Fung: Tax, spending cuts will spur economy

READY TO LEAD: Elected Cranston’s mayor in 2008, Allan Fung is setting his sights on becoming Rhode Island’s highest-ranking official. First, he will have to square off against fellow Republican Ken Block in a primary election next month. / PBN PHOTO/MICHAEL SALERNO
READY TO LEAD: Elected Cranston’s mayor in 2008, Allan Fung is setting his sights on becoming Rhode Island’s highest-ranking official. First, he will have to square off against fellow Republican Ken Block in a primary election next month. / PBN PHOTO/MICHAEL SALERNO

(Editor’s note: This is the fifth and final installment in a series of articles focused on 2014 gubernatorial candidates and their plans for economic development.)

Cranston Mayor Allan Fung is going all in on tax cuts as a Republican gubernatorial candidate. Not content to simply match the $100 million tax-cut plan of his GOP primary opponent Ken Block, Fung is going bigger, and more conservative, with a $200 million package of cuts meant to stimulate the economy.
In fact, Fung’s plan over the long term, if he could get it through the legislature, would actually cut taxes much more than the $200 million fiscal 2016 estimate, as he calls for most taxes to continue falling over the following four years he would be in office.
“My tax-reduction plan is the most comprehensive of all of the candidates for governor,” Fung told Providence Business News in a recent interview. “This will get us down, from a tax-policy standpoint, to the most tax-friendly state in the region.”
Before the General Assembly reduced the state’s corporate tax rate from 9 percent to 7 percent this summer, Fung had been proposing a cut to 6.5 percent, already half a percentage point below Block.
But once state lawmakers passed their cut, Fung ratcheted his corporate-tax-cut proposal down even further, to 5 percent.
For both Republicans, economic growth is synonymous with cutting taxes and they agree on many of the elements of creating a more frugal state government.
But unlike their Democratic counterparts – Clay Pell, Providence Mayor Angel Taveras and General Treasurer Gina M. Raimondo – who often refuse to identify a policy difference between them, even when they agree on principal, Block and Fung are quick to highlight their differences.
These include unemployment insurance, where Fung opposes Block’s plan to crack down on repetitive use of unemployment benefits by seasonal employees in excess of what their employer pays in taxes.
Block argues these annual collections cut against the intent of unemployment insurance, allowing seasonal employers to use the system as compensation at the expense of nonseasonal companies. Fung, however, said ending the practice could unfairly hurt critical segments of the economy.
“The big distinction between Ken and myself is his plan calls for a huge shift of unemployment tax to those seasonal industries that have been propping up our economy,” Fung said. “That’s a severe negative with respect to hospitality and tourism, which has been a leading revenue driver in the state during these depressed times. Construction is another one, along with farming and agriculture.”
Instead of cutting off seasonal use, Fung said he would crack down on individual recipients, limiting how often or how long they can collect unemployment, instead of going after their employers.
Like the corporate tax, the General Assembly this summer also cut the estate tax, or raised the amount of an estate exempt from it, but not as much as Fung would.
Fung proposes matching the federal estate-tax exemption of $5.34 million, more than Block’s $2.5 million or the newly enacted $1.5 million. He estimates this will cost $31.8 million in fiscal 2016.
To give small businesses a boost, Fung proposes cutting the corporate minimum tax from $500 to $50 over his four years in office. (The cost would presumably rise in subsequent years.)
He calls reducing the corporate minimum tax his top priority and, even if he can’t get it all the way down to $50, would fight to at least cut it in half to $250, which would have an estimated cost of $12.5 million in fiscal 2016.
Block proposes eliminating the corporate minimum tax for all companies in their first two years of existence.
And rounding out his tax cuts, Fung would cut the state sales tax from 7 percent to 6.25 percent in his first year in office, then another 0.25 percentage points for the next three years to get to 5.5 percent.
In its first year, the sales tax cut would take $120 million out of state coffers, Fung estimates.
Block’s plan cuts the sales tax only for border communities, an idea Fung described as unworkable and said shows where the Barrington businessman’s “inexperience in government comes in.” So how does Fung intend to pay for his tax-cut plan?
For his initial year in office, he would rely chiefly on spending cuts, including getting rid of 5 percent of the state workforce, and holding budget growth to 2 percent. In addition to that, he uses $70 million in one-time revenue from the current budget surplus and the $12.5 million slated each year to pay the 38 Studios bonds.
Beyond fiscal 2016, Fung would likely have to cut spending even further as he may not have the budget surplus to use and his proposed sales and corporate tax rates drop even lower. The 38 Studios payments are slated to continue until fiscal 2021.
On the subject of the 38 Studios LLC collapse, Fung, who supports giving lawmakers subpoena power to investigate the failed deal, said he hasn’t heard any solid evidence that the state would be worse off defaulting on the bonds rather than paying off the roughly $87 million still owed on them.
The issue divides the Republican and Democratic fields at least partially because of the greater value placed by the Democratic candidates on borrowing, which is impacted by the state’s credit rating.
“We can’t just keep putting a giant credit card out there and borrowing for stuff we can’t afford,” Fung said about using bonds to take on big, future projects. “If we have to shave down our projects to spur the economy then we are going to have to do that. We’ve done that in Cranston. We had to put a lot of infrastructure projects on hold when I first got into office.”
Maintaining Rhode Island’s highways and bridges was a major point of debate during the last two General Assembly sessions, with tolls on the Sakonnet River Bridge giving way to a larger infrastructure fund paid for through fee increases and a gas-tax increase.
Despite being wary of too much borrowing, Fung, who opposed both the Sakonnet River tolls and the gas-tax hike, said he would pay for the hundreds of millions of dollars Rhode Island needs to repair roads and bridges with an infrastructure bank capitalized by a bond.
The bank would supplement that government funding with private-sector partnerships that could include private tolling of highways. “I opposed tolling the Sakonnet River Bridge because it would have had a too-devastating impact on small businesses in that area, but if you can find the right location, possibly,” Fung said about tolling.
He didn’t say where the right place to toll might be.
Similarly, Fung sees the private sector as a possible answer for funding mass transportation and, if elected, would explore the privatization of the R.I. Public Transit Authority.
On public-sector pensions, Fung this past winter joined Taveras as having negotiated a deal with current and former city workers to reduce their future cost-of-living increases. (Raimondo’s state pension reform was pushed through by lawmakers and a subsequent settlement with workers was rejected by one group, sending it back to court.)
But he said he was most proud of an earlier deal with two unions that had new employees leave the state-run, defined-benefit Municipal Employees Retirement System for an independent, defined-contribution 401(k) plan.
If elected, Fung said he would work to go further than the Raimondo pension reform to move state workers, many placed in a hybrid defined-contribution, defined-benefit plan, entirely into defined contribution, which shifts investment risk unto them instead of the state.
Since the 38 Studios collapse, business attraction and incentive programs through the R.I. Commerce Corporation have been scaled back, but along with tax cuts, Fung proposes at least one spending plan to stimulate startup formation.
He would create a $1 million Entrepreneur Seed Fund that would offer $5,000 grants to pay for professional services for individuals putting together a business plan.
As for the Commerce Corporation itself, Fung said he would follow through on post-38 Studios calls to fold the quasi-state economic-development agency directly within the governor’s office.
“I firmly believe the Commerce Corporation should be an entity within the governor’s office,” Fung said. “I see the governor as chief economic-development officer for the state. We can’t keep going on with different messages promoting Rhode Island.” •

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2 COMMENTS

  1. Not a particularly bright strategy considering that trickle down economics hasn’t worked anywhere and even Reagan abandoned the effort after a few years of trying it out. The latest basket case using this approach is Kansas.