Anchor on the Air

As those who listened already know, Don switched with Andrew for this Wednesday's segment on the Matt Allen show. His commentary related to his post on Rhode Island's failure to address its current crisis can be streamed by clicking here (or download).

Next Wednesday at 6:50 p.m., Andrew will have his moment in the spotlight.

What, Me Worry?

Anybody who doesn't see what the big deal is when Don laments our state's lack of a sense of urgency need only read through yesterday's business pages. The values of assets are plummeting:

The median price of a multifamily house in Rhode Island during the first quarter declined about 39 percent, to $161,000, compared with $263,000 a year earlier. More than half the 261 multifamily houses sold during the quarter were bank-owned foreclosure sales, according to the Rhode Island Association of Realtors.

Condos aren't moving:

Sales of condominiums during the first quarter plunged 37 percent, as more units sat on the market unable to find buyers, according to data from the Rhode Island Association of Realtors. Only 244 condos sold during January, February and March, down from 390 during the same period a year ago, the data show.

At that pace, it would take 22 months — nearly two years — to sell all the 1,772 condos on the market during the first quarter of this year, according to an analysis of data from the statewide Multiple Listing Service.

"Holy smokes!" exclaimed Suzanne E. Mulvee, a senior real-estate economist in Boston with Property & Portfolio Research, upon hearing about Rhode Island’s condo inventory. "That sales volume is absolutely falling off the cliff."

And URI economist Leonard Lardaro is trying to shout us awake:

In a statement with the [Current Conditions Index], Lardaro said, "Anyone who denies that Rhode Island is in a recession is clearly delusional. More importantly, based on our state's 2008 economic performance, we have entered a second and deeper recession phase, where prior economic activity levels will continue to become ever-more unattainable. Having to eliminate large [state] budget deficits amid all this weakness will prove to be far more difficult than almost anyone here has imagined."

Folks, we're heading into a helluva time that some of us won't be able to make it through as Rhode Islanders. Whom we enable to remain, however, will determine the darkness and duration of the night.

Sinking Rhode Island Like a Lead Anchor

Maureen Martin's got it right:

If the [lead-paint] verdict is upheld, every dwelling in Rhode Island constructed before 1978 (about 240,000 total) will have to be inspected for lead-based paint, regardless of whether the owners agree to that inspection. Residents will be forcibly relocated if their homes need an "extreme makeover" to remove and replace everything with lead paint on it — siding, walls, stairs, even kitchen cabinets — all at the paint companies' expense.

This scenario is fraught with unintended consequences. First, because Rhode Island law already requires landlords to abate lead hazards in rental units at their own expense, those who neglected to do so would get a free renovation, paid for by the paint companies. Second, real-estate values, already in decline, would further plummet while repairs are under way. This will depress the real-estate resale market and impair the value of assets held by lenders.

Read the op-ed for a reminder of the details, but the sound one hears while reading such summaries is of a nation eating itself — no doubt with a toxic aftertaste for which somebody else will have to bear the consequences.

Rhode Island Persuades My Skeptics

Well, it took some time, but apparently, Roland Benjamin's been persuaded:

The info on shrinking tax receipts was predictable given Justin's demographic research here.

Because we have replaced around 29,000 people from above 3x FPL (about $60k in household income) with 25,000 below that threshold, the tax receipts should follow that. And they did.

Above $60k in earnings, a household is likely to be paying more in taxes than they are consuming in public services. The inverse will also be true.

My only skepticism with the original research was that tax receipts had not reflected the trend. Today's front page of the Projo removes any doubt.

"Holding the line" on taxes, when we are clearly chasing taxpayers out will simply preserve this outbound trend.

What the other side (which, to be clear, by no stretch includes Roland) has been desperately hoping to ignore is that these trends have a natural lag. The suggestion of the stunning income outmigration on the charts to which Roland links is that the exodus began in earnest in 2005. That's income reported on tax returns filed in 2006, some of it no doubt from people who continued to work in Rhode Island, thus making them liable for RI taxes, with some of the government revenue (as I've theorized) temporarily boosted by taxes on the activities entailed in packing up and moving.

I'm keeping my eye out for Census and IRS data for 2007, and although I'd be thrilled to find my prediction wrong, I fully expect to see the upper-income categories that have thus far held steady turning south. Once that happens, it's start-a-fire-or-lights-out time.

RI Revenues Down Again

Steve Peoples of the Projo reports that Rhode Island's economic condition is amongst the region's and the nation's worst...

Economists reported last week that Rhode Island is one of nine states across the country and the only one in New England experiencing an economic recession. State Tax Administrator David M. Sullivan supplied data yesterday detailing the effect of widespread job losses, stagnant wages and weak consumer confidence.

Sales tax collections are down $23 million, or 3.1 percent, compared with the same period last year, Sullivan reported, while income tax revenue is down $9 million, or 1 percent. Should the trend continue through the end of the fiscal year in June, as expected, it would be the first time that the state’s largest two revenue sources collectively fell since the early 1990s.

Indicative of Obviousness

Times are so dark — and the general thrust of the solution so obvious — that special interests and other general-revenue soakers can't even escape to the Lifebeat section for relief. Credit goes to Rita Lussier for using her influence for the cause of sanity:

Not to alarm you, but this situation is a ticking time bomb. My fear is that if we can't get the numbers to add up, the problem is going to stay unresolved and while you and I are out sailing or playing tennis or watching the Red Sox or whatever sweet distractions of summer might capture our attention, our legislators might to be tempted to take THE EASY WAY OUT so that they too can go off and sail and play tennis and watch the Red Sox. ...

Keep in mind that part of the problem here is that everybody else besides us is organized. The lobbyists are organized. The social welfare groups are organized. The unions are extremely organized. We, on the other hand, are not, mainly because we're so busy working to pay for all of this.

Well, I say it's time to get involved, time to say good job so far, now stay the course. And this is coming from someone who has never written to or called her representative. This taxpayer is speaking up:

DO THE RIGHT THING FOR OUR FUTURE. CUT SPENDING.

Voting for Your Family

I've been saying for years that we with eyes to see should attempt to explain to our fellow Rhode Islanders that their voting habits must change if they wish to keep their families together. A vote for the same old legislators is a vote for your son or daughter to move out of state in the search for work. That's also a conclusion in Edward Mazze's column, yesterday, which gives one the sense that ideas on general principles for moving forward are beginning to coalesce:

The outlook for jobs for the remainder of 2008 is bleak. For March, the Rhode Island Department of Labor and Training announced a decline of 3,100 jobs, which increased the state's unemployment rate to 6.1 percent. This is the highest unemployment rate in the region and the highest unemployment rate in Rhode Island since August 1995. In February and March, employment losses were reported in almost every industry sector in the state. It currently looks like no new net jobs will be created in Rhode Island in 2008. ...

The solutions include making Rhode Island more fiscally responsible and job creation the focus of Rhode Island's economic programs. The graduating class of 2008, as in past years, will have to seek employment in other states since there will be few jobs in Rhode Island available to them.

In recent years, there has been more job destruction (jobs lost due to business contraction, closure or out-migration) than job creation in Rhode Island. The net job-creation rate has been the highest among smaller businesses, while it has been negative at larger businesses. ...

The objective is to make the state business friendly. This goal can be accomplished by a sweeping reform of the state's tax policy, changing those policies that slow down business activities such as permitting, and changing legislation and policies that prevent individuals from entering specific trades by requiring long-term apprenticeships. Rhode Island must continue to develop a one-stop place for businesses to go for permitting, tax information and support services to create less red tape.

Number One, in a Bad Way

This gave at least a brief reprieve in a feeling of having company:

WHATEVER YOU TAX — and excessive regulation may also be viewed as a tax, since it forces companies to shell out money that might better be spent elsewhere — disappears, including, in the long run, revenues collected by the tax.

This is what is happening in Connecticut. The current budget is about $16 billion, slouching towards $18 billion; that's more than twice the bottom-line figure of the last pre-income-tax budget. Taxpayers and taxed companies are disappearing.

But then, the next day brought this:

Rhode Island stands alone as the only Northeastern state "in recession," according to economists who reported today that the state's economy hasn't been this bad in nearly two decades.

The Ocean State's employment figures, its foreclosure rates, and personal income growth are worse than its neighbors and national averages.

Rhode Island is one of just nine states in recession -- the next closest is Ohio -- while Massachusetts, New Hampshire and Connecticut have growing economies, according to Steve Cochrane, senior managing director for Economy.com, which is owned by Moody's Investors Service.

"Clearly, in the northeast, Rhode Island is a picture of weakness," Cochrane said. ...

Why did Rhode Island fare so poorly, given that most of the country has been hurt by the subprime mortgage crisis and subsequent credit crunch?

Cochrane cited these primary factors:

Rhode Island is losing population at a rate that he likened to the exodus in Silicon Valley after the dot-com bust. People returned to Silicon Valley, he said. But there's no evidence to suggest that Rhode Island will soon increase its pool of potential taxpayers and consumers.

Cochrane notes that our size — as, essentially, a one-metropolitan-area state — means that we don't have the opportunity for balance, but that could just as easily be a positive on the upswing. To ensure that upswing, step one would be a voter-driven startlingly high turnover rate in the General Assembly. As the guy said, though, "there's no evidence to suggest that Rhode Island will soon" find its way out of this mess.

Feinting Round One

Surely, I've become too apt to be suspicious, but something in this labor rep's reaction to the supplemental budget — in conjunction with the legislators' "yelling and screaming" during debate of it — reminds me that this was merely the preface:

"It's devastating," said Dennis Grilli, head of the largest state employees union, Council 94. "All in all, I don't think we fared very well."

Labor's disappointment was met with praise from Governor Carcieri's office, which applauded the Democrat-dominated Assembly's decision to avoid raising taxes to help close the massive budget hole.

I can already hear the claim that labor's already taken "devastating" cuts, so now it's the taxpayers' (or the business community's) turn.

Not a Bad Idea, but Dumb

Yeah, well, while I'm not so sure that forcing hospitals to pay property taxes is such a good idea, RI Senator Harold Metts (D, Providence) has a point when it comes to universities:

"In 1989, it was estimated that 35 percent of the city's taxable properties were owned by a few tax exempt institutions," said Senator Metts. "That grew to 40 percent by 1997 and today's estimates put the figure at around 48 percent or even higher. That means 100 percent of the property taxes are coming from 50 percent of the property owners, working-class homeowners. It's not fair."

Unfortunately, Metts seems to suffer from a common intellectual blindspot among those on the class-warfare Left:

"I am aware of the opposition this legislation will generate," said Senator Metts. "I also firmly believe that not one tenured professor at Brown will suffer a pay cut if the school has to start paying taxes on the vast amount of property it owns. I firmly believe that not one executive at Rhode Island Hospital will suffer a pay cut if the hospital has to start paying its fair share to the city."

Perhaps he's right that not one tenured professor or hospital executive would suffer financially from the tax, but you could bet your bottom quintile that a significant number of low-to-midrange employees would find their jobs eliminated, and that clients, patients, and students across the socioeconomic spectrum would see their costs go up, with a bit of trickle-out inflation.

That said, I wholeheartedly endorse Metts's plan as a first step in pushing delusional liberals toward their own epiphanies about the need for structural government reform in Rhode Island.

The Big One's Yet to Come

Today's Providence Journal has more on the supplemental budget. There's some reason to hope that the General Assembly will manage to avoid making things worse — although without bold changes, treading water could simply mean drifting further out to sea. Here's the key part of the report, though:

The vote marks a significant step forward in the state government's struggle to close massive budget deficits that Governor Carcieri says have pushed Rhode Island to the brink of financial disaster.

But it was just a first step.

The package passed yesterday addresses only the deficit projected for the current fiscal year. It does little to address next year's estimated hole of $384 million, a number that state leaders largely agree will grow substantially when fiscal advisers examine state revenues next month.

This was an emergency lunge. We'll see what the debate looks like when it's not peppered with promises about "next year's budget."

High Rollers on the Hill

I get that winning clients sometimes requires wooing them — especially in the glamor-obsessed entertainment industry. As a government activity, however, this makes me very uncomfortable:

When Steven Feinberg entertains people in the television and moviemaking industry, he entertains them in style.

He sprang for the Ravioli al Filetto at Venda's Café, the rib-eye special at Zooma, the 16 oz. center-cut sirloin at Siena , a filet mignon at The Capital Grille and along the way bottles of wine costing up to $39. He hired chauffeured cars to shuttle some of the stars of the Showtime series Brotherhood back and forth during nights out that ended at 3 a.m.

He treated actor "Joseph Pantoliano and family" to $203 worth of gondola rides along the Providence riverfront.

In his role as director of the state Film & TV Office, he sent $1,375 worth of gift baskets from Wickford Gourmet to the cast and crew of Evening, before they decamped.

And when Feinberg flew to California last summer, he stayed in a "premier ocean-view room" in the newly renovated Huntley Hotel in Santa Monica, that one magazine likened to "the city's hottest club ... a vision of movie-set cool." Though city-view rooms went for much less, his room cost fluctuated from $419 to $499 on different nights.

Every step of the way, Rhode Island taxpayers paid the bills.

Sure, other states do it, and RI House Speaker Bill Murphy (D, West Warwick) argues that Feinberg's activity has yielded "a tremendous return on the investment," but the whole effort is beyond the boundaries of what government ought to be about. I'd venture to suggest that few voters consider the dedication of their representatives to charming Hollywood; government isn't structured to behave that explicitly as a business. Frankly, the leadership on the Hill ought to turning over with sufficient frequency to make the company-legislature distinction clearer.

If, as a public collective, we wish to bring movie makers to Rhode Island, our government's appropriate approach is to get out of the way, not to fly a caviar charmer out to California.

Stop the Bleeding

Almost as if it's a coordinated emphasis on ignorance, the criticisms of my op-ed have done two things: 1) doggedly held to 2005 data, and 2) insisted that I haven't proven causation. The argument is that people aren't leaving, and there could be other explanations for their flight. Well, contradictions happen.

The reality is that I'm less concerned with the "why" than the "what now," and whether they're being crushed by taxes — which I consider to be more one of several underlying causes than a decisive and proximate one — or can't find housing or a job, this sort of trend, from a story in today's business section, is entirely in keeping with my argument and has to be arrested:

The state unemployment rate climbed two-tenths of a percentage point to 6.1 percent, a full percentage point higher than the national average rate of 5.1 percent, according to the state Department of Labor and Training.

Meanwhile, neighboring Massachusetts reported a 2,900-job gain, and its unemployment rate edged down to 4.4 percent. ...

The professional and business-service sector, which includes temporary help agencies, declined nationally and in Rhode Island, but added jobs in Massachusetts. The sector is closely watched by economists because temporary employees are considered to be a predictor of which way the economy is headed. Jobs there tend to rise when the economy is growing, and shrink when it is contracting.

Last month, Massachusetts reported that the sector added 1,000 jobs, following a 3,100-job gain in February. By contrast, Rhode Island's professional and business-services sector during the last three months has shed 1,600 jobs. (Nationally, the sector lost 35,000 jobs.)

We have to make Rhode Island more attractive to those who don't need or want public assistance. Otherwise, we won't be able to help anybody. And we have to close our ears to the melodious sound of Rhode Island's undertakers whistling past the graveyard.

Frankly Disappointing

It would seem that a confession of my naivété is in order, because I was actually surprised at the response to my recent op-ed on Rhode Island taxpayer flight that the Poverty Institute's Ellen Frank offered as a letter to the editor. Either she is being deliberately deceptive, or she did not manage to understand what she had read before penning her rebuttal. I'm not sure which possibility represents the more charitable assumption.

The fact that she relies entirely on data released for 2005 and earlier — and insists that I did the same — allows her to avoid (or prevents her from realizing) the centrality to my piece of 2005's anomalous results. She also apparently missed the fact that the IRS, whose data she touts as "much more reliable" than that of the Census, supplied a roughly equal portion of my numbers. She notes that IRS data derives from "all income-tax returns filed," and indeed, my clincher, that Rhode Island lost, on a net basis, 8,296 taxpayers, with an aggregate adjusted gross income totaling $485 million, from 2005 to 2006, is based on actual taxpayers tracked by their Social Security numbers as they crossed state and national borders.

Readers interested in reviewing my research, presented in graphical format, can find it on this Web page. I would have hoped that sheer intellectual curiosity would have led Ms. Frank, a prominent member of an academic institute, thereto, but as I've already confessed, I must be naive.

Local Competition in the Tinsel Economy

You're probably aware that after Rhode Island proposed one casino, Massachusetts proposed three. I'm not sure whose plan came first, but according to Tamara Race and Jack Encarnacao of the Quincy Patriot Ledger, the same thing is happening with movie studios: Rhode Island proposes one, while Massachusetts proposes two…

There is room and business enough for two movie studios on the South Shore, developers say. Studios proposed in Weymouth and Plymouth are expected to complement, rather than compete with, each other.

SouthField Studios in Weymouth’s hopes to be up and running first will not affect the Plymouth Rock Studios plans, founder David Kirkpatrick said.

“We’re not going anywhere,” Kirkpatrick said. “We plan to be here running our studio for the rest of our lives.”

A 25 percent tax credit is expected to double movie production in the state, and producers need sound stages, studios, and a work force to launch the new local industry.

Local Competition in the Tinsel Economy

You're probably aware that after Rhode Island proposed one casino, Massachusetts proposed three. I'm not sure whose plan came first, but according to Tamara Race and Jack Encarnacao of the Quincy Patriot Ledger, the same thing is happening with movie studios: Rhode Island proposes one, while Massachusetts proposes two…

There is room and business enough for two movie studios on the South Shore, developers say. Studios proposed in Weymouth and Plymouth are expected to complement, rather than compete with, each other.

SouthField Studios in Weymouth’s hopes to be up and running first will not affect the Plymouth Rock Studios plans, founder David Kirkpatrick said.

“We’re not going anywhere,” Kirkpatrick said. “We plan to be here running our studio for the rest of our lives.”

A 25 percent tax credit is expected to double movie production in the state, and producers need sound stages, studios, and a work force to launch the new local industry.

RI a Cut Below

In response to my recent column on Rhode Island's economy and taxes, I've received email asking whether it's merely the economy to blame — nothing unique to Rhode Island. Well, let's see:

Rhode Island was one of only five states nationally and the District of Columbia to post a higher unemployment rate in February than the national average.

Rhode Island's rate of 5.8 percent, with 33,400 residents out of work, was also the highest in New England, according to data from the Bureau of Labor Statistics of the U.S. Department of Labor.

Rhode Island's jobless rate for March is scheduled to be reported on Friday.

The U.S. unemployment rate was 4.8 percent in February and 5.1 percent last month.

The New England unemployment rate, at 4.6 percent in February, was unchanged over the month.

It would be interesting (for somebody with time) to make an attempt to trace whether Rhode Island's full percentage point of worseness contributed to the better-than-average score of the rest of New England.

Quiet Testimony from Rhode Islanders

Two bits of testimony from Tuesday's opinion pages are worth reading if you missed them. The firstL comes via Ed Achorn:

MIKE HAMEL grew up in Providence. He went to work at the age of 16 at Regal Plating on South Street, drying the jewelry produced at the plant. He has been working ever since. He served for more than four years in the U.S. Air Force, 1967-71. He's a union guy, a member of the Teamsters. He's 60 now. ...

As far as he can tell, nobody is lobbying for him on Smith Hill. The Rhode Island General Assembly seems uninterested in the private-sector working stiff, other than as a host on which to affix itself and remove ever-increasing tax dollars.

"They don't care about me. They pander to the special interests, and they pander to each other," he said. "I don't refer to them as the General Assembly. I call them the Board of Directors of the Rhode Island Public Employee Unions. That is a more accurate description of the job they perform." ...

Last November, he learned that he was going to lose his job. Clariant Corp. announced it was shutting down its plant in Coventry before the end of 2008, eliminating 120 positions — including Mr. Hamel's, supervising the operation of the boilers — and moving production to its plants in Germany and Mexico. It had become too costly to do the work in a state with such brutally high costs. ...

"The state does not seem to comprehend what is happening out here in the real world. It's almost like when they walk into the State House, they walk into Disneyland," Mr. Hamel said.

The second is a first-person offering from David Evans:

My background is that of an engineer, inventor, and lately, business owner. Our company manufactures electronic equipment and now employs 20 Rhode Islanders. The company started in 1996 and is located in East Providence. The company was built upon lots of sweat, long hours of hard work, and great personal financial risk. ...

It is expensive to do business here. I live in Massachusetts, whose income-tax rate is a flat 5.25 percent. The maximum tax rate in Rhode Island is 9.9 percent. Consequently, yearly we pay many tens of thousands of dollars more in personal- and business-income tax as a result of our business being located in Rhode Island. The difference amounts to much more than the annual cost of rent, property taxes, and utilities for our factory.

I can assure you, it would make great sense to move a mile up the road into Massachusetts, and we could do it without inconveniencing a single employee. Indeed, it would be easier for me personally.

A Financial Plan for Rhode Islanders

I'd been meaning to note financial planner George Wright's thoughts on demographic trends in Rhode Island:

Financial advisers are seeing a noticeable increase in affluent retirees moving out of the state, especially to Florida, which has no state income, inheritance or personal-property taxes, and is about three hours away on Southwest Airlines.

Here's a plan: Sell your million-dollar house, buy two $400,000 houses, in Florida and Rhode Island, come north in the summer to see the grandkids and save $30,000 a year in taxes. Wait until the Baby Boomers hit!

For Rhode Islanders who pay the alternative minimum tax, one of the main triggers of that tax is the Rhode Island income tax. The mentality of our representatives is, and has been since the 1930s, regressive. This mentality will keep our beautiful state at the bottom of the economic ladder forever.

Come on, George, there's got to be an "unless" at the end of it all. Here's mine: Break the corruption that funding under threat of the taxman's gun inevitably breeds, turn the lights on for those whom the pushers have hooked on handouts, and open the door for innovative and talented people with stars in their eyes and watch as Rhode Island fills its lungs and begins to sprint.

Fewer Loans Means Fewer Borrowers

Opinions are split concerning the significance of plummeting federally backed loans to small businesses in Rhode Island:

"There is capital available today that you can access without the [SBA] guarantees," said Kenneth B. Martin, executive vice president and director of business banking for the bank's parent, Citizens Financial Group. "That is typically the case when you have a good economy and a very competitive banking landscape."

In other words, the small-business loans offered through the SBA are being replaced by other types of bank loans that are often "less expensive," Martin said, and therefore more attractive.

Not so, said Mark S. Deion, president of a business-planning consulting firm, Deion Associates & Strategies Inc., and a small-business advocate. He said that what appears to be a lack of demand is actually the result of businesses getting discouraged with banks.

"Let's put it this way: If you know you're going to get laughed at in the face, why ask?" Deion said. "People are using home-equity loans and their credit cards ... and they're paying 13 percent [interest]. The reason is it's easier to get the money. ... It's the path of least resistance."

Personally, I'd suggest that readers turn a few pages to my own "R.I.'s economic clock runs down," which may persuade them that another possibility ought to be considered: that the strata of residents who would normally seek small business loans are fleeing the state. There are fewer of the sorts of people who could and would turn loans into profit and economic growth, which ought to weigh heavily on our minds as the state responds to people who live off of the economic stream that our government siphons away.

What the Numbers Show

Unfortunately, neither Community Catalyst nor RIte Care Works, the author and promoter respectively, seem interested in providing the full details behind a press release from The Clarendon Group that appears to support the conclusion that every dollar of RI government money taken from RIte Care comes with a 12¢ cost in economic activity but save Rhode Island — overall, not just its government — 14¢:

The report from the national non-profit advocacy organization Community Catalyst, broke down where the dollars cut from the RIte Care program would go:

• 52-cents of each dollar stays with the federal government rather than making it to Rhode Island in the form of federal matching funds.
• 35-cents of each dollar is shifted to the private sector in the form of high-cost uncompensated care that’s ultimately left to hospitals, insurers, and premium payers to pay.
• 6-cents of each dollar is lost in reduced state tax revenue that is no longer being collected on the economic activity associated with the lost federal matching funds.
• ONLY 7-CENTS REMAINS AT THE DISPOSAL OF THE STATE AS "SAVINGS."

Clearly, the authors are measuring "the state" more broadly than just its government, because they include the cost "shifted to the private sector," and surely a failure to merit matching funds doesn't shift to the expense column (for the government) in addition to being erased from the revenue column. What's notable about the findings is that money is saved even with this broad analysis.

On the other hand, they don't give the cost of lost economic activity, just the taxes on it, so the proper interpretation is probably that our analysts stirred a bunch of quick calculations in an activist pot until they arrived at a mixture that they thought to be salable.

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Don't Go Changing, to Try and Please... Special Interests

The Rhode Island Public Expenditure Council (RIPEC) makes a point that ought to be raised every time the progressives put forward data purporting to illustrate the lack of effect of recent tax cuts:

Estimating that taxpayers already are kicking in an average of 12.3 percent of their income to finance state and local government, the Rhode Island Public Expenditure Council urges that Governor Carcieri and the legislature be wary of making any sudden changes in the tax structure as a quick fix for the looming budget crisis.

"Before any changes to the tax structure are made, they ought to be analyzed in a fair amount of detail," said John C. Simmons, executive director of the business-backed organization that studies public fiscal matters.

"We're saying you have to do this in a thoughtful way," especially, he said, because the legislature has made changes to the tax code in recent years and it will take some time to gauge their effects.

One change is the flat tax option passed by the General Assembly in 2006. Another reduced the capital gains tax on assets held more than five years.

"Those changes are just starting to hit," Simmons said.

RIPEC puts our tax burden at 7th highest in the nation, with special emphasis on taxes that are particularly harmful to the business environment (general business and sales).

Solving RI's Crisis in 10 Not-So-Easy Steps

Anybody who missed it on Sunday should take a moment to read URI Business Administration Professor Edward Mazze's "10 steps to right R.I.'s dire financial state":

Any optimism for job creation next month has disappeared as the state, region and national economy slide downward. For years, we have been dealing with a partial truth that higher salaried jobs are on their way to the state and a reduction in taxes and new incentives will lead companies to move to Rhode Island. There is little evidence that any of these events took place in the last 18 months and evidence that the state's future expectations for growth may be unrealistic. There is no solution to the state's economic problems in sight.

Some legislators are introducing bills in this session to harm existing businesses and deter other businesses from coming to the state. The state needs an emergency management plan that takes advantage of the "best practices" of business. The state cannot respond to its bad economic performance with denials, blaming it on unions, Band-Aids, and smoke and mirrors that in the past have led nowhere.

If Rhode Island was a business with subsidiaries such as cities, towns and municipalities, what would the board of directors of the company do to preserve the wealth of the shareholders (in our case, the taxpayers), employees and suppliers and put the company back into motion?

Certain readers will likely zoom in on Mazze's instruction to avoid "blaming it on unions," and I'll agree that the core problem that makes public sector unions so conspicuously detrimental isn't the nature of the unions, but the spinelessness of our leaders. Unions do what they do.

Unfortunately, the same can be said of elected officials, and in Rhode Island there is a well-entrenched bloc, counting the unions among its membership, that must be broken before the openness and transparency so central to Mazze's 10 steps can be achieved.

A Handy Economics Lesson

Rep. Handy, who introduced the atrocity of a bill currently being discussed, just described one of the "injustices" that he's seeking to alleviate: He spent the past few years paying taxes on diapers for his child, but a rich person who could afford a diaper service would be free of that burden.

I'd dispute the notion that the very same taxes are not collected from somewhere, but the bigger point is this: Those rich parents have created jobs. They've financed income taxes. They've advanced business. That's exactly what we want, and that's precisely what this bill will undermine.

Re: What Was That About Corporate Welfare in RI?

The ranking to which Justin refers also gives us the edge in unemployment:

Rhode Island last month shed 1,200 more jobs, and payrolls shrank to their lowest level in nearly four years, a government report released today shows.

The state unemployment rate ticked up one-tenth of a percentage point, to 5.8 percent, as the ranks of the unemployed last month grew to 33,400 — 5,000 more than in February of last year, according to the state Department of Labor and Training.

Nationally, payroll jobs last month declined by 63,000 and the unemployment rate rose to 4.8 percent.

Nor is the siphoning of jobs year upon year due to the notably unfriendly business and business tax climates created by the General Assembly the ideal preparation for a recession.

Rhode Island’s mounting job losses — estimated at 2,900 during the first two months of this year — come on the heels of revised data released last month showing that the state ended last year with a 5,200-job loss. It marked the first annual job decline since 2001, prompting economists to declare that Rhode Island is at the leading edge of a nationwide recession.

What Was That About Corporate Welfare in RI?

Not surprisingly, taxation appears to be Rhode Island's method of being a world leader. We're tied with West Virginia for seventh highest top total corporate tax rate in the world.

Oddly, China and India aren't among the global Top 30. Go figure.

(via Instapundit)

There Are Credits, and There Are Credits

I may be incorrect about this, but the historic tax credits appear to be of a different nature than the movie industry tax credits. The latter are ultimately advance giveaways of tax money yet to be collected. The credits are handed to a production company, which can sell them to third-parties that aren't at all involved in the filming to offset taxes that they were going to pay anyway. It's a subsidy.

The historic tax credit, it seems, is more of a discount on taxes related to projects that may not happen without the incentive:

The 1891 estate with 12 bedrooms, 15 bathrooms and breathtaking ocean views is among the many properties that qualified for Rhode Island’s historic structures tax-credit program, which offers property owners and developers breaks on income taxes worth 30 percent of qualified historic-renovation costs.

Working in construction, I suppose I've an indirect interest in these credits, but I'm more or less ambivalent about them. That said, such credits follow a model that Rhode Island should implement more broadly: encouraging economic activity by discounting the costs imposed by government. Consider:

Governor Carcieri recently introduced a separate proposal to retroactively cap the number of credits redeemed every year, a move that would save nearly $25 million this year and $21 million in the next. Several real estate developers plan to sue the state if the governor's plan becomes law, according to local developer Colin Kane, head of the Peregrine Group, which has invested $15 million in an East Providence development he says he would have to abandon.

One must adjust for words spoken in advocacy, of course, but it isn't a stretch to imagine that such projects as Kane's wouldn't happen under the full burden of Rhode Island's tax laws. In other words, without them, there would be less economic activity for the government to tax in the first place.

Watching our government attempt to digest its deficit in the absence of one-time windfalls (or failing to digest it) brings to mind the game of chess. Nobody seems capable of thinking more than two steps ahead (to the step after "I lose my giveaways and special interest support"). That's a queen that ought to be exposed.

Principle Begets Innovation

Tom Sgouros decries the lack of worthy investments for people with money. The problem, he's arguing, isn't that the wealthy don't have the money to invest; it's that they have nowhere to invest it; they're holding it or directing it to safer investments. Me, I'll take his argument at face value, because I think he points to a more fundamental, and ultimately more important, discussion:

To be sure, there are still niches to find and exploit, but in a world with the global competition we have now, those opportunities are narrower and more elusive than they once were. Our problem isn't a shortage of investors or funds to invest, but a real shortage of places to invest them.

Instead of showering our largesse on the investor class, shouldn't we instead be focusing our resources on all the other essential parts of the equation: the inventors, the markets, the workers, the supply chains? Just as an example, recent talk about finding renewable energy opportunities, like building blades for giant wind turbines at Quonset, or creating local markets for clean electricity, seem much more on target to address these problems than current state policies. If you understand our economic issues this way, slashing school and university funding to benefit investors hardly seems to answer the needs we face, but that's what's in store this year.

Just to be clear, we're not talking government subsidies for investment; we're talking "cuts in corporate and income taxes," as well as capital gains. That being the case, conservative readers will surely pick up on, and object to, Sgouros's view that allowing people to keep money that they've earned is equivalent to "showering our largesse" on them. To the contrary, as a key matter of principle, it isn't "our" money; it's theirs, and if they were to remove themselves from our tax base (speaking especially in the context of Rhode Island, here), then we'd have none of it.

I agree, however, that we have to focus (our intellectual resources, anyway) on "the inventors, the markets, the workers, the supply chains." The question is how we do such a thing. Sgouros makes a somewhat oblique reference to the fashionable green energy industry, but he doesn't explain what it would mean to "focus our resources on it."

Curiously absent from these discussions, it seems to me, is any mention of what motivates our ostensible targets. What do inventors and workers want? What creates markets and facilitates supply chains? Well, workers want to make a living. Inventors are the same, but are often driven by intellectual curiosity to chase specific ideas. Markets arise when people want or need something, and supply chains develop to... err... supply them and their components.

These are all intentions and actions that arise unbidden. They do not need government bureaucrats and special interests to get together around a mahogany table in an air-controlled room so that they can step beyond the door to a pool of waiting microphones and announce to the society what direction would prove profitable. Inventors will solve problems and seek applications for their innovations. The people who comprise markets will look for what they want. Businesspeople will attempt to marry available technologies with apparent demand. Marketers will work to coax that demand along. And workers will calculate their own equations of need, interest, and ability to find the best opportunities for themselves.

An elite Board of Social Direction can only retard this process. By its nature, such a body begins with a priori requirements (which are ultimately political), and the only market that it can promise, it must wrest from all of the above citizens for reallocation. As much as that approach may periodically be necessary (in times of calamity and war), it is by no means efficient and too often proves irrevocable.

It oughtn't be controversial to suggest that the class of people who exist somewhere between neediness and opulence are so positioned that they will, by opportunity and necessity, make the most productive use of resources, but only rarely is a public entity most advantageously positioned to decide what that use ought to be. In attempting to allocate resources, that entity will more often overlay unnecessary and counterproductive obstacles.

To maximize a system of competition, the proper role of government is to facilitate the removal of obstacles that create unequal barriers to entry. That can mean physical obstacles, such as those literally lying in the path of transportation, but it can also mean regulatory obstacles — minimum wages and benefits, mandatory coverages, insurance, and other costs imposed by government.

People love to imagine that they can determine specific and ideal courses for their local societies, and many have direct interests in particular political outcomes, but even if one takes the tack that all wealth is ultimately "our" wealth, a largesse that we dispense at our pleasure, it's a whopper of a presumption that we can collectively elect or appoint a board with sufficient good will, objectivity, and intelligence to direct our economy.

In short, if we truly are to the point that further "tax cuts for the rich" only serve to give them money for which they've no productive use, it shouldn't fall to government to fabricate areas of investment. Rather, just as it has let out the monetary leash, so to speak, for an investor class, it must now let out the regulatory leash such that innovators and workers can more easily slip through the door.

Out with the High, in with the Low

There are basically two general theories about what is going on in Rhode Island. Tom Sgouros enunciates the leftward (vested interest) explanation more succinctly than most of his compatriots (paragraphs reprinted out of order):

So this is the situation: The Assembly and Governor have together created a tremendous budget crisis. The crisis was caused by tax cuts of the past ten years, exacerbated by the economic downturn (not the other way around). Now that we're in a crisis, the Governor is demanding the right to slash spending without accountability to anyone, and the Assembly leadership seems perfectly willing to hand it over. ...

There are certainly budget cuts that haven't been as deep as the Governor would like, but as I wrote about a couple of weeks ago, it's simply not feasible to balance the budget by cutting entitlements alone. This is a fact of arithmetic: Entitlements are simply not as expensive as you think, and we're deeper in the hole than that. The stuff about the legislature wriggling in the iron grip of the social service lobby is pure fantasy. And a lot of the Governor's plans for personnel reforms seem to imagine somehow that there aren't unions at all. Like them or not, realistic management means you have to acknowledge that unions exist.

The other theory, which most Anchor Rising readers could likely explain themselves, at this point, is that a government regime that is hostile to business, corrupt to its core, and just about criminally inefficient when it comes to providing services from education to transportation infrastructure is driving out productive citizens, even as costs for public employees and social services continue to climb. Those productive citizens take with them businesses that they've created, the readily accessible workforce that businesses might wish to see before opening up shop, and a key market for many goods and services.

The debate may be at such a broad level, and inextricably tied with personal interests and ideology, that no evidence will ever be conclusive, but let's just say that Saturday's Business section story providing details of Rhode Island's job losses last year hardly contradicts the Anchor Rising view:

The 5,200 jobs that vanished from Rhode Island’s payrolls last year were better-paying than the jobs the state gained, according to an analysis of state data.

Construction workers, mortgage brokers, loan officers and real-estate agents were among the hardest hit by job losses, due largely to the housing and credit-market problems, according to revised data released last week by the state Department of Labor and Training.

The average annual wage in the financial activities sector in 2006, the latest year available, was $53,728, among the highest of any industry, the state data shows. Construction wages averaged $46,668.

Meanwhile, the biggest job gains last year were in health care and social assistance, where the average annual wage in 2006 was $37,618, followed by private education, where the average wage was $39,804, according to the state data.

For years, the state has been replacing higher-wage manufacturing jobs with lower-wage services jobs. Now, higher-paying jobs in sectors tied to the real estate and credit markets are leaving, too.

Sgouros has, to some degree, covered this base with his mention of the economic downturn, but note that he stresses the primacy of the tax cuts in causing our crisis. (I'm purposely leaving aside the "fact of arithmetic" when it comes to the tax cuts' percentage of our deficit pending some research that I'm trying to slip into my schedule.) In light of these jobs reports, I'd offer testimony from very personal experience that the segment of the population that benefits from those "tax cuts for the rich" is central to keeping the construction and real estate losses from being even worse. Even if the tax cuts haven't attracted new taxpayers to the state, it's still true that they're allowing such working class folks as my family to remain in the state and to continue to pay their own taxes, rather than requiring public assistance, themselves.

In his February 17 Rhode Island Policy Reporter newsletter (which isn't online), Sgouros ends a piece about population migration with this paragraph:

It would be very challenging to use this data to support a theory that wealth is flowing from Rhode Island, except inasmuch as it flows with people seeking their as-yet-unrealized fortunes elsewhere. Those people are our future, so cannot be ignored, but to imagine that tax changes to favor wealthy people are the only, or even the best, solution, is only fantasy. A healthy economy requires investors, certainly, but it also requires workers, infrastructure, educational opportunity, markets and much more. To focus state policy solely on investors at the expense of the rest, as we have done and are doing, is to miss most of the picture of what makes a healthy economy, and will only drive more young people to look for opportunity in other states.

I would agree wholeheartedly, but with an emphasis on expanding the methodology by which we've sought to fortify our investor class across the spectrum — that is, creating an environment of financial freedom and personal opportunity, getting government out of the way. Something is manifestly wrong when, of the three fastest-growing employment areas, two are closely tied to government handouts and benefits and the other highlights the inadequacies of the public education system.

Crises call for extreme measures, which means that Rhode Island must take market-focused reforms to the extreme, at least for a few years. Scratch out the pages upon pages of burdensome regulations. Cut taxes and fees (which will require cutting government expenditures, in the short term). Bring people here to work and to spend.

In an interview with Matt Jerzyk, RI General Treasurer Frank Caprio suggests an advertising campaign that leverages Rhode Island's lack of tax on clothing of any price, which he believes would bolster tourism during our off season. That's the tack that the state should take across the board. All sales taxes should be cut beneath our neighbors' rates. At least when it comes to the scope of government, the cost of doing business in the state should be made similarly attractive.

Subscribing to a theory that tax cuts hurt the economy and that government expenditures are immutable will at best freeze our recovery and at worst hasten our collapse.

Placing the Worker Before the Job

I have to admit to being a bit confused by David's comments to my post about Rhode Island's lost jobs.

• I pointed out that Rhode Island hadn't gained jobs, as expected, over the last year, but lost them, including in the construction industry. With a slate of laws in mind that would attract low-end and illegal immigrants to Rhode Island, I quipped acerbically that such workers are precisely whom a state with our economy ought to be wooing.
• David asserted that the construction jobs being lost are those that such immigrants would claim (driving down construction prices and pay across the board) and that Anchor Rising surely hasn't a care for such people.
• Ignoring the baseless attack, I questioned the extent to which illegals are captured in jobless numbers and noted that the several men who've stopped by my jobsite desperate for work have all been middle-aged locals.
• David made an East Bay/West Bay distinction and explained, "My point is that while I am affected much more than you, I refuse to vent anger on the low wage people who have for the most part been used. Instead of a legitimate quest worker program (that Bush wanted and I would oppose) we got the illegitimate version. But I do not want to oppose the people working - who came here to work."

The compounding of bad decisions is enough to induce headaches. Ill considered and inadequately enforced immigration policy at the national and state levels creates an environment in which companies can exploit illegal immigrant workers and drive down wages for citizens, and the solution is to make it easier for illegals to stay and more attractive for them to come to Rhode Island specifically of all the states?

The only healthy (sane) approach for a geographically defined political entity to take is to establish and deploy policies designed to create jobs and then to expand the workforce as necessary. Businesses create jobs, and they will go where conditions are advantageous in order to produce goods for sale elsewhere or (especially with services) where customers are plentiful. In other words, if Rhode Island wishes to attract businesses to create jobs, its policies should focus on bringing in highly skilled workers and potential clients.

Of course, attracting potential clients is precisely what politicians and public sector organizations are doing by marketing the state to other nations' poor.

Give the Money to the Guy with the Carpet

See now, even if one agrees with the dubious proposition that the film industry is particularly worth attracting to Rhode Island, this method of creating incentive is simply wrong:

To qualify for the tax credits, a company has to spend a minimum of $300,000 on production costs that were "directly attributable to activity within the state" on a "feature length film, video, video games, television series or commercial made in Rhode Island, in whole or in part." ...

While the tax credits are not issued until the production is complete, they are a marketable commodity from the beginning. The holder can theoretically pledge the proceeds toward payment of a loan, or wait until the end, and then sell them to people or corporations seeking to reduce their Rhode Island tax liability. Brokers here and beyond boast their expertise in this arena on the Internet.

Say a production company qualifies for $100,000 in tax credits but has no income-tax liability in Rhode Island, it can sell the credits to someone who does.

That taxpayer might pay $85,000 for the opportunity to use those credits to write off $100,000 in tax liability. The production company gets money it otherwise would not have had, and the hypothetical taxpayer in this example has saved a net $15,000 in taxes.

An analysis by the state tax department found the tax credits being purchased by relatively small numbers of people.

The $9.5 million in tax credits generated by Underdog were split among only four taxpayers. At the other end of the spectrum, the $2.6 million in tax credits generated by the feature film Evening was divided among 124 parties.

To date, the credits have been used to reduce personal income tax payments to the state by $25.2 million, and corporate income tax payments by $10.5 million, according to state tax administrator David Sullivan.

A handful of people have emerged as middlemen in the transactions, including Anthony Gudas, a former revenue agent for the state tax department.

Got that? A production company with no Rhode Island tax liability can sell its tax credits for cash money to a broker like former tax agent Gudas, who takes a cut and sells the credit again to an individual or corporation with such a large liability that the credits represent an immediate tax discount. Put another way, the tax can ultimately be credited to somebody who was already going to pay taxes, whether Rhode Island had provided the setting for the movie or not.

That's certainly in keeping with common practice in Rhode Island. Once again, the strategy is all about government types' granting special dispensations (handouts), rather than stepping aside to allow growth.

If we decide, through our representatives, that we want to woo Hollywooden business, we should do so via tax credits to the local companies that the studios use, thus decreasing the ultimate cost to the studios. It would be new income and therefore wouldn't involve muddy calculations of net gain to the state.

Or better yet, we could just make Rhode Island an attractive place to do business all around.

Good Jobs A-Goin'

It would be a shame if this leap-day story were to be washed away in the wave of cycling news:

Rhode Island employers last month shed an estimated 1,700 jobs and the state unemployment rate in January climbed to 5.7 percent, the highest since 1995, according to a government jobs report to be released today.

The state has lost 7,200 jobs during the last 13 months and ended last year with the first annual jobs decline since 2001 — the strongest signal yet, economists say, that Rhode Island is at the leading edge of a nationwide recession.

"The U.S. is beginning a recession and it looks like Rhode Island may have gotten a head start," David A. Wyss, chief economist at Standard & Poors Corp. in New York, said yesterday.

Rhode Island's unemployment rate last month climbed 0.5 percent, to 5.7 percent — compared with 4.9 percent nationwide — and the number of unemployed residents in the state hit 32,800, the largest number in more than a decade, according to the state Department of Labor and Training. ...

"Rhode Island has been the weakest economy in New England for some time," said Mark Zandi, chief economist of Moody's Economy.com, "so I wouldn’t be surprised if it's the first in recession." ...

Rhode Island's latest job numbers released today surprised economists, who were unprepared for such a dramatic reversal. Rhode Island labor officials had previously reported that the state in 2007 gained 3,300 jobs, and now find that the revised data shows 5,200 jobs were lost. ...

In Rhode Island, the revised data show that construction employment, which is closely tied to the housing market, suffered a bigger hit than originally thought. During the last 12 months, the state has lost 2,300 construction jobs, including 600 last month, according to the revised jobs data. Construction job losses now are almost as large as those in the long-declining manufacturing sector, where jobs fell 2,500 during the same 12-month period.

Hey, I've got an idea: let's put forward legislation to attract masses of low-skilled illegal immigrants to our state. It's the compassionate thing to do, after all.

Have you noticed, by the way, that RIFuture has come to be dominated by Obamamania? My impression is that they're wagering that the charmant orator will draw an army of know-nothings to the polls to check the Democrat straight-ticket box, blissfully unaware of the massive damage that they are thereby doing to their state. A few You Tube videos with catchy music and famous people mouthing the syllables "oh-ba-ma," and thousands more Rhode Islanders lose their jobs.

Building a Small-Business Onion

Layer upon layer, that is. Wouldn't it be refreshing if Rhode Island's elected officers would seek to solve our problems by relinquishing control rather than expanding their influence? Consider legislation that Representative Gregory Schadone (D, North Providence) proposed this week:

The "Small Business Revolving Loan and Credit Enhancement Fund Act" would offer partial, low-cost loans and purchase credit enhancements to promote the growth of small business in the state. The fund would be created and administered by the Rhode Island Economic Development Corporation (EDC). ...

Under the legislation, loans can be given to small businesses for up to 25 percent of the total debt required, but cannot exceed $100,000. The EDC can also purchase credit enhancements on behalf of specific businesses, which also cannot exceed $100,000. All loans made by the EDC under the fund would be loaned at a below-market rate.

It's not as if legislators are ignorant of the underlying problems that businesses face:

"The small business community is a viable part of Rhode Island's economic makeup," said Representative Schadone. "Rising costs of employee health benefits and taxes create a difficult environment for small businesses to function to their full capability without some form of assistance."

The folks at the General Assembly just want to reserve the right to dictate terms when it comes to health care and taxes (as well as other areas affecting business, such as workers' comp) and then to layer on government discretion when it comes to dispensing relief from the climate that they have created:

Appropriated funds could not be used for the following purposes: grants, restaurants and professional office buildings, projects that don't attract or retain employment opportunities, nonprofit activities and private or public speculative real estate ventures.

Here's a general principle to keep in mind when entering RI voting booths in the coming elections: The smart leader will realize that Rhode Island needs its government to get out of the way, not to pull the economy even more firmly into its suffocating embrace.

The Wrong Side of Every List

A sharp-eyed reader points out the following mention of yet another comparative list for which Rhode Island is to the extreme on the wrong end, asking "Why does everything cost more in Rhode Island?" (emphasis added):

In 2007, according to the National Association of State Budgeting Officers, states spent $44 billion in tax dollars on corrections. That is up from $10.6 billion in 1987, a 127 increase once adjusted for inflation. With money from bonds and the federal government included, total state spending on corrections last year was $49 billion. By 2011, the report said, states are on track to spend an additional $25 billion.

It cost an average of $23,876 dollars to imprison someone in 2005, the most recent year for which data were available. But state spending varies widely, from $45,000 a year in Rhode Island to $13,000 in Louisiana.

Outgoing Families

Based on various trends, including taxpayer migration to and from Rhode Island, I've suggested a theory that working and middle class families have been selling their homes and leaving the state. While I wouldn't claim the following real estate data</