Dismal rankings seen as drag on state’s recovery

To Rhode Islanders, the national business-climate rankings that place the Ocean State at or near the bottom each year now look like self-fulfilling prophecies.
Rhode Island’s economy is weak and its government perceived as inefficient, so it sinks low in the rankings, which become a deterrent to outside investment in the state, further weakening the economy, stretching budgets and feeding back into the cycle of low rankings.
Frustration with this dynamic bubbled over – again – this fall in the Rhode Island Public Expenditure Council’s state-commissioned study of economic development and at The Rhode Island Foundation’s Make It Happen RI forum.
In both cases, groups concluded that the rankings themselves, apart from the underlying conditions that drove them, are slowing Rhode Island’s economic recovery.
And both recommended a task force to study the metrics that drive the most influential rankings and develop a set of strategies to bump Rhode Island up the lists.
“Since Rhode Island consistently ranks poorly in business-climate reviews, RIPEC recommends that the governor create a working group to analyze the various studies that rank business climates across all 50 states,” RIPEC said in its Sept. 25 report. “This analysis should determine ways for Rhode Island to improve its current rankings and should include working with the various organizations that publish the rankings.”
This isn’t the first time RIPEC has highlighted Rhode Island’s low marks on national business-climate reports.
In the fall of 2010, the business-backed fiscal watchdog issued a 15-page report calling for action to address a consensus in the five most prominent national rankings that Rhode Island’s tax and regulatory structures are among the most burdensome in the country.
Despite a series of tax-reform proposals, some of which were enacted, and much discussion about a regulatory overhaul, two years later the state is in broadly the same spot in the five primary rankings RIPEC examined as it was then.
Cable-television channel CNBC, which ranked Rhode Island second to last in its Top State for Business report in 2010, ranked the Ocean State dead last the past two years.
The Tax Foundation’s list of states with the most business-friendly tax climate ranked Rhode Island 47 out of 50 in 2010 and moved it up one spot to 46 in 2011 and 2012. (The Tax Foundation rankings are done by fiscal year, so the report that came out in October was for the fiscal year 2013 that started in July.) Forbes magazine ranked Rhode Island 49th out of 50 states in its Best States for Businesses and Careers in 2010, then raised it to 48th out of 50 in 2011. The 2012 ranking has not been released yet.
Rhode Island has done slightly better in the eyes of the Small Business and Entrepreneurship Council’s ranking of state public policies for small business, rising from 45th in 2010 to 41st this year.
And the most favorable publication to the Ocean State is Chief Executive magazine, which has called Rhode Island the 39th best state to do business in both 2010 and 2012. Last year the Rhode Island made a brief appearance at No. 35.
Of course, the different rankings measure different things and do so using disparate methodologies, only some of which are fully explained.
The Tax Foundation attempts to measure one relatively empirical thing, tax burden, while Forbes judges a wide range of objective and subjective values – from labor supply to energy costs to projected future growth – and molds them together according to unspecified criteria.
In some sub-sections of the rankings, such as quality of life, Rhode Island does relatively well, where others, such as regulatory climate, are nearly all poor.
“How good are these measures? They are not all great and the reason is in many of the rankings we do not know how they combine the information,” said Bryant University assistant professor Edinaldo Tebaldi, director of the school’s Center for Global and Regional Economic Studies. “Some of them look like a hodgepodge. They basically throw things in and get a product that’s difficult to attach a lot of meaning to. The subjectiveness in the process makes it hard to analyze.”
Still, Tebaldi said Rhode Island should pay attention to the rankings both for the slivers of insight it can provide into how different states match up and because company executives are probably reading them.
“My sense is a corporate board of directors will look at the rankings, though it will not be the fundamental force shaping their decisions,” Tebaldi said. “But if they find two possible locations and everything else is similar and they see that the indices are not great here, that might push them toward somewhere else.”
Even if some of the rankings are too opaque to completely understand or influence, Tebaldi said a comprehensive analysis of them suggested by RIPEC and Make It Happen could be valuable to better understand how the state is viewed from the outside and how it should be marketed. Even if Rhode Island does begin a vigorous campaign to understand the rankings and the government undertakes new reforms to become more business friendly, it’s unclear how high the state will ever rise.
With some exceptions, high-ranking states tend to be geographically large, rural and located in the central and southern part of the country.
Even though economic activity is concentrated in the nation’s urban areas, densely populated coastal states such as New York, New Jersey, Massachusetts and California almost always appear near Rhode Island at the bottom.
Chief Executive magazine ranked California the worst state in the nation to do business (with the Tax Foundation and Small Business and Entrepreneurship Council putting it at 48) even though 37 of the Wall Street Journal’s top 50 startup companies in the country this year were based in the Golden State. New York and Massachusetts had most of the rest.
At Make It Happen RI, the constant stream of negative rankings reported in the news made some participants want to reverse them, others to ignore them and others to try to drown them out with positive publicity.
A Make It Happen progress report and summary of the event called for work “with experts from our local universities to analyze the various business-climate rankings and determine targeted areas to address.”
Greater Providence Chamber of Commerce CEO Laurie White pointed out that state income tax reforms that went into effect last year were singled out for praise by the Tax Foundation in a June report, proving that improvement is possible.
“We have talked about the rankings for a long time and that is why we have talked about tax-policy reforms for so long,” White said. “The reason it is so important is a tremendous amount of analysis goes into the cost of doing business for investing or relocating.”
White added that the job of improving the state’s business climate, and the perception of its business climate, is a job too large for one official or group, and needs to be a statewide priority.
“Rhode Island is not the only state that has tried to improve its place in the rankings – everyone looks at it – so you have to keep your eye on the ball,” White said. •

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