Rhode Islanders will soon be paying more in federal taxes than they get back from Washington, according to a RIPEC report.

01:00 AM EST on Monday, March 27, 2006

BY PAUL EDWARD PARKER
Journal Staff Writer

For decades, Rhode Islanders have received more in federal spending than they have paid in federal taxes. But that is on the verge of ending, according to a report to be issued today by the Rhode Island Public Expenditure Council.

The report by the business-backed organization found that in the 2000 federal budget year, Rhode Island received $1.15 in federal spending for every $1 Rhode Islanders paid in federal taxes, such as income, excise, estate, gift and customs taxes.

By the 2004 budget year, that had dropped to $1.02.

"The trend's pretty clear," Gary S. Sasse, the council's executive director, said in an interview last week. "At this rate, in a couple of years, [Rhode Island's] going to be paying more than the state's getting back."

This shift can affect Rhode Island in two key ways:

The state budget relies heavily on federal dollars. "If the money doesn't come in at the rate it historically has, it's going to have an impact on the state," said Sasse.

According to the council's report, more than 29 percent of the state's revenue -- $1.9 billion -- will come from the U.S. government in the 2007 budget year. If that figure drops, or even does not grow as quickly as it has in the past, state budget makers would have to either cut programs or raise taxes to make up the difference.

Federal spending has a multiplier effect on the state's economy. People who receive federal assistance, such as Social Security, Medicare or Medicaid, spend most of that money in Rhode Island. If Rhode Island loses ground in federal spending, it will dampen the state's economy. "Federal spending in a state adds value," said Sasse. "The federal government's an important economic entity."

Sasse attributed the drop in how much of its taxes Rhode Island gets back to two main factors:

Rhode Islanders' per capita incomes have risen more quickly than the incomes of people in other states. Because the federal income tax is progressive -- the more you make, the higher the tax percentage -- Rhode Islanders are sending a greater proportion of their incomes to the federal government.

Federal spending has followed population shifts to the South and West, leaving the Northeast receiving fewer and fewer federal dollars by comparison.

Politics may also play a role, Sasse said.

Of the 19 states that voted for Democrat John F. Kerry in the 2004 presidential election, 13 pay more in taxes than they receive in federal spending. Conversely, of the 31 states that voted for Republican George W. Bush, 25 receive more than they pay.

"The political balance of power is evident in these numbers," said Sasse.

He said Northeastern states will need to band together to reverse this trend. "Congressional delegations from the Northeast really need to start to think and act as a team."

But, is it fair that Rhode Island should get back more than it sends to Washington, especially if per capita incomes are doing better here than in most other states?

"Why should we get more?" Sasse said. "Because we need more."

Infrastructure in the Northeast, such as roads and bridges, is older and needs more expensive maintenance, repairs or replacement, according to Sasse. Also, the population here is aging faster than many other areas in the country, creating a greater demand for health-care and housing spending. And, said Sasse, the urban areas in the Northeast have greater social issues.

pparker@projo.com / (401) 277-7360