Softening on tax incentives?

With a push to reduce the state’s seemingly intractable unemployment problem taking on new urgency, Gov. Lincoln D. Chafee is moving away from the blanket aversion to job-creation tax incentives for individual companies he showed as a candidate and in his early days in office.
In his fiscal 2013 budget, Chafee proposes reviving the “project status” program cut by lawmakers last year that exempts companies that promise to hire new employees from paying state sales taxes on building materials and equipment used in expansion projects. Soon after taking office last year Chafee said he too supported curtailing the program, after the EDC granted TD Bank $420,586 in sales tax reductions.
“You’re better off saying, ‘This is our tax structure, and we’re going to work every day to lower it, but that’s what it is right now,’ ” Chafee told Providence Business News in April 2011.
Now Chafee is proposing to bring the program back, in a limited way that excludes expansion of retail space.
In addition to project status, Chafee has also proposed broadening the state’s film tax credit to smaller companies and extending it for another five years while its effectiveness is studied.
While project status is estimated at a modest $1 million in credits for fiscal 2013, the addition of a new tax incentive is also a departure from Chafee’s fiscal 2012 budget proposal, which called for the elimination of the much larger Jobs Development Act.
Ultimately restored to the current budget by the General Assembly, the Jobs Development Act was estimated to save companies $21.26 million in fiscal 2010, with $16.7 million going to CVS Caremark Corp., and was going to be eliminated to help pay for a reduction in the corporate tax rate.
As a candidate, Chafee campaigned extensively against the $75 million loan guarantee the R.I. Economic Development Corporation offered 38 Studios LLC to lure the video game company from Massachusetts to Providence. “I think it shows Chafee’s flexibility,” said Wendy Schiller, a political science professor at Brown University, about the governor’s new economic-development priorities. “His position is evolving with the state’s needs, which is what you need from the governor.”
Chafee’s renewed focus on reducing the unemployment rate was evident at an EDC board meeting this month, when he asked board members to go home and “reflect” on how to make the agency perform better in job creation.
“For me, it is still that unemployment number and getting it down,” Chafee said. “Get energized and make it better.”
Mark Higgins, dean of the University of Rhode Island’s college of business administration, said Chafee’s current priorities are a reflection of just how important an issue creating jobs is in the state.”
“If you can get unemployment down, it is a double win for the economy and revenue,” Higgins said. “I think [Chafee] realizes the EDC might not have as easy a job as he thought, and he has to do something to turn things around.”
Paul Dion, chief of the state Office of Revenue Analysis, acknowledged that after a year in office the governor has come to appreciate some programs more than he did, but maintains that the revised project status would still fit within his preference for “programs” over “special deals.”
“He realizes after working with the EDC there can be some benefits, especially when you are expanding manufacturing or developing technology,” Dion said. “The governor feels [project status] is an effective tool with criteria open to anyone and not a special deal for one company.”
Chafee has included several economic-development proposals in his plans for the next fiscal year.
In addition to project status, the proposed budget would free up $2 million in the R.I. Department of Labor and Training to be available for workforce training. Chafee has proposed spending $770,000 on the Americas Cup World Series in a supplemental fiscal 2012 spending request, plus $4.4 million in fiscal 2013 to build a sailing center at Fort Adams State Park in Newport where the competition will be held.
The budget would also dedicate the proceeds of extending the hotel tax to bed and breakfasts, estimated at $250,000, to tourism promotion.
And in a proposal without any financial cost attached to it, Chafee has announced the formation of a new “jobs cabinet” made up of the heads of state departments with a role in economic development who will meet periodically to coordinate their efforts to spur job growth.
“The governor is very clear that job creation is going to be a priority – until people are employed, prospects in the state are going to be limited,” said Department of Labor and Training Director Charles Fogarty, who Chafee picked to coordinate the jobs cabinet. “We need to take a proactive approach and see how our policies in different areas can promote a climate conducive to business and job growth.”
The project-status program was first adopted in Rhode Island in 1996 and, by 2010, had approved sales tax breaks for 25 projects at 22 companies.
The program is designed to help large companies grow larger in Rhode Island. To be eligible, a company’s expansion project has to create at least 100 permanent, full-time jobs with wages 5 percent greater than the state median annual wage.
Over the course of the program, the R.I. Economic Development Corporation estimates that project status has saved companies $35.3 million in sales tax, but that through the new jobs created, the state has generated $71.9 million in income tax it wouldn’t have otherwise.
“Project status has been a highly successful business-growth accelerator,” said EDC Executive Director Keith W. Stokes. “Whatever we offer [companies] in inducement is paid for by income taxes from the new jobs.” Most of the largest companies in the state have participated in project status, although some have been more successful in creating local jobs than others.
According to an EDC review of the program released last year, projects under the program created 14,327 jobs between 1996 and 2010.
The company that produced the most new jobs over that period was Fidelity Investments, which built a 577,000-square-foot office building in Smithfield and reported an increase of 2,934 employees in the state by 2010.
Citizens Bank created 2,071 new jobs under its expansion projects. Amgen created 1,350 jobs, CVS added 1,207 and GTECH 1,103, according to the report. Electric Boat has already added 745 jobs and was on tap to create another 450 jobs in a second expansion signed in 2010.
On the other side of the ledger, Bank of America was supposed to add 900 employees to get to 3,713 in the state by 2015, but the company now says it has about 3,000 employees here currently.
Bank of America so far has not received any benefits under project status, according to EDC spokeswoman Melissa Chambers, although it will still be eligible through 2015.
Verizon created 68 new jobs under its project-status agreement, which ended in 2010, 324 short of the projected total.
The last company to be approved for project status was Hasbro Inc., which is eligible for up to $1.63 million in tax breaks for its move to 15 LaSalle Square in Providence if it hires 281 full-time jobs.
Stokes says the program helps keep the Ocean State competitive with neighboring states.
“When companies sit down with us to talk about expansion, [project status] is part of the negotiation,” Stokes said. “They have a desire to expand and the level of expansion is tied to cost. Each and every day businesses have to determine costs and Rhode Island has, at the very least, to be competitive with the rest of New England.” •

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