Projo Biz Blog

The House Finance Committee today voted overwhelmingly in favor of a budget bill that would, among other things, treat the first $2,400 of your unemployment benefits the same as the rest of your benefits.

If the committee's bill holds up, there'd be no change in the way Rhode Island treats unemployment benefits - they'd all be taxed.

This is an important issue to the 30,000 or so people who've lost their jobs and are collecting unemployment benefits through the Rhode Island Department of Labor and Training.

Governor Carcieri on March 10 made it clear he wants the federal tax break to flow through to your state income taxes, too.

But the House Finance Committee, worrying about gigantic budget deficits for this year and next, doesn't want to lose any more revenue.

So the committee decided not to adopt the new federal law for Rhode Island tax purposes. In technical language, the committee voted to "decouple" Rhode Island from the new federal law.

We've been here before - lots of times. Congress passes a tax break, and Rhode Island decides not to go along with it for Rhode Island tax purposes.

It's happened with federal income tax credits. It's happened, also, when Uncle Sam decides to let businesses take a bigger tax break to help them recover the cost of buying new machinery and equipment.

In these situations, Rhode Island in effect says that Uncle Sam has one set of rules when it comes to taxes, and Rhode Island has another.

Rhode Island is not alone in this regard; many other states also decouple from federal law when it comes to certain tax matters.

But the circumstances this time are different. The state's unemployment rate is 10.5 percent. A lot of people have lost their jobs amid this global recession, and many of them are collecting unemployment benefits.

Under the economic stimulus bill approved by Congress and signed into law by President Obama on Feb. 17, your first $2,400 of unemployment benefits will escape federal tax.

Should Rhode Island adopt that tax break, too? Carcieri says yes. "People are hurting as it is," he said at a State House news conference on March 10. But the House Finance Committee today said no.

Congress can do just about whatever it wants when it comes to tax breaks because it doesn't have to balance its budget; it can run a deficit.

Rhode Island must balance its budget each year by law, said House Finance Committee Chairman Steven M. Costantino. And there's the rub.

Costantino has estimated the state's budget deficit to be at least $357 million for the year ending June 30, and between $400 million and $500 million - "possibly more" - for the year which starts July 1.

"States are struggling with their own revenue" problems, Costantino said today. "We cannot spend money that we don't have at this point," he said.

Denying the tax-free treatment of the first $2,400 in jobless benefits would save the state about $5.4 million in revenue for the year that starts July 1, according to the House's fiscal advisory team.

The committee's bill also would not adopt, for Rhode Island tax purposes, another new federal tax break. It generally lets you deduct sales tax you pay on the purchase of a new car, light truck, motorcycle or motor home this year. Blocking that tax break at the state level would save about $1.4 million in revenue.

Those sums aren't enough to balance the budget. But they'll help, Costantino indicated.

John C. Simmons, executive director of the Rhode Island Public Expenditure Council, a business-backed group that monitors the state's finances, says he prefers Carcieri's position on the issue.

The House Finance Committee's decision to block the tax breaks "seems in opposition of the stimulus package," he said. The federal package includes a bunch of tax breaks that are intended to help stimulate the economy, he pointed out.

So what'll happen? Nobody knows for sure. The full House and the Senate still have their say. And even if the measure is approved as is, Carcieri still gets a say, too.

For now, remember this: If you're collecting unemployment benefits, you have a federal tax break right in hand. But don't count on a Rhode Island tax break, too. Wait to see what happens at the State House.

TODAY'S TIP: The House Finance Committee's measure retained a provision, proposed by Carcieri, that would eliminate the one-week waiting period for unemployment benefits. So if the measure is enacted, someone who's laid off would no longer have to wait the required one-week period before collecting benefits.

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