The U.S. financial crisis has shifted the public’s interest away from the state budget deficit in Rhode Island.

But the issue will come back into focus, soon. When it does, Rhode Islanders will see the situation is more dire than first thought, requiring them to make major decisions about the type of government they want and how to pay for it.

Business owners and investors should pay attention. After an intense budget debate earlier this year about whether to raise taxes, there’s another fight coming with even more at stake.

Some of the choices are outlined in a new report by the Rhode Island Public Expenditure Council, the independent, nonpartisan research organization that is supported and largely directed by businesses.

Here’s the background:

Rhode Island ended the fiscal year that finished on June 30 with a surprising deficit of $33.6 million. That included a previously reported revenue shortfall of $8.2 million and overspending by state departments of $27 million. Applying the previously projected surplus of $3.2 million yielded the deficit of $33.6 million.

There’s been a lot written already about the state departments that overspent their budgets. The General Assembly plans to hold hearings to get to the bottom of why the administrators who report to Governor Carcieri, who was elected in part because of his business background and experience in managing a budget, overspent what they were allocated.

But there are some new details in the RIPEC report about the revenue shortfall.

The study shows there was a decline in the sales and use tax of $8.1 million, as well as a decline in departmental receipts of $5.4 million. The falloff in consumption taxes and receipts is consistent with a slowing economy.

But the business tax collections were mixed. There was a decline of $5.1 million from business corporations, offset by additional revenues through public utilities gross earnings of $2.1 million, insurance companies of $4.5 million and health-care provider assessment of $2.5 million. Overall, general business revenues increased by $4.6 million.

There also was a $4.7-million increase in revenues over the projections of personal income tax collections.

That contrast between consumption taxes and income taxes is curious. More work needs to be done to understand how the state’s economy is affecting revenues of different types. More may be learned after the first-quarter report of tax revenues that should be available in the first week of next month.

Since the fiscal year-end audit, there’s more evidence that the state’s revenue picture may darken.

The decline in the stock market may erode state collections for estate taxes, capital gains taxes and income taxes, said John C. Simmons, executive director at RIPEC, in an interview. That makes sense, with the Dow Jones Industrial Average off 21 percent from its peak on Oct. 9.

The other concern is the deepening recession in Rhode Island. The state’s unemployment rate spiked in August to 8.5 percent, with 48,800 people out of work. It will get worse before it gets better, especially with the slumping U.S. economy, weakened by the declining housing market and more troubled banks and investment firms.

That all means state revenue collections could be less, much less than projected, widening the budget deficit. New estimates will come out during the November Estimating Conference, when the deficit will be reforecast.

The RIPEC report also noted that state leaders plan to tap the rainy-day fund to plug the previous year’s budget hole for the second year in a row. If the General Assembly approves using the rainy-day fund, “the amount taken out of the Rainy Day Fund would have to be paid back from the general revenue fund in fiscal year 2009,” the RIPEC report says.

That starts the current year with a deficit. Nobody has yet estimated that size of the deficit, but when you add in a revenue shortfall and savings that may not materialize, the state may be in a very deep hole already.

That’s a lousy place from which to start putting together a new budget.

The RIPEC report raises some big policy questions about state government.

Simmons said RIPEC is now doing a study, to be completed by year end, of what he called “the social safety net,” or the state programs needed to help those who can’t help themselves. Simmons wants to compare Rhode Island’s services with the cost of those services in other states.

Simmons also raised questions about whether fees and charges assessed by Rhode Island are in line with those of other states. He also asks about whether the state has ranked critical functions and developed realistic cost-reduction projections based on the state’s priorities.

Interestingly, the RIPEC report makes no mention of taxes among the “serious questions” it raises about a “fiscally sound budget process.” Last year, business leaders ran a successful campaign to hold the line on broad-based taxes.

“Looking at the tax burden now compared to other states, we don’t believe any tax increase is appropriate,” Simmons said.

RIPEC, however, does make recommendations on the timing of budget policy.

Simmons said intermediate steps may be needed as soon as the first-quarter revenue figures are available, as well as cost savings from personnel moves.

After the revenue estimating conference report in November, RIPEC says Carcieri should submit a supplemental budget in early January, with action by the General Assembly as soon as possible to give sufficient time to implement any additional fiscal-control measures.

“Fiscal discipline must be heightened during the intervening time period to ensure the proposed savings in fiscal year 2009 are realized or alternative plans need to be implemented to meet the proposed savings and avoid additional shortfalls in future years,” the RIPEC report advises.

Legislators last year credited the business owners who gathered and lobbied at the State House for the decision to resist raising broad-based taxes while framing the budget. It was a long, focused campaign.

But that’s over and another is starting.

Get ready. There’s a lot to decide about Rhode Island’s state government and how to change taxes, fees and charges to pay for it.

jkostrze@projo.com