PROVIDENCE, R.I. (WPRI) -- Gov. Dan McKee on Thursday unveiled a $14.2 billion budget bill that seeks to close the state's first deficit in years through a mix of spending cuts, new taxes and fees, and accounting changes. The biggest source of new revenue McKee wants is a 10% tax on digital advertising that would be paid by large tech companies. He also wants to increase charges on buyers of cigarettes and electric vehicles, and to levy the 5% hotel tax on more Airbnb rentals. "This budget generally signals a return to pre-pandemic conditions," said Jonathan Womer, director of the R.I. Department of Administration. "We need to right-size government." McKee's aides acknowledged that the projected deficit for the 2025-26 fiscal year, which begins July 1, has shrunk considerably from the $400 million they had forecast last fall. The projected deficit is now only $222 million, they said, thanks largely to higher-than-expected tax revenue and lower-than-expected caseloads for social programs. And for all the talk about deficits, the size of the budget will actually increase compared with this year -- just not by as much as state agencies had requested. The statewide increase in spending will be $253 million, or just under 2%. The state budget has grown enormously since just before the pandemic, when it was only $9.3 billion, in part due to significant infusions of federal money. A recent report by the Rhode Island Public Expenditure Council, a think tank, found that lawmakers have also increased state-funded spending at a rate well above inflation. Now the state is back to its perennial problem: sizable budget deficits. Under McKee's plan, state spending is expected to increase by 3.6% annually over the next five years, even though revenue is only expected to increase by 2.8%. Social services -- notably the Medicaid health insurance program -- and aid to local school districts together make up two-thirds of the entire budget. Their costs are consistently going up faster than tax revenue can keep up. That has created "a simple math problem" for state leaders, McKee wrote in his introductory letter to lawmakers. He said he had made "tough decisions to streamline operations, eliminate redundancy, and ensure every dollar is used efficiently." Lawmakers will hold hearings on the budget plan over the coming months, with a final negotiated tax-and-spending plan expected to emerge in late May or June. That plan will come out after the release of revised revenue estimates, which often change the math considerably. Here's how McKee wants to close the deficit The governor's overall plan to close the $222 million budget gap for the next fiscal year can be broken down into three categories. The biggest component of the governor's deficit plan is spending reductions, which the administration says net out to $125 million. Savings proposals include a 4% year-over-year cut in outside contracts as well as various efforts to trim administrative expenses, like getting rid of unused phone landlines and moving state agencies from leased space into state-owned offices. The latter effort will include another push to buy an East Providence office building currently owned by Citizens Bank, which officials said could house the R.I. Department of Environmental Management and the R.I. Department of Human Services, as well as a data center with special HVAC needs. Lawmakers rejected the building purchase last year when it got caught up in controversy over Citizens seeking a tax change that the company eventually won. Budget officials insisted the two issues were unrelated. Another building change aimed at saving money: McKee wants to close the R.I. Department of Corrections' minimum-security facility, which his aides argued is underused, and move those inmates into a new unit in unused space in the medium-security facility. The Hospital Association of Rhode Island criticized McKee almost immediately after the budget was released, citing what the trade group characterized as over $25 million in cuts to hospital funding. The governor's aides said they reduced one hospital payment program because of other streams of funding they are receiving. "The governor’s budget proposal will only make a bad health care situation worse for Rhode Islanders," said Howard Dulude, the association's interim president, in a statement. "Hospitals are already facing significant challenges due to low reimbursement rates and these cuts will further strain hospitals, forcing them to continue to make difficult decisions to stay afloat, including laying off staff and cutting services." The governor wants to save $10 million by limiting the annual increase in state aid to municipalities that reimburses them for what they used to get through the car tax, which was phased out over the last decade. The next-largest component of the deficit plan is new revenue sources, which are supposed to net out to $54 million. McKee's biggest source of new revenue is a proposed 10% gross tax on digital advertising, modeled on a similar one in Maryland. It would bring in $10 million during the 2025-26 fiscal year, when it would only be in effect for half the tax year, and then $20 million annually. While the digital ads tax is being pitched as aimed at tech giants like Meta and Google, the governor's aides acknowledged under questioning by reporters Thursday that it would also hit the state's largest newsrooms due to the size of their parent companies. Maryland lawmakers had exempted news media from the tax. Brian Daniels, director of the R.I. Office of Management and Budget, initially said McKee is open to tweaking the structure of the tax in talks with lawmakers but was aiming to keep it simple to start the conversation and avoid legal issues. Soon after the budget briefing, however, the administration issued a statement announcing the governor had directed the Department of Revenue to revise the proposal to exclude media outlets, and said McKee had already told them to do so when the budget was being drafted. Drivers of electric vehicles would be asked to pay a new annual registration fee: $150 for battery electric vehicles and $75 for plug-in hybrids. Officials said the fee would offset the fact that those drivers use less or no gasoline and therefore don't pay the gas tax, which is a key source of funding for transportation projects. Cigarette smokers -- a perennial target for state officials when they need more revenue -- would also be asked to pay up once again, with McKee proposing to increase the tax to $5 per pack. Officials said the increases are aimed in part at encouraging people to smoke less. McKee also wants to close what he calls a "loophole" in the 5% hotel tax, which officials said currently applies to short-term rentals like Airbnb if people rent a single room but not if they rent a whole house. The governor wants to direct revenue from the tax to address homelessness. Lawmakers killed a similar proposal last year. Another source of funding to address homelessness would be a proposed increase in the real-estate conveyance tax on homes worth more than $800,000. McKee's said the new 1.25% rate, up from 0.92% currently, would be equal to the rate in Connecticut. Truck tolls are set to come back now that a federal court recently ruled in favor of the state. McKee's budget books $10 million in revenue from tolls through June 2026, then $40 million a year going forward, similar to the program's original projections. Officials are still determining the details of how the revamped toll program will work. McKee is seeking another increase in the DMV's technology surcharge, which was only supposed to be in place from 2007 to 2014 but has been kept in place. Originally set at $1.50 per transaction, the fee was increased to $2.50 during Gina Raimondo's governorship, and McKee is now seeking to raise it to $3.50. The final category of the governor's deficit-reduction plan is the wonkiest: accounting transfers. But it's a lot of money. The biggest accounting change by far -- contributing $43 million toward closing the deficit -- is reversing this past year's twin transfers of higher-than-expected tax revenue into the state pension fund and the state's rainy-day fund. Those transfers are currently required under law. However, budget officials said last year's transfers were far larger than lawmakers had ever envisioned. That was because federal officials delayed the tax filing deadline from April to July to help people affected by last winter's flooding. The delayed payments meant extra revenue arrived after the May cutoff under law, triggering the supplemental transfer clause. Daniels said those tax payments would usually have come in during the normal tax season and never would have been transferred in the first place if not for the flooding delay, so the governor decided to put the money back into the operating budget to help close the deficit. That's not the only transfer between government accounts helping to fill the shortfall. McKee is proposing to resume the long-derided practice of "scoops" -- grabbing unused funds out of the accounts of quasi-public agencies and using the money to balance the budget. The governor wants to take $5.6 million from the R.I. Student Loan Authority, $3 million from the Underground Storage Tank Fund and $2 million from the R.I. Infrastructure Bank. Here's how McKee wants to spend the money As with every state budget, the vast majority of the spending is similar year to year. More than two out of every three dollars in the budget goes toward either health and human services -- mostly Medicaid -- or education. McKee is asking lawmakers to consider a long list of changes to how the state spends money, with a major focus on education. In addition to an increase of over $40 million in aid to all K-12 schools, the governor wants to increased a bonus payment that goes to five districts with high poverty levels. State colleges would also receive additional funds for initiatives such as the Rhode Island Promise and Hope scholarship programs. Training programs including Real Jobs RI would get new funding, as well. While officials said aid to cities and towns is flat in the budget, McKee is seeking to direct $6.5 million from the state's highway account to make his RhodeRestore initiative a permanent program. RhodeRestore helps cities and towns pay to repair municipal roads. The governor wants to eliminate some tax credits that he says are underutilized in order to expand the state's research-and-development (R&D) tax credit to bring it in line with Massachusetts and Connecticut. McKee's budget proposes some regulatory streamlining, such as easing staffing requirements for nursing homes; removing fees for many remote workers; limiting licensing requirements to operate on holidays; scaling back how often health providers need to acquire a Certificate of Need; and ending a paint stewardship program. As McKee previously pledged, the budget includes language that would institute a ban on so-called assault weapons in Rhode Island. Lawmakers have expressed skepticism about including a controversial non-financial item in the budget, though McKee's aides did pair it with a sales tax exemption on safety products for guns. As the state struggles with a shortage of primary care doctors, McKee is proposing two measures to deal with the issue: a $200,000 allocation to help young doctors pay their student loans, and a 2027 review by the health insurance commissioner of the rates they're paid. The governor wants to direct $2.9 million to T.F. Green Airport to provide subsidies for flights and funding for marketing. The budget includes a pilot version of the "baby bonds" program championed by General Treasurer James Diossa, which would create a state-funded account for low-income children born in Rhode Island. McKee's proposal would limit enrollment to families eligible for the RI Works cash-assistance program, and cost only $750,000 rather than nearly $14 million. Randi Rossi, executive director of the R.I. League of Cities and Towns, was among the first to comment on the budget bill. He indicated municipal leaders were pleased about McKee's priorities in the plan, but are also still seeking more funding. "We are hopeful that when revised revenues are issued this spring, further investment in education aid and local communities can be made," Rossi said. Georgia Hollister Isman, regional director of the progressive advocacy group the Working Families Party, slammed McKee for refusing to raise taxes on upper-income residents to help deal with the budget deficit. "The governor doesn’t have a funding problem, he has an allegiance problem," she said in a statement. "He says he’s committed to ‘progress and promise,’ but these proposals are more like ‘promise over progress’. He’s promised to protect the bank accounts of a handful of multi-millionaires, corporate CEOs, and their lobbyists." If McKee's budget plan were to pass as written, officials project the state would face a $301 million deficit when they start putting together the next budget a year from now. The red ink is forecast to grow to nearly $400 million by the 2029-30 fiscal year. Credit: R.I. Office of Management and Budget Ted Nesi ([email protected]) is a Target 12 investigative reporter and 12 News politics/business editor. He co-hosts Newsmakers and writes Nesi's Notes on Saturdays. Connect with him on Twitter, Bluesky and Facebook. Eli Sherman and Tim White contributed to this report.