Two Rhode Island lawmakers are calling for a truce in the economic border war waged with tax incentives with neighboring states, but some authorities on the intersection of business and government argue that such an agreement is easier said than done.
Sen. Samuel W. Bell, D-Providence, and Rep. David Place, R-Burrillville, recently introduced legislation that would allow Rhode Island to team up with other states to form a compact aimed at phasing out “corporate giveaways” used to either lure companies from other places or to keep them here.
The measures have been referred to the finance committees of each chamber.
Bell and Place, who introduced similar legislation last year, point to an R.I. Department of Revenue analysis released in early March that found that the state’s Rebuild Rhode Island Tax Credit program and tax increment financing would result in “a total net negative general revenue impact for the state over the years 2018 through 2035,” with $11.2 million in forgone tax revenue and $10.6 million generated by the recipients.
The lawmakers also referred to a broad study by the Mercatus Center at George Mason University that found that state and local governments waste $95 billion annually on corporate tax subsidies.
Bell said he’s not sure how his counterparts in Massachusetts and Connecticut view the proposal, but the legislation gives Rhode Island an opportunity to be a leader in the Northeast on ending selective tax incentives issued by governments.
Bell said Rhode Island would be joining a “national movement” of state leaders interested in forming a “no-poaching” pact. Kansas and Missouri reached a ceasefire in 2019 after the two doled out $335 million in incentives in less than 10 years to shuffle more than 12,000 Kansas City-area jobs. Last year, according to a national bipartisan campaign of legislators called the Coalition to Phase Out Corporate Tax Giveaways, bills were introduced in 15 states, including Massachusetts and Connecticut, aimed at forging a national agreement to stop luring firms from one another through the use of tax incentives.
“The idea is ultimately to take it to the national level,” Bell said. “It can work between one state and another. The Kansas City pact shows that. I think it’s totally feasible. This is relatively easy on the scale of things.”
Several economic leaders in Rhode Island believe that while the compact sounds good in theory, it would be difficult to enact and enforce.
Gary Sasse, a former director of the Rhode Island Public Expenditure Council and the R.I. Department of Administration, who is now director of the Hassenfeld Institute for Public Leadership at Bryant University, said the lines can be blurred as to what constitutes a tax incentive.
Some states may have lower sales tax rates than others, which can constitute a competitive advantage, and some may have lower tax rates for certain sectors of industry or specific economic activities, he said. Rhode Island, for instance, passed a law changing the tax code about 20 years ago that enticed Fidelity Investments Inc. to come to Rhode Island, but it wasn’t a tax deal with the company.
“The question is what will be the policing mechanism for whether a state needs to give up a competitive advantage,” Sasse said. “What’s the line? And how do you enforce it? Those are tremendously complicated issues both in terms of tax structure and preferential tax deals. It’s hard to distinguish.”
Saul Kaplan, former director of the R.I. Economic Development Corp. and founder of the Business Innovation Factory, agreed.
“The war to win the economic development game makes it really hard to do,” Kaplan said.
A spokesperson for R.I. Commerce Corp. said the agency would be “open to the conversation” on such an interstate pact but would “be concerned about the precise approach” such an agreement would take.
“These concerns include vulnerability to competition with states outside the agreement, restrictions on assistance that can be provided to companies for job training and job growth, and putting Rhode Island at a disadvantage compared to other states with historically more potent economies,” Adam Isaacs-Falbel said in an email.
Such a pact was short-lived in the early 1990s between New York, New Jersey and Connecticut. That pact ended in 1993 when New Jersey’s then-Gov. James Florio announced that his state was wooing The Daily News newspaper printing operation from Brooklyn, N.Y., to Jersey City by providing a generous grant and financing package worth nearly $10 million, according to a report by The New York Times.
A year before that, then-Mich. Gov. John Engler called for a ceasefire on the interstate bidding wars to no avail, after General Motors Corp. closed a plant there and relocated it to Texas.
Despite such complications and questions surrounding enforcement, a major proponent of the anti-poaching pact proposals said they are “gaining in popularity” due to growing public sentiment against “corporate welfare.” James M. Hohman, director of fiscal policy at the Michigan-based conservative think tank Mackinac Center for Public Policy, said the pacts may still be “a few years away” before taking root across the country.
At any rate, state governments should instead focus on improving the fundamentals of their business climates, quality of life and education for all, Hohman said.
“It’ll take some time, but we’re working on it,” said Hohman, who helped formulate the Rhode Island proposal. “I’m trying to promote this because the policies we’re working to get rid of are expensive and unfair. They should be unpopular. The compact should be the type of thing that gets broad public support.”
Marc Larocque is a PBN staff writer. Contact him at Larocque@PBN.com. You may also follow him on Twitter @LaRockPBN.
