Which States Are Stealing Jobs From Rhode Island?
Tuesday, October 29, 2013
Back in August, after Massachusetts had just enacted a new 6.5-percent excise tax on computer-software services, Rhode Island Gubernatorial candidate Kenneth Block announced that the Ocean State should take advantage of the Bay State’s move back to becoming “Taxachusetts.” Connecticut also taxes software services - at 1 percent - while Rhode Island does not tax them.
"For years, we have watched businesses leave Rhode Island, lured away by a more favorable business climate in Massachusetts," Block said in a statement at the time. "Now we have the opportunity to reverse that trend."
Since August, Beacon Hill has repealed the so-called “tech tax” – after much outrage and pushback by the business community. As a result, Rhode Island has one less arrow in its quiver to hunt for Bay State businesses.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLAST“Rhode Island routinely lures jobs from neighboring Massachusetts,” according to a report by a national policy-resource center for grassroots groups and public officials. The report cites the now-infamous $75-million loan that Rhode Island made, in 2009, to former Boston Red Sox pitcher Curt Shilling’s video-game company, before it filed for bankruptcy.
Rhode Island is not alone among the 50 states in seeking to attract businesses to relocate their facilities and employees from another state. And the tens of millions of dollars that the Ocean State spent in its wild pitch to Schilling, is also far from unusual.
To rub sea salt in the scabbard wound, the Austin Chamber of Commerce has produced a map showing the 225 relocations to Austin from other states between 2004 and 2011. A total of 10 New England businesses – five from Mass., three from Connecticut and two from New Hampshire – are now deep in the heart of Texas.
Interstate job fraud
State and local governments “waste billions of dollars each year” on economic-development subsidies given to companies for moving existing jobs from one state to another rather than focusing on the creation of truly new positions, according to Good Jobs First’s report.
“What was long ago dubbed a Second War Between the States is, unfortunately, raging again in many parts of the country,” states Greg LeRoy, executive director of Good Jobs First and principal author of the report. “The result is a vast waste of taxpayer funds, paying for the geographic reshuffling of existing jobs rather than new business activity. By pretending that these jobs are new, public officials and the recipient companies engage in what amounts to interstate job fraud.”
Interstate job piracy is not a fruitful strategy for economic growth, LeRoy notes. “The costs are high and the benefits are low, since a tiny number of companies get huge subsidies for moving what amounts to an insignificant number of jobs,” he adds. “The flip side is job blackmail: The availability of relocation subsidies makes it possible for companies that have no intention of moving to extract payoffs from their home states to stay put.”
To cool these job wars, Good Jobs First’s report recommends that states demonetize interstate job fraud. That is, the states should stop subsidizing companies for existing jobs that are treated as “new” simply because their location has changed.
The vast majority of states already know how to do this, according to the report. Four-fifths of the states already refuse to pay for intrastate job relocations. For at least one and sometimes most of their major incentive programs, 40 states disallow subsidies for existing jobs that are merely being moved within their own borders.
Good Jobs First’s report also recommends that states end business-recruitment activities that are explicitly designed to pirate existing jobs from other states. It also suggests a modest role for the federal government: reserving a small portion of its economic-development aid for those states that amend their incentive codes, to make existing jobs ineligible for subsidies and certify that they no longer engage in raiding.
A very risky strategy
A big part of Rhode Island’s approach to economic development has been to lure companies from Mass. Over a decade ago, Rhode Island put up a big billboard just inside the state border on
southbound I-95 reading “This is Your Exit.” The billboard directed drivers to a now-defunct website with the name “Mass. Exodus,” arguing the case for leaving the Bay State for the Ocean State.
“Some of the companies that respond to these pitches—and to the subsidy packages that often go along with them—end up being more of a bane than a boon to the Rhode Island economy,” according to Good Jobs First’s report. In 1999, pharmaceutical company Alpha-Beta Technology went bankrupt despite having receiving $30 million in low-cost financing to relocate from Worcester to a new $200-million facility in Smithfield. Sailfirst.com, an online company for sailing enthusiasts, went bust shortly after getting subsidies from the state. In 2009, Rhode Island lured video-game start-up 38 Studios from Maynard to Providence in what became one of the most notorious economic-development deals in recent U.S. history.
The Rhode Island Economic Development Corp. awarded Schilling’s 38 Studios a $75-million loan to relocate 160 existing Massachusetts jobs. The deal promised to create 450 total jobs by the end of 2012. But in May of that year, things began falling apart, when 38 Studios missed a $1-million loan payment. Employees at the company went unpaid, top executives fled and 38 Studios went bankrupt in June, laying off the remaining workers.
Since 38 Studios had little in the way of property, the state lacked much collateral to recover. An auction of assets netted only about $650,000, while the state remained on the hook for millions, some estimating as much as $100 million. Shilling spent all of the $50 million he earned during his 23-year baseball career in a failed attempt to save the firm.
Later that summer, the Rhode Island’s State Police and Attorney General’s Office along with the U.S. Attorney’s Office and the FBI launched investigations into the loan scandal. By November 2012, Rhode Island had filed a suit against backers of the company, including Schilling himself, alleging conspiracy to defraud the state.
“If Rhode Island’s approach to economic development proves anything, it’s that putting lots of eggs in one footloose corporate basket is a very risky strategy,” Good Jobs First’s report states. “It is also a cautionary tale about the importance of vetting a deal fronted by a celebrity, not to mention a huge loss of resources that could be better spent on things that really matter to all businesses.
Chasing a shrunken number of deals
Why are states such as Rhode Island stooping to such dubious behavior? “A supply-and-demand analysis suggests more anxious politicians chasing a shrunken number of deals,” according to Good Jobs First’s report.
As the U.S. economy recovers slowly from the Great Recession of 2007-2009, most states continue to suffer persistently high unemployment rates, the report notes. “This causes public officials to be more aggressive than usual in promoting job creation, creating pressure to spend more on attraction deals, and making officials more sensitive to relocation threats. Consistent with high unemployment there are fewer economic-development projects.”
The total national number of projects peaked in 1999 and fell sharply - well beyond the 2001 recession, as the accompanying chart shows. The chart data are from Conway Data, which maintains a 50-state database of business investments in new facilities and expansions by surveying state and local economic-development organizations, news reports and other sources.
Even in the non-recessionary years of 2003-2006, the number of major new projects averaged barely half the rate of the 1998-2000 peak. From that already-low base, the number of projects dipped in 2008-2009 and then recovered only modestly in 2010-2011.
In other words, states have been competing for a shrunken number of economic-development projects for many years, with 2011 deals still 61 percent off the 1999 peak. And, according to Good Jobs First’s report, “these numbers are probably rosy because of technical aspects of Conway Data’s methodology.”
In fact, the number of deals for which states are competing has reportedly declined substantially in the last decade, according Good Jobs First’s report. Site Selection magazine, which is published by Conway Data, runs the annual Governors’ Cup Award, which it gives to the state with the most new and expanded corporate facilities as tracked by Conway Data. And Chief Executive magazine names annually the Best and Worst States for Business. The two latest lists show the same No. 1 state: Texas.
Among the six New England states, only one, New Hampshire, made it – barely – in the top half of the Chief Executive ranking, at No. 26. As for the rest: Maine was No. 35; Rhode Island, No. 37; Vermont, No. 39; Connecticut, No. 45; and Mass., No. 47, fourth from the very bottom.
Perhaps it’s high time for the New England states to call a cease-fire on pirating businesses and jobs from each other. Instead, they may want stage counter-raids on states outside our region. And their battle hymn could be, “The Eyes of N.E. Are on Texas.”
Steven Jones-D'Agostino is chief pilot of Best Rate of Climb: Marketing, Public Relations, Social Media and Radio Production. He also produces and hostsThe Business Beat on 90.5 WICN, Jazz Plus for New England. Follow him on Twitter@SteveRDAgostino
Related Slideshow: New England States Battle Over Jobs
Here are several examples of business and job raiding by and against New England states, according to the Good Jobs First report,
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