Incentives face scrutiny in G.A.

Business incentives and tax breaks were in the spotlight in the past year and will almost certainly be again in 2013.
38 Studios LLC’s failed loan guarantee, the film tax credits the company tried to secure, an overhaul of the film-credit program, creation of new theater credits and an urgent push for new historic-renovation credits were all grist for debate.
A report from the state Office of Revenue Analysis in August listed $84 million in business corporation tax expenditures alone in 2009 tax filings, $41 million if you don’t include deductions for operating losses that year. A separate Division of Taxation report listed $34.5 million in credits issued in fiscal 2012 for the state’s six main business-incentive programs.
In a 10-month exploration of business subsidies across the country, The New York Times this past fall estimated that Rhode Island spends $356 million per year on incentive programs. It singled out the $75 million 38 Studios loan as a dubious example.
But as lawmakers prepare for the start of the 2013 legislative session with Rhode Island still battling high unemployment and a structural budget deficit, it’s unclear whether there’s greater sentiment to cut incentives or grow them.
Gov. Lincoln D. Chafee entered office a skeptic of corporate “deals,” and in his first budget proposed ending the $21 million Jobs Development Act and requiring combined reporting of large, multistate companies as part of an ambitious proposal to reduce the state corporate tax rate.
The plan died in the General Assembly and in his last state budget Chafee went the other way with an unsuccessful bid to resurrect the “project status” sales tax-break program.
After spending a large chuck of 2012 picking up the pieces from 38 Studios, the efficacy of business incentives is something Chafee “is specifically taking a look at,” said spokeswoman Christine Hunsinger, although she declined to discuss any specifics related to his upcoming budget proposal.
Chafee supports reviving the state historic-restoration tax credit, which was suspended in 2008, although he did not include it in his budget proposal last year. Like Chafee, leaders in the General Assembly say they support holding the state’s business incentives up to further scrutiny, although they haven’t singled out any specific programs yet.
Senate President M. Teresa Paiva Weed, D-Newport, said in an email that she wants better reporting and analysis of incentives and tax breaks.
“In the 2013 legislative session, we will closely review the impact of tax expenditures on both the state budget and the economy to ensure that they are having their intended effect,” Weed said. “It appears that the law should be strengthened to improve data sharing so that we have the information we need to ensure these expenditures continue to be wise investments of taxpayer funds.”
House Speaker Gordon D. Fox, D-Providence, who survived a tough re-election challenge centered on his endorsement of the Job Creation Guaranty program that spawned the 38 Studios loan, said in a statement that lawmakers have to “enforce accountability to make sure taxpayer dollars are spent wisely.
“I intend to have the House review programs that are in place now, fund effective ones and eliminate the programs that are not producing results to make sure that we receive the appropriate return on the state’s investment,” he added.
In the tiny Republican opposition, House Minority Leader Brian C. Newberry, R-North Smithfield, said his focus is on ideas that will make Rhode Island more competitive economically with its neighbors.
Ending the state sales tax and cutting unnecessary regulations are Newberry’s top proposals, but in a perfect world, he said he would prefer fewer tax breaks and lower tax rates.
“Generally speaking, I am not a fan of government picking winners and losers in the private sector,” Newberry said. “Bigger companies are able to get laws passed that give then advantages and all that does is crowd out smaller players and distort the market.”
But Newberry predicted that, regardless of what lawmakers would like to see on business incentives, the state’s fiscal policy this year will continue to be driven by the short-term need to plug budget gaps and avoid a crisis. Even if proposals to roll back any of the state’s large incentive programs are done with the objective of rate-lowering or structural tax reform, they are likely to be met with opposition from the business world.
Asked whether she would support a proposal to reduce incentive programs in order to lower tax rates, Greater Providence Chamber of Commerce President Laurie White said she would be concerned about any plan that creates more corporate uncertainty with the tax code.
“Generally speaking, I would go back to our themes of tax stability or predictability,” White said. “It would be better from a predictability standpoint not to tinker with the tax code, because it does not foster reliability for investment.”
Early in 2013, White said the Chamber will propose two new incentive programs to spur growth in the technology sector: one would exempt franchise fees for the first three years of a company’s existence, the other would allow pre-profitable startups to sell their research-and-development expenses to profitable firms for use against their tax liability.
“We want to encourage new growth and improve Rhode Island’s ranking in the Knowledge Economy Index,” White said.
The budget watchdog Rhode Island Public Expenditure Council this year studied the historic-tax-credit program, but noted in a later report on the state’s economic-development structure that a broad analysis of the entire menu of incentives and subsidies is urgently needed.
RIPEC Director of Research Ashley L. Denault said she sees new impetus for scrutinizing tax breaks and subsidies across a number of constituencies entering 2013.
“One thing that will likely be brought up is whether it is better to lower incentives [in order to cut tax rates for everyone], or whether incentives are the way to go.” Denault said. “There needs to be a thoughtful analysis of the benefit generated and whether it is consistent with state goals. The film credits have been looked at twice with two different results, and we think the same amount of analysis needs to be done for the others.” •

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