Reviving Rhode Island: A Familiar Plan

Almost a full year into her first term, Governor Gina Raimondo has already taken ambitious steps toward her campaign promise to revamp the Rhode Island economy. This past June, she signed a number of financial incentives into the state budget, including a $25 million I-195 development fund, a $5 million small business assistance program, and another $5 million worth of support for a gap financing fund to assist with business development. Also included is $7.8 million towards a comprehensive campaign to boost Rhode Island’s tourism industry, one of the state’s largest industries. Together, the economic growth incentives total $98.75 million, all to encourage real estate development, job growth, and business activity in Rhode Island. However, Raimondo’s push to jumpstart the state’s weak economic recovery is hardly new for Rhode Island politics; lawmakers have been trying to fuel the state’s economic engine for much of recent history without much tangible progress. In the context of these earlier efforts for economic reform in Rhode Island, it’s uncertain how much impact Raimondo’s plans – some of which are strikingly similar to past efforts – will actually have on the state’s economy. Given this uncertainty, it’s crucial that Raimondo implements measures of accountable and comprehensive program management and evaluation into her economic policy, so as not to repeat the same economic policy blunders that have hurt the state in the past.

The political emphasis on turning the state’s economy around is a product of Rhode Island’s chronic economic troubles. Since the 1980s, Rhode Island has consistently had a higher unemployment rate than the regional New England average, as tiny Rhode Island has struggled to compete with neighboring states to attract business growth. The 2008 financial crisis hit Rhode Island particularly hard, causing the state to lose roughly 30,000 private sector jobs, largely from the manufacturing industry. At one point, Rhode Island’s unemployment rate was the highest in the nation. The Ocean State was also one of the last states to recover from the recession, experiencing relatively slow job growth and per-person economic output.

As such, economic stimulus has been a cornerstone of Rhode Island policy for much of the past few decades. Going back to 1984, Rhode Island lawmakers developed a comprehensive economic plan – dubbed the Greenhouse Compact – allocating over $225 million to help boost economic development. More recently, initiatives such as the 2002 Historic Preservation Tax Credit, the 2005 Jobs Growth Act, and the 2010 Job Creation Guarantee Program provided various forms of tax relief to revitalize the economy and encourage job growth. Just before Raimondo took office, Governor Lincoln Chafee worked with the state legislature to pass a comprehensive tax reform that included lowering the corporate sales tax and repealing the state franchise tax, all in an effort to encourage business growth. The long history of economic development initiatives ultimately raises the question: If so much has already been done to revive the Rhode Island economy, why is it still in need of repair?

The unfortunate answer is that economic development has a shaky track record in Rhode Island, often failing to meet expectations. The Greenhouse Compact of 1984 is perhaps one of the best examples of Rhode Island’s failed economic development plans. Despite the fact that the plan was developed after consulting a range of Rhode Island stakeholders and an in-depth analysis of the state’s economy, voters overwhelmingly rejected the compact in a state-wide referendum. While factors such as poor public communications and structure contributed to the defeat, post-election polls indicate that it was actually distrust in the state government that ultimately killed the initiative.

But the Greenhouse Compact didn’t even have the chance to be enacted, whereas other plans that have gone through have had a limited effect. Take the former governor Donald Carcieri’s 2005 Jobs Growth Act, which reduced the income tax for high-paid employees at companies that created at least 100 Rhode Island jobs worth at least $100 million in payroll. This act was largely credited as the reason why the trading broker Fidelity Investments relocated a branch to Rhode Island, creating about 1,000 jobs. Missing from the plan, however, was any measure to track exactly what impact the policy had on job growth, making it difficult to determine its effect. And yet, unemployment in Rhode Island during Carcieri’s time as governor went from around 5 percent to about 11 percent. While most of the increase is probably attributable to the 2008 national recession, Rhode Island was extremely hard hit and slow to recover. Therefore, while Governor Carcieri’s policies may have had individual successes, they did not have any net measurable effect on economic growth, and if anything, completely failed to help Rhode Island mitigate losses in jobs and growth during the onset of the recession.

Also under Carcieri, the state legislature passed a new $125 million economic development initiative called the Job Creation Guarantee Program to attract high-tech and knowledge-based companies to Rhode Island. Of that funding, $75 million was loaned to the start-up video game company 38 Studios. On the surface, this tech-industry loan program seemed like another effort to bring new industry, new jobs, and additional tax revenue to the state. However, 38 Studios went bankrupt only two years later, costing Rhode Island taxpayers roughly $90 million total in principal and interest payments. What’s more, recent inquiry from the past few months has revealed that government officials at the time had known about the risk involved with funding such an unproven company, and yet inside interests where still able to appropriate millions under the premise of ‘economic revitalization’. Considering the complete failure of governmental management with 38 Studios, perhaps the Rhode Island voters of 1984 who voted down the Greenhouse Compact were right to distrust the state to responsibly manage economic development.

The long history of economic development initiatives ultimately raises the question: If so much has already been done to revive the Rhode Island economy, why is it still in need of repair?

When viewed in the historical context of Rhode Island’s past economic development efforts, Raimondo’s budget plans for economic development start to sound eerily familiar. For example, to supplement her understanding of Rhode Island’s economic condition, the governor has commissioned a study with the Brookings Institution to identify areas of potential growth and recommend consequent strategies. However, lawmakers have been commissioning studies of the state’s economy for a while now, from the 1984 Greenhouse Compact to the more recent 2013 Fourth Economy Economic Development Report. The Rhode Island economy is already extremely well studied, and yet, little has succeeded in turning it around so far, raising questions as to how much difference the Brookings Institution partnership will ultimately make. Additionally, Raimondo’s New Qualified Jobs Incentive Act, which aims to create jobs by offering business $2,500 in tax credits for every new job, is strikingly similar to the Jobs Growth Act of 2005; both initiatives encourage job growth by reducing the tax liability on employers. Raimondo’s real-estate development incentives are also similar: the $1 million Rebuild Rhode Island tax credit component of the plan, which aims to encourage real-estate development through a series of tax breaks for development projects, is similar to the former Rhode Island Historical Tax Credit that was terminated in 2008. Thus, the major policy toolkit in Governor Raimondo’s budget have, to some extent, been tried before.

To Raimondo’s credit, the package of growth initiatives in the state budget could indeed help to boost the Rhode Island economy, despite the similarities to previous initiatives. The logic behind them makes intuitive sense: In offering financial incentives to developers and businesses through tax credits, competitive loans, and governmental support, more businesses, and, therefore more jobs and tax dollars, will move to the state. The proposals for development projects – which include new university facilities, office and apartment complexes, and other attractions like a new ballpark – could similarly attract people and businesses to the state. And many of Raimondo’s policies reflect similar approaches to the previous economic development packages that were relatively successful, such as the Historical Preservation Investment Tax Credit, which Smart Growth Rhode Island estimates generated roughly $2.46 billion in economic activity, earning a return of $5.15 for every dollar spent by the state. While Raimondo’s corresponding Rebuild RI Tax Credit is broader in scope, it essentially has the same structure and potential for success.

Missing from the focus of the governor’s economic package and those of her predecessors, however, are any meaningful measures of program evaluation to track the progress and effectiveness of these policies. As part of the incentives package, lawmakers included transparency and reporting requirements to track how the government is spending this money. Additionally, the new tax incentives fall under the 2013 Tax Incentives Evaluation Act requiring the Office of Revenue to conduct an in-depth cost-benefit analysis to determine how successful such programs are. While this may seem like a solid standard of program evaluation, these measures actually are not as comprehensive as one might imagine. First, the reporting requirements only track which companies received tax credits and how many credits they received, not whether the credits were cost-effective or if they had any positive impact on economic growth. Secondly, the law only requires a cost-benefit analysis once in the first five years, and the tax incentives are set to sunset in 2018. This means that lawmakers will have to decide to renew the tax incentives before they have any concrete understanding of the incentive’s impact on the economy. If lawmakers decide to renew the incentives in 2018, a comprehensive program evaluation won’t even be completed until 2020. Keep in mind, 38 Studios went bankrupt in only two years, so if a similar debacle were to happen again, the five-year program analysis would be of no help. As such, there is no system in place to determine the extent to which to these policies will positively stimulate the economy, if at all, in the near future.

To avoid some of the same shortcomings that previous economic policies have had in Rhode Island, the governor should include a series of checks and balances within the programs that ensure proper management, such as intergovernmental oversight over funding decisions, more frequent program evaluation, and increased feedback measures from stakeholders. This would reduce the chance of complete investment failures such as 38 Studios while also hopefully mitigating the same public distrust that rejected the Greenhouse Compact. Part of the reason many of the same ideas have been tried and retried over the years is because the policies never yielded direct results but rather rough estimations or anecdotal evidence of success or failure. A more comprehensive system of management could therefore protect taxpayer investments by ensuring that the economic growth incentives are not abused and function as intended.

With Raimondo continuing into her second year as governor, she most certainly will continue to push more efforts to boost the economy. As her new policies start to take effect, however, Rhode Islanders should be aware of the similar efforts from the past that had shaky track records of success. For the sake of Rhode Island taxpayers, let’s hope that Raimondo learns from these failures by supplementing the policies with more accountable management practices and a better understanding of their impact.

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