USA > Rhode Island > Rhode Island : three centuries of democracy, Vol. II > Part 31
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porate excess, and included a revision of the state tax laws relating to banking corporations, savings banks and participation accounts in commercial banks and trust companies, and to taxes on the gross earnings of public service corporations.
A state tax on "net estates, inheritances, legacies and gifts" was ordered in 1916. The most significant increases in the state revenues for 1919 as compared with 1909 were in taxes on towns and cities, $415,000, due to a special tax for public road construction, first levied in 1919, after the electors in 1913 had rejected a proposition to fund a road building pro- gram by bond issue; in taxes on public service corporations $238,000; on savings bank and savings and participation deposits in commercial banks and trust companies, $284,000; on motor vehicles, $440,000. Additional to these were new taxes on corporations under the act of 1912 as amended, amounting to $1,080,000; and on inheritances and legacies, yield- ing $387,000. The inheritance tax law was revised in 1926, and the rates of taxes were increased principally because of federal legislation in the same field which left Rhode Island no option otherwise. The federal estate tax law as amended February 26, 1926, permitted rebates, not exceeding 80 per cent. of federal levies, because of inheritance taxes paid to a state. No state could afford to neglect to take complete advantage of the rebate, inasmuch as the federal tax must be paid, the only question for a state to decide being whether it would take the inheritance tax up to the limit or surrender it to the federal government. Rhode Island, therefore, increased inheritance tax rates; but the General Assembly in 1927 passed a resolution of protest, in part as follows: "Whereas, The federal estate tax law, as amended February 26, 1926, provides that estates liable thereunder shall be credited with any inher- itance taxes paid by the beneficiaries to the state, or states, the credit not to exceed 80 per cent. of the federal levy; and .
. . . this amendment abridges the right of the states, because it obliges them to abandon their state inheritance tax laws in favor of statutes based on the federal rates and system; the federal tax not being a necessary component of its revenue system at this time; its only object now must be an attempt to coerce the states; therefore be it resolved, that the General Assembly of the State of Rhode Island respectfully requests Con- gress to repeal immediately the federal estate tax provisions of the revenue law effective Feb- ruary 26, 1926, and abandon this field of taxation in time of peace."
The General Assembly, in 1925, levied a tax on gasoline used in motor vehicles, and in 1927 increased the rate of the gasoline tax. In 1927, also, Rhode Island accepted the provi- sions of the federal highway act, as amended and supplemented, and undertook to cooperate in the federal plan for road construction. The effects of some of these measures appeared in the budgets of revenues and expenditures for 1929. The largest source of additional and distinctly new revenue in 1929, as compared with 1919, was the tax on gasoline, which yielded $1,441,000. In the same year, $4,661,000 received as inheritance taxes included an extraordi- nary payment of $3,970,240.25. Otherwise there was a decrease in the taxes paid by towns and cities, due to the substitution of the gasoline tax for the direct tax to support the road- building program; and increases of $250,000 in general corporation taxes, of $266,000 in taxes on public service corporations, of $714,000 in taxes on savings deposits, of $378,000 in insurance taxes, of $1,964,000 in taxes on motor vehicles, of $91,000 in license fees. Increase over the period in receipts by courts, by the penal and charitable institutions, and for interest, were more than offset by large increases in costs for maintenance, or interest paid on bonded indebtedness and contributions to sinking funds. The magnitude of the items last mentioned appears in the $1,107,III.69 paid as interest in 1929, additional to $1,007,160 taken from the extraordinary receipts from inheritance taxes and applied to the redemption of part of the state's bonded indebtedness.
The expenditures for maintenance of the state government in 1900 were $1,355,400; in 1909, $2,295,359.24; in 1919, $5,142,533.39; and in 1929, $14,142,368.61. The expenditures
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for 1929 might be classified as follows: Executive, $29,416.16; legislative, $109,417.38; judi- cial, $1,899,071.02 ; administrative, $182,552.39; interest, $1,107,111.96; cancellation of bonds, $1,007,160.00; law enforcement, $216,147.23; military, $131,159.31; education, $1,- 358,502.80; penal, corrective and charitable, $2,302,370.88; highways, parks and bridges, $4,850,042.35 ; public health, $127,923.63; agriculture, $170,743.74; regulative, banks, insur- ance companies, and public utilities, $79,060.23 ; regulative, miscellaneous, $58,360.69; fisher- ies, $54,940.64; harbors, rivers and waters, $40,678.04; labor and industries, $22,287.33; relief, veteran soldiers and sailors, $105,281.33 ; State House and State Office Building, $170,- 734.64; commissioner of birds, $15,453.31; state airport, $18,017.08; miscellaneous, $85,- 936.17. The total expenditures for three fiscal years, 1927, 1928 and 1929, were, respectively, $11,587,200.12, $13,370,775.83, and $14,142,368.61, an average of $13,033,448.19. It is worthy of note (1) that the expenditures in 1929 were ten times as great as in 1900; (2) that in 1929 expenditures for maintenance of courts of justice and of public schools each exceeded total expenditures for all purposes in 1900; (3) that three and one-half times as much money was spent for roads, parks and bridges in 1929 as for all state purposes in 1900; (4) that the maintenance of penal, corrective and charitable institutions and agencies cost Rhode Island almost $1,000,000 more in 1929 than the total cost of the state government in 1900; (5) that interest payments on the state debt in 1929 had reached to within a quarter of a million dollars of the total state expenditure in 1900.
On the revenue side the income in 1929 from (1) taxes on towns and cities, (2) taxes on corporations, (3) taxes on savings banks, (4) the tax on gasoline, each one alone would support the state government were it maintained on the same scale as in 1900; while the taxes on motor vehicles were sufficient almost in 1929 to support an establishment twice as large as it was in 1900. It is also to be noted that the largest single item of expenditure was for roads, bridges and parks, $4,850,042.35, exclusive of the interest paid on outstanding bonded indebt- edness for these purposes; and that the total revenue from motor vehicle licenses and the tax on gasoline, $3,882,701.08, did not approach within $1,000,000 of the expenditure for improvement of public rights of way. Within the five years preceding 1930 the financial department of the state has been completely reorganized, and current revenues and expendi- tures have been studied with emphasis upon careful budgets of income, estimates and expen- ditures. In spite of the marked increase in expenditures in the past thirty years Rhode Island is one of a very few states that have not had recourse to income taxes as a means for increas- ing revenues, and this is more remarkable because Rhode Island has neither holdings of public lands that may be sold or made to yield rents, nor mineral wealth that yields severance taxes.
The prohibitory amendment to the Constitution of the United States struck from the list of sources of revenue the excise by way of liquor licenses, without apparently compensating for the change by any noticeable decrease in the expenditures for enforcement of law and the support of institutions for those who became dependent upon the state, though these were both bracketed with liquor licenses in the relation of cause and effect before the amendment. Per- haps one of the most significant items disclosed in the analysis of state finance is the tax on deposits in savings banks and trust companies conducting participation banking. The savings of the people of Rhode Island yield a constantly increasing tax revenue, as their growth dem- onstrates the thrift of the people. The increase has continued during a period in which the number of automobiles registered indicates that practically the whole state is riding in gaso- line-driven vehicles, and that the distribution is approximately one to a family. This pros- perity, proved by the increase in savings and the ability to own and operate private motor vehicles, has been attained while state taxes have risen from 60 cents per capita annually in 1850, to $3 per capita in 1875 and 1900, and to over $20 per capita in 1930. In this connection it should not be forgotten that the tremendous increase in the size of the state establishment,
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and the multiplication of service undertaken and furnished by the state, all cost money, the question for the taxpayer-and he is everybody-to answer for himself being "what am I getting for my tax dollars?" If Rhode Island is a better state to live in because of the exten- sion of state service then the taxpayer ought to be contented.
TAX REFORM DISCUSSED -- The discussion above of the increase in the tax on inheritances and legacies because of action by Congress, and Rhode Island's protest of use of the tax powers of the federal government to promote social policies and to coerce the states, led to the appointment of a commission to make the protest effective, and to Rhode Island's participa- tion in a joint state and federal conference to consider tax problems. The conference resolved itself into a national council of state legislators, which, on April 29, 1930, announced a pro- gram of principles on taxation readjustment including the following: (I) "Separation of tax sources, federal and state," and in each state "in its own way and as far as practicable . ... the same principle of separation of tax sources between the state and the various local sub- divisions"; (2) estate (inheritance) tax proceeds to be reserved for exclusive use of state governments ; (3) broadening the tax spread, "by reducing general property taxes, consider- ation to be given to other taxes, such as license taxes and sales taxes levied upon select com- modities as exemplified by the gasoline tax; (4) equalization of state taxes, designed to meet the existing decline in both valuation and earnings of farms and other property ; (5) limita- tion of joint federal-state appropriations and levies, and elimination of coercive levies ; (6) graduated levies and restriction of graduated levies ; (7) more rigid economy in the affairs of government." In addition to the foregoing principles, the council recommended "that gen- eral attention be paid by all tax levying bodies and by all organizations considering the sub- ject of public revenues to the economic pressure caused by the large burden of taxes now assessed and collected against the farms, homes and business enterprises of the people. We believe that the primary work . ... owing to the heavy burden and inequality involved in this condition, should be directed to the reduction of taxes on homes and farms, and the equal- ization of taxes on business by the substitution of now unoccupied and unused sources of taxes for whatever part of the taxes now raised on farms, homes and business are unjust and unfair."
MUNICIPAL FINANCE-Municipal finance in colonial and even in early state history was characterized by thrift almost to the verge of parsimony, and a pay-as-we-go policy. The Rhode Island taxpaying freeman was too canny to cajole himself into assuming an obligation to pay interest and to accumulate sinking funds with the consolation that thus he was permit- ting posterity to pay its share of the cost of improvements. As a rule, he chose to live with- out the improvements and let posterity work out its own solution of its own problems. Faced with a present necessity involving unusual expenditures, such as replacing a bridge, he pre- ferred a lottery and the gambling chance of a return on his investment to taxation, which repays no dividends. The long struggle in Providence to achieve a tax-supported public school system in place of the schools maintained principally through private initiative, which continued for thirty-three years, from the report of the school committee of 1767 recommend- ing a plan, until John Howland obtained mandatory legislation in 1800, is an apt illustration of the reluctance to assume additional tax burdens. Even after public schools had been estab- lished, the town of Providence spent only $3500 annually for teachers' salaries until 1818, and $3750 from 1818 to 1828, because in 1818 it had increased the salaries of five assistant teach- ers from $200 to $250 per year of full fifty-two weeks, with no vacations save a few holidays. Stokes* characterized this period as one of "strict economy," ignoring the probably utter wastefulness of spending any money at all for service that could be bought and sold so cheaply.
*"Finances and Administration of Providence," 1903.
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Newport and Providence, rival towns in commerce and in politics, for years after the Revolu- tion had few paved or lighted streets, maintained only skeleton night watches rather than police forces, spent little for protection against destruction by fire, had done almost nothing to provide for drainage sewers or other sanitary measures for disposition of waste and filth ; where water was supplied through pipes, the areas served were small and the initiative was private. Support of public schools, as it was in the instance of the state in 1850 one of the largest items of expenditure from the general treasury, tended to be the municipal under- taking absorbing most of the money raised by taxation. The filling in of part of the Cove lands in Providence in 1857 was a major municipal enterprise in the period.
After the Civil War Providence undertook new projects, including the construction of large and splendidly equipped schoolhouses; the acquisition of water rights and the building of reservoir, aqueduct, pumping station and pipe lines for a municipal water supply; new bridges across the Providence River, one being the swinging drawbridge at Point Street; the Brook Street impovement, involving the removal of a hill at Fox Point, and filling on the west bank of the Seekonk; a million dollar city hall; new streets, sewers, street lighting and the filling in of the Cove. By 1880 the city had a bonded indebtedness of $10,475.000, and a sinking fund of $1,102,000.
Newport, lagging behind Providence in population since 1800, and already passed by Paw- tucket and Woonsocket in 1880, had a net debt of $116,000. Pawtucket's net debt was $935,- 000, and Woonsocket's was $230,000. The total indebtedness of towns and cities in 1880 was $12,607,000, against which sinking funds amounting to $1,336,000 had been accumulated.
Two years earlier, 1878, the General Assembly had forbidden towns and cities, unless authorized by statute, to incur indebtedness exceeding three per cent. of taxable property. In doing so the Assembly had done little more than make a gesture, out of which arose a pro- lific type of special statute in the form of enabling legislation, usually combining sanction for incurring indebtedness in excess of the three per cent. limitation with authorization for issuing long-term bonds, as borrowing by the latter method became a common method of financing public improvements. In the twenty years from 1880 to 1900, municipal debts were more than doubled, reaching $27,948,000, which, by sinking funds amounting to $3,467,000, were reduced to $24,481,000 net. In the interval the northern cities had borrowed almost lavishly, the net debt increasing 60 per cent. in Providence, 354 per cent. in Pawtucket, and 1115 per cent. in Woonsocket. All three cities had exceeded the tentative statutory debt limit of 3 per cent. of valuation ; related to assessed valuations the city debts were in Providence 7 per cent., in Pawtucket 12.7 per cent., in Woonsocket 17.8 per cent. Newport had increased indebtedness 574 per cent. in the twenty years, but Newport's net debt was not quite 2 per cent. of assessed valuation. The advantage for Newport lay both in the wealth of property available for assess- ment, and in the holding of so much in large estates as summer homes, which imposed little burden on the city for schools, water, sewers, streets, lighting, police, fire or other common . municipal services. Town and city indebtedness in 1930 aggregated, in round numbers, $100,000,000, against which $25,000,000 had been accumulated as sinking funds. The city debts,t as percentages of assessed valuation, were: Central Falls, 8; Cranston, 5.5; Newport, 2.7; Pawtucket, 7.5; Providence, 5.3; Woonsocket, 15. Woonsocket, in 1929, had reached so nearly to the limit of the borrowing power that loans were refused by banks until a special examination had been undertaken, with the result that the city obtained an extension of credit. The city had been carrying forward an extraordinary, expensive improvement program, which reached its apex almost at the same time that an industrial depression affected seriously a large number of factories, some of which had been closed. Woonsocket at the time levied the
+Figures used are for nearest year to 1930 for which statistics were accessible; they are approximately but not absolutely accurate.
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highest tax rate in Rhode Island, with the exception of New Shoreham. The island town had been through difficulties because of town indebtedness incurred in ambitious projects for improving the town harbors, and for several years had been conducting its finances under agreement with bankers, who extended credit only upon condition of maintenance of a high tax rate and steady reduction of indebtedness by annual installment payments. Pursuing this plan the island town has reduced its net indebtedness to less than ten per cent. of assessed valuation.
Rhode Island towns* having net indebtedness exceeding $1,000,000 are East Providence and Westerly, with debts, respectively, amounting to 6.5 and 6 per cent. of assessed valuation. City government has been proposed for East Providence because of the rapid increase in population, and municipal problems closely resembling those that are characteristic of cities ; while Westerly includes a compact section that suggests a small city. More than half the towns and cities have increased bonded indebtedness in recent years to finance the construc- tion of finer and larger schoolhouses, of new streets, of sewers, and, particularly because of the vigorous insistence of the Board for the Purification of Waters, for sewage disposal systems. Rhode Island finally has awakened to the desirability, if not the necessity, of restricting drain- age into rivers and bay, thus to preserve one of the finest assets of the state, irrespective of the viewpoint-aesthetic, sanitary, recreational or even utilitarian, the last as measured by the wealth of fisheries in an unpolluted waterway.
For the whole state, bonded indebtedness of towns and cities was 5.5 per cent. of valua- tion in 1930; and state, town and city indebtedness combined was 7 per cent. of assessed val- uation. Other elements than assessed valuation and net indebtedness which enter into a determination of town solvency and ability to carry the tax and interest burdens of increased indebtedness, include the time of expiration of outstanding bond issues, and the adequacy of sinking funds, besides the trend of population growth or decrease, and of building opera- tions as these affect the accumulation of assessable property. With a bonded indebtedness of remote maturity, a small sinking fund, if steady increase is assured, may be adequate to warrant a high credit rating for the town. On the other hand, a town with relatively a low percentage of bonded indebtedness-Johnston, for instance, with less than 5 per cent .- may by reason of neglect of sinking funds, failure to collect taxes, slowness in meeting current obligations, and practical exhaustion of the possibilities of increased valuation, reach a finan- cial rating that warrants refusal by bankers of further accommodation. In the particular instance, Johnston, the town in 1898 permitted a compactly built section adjoining the city of Providence, and including the town high school and the town's flourishing business centre at Olneyville, to annex itself to the city, the town as a whole being unwilling at the time to undertake municipal improvements that were wanted by Olneyville. The episode, in rela- tion to twentieth century developments, suggests that Johnston parted with "the goose that laid the golden eggs," inasmuch as Olneyville had been the section most productive of tax revenues. Johnston, in the twentieth century, and particularly in 1930, finds herself a dormi- tory for a population that, for the most part, works and spends its money in the city of Prov- idence and neighboring towns and sends its children to the public schools of Johnston. The town is distressed by the problem of providing adequate school facilities, and is almost ready, should opportunity be afforded, to transfer another compactly built section to the city. The exceptions to general rules have been noted; Rhode Island as a state is wealthy and abundantly able to solve financial problems. The same is true of most of the towns and cities; in instances in which towns have the appearance of being unable to meet financial obligations the remedies lie within control of the General Assembly, and consist either in a better allocation of respon-
*Not cities.
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sibility for various types of state-municipal functions, or in a new political map related to a readjustment of town boundaries in such manner as to assure ample tax resources.
The assumption by the state of almost total responsibility for the construction and main- tenance of roads and bridges in and between towns, and the more recent creation of a state police, both are suggestive that other readjustments of state-municipal obligations ought to be made; whereas, with reference to the support of schools, one of the heaviest burdens in sev- eral towns of large area and small population, the state in the twentieth century has receded from an earlier and more generous position until the contribution from the general treasury has become a minor fraction, although the school statutes, for the most part, are mandatory. So long as the General Assembly may create and abolish towns and cities, may divide existing towns or combine them, and may alter boundaries to serve state purposes, so far as it, under Constitution and laws, makes the towns and cities its agents for performing governmental and municipal functions, it may not avoid responsibility for the weakness of its creatures. The interest charges on the indebtedness of Rhode Island towns and cities, including interest on bonds and on short-time notes to cover borrowing in anticipation of tax payments, amount annually to over $4,000,000.
The ratable wealth of Rhode Island in 1930 is approximately $2,500,000,000. For 1929 the totals were: Real estate, $918,332,791 ; tangible personal property, $226,152,327; intan- gible personal property, $249,257,023-total taxable property in towns and cities, $1,393,- 742,14I ; exemptions in towns and cities, $160,605,383; total property in towns and cities, $1,554,347,524; savings deposits in savings banks, trust companies and national banks, $365,- 797,227.50; corporate excess of other than public service corporations, $317,551,384.80; premiums on insurance policies, $40,667,188; public service corporations, $151,089,382.50; state total, $2,429,452,706.80. State plus municipal taxation totals annually $38,000,000, or little over $1.50 per $100 of taxable property. The total state and municipal taxation is approximately $2,000,000 annually more than the peak of federal taxation in Rhode Island annually during the World War. The per capita expense for state and municipal government in Rhode Island is approximately $54 annually ; the federal government took approximately $60 per capita annually during the war. The per capita wealth is $3570 as based on tax resources.
BANKS AND BANKING-The colony of Rhode Island, by issuing paper currency in large part as loans to freeholders upon land as security, not only provided ready-money "capital" for expanding business, but also usurped so many of the functions of banking as to make private banking impracticable. The earliest private banking, therefore, aside from the use of credit instruments following the law merchant, which were almost inseparable from the inten- sive development of commerce in the eighteenth century, belongs to the period following rat- ification of the federal Constitution. The leaders in the movement, as in the remarkable expansion of the carrying trade following the Revolution, were two of the Brown brothers, John and Moses. The General Assembly granted a charter for the Providence Bank, Octo- ber 3, 1791. The capital stock was oversubscribed, $180,000 of offers being accepted, with $20,000 and $50,000 reserved, respectively, for state and nation, neither of which purchased stock. Like so many legislative bills of the period, including statutes, the bank charter con- tained a preamble, which recited: "Taught by the experience of Europe and America that well-regulated banks are highly useful to society, by promoting punctuality in the performance of contracts, increasing the medium of trade, facilitating the payment of taxes, preventing the exportation of specie, furnishing for it a safe deposit, and by discount rendering easy and expeditious the anticipation of funds on lawful interest, advancing at the same time the inter- est of the proprietors," etc. One of the extraordinary powers granted to the new corporation was "bank process," through which, on giving notice to a debtor and filing an affidavit of his
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