Recently, CNBC was once again ranked Rhode Island as having the worst business climate in the nation. CNBC referred to Rhode Island’s finances as in “poor shape,” its “tax and regulatory climates” as “rough,” and its “economic growth” as “sluggish.”
Meanwhile, the General Assembly included in the budget a new economic development program that utilizes insurance premium tax credits to help finance local businesses. This complicated program could cost taxpayers up to $42 million. A similar program in Maine cost taxpayers $16 million in a failed effort to save a paper mill. In New York, a comparable program spent $325 million but created only 188 new jobs.
Gov. Gina Raimondo described the new program as “just” giving “money out and hope for the best” and referred to 38 Studios. In response, the spokesman for House Speaker Nicholas Mattiello pointed to the “shortcomings” of Raimondo’s economic development programs, which Mattiello once described as “just” paying “for individual companies to locate here.”
Both Raimondo and Mattiello are correct in their criticisms of each other’s economic development programs because both programs just use taxpayer funds to benefit a few businesses. For generations, Rhode Island politicians have been following this policy while Rhode Island’s business climate has continued to rank at or near the bottom.
Rhode Island’s current economic development policy of assisting a few businesses rather than significantly improving the state’s business climate began generations ago.
Following the Second World War, numerous Rhode Island textile mills moved to lower cost southern states. In 1952, Gov. Dennis Roberts acknowledged the existence of “major differences in the competitive positions of northern and southern mills” in relation to “taxes” and “labor costs,” but he proclaimed “there are certain things which we in Rhode Island cannot and will not surrender.” Instead, Roberts declared the equivalent of “war” on southern states by unveiling a new million-dollar loan program to finance the construction of new industrial plants.
Republicans countered that Roberts’ program did not address “the fundamental trouble” of “unfavorable industrial conditions.” They argued that “the sounder course is to create a more favorable industrial climate in Rhode Island by removing the handicaps that now exist” by pursuing such policies as a lowering of taxes “to a level comparable to other states.”
At first, Roberts’ plan failed to pass the Republican-controlled Senate, but in 1958, during a severe recession, Roberts’ proposal to provide mortgage guarantees for industrial companies finally became law.
Although Roberts’ mortgage program for industrial companies and a comparable program for recreational businesses guaranteed millions in loans, Rhode Island’s economy still fell behind other states. As a result, in 1982, Gov. J. Joseph Garrahy created the Rhode Island Strategic Development Commission to develop a plan to improve Rhode Island’s economy.
This commission, which did not include a single economist, rejected arguments that “we lower our taxes,” and declared it “will not sacrifice the values which we hold as a state” in order to improve the state’s business climate ranking. Instead, guided by Ira Magaziner, the commission developed the Greenhouse Compact, which proposed spending approximately $250 million in loans and other subsidies for targeted industries and specific businesses.
Various economists, including some at Brown University, opposed the plan. They explained that it would be “impossible to keep politics out of decisions about which companies should get the incentive money.” They argued that Rhode Island was at the bottom of national business climate rankings because “our taxes are high,” “our social benefits are high” and “our laws are enforced in a way which is biased against the business community.” Instead, they recommended that Rhode Island emulate “New Hampshire, which has built its reputation as a low-tax state.” The voters agreed with the economists rather than the politicians and overwhelming rejected the Greenhouse Compact in a referendum in 1984.
Nonetheless, during the 1990s and into 21st century, politicians either unable or unwilling to fundamentally change Rhode Island’s business climate continued to pursue economic development policies that favored a few specific businesses.
During this time, a special tax deal for American Power Conversion was approved; tax changes targeting the financial service companies were adopted; a no-bid contract to GTECH to operate Rhode Island’s lottery was awarded; and a $125 million loan guarantee fund to help finance 38 Studios was passed. More recently, Raimondo and the General Assembly approved economic development programs designed to spend millions in taxpayer funds to benefit a handful of businesses to create perhaps a few thousand jobs. All the while, Rhode Island’s business climate continued to be ranked at or near the bottom.
As long as Rhode Island pursues economic development policies designed to benefit a few businesses, rather than all businesses, its economy will trail behind other states. To fundamentally improve Rhode Island’s business climate ranking, and significantly grow its economy, Rhode Island will need to dramatically lower its taxes and reduce its regulatory burden so it can compete with other states.
Rhode Island did not always pursue a economic policy of just spending taxpayer money to help a few favored businesses. At the beginning of the 20th century, Rhode Island’s taxes were low, and its regulations were few. Without the need of costly taxpayer funded economic development programs, Rhode Island entrepreneurs thrived and out-of-state businesses moved here. As a result, Rhode Island was one of the wealthiest and most prosperous communities on earth.
In 1908, Gov. Aram Pothier, probably Rhode Island’s most successful political leader in economic development, explained how he could persuade French and Belgian manufacturers to invest millions and employ thousands in Rhode Island. He stated that “foreign capital” would never “have reached our shores if our reputation for the enactment of conservative laws had been other than we all know it to be.”
As long as Rhode Island’s business climate is ranked at or near bottom, Rhode Island’s reputation in the business community will be of a place to avoid.
Steven Frias is Rhode Island’s Republican National Committeeman, a historian, and recipient of The Coolidge Prize for Journalism.