Assembly cautious on economy

Measured in volume, economic-development proposals dominated Rhode Island’s 2013 legislative session.
With the state economy still underperforming its neighbors and the costs of the 38 Studios LLC failure being realized, lawmakers from all points on the ideological spectrum pitched plans to put the state on a better course.
But when this year’s economic-policy proposals are measured by their potential economic punch, few passed by the General Assembly last week appear poised to substantially boost growth or fundamentally improve the state’s business climate.
A $30 million revenue shortfall and the collective risk aversion caused by 38 Studios combined to produce a state budget for next year highlighted by modest initiatives and incremental steps forward.
“I don’t know what they have really done to change anything,” said Mark Higgins, dean of the University of Rhode Island’s College of Business Administration, about the budget and bills passed last week.
Compared with the $1.5 billion economic-incentive package approved in Connecticut this year, Rhode Island’s policies, even the good ones, may not have much noticeable impact, said Gary S. Sasse, director of Bryant University’s Institute for Public Leadership.
“I get the impression that the really big issues that have an impact of economic development – tax reform, support of higher education – the things that will really have a structural impact, have largely been ignored,” Sasse said. “That is unfortunate, because the states we compete with are not ignoring them.”
Although it may have lacked a signature economic measure, the 2013 legislative session was far from hostile to the business community.
Most of the new economic initiatives that moved forward did come from local industry leaders and, despite the budget crunch, there were no broad-based tax increases.
Greater Providence Chamber of Commerce President Laurie White said overall, lawmakers were heading in a “good direction” in 2013.
The Chamber championed several initiatives that passed or were near approval last week, including increased education funding, revival of the historic-tax-credit program, biweekly pay, state help to firms applying for federal Small Business Innovation Research grants and a state tax-code change allowing companies to front-load asset depreciation.
The measures still need to be signed by Gov. Lincoln D. Chafee and in some cases House and Senate versions need to be reconciled. The depreciation change is expected to cost the state $10 million in fiscal 2014 and was favored by the General Assembly instead of Chafee’s plan to cut the state corporate tax rate from 9 percent to 7 percent over three years.
The corporate rate cut was Chafee’s latest attempt to broaden the tax base while lowering rates, making the state more attractive to companies nationally. To pay for the corporate rate cut, Chafee proposed scaling back the Jobs Development Act tax breaks for large employers and ending Enterprise Zone tax incentives.
When fully phased in, Chafee’s proposal was expected to cost $25 million annually.
“Obviously in a fiscally constrained environment, key initiatives were held back, so it does not surprise us that the governor’s corporate income tax cut had to be sacrificed,” White said.
But while cost may have doomed Chafee’s corporate tax cut, the fact that it was opposed by CVS Caremark Corp., which received $15.4 million of the $16.4 million in Jobs Development Act proceeds in fiscal 2012, was likely also a factor in its demise.
“Policy-wise, you shouldn’t favor one company over another, but in fairness to [the General Assembly], you would be playing chicken with CVS and they are not in a position to do that,” Higgins said.
Broadening and lowering taxes by cutting special breaks is popular with Chafee and tax-policy experts, but didn’t make too much headway in Rhode Island this year.
The manufacturers tax credit would have provided a $500-per-worker tax credit for manufacturers who hire at least 100 new employees and invest at least $10 million in new facilities.
But the tax credit was pulled from the budget by its sponsor, House Finance Committee Chairman Helio Melo, D-East Providence, during debate on the spending plan.
On a much smaller scale, Newport Grand slot parlor received a $2 million break in the amount of gaming revenue it has to send to the state.
In the previous two years, Chafee has tried, with limited success, to broaden and lower Rhode Island’s sales tax, but this year two new exemptions will, at least temporarily, narrow the sales tax base.
A measure backed by Senate President M. Teresa Paiva Weed suspends sales tax collections on arts and crafts, while a pilot program supported by liquor-store owners will suspend the sales tax on wine and liquor for 16 months.
Fiscally, the pilot program only reduces state alcohol revenue by $1.2 million next year, as it includes a corresponding hike in excise tax. But Ocean State liquor-store owners have said the sales tax in particular makes them vulnerable to competition from Massachusetts. The other major facet of both House and Senate economic proposals was reform of the state’s economic-development arm to prevent public-financing programs from creating a future 38 Studios debacle.
Although initial proposals in the wake of 38 Studios called for the breakup of the R.I. Economic Development Corp., plans were scaled back as the year went on.
Surviving measures will give the EDC a new name, the R.I. Commerce Corporation, and require it to work with a new council of economic advisers on creating a long-range state economic plan similar to Massachusetts. The new Commerce Corporation also will have to follow a number of new transparency and reporting requirements for all its financing programs.
Perhaps the most significant change was the elimination of the Job Creation Guaranty program that made the 38 Studios deal possible.
In addition to 38 Studios, three other companies received loans under the program totaling $6.5 million. The program had $43.5 million left in underwriting capacity that will now go untapped.
Although the calls for EDC reform were loud after 38 Studios, nearly a year of debate about what to do with the quasi-state agency has made the changes anti-climactic for some.
“I think it is unfortunate a lot of energy went into how we rearrange our deck chairs,” Sasse said. “We spend a lot of time on process and not on substance.”
The Chamber was one of the most outspoken supporters of structural change at the EDC after 38 Studios, but White said the urgency for a radical overhaul has softened with internal changes at the agency, including the appointment of new executive director, Marcel Valois.
“The landscape from our perspective has changed in respect to the EDC,” White said. “I don’t think the business community is as agitated as it was at the beginning of the session.”
This is the first year the Rhode Island budget has included spending for 38 Studios, but the policy impact of the state’s failed gamble on video games went well beyond the initial $2.5 million to begin the bond repayment process. And with seven additional years of $12.5 million payments left to cover the bonds, it’s an impact the state may have to get used to.
“The pall of 38 Studios will hang over the state and economy for a generation,” White said. “That is unfortunate. It cannot be used as an excuse.” •

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