There's the "Business Community" and There's the Business Community

In Rhode Island, class differentiation has a high degree of overlap with insiderdom — perhaps because people who aren't insiders don't see as much value in remaining, so they've filtered out. In that context, comments from one representative of the "business community," offered in an article about Governor Chafee's promise of "painful cuts" — are disconcerting:

"I think all of us in the business community expect some level of pain," said Colin Kane, a developer who is a principal of Peregrine Group LLC in East Providence. "I'm not going to call it pain. I'm going to call it commitment — and sacrifice — toward making the state fiscally responsible and functional."

Reporter Tom Mooney doesn't bother to point it out, but Kane is also Chafee's appointee to head up the commission overseeing the conversion of the land formerly covered by route 195 in Providence, so he's clearly in the upper tier of insiders. He goes on to say:

And, he said, "I do believe that the public is prepared and willing to make a reasonable sacrifice if indeed they do see a future of getting us below [an unemployment rate of] 10.8 percent."

"I pay a lot now. I suspect I will pay a lot later," said Kane. "Let's face it. Last year in Providence our property taxes on commercial [property] went up 25 percent. So we’ve made the sacrifice... Does it cripple? Yes. But we're still alive."

Business survival may be adequate for people who are already financially set, who already have the added perks, locally, of power and influence. But maintaining the status quo is not going to turn things around. As another article on yesterday's front page points out, Rhode Island has continued to bleed jobs. The most optimistic thing that can be said is that job creation was just barely positive for 2011, after losses for almost the entire second half of the year.

It isn't enough for Rhode Island to temper its tax increases to keep people like Kane afloat. Any increases at all, at this point, will kill start ups and continue to discourage new businesses from migrating here, while persuading others to continue leaving. Every penny of Rhode Island's pain has to come through reductions in government spending, taxation, regulations, and mandates, because what's needed isn't a painful solution, but a liberating one — one in which the economy grows rapidly enough to overcome the truly horrid decisions of insiders past.

Sympathy for Zimbabwe

Tyler Dorden's point, with his post about trying to send money to his friend (actually named Time) in Zimbabwe is that the United States strangles business with meddling. In this case, he suggests, it does so by requiring Western Union to layer on burdensome precautions before allowing people to transfer money there.

I don't know the background of the policy well enough to say whether the imposition is worthwhile. Judging from the questions that Dorden reports Western Union having asked, it appears to be both an attempt to stifle Internet scams and a form of mini sanction against the nation's ruler, Robert Mugabe.

More compelling than that argument, though, is the description of Time's background. The proportion may be very imbalanced, but I couldn't help but think of Rhode Island when I read the following:

By the time he was 15-years old, Time could see the writing on the wall. Mugabe had all but destroyed the market and private property rights, and Time knew there would be absolutely no prospects for him in Zimbabwe.

How many people, especially young Rhode Islanders embarking on the working phase of their lives, have made the same decision about this state? I know I've heard the advice suggested frequently, in multiple contexts and with an air of plain common knowledge.

Trillo's Flawed Government Theory

I don't relish the observation, but it seems to me that Rep. Joe Trillo (R, Warwick) is displaying an unhealthy political philosophy in his quest for a Quonset casino:

"It would have to be bigger than Foxwoods, bigger than Mohegan Sun, otherwise it's not going to work," he said. "To just go with a regional casino, it won't be able to compete."

Trillo also envisioned a scenario in which a single operator would buy and run the privately-owned Twin River and Newport Grand, and the new Quonset Point casino. Asked if he had been approached by anyone interested in making such a major investment while the Mohegan Sun struggles financially, Trillo said an emphatic no: "I have purposely stayed away from any casino operators."

It's well and good, if true, that Trillo is avoiding the corrupting influence of those whose money would be necessary to make his vision a reality, but of itself, a vision of such scope and specificity is not an appropriate basis for government action. It isn't the job of elected officials to decide what sort of business on what sort of scale for what sort of market their area ought to have and then go about developing it.

Government should stick to ensuring that the marketplace remains competitive, broadly, and that its policies are not hindering the people from pursuing activities that, within limited boundaries of order and cultural integrity, they believe will be profitable and beneficial.

Big Finance Likes Totalitarianism, but Democracy Requires Hard Lessons

I'll admit that I don't have much new to say about the continuing activities of the state-appointed budget commission now ruling East Providence:

The state-appointed budget commission overseeing the city's finances convened for the first time Wednesday, chose Michael O'Keefe, a former state budget director, as its president, and established its first priority: improving the city’s cash flow.

Essentially, that means debt; the city needs $10 million in tax anticipation notes, and the lowering of its rating to "junk" will make that "more difficult and expensive," as O'Keefe puts it. It all comes back to government debt and charming investors. We've discussed previously that the municipal takeovers are meant as "a statement to Wall Street," and the point merits continued emphasis. What Wall Street likes about state-imposed budget commissions is that they open the door to options that might benefit civic units as economic entities, but not necessarily as self-determinant civil societies. The state can take money from other parts of the state to hand to struggling cities and towns; it can impose taxes on local residents without fearing democratic reaction; it can change policies and, ultimately, contracts to address shortfalls.

At bottom, the problem is that the way in which the state determines a preferred mix of these solutions will depend on the influences on it. That means not only special interests, like organized labor, but also the general priorities of the class of people who occupy the state's bureaucracy and elected positions. The people who actually live in a city or town are not likely to rate very highly, and voters in other cities and towns are not likely to pay all that much attention.

I'd suggest that a healthier solution — in the long term, and with an eye toward effective democracy — would be to let a city or town run out of money. Let it reach the point at which it cannot provide services or pay employees. Or, alternately, that it must raise taxes and impose fees almost immediately. If we're to be a self-governing people, we have to experience, together, the consequences of incompetent leaders and bad decisions.

Of course, if people start learning such lessons on the small, local scale, they might begin applying them at the state and national levels. And we couldn't have that, now could we?

Killing the Weak as Recovery Strategy

Reading about Rhode Island's effort to return its unemployment fund to solvency in yesterday's Providence Journal, I got the impression of a system so counterproductive that only government officials could conceive of it (and getting worse):

The employers' payments are determined by the number of former workers qualifying for payments; those paying the highest taxes now will pay even more.

...

Employers will now be split into two categories and pay unemployment insurance taxes based on two taxable wage bases. Most employers will pay a tax calculated with a wage base of $19,600 — a 3-percent increase over last year's base of $19,000.

But those employers whose taxes are calculated at the 9.79-percent rate because they have the highest number receiving benefits will have a wage base of $21,1000. That's intended to offset the large drain these employers exert on the unemployment fund...

It's funny: When children are poor, we don't tax their parents more because their kids are a drain on the system, yet when the economy turns sour, we tax the hardest-hit businesses most. That'll teach them! No doubt, as they begin to recover to profitability, they'll be that much more reluctant to hire new employees.

And call me cynical, but splitting the "wage base" looks like an elaborate way to avoid having the high-end tax break the 10% barrier. Taken together, these two points illustrate well how the government in Rhode Island perceives businesses — not as partners, allies, or patrons, but as a "them" that has money to take.

Removing Pension Dollars from the RI Economy

Union reps and pension testifiers have been arguing that reducing pensions will harm the local economy. Using the RI Center for Freedom & Prosperity's pension database, though, I've looked at some relevant numbers, including the fact that the state sends $142 million in public pension payouts out of state.

Running the State as a Giant Corporation Is a Bad Idea

Part of what bothered me about Governor Chafee's "findings" in Pittsburgh was the broader economic strategy whereby the state government tries to run Rhode Island like a giant corporation — picking preferred industries, backing particular players (as if they are subsidiaries), and trying to shape available public resources (such as the I-195 land) toward a specific vision. That's the impression also given by a recent article in which Monster Mini Golf founder Christina Vitagliano complains about Rhode Island's handling of businesses:

... even a glowing skeleton doesn't make Monster Mini Golf a biotech company, and Vitagliano said her firm doesn't fit in with the state's plans to create a "knowledge district" of life science and high-tech companies.

"No one knows we're here," Vitagliano said. "I'm not a pharma company, I'm not a medical-device company, I'm not Curt Schilling. There has been zero help from anyone."

She said that's a stark contrast to her experience in Las Vegas. "When you walk into City Hall in Vegas, they welcome you with open arms. It's a very pro-business, proactive city."

Who in government would have gone in search of a black-lighted mini-golf company as an economic development project? Mr. and Mrs. Vitagliano had a unique vision, they chased it down, and it's been a success. That's real entrepreneurship, and government — with its vested interests, direct line to bar-raising regulation for big-rolling incumbent organizations, and access to NIMBY politicians and constituents, alike — is ill suited to encourage it.

The best strategy is simply to get government out of the way.

RI Needs a Strong Economy to Keep Bank of America

In his Sunday Providence Journal column (not online), John Kostrzewa worries that Rhode Island officials aren't doing enough to ensure that looming cuts in Bank of America's workforce don't come out of our local economy. He suggests that they're waiting for a more opportune time and insists that they can't afford to do so.

But the persuasion that he suggests is built upon a big threat:

... the state kept an average bank balance of more than $35 million at Bank of America during the fiscal year that ended June 30. Some federal receipts flow into a general fund account at the bank. And Bank of America is a senior bond underwriter for the state and assists in the marketing and sale of state bonds.

All of that work doesn't have to go to Bank of America. It could go to other institutions that make commitments to add jobs.

Rhode Island may or may not have the financial leverage to bully the bank. Considering that BoA is looking to save $5 billion per year in personnel costs, the numbers in play may be out of Little Rhody's league, even with the combined threat of lost business and promise of the state's famous big-shot handouts.

Just under two years ago, the Bank of America branch on Main Rd. in Tiverton closed down. A manager, there, told me that the branch was profitable, but that the lack of small-business prospects in the town erased the justification for maintaining a presence here. Although the scale is much smaller, Tiverton's experience suggests a better way forward for Rhode Island.

My mind turns to a CNBC analysis from June of this year, in which Rhode Island managed to be dead last on a list of Top States for Business. In three of the ten subrankings — workforce, technology & innovation, and access to capital — the state stood right on that middle line of mediocrity. It did a little bit better in education and a little bit worse in quality of life. That's half of the rating's factors. With the other half, we're bottom ten material: cost of doing business, infrastructure & transportation, economy, business friendliness, and cost of living.

If Rhode Island wants to halt its slide into backwater and change its status as the Northeast's Mississippi, the government is going to have to focus on making the state a more attractive place to do business. Rather than one-time giveaways, the state has to lighten up on its taxes and regulations and improve its infrastructure — while decreasing the cost of living and doing business.

Evidence that Rhode Island is serious about turning itself around — and fast — would do more to persuade BoA CEO Brian Moynihan that it's worth staying here than would threatening letters from every single elected and appointed official from local water authority up to Speaker of the House. Unfortunately, our current governor and General Assembly, Providence's current mayor, and (all evidence indicates) the state's electorate, itself, lack the will to do what's necessary.

How a State Buries Itself with Wind and Overreaching Government

Rhode Island had to have a speculative wind project. The General Assembly and former Governor
Don Carcieri effectively castrated the regulatory body that oversees energy policy and forced through the Deepwater Wind agreement that will raise energy costs for all Rhode Islanders in order to guarantee the company profits. Of course, those who use more energy, such as substantial manufacturers (and employers) like Toray Plastics are affected more.

Not to worry, though. Taxpayers can be tapped, yet again, to subsidize green energy:

The Economic Development Corporation board on Monday unanimously approved giving Toray Plastics (America) Inc. $1 million in energy-assistance grants that will pay about half of the company's costs to install 1,650 solar panels at its Quonset Point facility.

The investment of state and federal money is not expected to bring any additional jobs to Rhode Island, company President and CEO Richard R. Schloesser said before the meeting, adding that the solar project is "strictly for the environment — renewable energy."

That won't be all, though. You'll recall that, in its zeal to leap into the wind energy business, the government of Rhode Island explicitly called for energy distributor National Grid to ensure a profit for itself and for green-energy suppliers like Deepwater Wind by charging a premium "to all distribution customers through a uniform fully reconciling annual factor in distribution rates."

With Toray implementing a government-subsidized system to supply some of its own energy, it will be paying a smaller share of that "uniform fully reconciling annual factor," which means that everybody else will be paying more.

This is how a government can bury itself and the people it represents while attempting to react to the negative consequences of poorly considered policies, and Rhode Island's manner of governance is practically defined by this short-sighted dictate-and-dig methodology.

Come to Rhode Island... Just Not for Long

I hate to be so negative... I really do... but isn't it just too perfectly Rhode Island that the geniuses guiding the state would come up with this as an advertising slogan:

The judges like Team 5's idea about unpacking Rhode Island. But they choose another slogan and marketing plan for the winner: "Rhode Island: It's so small you can do it all."

"Every school kid knows one thing about Rhode Island — it's small. So we asked, what's good about being small?" said winning team member Alec Beckett, a creative partner with NAIL Communications.

So small I can do it all? You mean, like in a long weekend? How much can there be to do in the state if I can do it all in a single vacation?

Maybe "Rhode Island: It's all within reach," or something. That way ads can refer to proximity without implying limits on activities. They can also play on the words to imply cost savings over trips to locations farther away.

Gimmicks Won't Spark Business Activity

The Economic Development Corp. is limited in the scope of the activities in which it can engage (and its board members are appointed by local politicians), but I didn't want to let this article slip through the cracks as I catch up with things because it so well illustrates the futility of usual practice in the face of Rhode Island's problems:

... Businesses are fighting over space in Massachusetts, prompting Babineau to tell those people to take a look at Providence.

"And they said, 'Really? We didn't know,' " Babineau said. "I said, 'That's our fault.' "

Board members kept returning to that idea. Daniel Sullivan Jr., president and CEO of Collette Vacations Inc., said the EDC and state must market and sell what Rhode Island offers. Referring to Babineau's encounter, he urged, "We've just got to get in front of them."

Somehow, I don't think businesses would be flocking to the worst-bar-none business environment in the United States but for the failure to market to them and hold conferences. At this point, the EDC's singular focus should be... let's say... educating Rhode Island's political class about the damage that it has done and continues to do to the state.

Letting the Spinners Get Away with Economic Baloney

It's getting kinda hard to take the spin that permeates economic reporting. Reporter Kate Bramson and her headline writer mainly adopt RI Department of Labor and Training Director Charles Fogerty's line that the statistics show "slow, steady progress." The headline and lede are, "Rhode Island unemployment dips slightly, to 10.8 percent, Still, 10.8% an improvement over numbers for December," and the story deepens with this:

Job growth in Rhode Island is one of the positive trends in the first half of the year. Although the number of jobs dropped from May to June by 1,500, Rhode Island had 4,200 more jobs in June than in December. That six-month growth is an increase of 0.9 percent -- which Fogarty said is "outpacing the nation."

A quick glance at the accompanying table, mostly taken from the U.S. Bureau of Labor Statistics' page for Rhode Island unemployment, shows that, while the number of unemployed Rhode Islanders dropped by 4,891, the number of people working also dropped, by 5,362. That is, the overall labor force shrank by 10,153 and hasn't been this small since September 2009.

As for the increase of "jobs based in Rhode Island" since December, a closer look at the month-to-month statistics (which are all that are easily found) suggests that the uptick is mainly in construction and accommodation and food services, which can be expected to increase in Rhode Island this time of year.

Rhode Island: The Business Underdog (of our own making)

Toray has been in Rhode Island for over twenty years. They are looking to expand. They also have a facility in Virginia. The Rhode Island facility is bigger, but the costs are higher. Virginia looks pretty good. #50 business friendly Rhode Island is now competing with #1 business friendly Virginia to woo a business it already has.

[Toray CEO Richard] Schloesser is looking to make his decision by the end of the year, said he’d prefer to expand here. But he’s concerned about the cost of doing business in Rhode Island. “It’s a very expensive state to do business in,” he said....One of Toray’s big concerns is energy. The company is the largest consumer of electricity in the state, and it went to court to appeal the power-purchase agreement between National Grid and Deepwater Wind, which plans to build wind farms in the waters off Rhode Island. Toray contended the agreement would drive the price of power too high.

In an interview last week, Schloesser said the court’s decision will have “some impact” on the company’s expansion plans.

On Friday, the Rhode Island Supreme Court upheld the power agreement, ruling against Toray and fellow plaintiff Polytop Corp. Schloesser could not be reached for comment Tuesday....[Earlier] Schloesser said he is worried about the long-term economic climate in the state. He said some of Chafee’s tax proposals, particularly a 1-percent tax on manufacturing equipment, could have been a deal-breaker for Toray. But that idea never made it through the General Assembly.

“We’d like to have the expansion here, but we have questions about what will happen to the state. Is this going to be a good place to do business in the next five years?”

[EDC Executive Director Keith] Stokes aid Toray might be able to qualify for tax credits under the state’s provisions for manufacturing research and development, and another for job creation. He said officials from the Quonset Development Corporation have also been involved in the discussions about land acquisition.

“Companies are making their decisions based on costs,” Stokes said. “It’s not lifestyle. It’s not loyalty. It’s costs.”

Stokes said certain costs –– utilities, health care, land and taxes –– are higher in Rhode Island than in other states. What the EDC is trying to do for Toray, he said, is come up with a package to make Rhode Island cost-competitive....Stokes said that in a perfect economic world...[r]ather than a whole set of incentives and inducements, Rhode Island would be better served by a lower corporate-tax rate, a stable budget and a predictable business climate.

But, said Stokes, we’re not living in that perfect world. Stokes said that when it comes to economic development, keeping existing companies, particularly an expanding company, is even more important than luring new ones.

Stokes said the incentives under consideration for Toray are not “deals,” but ways of compensating for the higher fixed costs of doing business in Rhode Island.

Evolving Arbitration

Sam offers Fred $10, but Fred wants $30. To solve the problem, they call in their buddy, "The Arbitrator", who decides $20 is fair. Sam pays more, Fred gets more.

The next week, Fred asks Sam for $30 again, but Sam says he's only got $13 in his wallet. Fred says Sam is holding out. They go to The Arbitrator, who says Sam isn't holding out, but he should check back at the house and he could probably come up with more than $13. To be fair, The Arbitrator says Sam should give Fred $17.50.

The next week, in anticipation of the request, Sam offers Fred $10 and explains that's really all he can afford, assuming he gets paid next week. Fred still wants $30, but says he can live with with $20 so long as Sam kicks in an extra $.30 a week to help him buy a pack of gum. They turn to The Arbitrator, who thinks Fred is asking a bit much, given Sam's current financial situation, but in the spirit of cooperation agrees that Sam could handle $12.50 along with the $.30 per week.

Then, The Arbitrator says from now on, he'll take the last best offer from each of them and pick one.

Sam prepares for Fred's next request. Based on past precedent, the Arbitrator has never awarded exactly what either of them has proposed before, but "compromise" always results in Sam paying more than he offered. Sam assumes he'd better build a compromise-type number into his next offer so that it has a realistic chance of getting picked. As usual, Sam expects he'll have about $10 in his wallet when Fred comes calling, but he scrapes together a few more bucks--some from his kid's allowance--knowing that, based on past transactions, Fred will want more and will get more--he always has.

When the time comes, Sam offers Fred $15 and the $.25 gum subsidization and crosses his fingers. Fred asks for $20 along with $.30 per week for gum--the price has gone up. The Arbitrator looks at both offers. The price of gum has gone up and Sam and Fred are only $2 apart as far as the main nut. Besides, Winston, their friend from East Greenwich, has been loaning their other friend James $25 regularly since last year and Sam makes almost as much as Winston. And Sam has always managed to come up with more than his original offer.

The Arbitrator sides with Fred.

Sam moves out of state.

Fred walks up to Winston...

Last Again, Naturally

CNBC has ranked Rhode Island as the least business-friendly state in the country. #50. Dead last. I know the yabuts will be out, but--to coin a phrase--"perception is reality" and when a business channel reports that your state is the worst, well, what do you think the business people watching that channel are going to come away with? The rankings are here and were derived following this method:

This year’s categories and weightings, for a total of 2,500 points, are:

* Cost of Doing Business (350 points)
* Workforce (350 points)
* Quality of Life (350 points)
* Infrastructure & Transportation (325 points)
* Economy (300 points)
* Education (225 points)
* Technology & Innovation (225 points)
* Business Friendliness (200 points)
* Access to Capital (100 points)
* Cost of Living (50 points)

The Long Reach of Educational Inadquacy

Here's a little nugget of insight that deserves broader comment. Apparently, Rhode Island is having a difficult time filling the open position of Director of Health:

In a phone interview, [former director David] Gifford said that a number of prospective applicants had contacted him with questions. The salary, he said, is an issue, but not the top one.

Instead, doctors considering moving their families from out of state were concerned about the quality of public education in Rhode Island, which some found to be below par, he said.

No doubt, progressives will be chime in to declare this as evidence that people don't migrate on the basis of taxation, but that would be a distraction. The point that must be understood is that progressive policies — educationally and as a matter of civic structure — have brought us to this point. On the educational side, the emphasis of public schools has shifted toward catering to disadvantaged and challenged students to the detriment of the broader mission, and curricula have been politicized both in the content and in the amount of time that schools spend concentrating on what might be termed institutional parenting (the focus being on imparting self esteem and teaching behavior).

More significantly (and harming Rhode Island disproportionately to its competition) is the structure of the system. Centralization toward an educational bureaucracy has left municipalities less able to address the communities that they actually serve, and the unionized workforce, with the advantages that it has secured through hardball negotiations and state-government advocacy, has driven up the cost of public education to the degree that programs must be cut and schools operated inefficiently.

The pervasiveness of that problem can be observed by expanding the above quotation by another paragraph:

Additionally, continual funding cutbacks will make it hard for any director to take on new initiatives.

As a small-government type, I don't take it to be inherently a bad thing for government departments to be constrained in that way. The point is worth making, though, that limits in what they can do and the ways in which they can experiment to become more effective and efficient are sure to be imposed when an ever-growing portion of their budgets must go to labor — both current and retired.

Zero-based budgeting

Looking at RIPEC's state budget projections, Ted Nesi explains how a "budget on autopilot" is untenable no matter what the entity--towns, cities, states, the country. You can also read "autopilot" to mean "assumptions." Yet, the assumptions built into these budgets--3% raises, increase in program costs, etc.--aren't even enough to cover the rate of growth, which far outpace the ability to tax (or "generate revenue").

Nesi provides a nice pie chart showing that 52% of the growth in the budget since FY2002 is from social services and 17.7% of the growth comes from increasing personnel costs (while the growth in personnel costs--particularly in a good economy--are probably about what we'd expect to see, keep in mind that the state workforce has shrunk). Meanwhile, as we well know, aid to cities in towns--ie, money that towns send to cities, some of which filters back to them--has been reduced by nearly 3%, which isn't a lot in the big picture, but hurts each community acutely.

Given our current straits, perhaps it's time to implement zero-based budgeting instead of the current practice of "last year + (at least) 3%". Start fresh. Look at what we spend our tax dollars on and (re)prioritize: infrastructure, economic development, providing important services at reasonable cost, etc. Now, it takes a lot of work, so perhaps we could do a zero-based budget in the first year of each new governor term and then baseline from there. It's an interesting concept, but the chance of it getting implemented is, well, zero.

Now for some good news: TACO Expands

For good reason, it's easy to focus on the bad around here. But there are positive signs every now and then. As reported by WPRO, TACO, Inc. has gone ahead and broken ground on a new expansion: the "Innovation and Development Center". Obviously John Hazen White Jr., owner of TACO, is confident the budgeted costs won't increase from any tax law changes. The purpose of the expansion is important to note. Companies--manufacturers in particular--used to rely heavily on institutionalized training/apprenticeship programs.

For instance, my father was accepted to the General Electric Apprenticeship program back in the late '60s, where he learned how to do things the "G.E." way. To be sure, many companies have continued such programs, including TACO, but I think they were de-emphasized as more kids received college degrees or went to technical schools to learn skills. I wonder if the new expansion is a sign that TACO will re-emphasize getting prospective employees in-house quicker to learn the "TACO way."

Now It Costs More to Borrow

Whenever a rating agency lowers their estimate of the ability of a state to pay back its bonds, the interest rates the state pays go up. Moody's just lowered its rating for Rhode Island.

Moody's Investors Service has downgraded the outlook on Rhode Island bonds to negative from stable because of "the potential impact of rapidly escalating pension costs on the state's ability to increase its liquidity margins, diminish its reliance on one-time measures to balance its budget and reduce its debt burden."

Moody's added, "The state's pension costs are set to double in two years by an amount that roughly offsets its budget reserve account, raising the likelihood that it will continue to face significant budgetary pressures..."

For his part, Governor Chafee recognizes this and is trying to find ways to get off the transportation bond wagon. Unfortunately, his ideas revolve around paying tolls or mileage taxes. That's a non-starter, too. Just like his call to add more workers to the DMV. Maybe we should make Twin River a full-on casino and devote some of that revenue to transportation. Or we could just re-prioritize the state budget--baseline it--and go from there. Doubt that will happen.

Body of Proof That Tax Increases Aren't the Way to Go

Many Rhode Islanders aren't completely sold on the economic benefits of giving away tax credits to TV and movie productions, and some of those who are seem to think the benefit has more to do with notoriety. Still, it's reasonable to count this as high-profile evidence of the effect of attempting to solve the Rhode Island government's financial problems through revenue increases, rather than spending reductions:

ABC-TV has received approval for a $7-million tax credit for filming "Body of Proof" in Los Angeles, the director of the California Film Commission tells the Los Angeles Times. ...

"They have indicated they are moving the show, and will start filming in Los Angeles in mid- to late July," Amy Lemisch, the film commission's director, told the Times in a story published Tuesday. ...

Network TV series like "Body of Proof" can qualify for California's film-tax program only if they are moving to California from another location, the Times said. The show also received tax credits in Rhode Island during its first season, but Governor Chafee's proposed budget — now under discussion in the General Assembly — calls for eliminating the credits.

Even a casual observer of the entertainment industry can assume advantages to setting up shop in California, beyond tax credits, and it's not improbable that the operation came to Rhode Island for a season to test the TV audience and then move to California as an "moving" operation, per the rules of CA's tax credit. Still, the possibility of finding its RI credits evaporating couldn't have done otherwise than eased the decision. More importantly, that it's such an obvious thing for observers to consider as a possible reason illustrates how obvious such factors are for decisions being made across the economy.

Cultural Economic Potpourri

OK, so I'm aggregating a bit, but just today we've had all sorts of cultural economic news. Providence is going to host a professional video game tournament in November (where was this when I scored so high on Donkey Kong on the Atari that the sprites started quivering!) that will bring in 16,000 spectators. (Advice: stock up on Mountain Dew and other snacks and sell them streetside for a quick buck~ahem, with all the proper licensing of course....).

Then we have the U.K. Telegraph calling Providence "New England's coolest city". This seems based largely on the prominence of RISD and it's alumni, especially for the foodee culture. I loved the observation that, "Like Rome, Providence congregates around seven hills." Never thought of that.

Finally, the news is that RI-filmed TV show "Body of Proof" has been renewed--but it won't be filmed in Rhode Island anymore. Phew. Call me a typical provincial Rhode Islander, but now I won't feel as obligated to watch it. Another hour freed up. (Well, more like 40 or so minutes, I DVR everything).

Economic Passivity in Rhode Island

At first, I was just bothered by the passivity evidenced in the first sentence of the following paragraph:

Because Rhode Island's economy is interconnected with the regional and national economies, the slowdown in the national economic recovery in the first quarter of 2011 affected Rhode Island, according to the [Bryant University-RIPEC] report. The U.S. Gross Domestic Product increased at an annualized rate of 1.8 percent in the first quarter, compared with 3.1 percent in the fourth quarter of 2010.

Why should it just be assumed that Rhode Island will follow the national trend?

But then, I reread the first paragraph of the article:

Rhode Island's economy expanded 1.9 percent in the first quarter of 2011, sustaining about the same rate as in the last two quarters of 2010, according to an economic index to be released Monday.

So, the national growth is actually down significantly from the last quarter of 2010, while Rhode Island's anemic growth is about the same as it was during the last quarter of 2010. Do we only follow the national economy when it's bad to do so? Or were we really expecting a huge non-national surge in our state that was dragged down?

Whatever the case, I still think we need to cut taxes, slash regulations, and eliminate mandates in order to set our state free of economic shackles — whether of our making or the nation's.

Left Holding the Bag

The ProJo headlines the $9.4 billion pension liability, but also mentions the $2.4 billion health care liability. That's $11.8 billion in money owed to state and municipal retirees (some of which is funded). They try to soften the blow explaining that an 80% funding level "is considered healthy" for pensions. So that makes it about a $7.5 billion pension obligation (if we include health care--assuming the 80% "rule" applies--the overall would be $9.4 billion). Yes, some pensions are partially funded, but it's still not good.

Most of Rhode Island’s pension plans fall short of the 80-percent funding level, a gap of more than $5.7 billion. Of the 155 plans, more than 100 are less than 80-percent funded.

The 37 plans run by municipalities are in the worst financial shape, with 32 of them not reaching the 80-percent level.

Historically, pension contributions to the locally run plans have often been shortchanged in favor of other municipal services –– such as education, public works and public safety –– when money is tight.

For all of these broken promises were made by politicians who continued and continue to be re-elected. 70 years of Democrats have done this to you, Rhode Island. That's the truth. Don't blame the odd Republican Governor or occasional Republican Mayor for this. It was the Democrats in the General Assembly, on the Town and City Councils, on the "non-partisan" school committees who made these broken promises. This is what letting yourself become beholden and brainwashed into thinking that one party--the party of the "little guy"--would look out for you.

You elected them because they promised you a "good deal". Now you and your kids and grand kids and Rhode Island taxpayers and their kids and grand kids are all left holding an empty bag full of broken promises. All because elected officials, almost all of them Democrats, told you what you wanted to hear and you believed them. It's worked out for them. How's it working out for you?

Still Underpreparing for Pensions

So, Rhode Island League of Cities and Towns Executive Director Dan Beardsley is warning of the large dollar amounts that state and local taxpayers are going to have to begin paying if the state Retirement Board approves actuarial recommendations:

The Retirement Board, which is chaired by General Treasurer Gina Raimondo, is set to vote Wednesday on whether to accept the new numbers — and the higher annual funding they will require. "My vote's going to be the toughest vote I've ever had to cast in my 20 years on the Retirement Board," Beardsley said.

You'll recall that the board recently voted (pretty much along a union/non-union line) to lower its predicted rate of return on pension investments from 8.25% to 7.5%. Personally, I'm with Konrad Steuli, of Sunderstown, in wondering if even that's appropriately realistic:

... while talented state General Treasurer Gina Raimondo deserves credit for lowering, for planning purposes, the assumed rate of return for pension fund investments from 8.25 percent to 7.5 percent (net of inflation), the latter is still a “junk bond” level of return, and maybe worse.

In other words, we are still kicking the can down the street. Who gets that kind of a return for an appropriately safe investment loaded with the retirement expectations of Rhode Islanders?

As the Providence Journal reported even 7.5% is well above experienced returns, which were 2.47% for the past decade, 6.23% for the past 15 years, and 7.13% for the past twenty years. Surely, we are all hopeful that the American economy will recover and return us to the prosperity to which we've grown accustomed, but given the numbers, it would seem that we'd have to see that and more for our pension system even to come within range of plausibility.

No Business like Non-Profit Business

Over the weekend, the ProJo editorial board pointed to the apparent dichotomy of non-profit organizations enabling their directors and board members to profit with significant sums of money:

Recently, Blue Cross Blue Shield of Massachusetts parted ways with its chief executive, Cleve L. Killingsworth, but not before handing him an $11 million severance package. Bay Staters rightly howled; an investigation by Atty. Gen. Martha Coakley is now under way.

Amid the uproar, however, another questionable practice came to light. Blue Cross and other nonprofit health-care insurers have been paying their board members — and well. Last year, annual payments ranged from around $20,000 to more than $80,000 per board member, according to The Boston Globe. They are, in effect, subsidized by taxpayers. In almost no other charity in the state are board members paid at all. In fact, the tradition is for members to contribute money of their own to the organizations they serve. Usually, it is regarded as an honor to “give back.” And, truth be told, members benefit financially, if more indirectly, from the personal ties they cultivate with fellow local movers and shakers on boards.

Whatever happened to just plain knowing better? Amid the search for personal status and enrichment, the purpose of nonprofit organizations seems increasingly lost. This is especially ominous in health care, where rising costs are a signature domestic crisis of our time. Yet nothing can change if attitudes do not change first. The sense of entitlement that has developed among some health-care insurers urgently needs reversing.

ADDENDUM: Of course, we don't have to rely on just the ProJo. Last month, WPRI's Ted Nesi confirmed that the board of BCBSRI is not compensated.

CEOs Grade the States

Yeah, I know, who cares what a bunch of rich CEOs think. Anyway, fwiw (h/t Ted Nesi):

Business leaders graded the states on a variety of categories grouped under taxation and regulation, workforce quality and living environment. “Do not overtax business,” offered one CEO. “Make sure your tax scheme does not drive business to another state. Have a regulatory environment and regulators that encourage good business—not one that punishes businesses for minor infractions. Good employment laws help too. Let companies decide what benefits and terms will attract and keep the quality of employee they need. Rules that make it hard, if not impossible, to separate from a non-productive employee make companies fearful to hire or locate in a state.”

Not surprisingly, states with punitive tax and regulatory regimes are punished with lower rankings, and this can offset even positive scores on quality of living environment. While state incentives are always welcome, what CEOs often seek are areas with consistent policies and regulations that allow them to plan, as well as intangible factors such as a state’s overall attitude toward business and the work ethic of its population.

First, here are the actual stats:

43rd - % GROWTH 2005-09
43rd - % 2005–2009 GROWTH IN TERMS OF NATIONAL AVERAGE
23rd - UNEMPLOYMENT RATE %NOV. 2010
23rd - COMPARISON WITH NATIONAL UNEMPLOYMENT RATE %
39th - DOMESTIC NET MIGRATION RATE PER 1,000 (2000-2006)
48th - DEBT PER RESIDENT $ ($8,716)
40th - STATE AND LOCAL GOVERNMENT EMPLOYEES PER 10,000 RESIDENTS (ranked lowest to highest - 510.84)
46th - STATE-LOCAL TAX BURDEN
45th - STATE-LOCAL TAX BURDEN COMPARED TO NATIONAL AVERAGE (9.8%)

Then are the ratings by CEOs (ie; their perception of RI):

47th - TAXATION AND REGULATION
41st - WORKFORCE QUALITY
41st - QUALITY OF LIVING

Basically, it looks like our unemployment rate and low gov't employee/10,000 residents got us "up" to #35, because every other statistic is pretty much what we expected it to be. Finally, here is how Rhode island and the rest of New England compare in the eyes of the CEO's (it's not good for RI):

TAXATION AND REGULATION
New Hampshire (6th)
Maine (38th)
Connecticut (42nd)
Vermont (43rd)
Massachusetts (46th)
Rhode Island (47th)

WORKFORCE QUALITY
New Hampshire (6th)
Connecticut (26th)
Massachusetts (27th)
Vermont (37th)
Maine (40th)
Rhode Island (41st)

QUALITY OF LIVING
New Hampshire (8th)
Vermont (29th)
Maine (34th)
Connecticut (36th)
Rhode Island (41st)
Massachusetts (43rd)

Yay, we beat someone! Regardless, the stats aren't important. It is the perception. We need to change that perception so corporate decision makers will change their minds. We can't just say it or believe it to make it so. We actually have to do something.

Sleepy Public Construction Methods

I've had occasion to drive through the construction site of the new Sakonnet River Bridge in Tiverton quite a bit, lately, and no matter how many times I see it, I never fail to be impressed with the structural inefficiency of the work habits. The other day, I saw three employees gabbing over two who were doing masonry work while two stood nearby to direct traffic in those infrequent instances when a construction vehicle had to cross the sparsely traveled back road and a police officer sat in his car. One wonders if that's where WPRI reporter Tim White's latest catch got the idea that it'd be just fine to sit in his car to eat, read, and sleep for three or more hours per day:

That dozing fellow is Department of Transportation engineering technician Kevin Coulombe, who is responsible for inspecting road and bridge materials. White notes that Coulombe oversaw the Barrington Bridge project "which was $11 Million over budget and took twice as long as expected."

According to Transparency Train, Coulombe's 2008 salary was $50,712, so clearly he's no Stephen Iannazzi. Perhaps if he actually works his full six hour day (or whatever it is) he can reach that high level of extreme competence.

But Who Dropped the Anchor?

RI General Treasurer Gina Raimondo uses an apt metaphor to describe the significance of the state's public pension problem:

"If you remember one thing from me this afternoon, remember this," Raimondo said, speaking bluntly: "fixing this state's pension system is not an issue, it is the issue. Our state retirement debt is an anchor holding our state back and preventing our growth into the future."

She goes a bit far, to my mind, in that state and municipal governments have sunk myriad anchors over the year — of taxation, regulation, mandates, and so on. Pensions are notable because they provide a stark dollar amount of looming debt. How much the state has lost in economic activity because its policies are constructed to pool power in the hands of a few narrow classes (mostly related to tax-revenue-related employment in one way or another) is not so easily calculable.

Perhaps out of political calculation or perhaps because she's not ready to begin discarding the worldview that her progressive supporters recognized in her, Raimondo leans quickly away from the larger problem underlying the state's pension difficulties:

She acknowledged the challenge is complex and emotional. "I am extremely sympathetic to our state employees and our teachers. They did everything they were told. They have paid into the system as they were told. They have worked hard faithfully every year. It's not their fault. And we should not blame employees. The fault is that the system was designed poorly. And if you're looking for a culprit, I believe that culprit is politics."

For some 30 years, she said, elected officials extended benefits for retirees without putting enough money aside to pay for them.

Let's not soft-pedal this. Among the "everything they were told" was voting for particular candidates for political offices at both the state and municipal levels and engaging in such activities as strikes and work-to-rule in order to foster an environment favorable to their side of negotiations. (Indeed, the number of politicians who have been union members over those 30 years is probably too high to count.) With only so much they could give away to labor in the open, those friendly politicians gave away money that wouldn't come due for years to come.

The culprit may be politics, as Raimondo insists, but it has been a politics dominated by and consciously perpetuated by employees and their unions. The current crop of such politicians cannot ignore the pension problem much longer (despite the hypnotic cooing of union propagandists), and although it's possible that they'll change what needs to be changed without naming it, that outcome isn't very likely.

The Young and Unemployed

As the old song goes, the children are the future, and in discussing the effects of our graying workforce, John Kostrzewa worries about Rhode Island's:

Eleven percent of the 107,108 people ages 22 to 29 who lived in Rhode Island in 2008 moved out in 2009. That's 11,200 young people.

The numbers are even scarier when you break out college educated Rhode Islanders.

One in five who were here in 2008 had left in 2009, largely because they couldn't find a job.

Kostrzewa's mainly addressing the effects of our long-running downturn, but since I arrived in the late '90s, it's been the common wisdom in Rhode Island that young adults had to leave to find opportunity. The Great Recession just exacerbated what was already a problem, and as factions fight over slices of the public pie and beneficiaries demand that the pie be expanded through taxation, necessary priorities come into stark relief.

After all, what's the point of Rhode Island's generous "investment" in education if the products of our efforts — highly educated young adults — simply leave? Increasing taxation and making it harder to do business in the state in order to prop up an inefficient educational system of questionable quality has the steps backwards. The state has to reorder its priorities, and the people who make public decisions (and those who pull their strings) are manifestly disinclined to do so.

Commenting to my morning post, yesterday, Dan offered a compelling simile:

Fixing Rhode Island's cyclic financial problems at this end-game point in time is like trying to remove a horned toad that has inflated itself in crack deep between two jagged desert rocks while it bites and hisses and squirts defensive blood at you out of its eyes. Any herpetologist knows that once it has retreated in there, it's too late and it's time to move on to another location. Lots of other states to choose from in the United States.

Or, as Mark Patinkin put it, while explaining that RI's elected leaders have to do what's necessary, even if it means the end of their political careers:

One can say many public employees — especially those doing risky jobs like cops and firemen — deserve such pensions. Even I think they do. But sadly, we are past the point of talking about "deserve." We're in the realm of "afford."

Pensions are only a heavily bleeding part of the wound. Rhode Island has to make subjective notions of fairness and desert secondary to functional possibility. Social services have to be curtailed; the education system has to stop being managed under the assumption that more money means better results; and regulatory manacles have to be removed from businesses, even if it means that the state no longer micromanages everybody's safety and, yes, even if it means that people get rich.

Local Governments Founded in Deception

One can't call the vote "party line" because Rhode Island's Pension Review Board is technically non-partisan, but as Marc observed on Wednesday, the vote to bring investment estimates closer to what the pension fund has actually been earning nearly fell along what might be called a "union picket line" vote. Basically, the question was about whether to give Rhode Islanders a better sense of just what their elected officials have promised, and that's not a reality that the unions want the public to face.

The perspective of one public figure who often falls on the other side from the unions is very interesting:

With school districts now facing a $55.5-million hike in pension costs in 2012-13, beyond the increases they were already expecting, Tim Duffy, executive director of the Rhode Island Association of School Committees, said: "I don't know how local government is going to continue to exist, given all the financial stresses."

If it's true that the pension promises of government amount to a self-inflicted and fatal wound, maybe local officials should lead the way in accepting reality, especially school committees. That's going to mean completely rethinking the way in which they structure compensation. Like countless private-sector organizations, families, and individuals, they're going to have to begin doing much more with much less. If that's an impossibility, as Duffy seems to imply, then local government is a failed experiment, anyway.

RE: Paying the Pension Piper - Board Approves ROI Assumption Reduction

Earlier today, the pension review board was presented with an actuarial study concerning the RI Pension system. After the presentation, the board voted 9-6 to reduce the assumed rate of return on pension investments from 8.25% to 7.5%, which was the figure recommended by the study. The ProJo has the roll call:

• General Treasurer Gina Raimondo, serves as chairwoman YES

• Richard A. Licht, state director of administration YES

• Thomas A. Mullaney, associate director of the state budget office, designated by the state budget officer YES

• Daniel L. Beardsley, president of the R.I. League of Cities and Towns YES

• Four public appointees -- two by the governor and two by the state treasurer, all subject to Senate approval (years in parentheses represent when terms expire)

Gary R. Alger (2011) YES

Frank R. Benell Jr. (2013) YES

M. Carl Heintzelman (2011) YES

Jean Rondeau (2012): YES

• Two active teacher representatives; Finelli serves as vice chairman

William B. Finelli YES

John P. Maguire NO

• Two active state employee representatives elected by working teachers union members

John J. Meehan NO

Linda C. Riendeau NO

• Louis M. Prata: active municipal employee representative elected by working union members NO

• Two retiree representatives elected by the plan retirees

Roger P. Boudreau NO

Michael R. Boyce: NO

Paying the Pension Piper

Consultant's hired by General Treasurer Gina Raimondo will present their findings to the state retirement board today (report here - PDF). Their findings are grim if unsurprising, as reported by the ProJo. There are some basic structural problems:

The state pension system is based on three basic sources of funding: employee contributions, employer contributions and the volatile stock market. Because the employee contributions have been locked in place at 8.75 percent of pay for state employees, and 9.5 percent for teachers since 1995, taxpayers have been required to pay more and more each year....

The state adopted the 8.25-percent assumed rate of return on its investments in 1998, over the strenuous objections of then-Treasurer Nancy Mayer, who denounced the move as “amazingly irresponsible” in a volatile economy.

The actual market return averaged 2.47 percent over the 10 years that ended on June 30, 2010.

[T]he gap between promises made and money available to pay for them is at least $1.4 billion bigger than previously believed.

• The required taxpayer contribution toward state employee pensions would shoot from 26.55 percent of payroll to 36.34 percent which, in dollars, would mean the difference between $182.5 million, with no change in assumptions, and $246 million.

• State and local contributions to teacher pensions would increase, at the same time, from 26.21 percent of payroll ($282.8 million) to 35.25 percent ($375.3 million).

At those levels, the required taxpayer contributions would be more than $100 million higher, within a year, than the $358.7 million that Governor Chafee anticipated...

1. Decrease the price inflation assumption from 3.00% to 2.75% per year.
2. Decrease the assumed net real return on investments from 5.25% to 4.75% per year. Combined with #1 decreases the nominal assumed investment rate of return from 8.25% to 7.50%.
3. Based on #1, change the COLA assumption from 2.50% to 2.35% for Schedule B retirees.
4. Modify the service-related components of the salary increase rates for both state employees and teachers; also change the wage inflation assumption from 4.50% to 4.00%.
5. Decrease the payroll growth rate from 4.25% to 3.75% for both state employees and teachers.
6. Improve the mortality assumption for active, and retired members, including the addition of
an assumption for ongoing future improvements in life expectancy. Also improve the
mortality assumption for disabled retirees, and lower pre-retirement mortality.
7. Make slight changes to the rates of disability for active male state employees and all teachers.
8. Make no change to the retirement rates for state employees or teachers.
9. Make no change to the termination assumption for state employees. Slightly increase the termination rates for teachers.
10. No change to the percentage of members that are assumed to be married.
11. No change to the actuarial cost method or the method for calculating the actuarial value of assets.
12. No other changes are recommended for any of the other actuarial assumptions or any of the actuarial methods.

ADDENDUM: Ted Nesi has some thoughts from Governor Chafee on pensions.

Block Willing to Help

I heard a little bit of Ken Block this morning on the Helen Glover Show explaining how he was willing to help the state reduce the fraud, waste and abuse in its social services programs. For free. According to Ian Donnis, Governor Chafee is "receptive" to the offer.

Duh.

Tell me, how often does someone with a track record of finding savings offer to help for free? OK, OK. In all fairness, Block hasn't formally offered his services yet and will do so at a public hearing later this week.

The Top-Down Model of Economic Development

It's possible that all of the corporate executives on the Economic Development Corporation's board wouldn't dream of allowing their own companies' interests affect their prescriptions for the state's economy. It's even more possible that state government will treat the board's activities as a nice show to prove that everybody's really, really interested in turning Rhode Island around. Still, this makes me nervous:

EDC Executive Director Keith W. Stokes, who previously served on the board for 15 years, commended the board and gave Chafee credit for its new direction.

"This is unique," Stokes said. "This is the first time that the EDC will be driven by the board ... and that in itself is going to have an incredible value because these men and women — they're the eyes and ears of the business leadership."

Well, they're the eyes and ears of Collette Vacations Inc., Ximedica, CVS Caremark Corp., Betaspring, VIBCO, and Banneker Industries, anyway. Whether they'll recommend steps that would make it easier for start-ups or immigrating businesses to compete with their companies remains to be seen.

Finding a Way to Build the Tax Wall

Rhode Island's aristocracy chose to believe in their own power to impose taxes rather than the power of economic incentives, and some don't like the result:

State Rep. Raymond Gallison, D-Bristol, says local businesses are losing revenue that could help the state's financial situation, while the state itself has not generated any new revenue from the law, according to the Chafee administration.

Large online retailers such as Amazon.com and Overstock.com cut ties with local companies and individuals immediately in response to the state law. In effect, the companies absolved themselves of the responsibility of collecting the Rhode Island sales tax, but they also denied local affiliated businesses vital revenue, he says.

Of course, the preferred solution is to turn to state government's big brother to help with the bullying:

Governor Chafee, state Senate President M. Teresa Paiva Weed and House Speaker Gordon D. Fox are urging the state's congressional delegation to pursue national legislation that would require online retailers and other remote sellers to collect state sales taxes.

You'd think they'd learn that increasing taxes is increasing taxes, and consumers and the economy ultimately pay the price. eTailers aren't forcing their sales upon Rhode Islanders, and there are reasons Rhode Islanders turn to them and are willing to delay their gratification to buy goods online.

Elected officials should devote their energy to helping brick-and-mortar companies counteract those reasons rather than seeking to build economic barriers in everybody's way.

Block Edges Toward the Border

It seems as if Rhode Island's current government is pushing Moderate Party founder and gubernatorial candidate Ken Block toward an extreme:

Every year at this time, my accountant looks me in the eye and says I'm nuts to own a business in Rhode Island. ...

A 6 percent hit to my bottom line is more than enough to cause me to move my software business out of the state — as fast as humanly possible, taking more than $100,000 in state and local taxes with me when I move a few miles across the border.

I suspect that Mr. Block is far from alone, among those who've striven to improve Rhode Island's governance, in his growing sense of opposition's futility and willingness to turn from fight to flight. Certain groups may find that to be a positive development; most should not.

Still, one cannot touch on this topic without noting that, as Chafee was the far-left independent candidate, many voters treated Block as another choice on the center right. It's reasonable to suggest that, but for the 6.5% of the vote that Block drew to himself, Lincoln Chafee would not now be our governor. In that regard, Ken is fortunate that he has the resources to escape what he helped to bring about, should he so choose.

Lamenting Taxes While Endorsing Taxers

The Providence Journal editorial board is right, of course, to speak out against Governor Chafee's proposed expansion of sales taxes:

This is not a matter of greed; for many businesses, it is a question of survival. Small businesses are the job engines of any economy, and when they are wiped out, jobs disappear. Rhode Island's years of suffering one of America's worst unemployment rates should have taught that lesson. ...

Taxing manufacturing machinery and equipment, which Mr. Chafee wants to do, seems especially shortsighted --- which is why 33 states, including Rhode Island, currently do not do it, Mr. Sasse notes. Encouraging productivity and innovation ultimately pays off in more jobs and higher tax revenues.

I convey the thought only half seriously, but I did wonder whether the Projo should make a habit of mentioning — disclosing, if you will — that its product will face a new tax, as well.

More broadly, the editorial is an excellent example of the paper's tendency to treat issues as if they can be constructed to generate the perfect political regime (from the writers' perspective). That is, the Providence Journal is an establishment entity, in Rhode Island, and its endorsements and policy advocacy have helped to bring Rhode Island to its current circumstances.

Hopefully those who are coming to see the folly of the Chafee Way will follow the logic back to other aspects of RI governance and politics that preceded his election.

If Not for the People, RI Would Have Fewer People

Perhaps it's a function of idealism, but the continual penchant for racism in our country wearies me. By racism, I mean the division of people into racial groups and inclination to treat them as separate communities:

Without the 39,835 additional residents who identified themselves as Hispanic, Rhode Island would have lost 35,587 people from 2000 to 2010. That would have joined the Ocean State with Michigan, the only state to lose population in the 2010 census. As it was, Rhode Island ranked 49th in population growth, gaining 4,248, or 0.4 percent. ...

Hispanics officially became the majority population in Central Falls, while Providence grew closer to that status. If separated, Providence's Hispanic population of 67,835 alone would be the fifth-largest city in the state.

And so on. The thing is: they are not separated. The population did not decrease by 35,587. What is it we should determine to do differently based on this information? Should it become an outrage that Central Falls doesn't have a majority Hispanic government? Or, from the other side, should we treat "Hispanic" as a synonym for "immigrant" and panic at the loss of native-born Americans from our state?

The detriment arises from the mixture of these perspectives, such that assumptions are made about a group and then notions of how society should be arranged are imposed under those assumptions. The insinuation is that Hispanics have unique needs and points of view, and if those qualities aren't reflected in the political order, then some sort of under-representation must be to blame.

Personally, I find this bit of Census news to be more relevant, and definitely distressing:

In 2000, 247,822 children lived in Rhode Island, according to the Census Bureau. That was 23.6 percent of the state's population of 1,048,319.

By 2010, the number of children had dropped 23,866 to 223,956, or 21.3 percent of the state's slightly larger population of 1,052,567.

Unless one wishes to suggest that we were in the midst of a baby boom in 2000, the decrease in children is an indication of a waning society. Of course, it isn't necessary to turn to demographic statistics to discern that about Rhode Island.

Thinning the Fuel Won't Create Efficiency

My Patch column, this week, defines the target population of Rhode Island's recent and proposed tax changes and offers a brief economics lesson to suggest that the apparent strategy is perhaps not the best:

The consequence, overall, is that Rhode Islanders who've invested in property have seen local taxes climb inexorably. Last year, the real cost of those investments increased courtesy of the income tax change. Meanwhile, the tax bite resulting from their efforts to improve their financial positions broadened, and now they'll be rewarded for modest spending habits with a new sales tax targeting essentials. The harm is exacerbated if they've had the audacity to reproduce, thus creating larger families requiring more of life's basics.

In short, with Rhode Island's economic recovery barely detectable, and scarcely felt, the state is turning the screws on home-buying parents who are striving to build their futures. The tendency may satisfy special interests, by protecting government handouts and special deals, and it may comfort politicians, inasmuch as busy families are less able to be politically active, but it is economic suicide.

Watching the Wheels Go Fruitlessly Around

Is it me, or does neither Allan Tear's list of necessary attributes to grow RI's economy nor the differently emphasized suggestions of John Simmons leave much room for optimism? Here's Tear's list, with my brief thoughts:

• "Access to talent." It's long been known among RI's young that they must leave the state to find opportunity.
• "Quality and costs associated with public education." We were making some advances in this area, but our new governor was in some sense elected to end them, and he appears to be complying with that mandate.
• "Personal taxes." The last fiscal year ended with a bit of reshuffling that disguised the fact that Rhode Island's been backsliding on income tax reform for several years.
• "Effective government." No comment necessary.
• "Indirect costs, known as the 'hassle factor'." I'd characterize this as one of Rhode Island's specialities (in a bad way), particularly in the way the government spreads around bureaucracy so as create pools of political power.

Simmons is a bit more traditionalist in the list of things that RI does badly:

John Simmons, executive director of the Rhode Island Public Expenditure Council, rattled off Rhode Island's rankings: 44th by the Tax Foundation; 45th by the Small Business and Entrepreneurship Council; 49th by CNBC; 50th by Forbes, which another presenter said had moved the state up to 49th in its most recent ranking; and 39th by Chief Executive Magazine. The business-backed RIPEC monitors government spending.

Those rankings take into account property taxes, unemployment taxes, a state’s regulatory environment, economic climate and transportation, Simmons said. However, Tear said the traditional barriers to doing business here --- energy and labor costs, site availability and permitting --- aren't barriers for the kinds of businesses he's helping grow.

Rhode Island's only hope for real recovery is for the economy to grow so healthily across the rest of the country that our little backwater can't do otherwise than follow it. Unfortunately (though predictably), national policies aren't conducive to healthy growth of anything but government, and (less predictably) international events are ensuring that there's very little margin for economic error.

The Governor's Faith That You Don't Matter

Here's an interesting tidbit from Ed Achorn:

I asked Governor Chafee last week whether he, or anyone in his administration, had done an analysis of the number of jobs that his tax hikes would cost the state, since many financially stressed Rhode Islanders would respond by traveling the short distance to neighboring states for goods and services.

After three rounds of spin by Mr. Chafee and his aides, I finally got the governor's answer on the fourth try:

"No."

The loss of such private-sector jobs seem to be of little concern.

To take the charitable view, it might just be that Chafee and his administration lack the competence to ask and answer such difficult questions. It's much easier to simply calculate a tax as if it will have no effect on the behavior being taxed. One would think, though, that some effort might have been made to figure out what incentives would be created by the new taxes and what ripples would therefore be likely.

Be that as it may, government budgeting isn't ultimately a matter of predicting revenue and planning expenses on its basis. Rather, it's ultimately a matter of making the books appear balanced to conform with the law and adjusting later when financial reality gives the politicians excuses to act. In the case of the current governor, it seems likely that, when revenue doesn't increase as much as he expects and when his meager and vague cuts and efficiencies don't produce the predicted savings, he'll seek to increase taxation yet again. More of that shared sacrifice... meaning that taxpayers share the sacrifice among themselves to support government.

The Biggest Tax Increase... and on Whom?

Here's a point worth restating throughout the current session of the General Assembly (emphasis added):

By broadening the general sales tax and levying a new 1 percent tax, Chafee's budget would raise about $165 million in new tax revenue — even after taking into account the drop in the general sales tax rate. That would be one of the biggest tax increases in state history — if not the biggest, according to Gary S. Sasse, former state revenue director and now distinguished professor of public policy at Rhode Island College.

Whether Governor Chafee's manages to improve the state's ranking when it comes to taxation schemes, his solution to balancing the state's budget is to raise taxes on a population that's already heavily taxed. And it's not a neutral increase; there's a shift in burden involved. Consider (emphasis added):

Rep. Thomas Winfield, D-Smithfield, said that when he stopped for coffee at Fast Freddie's, in Greenville, a crowd of angry people objected to applying sales taxes to such a long list of items. When asked how he'd respond to the Fast Freddie's crowd, [Chafee Director of Administration Richard] Licht said that lowering the sales tax rate from 7 percent to 6 percent would save people money on big-ticket items, so they'd "pay a little more for their haircut but they'll save on their car."

Frankly, my family can no longer afford "big-ticket items." Chafee's revenue increase, in other words, leverages my basics to subsidize somebody else's luxuries. Would it be too cynical to discern the policy's hidden objective as making sure that Rhode Islanders have nowhere to hide from the taxman, even during times of economic hardship?

Yea or nay, the effect is once again that Rhode Island would turn the screw even more tightly on those who are struggling to get by and striving to advance.

Deficit Hawk... Not So Much

Sadly, whatever else they might say, people seem to believe Governor Lincoln Chafee's characterization of himself as a deficit hawk. Indeed, following a press briefing from State Budget Officer Thomas Mullaney, which Ian Donnis mentions here, Ted Nesi put up a post titled "Chafee's budget shrinks Carcieri's long-term deficits." And indeed, although Nesi's accompanying chart shows Chafee's deficits increasing over time, they appear to be about a quarter-billion dollars below what Carcieri predicted for the same years.

Of course, as Nesi writes:

... the easiest way to eliminate the deficit isn't through tinkering with revenue and expenditures — it's through healthy economic growth. A growing economy simultaneously boosts tax revenue as employment increases and profits rise while easing demand for social safety-net programs like jobless benefits.

In that context, it's worth noting that Governor Carcieri's last five-year forecast assumed "that recovery in the Rhode Island economy does not take hold until FY 2012, while Chafee's version assumes "that recovery in the Rhode Island economy started in FY 2011." Consequently, Chafee assumes revenue growth of 3.1%, while Carcieri's budget forecast put revenue growth at 2.1%.

So, some of Chafee's hawkishness is facilitated by a sunnier outlook. Carcieri predicted the income of Rhode Islanders to grow at a rate of 4.1% and employment at 2.3%, while Chafee expects 4.4% income and 2.5% employment growth.

Of course, Chafee isn't just sitting still and letting revenue increase because Rhode Islanders are making more money; he's raising taxes. If we compare the amount that Chafee is decreasing the "Carcieri deficits" with the amount that he's proposing to increase taxes over the same period, we get the following:

In the first year for which both forecasts offer data, 77% of Chafee's deficit reduction derives from new revenue, 74% from tax increases alone, 61% from a sales and use tax increase. By the end of the four year span, tax increases will represent 136% of the deficit reduction. In other words, our deficit hawk is finding taxpayer money to be such attractive prey that he's using it to grow expenditures, even as he allows deficits to grow year after year.

Indeed, over the latter four years of his forecast, Carcieri expected deficits to grow by 48%, while during the latter four hears of his own forecast, Chafee's deficit will grow by 227%. And that's assuming he gets all of the concessions that he's looking for from labor and the General Assembly and that his tax increases perform as well as expected. In summary, Chafee moved the economic recovery up a year and increased taxes, and still his deficits catch up to Carcieri's at a rate of approximately $40 million per year.

Naming the Broader Tax Base

Matt and I talked budget and a "broader tax base" for Governor Chafee's sales tax on Matt Allen Show, last night. Stream by clicking here, or download it.

The Line of Awareness Crossed Too Late?

If the Sunday Providence Journal is any measure, commentators as a class have moved toward greater concern about the effect of Rhode Island's stacked public-sector deck. From Froma Harrop to Julia Steiny to Mark Patinkin. Here's an interesting bit from Patinkin's offering, which imagines the Starship Enterprise reaction:

"But things seem more peaceful and stable than Planet Wisconsin, which I heard was in upheaval over budget issues."

"Au contraire, Captain. The unfunded pension liability in Wisconsin is $252 million. Here in Planet Rhode Island, the state treasurer herself puts it at $5 billion or more. That's 'billion' with a 'B,' Captain." "Impossible, Spock."

The main difference is that peculiarities of Rhode Island politics filled all of the important policy-making seats in the government with people who have proven themselves inclined to ignore problems for as long as possible in order to maintain the status quo. We're already in worse condition than states that are taking steps to solve their budget problems, and we're digging in for a while longer.

The Shape of the Governor's Solutions

Governor Chafee isn't giving many clues as to the decisions that he's making as he builds his budget proposal, but some statements that he has been willing to make are telling with regard to his approach, to say the least:

Chafee did describe some specific priorities. He supports proposed federal legislation that would help the states to recoup taxes on sales over the Internet, he said.

As he has since he was mayor of Warwick, Chafee called for the federal government to reimburse state and local jurisdictions for the cost of such mandatory programs as special education.

The governor acknowledged that he’s had "limited success" since the 1990s in seeking federal financing of the federally required school programs. But Chafee said he will keep asking for the money. "I'm going to be like a terrier with a bone," he said.

How apt the dog analogy is. Apart from begging for table scraps from the federal government, raising taxes is a bit like sneaking up and snatching sandwiches from unsuspecting children's hands, a maneuver that many a domestic canine has mastered.

I'd love to be proven wrong, but one suspects that there will be no difficult decisions made by this governor. He'll govern under the same principles of short-sighted budgeting, irresponsible spending, reliance on hand-outs, quick fixes, and illusions that have brought Rhode Island to its current state.

Rhode Island in Top 10 for Public/Private Pay Differential

From USA Today, which took a look at compensation (salary+benefits) differences between the private and public sector in each state (using U.S. Bureau of Economic Analysis numbers), Rhode Island is in the top ten for total compensation for public employees:

Where RI really "shines" is the gap in the average compensation between public and private employees:

That's a pretty substantial gap and, it would seem, indicative of an imbalance, wouldn't you say?

ADDENDUM: For the heck of it, here's the New England breakdown:

RISC Meeting Spawns a question: What's the Real State of RI Fisheries?

The Rhode Island Statewide Coalition held its annual meeting yesterday. As the ProJo reports, the focus was on the economy and included guest speakers Leonard Lardaro (URI Economics professor) and a former New Zealand parliament member Maurice McTigue.

McTigue...gave examples of how his country made major internal changes to turn the tide on years of debt....[He]...told the audience that one of the ways his country got out of debt was by using its natural resources. He said New Zealand used long-term contracts to get commercial enterprises such as lumber companies — whether locally or from abroad — to become invested in the country’s economy.

He also described how it tossed out old bureaucracy and completely overhauled its education system by having individual schools governed by boards of trustees consisting of people elected only by the parents of children who attend the schools.

The arrangement led to accountability and better education, he said.

McTigue said that after making difficult changes, his country went from decades of not having balanced budgets to years of posting surpluses.

“Most of us here have had to live with the exact same income we got four years ago,” he said. “If we can do it, why can’t the government?”

It should be obvious what the Ocean State's greatest natural resource is, right? The Bay. Water (or "Waaatterrrr" a la Patrick Kennedy). The shipping/port issue debate comes to mind immediately, but I want to go beneath those waves and focus on our fisheries. Basically, maximizing our fishing industry responsibly is something that needs to be studied. But I'm no expert at all and confess to being naive as far as the state of the fisheries.

In 2008, shore fisherman started expressing their worry that our striped bass population was in decline. Some thought this was the "canary in the coal mine", but the Atlantic States Marine Fisheries Commission maintained that all was well with stripers. Fishermen didn't agree with each other, either (though I'm pretty sure that's not surprising!). Shore fisherman continue to believe that stocks are declining, citing a scarcity of "schoolies". However, apparently teen stripers and some of the big boys are still plentiful. There are also concerns that commercial fishermen down the coast (Maryland, for example) are wreaking havoc on our stocks.

Now there are also concerns about the Southern New England lobster industry and plans are in the works to reduce the allowable catch by between 50-75%. That would be a death blow to many, many lobstermen, who point out that they are older and basically the fleet is going to "age out" eventually anyway, so drastic cuts aren't needed.. Apparently the drop in catchable lobsters is attributed to "warming water temperatures, shell disease and an increase in predators such as striped bass and dogfish." An increase in striped bass. See my confusion? One fishery is shrinking because of an increase in the population of another species that is also shrinking. Or is it?!

By the way, I never knew that squid fishing was the most valuable fishery around here. Calamari anyone?

When the Numbers No Longer Add Up

The timing of Wisconsin's contribution to the era of global protest coincides profoundly with a new report on pensions from the Rhode Island Senate:

The new report also factors in the cost of other post-employment benefits, which cities and towns, as well as the state, have only recently begun to show on their accounting statements. With those costs added to the pension costs, whether state-managed or locally managed, the annual payments needed to keep pace with current and future retirement benefits begins to eat up a significant portion of some local tax levies.

What sorts of numbers are we talking about?

While the unfunded liability for locally managed pension plans totals about $2 billion, the unfunded liability for other post-employment benefits totals another $2.4 billion, according to the report. This does not include the millions of dollars in retirement obligations that cities and towns share with the state for teacher pensions.

From the sampling of numbers reported in the Providence Journal, there appears to be significant variation from municipality to municipality, but the average city or town would have to devote about one-quarter of its annual budget to support employees who are no longer working. Pawtucket, Central Falls, and Johnston would need 59%, 57%, and 47%, respectively. And, again, that's excluding payments that the state subsidizes.

Keep in mind, too, that government continues to operate and to grow. This is an after-the-fact payment to those who've already retired.

The Wrong Starting Point for Economic Development

The advice is wise, I'd say, for states to focus on economic development activities that benefit a broad range of businesses, rather than one or two big catches, but the experts in the field begin from the wrong perspective:

Creating sustainable new jobs is complicated, and states will need help from the federal government, says Robert D. Atkinson, president of the Information Technology and Innovation Foundation in Washington, D.C., who in 1996 was the first head of what was then the Rhode Island Economic Policy Council.

"First, the idea that states can fight and win the competitiveness battle on their own is simply wrong," Atkinson says. "Unless Washington gets in the game, it will be very hard for states to grow their economies."

Indeed, the economy is so complicated that it is folly to place its operation in the hands of politicians and bureaucrats. The more responsibility and risk can be distributed to individuals whose livelihoods depend on their being able to work and expand, the better.

The false starting point is the notion that government operatives "create sustainable new jobs" at all. At best, they help or hinder private citizens in their efforts, and by meddling they are more likely to hinder them. The article centers around a solar panel plant that recently left Massachusetts for China, thus illustrating the point: extra incentives and breaks offered to Evergreen Solar had to be forcefully withdrawn from the economy, somewhere, and now, in effect, they're going to China. Moreover, the hip ambiance that's been painted on green technology surely jaded Massachusetts officials' judgment, with the end result that opportunities, considered as broadly as possible, were constrained.

In other words, the policies that drained money and effort for the benefit of a company playing in an industry that every state and nation is eying as the wave of the future should have been refocused to lighten the burdens of taxes, regulations, and mandates.

The closing moral of the linked article is that public negotiators should "write a good clawback," so that they can force companies to repay taxpayer contributions, should they depart, but that misses the larger lesson — namely, that policymakers should stop pretending to be economic masterminds.

Avedisian's Pension Plan and Continuing Problems

I noted that Warwick Mayor Avedisian was offering up a pragmatic, if typical, pension reform plan in that it dealt with reforms for future pensions. Avedisian took to the pages of the Providence Journal to explain his plan, but, as Ted Nesi notes, Avedisian tries to get away with shoving the past pension problems aside.

In the 1950s, 1960s, and for most of the 1970s, the City of Warwick did not properly fund its pension plans and make the necessary annual contributions needed to keep them solvent. Some years the city would make proper contributions and in others there would be no contribution beyond the actual benefits paid out. To be exact, if pension payments totaled $500,000, the city leaders funded that amount to pay pensions....in Warwick, the biggest unresolved issue are the[se] original police and fire pension plans. Today, they are funded at only 27 percent of what is needed. So, while people can suggest that the city has failed to do what is right, they instead should be asking the original creators of the pension systems why there was no leadership when the plans were created. Had even a small amount been contributed annually in those years, the unfunded liability today would be very small.

The question, then, is what Warwick is going to do about the $200 million gap between its pre-1971 plan’s assets and liabilities. It’s plans like those which the Rhode Island League of Cities and Towns’ Dan Beardsley suggested to me the other day could be the source of litigation as cities unable to fund them move to take away benefits promised in the past....I suppose we could call up Raymond Stone or Horace Hobbs to ask why they failed to make pension contributions in the ’50s and ’60s. (Actually, we can’t; Hobbs died in 1999, Stone in 2004.) But that’s not going to yield a solution to Warwick’s $200 million pension gap.

Avedisian and his fellow mayors may have inherited this problem – but it’s still theirs now.

Pension Reform in Johnston

Out of necessity (ya think?) they're reforming pensions in Johnston. Stephen Beale reports on why:

One of the biggest problems is with disability pensions. Out of 71 retired firefighters, 34 of them are on a disability pension, earning two thirds of their salary tax free. During the tenure of former Fire Chief Victor Cipriano, 15 firefighters retired—and all 15 went out on disability pensions. Even Cipriano himself went out on a disability pension, earning more in retirement last year than he did while working.

To put the numbers in perspective, just 8 percent of the firefighter pensions in New York City are disabilities. In Johnston, the disability rate is above 40 percent. “Those are unusual numbers,” Rodio said.

Rodio has estimated that 25 firefighter disability pensions are in violation of not one, but two state laws—one that says a retiree cannot earn more than he did while employed by a city or town and another that says those tax-free disability pensions needed to be approved by the state retirement board.

A police officer or firefighter who retires on a disability but gets another job will be considered partially disabled and can receive only half of their salary, rather than two thirds.

The ordinance also goes out of its way to define salary as base pay—excluding overtime pay, holiday pay, and other benefits from being used to calculate a disability pension.

In the future, a police officer or firefighter applies for a disability will have their case reviewed by three doctors—two of whom must confirm that the person is actually disabled. Once the disability pension is approved, a retiree has to undergo an annual physical and submit a sworn statement documenting how much they have earned for the year.

WRNI - Raimondo Says Pensions Can be Cut

WRNI's Ian Donnis reports:

State Treasurer Gina Raimondo says she doesn’t believe current pension recipients are legally shielded from possible cuts to their pensions. She outlined her view during a taping today of WRNI’s Political Roundtable, which airs tomorrow at 5:40/7:40 am. Scott MacKay asked Raimondo, as a lawyer and financial expert, whether pensioners currently receiving an annual pension of $80,000 or $90,000 have a property right to their pensions. “If push comes to shove, what happens?” MacKay continued. ”Do we go the United Airlines situation, where they take a haircut?” Here’s how Raimondo responded to the question of whether pension recipients have a property right: “I don’t believe so. That hasn’t been established in law, and I don’t believe they do.”

...Raimondo blames a piecemeal approach. “The reason we’re in this mess” she says, “is because every year we chink away at the problem — let’s tweak the COLA a little bit, let’s tweak this, let’s tweak that. We got to do the whole system. This is not about taking benefits away. This is about securing retirement security for everyone . . . . It is a fallacy to think that those benefits will be there if we don’t fix this system. And the system that we have today calls for a billion dollars to come out of the budget in about 10 years to pay these benefits. I cannot look in the eye of a state worker and promise that that will be there.”

Desires as Economic Development

Reacting to Governor Chafee's mention of it, Ed Fitzpatrick has read Richard Florida's book proclaiming the importance of tolerance to the economy and expresses, it seems to me, an appropriate skepticism regarding causation and correlation:

"My research finds a strong correlation between, on the one hand, places open to immigrants, artists, gays, bohemians and socioeconomic and racial integration, and on the other, places that experience high-quality economic growth," Florida wrote. "Such places gain an economic advantage in both harnessing the creative capabilities of a broader range of their own people and in capturing a disproportionate share of the flow."

I believe it was Snooki who first said: Correlation is not causation. In other words, just because there is a "strong correlation" between tolerance and economic growth doesn't mean tolerance causes economic growth. Perhaps that is a point both Chafee and his critics gloss over.

As I suggested a few weeks ago, it seems to me that urban areas, especially with high concentrations of colleges, are likely to attract creative types regardless of an Nth degree of tolerance for them. Indeed, one might suppose that a region experiencing "high-quality economic growth" might generally attract people who are different from the native population.

In any event, even if "tolerance" deserves its place as one of three economic legs (talent and technology being Florida's other two), that doesn't mean that it is the one on which Rhode Island is deficient. Personally, I'd put aside the "three Ts" as an interesting post facto analysis with only indirect influence on Rhode Island's economic health and focus, instead, on the more specific metric of economic freedom as indicated by taxes, mandates, and regulations.

Local Food: Where's the Fish?

Rhode Island's "buy local" food movement has had some success:

The resurgence of farms and farmers' markets has brought local, fresh produce to thousands more Rhode Islanders in the past few years....“The miraculous comeback of Rhode Island farming,” said Division of Agriculture Director Ken Ayars, "is due in large part to efforts like the statewide Buy Local campaign, establishment of harvest cooperatives like Rhody Fresh milk, organic and good agricultural practices certification schemes and the annual Rhode Island Agriculture Day.”

Noah Fulmer, director of Farm Fresh Rhode Island, an organization that runs eight farmers’ markets in the state, highlighted the need for more direct-marketing venues for seafood.

“What’s missing at farmers’ markets,” Fulmer said, “is seafood from the Ocean State. People are asking ‘Where’s the finfish? Where can I get fresh seafood?’ We don’t have an answer for them right now. It’s an opportunity that’s waiting to be taken.”

Currently, most of the seafood landed in Rhode Island is sold to distribution companies who ship it around the world. Department of Health regulations make it difficult — and expensive — for fishermen to sell their catch directly to the public.

[E]stablished seafood companies caution that local marketing of Rhode Island seafood challenges the basic laws of economics. Export Rhode Island-caught seafood, they say, is more profitable than selling it locally.

Christopher Joy of SeaFreeze, a fishing and distribution company in North Kingstown, explained, “If it’s too expensive, it’s because others are willing to pay more for it.”

Similarly, Eric Reid of Deep Sea Fish, a Narragansett-based seafood distribution company, said it is more profitable to ship Rhode-Island-caught seafood out of state while bringing in cheap fish from abroad. Rhode Island customers, he said, prefer low prices. “Simply put,” he said, “it’s a math problem.”

In the coming months, fishermen and their allies may try to alter this equation by building demand for local seafood in Rhode Island. Locally landed fluke, sea bass, scup and stripers may soon be available at a farmers’ market near you.

Nesi: Washington Cuts Will Squeeze Rhode Island

WRNI's Ted Nesi explains how RI has become over-reliant on the Federal Government for budget dollars:

[T]he share of Rhode Island’s state budget paid for by the federal government has jumped from 28% to 37% since the recession began; over the same period, the share paid for by state tax revenue (the ol’ General Fund) fell from 49% to 37%.

Put another way, state funds are covering $2.94 billion of Rhode Island’s budget this year while federal funds are covering $2.90 billion. In a $7.9 billion budget, that’s basically a rounding error – Rhode Island is leaning heavily on Washington to balance its books.

Rudderless Rhode Island: National Perception is Reality

Steve Malanga at RealClearMarkets gives us the national perspective of what's going on in Rhode Island (h/t Jim Hackett via Facebook):

Tucked in between Massachusetts and Connecticut and overshadowed in Northeastern political discussions by states like New Jersey and New York, Rhode Island is barely noticed these days.

Still, the Ocean State bears watching. Its fiscal problems are, relative to its size, among the worst in the country. And the reform agenda (if you can even call it that) of its new governor, Lincoln Chafee, elected with union support and with only a plurality of the vote, is among the tamest in the nation. In Rhode Island we may get to see how the union version of fixing a state's problems via tax increases and the barest of reforms of government spending and employee entitlements works.

Though smaller than its neighbors, Rhode Island very much bears the stamp of Northeastern politics and governing. It has the third highest level of public employee unionization in the country, 64 percent, behind New York and Connecticut. Its government is among the top 10 in the nation in per capita spending and in the tax burden it imposes on residents, plus the state has one of the least attractive business environments....

Rhode Island's long-term obligations compare unfavorably with just about any other state, and that's saying a lot....

the Daily Beast recently ranked Rhode Island the state most likely to go bust...

Moody's...ranked Rhode Island among the most troubled states on a variety of metrics...

A recent audit revealed that Rhode Island's biggest city, Providence, has been spending more than it budgets throughout the recession and depleting its reserve funds in the process, to the point where the city is almost out of cash....

[A]nother city, Central Falls, is insolvent thanks to $32 million in promised post-retirement health-insurance costs for its employees plus $48 million in pension obligations that the city can't meet on its own....

The burden this spending places on the private sector is significant. Rhode Island is not a state where businesses are investing in the future. An analysis of private sector investment several years ago by the Rhode Island Public Expenditure Council found investment per employee was among the lowest of any state, 30 percent below the national average. And while the state ranks only 20th in average private sector wage per worker, it ranks 4th in public sector pay.

What Should Be and What Will

John Kostrzewa makes a number of excellent points in a recent column:

[Two economists'] forecast is important because there is an argument making the rounds in City Halls and at the State House that the recovery of the economy will eventually pull city and state finances back from the brink of disaster. The thinking is that an improving economy will bring in more tax collections to pay for the services and employee benefits that elected officials have approved over the last few decades.

It's not going to happen.

The financial hole dug by city and state leaders is so deep and the improvement in the Rhode Island economy is so shallow that the crisis can’t be solved by waiting it out.

Rhode Island's economic difficulty has been building for decades, at least. Perhaps because world events and prosperity led voters to take their eyes off the budgetary ball, or perhaps because compounding policies finally reached the cliff, over the years since the turn of the millennium, the government excess has become impossible to ignore. Indeed, Rhode Island's annual deficit problem began in the midst of the housing bubble; its taxpayer flight began earlier; and there's no reason to believe that either trend will reverse just because the rest of the American economy brings a rising tide.

The other day, Ted Nesi noted that, at its current rate of job growth, Rhode Island won't return to its employment peak until the year 2045. As I've been warning, the recovery of employment and economic opportunity elsewhere could accelerate RI's relative deterioration.

Kostrzewa does make one point, though, about which I'm skeptical:

That makes 2011 the bellwether year when public officials, pushed by taxpayers, have to prioritize which services they want to provide and how to restructure government, whether through consolidation or regionalization, to pay for them.

The note in the margin of my newspaper reads: "Wanna bet?" Kostrzewa has described what has to happen, but nobody should expect that it will. We have the wrong government policies in place (taxes, mandates, regulations). For the most part, we have the wrong people in public office (the new governor worst among them). And increasingly, we have the wrong electorate (heavily constituted of people dependent on government, in one way or another, and insulated by government policies). What we're more likely to get are policies that, like last year's tax "reform," have the sound of positive change but do not resolve structural problems and potentially make them worse.

Yes, we all have to ring this bell as frequently and loudly as possible, but we should brace ourselves for even rougher roads ahead.

Two Post Facto Responses on Felner's Behalf

This episode of Newsmakers makes me wish I'd been there... or had had a means of communicating suggestions to Bill Felkner of the Ocean State Policy Research Institute:

Newsmakers 1/28: Stokes, Felkner, Sgouros: wpri.com

For one thing, in attempting to present the other side, Tom Sgouros (whom Tim White bills as a "progressive economist") holds on to the precise representations of the data as if holding on to the tail of a magic newt. Unfortunately, Sgouros, himself, is not precise:

What the IRS reports is how many people moved and what they earned in the places where they lived after they've moved.

Actually, the adjusted gross income data measures that money claimed on the tax returns of people filing outside of Rhode Island who, the previous year, had filed their federal returns from within Rhode Island (or vice versa for those who moved here). In other words, pretty much by definition, some of that income was earned in Rhode Island; for taxpayers who moved after the tax year for which they're filing (between New Year's day and tax day), all of the money claimed was earned in Rhode Island, or at least while Rhode Island residents.

Alone, that doesn't answer Sgouros's objection that migrants aren't necessarily taking their jobs with them. It does, however, emphasize the lack of parity between those coming to Rhode Island and those leaving. Put directly, it shouldn't be a comfort that people who want to make more money have to leave the state, even if they leave their lower-paying jobs behind.

Another point, which panelist Arline Violet considers to be a "fatal flaw" in OSPRI's report, derives from the Poverty Institute's response to it: namely, that, whatever the relative incomes, if those leaving are replaced by people arriving, then their property taxes are covered, because somebody buys their houses. But the fact is that, on a net basis, Rhode Island isn't importing taxpayers at the same rate as it's exporting them. More importantly for this discussion, though, is that property taxes aren't the only revenue that Rhode Island governments extract from Rhode Island residents.

According to the Rhode Island Public Expenditures Council, about 22% of tax revenues to state and local governments, in Rhode Island, come from individual income taxes. Moreover, if the question is the effect of shifting demographics, Violet and the Poverty Institute's point isn't a "fatal flaw," it's irrelevant. People who make more money pay more in income taxes; that they pay the same amount in property taxes (presumably) doesn't change that fact.

Indeed, if they make more money, one can assume that they're more likely to improve upon their properties or build new houses (increasing value and therefore taxes) and to spend more in discretionary income (increasing economic activity and sales taxes).

One Anecdote of Many

Sure, we hear counter-arguments all the time, around here, but Michael Miale of Johnston offers an evidential anecdote that certainly captures the impression of many:

[After listing close friends and family,] I then refined the list further into two categories: those who have left the state within the previous 12 months, which is 8, and those who are going to leave in the next 12 months, which is 3, totaling 11 family units leaving the state. That means 52 percent of my immediate family and close friends have left or are in the process of leaving the state of Rhode Island.

Those numbers cannot be refuted by anyone. They tell me all I need to know about the state of the state of Rhode Island.

What would be fascinating, although likely impossible, would be a broad sampling of these and opposing anecdotes in order to discern characteristic commonalities and differences between the "yes-flight" and "no-flight" observations. I'm sure Anchor Rising readers have their own speculations.

Some Hot Air in the Green Economy

Speaking of the suspicious structure of the "new economy"... the economics of wind have come under some scrutiny, lately. Specifically, the project being questioned is Portsmouth's windmill:

Because the setup was considered net metering under state law, National Grid never negotiated a power purchase agreement with Portsmouth. An agreement would have been reviewed by the PUC, which could have rejected the selling price.

Instead, state law required National Grid to buy the power at a prescribed rate that is higher than what the utility pays for power from other sources, such as natural gas-fired power plants.

Portsmouth sells its power to National Grid at the exact price the utility charges the town and other customers in the same rate class. It’s a retail rate, not a wholesale rate. The bundled price includes the actual cost of energy, along with other charges for distribution, transmission and transition. ...

That left the town a net income for the period of $257,075 — money it could use to pay its energy bills or any other line item in the municipal budget.

In other words, the state government forced the energy company to pay extra money for Portsmouth's wind energy, which it will pass on to other clients, thus shifting money from the private sector into the Portsmouth government's coffers. One suspects that much of the emphasis on "green technology" — especially that emphasis coming from the public sector — is built around similar schemes.

The Knowledge Economy Does Not Offset a Bad Economy

It seems as if, whenever I cite economic trends in Rhode Island, as I've been doing all this week, commenter Russ chimes in regarding studies of the "new economy" or "knowledge economy" by the Kauffman Foundation, as he did here:

According to the 2010 Kauffman State New Economy Index Rhode Island ranked 8th nationally in the "Migration of U.S. Knowledge Workers." RI ranks well in that category year after year, despite how much some here seem to wish it were not so.

First of all, importing "knowledge workers" is hardly a trump card if the overall migration trends are still outward (which they are) and the folks leaving still have higher incomes than the folks coming (which they do). Second of all, as I've pointed out before "knowledge economy," in this context is in some regards a stand-in for "taxpayer subsidized," with revenue coming from the government and tax-exempt organizations and going to government and tax-exempt organizations.

Look to the Kauffman study that Russ mentions (PDF. Rhode Island may rank well in "migration of U.S. knowledge workers," but it's #31 in "immigration of knowledge workers." It's 47 in "manufacturing value-added," 30 in "high-wage trade services," 48 in "export focus of manufacturing and services," 48 in "fastest-growing firms." We rank 16th overall.

That "fastest-growing firms" number is important. Rhode Island ranks 33rd in "industry investment in R&D," but it ranks 5th in "non-industry investment in R&D." That is, investment in Rhode Island means "federal, state, university, and nonprofit investments in R&D." We're not, in other words, living in a hub of economic activity in the "new economy;" we're a small state with data skewed by a military base, a bunch of colleges, and a burdensome government structure. Governments must draw the revenue that they invest from somewhere else (the private economy), and they spend it less efficiently.

Looking at overall "new economy" ranks, Rhode Island's 16th place is above the midpoint, to be sure, but Massachusetts is #1 and Connecticut is #5. In other words, Rhode Island represents a relatively dark spot in a nation-leading area, and we rank as highly as we do mainly on the strength of government taxing and spending. As the report states, "non-industry investment in R&D" represents only a third of "industry investment in R&D." The better strategy, therefore, would be to shift the local emphasis from an economy that takes money from some, under threat of imprisonment, to an economy in which people exchange dollars because they see opportunity in doing so.

Who's Leaving and What the Legislators Are Doing

Last night, on the Matt Allen Show, I mentioned my work on population trends and Andrew's work on legislation. Stream by clicking here, or download it.

Once again, I didn't go into the sales pitch, but please email or call (401-835-7156) me to pledge financial support — as subscriptions, donations, or advertising — for 2011 to help us create a full-time job within Anchor Rising.

So What's the Answer?

On Monday, I presented the growth trends among different income groups in Rhode Island. Tuesday, I dipped into the state income taxes that they've paid and the numbers of taxpayers leaving the state. And yesterday, I looked at the trends of each income group to get a sense of where the shifts are occurring.

So who is actually leaving the state?

I hastily wrapped up yesterday by noting that Census data shows there to have been an increase of 25,274 households claiming income of $100,000-$199,999. According to the IRS, 16,426 of them are directly attributable to an increase in joint tax returns. That leaves 8,848 households, which would equal 17,696, if they were all two-income households filing separately. (I'm not saying that they are, just illustrating the maximum of what I believe to be the trend.) As it happens, the increase in non-joint tax returns with $50,000-74,999 in income over the same period was 17,912; very close. It's interesting to note, as well, that the increase of joint returns among those making more than $75,000 could (as a hypothetical maximum) account for 72% of the losses in joint returns with income below that number.

The picture that begins to emerge is of older, more-established, working-to-middle-class households selling their homes at large enough profits to rocket them up the income scale for a year, with younger households — still single or still filing separate returns — partially filling the gap. Consider that the Census's American Community Survey shows 12,472 fewer Rhode Island households overall in 2008 than 2003, but the IRS shows an increase in tax returns of 12,646, with the growth entirely among categories over $75,000. Yet, IRS migration data that tracks actual taxpayers by their social security numbers shows large losses of taxable income as thousands of taxpayers move away each year, 17,221 of them from 2003 to 2008, bringing with them higher incomes, on average, than those who move in.

The increase in returns, that is, derives from people who were already here, and those leaving had greater wealth. Some of the former are likely to have been young adults graduating from high school and college, but living with their parents and (perhaps) not counting their income as part of the "household" total.

In the trend that I'm suggesting, many of those who've sold their houses have simply left rather than returning to their previous income brackets. Meanwhile, those who've arrived had to over-leverage debt to afford the houses in which they'd invested, leaving many of them underwater and foreclosing when the market took a dramatic downswing.

This narrative ties in very well with a study that the Ocean State Policy Research Institute is releasing today that looks at the data from a slightly different angle. OSPRI focused more on the policies and qualities of the states with which Rhode Island has exchanged residents. Not surprisingly, "people move to states where the weather is warmer, taxes are lower, union membership is lower, population density is lower, and the cost of housing is lower." Moreover, "the most significant driver of out-migration is the estate tax."

I've long argued that the people leaving the state are families in the beginning of their careers who need greater opportunities for advancement, families in the middles of their careers who have turned their attention to the need to advance more quickly as they head toward retirement, and retiring families who need to make their dollars go farther. Meanwhile, improvements in the tax climate for wealthier residents and those investing in the state helped Rhode Island to maintain and grow its base of wealthy individuals while making property a worthwhile investment for families able to handle some years of the opportunity cost that Rhode Island imposes on its working residents.

To some extent, the shift could be a healthy one, assuming that younger families (1) work more cheaply and (2) are willing to put more productivity into the economy in order to advance. However, Rhode Island can't continue to stifle them with mandates, regulations, and taxes, and the state government can't afford to continue losing taxable income based on migration patterns.

Unfortunately, the state has recently been moving in precisely the wrong direction, and Governor Lincoln Chafee and House Speaker Gordon Fox and Senate President Teresa Paiva-Weed's General Assembly promise to continue that error. Arguably, beginning to phase out the capital gains tax early in the decade greased the path for the housing bubble to be worse in Rhode Island than elsewhere by decreasing disincentive to sell and increasing incentive to buy. But the state killed that policy soon after the accelerating market began to come apart — slamming on the brakes when it really needed to ease toward a more reasonable speed. Eliminating taxes on property sales would certainly have helped in that regard.

Last year, the General Assembly killed the phasing-out high-income flat tax by effectively freezing it within a larger tax reform. Worse, by increasing the standard exemption at the expense of those who benefit from itemization (because they've bought property, had children, and invested in their careers and businesses), that tax reform shifted the burden precisely toward Rhode Islanders who are striving to build families and advance in their careers. In addition, as OSPRI's report explains, 2005 changes in federal law led Rhode Island to create an estate tax, and "only two other states have a more punitive" one.

So, older members of "the productive class," as I call upwardly mobile working and lower middle class families, may now be stuck in Rhode Island, unable to sell houses that they're counting on for nest eggs and facing a large tax penalty for selling them. However, the need to find a more hospitable environment in which to advance and retire has not changed, and they're staying put in the jobs they have, blocking the early-career advancement of younger residents. In addition, the policies by which Rhode Island stifles entrepreneurship and innovation are locking the economy in place — the mandates, regulations, and taxes, of which Governor Chafee's proposed sales tax increase (and other policies to expand its reach in one way or another) is a fine example, as is legislation to require registration and insurance among landscapers.

If my interpretation is correct, the data to be released in coming years will not be cause for optimism, to say the least.

Tomorrow, I'll address a study that some folks cite (notably Anchor Rising commenter Russ) as evidence that Rhode Island has a booming "knowledge economy" and show how, even in the positive light, it's possible to see how detrimental the state's governing mindset can be.

Up and Out, or Just Out?

Yesterday, I presented two facts:

• Every year, from 2003 to 2008, thousands of people who had filed tax returns from Rhode Island filed them from somewhere else. Subtracting those who moved in the opposite direction, during that five-year span, the state lost 17,221 taxpayers.
• Because those leaving have typically had higher average incomes, the state has lost hundreds of millions of dollars, on a net basis, in taxable incomes — $915,863,000 to be exact, from 2003 to 2008.

Nonetheless, on Monday, I showed that, for most of that time span, wealthier taxpayers increased at a healthy rate. So who is leaving the state? The following charts show trends by income bracket, using IRS and American Community Survey data.

Sticking to the years for which I have data from both sources, the number of households earning below $50,000 decreased by 38,335 from 2002 to 2008, while the number of tax returns decreased by 19,353. For the range of $50,000-74,999, the corresponding numbers were 15,740 and 6. Noting that my migration data is shy a year, with 17,221 tax returns directly attributable to out migration from 2003 to 2008, it 's tempting to suggest a direct flow of this group out of the state.

However, those losses correspond with a 44,910 increase in households earning above $75,000, accounting for all but 9,165. For tax returns, the numbers are a 31,841 increase above $75,000, for an overall increase of 12,482. Considering that those leaving the state have had a higher income than those arriving, it can't be the case that Rhode Island is importing wealthier residents.

And anybody who's been living in Rhode Island will find a dramatic shift toward wealth to be a surprise. Indeed, Phoenix Marketing data of millionaire households shows the increase in millionaires to be relatively small. My suspicion is that, given the housing boom, the shift has more to do with the sale of houses — with people in the upper-working to lower-middle class range selling their homes, often leaving thereafter. The phasing out of the capital gains tax would have created incentive both to sell (because able to keep more of the profit) and to buy (because property in Rhode Island would be taxed at a lower rate, perhaps 0%, when sold).

Call it an "up and out" trend. Each year, until the end of the decade, the number of one-year-only "rich" people amounted to more than those who returned to prior income levels or left the state.

One puzzle in the numbers arises from the difference between Census household data and IRS return data. Why did the number of households between $50,000 and $74,999 (what I'm calling "lower middle class") decrease while the number of tax returns remained pretty much the same? One possibility is that people joined their incomes for the household results but filed separate returns. A look at just joint returns suggests that as a factor:

Turning to the Census data, households earning between $100,000 and $199,999, for example, increased by 25,274 (2002-2008), with 16,426 of those directly attributable to an increase in joint returns. That leaves 8,848 households, which would account for 17,696 tax returns if they all paired up.

Unfortunately, I've run out of time, this morning, so I'll have to draw the threads together later.

(The next post in this series is here.)

Giving Away the Store, or Maintaining a Base?

Yesterday, I showed that the number of high-income tax returns increased every year in Rhode Island from 2002 to 2007. In fact, the rate of growth among taxpayers in every income category above $50,000 was greater in Rhode Island than in its neighboring states through 2004, when things began to change.

During the decade, Governor Carcieri and the General Assembly enacted various tax reforms, agreeing to phase out the capital gains tax in 2002 and beginning a stepped reduction of an alternative flat tax in 2006. Of course, during this same period, especially the latter part of the decade, the state government faced massive budget deficits year after year and used one budget gimmick and one-time fix after another to muddle through.

The question arises, therefore, whether the tax reforms needlessly gave away money that the state could have used (although it never came close to equaling the deficits) or the tax reforms were a positive influence despite larger problems. I'm not sure that it's possible to collect enough data to declare the question answered, but today, I'll add some charts to the mix that I believe continue to point in the direction of my thesis: that tax policy helped Rhode Island to maintain and increase its base of wealth, which could have been a spark of capital for entrepreneurs and other producers, but heavy regulations, mandates, and taxes stifled growth and motivation among "the productive class," which therefore didn't act as kindling to get Rhode Island's economic fire going.

The following charts, drawn from this data, show the amount of state income taxes claimed on IRS tax returns for those filing in Rhode Island, Massachusetts, and Connecticut, respectively:

Once again, it appears that the dot-com bust that began the millenium did not affect Rhode Island as deeply as it did Massachusetts. From that footing, with the implementation of the capital gains tax phaseout and a reduction of the state's nation-leading top tax bracket on the horizon, Rhode Island led the three states in the rate at which it increased the revenue drawn from the upper brackets. The numbers throughout the decade are as follows:

During the early part of the decade, Rhode Island led in the rate of increase of wealthy taxpayers, although that healthy development for the state overall did reduce the rate of growth in revenue that the government drew from them. Tax policy, however, wasn't to blame for Rhode Island's slowed growth during the latter part of the decade. Something else was, and I'd argue that the improving attitude of the government toward taxation prevented Rhode Island from doing worse, comparatively... until that attitude started to change in a vocal way during and after the debate over the flat tax.

The IRS also provides taxpayer migration data, which compares the location from which every American files his or her return to his or her location the year before. The years shown for migration are those in which the returns were filed, which means that the taxpayer moved during or just after the tax year (which is what the years used thus far in these posts have referred to).

Not that it matters; Rhode Island's loss of taxpayers has been consistently between 2,000 and 4,500 for the entire decade:

The bars at the top of the chart show the migration of actual people, and the line at the bottom shows the net loss of taxable adjusted gross income. That is, from 2003 to 2008, after subtracting the incomes of people who came to Rhode Island, former Rhode Islanders took with them almost $1 billion in income. With the exception of the two years that the revenue loss moderated, the average adjusted gross income of those leaving was greater than those arriving:

In the past, I've looked at the data of migration to counties abutting Rhode Island on the theory that such people aren't leaving the region but, rather, wanted to stay within work-and-play reach of Rhode Island:

The image that emerges is a pull of wealth away from Rhode Island. The fact that the wealthy were increasing in number, within the state, suggests that they continued to find Rhode Island to offer a friendly environment. Some other income range must account for those thousands of lost taxpayers, and I'll take a closer look in that direction tomorrow.

(The next post in this series is here.)

Trends of the Decade

Three critical considerations tend to get lost in debates about population and the ways in which it flows and changes over time. The first is that large trends trump. A tax break isn't going to prevent a global economic hurricane from rearing its head in one state while devastating the next one over; there will surely be differences in how the states weather the storm, but the storm will appear in statistical results for both.

The second is the complexity of the numbers. As the income brackets shift within a state, the reasons for each individual change will span so many categories of information that a thorough picture becomes impossible to paint. Marriage rates, tax policy, welfare policy, different markets, employment, and on and on will affect the results. When multiple states are on the table, the number of policies and trends is that much greater. As far as I know, nobody has undertaken a study to break regional changes down to the percentage effect of every demographic shift, and even then assumptions would have to be made which individuals move to which categories.

The third factor that tends to get lost is that the effects of public policies don't just splash into the society on the day that they are signed into law. The debate leading up to passage of a law will affect people's behavior, as will the perceived likelihood that a particular policy will survive the political winds. Taxpayers (to limit the field) will respond to changes in the law, but they'll also respond to a general sense of a state's direction. Meanwhile, laws can either betoken additional reforms in the same direction, or they can make it to the governor's desk with the impression of having barely little chance of resisting repeal or efforts to undermine them.

In any event, what those with a specific interest in the health of a particular state must do is to assess the condition of the state and determine what effect policies have had, or will have, from the baseline of what would happen in their absence. If the widget industry is in decline, tax breaks for widget manufacturers will preserve their jobs to some extent, even if they cannot prevent the trendline from drifting down.

Such are the thoughts that came to mind upon viewing the following set of charts, which will probably take me multiple days to roll out, and which update previous posts here, here, and here.

Each data point in this chart (based on this data) represents the percentage change in the number of IRS tax returns claiming an income range from the previous year. Thus, in 2004, the number of tax returns showing $200,000 or more in adjusted gross income increased by 16.7% from 2003; from 2004 to 2005, the change was 14.6% — still a large increase, but because the rate of change slowed, the graph shifts down. The red lines show tax returns filed from Rhode Island, blue from Massachusetts, and green from Connecticut. The smaller the dash marks of a line, the lower the income bracket.

Because the highest bracket is the most controversial, because it is most affected by Rhode Island's constantly churning tax policy of the last decade, and because it results in about 40% of all income taxes to the state, the solid lines are of greatest interest. And as is clear, all three states began the decade with losses of such taxpayers (likely because of both migration away from the region and a loss of wealth associated with the dot-com bust). In 2002, the year that Rhode Island began to phase its capital gains tax toward zero percent, we were the first of the three states to show an increase in wealthy households, and we led the three states until 2005.

At that point, our state was in the midst of a series of budget-deficit years to which our elected officials responded with one one-time fix after another. The General Assembly enacted the flat tax phase-out in 2006, but whereas the capital gains change promised to make investments made in and from Rhode Island more valuable (because less taxed) over time, the flat tax phased out gradually and required calculation against the benefits of itemizing and capital gains income. In 2006, the flat tax offered an 8% rate (as opposed to the regular 9.9%) and decreased 0.5% each year.

In any event, as the final years of the decade wore on and brought economic crisis, it became increasingly clear that lawmakers would backtrack on tax reform, and by 2008 Rhode Island led the region in loss of wealthy taxpayers. The capital gains tax phaseout disappeared in 2009, and the flat-tax alternative was frozen by the larger income tax overhaul last year.

An alternative narrative would be that Rhode Island recovered more quickly from the dot-com bust at the beginning of the decade because it had benefited less from the corresponding boom. Then, with so much waterfront property, the state experienced the ups and downs of the real estate bubble more profoundly than its neighboring states.

As this post began by noting, this type of data is subject to interpretation, and given data related to taxpayer migration as well as trends indicated by tax returns and Census data, I'd argue that my long-running explanation still stands: Favorable changes in income tax policy have helped Rhode Island to maintain and grow its base of wealthy residents. Unfortunately, though, heavy regulations, mandates, and taxes overall have not allowed the economy to capitalize on that available economic spark. The "productive class" — my term for the upwardly mobile upper-working to lower-middle class range — has not effectively acted as the kindling to turn that available money into economic growth.

Thus, Rhode Island has been more vulnerable to the mobility of the wealthiest Americans and has not fostered an environment of long-term advancement for the motivated workers and entrepreneurs who will willingly add hours of labor to the economy. Inasmuch as my own quest for upward mobility has not yet borne the fruit that would allow me to continue with this topic, today, I'll have to take up the specifics of taxpayer migration data tomorrow morning.

(The next post in this series is here.)

Rhode Island, by Example

Further to my point about a new political wave starting local, the landscape of Rhode Island politics stands as a stark example and testing ground:

... while the state has been trying to work through the desperate finances of its smallest city [Central Falls], it has also been working with three other economically distressed communities — North Providence, Pawtucket and Woonsocket.

And there is growing concern that other communities, also trying to cope with cuts in state aid and rising costs for salaries, benefits and pensions, may also be on the brink of being unable to pay their bills.

The backroom operations and self-dealing maneuvers of public sector unions have created an unsustainable structure, not only in the direct taxpayer costs that they impose, but also in the degree to which they hinder the progress that Rhode Island has to make, as in our shoddy public education system. Worse, it is exceedingly unlikely that the new governor and the General Assembly are going to take the sort of actions that they would have to take to turn things around, following my mantra of mandates, regulations, and taxes. Even if a reform impulse were to strike the state's leaders, the establishment's hand is simply too strong not to turn reforms their way by legerdemain.

Policies must change at the town level, and new, less corruptible, leaders must be found and nurtured through the system.

Sadly, the Propagandist Can't Be Ignored

Look, Pat Crowley of the National Education Association Rhode Island is a paid union hack. One knows what his conclusions will be simply by looking at his job title. He allows no illusion that he will say anything other than what he thinks will benefit his employer, whether true or not. If read at all, his public writings should be studied as examples of propaganda.

Consider his latest missive, which (I suppose) the Providence Journal had no choice but to publish. Crowley attacks people whom he says are making a "Flight of the Earls" argument — that rich people are leaving Rhode Island — notably Ed Achorn and (although he can't bring himself to say so) me. The first disingenuous aspect of his argument is that the people to whom he points aren't actually saying what he suggests. Anybody who reads Anchor Rising knows that I've been referring to the "productive class" (upwardly mobile working and middle class families) as those leaving the state, and Ed Achorn has been making similar arguments, at least in the several years since I first posted my related research (see here, here, and here).

Unfortunately, respectable journalists continue to take Crowley as a serious participant in intellectual discussion, which leads them to some pretty egregious and misleading errors. WPRI blogger Ted Nesi, for example, writes in response to Crowley's op-ed:

Projo columnist Ed Achorn says wealthy Rhode Islanders are leaving the state in significant numbers because of high taxes. NEARI official and Rhode Island's Future contributor Pat Crowley says that's dead wrong.

Follow Nesi's link to what Achorn says, and one finds this:

The flight of the middle class is an ominous trend. It puts downward pressure on housing prices, eating away at a key source of most families' wealth. It drains our state of precious human capital, as educated people who could contribute greatly to charity, civic culture and the tax base head elsewhere for opportunity. It costs jobs, as businesses shut down or move.

Even in Crowley's fever swamp, the middle class isn't "the wealthy." Media professionals risk their credibility when they allow a union mouthpiece to summarize the arguments of his opposition.

But one needn't read Achorn's article to have reason to suspect that Crowley is up to tricks. For one thing, Census data showing total population at 10-year increments for the past half-century have only tangential relevance to the question of whether a particular demographic group is leaving the state. Decade-long windows also don't allow much opportunity to align trends with actual policies. Since the last time the Census came to town, for its year 2000 count, Rhode Island has enacted and done away with phase outs of capital gains taxes and an alternative flat tax. One must look at year-to-year data for such a purpose.

When Crowley does look at year-to-year data, he has no choice but to become anachronistic:

In 2005, there were 11,913 people with incomes over $200,000 a year. By 2008, the number climbed to 12,515. Taxpayers in the $100,000 to $200,000 range grew from 41,817 to 51,904 in the same period. This was the very same period of time The Journal was editorializing that these high-income taxpayers were fleeing the state, and calling for action to keep them here. Action was taken, and we are paying for it with budget deficits.

Actually, no. To the extent that people were arguing that "high-income taxpayers were fleeing the state," it was prior to these years. The capital gains tax phase out was enacted in 2002, and the alternative flat tax made it through the legislature in 2006. Rhode Island's annual budget deficits far precede "the very same period of time," and during the years 2002-2007, the amount of state income taxes that "the rich" have paid has increased in a steep upward slope.

In other words, the increase in wealthy taxpayers that Crowley cites corresponded with the very policies that were supposed to have that effect. Now, in response to the lies and political activity of Crowley's crowd, those policies have disappeared and, not-so-ironically, leftists and unionists are promoting the effects of the policies as evidence that they were not needed.

The sad thing is that Crowley's essay is clearly a political strategy. Later this week, the Ocean State Policy Research Institute will be briefing legislators on a report addressing taxpayer migration, going fully public with the report next week. In the meantime, on Monday, I'll be posting my updated research. As Nesi illustrates when he blatantly mischaracterize's Achorn's argument and places it in balanced opposition to Crowley's propaganda — as if the two sides should be considered equally credible — the tendency will be to see our statements in terms that Crowley has set.

Anybody observing with an unjaundiced eye can begin to see why Rhode Island is in its current predicament.

Letting the Scam's Legislative Architect Run the Budget

Here's a worrying tidbit about a frontrunner for the open House Finance Committee chairmanship in the General Assembly:

[Rep. Helio Melo (D, East Providence)] is the current deputy Finance Committee chairman, and House leaders signaled their confidence in him by letting him take the lead on last year's big end-of-session, income-tax overhaul.

I suppose that the experience ushering into law a reform that took Rhode Island's tax policy in the wrong direction while making it appear to do the opposite will be a valuable point of reference when making the state's budget appear to be balanced when there is no way it could be.

Starting Up to Capture Talent Flow

The fifth Dear Mr. Chafee column on Ted Nesi's blog, by technology consultant Allan Tear, sounds really good, but I don't know that it contributes all that much by way of concrete suggestions for Rhode Island's advancement:

Startups. A recent Kauffman Foundation study shows that firms less than five years old — startups — have generated nearly all of the net job growth in the U.S. over the past 25 years, while established firms averaged near-zero growth in aggregate. It matters less if the startups are what we think of as "old economy," "Main Street" or "innovation economy" businesses. What matters is that we start talking about new startups and entrepreneurship as the primary engine of job creation in Rhode Island. Remember: our economic stalwarts of today — Hasbro, APC, GTECH and FM Global — were all Rhode Island startups once.

It's long been a central plank of Anchor Rising's program for turning Rhode Island around that the state should make it easier for people to start new businesses, which means reducing taxes (especially on capital investments and income that some might consider "excess"), lightening regulations, and erasing mandates that favor established players. So, in that regard, any evidence that points in that direction is welcome. That said, there's something conspicuously semantic about the study that Tear cites:

The BDS series tracks the annual number of new businesses (startups and new locations) from 1977 to 2005, and defines startups as firms younger than one year old.

The study reveals that, both on average and for all but seven years between 1977 and 2005, existing firms are net job destroyers, losing 1 million jobs net combined per year. By contrast, in their first year, new firms add an average of 3 million jobs.

Further, the study shows, job growth patterns at both startups and existing firms are pro-cyclical, although existing firms have much more cyclical variance. Most notably, during recessionary years, job creation at startups remains stable, while net job losses at existing firms are highly sensitive to the business cycle.

Basically, when companies are brand new, they hire. Then they reach stasis, begin to fail, or continue to grow, with the net effect being stasis, depending largely on how well the economy is doing in general. It probably oversimplifies matters, but one can easily imagine that, when times are good, capital investment exists to encourage employees to break off on their own, and when times are less good, more folks are forced (or willing) to jump ship and start new companies, accepting less money, thereby keeping the number of startup jobs stable.

Whatever the case, Rhode Island should definitely revamp its policies with an eye toward the perspective of job creators. Inasmuch as new businesses turn into established businesses, though, the state clearly cannot shift in such a way as to strangle them when they pass the one-year mark (or the five-year mark). In other words, Tear's dislike of clichés notwithstanding, the state just has to improve its businesses climate.

Back to Tear:

Talent Flow. As a state that feels like we've lost much in the past few decades, we are obsessed with holding onto what's left, and that is doubly true when it comes to conversations about our college graduates leaving, or Brain Drain. But the most vibrant economic hotspots have a flow of talent coming and going; learning, studying, starting companies, creating art, doing research, treating patients — and, yes, often moving on. This flow benefits us immensely as a state, bringing new ideas and global expertise, and imparting an affection for and connection with the Ocean State. When we shift from talking about Brain Drain to Talent Flow, we can begin to engage the energetic and smart folks that already flow through our state, get the most from our time with them, leverage them as Ocean State alumni if they move, and create new reasons for them to stay. The 21st century economic challenge is not to attract companies, but to attract talent.

This is well and good, as long as there isn't a net loss of talent, which is what I understand "brain drain" to mean. It's also crucial that Rhode Island keep in place the structure to retain the "new ideas and global expertise" that flowing talent can bring. That means attracting companies and making the state an attractive place in which to start them. In practice, companies are collections of people, so the line between "talent" and "companies" isn't all that stark. The distinction is that the latter include the institutional structure that captures the aggregate expertise of employees, consultants, and customers. In other words, the businesses are the "we" that benefit from transient populations.

We can bat around the specific terminology that we use to discuss Rhode Island's economic policy, and if one set of words makes hip people feel more comfortable embracing ideas that we right-leaning reformers have been shouting from the outskirts all along, then it's to the better. The danger is that the establishment forces that continue to clasp the state's legs are adept at twisting buzzwords — which tend, by their nature, to imply more than they explicitly state, thereby leaving much to subjective interpretation — in such a way as to further entrench themselves and hinder the rest of us. Consider the comments to Tear's essay...

We've Already Maxed Out the Beauty Quotient

Just about every workday, I drive by the Black Goose Café in Tiverton and think about how much I love their pumpkin chai, but with the beverage priced at $4.50 a pop, except in the most freewheeling moods, I pass right by. Oh, I continue to have a positive opinion of the business, based on this one drink, but that opinion does them little economic good when I determine that my money would be better spent on milk, shampoo, or gasoline.

Something similar is at play in another Dear Mr. Chafee post on Ted Nesi's blog, wirtten by RI Council for the Humanities Executive Director Mary-Kim Arnold:

Surprisingly, the most important factors to most residents were not economic. From city to city, the top three factors that people identified were:

1. the availability of social offerings — places to meet, arts and cultural opportunities and the sense that people care about each other;
2. a sense of openness — how welcoming the community is to different types of people, including families with young children, minorities, and talented college grads; and
3. aesthetics — the physical beauty of the community, including parks and green spaces.

The study in review notes these as qualities that increase "emotional attachment," and Arnold's point is that, as governor, Chafee should "consider factors beyond the state's rankings and beyond the immediate economic data." It's a sentiment with which it's difficult to disagree; leaders should consider a broad range of factors, but the insinuation that social offerings, openness, and aesthetics should be the leading guides is disconnected from our particular time and place. (Put aside questions about the ability and prudence of government's involvement in them all.)

The Black Goose could make its cups more appealing; it could put out a big side reading, "Conservatives Welcome!"; but that won't overcome, for folks in my situation, a price tag equivalent to a meal. Just so, Rhode Island has already squandered the advantages that its residents' substantial emotional attachment provides. The premium is already too high. The great desire that Rhode Islanders have to remain in their state is what enables governance that is corrupt and overly generous to specific special interests..

In other words, just because, all things considered, love of a place will benefit its GDP does not mean that all things needn't be considered. At a certain point — which our state is already well past — emotional attachment just isn't enough, especially when a critical goal of policy has to be the attraction of new people and businesses that don't yet know how attached they could become.

Can Rhode Island Be the Exception to Foolish Consistency?

An interesting juxtaposition.

Reading around the Internet, yesterday, I came across Ed Morrissey's observation that all ten states that lost seats in the U.S. House of Representatives are majority Democrat states:

Michael Barone's analysis probably comes closest to the truth: low-tax states attract larger populations, while high-tax, high-regulatory states tend to lose people. That also works in the GOP's favor, and explains why it resulted in such a resounding win in these midterms.

Elsewhere, Dick Morris echoes the analysis:

High taxes kill states. There can be no better evidence than the 2010 Census. The states that lost House seats -- because they're shrinking, relative to the nation -- had taxes 27 percent higher than the ones that gained seats.

Of the seven states that don't have a personal income tax, four (Texas, Florida, Nevada and Washington) account for eight of the 12 seats apportioned to the fastest-growing states.

New York and Ohio lost two more seats. Other losers -- down one each -- are Massachusetts, Missouri, Michigan, New Jersey, Pennsylvania, Illinois, Louisiana and Iowa. What do they all have in common? High taxes.

But then, when one turns to local analysis, the lede of a Scott MacKay commentary on WRNI reads as follows:

Rhode Island's business and political leaders constantly focus on the state's high taxes as a roadblock to economic development. WRNI political analyst Scott MacKay reminds us that our state has an even bigger barrier to creating good jobs.

The "bigger barrier," according to MacKay's assessment, is the inadequately educated workforce, which he blames not on "the teachers, the schools and the government," but on "the culture of a blue-collar state." Before taking up that analysis, let's acknowledge that the two explanations are not mutually exclusive. The same society that tunes its priorities on organized labor and welfare, and tolerates Rhode Island's brand of political corruption, might be predicted also to place relatively little priority on actual educational achievement. MacKay declares those priorities not to be a factor, but he offers no evidence or argument as substantiation.

Instead, he offers this as the relevant evidence that the problem isn't the people who run and teach Rhode Island, but the people who live here:

The blue-collar manufacturing jobs have left but the attitudes of that era live on among too many native Rhode Islanders. The percentage of native-born Rhode Island adults with at least a bachelor's degree is only 25 percent, while 50 percent of Rhode Island residents born in other states have at least a bachelor's. What this means is that transplants are moving here to take jobs Rhode Islanders are not qualified for.

Unfortunately, I have to repeat my lament that I wish I had the time to research the statistics, but it's at least plausible to suggest that MacKay's numbers, wherever he gets them, don't really have the meaning that he attributes to them. Even if Rhode Islanders set a higher priority on educating themselves, one might expect three-quarters of those raised here to wind up elsewhere — having pursued higher education out of state and looked for work elsewhere. The same is true in reverse: No doubt, a high percentage of "transplants" to Rhode Island arrived here via the state's colleges and universities and remained. And some of them (me included) took what work the state could provide, regardless of its relation to their degrees.

It won't surprise anybody that my suggestion is just about the opposite of MacKay's. I say blame "the teachers, the schools and the government." Force the first two to reform and the last to get out of the way so that both native Rhode Islanders and immigrants to the state can pursue excellence and create the jobs that will attract RI-born graduates back. The producers will strive to raise or bring the necessary workforce here for the same reason that we all tolerate the burdensome governance in the first place: Rhode Island is a desirable place to live.

Arguably, the initial effect will be a boom in salary levels, as employers compete for workers. A longer-term effect will be a greater emphasis in that ol' blue-collar culture on the education and training that will procure the higher pay. The first step in changing the color of the state's collar is to begin governing with an emphasis on personal responsibility, risk, and achievement, which points the finger at precisely the parties that MacKay wishes to exculpate.

Toward Fighting the Usual, Expected Interpretation

This is the sort of claim that begs for a well-researched response:

"The data ... clearly illustrates the need for more affordable homes in the Ocean State," said Nellie M. Gorbea, executive director of HousingWorks. "As lawmakers convene in January, it is imperative that they fund affordable-housing programs like the Neighborhood Opportunities Program ... to immediately address the large number of families on the verge of losing their apartments or houses because they can't afford the rent or mortgage."

The basis for the claim is a HousingWorks study of U.S. Census data finding that 41.7% of Rhode Islanders pay more than 30% of their incomes on "housing costs," which is the highest ratio in the region. Unfortunately, I spent most of my blogging time, the other day, discovering that the Census's new data acquisition tool would eat up most of my blogging time.

The first thing I wondered was whether property taxes are included in "housing costs." The second thing I wanted to research was the significance of average incomes on the calculation. I know from past research that Rhode Island's income level is relatively low, by New England standards.

Both of those considerations support the argument that the last thing Rhode Island should do is to increase government expenditures. Rather, we should lower taxes across the board and lighten mandates and regulations, thereby encouraging economic activity and higher average incomes.

Were Anchor Rising a full-time gig, we would collect the necessary data and post it in the form of a report, which we would promote around local media and bring before any relevant legislative committees — not out of protection of special interests, but out of pure interest in the subject matter and the health of the state.

Down Again

Earlier this week, URI economist Len Lardaro noted the reversal of his economic index's positive trends for Rhode Island:

A slump in October in two key indicators that make up an index that forecasts the Rhode Island economy may signal that the state could be in for a double-dip recession, according to Leonard Lardaro, the University of Rhode Island professor who compiles the Current Conditions Index.

Today, we learn that the professor's index isn't the only discouraging statistic:

After eight consecutive, incremental drops in Rhode Island's unemployment rate, the November rate increased slightly to 11.6 percent, indicating the state's economy is staggering to year's end. ...

Unemployment rate: Up to 11.6 percent from 11.4 percent, the first increase from one month to the next since last December.

The silver lining is that the increase in the unemployment rate appears to have been attributable to the fact that 800 people reentered the job market. Of course, the problem, there, is that the number of employed Rhode Islanders remained the same, and the number of jobs based in Rhode Island decreased by 1,200.

Rhode Island is not at all well positioned to emerge from the Great Recession, and those leading the state are not well suited — intellectually or ideologically — to change our course.

Tabulating Rhode Island's FY2011 Federal Earmarks

For those interested, HERE is a working list of all of the earmarks contained in the lame duck FY2011 budget. I assume it will be continually updated as required (hence, the "working"). I've also broken out the RI earmarks from messr's Reed, Whitehouse, Langevin and Kennedy and you can download it HERE.

All told, according to the latest info, RI's Congressional delegation has requested $53,625,000, broken down as follows:

* Approximately $41.4 million tabbed for Department of Defense projects
* $2.65 million is tabbed for EPA--particularly wastewater improvement projects--and Parks Service projects
* $2.5 million for economic development projects (broadly defined) with money going to the John H. Chafee Center for International Business, Rhode Island School of Design and URI
* Approximately $7.12 million is going to various projects under the Dep't of Labor, HHS, & Education.

Whose Taxes Will Change How

This Neil Downing article points to an egregious error in the waning year of Governor Carcieri's time in office (emphasis added):

... the amount of Rhode Island income tax withheld from your pay will change because of massive changes to the state income tax law enacted in June. Employers will have to withhold more in tax for some workers, less in tax for others. ...

... the new law lowers the top tax rate to 5.99 percent from 9.9 percent, increases the standard deduction amounts for most taxpayers and eliminates the option to itemize deductions.

As I've explained, before, the central act of the new law was to freeze the flat tax where it already was. Folks who pay attention only a little bit may be lured by the elimination of that 9.9% red mark, but those who take the time to understand the upshot (especially those affected by the change) should realize that what was actually eliminated was a pending decrease in their tax burden.

The second act of the law was to transfer wealth from folks who do those economically active things that create deductions — such as buying local property and spending money on careers and businesses. Downing reports that the changes in paycheck withholding will be "slight," but what's "slight" on an individual basis is massive in aggregate.

Downing also explains the coming increase in TDI taxes and federal withholding amounts. Layer in there the tax increase if U.S. House Democrats foil the tax-cut extensions. Our state and nation could wake up in January 2011 with one pounding hangover.

"Body of Proof" Flips Paiva-Weed on tax credits

The upcoming, filmed in Rhode Island, ABC show Body of Proof (starring Dana Delaney and Jeri Ryan) was feted at the State House today. Both Delaney and Ryan extolled the virtues of the Ocean State while executive producer Matt Gross explained that it was the tax credits that brought the production to Rhode Island:

"Having produced ten feature films and 200 hours of television all over the United States and out of the country, I can tell you this has been my best experience to date," said executive producer Matt Gross. "The state supports the needs of production like no other I have ever been to."

Gross credited the film and television production tax incentive -- which provides a 25 percent transferable credit for all related spending in Rhode Island -- with drawing the project to Rhode Island.

The production has generated more than $30 million of revenue in Rhode Island and has led to the creation of about 170 (temporary) full-time jobs, said State senate president Teresa Paiva Weed...."I was one of the skeptics when the film tax credits came out ... but have come ... to be a real believer because we now know that it works," said Paiva Weed. "A recent study showed that the film tax credit generates $8 for every $1 of investment from our state. And I don't think there's a better investment that also builds on our tourism industry."

Questions about the EDC's Loan to Trainor

I note a couple things from the ProJo story about Chafee spokesman Michael Trainor's defaulted loan from the RI EDC.

1) Trainor and his partners approached the RHODE ISLAND EDC for a loan for a business based in CONNECTICUT.

2) The business plan centered on the purchase of three companies in the south that would make hurricane shutters, which would be then distributed in the Northeast. Got that: manufacturing jobs in the south, sales jobs in the Northeast...out of Connecticut.

Then the company went bankrupt and Trainor and his partners still owe the EDC around $250k.

In the meantime, we heard Trainor, acting as Chafee's mouthpiece, being critical of the deal that the same EDC gave to Curt Shilling's 38 Studios. Hypocrisy? Not according to Trainor:

“The state handed him $75 million in loan guarantees without any personal obligation,” Trainor said. “I’ve had to place myself in bankruptcy.”

I know businesses fail, especially lately, and I'm certainly not criticizing entrepreneurship. Obviously, the scale of the Trainor and 38 Studios deals are much different (millions vs. thousands), but at least 38 Studios is actually coming to RHODE ISLAND and hiring RHODE ISLANDERS.

So, given some of the facts surrounding Trainor's company and the EDC loan, I've got some genuine questions. 1) How often do non-RI companies get RI EDC loans without showing they are going to employ--or even be based in--the state? (Was that indeed the case in this deal or were there promises of RI-based sales staff or the like?). 2) Is just being a Rhode Islander (who may know the right people) good enough to get a loan? Basically, I'm not sure we've really gotten the whole story of how the EDC operates.

When Marketing Isn't a High Priority

A familiar theme pops up all over the place, if you're looking for it. Consider the advice of consultants that the tourism division of the Economic Development Corporation (EDC) hired to help Rhode Island with its efforts in that area:

The consultants learned that 70 percent of the state's visitors come from just five states — Connecticut, Massachusetts, New Jersey, New York and Pennsylvania. However, of 1,100 people they surveyed, respondents were more likely to associate destination themes like "charming, quiet, peaceful, relaxing and friendly" with other states that compete for the same visitors.

Rhode Island may be losing visitors to places like Vermont and Maine, the consultants said, because other states spend far more to promote their own tourist attractions than Rhode Island does.

With a tourism budget of $720,000 annually, Rhode Island spends less than 10 percent of what the average state spends promoting tourism, says Mark G. Brodeur, director of the state's tourism division. That average, he says, is $11 million.

I'm not convinced that public resources are best spent on marketing campaigns, and I'd point out that Rhode Island has only 17% of the population of the average state. The reality is, however, that even if we adjust the perspective to say that Rhode Island should be spending twice as much (rather than ten times as much) on tourism, the state already taxes its residents too vigorously. We cannot fund such things as tourism marketing, because we're spending too much money on other things — like labor costs, giveaways, and the support of public corruption.

As with the higher education crowd, it's all well and good for economic development advocates to ask for more money, but we really need them to be making the case that they deserve the money more than other recipients of public largess.

Golden Geese, Living and Dead

A quick Google search of his name suggests that he might, but I wonder how many people who agree with Shane Gaudet's view on taxing nonprofits would apply that argument to such things as corporate and income taxes for high-income Rhode Islanders:

The nine nonprofits listed in the story employ more than 20,000 people. Jobs are good, are they not? And consider the number of students who live in, or commute to, the city to attend the four private colleges, and what their presence means for business. Did the officials "factor" this in their study?

If these colleges decided to pack up and move to another city (it can be done) where would that leave Providence? I think Rhode Island's capital would be more like Detroit than a flourishing city.

The Providence Journal titled Gaudet's letter, "Golden-goose squeeze." Well, a thriving state should have multiple such geese, and Rhode Island has been squeezing them all for far too long. Gaudet urges city officials to concentrate on "ways they can cut spending" (emphasis in original). Would that more voters shared his preference.

Another Phrase for "Taxpayer Subsidized"

This group of industries seems a bit too narrow to count as a "knowledge economy" or to stand as comprehensive representatives of the value of intellectual capital. Indeed, another quality that they share would be a much better descriptor:

The knowledge economy refers to the health-care, life-sciences, research and green-technology sectors and to the idea that work, jobs and wealth are created with innovative brain power.

Especially with healthcare and "green" technology, the application of knowledge isn't much more relevant than it is in just about any industry, but what all of these sectors have in common is that they're taxpayer subsidized. Note the examples:

In 2009, Lifespan Hospitals successfully sought $49.2 million in competitive grants from the National Institutes of Health, he said. Brown University pulled in $180 million in research grants for the 2009-2010 school year, a 37-percent increase over the previous year, Hatfield said. And the University of Rhode Island got $105 million in grants, 60 percent more than three years earlier ...

Grants, if not given directly by government departments, are typically provided by tax-exempt entities, and in the cited cases, they're going to tax exempt entities. The picture accompanying the story features Providence Mayor-elect Angel Tavares, General Treasurer-elect Gina Raimondo, and state Sen Joshua Miller (D, Cranston); one wonders whether and why they're supportive of a strategy of relying on organizations that don't pay taxes to grow the state's economy.

Fortuitously, Jim Hummel's latest report expands on the broadly recognized fact that almost 40% of Providence property is currently owned by tax-exempt groups by catching retail enterprises that serve the knowledge economy as selected partners failing to charge sales tax. The immediate controversy is that the stores (including a Starbucks) are supposed to tax non-students, but even were they complying with that rule, exempting sales taxes for certain private businesses can only harm others that seek to capitalize on "knowledge economy" participants like students.

What Chafee Means by "Harmful"

I've received reader email expressing cynicism at the Providence Journal PolitiFact's release, post-election, of its finding that Governor-elect Lincoln Chafee's statement was "barely true" that "experts say the property tax 'is the most harmful to economic growth and ... the sales tax is least harmful." Indeed, Eugene Emery's article notes:

[Tax Foundation economist Kail] Padgitt referred us to a study by the Paris-based Organisation for Economic Co-operation and Development, an international agency founded to help its 33 member countries find the best economic policies.

The OECD's 2008 study of tax structures and economic growth says that when taxation is necessary, a stronger reliance on property taxes is the best method for encouraging an economy to grow, followed by consumption taxes, such as sales taxes. High corporate taxes, it concluded, were the worst when it came to increasing the gross domestic product (GDP).

The only rational conclusion to which one can come, on the question, is that it depends. Blanket statements of which tax is preferable are fatally flawed in that there are limitless number of ways in which a regional government can hinder or help its local economy, and the particular mix at any given time will have a huge effect on what tax increases are more or less damaging.

Inasmuch as Rhode Island's underlying problem is an inability to attract and retain economically productive people — to start and populate businesses — increasing property taxes should be a nonstarter. On the other hand, given the size of the state, with cross-border shopping opportunities mere minutes away for most residents (and the Internet readily accessible), increasing the sales tax will likely drive our consumer economy increasingly away. That's good for neither near-term economic growth nor the initiation or immigration of businesses to the state.

But it's nothing new to suggest that Rhode Island cannot afford to increase any taxes (or fees, for that matter). What's interesting about Chafee's statement is what I think underlies it. Local progressives, among whom Chafee clearly numbers, often declare that the property tax is "the most regressive." That's obviously questionable in comparison with a proposal to tax necessities that are currently exempt from taxation, under the law. But I'd wager that Chafee is extrapolating from that cliché that regressiveness in the tax structure is inherently harmful to the economy.

Balance Is Unexpected for a Reason

Much is being made of Rhode Island's unexpected budget balancing. Here's Kathryn Gregg in the Providence Journal:

After meeting on and off over several days, the top financial advisors to the House, the Senate and the governor, determined that revenues are running about $16.7 million ahead of expectations when the General Assembly signed off on this year's state budget last June which, when coupled with an end-of-year surplus from last year, gives the state some welcome elbow-room this year.

And Ted Nesi has more:

[House spokesman Larry] Berman credited the balancing act to higher tax revenue, lower spending, and a surplus left over at the end of last year. "It is also good sign that revenues are running slightly ahead of projections, showing that the economy is turning around slowly," he said.

Of course, the largest factor in this "good news" is the windfall of federal dollars that has helped our state government avoid the really tough decisions that it's going to have to make when that money dries up. (You know, that "stimulus" money that has arguably contributed to the continuing economic malaise.) Another factor has been the state's willingness to push expenses down to cities and towns without easing its requirements (via mandates and regulations) to spend money.

That said, this is a prime example of an issue that frustrates me with regard to my tight schedule. My gut's telling me that there must be more — perhaps having to do with tax code changes that effectively raised taxes on productive and economically active Rhode Islanders. An article that Projo reporter Neil Downing published today supports that conclusion:

For example, the total amount of personal income tax withheld — mainly from paychecks — increased by 7 percent for the first four months of the fiscal year, and by 9 percent in October alone, said state Tax Administrator David M. Sullivan. Those figures indicate that more people are working, he said. (The state's unemployment rate, while still high, has been gradually dropping in recent months.)

But some other figures suggest economic softness in some spots.

For example, cumulative personal income-tax collections came to $322.6 million, up 4.8 percent compared with the same period a year ago. But that was largely on the strength of increases in the first three months of this fiscal year. In October, personal income-tax collections slipped 4.8 percent compared with the same month a year ago.

The parenthetical note about the slowly decreasing unemployment rate misses the point that fewer people are actually working. Folks are just giving up their job searches, driving down the rate of people who are trying to be employed, but aren't. The summer boost in income tax withholding could have indicated a real jump in summer tourism income, or something similar, but it also could have included a boost in withholding based on changes in tax credits and deductions that the General Assembly had recently passed.

News consumers are used to getting the tailored pronouncements of government officials, perhaps mixed by journalists (working with limited space) with a couple of broadly stated opinions from opposing factions. What we need is to see the numbers dollar-by-dollar and aligned with specific policies and decisions.

A Sign of Things to Come

Rhode Islanders should expect more of this:

It may be a sign of a bad economy, but some businesses are balking at a plan to charge fees for placing business logos on the blue highway signs at exits for food, gas and lodging. ...

The $1,200 per-sign fee, which went into effect on Nov.4, applies to any business posting a logo on a highway sign; state transportation officials have since proposed a reduced rate of $300 a year per sign for the 72 businesses that already have permits to post their logos on the highway signs, according to Rocchio.

The businesses paid to install the signs, and now the Dept. of Transportation wants them to pay fees (1) just in case they are knocked down and (2) to hire enforcement bureaucrats to catch any such businesses that aren't complying with regulations having to do with handicap access and public availability of bathrooms and phones. In short, it's another way for the government of Rhode Island to squeeze benefits.

DOT Managing Engineer Robert Rocchio magnanimously points out that "no state or federal regulation requires" the signs to exist (in the Projo paraphrase), and the new fee matches that charged in Massachusetts. Rocchio misses the point: Each state must figure out its mixture of charges and benefits, and the relevant question at any given point is which direction it's heading. This is a new imposition on productive Rhode Islanders who need to lure every through-state driver they can to boost our local economy.

As I began by saying, we should expect more policies like this. Rhode Island's "leaders" have no new ideas, and Rhode Islanders keep electing them to office.

Mo' Money by Default

Marc's already splashed into the political hay of the issue, but we should take a moment to look more directly at the raises received by Rhode Island's top office holders:

The salaries go up only once every four years and when they do, they reflect the Consumer Price Index for the Northeast region for the previous four years.

Translated: the annual salary paid the governor is going from $117,817 to $129,210 on Jan. 11 and for the attorney general, from $105,416 to $115,610.

At the same time, the salaries paid the lieutenant governor, treasurer and secretary of state are rising from $99,214 to $108,808 annually.

We could have the debate about whether the amounts are justified. In some cases — especially lieutenant governor, the answer is, "surely not." In other cases, such as governor, the amount is nowhere near what a comparable CEO could expect. That said, the numbers are more than enviable from the lowly position of many of us.

But the question of automatic increases is the rub. Such offices differ from the private sector in that the candidates for office run in an election; they don't, as in the private sector, negotiate with their employers-to-be. It's reasonable, therefore, for the government to have a standard, nearly apolitical, formula that keeps the compensation reasonable no matter who wins the office.

That said, it'd be a rare Rhode Islander who'd claim that the state's economy has improved by 9.67% over the past four years, and rarer still would be those stating that the government's ability to pay its officers more has increased. During times of recession, the General Assembly should pass statutes postponing all raises until Rhode Islanders have felt the return of economic health.

Of course, in our current circumstances, that might represent a permanent moratorium on raises.

A Voice on the Other Side of the Wall

Erstwhile commenter and Rhode Island escapee Dan has left the following comment:

Hello, everyone. This is my first time commenting since I moved out of Rhode Island, and it may be my last.

Just stopping by to report that since I left the morally and economically bankrupt Democratic hellhole that was my home for 25 years, I have been far happier and more successful. I have a great new non-union job with a great boss, which for some odd reason doesn't pay me minimum wage with no benefits, defying all progressive logic. I feel like a great weight has been lifted, like I'm not being robbed and insulted everyday by those who run my government. It's an amazing and empowering feeling.

In my current state, taxes are low and are spent responsibly on public works that people actually enjoy like trees, benches, and working fountains. The people are friendlier down here. Unemployment is lower and unemployment benefits are lower. There is a pride in working and personal responsibility that I never felt before in RI.

It is a right to work state, so I don't hear much from teachers unions anymore. I'm sure I don't have to mention that we blow RI out of the water in quality of education, not a coincidence. Police are paid reasonable salaries and mostly just leave people alone. Firefighters are volunteer. Sales tax is a whopping 4%. Not much corruption, or they do a very good job hiding it.

I urge each and every one of you to leave the fool's errand that is RI as soon as you are able. Every day you stay in RI, you are voting with your actions for the Marxists and criminals who run the state, doing your part to ensure that status quo. If you haven't learned by this past election that nothing will ever change in RI, well, you won't ever learn, and you'll die unhappy fighting those same old windmills.

You have 49 other states from which to choose. RI is not the best of them. Move to NH, move to VA, anywhere, just move somewhere and stop bankrolling the legal mafias in the public unions, city councils, and state legislature. If you love your family, take them with you. Friends will follow, or you'll make new friends. Get out, and do it sooner rather than later. Don't be a martyr for liberty and sanity. Do yourself a favor.

It's difficult to argue with much of what Dan writes, but two points must be made. First of all, individual taxation is the lesser of two ways in which Rhode Islanders pay for the sorry state of their government. The larger component is opportunity costs; I find it jarring, for example, to place the list of things that I can do and have done next to my itinerary of daily activities setting up tools on a muddy jobsite in order to place cement-board siding on a house in the cold and damp. On the other hand, there are opportunities in what I've been doing, not only careerwise, but experiencewise. Being a carpenter has changed me in positive ways, over the past six years, and I would never have taken this path if others hadn't been blocked by circumstances. Moreover, if the larger cost is an opportunity cost, then succeeding is still possible, just more difficult.

The first point leads to the second: it is a presumption of Dan's that one must "die unhappy" if the state does not change. As with anything, considerations must be balanced. A better job and more reasonable civic culture is not everything; note how little attention the average person pays to the latter. In fact, I do not cede Dan's assertion that the state is impossible to change, and even if it proves true, in practice, there is value and great reward in making the effort... provided one can survive economically.

The Bankruptcy Option

Given the long political, economic, electoral, etc. track record of this state, many believe that the only solution to fixing Rhode Island lay in bankruptcy. Well, if that is indeed a solution, then this post by Richard Epstein is concisely informative on the topic. Epstein explains the how's and why's, but then concludes that bankruptcy probably isn't an option.

I don’t think that full-fledged bankruptcy is a realistic prospect as of now. I think that the much more sensible approach is to side-step the bankruptcy proceedings and find ways to attack the union pension obligations directly, given their enormous size. It is odd that these days the only sacred contracts are those which the state enters into with unions for the benefit of their members.

The key question is whether it will be possible to persuade the courts that these pension agreements were the result of political self-dealing, which means that they should be set aside unless it could be shown that the state received fair value for the services rendered when it made those deals. I think that case is bold but winnable, yet only when the situation becomes truly desperate. Funding that litigation will take some bankrolling, but the corporate-law analogies on self-dealing make it pretty clear that the state legislatures violated all their duties of loyalty to the public at large when they entered into deals from which union pension funds got all the upside and everyone else got the downside. Not nice. Undoing it is the work of the next generation.

The Broke Lender of Last Resort

Why isn't it sufficient for candidates for public office simply to say, "I'll get out of the way"? Take gubernatorial candidate Frank Caprio:

A centerpiece of his TV ad campaign for weeks, Caprio's plan relies heavily on $13.1 million in new federal dollars for loan guarantees, and "moving" the $50 million that remains in the $125-million loan-guarantee program that state lawmakers created earlier this year into a new Small Business Loan Fund.

Standing in front of Moretti Salon on Atwood Avenue in Cranston, Democrat Caprio suggested a state-backed commitment of that size could be used to leverage $640 million in private loans to businesses that might not otherwise qualify, to "retain or create 14,800 jobs."

I'd trust private investors to sift through potential projects and judge the worthy more than I trust the government to do so. Investors have profit as their motive, so they look for long-term successes; politicians have talking points as their motive, so lending public money allows them to claim to have "created" jobs and, if the business fails, to offload the blame on its operators. In the case of loan guarantees, the government generally isn't even invested to the extent of putting up money that it might use for other purposes; the hit comes after the failure.

We certainly require new businesses to open their doors and begin hiring, but at this point, guaranteeing loans is just a sly way for the government to compensate for the unnecessary burdens and risks that it places on the economy through mandates, regulations, and taxes.

Lardaro on the Downswing

University of Rhode Island Economist Len Lardaro has to be the most mixed-message-sending economist in the state. He regularly appears in the local media declaring that his economic index shows Rhode Island in recovery (and has been doing so for months of the recession), yet here he comes with a doomsday warning for the next election:

On the labor-supply side, much of the current unemployment is long-term in nature, the result of jobless persons failing to possess the skills demanded by the employers who are attempting to increase employment. Economists refer to this as "structural unemployment." The result is skill shortages, even with so high a jobless rate.

On the demand side, employers have continued to find ways of meeting current product demand with fewer hours worked by their labor force than they thought possible in the past. ...

The upcoming election is more important than is generally assumed for Rhode Island, because federal bailout money will no longer be available by this time next year. Fiscally, this will force us to go "cold turkey." The resulting jolt to a fragile upturn may well force our state into a double-dip recession. The citizens of this state need to be proactive, even though our elected officials seldom are.

Don't get me wrong: I agree with Lardaro's assessment and his hinted solutions, but he would help to prime the public for this sort of revelation if he regularly accompanied his index-related press releases with a big "but."

The Give Me Mine Vote

It's pretty clear, from a recent Brown University poll that about one-fifth of the electorate in Rhode Island are in the die-hard public sector camp:

On the other hand, a large percentage — 73.3 percent — opposed raising the state sales tax, while 18.9 percent supported the idea. And 74.7 percent opposed raising the state income tax, while 19.3 percent supported the idea.

When asked about measures that would affect state employees, 46.6 percent supported unpaid furlough days, while 38.4 percent opposed the idea, and 57.9 percent supported a defined-contribution pension plan for new state employees, while 21.1 percent opposed the idea.

Basically, 20% of survey respondents want higher taxes to support the deals currently offered to public-sector employees. I can't say, of course, how much overlap there is between wanting to increase the sales tax and wanting to increase the income tax, but I'd wager that it's significant — constituting, overall, a statement of "whatever it takes." That's a significant portion — especially given its greater likelihood actually to vote and to become active before election day — but it's not overwhelming.

The route to countering that bloc will be to isolate their issues in the face of a single candidate — who, incidentally, has made it abundantly clear that he's their guy:

... during and after the Marriott Hotel lunch, [Lincoln] Chafee insisted that [Frank] Caprio’s $100 million in promised [pension] savings are illusory, because his plan "won't standup to legal scrutiny."

"It's hard to believe that a court would agree that somebody that has been paying into a certain pension fund for 30 years, all of a sudden has a new pension plan. It's hard to believe a court, beyond the fairness issue, would say that is legal," Chafee said.

Determining, beforehand, that the union's ever-present threat of expensive litigation will prove indomitable is a classic ploy of union-bought candidates for office. It simply is not difficult to believe that an objective judge would allow the state to change the terms of an insupportable pension system, at least for investments not yet made. In other words, the fact that employees have been paying into a system does not mean that they have a legal right to see that system perpetuated. Some aren't yet vested, which means that they don't even have a claim to the fruits of their investments thus far, and others can be told that different rules will apply to payments made from this moment forward.

The more extreme measure — which may yet prove necessary — would be to transfer the vested payments into a defined-contribution plan that is financially comparable, but with better terms for the state. But I don't think any candidates have gone that far.

Incentive Not to Work

In contrast to the PolitiFact about which I complained, yesterday, this one by Eugene Emery was actually informative. The statement under scrutiny was from Republican candidate for governor John Robitaille, that "Rhode Island has a very generous unemployment compensation rate compared to most other states":

By the latest measurement, during the first quarter of 2010 Rhode Island ranked second in the nation. The state paid the typical recipient 47.8 percent of the average weekly wage of $816.71. (Hawaii topped the list, at 54.8 percent. Massachusetts, by that measure, was at 37.3 percent, ranking it 29th.)

Put another way, the average hourly wage in Rhode Island during the first quarter of 2010 was $20.42. The average person receiving unemployment insurance got the equivalent of $9.76 per hour. The benefit could be as much as $13.76 an hour for an individual or $17.20 per hour for someone with five or more dependents.

Robitaille's contention is that unemployment benefits so high discourage people from going back to work once unemployed. I've actually run into that dynamic, with a new carpenter who spent most of the single day that he worked with my company telling another new guy how nice it was to be able to go fishing and such while receiving a government subsidy.

It's important to note that unemployment needn't exceed the pay rate that a potential worker could expect. It just needs to be more than he or she requires to live an acceptable lifestyle.

State Budgets, Easy to Grow....

Matthew Mitchell at George Mason University's Mercatus Center has done research showing that States will have to increase their 2009 budget cuts (average of 6.8%) to 12.3% and sustain that level of spending to pay off their debts. Rhode Island is one example he cites:

[T]he entire budget gap could have been eliminated had the state maintained 1987 inflation-adjusted per capita spending levels. Rhode Island's 2009 expenditures were $7.6 billion. If held to real 1987 per capita levels, however, the budget would have been less than half this amount: $3.3 billion. This would have been more than enough to close the state's $872 million gap. But as with other states, spending restraint needn't have begun in 1987 for the state to have avoided its budget gap. If held to real 1995 per capita spending levels, I estimate that the state would have spent $5.1 billion in 2009. Assuming revenue would have followed its same course, the difference is still enough to have avoided the state's entire gap.

Measuring the Economy by Taxation

Tax collections are up, in Rhode Island, and not a few people are happy to offer tentative suggestions that it's a positive sign for the local economy. I hope so. But still, I think it's tricky stuff to use this measurement. Consider two notes that Neil Downing offers on the data:

* The amount of state income tax withheld from workers' pay totaled about $145.5 million, up 9.1 percent from the same two-month period a year ago. In general, this suggests that more people are working, workers are earning more, or both, Dion said.

Sales-and-use tax revenue rose 3.5 percent, to $152 million. The category includes revenue receipts at the Registry of Motor Vehicles, which increased 6.8 percent, to $14.8 million. Overall, "there seems to be some pickup in consumer spending," Dion said.

Comparing this year's report with last year's iteration, the difference in total tax collections is $36 million. One-third of that ($12.1 million) comes from the increase in withholdings. This year's rate is even higher than that in FY09 (or actual year 2008), when it was $139 million. (The report for the year before is not online.)

So is our job market now better than it was two years ago, when the unemployment rate was 8.1%? According to the Bureau of Labor Statistics, 505,495 Rhode Islanders were employed as of July 2010; the number in July 2009 was 501,957; in July 2008, it was 525,562. Why is an employed population that is 4% smaller withholding an amount of taxes that is 4.5% greater? If you want me to offer a comprehensive answer to that question, you'll have to finance Anchor Rising as my full-time job, but I'd be willing to speculate that it might have something to do with changes to tax laws that reduce itemized deductions and shift the tax burden around.

Another million dollars in increased "tax" collections derives from the Registry of Motor Vehicles. And again, the amount is well above the number two years ago. Is that a sign of new car purchases? Perhaps. Or maybe it's a sign of creeping fees.

Another $2.7 million in increased collections derives from Historic Structure Tax Credit Reimbursements that weren't given this year. $2.3 million comes from fewer refunds/adjustments this year. Business received $4.6 million less in refunds and adjustments..

About the only increase that doesn't have an immediately apparent dark lining is net sales and use taxation, which rose about $3.9 million. That's a 3% increase from the year before, although it's still $2.6 million less than the year before that.

If that's what we're looking toward for hope of a recovery, we must really be getting desperate. But the larger point is that taxation isn't a reliable advance-notice measure of economic improvement.

On the Hook, One Way or Another

Local journalist Ted Nesi has moved from the Providence Business News to WPRI.com and is maintaining a column there (although they're calling it a "blog"). One sample from a couple of weeks ago has been nagging at me:

The Daily Beast is out this week with one of its link-drawing listicles — "The Most Screwed States" — and guess who they say is the most screwed of all? You guessed it — good ol' Rhode Island. ...

But those numbers are also very misleading — and more than a little bit alarmist.

Nesi's first step is to update the numbers cited in the article, which adjusts our debt-to-GDP ratio in a little bit healthier a direction. But his next point, which relates to Andrew's commentary about state bonds, seems like it must be ignoring something:

Rhode Island taxpayers are not on the hook for the state's entire $8.9 billion in debt. In fact, we're on the hook for less than half of it. The reason is because a big chunk of that borrowing is what's known as "conduit debt."

Conduit debt is basically when the state goes out and borrows money on behalf of someone else — nonprofits like Brown University or Rhode Island Hospital, or individuals via state agencies like RISLA and Rhode Island Housing. Going through the state makes it easier and cheaper for those entities to borrow money.

Reading the article, one gets the impression that the state's involvement in conduit debt is less than superficial. If that were the case, however, then why would it be true that lenders make the borrowing process "easier and cheaper" when the state is involved? Nesi should be a little more careful with his language: The taxpayer is "on the hook" but is trusting the recipients of the borrowed money to pay it back — sort of like the federal government trusted mortgagees through Fannie Mae and Freddie Mac to pay for their houses.

Just as significant is the incentive system that conduit loans set up. Particularly when it comes to organizations — perhaps, although I lack the time to confirm, including the City of Central Falls — the state's interest in the health of its sub-borrowers could lead to special arrangements with tax dollars to enable them to pay back the debt before it officially defaults to the state.

In other words, conduit debt essentially makes the borrowers quasi state agencies paying the debt through their own revenue sources — no different than fees and other revenue that state departments take in — for the term of the loan. Perhaps they shouldn't be incorporated into lists tallying annual state debt payments, for example, but it surely shouldn't be written out of consideration.

And whatever the case, for all of the adjustments that Nesi makes, he still only manages to improve Rhode Island's debt problem from worst in the country to seventh or tenth worse (depending whether one looks at income or population). Not a comfort, especially considering that we tie with the collapsing state of California.

Putting Rhode Island in Deep Water

Well, the Rhode Island Public Utilities Commission (PUC) has reached the decision that the General Assembly and Governor Carcieri all but required it to make, signing off on the expensive contract for an offshore wind farm between Deepwater Wind and National Grid:

"It will be four cents a day more," Carcieri said. "Who wouldn't be willing to spend that to invest in our economy, keep our money here instead of sending it to Saudi Arabia [for oil] and start a major new industry?"

It may be only $15 dollars per year to whatever demographic Carcieri is describing, here, but it will be much more to companies and manufacturers that require large amounts of energy. Indeed, the best the PUC could say about official complaints from two Rhode Island companies, Toray Plastics and Polytop Corp., was that "at least they didn't threaten to leave." But they did note that the increased costs would make it more difficult for them to expand in the state. That statement raises another item in today's Providence Journal:

The United States is selling fewer products around the world and spending more on cheap imported goods, an imbalance that hurts the job market at home and means the economy is even weaker than previously thought.

The trade deficit of nearly $50 billion for June is the biggest in almost two years, and economists fear that economic growth for the second quarter, which came in at a sluggish rate of 2.4 percent in early estimates, may turn out to be only half that.

"The problem is that to the extent we have a recovery in the United States, it is pulling in a lot of imported goods. That means it is not translating into production and jobs at home," said Nigel Gault, chief U.S. economist at IHS Global Insight.

Redirecting our energy dollars from the Middle East to the United States is certainly an important objective, but when the cost difference is so dramatic — with guaranteed increases year after year — it affects the activities of those who are required to pay the inflated rates. Government should not be as deeply involved in the economy as the Deepwater deal has exemplified, and I fear that Rhode Island is going to be on the bleeding edge when it comes to finding out why.

Set the Entire RI Economy Afloat

May I make a somewhat obvious point — coming from a conservative — about the recent conversation concerning tax-free boating in Rhode Island?

The tax policy has also helped the state rebuild the ranks of highly skilled boat workers, and has triggered the creation and expansion of boat yards, designers, builders and subcontractors — who specialize in such fields as electronics, sails and marine insurance, he said.

The benefits are not solely Aquidneck Island's, either; owners fly in and out of T.F. Green Airport, rent cars, dine in restaurants and attend shows in the Providence area, he said.

According to Neil Downing's article, Rhode Island is forgoing about $8.4 million dollars, out of its $7 billion budget. Can you imagine what our economy would look like if the state and local governments would forgo more? A government should be a secondary consideration (if that), in society, not the primary determinant of its economy and life. By making itself more central, governments suffocate the very people they ostensibly seek to assist.

Warwick School Committee Chooses the Tough Path

Faced with an insurmountable $13 million cut in state and local funding, the Warwick School Committee voted to freeze pay and impose a 20% health care co-pay for all of its employees last night.

Before the vote, School Committee Chairman Chris Friel stressed that these are not actions the district wants to take but it has no choice faced with insufficient funding for its budget of about $161 million for the current fiscal year, which began July 1.

He said the district did not want to cut programs that directly affect students, such as sports, gifted classes, mentoring and all extracurricular activities.

The action is in apparent violation of the School Department's contract with its roughly 1,000 teachers represented by the Warwick Teachers Union, with teachers slated to lose a 2.75 percent raise this year....The leaders of the two unions that represent almost all school employees - the teachers union and the Warwick Independent School Employees union - vowed that they will respond with swift court action.

"I feel stabbed in the back," teachers union president James Ginolfi said, noting that the first he and other union executives heard of the School Committee's plan was less than an hour before it took action in executive session.

"We listened to what they had to say and said we'd get back to you," Ginolfi said, adding that the school board is sending a public message that it has no regard for a legal agreement. "I am shocked," he said.

Put it all on 38?

States, including Rhode Island, are smart to market themselves and offer incentives to businesses. The deal with 38 Studios is coming in for praise and criticism, to be sure. Gamers have their opinions, with the optimism based on the all-star cast of gameworld creators--R.A. Salvatore, Todd McFarlane and Ken Rolston--while the pessimists basically think the game will be just one more World of Warcraft "me too" that is destined to fall by the wayside (though some think that an MMO of a different flavor--ie; not "fantasy"--is might work.

The business community is split, too, with skeptics pointing out that the funds would have been better used if spread out or at least not spent on one seemingly risky venture. Others make the point that the splash made by the deal has already caused increased business interest in RI and that there are protections to mitigate risk.

Part of the confusion probably lay in the nature of the business in question. I wonder if there would be as much reservation if this was a business that was selling or producing a tangible product? The truth is we just don't know what exactly to expect from a video game company. It's a relatively new industry and, let's face it, most of the business media and non-related business leaders around here just don't really know much about video games. So, until 38 Studios actually produces a product and the prospect of other video game companies coming to RI goes from potential to reality, we're not going to know if the deal pays off, either directly or indirectly. Until then, it's simply a gamble.

The Illusion of an Improving Tax Structure

A while back, I pointed out (see the addendum) that what looked, at first, to be an economic improvement — the increased percentage of wealthy people in Rhode Island — turned out to be evidence of the contrary. The percentage improved because the non-wealthy left the state in such great numbers while the decreasing flat tax and capital gains tax maintained our population at the high end.

It seems likely to me that such less-encouraging factors explain the tax-related findings of the Rhode Island Public Expenditures Council (PDF), which Marc mentioned here. From the Providence Journal summary:

From 1998 to 2008, individual income tax collections, as a share of personal income, declined by about 7 percent, sales tax collections increased by less than 1 percent, and property tax collections increased by almost 4 percent.Simmons says the increasing reliance on the property tax in recent years can be attributed, in part, to the state’s decision to cut state local aid for education during the economic recession.

That forced communities to make up revenue losses through a combination of trimming expenses and raising the property tax — its only other major funding source besides state aid.

The silver lining is that Rhode Island's property tax grew at a slower rate than the national average of about 8 percent.

Because these calculations are made based on total income and population, in the state, and since our local economy has been struggling, while population has decreased, and since the General Assembly hasn't actually cut the tax, the sales tax revenue result is likely attributable to declining consumer confidence and increasing incentive to shop out of state, where sales tax is lower. On the income tax front, those who pay in the mid-range brackets have been leaving and out of work, while the tax on the upper range has been decreasing. That Rhode Island entered the recession ahead of the rest of the nation probably facilitated our "improvement" by this measure even more.

This puts a different light on the property tax question. Sure, the immediate cause was the cut in state aid, but the decrease in revenue from state-level taxes has surely been a prior cause (along with excessive spending and an unwillingness to cut state budgets to the necessary degree). That the growth in property taxes was slower than the national average need indicate only that Rhode Island was already closer to the threshold that residents could bear, and since the decrease in tax revenue for the state hasn't corresponded an increase, but rather followed from a decrease, in discretionary income for residents that threshold has, at best, remained stagnant.

Unemployment the Same; "Unemployment" Down

Here's an interesting observation. The Providence Journal's story about Rhode Island's decreasing unemployment rate may have been headlined "State's jobless rate declines to 12 percent," but the lead reads, "The figure is counteracted, however, by decline in size of labor force," and Andy Smith sets the tone of the article at the very beginning:

On the surface, there is good news in the state unemployment numbers released Friday. The Rhode Island jobless rate dropped to 12 percent in June, a decline from 12.3 percent in May, and the number of people classified as unemployed decreased by 1,900, falling to 69,300.

By contrast, the cycling news on WPRO — to which I'm able to listen at work, now that Buddy's show has moved to drive time — clearly presented the numbers as positive.

The upshot is that 800 government jobs (mostly for the Census) went away; 800 private sector jobs appeared (presumably with a significant percentage of temporary seasonal jobs); and 2,800 Rhode Islanders gave up their job searches and exited the calculation. Anybody who is tracking unemployment as a measure of actual economic health and resident well-being, in other words, should not be encouraged.

I will say this, though: It looks like my prediction of 15% unemployment was off the mark, but mostly because I didn't include the possibility of workers exiting the market.

Sailing in the Ocean State

Yes, we lost the bid to host the America's Cup, but there is still opportunity to grow our economy by focusing on sailing related business.

Warned ahead of time, the state administration immediately took a positive perspective, saying that Rhode Island is likely to host preliminary races that could become as big a benefit as the actual Cup defense....Keith Stokes, head of the state Economic Development Corporation and the leading state official on the issue, said the trials to select the Cup defender could involve several yachting syndicates.

Stokes said in an interview that the preliminary races in some ways offer a better opportunity than the final Cup challenge. Given the potential for multi-year events, “that provides a longer-term and stable economic opportunity.”

Long-time yachting expert Halsey Herreshoff, president of the America’s Cup Hall of Fame, said he sees another, long-term bright side to the situation: Newport is an excellent place to sail. Once current America’s Cup sailors find that out through sailing preliminary races here, he reasons, they’ll want to come back for future Cup competitions.

A Measure of Sustained Suckitude

We bat around the Lardaro Current Conditions Index from time to time, typically determining that it's not very useful, but it really does demand some .statement of context:

Rhode Island's recession is not over, but the end may be very close, according to the Current Conditions Index released Monday by University of Rhode Island Prof. Leonard Lardaro.

The index reported a value of 50 in April, down from 58 in March.

As I understand it, Lardaro's index measures current results against the same month one year prior, with a score of 50 indicating no decline or improvement. In other words, even if the recession technically ends in that the economy isn't shrinking, that doesn't mean that times are improving.

I say that not to issue in dark clouds, but because I think the general public thinks, when they hear that "the recession has ended," that the economy is back to normal, and if 2009 is Rhode Island's new normal, we're in a great deal of trouble. People in power keep pushing for economy-boosting reforms until the Current Conditions Index starts hitting 100, to compensate for the months on end that Rhode Island spent scraping zero.

In Defense of Realistic Taxation

In defense of the Tea Party — in the broad movement sense — Fred Deusch of North Providence sums up the problematic thinking of those who advocate for progressive taxation:

Rhode Island has about 1 million people, but only 12,000 pay 41 percent of the state's taxes, according to Treasurer Frank Caprio. How much does Mr. Platt want from those 12,000? In a May 9 Commentary piece, Michael McMahon, former head of the Rhode Island Economic Development Corporation, wrote: "Montgomery County, Md., similar in size and population to Rhode Island, tried to balance its budget by increasing taxes on the top wage earners from 4.75 percent to 6.35 percent. This was supposed to generate $106 million of additional revenue. But many of the wealthy, who are very mobile, left town. Revenue actually fell by $257 million as the number of millionaire taxpayers declined from 7,989 to 5,529."

When the wealthy leave for greener pastures, whether from Maryland or in Rhode Island, who does Mr. Platt think makes up the for the loss in tax revenues? Answer: We all do.

As I've pointed out multiple times, for much of the last decade, Rhode Island's tax policies — the flat tax and the capital gains tax — appeared to be maintaining our base of wealthy residents, while high property taxes (to fund unrealistic contracts for public-sector unions) and the general hostility of our political culture to economic growth continued to drive out the working-to-middle class folks who wish only to build on that base of wealth in order to improve their own circumstances.

Now, the capital gains tax is back with a vengeance, and the flat tax has been eliminated through a clever "overhaul" that appears to make the income tax more progressive, in its real effects, not less. And nothing has been done to improve the lot of those who've been fleeing all along. As Mr. Deusch suggests, we're all going to pay the consequences... all of us, that is, who stay.

Getting the Kids to Work

The Providence Journal's John Kostrzewa and the public officials on whom he reports miss some critical dynamics in their discussion of the problem of teen unemployment in Rhode Island:

More and more teenagers in Rhode Island can't find work because the recession has shrunk the number of job openings. The jobs that are available and that young people used to fill are being taken by seniors forced back into the labor market or out-of-work adults who can't find anything else.

Not to mention the factors of illegal immigrants and other unskilled labor attracted by our progressive welfare and tax policies. A more fundamental thought derives from this description of the problem:

When young people don't get jobs and are idle, they don't learn valuable behavioral traits and skills such as showing up on time, respect for supervisors, teamwork and the value of their labor.

Providence Mayor David Cicilline, Education Commissioner Deborah Gist, and others see the solution as more government programs, including education and training, but that's suspiciously helpful to bureaucrats and public-sector labor unions. The reality is that, as its policies across the board prove, Rhode Island is not designed for successful, upwardly mobile lives. Our state punishes success and rewards conformity and going along to get along. That dynamic leads to policies that restrict job growth and — in whom it attracts and what it encourages — floods out the opportunity to follow a clear course of opportunity from menial work to a successful career.

That's more of a cultural issue than an economic one, but if there's any hope to change it, it will come with the economic decision to encourage business activity — really encourage it, not by making forms easier to fill out, but my making business easier to conduct.

Where Rhode Islanders Are Going

Forbes has an interactive map where you can look at where the people are moving. I found it via Ryan Streeter's post concerning the difference in migration between California in Texas (Texas is gaining, Cali ain't). Consider Rhode Island more a Cali than a Tay-has. Here's Providence County, for instance:

Kent, Washington (er..."South") and Newport counties are also in the red, so to speak. Unsurprisingly, it looks like a lot of retiring Rhode Islanders are heading to Florida, Arizona and maybe SoCal. Another group, probably more based on economic reasons, is headed to Georgia--particularly Atlanta--and the Carolinas.

Cross Every Picket Line

Circumstances have made me slow to respond to this, and my position will hardly be a surprise, but I did want to express — ahem — solidarity with RIGOP Chairman Gio Cicione (as well as the RI Young Republicans) on the matter of crossing a union picket line to hold a Central Committee meeting at the Westin Providence hotel:

Explaining why the state Republican Party, along with the Rhode Island Young Republicans, decided to hold its State Central Committee meeting at the hotel, party chairman Giovanni Cicione said: "If Democrats continue to torture every local business with threats of strikes and boycotts, especially in the midst of this recession, Rhode Island will soon find itself with no employers left."

A Revolutionary Tax Twitch

Here's a humorous note for perspective: That revolutionary tax "overhaul" that the folks in the General Assembly are trumpeting as such a big deal, but that still needs to be watered down to remain "revenue neutral"? It will move us past a whopping three states in business tax climate:

Rhode Island's tax climate for business would improve somewhat if the state adopted a tax-overhaul plan proposed by the General Assembly's Democratic leadership, the Tax Foundation said Wednesday.

Rhode Island now ranks 44th of the 50 states, among the 10 worst nationwide, according to the Tax Foundation, a nonprofit group in Washington, D.C., that monitors government fiscal policy.

If the plan were implemented for this year, the group said, Rhode Island would rank 41st. "This indicates the plan would be a modest but positive change for the state's tax system," the group said in a report.

Look out Minnesota, Wisconsin, and Vermont! (PDF)

RI has 2 of 7 "Junkiest Cities"

Oy.

Think Greece and Spain are drowning in debt? Look a little closer to home. Seven U.S. cities recently had their municipal bonds downgraded below investment grade. Their debt is now junk, considered more worthless than that of the so-called PIIGS.

"America's short-term budget crises, long-term growth perspectives and needs for austerity are similar [to Greece]," said Matt Fabian, managing director at Concord, Mass.-based consulting firm Municipal Market Advisors.

Last quarter, Moody's Investor Services declared the debt issued by Harrisburg, Penn., and Woonsocket, R.I., to be junk, or below-investment grade. Meanwhile, Fitch Ratings currently has four other cities in the basement -- Detroit and Pontiac, Mich.; Harvey, Ill.; and Littlefield, Texas -- while Standard and Poor's has one -- Central Falls, R.I.

These seven cities are struggling under the weight of the recession. Residents are unemployed, and without a job, they can't pay their property taxes, which are the foundation of local budgets. And cities' operating expenses continue to soar; pension and debt payments don't go away. And as their credit gets worse, the cost of borrowing for municipal projects -- such as sewer plants and roads -- just gets more expensive.

"The fiscal stress is severe in cities around the country, and it's likely to stick around for at least a couple of more years," said Chris Hoene, director of policy and research at the National League of Cities.

Rhode Island's Love of the Bottom

I'm not sure whether or not it's a healthy development that Providence Journal economy columnist John Kostrzewa has come to the despair-bearing conclusion that many of us in the back alleys of conservative RI commentary have harbored for many months, now:

Hope has all but evaporated for a V-shaped recovery in Rhode Island — one in which the state quickly gains back the jobs and economic strength it lost during the recession. ...

Rhode Island has a noncompetitive tax structure, a lousy business climate and reputation, and an inability to solve state and local budget crises, leaving uncertainty for any taxpayer or business trying to plan a future here. Who would want to live or move into that environment?

During the long recession, a lot more could have been achieved if the state's leaders had kept their promise to rebuild the state's economy.

Because they didn't, Rhode Island is still stuck in the back of the pack.

Too many Rhode Islanders are invested in the status quo or duped by the arguments that what they love about the state is irrevocably tied to what's killing it or lulled by the preemptive assertions that we'll always be first in, last out of every economic decline for reasons outside of our control. The truth is that, in a state with a healthy political culture, every member of the General Assembly would be facing a tough fight to retain office, this November. The likelihood is that only a handful will change, and without significant effect.

The most sound advice, at this point, has to be to get out or hunker down. And if you choose the latter, for whatever reason, the best strategy for substantive change is to start local. It's not a thrilling call apt to rile up a revolution, but it's the only way forward.

Greece Is the Way

I'd been intending to highlight Ed Achorn's column from last week, anyway, but it's got special significance for me, after Saturday's vote in Tiverton:

See if any of this sounds familiar.

In Greece, politicians have duped voters into believing that it is compassionate to run up massive debts, fund unsustainable social programs, punish the work ethic and job creation, and give away the store to public-employee unions (with higher wages, better benefits and earlier, more generous retirements than those available to most in the private sector). ...

Still, thanks to a sufficient number of voters who pay little in taxes, get handouts, and/or have friends or relatives in government to protect, its politicians have gotten away with this behavior for quite some time.

Ed's focus is on Rhode Island, as a state, but the same characteristic philosophy resides in the cities and towns, to varying degrees. Some of the people who voted for a 7.88% minimum tax increase, in Tiverton, were parents riled by the threats of the School Committee, but most were teachers themselves or the family and friends of union members. Fill in the remainder with residents who enjoy what they perceive as free services and others who just resent having people who've lived here for only a decade or two deign to offer suggestions.

It's difficult to see what could turn the ship around.

What Reamortization Means to a Future Business Owner

Andrew gave listeners to the Matt Allen Show a quick and easy way to conceptualize the effects of reamortizing the state's pension debt.. Stream by clicking here, or download it.

Rhode Island's Beef with Business

When the "public option" fell out of the healthcare debate, I made the point that the legislation was the public option. The rules and restrictions under which our healthcare system must operate and bureaucratic presumption of dictating rates and expenditures make it, de facto, a creature of government design. There's something similar hindering business operation in Rhode Island.

Michael Morse's Engaged Citizen post, the other day, gave the worthwhile testimony that initial paperwork and fees weren't excessively burdensome. Of course, that's from the point of view of a man with some savings who determined to open a full-time storefront business. The calculation changes for folks with more drive than resources who want to ease into a business as a part-time affair.

More importantly, Michael's argument, like a legislative package that the General Assembly unveiled yesterday to make "it easier to do business in Rhode Island," is largely beside the point. In the General Assembly's case, one could argue that it's a smokescreen.

Assuming all of its components make it through the legislative gauntlet, the package makes some common sense changes, such as combining required paperwork into an online form and allowing government agencies to operate together and simultaneously when handling incipient businesses. But mention of taxes is nowhere to be found, and easing of mandates and regulations is danced in a circle. Consider the provision dealing with "Fire Code reforms":

... this legislation provides that fire alarm, smoke detection and carbon monoxide plans would have to be approved or denied within 15 days, instead of the current 90 days. To ensure that the fire code is enforced consistently, all assistant and deputy fire marshals would be required to participate in standardized national training and certification as determined by the state fire marshal. Approval of plans and construction of some buildings could be expedited, with the approval of the State Fire Marshal, if prepared and supervised by a professional engineer or architect. All other inspections and approvals would be conducted within timeframes to be established by the State Fire Marshal, not to exceed 90 days.

The problem with fire code regulations is that they're too onerous. For a non-business example, Tiverton has spent millions of dollars on new school buildings because recent changes to the fire code made them unsuitable for their intended purposes. In both the private and public sectors, requirements for construction add thousands of dollars to any project. If anything, this legislation increases mandates by requiring towns to hire new staff to meet requirements and ensure that employees can attend all necessary training.

The only component of the legislative package that actually touches on changes to regulations and mandates — as opposed to applying them more rapidly — is that old do-nothing mechanism of a panel to make reports:

This legislation, sponsored by Sen. Walter S. Felag, Jr. (D-Dist. 10, Warren, Bristol, Tiverton) and Rep. Peter F. Martin (D-Dist. 75, Newport), establishes the Office of Regulatory Reform within the EDC, to review Rhode Island’s regulatory processes and permitting procedures for businesses in an effort to further improve them. Each municipality would be granted the authority to appoint a liaison responsible for coordinating with the Office of Regulatory Reform. The Office will publish an annual report on the regulatory processes of state and municipal agencies and permitting authorities for the purpose of: encouraging agencies to improve procedures and reduce paperwork burdens impacting small business; making recommendations for simplification of regulatory processes, and making proposals to any agency for consideration of amendment or repeal of existing rules or procedures which may be obsolete, harmful or burdensome. The Office of Regulatory Reform would have the authority to intervene in regulatory or permitting matters before state agencies and municipal boards, commissions, agencies and subdivisions for the purpose of assuring efficient and consistent implementation of rules and regulations in order to foster the creation and retention of jobs in Rhode Island.

The wording of the statute could make a big difference, but this new office seems only to add one more government official into the mix of manipulation and noise-making. The reaction of big government to complaints that it isn't responsive to a particular constituency is too often to create another bureaucratic entity in the name of the unheeded group. Legislators, themselves, are supposed to be the people's voice in government, and this package does nothing about representatives who continue to present legislation with a "there oughtta be a law" mentality and refuse to ease up on their own financial demands in order to lower taxes.

Changing the Rules for "The Next Big Thing"

Special deals. Special laws. Once the state starts taking this sort of step, we're well past the point of reasonable accommodation for an incipient industry:

State lawmakers are attempting to breathe new life into a stalled proposal for an eight-turbine wind farm in waters off Block Island through legislation that would allow the project to bypass a difficult regulatory hurdle.

A bill filed late Wednesday would make it possible for developer Deepwater Wind and National Grid, the state's main electric utility, to enter into a power-purchase agreement without having to win approval from the state Public Utilities Commission. ...

Instead of the PUC, approval of a new contract for Deepwater would be in the hands of the appointed directors of four other state agencies: the Division of Public Utilities and Carriers, the Economic Development Corporation, the Office of Energy Resources and the Department of Administration. All four agencies would have to certify an agreement for it to go into effect, but they would each be given very narrow parameters for their review.

Deepwater and its government supporters didn't get the result they wanted through the normal path — permission to force energy consumers to pay three times the going rate of electricity for its product — so the latter are changing the regulatory path and putting blinders on the regulators. Whatever good intentions may lie behind such initiatives, this sort of special treatment should be a red flag for voters and legislators and is a bright beacon for corruption.

Amy Kempe, Carcieri's spokeswoman, said the introduction of the bill had no connection to the Cape Wind decision. Approval of the Massachusetts project, she said, only buttressed the belief held by Carcieri and House and Senate leaders in the promise of a national offshore wind industry.

"Yesterday's announcement shows that this is a viable industry," she said Thursday. "It is going to be moving forward."

It appears that Ms. Kempe misses the distinction between evidence that an industry is viable and evidence that it is politically popular. The former means that people are willing to allocate their own money for a good or service; the latter means that elected and bureaucratic officials are willing to allocate other people's money for it. The standards for success are clearly quite different.

Michael Morse: Doing Business in Rhode Island

Nobody said starting a business would be easy. I didn't expect it to be. Nobody told me I would get rich. I probably won't. A lot of folks said it would be impossible. Opening a business is not cheap. I needed every penny of equity from my home to make it happen. I've lived a simple life. I have no credit card debt. I drive a 1992 Toyota. My idea of an extravagant vacation is a weekend in New Hampshire. I've established good credit. I know how to work long hours with little sleep.

Along with my quest for independence comes a stubborn need to find things out for myself. An opportunity presented itself. I did some homework. I took an inventory of my current obligations. I ignored the incessant barrage of negativity that pervades the stream of consciousness of Rhode Island. I decided to act. My wife and I bought a tanning salon.

"Are you crazy?" was the reaction we encountered most. There are too many regulations! The economy is terrible! The government will tax you out of business!

Friends and family were amused by our latest idea. Though encouraging, I think some secretly hope we'll fail, if for no other reason than to prove to themselves that it can't be done, at least not in Rhode Island.

The closing was in late October. We incorporated in November. Filled out the state sales tax form, applied for a building permit and certificate of occupancy and went to work.

We planned on opening December 1st. We applied for a permit from the Department of Health. The Health Department paperwork took about a half hour to complete and cost two-hundred and thirty dollars. The people there were efficient and helpful. The only trouble we had was with our own unrealistic expectations. December 1st came and went, our place was a disaster. We worked through the holidays.

We finished construction of our store on January 12th. The people at Warwick City Hall helped us navigate the inspection process. In one day, the fire alarm, mechanical, plumbing, electrical and building inspections were done. We received the certificate of occupancy in the mail a week later. The entire process cost $50 and about three hours of our time. Somehow, the fact that we still needed a license to operate from the City of Warwick slipped our minds. We applied, and I had it the next day. We needed another license to do business on Sundays. A day later it hung on the wall of our new business, next to the Health Department license, the permit to make sales at retail and the CO.

We paid the State of Rhode Island a total of $740: $500 to incorporate, $230 for a license to operate from the department of health, and ten bucks for a permit to make retail sales. The City of Warwick got us for $150. This March we have to pay another $500 to the state to stay incorporated, the yearly fee of $230 to the Department of Health for our license, another $10 to keep our retail sales permit, about $1,000 to the City of Warwick for inventory taxes and the $100 for our sales licenses.

Insurance is costly, about $2,000 a year. Workers compensation another $400. I have to pay weekly payroll taxes of about $50.

Expensive, yes, but hardly onerous. Not quite the roadblock I had expected. It wasn't cheap or easy, but if it were, everybody would do it. The cost of doing business in Rhode Island is not a reason to not do business in Rhode Island. I needed to spend some money to make some money.

Now, I hope people come to my place and spend some of theirs!

The Mindboggling Contortions of Nanny Staters

Beyond her many ways of saying "raising taxes" without saying "raising taxes," note the convoluted language that this advocate of poverty uses to confuse voters (emphasis added):

Kate Brewster, executive director of the Poverty Institute in Providence, which analyzes tax and budget policies on behalf of low-income people, said, "State leaders need to take a balanced approach to solving our financial problems, which includes carefully reviewing our tax policies. We agree with RIPEC that the state should avoid a piecemeal approach to tax policy. However, there are several reasonable policies that could be enacted that would generate much-needed revenue in a fair and responsible manner, such as ending corporate giveaways, modernizing our sales tax and considering the hundreds of millions of dollars we forgo each year through tax expenditures."

Would any casual reader understand that not forgoing expenditures means raising taxes? Hopefully a reader who does will understand that, by Brewster's reasoning — which, to be fair, appears to have been the dominant perspective of those who determine Rhode Island's budgetary and spending policies — every dollar in the private economy is ultimately just tax revenue that the state chose not to collect and every decision not to collect it is an "expenditure."

Here's another interesting tidbit from the same article, by the way:

Taxes paid by businesses in tax year 2008 amounted to 5.7 percent of the state's gross state product for that year, compared with 4.2 percent for Massachusetts, 3.7 percent for Connecticut, and a national average of 4.9 percent. "We have a very heavy business-tax burden," Simmons said.

We must stop this now, or everybody who remains in the state of Rhode Island is going to suffer, the poor and working class most of all.

Will Disaster money become another "one-time fix"?

I've heard chatter about how, perversely, the flood disaster here in Rhode Island could turn out to be some sort of blessing. Why? Because the Federal Disaster Area tag brings with it Federal dollars that can be used to rebuild infrastructure damaged in the storm. And whereas Bastiat's parable of the Broken Window certainly applies to those businesses damaged by the flood (money they could have spent elsewhere is going towards just getting back to normal), does it apply to RI government?

On a macroeconomic scale, yes it does. Federal dollars are still our dollars, though filtered through Washington. That is money that could be spent elsewhere if there was no disaster. So, whether you agree or disagree with the other avenues of spending--ie; health care, military, etc.--disaster relief takes money away from other areas.

On the other hand, if we've already sent the moola to D.C., what the heck is wrong with getting it back because we need it, right? In fact, isn't disaster relief amongst one of the core functions of a government anyway? I would say yes and to heck with Bastiat.

But then there is this: RI government has done an awful job at one of its supposedly central functions of maintaining infrastructure. The budgetary crunch wasn't going to alleviate that any time soon and, at best, we would be subject to the same routine as past years such as voting on "transportation bonds" apart from the normal budget or cutting out school building improvements. But then we get the rains of March and the resulting disaster, which leads to the promise of a Federal bailout of a different sort.

My fear is that the General Assembly will manage to turn disaster aid--just like last year's stimulus money--into another short-term, one-time "fix" by moving money around and using federal dollars to replace state spending (like they did with education stimulus dollars) instead of as a supplement to it. So questionable programs favored by those in the General Assembly will be maintained and Federal dollars will be used to cover the basic areas that State government should be doing anyway. Another one time fix that will allow the GA to kick the can down the road again.

Stimulating Everybody in Rhode Island

Rep. Stephen Ucci (D., Cranston, Johnston) has proposed legislation with a targeted "stimulus" intention:

The bill (2010-H7905) would implement a three-year freeze on the sales tax of all building materials used in the construction of new or improvements to existing residential and commercial buildings.

"The retail sales tax incentive program would essentially amount to a seven-percent discount on raw materials used to construct or make improvements to any building, including wiring and plumbing supplies," said Representative Ucci.

In addition, Ucci's construction stimulus package would implement a three-year property tax moratorium on all new construction and improvements to existing buildings completed in 2011, 2012 and 2013.

I suppose, since it's my industry, I shouldn't be inclined to criticize the intention, and I suspect the legislation's chances of making it into law are just about nil. But I do wonder why the move should be so limited. If it would be a good thing, by decreasing sales tax and holding back property taxes, to stimulate the economy, why not stimulate it all around? Construction's an integral field for economic development, but it doesn't really open up new routes for economic growth.

Once the houses and office buildings are erected, people have to live and do productive things in them. That's what the state ultimately has to begin encouraging, rather than discouraging.

Special Interests Strike Again

This, reported in the weekend edition of the Newport Daily News, is very typical of the way Rhode Island does business:

The state has cited the company Newport’s water division hired to install new radio-read meters at all 14,500 water accounts in the city and in Middletown for not having master plumbers do the work.

The notice of violation from the state’s Division of Workforce Regulation and Safety caught the city by surprise.

Julia A. Forgue, Newport’s director of utilities, said forcing the city to hire master plumbers to change the meters would increase the project’s cost by two to three times. The contractor is appealing the decision to the Department of Labor and Training.

Non-plumber city employees have been changing and maintaining meters for years. These little requirements, jacking up the cost of living and operating in Rhode Island for the benefit of politically connected interest groups (notably unions), are why I say that the state could rocket out of its perennial recession if only it would toss aside its unnecessary burdens. This case is even more egregious, because the change of meters isn't self-initiated:

The state's Public Utilities Commission asked Newport to convert all water meters to ones that can be read from the street with a radio device, to reduce long-term costs and to make meter reading more efficient. The city in July 2008 awarded a contract to Stiles Co. Inc. of Norwood, Mass., to provide the meters. Stiles hired Five Oaks Construction Co. of Groton, Mass., as the subcontractor to install the meters, and it began the work in December 2008. By the end of last month, Five Oaks had installed just over 5,550 meters.

So, an unelected state board is requiring the change, and the state government is requiring that it be excessively expensive. Little wonder Rhode Islanders feel powerless (and just leave when the state hits their thresholds for tolerance of reductions in their quality of life).

First to Unemployment

Rhode Island should not, under any circumstances, increasingly burden the state's employers with the costs of its unemployed, but clearly, something must be done to adjust for our long-term burden of unemployment. This conversation is therefore very necessary:

The state Department of Labor and Training on Wednesday proposed sweeping changes to Rhode Island’s unemployment-insurance system to try to restore the state's unemployment trust fund to solvency.

The plan would gradually raise the state unemployment tax paid by more than 30,000 employers in Rhode Island and cap or reduce benefits that an unemployed worker could receive.

The mix of solutions is a matter for extended debate, but this suggestion makes absolutely no sense to me:

Benefit changes would apply only to people filing claims in the future, not to those currently collecting, officials stressed.

Frankly, I see no justification for that distinction, except (maybe) to keep the state from having to recalculate anybody's benefits. It's not as if the currently unemployed invested more into the system, and it's not as if those who are still working will have additional time to prepare for a change in unemployment benefits that they don't yet know that they'll require.

Under the same logic, one could argue that no businesses that are currently making payments for their unemployment insurance should see an increase in their rates.

What Profiteth a Non-Profit to Advocate Big Government?

I concur with Marc that seeking to compensate for horrendous government spending, taxing, and economic policies by squeezing money from non-profits would be shameful. We shouldn't let the news cycle revolve, however, without noting the significant overlap between the non-profit community and the segment of the population that advocates for the very policies that are sinking the state.

Every time somebody demands charitable assistance from the government, whether effected as a mandate or revenue, that person is demanding a shift in responsibility from private citizens to the government. Once the structures are in place, the government considers that it owns the cause. Heed well the parenthetical note from the article to which Marc links:

Aside from health facilities, Rhode Island law also grants tax-exempt status to churches, Little Leagues, public and private schools (Costantino noted that public schools and universities probably wouldn’t be affected by any proposal), and afterschool programs such as the YMCA.

First the government is a partner. Then it's competition. Then it gives itself unfair advantages. And ultimately, the same organization that extracts money by force of law for taxes is the same organization that grants college loans, manages the healthcare industry, maintains a criminal justice system, maintains a military, and determines how much help people deserve, what sorts of strings ought to be attached to that aid, and what social agenda ought to be furthered by the charitable process.

Promises Unkeepable

There it is on the front page:

The promises that Rhode Island and its cities and towns have made to their current and future retirees without putting money aside carry a dollar figure that is big enough to buy 345,588 Ford Mustang GTs, 47,000 houses priced at the state median or several hundred of the finest mansions along the state’s coast.

Put another way, the state’s unfunded retirement obligations add up to about $9,400 per Rhode Island resident.

All told, those promises come with a price tag of $9.4 billion — a number revealed for the first time in a report to be released Wednesday by the Rhode Island Public Expenditure Council.

That bit of news dovetails perfectly with a recent op-ed that I'd intended to mention, today, by RI Senate candidate for district 35, Dawson Hodgson:

Hard-working and dedicated government employees deserve a compensation and retirement structure comparable to that of their fellow citizens. In some cases, such as police and firefighters who risk their safety to protect ours, they even deserve a little bit more. All they have now, however, is an illusion that has been sold to them by irresponsible politicians. A deal that can't be kept is no deal at all. We owe these employees and our taxpayers a contemporary and competitive benefit structure within the confines of what we can afford.

Among the problems that government faces is that, when it tries to commit future generations to make specific (and imbalanced) payments, those generations don't have much reason to feel as if they have ownership of the promises made. Another problem that Rhode Island has, especially, is that those younger folks can just leave, making the promises even harder to keep.

A Bit of Hot Air

This is the proposed subsidy that the General Assembly and Governor are foolishly forcing energy consumers to provide for wind power, unless the Public Utilities Commission objects:

Under the deal being reviewed, National Grid would pay 24.4 cents per kilowatt hour for power from the project starting in 2013. The price would increase by 3.5 percent a year. The utility currently pays 9.2 cents per kilowatt hour for power from natural gas-fired plants and the like.

We've essentially created a controlled market for wind energy that begins two-and-a-half times the going rate and increases about 15% per year regardless of market forces. During a massive recession, this is a wonderful example of the insanity that Rhode Island does so well.

"A lot of industries are looking to pull out of this region," Energy Management vice president Dennis Duffy said. "This is one new industry that is trying to get in."

Of course, Mr. Duffy doesn't speculate as to what other industries might try to get in the region with the same subsidized deal and guaranteed market. Rhode Islanders should remember Duffy's argument in a few years when there are even fewer jobs, fewer business, and a smaller taxbase and public infrastructure has switched from crumbling to dissipating for lack of resources.

"Sins of the Past" Contribute to Pension Woes

ProJo has the story:

Acting Auditor General Dennis E. Hoyle said...cities and towns need to look at their sometimes generous retirement plans, determine whether they are “sustainable or not” and make changes. He said cities and towns could improve the situation by making full contributions each year, raising employee contributions and transitioning out of defined-benefit plans to defined contribution or hybrid plans for new hires.

“Without changes in the benefit structure, there’s not going to be that much of a dramatic savings” he told the commission.

...cities and towns are trying to deal with the “sins of the past” when it comes to promised retirement benefits, but he acknowledged it is a challenge. It would help, he said, if the state allowed defined contribution and hybrid plans for cities and towns that enroll employees in the state Municipal Employees Retirement System, because those would lower projected costs for new hires.

Hoyle cited the Cranston police and fire retirement system as an example of a plan that is in trouble. According to the report, the Cranston plan covers 70 active members and 426 retirees and has enough money to cover just 15 percent of its projected obligations. As a result, the annual required contribution needed to keep pace with projected costs is $20.1 million. By contrast, the annual required contribution for the state Municipal Employees Retirement System, which covers 14,667 active employees and retirees — more than 29 times as many people as the Cranston plan — is $33.5 million.

Any Way to Tax the Productive

A letter by Middletown Republican Town Committee Chairman Antone Viveiros in the Newport Daily News directs attention to H7563, submitted by Rep. Amy Rice (D., Portsmouth). The legislation would add the following language to Rhode Island tax law:

Opting out of the domestic production deduction. — All corporations doing business in the State of Rhode Island shall add back into their taxable income any amount deducted under the federal "domestic production deduction" also known as section 199 of the federal Internal Revenue Code. State tax forms shall be changed if needed in order to comply with this statute.

For the likes of Rice, it appears, ideology trumps economic wisdom. Even were it a principled correction to remove national tax reductions from the Rhode Island calculation, sucking money out of the productive segment of the state is plain lunacy in the current economy and in our current condition of civic deterioration. As Viveiros asks in closing:

Is this the way to create jobs?

Why won't the General Assembly majority cut spending, as we have? Do they have to, to get reelected? I'll leave those answers to you.

Trying to Comprehend the Amazon Tax

Being as circumspect as I'm able, I can't see the Amazon tax as anything other than myopic protectionism on the part of RI policy makers. Basically, the law states that a company has "a physical presence" in the state if it has affiliate agreements with local businesses, requiring them to collect Rhode Island sales taxes:

[RI House Finance Committee Chairman and General Treasurer Candidate Steven] Costantino said he wants to keep the law in place as a matter of equity. "Rhode Island businesses who are on Main Street need a fair playing field," he said.

Gary S. Sasse, director of the state Department of Revenue, put it this way: When buying a camera from a store in Rhode Island, a consumer must pay a sales tax. When buying online, a consumer may or may not pay sales tax.

"It's a violation of the basic concept of fairness in tax policy, to tax one seller and not the other," Sasse said. Repealing the Amazon law would be a mistake, he said.

The vision evident in that view is as narrow as a snake's scale. First of all, local businesses can compete on the lack of shipping costs and immediate gratification. Second of all, the Internet enables local businesses to create online stores and pursue customers worldwide. Large, national companies will have a huge advantage over small, Rhode Island companies once all states follow Rhode Island's lead.

The most mind-boggling thing is that consumers can still get the products without taxation, provided absolutely nobody locally benefits from the purchase. At the very least, one can say that Rhode Island is in no position, economically, to be in the vanguard of this government backlash against Internet retailers.

Once More, With Feeling: RI Government Must Shrink

John Kostrzewa notes what is likely just the baseline for actual results:

All of the recent turmoil is the result of Rhode Island's anemic economy and plans to close state budget deficits of $219 million for the year that ends June 30 and $427 million for the year that follows ..

The report shows the state's budget deficits for the coming years that end June 30 are forecast to be $362.2 million in 2012, $416.2 million in 2013, $457.8 million in 2014 and $535.7 million in 2015.

If the state government doesn't take dramatic steps to rework its functioning, I suspect those numbers are going to look like wishful thinking. Kostrzewa insists that entitlements and social services spending have to be cut back, and he's right. He's also right that cities and towns have to "redirect some of the energy they are putting into whining about state aid cuts to restructuring their governments," and the state will have to lighten the burdens it places on municipalities and school districts.

The only difference I have with Kostrzewa comes with this:

The tools [that the state should supply the cities and towns] range from changes to municipal pensions and minimum manning provisions, to municipal health insurance cost sharing and a uniform public school employee health care benefits program. Other proposals include eliminating mandates for school bus monitors and the requirement that school nurses be certified teachers.

My view is that the state should eliminate mandates, not reverse their direction. In other words, the General Assembly should provide relief from itself, but not impose terms on contracts, even if any economically literate resident would prefer those terms. Let residents get involved and rebuild their local governments on their own impetus; otherwise, the focus of activism for special interest will just shift away from towns, and they'll place even more emphasis on dominating the State House, which will be more difficult to reach from the grass roots.

Some Different (Not Necessarily Good) Ideas

I don't know much about Coventry's Victor Moffitt, who has announced his intention to announce a run for governor as a Republican. Most of his reported ideas represent the sort of reform of which my opinion ranges from suspicious to hostile:

Rhode Island no longer has a surplus, but Moffitt in a brief interview said many of the themes of his campaign for governor will echo his 1998 campaign [for treasurer]. At that time, he proposed eliminating school spending from the local tax burden, establishing a statewide 7 percent flat income tax (which he says would bring in enough new revenue to establish a statewide school-funding financing plan) and breaking the state into four regional school districts. He also wanted to reduce the state sales tax to 6 percent.

Centralizing financial control of the schools: bad idea. Increasing taxes for most Rhode Islanders: worse idea. On the other hand, the article offers an intriguing glimpse of rhetoric from Moffitt's past:

In response to news that the state had logged a $132-million surplus in 1998, for example, he wrote: "A 'surplus' is created when taxpayers are overtaxed ... Every 1 percentage point of the Rhode Island sales tax represents about $70 million in state revenue. Therefore, we should reduce the sales tax to 6 percent ... to allow our Rhode Island retail businesses fair competition with our neighboring states."

His general perspective appears to be correct, if his solutions would ultimately exacerbate our problems. My mind, of course, went to the Tiverton school district, which had a quarter-million-dollar surplus this year yet continues to complain that taxpayers "cut" its budget by declining to increase it by an additional $627,000 (or so) in the last budget cycle.

What Does Lardaro's Index Mean?

It seems as if URI Economics Professor Len Lardaro is changing his explanation of his index in a subtle, but significant, way:

The Current Conditions Index fell to 33 in December, down from 50 in November and 42 in October. But Lardaro emphasized that the latest report was not uniformly negative. ...

The Current Conditions Index uses a dozen national and local economic indicators to track the state’s economic performance. A reading of 0 would mean no indicators improved compared with a year earlier, while 100 would mean all 12 improved.

December was the eighth consecutive month that saw Lardaro's index top its year-earlier level, as four the 12 indicators showed month-over-month improvement, including manufacturing wages, the size of the labor force and new claims for unemployment benefits.

Every explanation that I've read up to now has stated that a score below 50 means contraction and a score over 50 means expansion. (I also thought the indexes compared each month to a year earlier, not the prior month.) Have we just been shrinking for so long that Lardaro has to delve deeper to find a positive message?

There's A Reason That "Hope" and an Anchor are on the Flag

Look, for obvious reasons, it's hard to be optimistic around here, but a couple stories should give us OCEAN staters a glimmer of "hope." First, Quonset Point is getting some stimulus dollars to upgrade infrastructure and, possibly, help build a new manufacturing facility:

The Quonset Development Corporation has been awarded $22.3 million in federal stimulus money to upgrade the infrastructure at Quonset Business Park and purchase a crane for Davisville Port with an eye toward creating a hub for wind turbine assembly.

Gov. Donald L. Carcieri said the money would give “a tremendous boost” to the state’s efforts to become a center for the renewable energy industry. QDC Managing Director Steven King said construction work may begin within six months....

The QDC says the upgrades will help offshore wind developer Deepwater Wind LLC open a planned wind turbine assembly plant at the park. However, the federal government has not yet said exactly which projects have been funded, King said....In its application, QDC said the money would create between 500 and 800 jobs. The bulk of those jobs would be at the Deepwater plant, with the agency anticipating the remainder coming from businesses that expand or move into the park as a result of the infrastructure improvements. The new crane and refurbished docks also could create jobs, QDC said.

The spectacle of America’s Cup yachts flying anew across Rhode Island Sound became more than a shot in the dark after software billionaire Larry Ellison — who apparently bought Astors’ Beechwood Mansion on Bellevue Avenue recently — won the 33rd America’s Cup challenge on Sunday in Valencia, Spain.

Ellison, whose BMW Oracle team seized the Cup for the Golden Gate Yacht Club, immediately cited San Diego, San Francisco, and Newport as possible venues for the next Cup challenge, expected to be held in 2013....

Larry Fisher, executive director of the Herreshoff Marine Museum and America’s Cup Hall of Fame, said, “Apart from the great tradition and spectacle that the race is, and all that leads up to it, it’s a great opportunity for economic development.”

Fisher cites two recent studies that determined the economic impact on the 2007 America’s Cup in Valencia to be “in the realm of 70,000 jobs created, and billions