January 26, 2010

Whatever Progressives Might Wish to Be True, Money Must Be Made in the State

Justin Katz

Financial analyst Lou Mazzucchelli offers the sort of economic opinion piece that we should expect from professionals in the field:

Entrepreneurs build businesses where there is economic opportunity. A large pool of investment capital is one measure of that opportunity. A cursory comparison of Rhode Island and Massachusetts shows the pool of venture capital in Massachusetts is at least 882 times Rhode Island’s. With six times our population, Massachusetts has 142 times the available venture capital per person. Why are Rhode Islanders chagrined about new business creation here? It only makes sense for entrepreneurs to go fishing where there are fish.

Measuring venture capital investment in Rhode Island and Massachusetts from all sources, not just in-state investment, we see the total amount invested in Massachusetts since 1995 was $45.5 billion across 5,773 investments, or about $7,000 per capita. Rhode Island attracted $687 million across 104 investments, or $654 per capita. Massachusetts saw 55 times the number of investments, and almost 11 times the investment per capita compared with our state.

Mazzucchelli speaks of "heavy assets" and "light assets," the former being structures and established communities and the latter being more mobile. Universities are the former; military installations are the latter. Unskilled workers are the former; highly skilled workers are the latter. What Rhode Island needs, in a nutshell, is to attract light assets and leverage them to build heavy assets.

One method of doing so would function through taxation. Eliminate and decrease taxes of concern to people who invest preexisting wealth as their source of income (the rich) and who are sufficiently successful in their careers to generate a lot of income (the productive). That means eliminating the estate tax and the corporate tax and decreasing income and sales taxes to the lowest rates in the region. Then, structure investment taxes in such a way as to encourage investments to be made within the state. That means reducing the capital gains tax and eliminating it entirely on long-term investments within the state of Rhode Island.

I'd expect any revenue loss to the state to be temporary, pending the take-off of our way-over-burdened economy. But in the meantime, the state's leaders simply have to admit reality. First, they should lower all social welfare expenditures below others in the region; give healthier states the opportunity to assist those for whom we lack resources. Second, resolve imbalances in goverment operations, such as the pension liability.

All it will take is a little intelligence and a lot of political will (which is why it probably won't happen, leading the state toward insolvency).

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Implicit in this post is the fact that there is a lot of nearby capital. Since it has been about 25 years since investors worried about state borders, that capital is available in RI. The question then becomes "how do we attract it here"?

Unfortunately, most people in Boston think RI is run by the Sopranos.

Posted by: Warrington Faust at January 26, 2010 3:06 PM

--"Unfortunately, most people in Boston think RI is run by the Sopranos."

Not without cause. Look at the mob-connected LIUNA presence in RI, and its influence in Providence city government and Smith HIll.

And last session the geniuses in the Democrat General Assembly raised capital gains taxes.

And today's Providence Business Journal contains a story that RI has one of the highest unionization rates in the country, and the highest in the region.

There's good reason why RI consistently ranks as one of the worst states in which to locate a business operation, and no indication that the Democrat General Assembly has any intention of meaningfully addressing that.

But hey, there's always another of Murphy's magic rabbits to pull out of his hat, right?

Posted by: Ragin' Rhode Islander at January 26, 2010 4:24 PM

Face the facts, Rhode Island will never be NH, VT, ME, MA, CT or NJ. RI is the smallest state in the union and most people think it's part of Long Island, NY!

Smith Hill was worried about taking care of what was going on in RI up until the end of the Joe Garrahy administration and MA was referred to as "Taxachussetts"! after that it seems everything went downhill.

Somehow RI started comparing itself to MA and CT plus trying to out due each other state in taxes for business opportunities.

The facts are RI you do not have the size, money or manpower to even compare yourself to MA or CT! That is totally wishful thinking pie in the sky which has led the state into the continuing spiral into impending future bankruptcy and anyone perpetuating the myth that RI can compete is out of contact with the real world.

What RI needs to do is start paying attention to what is happening within its' boarders and address the needs. RI will never be a leader or world center if it can't control its' own financial needs (30 years documented not balancing state budget by the Pew Research Center both Democrats and Republicans) within the state boarders and provide for its' people and business community. It also means RI is so far down the bankruptcy slope that tax increases really may be required because state, municipal and town services and personnel have been striped to almost bare bones minimum.

Grow up! RI is not world class, 1st class or even 2nd class 3rd class or best of class! How about bottom of the barrel for starters! There are no quick easy fixes as much as some people wish there were and this recession was not born over night-- how about over 7 years earlier there were documented signs of such. Obama nor any other president could not fix 7 years of the financial recession in a single 4 year term never mind the first year in office! Reality check people--any of you who has worked for the federal government understand we are still working with what President George W. Bush put in place!

When I left RI in 2006 the top state management positions were fetching $80K-$90K. Now those same positions are fetching up to $140K and they are appointed not union positions! RI even tried to hire a new EDC director for $250K! Government service is suppose to be "break even" and not for profit like private business. I don't know where RI is going to get the money to support these outrageous salaries of appointed people plus retirement, benefits for any incoming replacements with the new administration. Would you work for less than the previous person in the same position? RI is so screwed!

RI start addressing what needs to be accomplished within your own state boarders and to hell with comparisons to other states; stop banking heavily on gambling for state income; stop trying to micro-manage and in time RI will grow again!

Posted by: Ken at January 26, 2010 10:17 PM


Your comment is nonsensical. Juxtapose:

The facts are RI you do not have the size, money or manpower to even compare yourself to MA or CT!


RI will never be a leader or world center if it can't control its' own financial needs

How does that "if" correspond with the previous "never"? Point of fact: I'm not suggesting micromanaging anything. I want the state to get out of the mandate business, lighten its regulations, and cut taxes. I've been asked what taxes, so in this post, I suggest a framework. That's it. Let the private sector do the rest.

And I disagree: Rhode Island can compete. If people from MA and CT can live here and keep more of their income, and invest in companies that are located here and recoup all of their gains, they'll do so. Indeed, the evidence suggests that they were doing so until the GA panicked in response to special interests and started making noises (and then taking action) to start raising rates again. And indeed, having loose welfare policies has attracted that crowd.

Posted by: Justin Katz at January 26, 2010 10:31 PM

So be it Justin!

It's your point of view.

Unfortunately this is not the time when RI can spend the time to get out of the mandate business, lighten its regulations, and cut taxes.

Time is at essence. The state has dire financial problems it needs to address without somehow crushing the delicate eggshell. Any cuts at this time drive the state deeper in the hole! You want tax cuts so be it but be prepared to pay the price!

There is no income coming into the state to support state spending and more people like me are leaving the state which drops income tax (unless your retirements comes out of RI so RI-1040NR kicks in) and sales tax income plus housing prices have dropped driving down tax collections which state, cities and towns relies heavily on, gambling is down which state also relies heavily and tourism is down because RI has one of the highest tourist taxes in the nation on restaurants, hotels and rental cars (if you look at Visit RI Tourist web site: http://www.visitrhodeisland.com/ all the videos are of senior visitors which are great for knee capping the state image)! Who was appointed and approved these lame videos to sell the state internationally?

In HI all management, unions executive, judicial, general assembly branches, colleges, local teaches (teachers fall under the state because 1 school district for whole state) and unionized support personnel OK'd a 5% pay cut and non-paid furlough days for the next 2 years to balance the state budget. Our Governor is proposing tax cuts for business, unemployment insurance and alternate energy to spur growth and by the way a National Republican convention will be held in Honolulu shortly. HI state budget is for 2 fiscal years unlike RI for 1 year.

Yes we have our problems also in HI but our (R) Governor Lingle has balanced the budget, unemployment has dropped from 8.0% to 6.9% and tourism (dropped 20% because of recession) is rising plus airlines have added 500,000 flight seats to the state.

Our houses are still selling; one sold for $8.6 million last week. Walt Disney Co. is on Track to complete the first ever out of theme park $800 million resort 30 min from my house next year and $1 billion investment makeover of 2 hotels will be starting added to 45 years of scheduled city-wide private funded construction and housing projects. starting this year.

State fiscal stupidity lead me to leave the State of RI in 2006 after being directly involved with state, municipal and federal government and private industry and as a photographer with access to backrooms on both Republican and Democratic sides (my negatives are in locked storage to be destroyed when I die). I go back to Governor John Chaffee (R).

After all RI killed the commercial historic tax credits that was generating according to out of state independent auditor about or more than $5 income for every $1 in tax credit plus adding property back to the local tax rolls because the Gov. said RI could not afford it with budget deficit. Hey it's all about running the state like a business right (5 to 1 income ratio; Go figure)!

I applaud your optimism you are young and ambitious but face the real facts, as long as comparisons are made between RI and other New England states RI will not progress to a balance budget or become a player again in the New England states because of the current micro-management from both political parties.

The RI GA (childish finger pointing) did not appoint and set the unbelievable high paying management jobs now currently in place in the State of RI. (R) Governor Donald Carcieri did draining the state budget and adding to the benefits; retirement packages in the last 7 years the State of RI fiscal budget deficit has grown from $100 million to close to $1 billion according to your estimated figures blaming the GA 100% is erroneous who I must admit must share 50/50% of the blame with the governor's office!

Tax cuts to gain upper hand over neighboring MA and CT and over estimations of state income and gambling income decline as well as explosion of housing market and mortgage failures also attributed to RI's down fall.

Most all of what I have mentioned is well documented on the web and neutral political government research organizations.

Stop trying to compare RI to MA and CT! The grass always looks greener on the other side of the fence or street!

Learn to take solid care of your own within your state boarders first before you start comparing!

PS: One thing I do not think most have not taken into account is RI has royally screwed the Narragansett Indians and the native American Indian tribes are slowly circling around the State of RI. The estimated $240 million income from gambling just might soon be bye bye putting additional stress on RI state budget as a whole. There may be a RI Custer's last stand soon coming!

Posted by: Ken at January 27, 2010 2:20 AM

Total amount invested since 1995, eh? Seems kind of cherry picked when you consider that RI has been performing well recently (so much for VC as an indicator of overall economic health)...

While Massachusetts’ share of the venture capital economy dwarfs that of other New England states, Rhode Island and New Hampshire managed to post significant gains in 2008. Rhode Island’s venture capital funding grew by a factor of more than ten, from $4.2 million in 2007 to $51.8 million this past year, while New Hampshire investing grew to $158.8 million, an increase of 19.4 percent. Connecticut’s VC investment fell precipitously, dropping 60.1 percent to $142.9 million. Vermont posted $14.7 million, a 33.7 percent drop; while Maine saw investing fall off by 74.1 percent, to $2 million.

You guys even commented on the story at the time.

BTW, I agree with the Mazzucchelli that the Slater Technology Fund is woefully underfunded (so much for the snarky title... this progressive has even raised VC). But as near as I can tell, Carcieri and the folks running for Governor don't seem to care, preferring to spout feel-good statements about helping small business. I even asked Caprio directly if supporting "small business" meant increased funding for STF, but he was noncommittal.

Posted by: Russ at January 27, 2010 11:31 AM

"who I must admit must share 50/50% of the blame with the governor's office!"

If that were true, the state would have been 50% better off for the last seven years.

Alas, 100% of the responsibility for the current condition of the state is attributable to the General Assembly.

Posted by: Monique at January 27, 2010 6:09 PM
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