May 15, 2012

You Can't Have It Both Ways

Patrick Laverty

For those who are seemingly dancing on the grave of 38 Studios already, keep in mind the reasons for things like the EDC's $75M loan guaranty. I'm hearing and seeing various people crowing with their "I told you so" and explaining that the state should not be in the business of picking winners and losers. They're questioning why conservatives like Carcieri and Schilling would be in favor of government intervention only when it suits them.

That's all fine, and I'm in agreement that the government should not be making such risky investments and putting taxpayer money on the line. But why do they have to? Why do many businesses need to negotiate some kind of deal with the Governor and/or General Assembly to find Rhode Island more appealing or even fiscally possible? With the many different regulations and taxes (boiler inspections and inventory tax just being a couple examples) why would a business want to come to Rhode Island? Well, the answer is, they don't. Unless someone reaches out to them and makes an offer for things like property tax breaks (GTech), film credits (Body of Proof) or the current 38 Studios loan guarantee in exchange for 450 jobs.

I've said this before, but let's try it again. Rather than one-off, quick fix gimmicks, how about we just overhaul the system. Create a set of business regulations that we can be proud of and advertise and that will be enough to entice businesses to move here.

If we want to have jobs in Rhode Island, we need to have businesses in RI. As others have said, we need to start looking at businesses as job creators and not piggy banks for new taxation. Let's generate it through the income tax of thousands of new employees at these businesses and the increased value of real estate.

The problem unfortunately is I expect most will only see half of this issue and merely conclude, "See, I told you it was bad to give money to a business." without looking at any of the reasons for why it was necessary to do so in the first place.

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If the problem is lack jobs and economic growth strangling municipal finances, the answer is going to be to change our tax structure to be slightly more favorable in the region.

Eliminate all sales tax exemptions and put the sales tax at 4%. This will raise revenue AND reverse the 'shop over the line' trend at our borders. The state should ratchet-up income taxes (wait, it gets better) so they can lower business taxes and restore aid to cities and towns (which should have to remove their inventory taxes to get reimbursed). Nix the tax on out-of-state internet sales.

Unfortunately, we're going to have to balance this on personal income taxes, because there's nowhere else to do it. It's all well and good that we lowered the income tax, but we don't need -people- (even the 'job creators') as much as we need -companies- right now. Micromanaging deals with individual companies isn't going to work.

Posted by: mangeek at May 15, 2012 9:15 AM

"how about we just overhaul the system" . . . HA HA HA HA!! I'm glad there are still dreamers out there Patrick, but unfortunately in this state, it will NEVER happen.

"If we want to have jobs in Rhode Island, we need to have businesses in RI"
WHAT?!? I thought that was what the government was for?

In all seriousness, it will NEVER happen. Unless and until we collectively have a fundamental change of attitude about what the role of state and local government is and should be, along with having a GA that consists of more than one party. Call them what you will, but you can't deny that we could use some REAL debate in the GA on some REAL changes, and that will never happen as long as the GA is 90% Democrat. 70+ years of one party rule and here we are folks, the armpit of New England.

Can you imagine having the Speaker and Senate President from different parties?

Does anyone know the last time THAT happened in this state?

Posted by: StuckHereinRI at May 15, 2012 9:29 AM

Patrick - Consider me dancing on the grave of 38 Studios (I was doing it before it was fashionable), but it's not all schadenfreude. I agree with most of your points, but I think you have one thing a bit backwards. These public loans, credits, stimulus, or whatever you want to call them, aren't just some ham-fisted attempt to fix what's wrong with the state - they are a significant part of what's wrong with the state in the first place. Beyond the mountains of economic theory supporting the point that central planning is inefficient, businesses don't look at these loans as Rhode Island reaching out to the business community. All they see is political favoritism and volatility, and it drives them further away to more stable states that treat their businesses equally. These aren't just gambles the state is making to compensate for its structural deficiencies - these deals hurt the state economically in the long-term. We should be glad whenever the folly of these practices is exposed for all to see. Of course, the state won't learn from its failures, but nobody said taking the medicine would be easy.

Posted by: Dan at May 15, 2012 9:32 AM

This was a forseeable outcome. I don't care that our system is screwed up compared to how much I care that I don't want to get hung w/ a $75M loan.

StuckHereinRI has it right -- until we as a state drop this anti-business attitude we have on Smith Hill, which would mean the residents of this state must also drop this attitude, we'll continue to limp along, being the 1st state to drop into recessions and the last to exit from them.

Posted by: jgardner at May 15, 2012 9:35 AM

"The state should ratchet-up income taxes "

Mangeek, are you advocating for increasing the tax *rate*?

That's fine if you are, but to keep away any confusion, it's not what I was advocating for. I was writing that the state can get more money from income taxes by businesses hiring thousands of new employees. Keep the rates same, increase the number of people contributing to the system. I think the rate is fine as-is. It's similar to the nearby states. As nice as it would be to have people working in RI, it's just as important to have them *living* in RI as well.

Posted by: Patrick at May 15, 2012 9:49 AM

Geek -

Your proposal falls apart because the majority of businesses and majority of jobs in this state are provided by small businesses, the majority of whom file 'S'-Corp and LLC tax returns - which means that the personal income tax IS in effect the business tax.

That fact is too often lost in the shuffle.

For RI to effectively compete in our regional economy - we need to be a better deal than our surrounding neighbors.

Posted by: Ken Block at May 15, 2012 11:35 AM

Sure there is-welfare, cronies, JCLS, "providers", "non-profits", legislative grants, movie credits, babysitters, educating illegals just to name a few of many many more.

Posted by: Tommy Cranston at May 15, 2012 2:03 PM

True enough, Mr. Block!

I think Dan is right-on here. The BEST thing we could do wouldn't be to beef-up the EDC. It would be to fix what's broken and send out a press release that we're now such a good place to do business that we've CLOSED our EDC.

Right now we're like a company that's doubling-down on marketing to push a crappy product. We ought to just make a good product and let it market itself.

Posted by: mangeek at May 15, 2012 3:18 PM

I think we get hung up on the two party problem at the state house. There is only one party there, and it's a MONEY party. He with the biggest stack wins, it matters not if their backers, or recipients are democrats or republicans.

It is nearly impossible to list the advantages and disadvantages of doing business in RI. It is too complicated, and hidden fees, and now and then advantages come out of the woodwork only when the business is up and running.

I would like to see everything simplified, and a nothing to hide agenda be prepared, and adhered to by our business leaders, with the sole purpose of an equitable, profitable business climate for all comers, small and large.

Then, as Mangeek points out, The EDC will be obsolete.

Posted by: michael at May 15, 2012 4:17 PM

Depending on how the whole 38 Studios thing emerges, the EDC may be obsolete sooner rather than later.

Posted by: Ken Block at May 15, 2012 4:35 PM

Michael, if one of the things that got us an "equitable, profitable business climate for all" was to make RI a Right to Work state, would you support that?

Posted by: Patrick at May 15, 2012 4:39 PM

Michael - I share your overall sentiment, and I am glad you have recognized the economic value of rules over discretion - glad to have you on board. Businesses need to be able to cost and plan; they fear volatility and having the rules change as they go, which RI has become infamous for doing.

But where you do you think all that corrupting political money is coming from in RI, and where do you think all that collected revenue goes?

Take a look for yourself at the Senate Majority Leader's campaign donations:

Labor, labor, labor, labor, labor...
Bueller, Bueller...

Those fines and fees and taxes you hate so much are being returned to your union in the form of salary, overtime, health benefits, disability, 5-6% COLAs for retirees, etc. You feel entitled to all of the above, but so does every other special interest group in RI. So the cycle continues and nothing ever gets resolved.

I don't know what the solution is in practical terms - only in the abstract as an intellectual exercise. I personally think the state is too far gone to save at this point, which is why I left in 2010. Say, now there's an idea.

Posted by: Dan at May 15, 2012 4:50 PM


Isn't this an unusual place in the development cycle for a software company that has to worry about fewer than one retail product per-year to blow up? Operations costs should have been reasonably predictable (programmers and their development hardware), and the company knew they wouldn't be realizing revenue from their new product until after it was finished, so no rocket science was needed to figure out how far the (borrowed) money in the bank needed to be stretched, to get to the next release. As I understand it, their most recent release was reasonably successful, so that shouldn't have derailed their planning.

For this problem to be occurring now, unless they lost a bunch of important knowledge to staff turnover and fell so far behind schedule that they could never catch up (and no one is suggesting that), it seems that either 1) the company was mismanaged from the start or 2) a major round of anticipated financing from an outside source never arrived.

Posted by: Andrew at May 15, 2012 5:00 PM

Patrick, the big question is "if." I don't think being a right to work state will make any difference at all. I also don't know much about right to work, other than little tidbits I read here and there, it seems like a polarizing topic with no real solutions.

Dan, If indeed labor represents the lion's share of political contributions you have a point, but I've been reading, albeit in an offhand kind of way, that the balance of political contributions as a whole leans toward business, with labor competing to stay in the game. Problem being it is all a game to to politicians, whose very presence in office is the result of campaign contributions, and their core values compromised by being players in that game.

I've been thinking about complete taxpayer funding of all political campaigns, with a limit commensurate with the level of office. The current system obviously is broken.

Please, before we get into how union brainwashed I am, and how clueless, remember that these are simply opinions, nothing substantive, but now and then a workable solution comes from idealogical thoughts.

Posted by: michael at May 15, 2012 6:02 PM

Michael - I appreciate the thoughtful response. I believe what you are saying holds true in national elections but not in state elections in RI.

Posted by: Dan at May 15, 2012 6:19 PM

"Isn't this an unusual place in the development cycle for a software company that has to worry about fewer than one retail product per-year to blow up? ... it seems that either 1) the company was mismanaged from the start or 2) a major round of anticipated financing from an outside source never arrived."

Huh, good point.

What's especially troubling is the failure make the May 1 payment to the EDC. They had to know that that would set off loud and very public alarm bells about the fiscal condition of the company. Yet the company's situation is so straited that they couldn't arrange to make that payment??

Posted by: Monique at May 15, 2012 10:12 PM

Andrew -

You pose great questions - and I hesitate to conjecture here. Their business plan may have required another round of financing all along - and maybe they have hit a snag with that next round??

Also - do the 38 Studios principals have any skin left in the game at this point - or have they all pulled their original investments out?

Posted by: Ken Block at May 16, 2012 11:25 AM

"Also - do the 38 Studios principals have any skin left in the game at this point - or have they all pulled their original investments out?"

Another good question. Rumor is that they still have some of their own money at stake - but, again, that's just a rumor at this point.

Posted by: Monique at May 16, 2012 11:08 PM
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