By James Nani

Law360 (March 11, 2021, 8:18 PM EST) -- Rhode Island would legalize and tax recreational cannabis, increase taxes on hospitals and some real estate transfers and partly tax federal pandemic-related business loans under an $11.2 billion budget proposed by the governor Thursday.

Democratic Gov. Daniel McKee, who took over this week from former Democratic Gov. Gina Raimondo, offered a budget that he said looks to address the needs of the novel coronavirus pandemic. But it could undergo changes depending on how much funding Rhode Island receives from the $1.9 trillion federal stimulus law signed Thursday by President Joe Biden. Raimondo stepped down last week after being confirmed as commerce secretary in Biden's administration.

"The pandemic has also magnified many inequities and injustices that predate COVID-19 — our budget looks ahead to address these issues and others that will persist even after the threat of this virus subsides," McKee said, referring to the respiratory disease caused by the virus.

McKee said in a letter that one of his top priorities would be to use federal stimulus money to fully conform to tax breaks for federal Paycheck Protection Program loans. Under Thursday's proposal, Rhode Island would partly decouple from the federal tax treatment of PPP loans, with the state taxing forgiven loan amounts of more than $150,000. Other states, such as Maine, are also wrestling with the costs of full PPP loan conformity.

Joseph Codega, deputy budget officer for the state Office of Management and Budget, said during a budget briefing that under full conformity to PPP loan treatment, Rhode Island would lose $133 million over two fiscal years. Partial conformity would allow Rhode Island to recover $67.7 million of those losses, he said.

McKee also proposed legalizing and taxing recreational cannabis at a combined rate of about 20%, a pitch coming days after state Senate leaders unveiled their own cannabis bill. Rhode Island would impose a weight-based excise tax on cannabis cultivation expected to equate to about 3%, an additional retail excise tax of 10% and the state's 7% sales and use tax to cannabis transactions. The program would allow for 25 licenses to be rolled out annually for the first three years.

Scheduled to start in April 2022, McKee's cannabis program is estimated to raise $1.7 million in the 2022 fiscal year but ramp up to $17 million afterward, according to a budget presentation. The Senate proposal would tax cannabis at the state's 7% sales and use tax rate, add a 10% special excise tax but allow for up to a 3% local sales tax. Last year, Raimondo proposed legalizing adult-use cannabis but having the state control sales and profits through contractors.

Rhode Island's real estate conveyance tax would be modified under McKee's budget to tax property transfers at $2.30 for every $500 of consideration on the portion of value of more than $700,000. Codega said the proposal is similar to one Raimondo offered last year, which proposed creating a 0.92% bracket, except Raimondo's proposal started at $500,000. For values under $700,000, the current 0.46% rate would still apply. Raimondo's proposal was rejected by lawmakers last year.

McKee made a similar proposal to Raimondo's in pushing for the state's hospital licensing fee to increase from 5% to 6% of net patient-services revenue to raise $32.3 million in the 2021 fiscal year and $178.2 million in fiscal year 2022. That Raimondo proposal, too, was rejected by lawmakers last year.

James Thorsen, acting director of the Rhode Island Department of Administration, noted that McKee looked carefully at raising income taxes on high-earners but was "very reluctant" to do so, particularly because of the federal stimulus.

Jonathan Womer, director of the state OMB, noted that the administration considered such a measure for months.

"We didn't think it was necessary to raise it," Womer said.

Sue Stenhouse, a House Republican spokeswoman, said GOP lawmakers were tied up in committee hearings and couldn't immediately respond to comment.

State Senate Finance Committee Chairman Ryan W. Pearson, D-Cumberland, told Law360 that at first glance, the budget proposal looked to be a "strong foundation on which to build." He noted that more details from the federal stimulus package enacted Thursday will come out soon and will affect state revenue projections.

"As those details become clear, we will work to balance our operational budget and lay out a long-term plan for this one-time infusion of federal dollars," Pearson said.

House Speaker K. Joseph Shekarchi, D-Warwick, noted that McKee has had little time to fully prepare for his first budget but said he's developed a good working relationship with him. He also noted the effect of the federal stimulus package.

"I am ever mindful that these one-time funds will not be there to support the ongoing costs of new or expanded programs and we must be prudent in order to emerge from this crisis stronger," Shekarchi said.

--Additional reporting by Asha Glover and Abraham Gross. Editing by Neil Cohen.

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