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Steven Senne, Associated Press
Rhode Island House Speaker Gordon Fox, left, and R.I. Senate President Teresa Paiva Weed, right, laugh together at the podium in the House Chamber moments before R.I. Governor Lincoln Chafee took the podium to deliver his state-of-the-state address at the Statehouse, in Providence, R.I., Tuesday, Jan. 31, 2012. Chafee made his pitch for new taxes on restaurant meals, pet grooming, car washes and taxi fares Tuesday, saying higher taxes on discretionary spending is the best way to rescue struggling city schools as the nation's smallest state struggles to find an exit from its economic doldrums.

PROVIDENCE, R.I. — Rhode Island Gov. Lincoln Chafee made his pitch for new taxes on restaurant meals, pet grooming, car washes and taxi fares Tuesday, saying higher taxes on discretionary spending is the best way to rescue struggling cities and schools as the nation's smallest state struggles to escape its economic doldrums.

Chafee, an independent, unveiled his $7.9 billion budget proposal Tuesday night as he delivered the annual State of the State address. It now moves to lawmakers, who are likely to make big changes before approving a final budget later this spring.

Calling the state's 10.8 percent jobless rate unacceptable, Chafee called on lawmakers to focus on the plight facing cities and towns while bolstering schools, infrastructure and government efficiency. Chafee noted that Rhode Island's jobless rate trails those in the other five New England states by more than two percentage points.

"We must catch up with the rest of New England," Chafee told lawmakers assembled in the House chamber for the address. "There is no excuse for Rhode Island to be lagging behind our neighbors. We need action now."

Public schools and local governments are the big winners in Chafee's budget recommendation. The proposal would give local schools an additional $40 million generated through higher taxes on restaurant meals. All told, aid to local governments and school districts would increase by $63 million over last year.

Mayors had urged Chafee to act in the face of cash flow problems that threatened to delay worker paychecks and plunge cities into fiscal calamity. Two cities — East Providence and Central Falls — are now under state financial oversight and the latter is seeking bankruptcy protection. Many others have seen their bond ratings tumble as they confront chronic budget deficits.

To address what he termed a "crisis," Chafee is calling on lawmakers to consider a set of "modest" tax increases that would raise about $70 million in new dollars.

The proposal would increase the sales taxes on meals and beverages bought in restaurants from 1 to 3 percent. The tax is levied on top of the current 7 percent sales tax. The additional revenue would go to local schools, Chafee said, and enable municipalities to pay their education bills without raising property taxes.

Pawtucket Mayor Donald Grebien said his cash-strapped city stands to gain $3.6 million in school dollars if the tax increase is approved. Pawtucket recently asked the state for permission to take out a loan to make payroll next month. Like many cities, Pawtucket is still reeling from big drops in state funding.

"We have lost $18 million in state aid over five years," Grebien said. "Nobody likes to see new taxes but the money has to come from somewhere."

Chafee would also impose the 7 percent sales tax on taxi fares, moving, storage and freight expenses, pet grooming and car washes; all items now exempt from the tax. Under the proposal the tax would also be levied on clothing and shoes costing more than $175 per item. Lesser priced clothing and shoes would remain tax-free.

Lastly, Chafee would increase the state's cigarette tax from $3.46 per pack to $3.50 a pack.

All the items facing a possible tax increase are discretionary, Chafee said.

"While I do not like raising taxes on anyone I sought to minimize the impact of these proposals on the working families of Rhode Island," he said.

Top lawmakers said they will review Chafee's plan before deciding whether they can support some or all of his tax proposals. Rep. Helio Melo, D-East Providence and the chairman of the House Finance Committee, noted that if lawmakers balk at the meals tax hike, they'll have have to find another way to increase school funding.

House Minority Leader Brian Newberry, R-North Smithfield, said he's ready to reject the tax proposal. He said lawmakers must find ways to help local governments without penalizing taxpayers and small businesses.

"There are better ways to help the cities and towns besides just giving them money," he said. "I support funding schools, but we need to find the money without raising taxes."

Already, business owners who would be affected by the new taxes are lining up in opposition.

"Any extra tax is too much," said Scott Gordon, who along with his wife has owned the Delmyra Country Club for Dogs and Cats, a pet boarding and grooming business in Exeter. "Our business is down 30-40 percent since 2007. We're limping along. But the sad part is I don't think we're through it yet."

Last year, Chafee proposed a more ambitious expansion of the state sales tax to cover many now-exempt items such as haircuts, taxi rides and movie tickets. Instead, lawmakers opted to impose the tax on a smaller list that included non-prescription drugs, sightseeing tours and some computer software.

Rep. Jon Brien, D-Woonsocket, said he too opposes Chafee's newest sales tax proposal. He predicted it would look quite different once lawmakers have their say.

"The governor proposes his budget, it goes through the sausage factory of the finance committees and it comes out looking totally different," he said.

Chafee's proposal would also ask voters to authorize $25 million for affordable housing and $65 million for a nursing school for the University of Rhode Island and Rhode Island College in downtown Providence. The referendums would be placed on the November ballot.

Jim Ryczek, executive director of the Rhode Island Coalition for the Homeless, said in a statement that Chafee's affordable housing initiative is a good long-term solution and that lawmakers also must take steps to help the homeless.