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slides: 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Since August, Beacon Hill has repealed the so-called “tech tax” – after much outrage and pushback by the business community.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.

“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,

Shell Game: Ending the Wasteful Practice of Subsidizing Companies that Move Jobs From One State to Another

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States pirating other states for existing businesses and jobs is nothing new.

The 1950s saw heightened concern about the growing number of footloose companies that were abandoning long-standing industrial locations in the north to take advantage of benefits being offered by states such as Mississippi. Then-Sen. John F. Kennedy of Massachusetts decried southern “raiding,” especially in the textile industry. Organized labor took notice. In 1955, then-named American Federation of Labor published a pamphlet with the title “Subsidized Industrial Migration: The Luring of Plants to New Locations.”

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In Massachusetts, the free market-oriented Pioneer Institute likened interstate lures to “playing the lottery” in examining the National Establishment Time-Series Database for 1990-2007.

Although the Bay State has had a small net loss of jobs to interstate moves, it loses and gains jobs from mostly the same states (New Hampshire, New York, Rhode Island and Connecticut all rank in the top 5 for both directions). In addition to some cautionary findings about the Bay State’s trends, the Institute concluded, “The majority of establishments that moved to the state did not receive special incentives from the state to do so. Therefore, public thinking and public policy with respect to economic development should be reoriented to place less emphasis on interstate relocation.”

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Ballooning state-budget deficits are costing millions of jobs, affecting every state, with no regard for region or corporate tax or incentive regimens.

For example, a study of job loss due to the growing trade deficit with China names New Hampshire, California, Massachusetts, Oregon, North Carolina, Minnesota, Colorado and Texas among the 10 most affected states - proportionally, and in that order. That should be a sobering fact for states such as New Hampshire (that so shamelessly pirates jobs from Mass.) and Texas (that openly lures companies from Mass. and other states).

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Several states have rules prohibiting subsidies for intrastate job relocations. Among them, are two in New England:

  • Connecticut:

o Enterprise Zone and Urban Jobs Tax Credits

o Urban and Industrial Site Reinvestment Tax Credit

  • Maine:

o Employment Tax Increment Financing

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Several states have major state-subsidy programs with restrictions on intrastate job shifting. Among them, are two in New England:

  • Rhode Island:

o Corporate-income tax-rate reduction for job creation

o Enterprise-zone tax credits

  • Vermont:

o Economic-advancement tax incentives

o Employment-growth incentives

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In 2011, the Boston Globe published a profile of the State of New Hampshire’s top business recruiter, Michael Bergeron, labeling him a “full-time thief.”

Bergeron, who was said to have removed the state seal from his car to be less conspicuous when visiting prospects, claimed to have lured dozens of firms from Mass. to the Granite State. Brazenly, he posted the Globe profile on his agency website.

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In 2010, Connecticut Governor Jodi Rell faced allegations of inciting a border war by writing to New York City-based hedge-fund managers.

“I am personally inviting you and a few of your colleagues to meet with me. We have much to discuss!” Rell added. “The meeting will be intimate, direct and private.”

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Art Imitating Life

Connecticut’s use of a tax credit to lure media-production companies was satirized, in 2011, in the I Heart Connecticut episode of the popular TV show “30 Rock.”

 
 

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