New governor. New plan. Different result?

 / Source: U.S. Bureau of Economic Analysis
/ Source: U.S. Bureau of Economic Analysis

Something remarkable happened in the recently concluded legislative session. For the first time in a long time, the governor’s budget initiatives weren’t dead on arrival. And a flood of new resources is being pumped into economic-development initiatives, many of them traditional government incentives tied to job creation or real estate development.

In fact, the fiscal 2016 budget process, the first for newly elected Democratic Gov. Gina M. Raimondo, looked and sounded like one in which the parties all shared a common vision. And that, say economists and political observers, has not happened in a long time.

In the past, political and philosophical differences between the governor and the Democrat-dominated General Assembly led to an approved budget that little resembled the original proposal. Before Raimondo, the last elected Democrat to serve as governor was Bruce Sundlun, who left office in 1995.

Since then, the governor and legislative branch often have been at odds as to how to address Rhode Island’s economic problems, said Leonard Lardaro, an economics professor at the University of Rhode Island.

- Advertisement -

“This is very unusual,” he said. “We’re acting like a real state.”

And yet, is comity among the state’s leaders going to translate into a different fate for Rhode Island’s economy?

The tool box

The economic-development package approved unanimously by the House on June 16 as part of the $8.7 billion fiscal 2016 budget, and endorsed the following week by the Senate, relies heavily on government incentives, rather than broader tax reforms aimed at improving the business climate and reducing the cost of doing business in Rhode Island. In that way, it resembles many past efforts to move the state forward, efforts that have yielded a state economy that is not among the nation’s top performers. (Significant economic-development plans in the last 20 years are highlighted in the boxes below and in the attached graphic.)

But the amount of money made available this year represents a different approach, say observers.

The budget that took effect this month has almost $45 million in direct incentives for economic development, including $25 million for businesses that locate in the Interstate 195 redevelopment district of Providence, statewide tax-increment financing authority and a new Anchor Institution Tax Credit, providing financial assistance for companies that help to relocate a supplier or customer to Rhode Island.

Overall, the newly created Executive Office of Commerce will get $76 million for economic development, and more consolidated power to make decisions that affect business. That figure includes a $7.4 million state appropriation for the R.I. Commerce Corporation. For the previous three fiscal years, the Commerce Corp. and its predecessor received about $4 million a year.

The budget does include some tax reductions, notably the sales tax on utilities paid by nonmanufacturing businesses, which is aimed at improving the business climate of the state. But it is heavily weighted toward government incentives, which would be awarded by public officials, observed Gary S. Sasse, founding director of the Hassenfeld Institute on Public Policy at Bryant University, and the former head of the R.I. Department of Administration, as well as the long-time head of the Rhode Island Public Expenditure Council.

“You have to do both,” Sasse said. “The question is whether her program is in balance or out of balance, and if it relies too heavily on incentives and not enough on improving the overall business climate.”

The mandate to get something done, and the flood of new economic-development spending, doesn’t mean the new initiatives are the right mix. The speed of the approval could be misinterpreted, Sasse said.

“It reflects the consensus that something has to be done, not necessarily a consensus that what she’s proposing is necessarily the right thing,” he said.

Sasse also questioned what he called the “mixed messages” of the budget, which created a new tax on health care insurance premiums, as well as a new tax on short-term rentals of vacation homes.

“You impose two, highly visible new taxes, both of which are going to affect the perception of the state. And they both, together, don’t generate $10 million,” he said.

Getting to growth

For the first time in decades, Rhode Island is putting significant resources into an effort to attract business development, said Saul Kaplan, who led economic-development initiatives for nearly three years as head of the R.I. Economic Development Corporation (the precursor to Commerce R.I.) under former Gov. Donald L. Carcieri.

Many of the incentives now available for economic development are similar to programs sought during his time in government, said Kaplan, who now leads the Business Innovation Factory.

The challenge for Rhode Island for years has been how to flip the proportion of jobs in relatively lower-wage sectors, compared to higher-scale sectors such as health care, advanced manufacturing and financial services.

Growing employment in the higher-wage sectors is important because they are more resilient during national economic downturns, while the sectors that defined Rhode Island are hit hardest, he said.

Kaplan said the agency tried to move the state from an old economy, based on manufacturing and industry, to one focused on innovation and entrepreneurship.

But, he added, continual conflict over the budget and lack of tools led to a scenario in which the EDC had few programs or tools to attract investment or new companies.

“Never mind growing the set of tools. They took away tools,” he said.

“Not because we were doing anything wrong. This was prior to 38 Studios. They didn’t trust us, and the politics didn’t support it. We tried every year. And every year we would get shot down,” Kaplan said.

As for 38 Studios, the ramifications of that failed investment are still playing out in the state’s budget. The spending plan will provide $12.5 million toward the debt owed on the state-backed bonds.

Among other things, the failed venture serves as an example of the danger of government incentives for specific companies, Sasse said. “That is a great, great poster child for what happens when government tries to pick a winner, and they don’t know what they’re doing,” he said.

Lardaro, who maintains a website that tracks economic activity in Rhode Island, said the state has not acted swiftly enough in previous years to restructure its economy. He warned that the impending loss of gaming revenue to elaborate resort casinos that will open in Massachusetts will have a devastating effect on the operating budget.

“We’ve done virtually nothing; we’ve done a lot of talk,” he said, of previous years’ efforts.

The state’s new economic-development program represents an effort to invest, he said, but Rhode Island still lacks the in-house expertise to provide sufficient investigation of the effectiveness of economic-development programs.

“We speculate how it should make this much of a difference. It should create this many jobs,” he said. “We don’t really know. And so we’re always throwing darts.”

To view graphics associated with this story, click HERE.

No posts to display