in new construction in 1968, but there are an estimated 40,000 to 50,000 still functioning in Rhode Island, according to Bob Ballou, assistant to the director of the state Department of Environmental Management. Of this number, about 2,000 are thought to be in high-risk areas.

Ballou said the law has been “a long time in coming” because “it’s a tough issue politically” due to the costs involved for homeowners. But cesspools “by definition are substandard,” he said, and they must be phased out because they allow raw untreated sewage to enter the environment.

“It’s probably more of a public-health issue than an environmental issue,” he said, because cesspools present a danger to anyone drinking public water, swimming at a beach, or eating shellfish in Rhode Island.

Charlestown has its own cesspool phaseout program; the remaining functioning cesspools in town — about 300 — are pumped and inspected annually, and are scheduled to be replaced by 2009. Ten-year loans of up to $25,000 at 2 percent interest have been offered by the town and Rhode Island Housing to help homeowners with the cost of repair and replacement of failing septic systems and cesspools, according to Diane Johnson, an onsite wastewater specialist in Charlestown.

Johnson said South Kingstown has a similarly aggressive program, as does Block Island, where, she said, cesspools have been eradicated completely. “They led the way; they were the first,” she said. Other communities in Rhode Island, including Tiverton and Portsmouth, are also stepping up regulation efforts, she said.

Another environmental danger, radon, was the subject of proposed legislation that failed to pass this year. There was a proposal in the budget that would have instituted mandatory radon testing by homeowners before they sell residential real estate. Currently, buyers are given information about radon on a disclosure form and given the opportunity to test for radon during the inspection process.

The state’s budget deficit led to some attempts to raise taxes this year by adding to the cost of selling and financing real estate. According to the 2000 Census, Rhode Island had a home ownership rate of 60 percent, below the national average of 66.2 percent.

“The General Assembly went into the [2007] session facing an enormous budget deficit, so most of our time this spring was devoted to fighting proposed tax increases,” Monica Staaf, legal counsel and government affairs director for the Rhode Island Association of Realtors, told members in a recent report.

The following real-estate related tax increases were proposed, but failed to pass, this year:

•The real estate conveyance tax, a fee paid by sellers at the time of closing, could have gone from $2 — the current rate — to $2.50 per $1,000 of the house price; a bigger increase, from $2 to $3 per $1,000 of value, was proposed for properties that sell for $300,000 or more.

For the median Rhode Island house price last year, $282,500, the tax would have gone from $564 to $706; and the owner of a house that sold for $300,000 would have seen an even bigger hike, from $600 to $900.

•An entirely new tax on mortgages was proposed in H6341, which would have allowed cities and towns to impose a local tax of $2.50 per $1,000 on all mortgages and refinancing, except for buyers who had not owned a home during the previous five years. This would have meant a new tax of $706 for someone financing a $282,500 house. A proposed amendment to this bill would instead have imposed a flat tax of $500 on residential mortgages and $1,000 on commercial mortgages.

•Another proposal would have imposed a tax of 4½ percent on real estate-related services, including brokerage, property management, inspections, appraisals and financial services; and another brand-new tax was proposed for the practice of “flipping” houses — buying houses, renovating them, and offering them for sale again. According to Staaf, this failed tax proposal would have been “in addition to the existing capital gains tax” and would have ranged from 0 to 5 percent, depending on how long the owner held the property and whether it was owner-occupied.

cdunn@projo.com