R.I. has a law that caps property taxes. Now one city has to issue refunds.

Central Falls Mayor James Diossa speaks at a 2018 news conference.Michelle R. Smith

CENTRAL FALLS – When Rhode Island lawmakers approved legislation in 2006 that placed a cap on the annual amount that cities and towns could increase residential property taxes, then-Senate Majority Leader M. Teresa Paiva Weed called it a “sure and steady move toward lower property taxes and more fiscal accountability by their municipal officials.”

The plan largely worked. Over the last decade, few municipalities have sought to increase their overall tax levy – the total amount of property taxes they take in each year – beyond the limit of 4 percent, which requires multiple layers of state and local approval.

Now officials in tiny Central Falls are learning what happens when you don’t follow the rules.

City leaders say they miscalculated tax records for the current fiscal year, resulting in an 8.95 percent increase in the overall levy. That’s more than double the amount legally allowed under state law.

The result is the city has begun notifying taxpayers that it intends to issue refunds or future tax credits totaling $682,000 to bring Central Falls back in compliance with the law. It’s a significant sum for a city that projects it will collect just over $14 million in property taxes this year.

The amount of refunds or credits will depend on the value of a property. For a home with the city’s median value of $181,700, city leaders say they can expect a refund of $154.

“Our new finance team is working diligently to solve this problem,” Mayor James Diossa said in a prepared statement. “I assure taxpayers that this will be dealt with quickly and I have revised and implemented safeguards to the budget process so that this doesn’t happen again.”

So how did it happen?

Barbara Addison, the city’s finance director, claims a former employee failed to report the city’s accurate tax rate to the Rhode Island Department of Revenue. That meant a budget approved by the City Council and signed by Diossa taxed owner-occupied properties at a rate of $19 per $1,000 of assessed value.

The city now says its corrected plan lowers the tax rate for owner-occupied properties to $18.15 per $1,000.

It’s unclear when Central Falls leaders decided to take action on the mistake. In a statement, Addison said the state first contacted the city in September. But the Globe started inquiring about the city exceeding the tax cap on Jan. 8, and changes were announced a week later.

While state law does cap the amount municipalities can raise their tax levies, the state does not have the power to penalize communities that violate the law, according to Paul Grimaldi, a spokesperson for the Department of Revenue.

Instead, Grimaldi said taxpayers in any community that exceeds the tax cap could go to court to “resolve any concern they may have with the levy.”

Municipalities can seek to exceed the cap by securing a fourth-fifths affirmative vote of their local legislative body and getting approval from the state. Since 2015, 11 communities have gone over the 4 percent limit, according to an annual property tax report published by the state.

For the current fiscal year, Smithfield also went over the cap without seeking approval from the state, but officials say a pending resolution to litigation was the reason for a 4.6 percent levy increase.

In Central Falls, maximum tax increases are nothing new.

The city filed for bankruptcy in 2011, and part of its corrective action plan was an agreement to raise property taxes by 4 percent each year for at least five years. Diossa largely held the line on taxes between 2017 and 2019, but a state-mandated property revaluation resulted in a spike for the current fiscal year.

The city’s plan to refund taxpayers or issue credits is a new concept, according to Dennis Hoyle, the state’s auditor general.

Hoyle said some communities did issue refunds on car tax bills in 2017 after House Speaker Nicholas Mattiello announced plans to begin phasing out the car tax because they had already sent out bills, but that hasn’t happened with residential property taxes.

“I’m not aware of another example where this occurred and resulted in refunds to taxpayers,” Hoyle said.

In Central Falls, City Council President Maria Rivera, who is widely expected to run for mayor this year, said the council is planning to hold three special meetings to answer questions about the mistake.

“The City Council is prepared to restart the budget process in order to fix the error with the tax levy,” Rivera said.