Gencarella: Robbing Peter (and Mary and Jane and Rob) To Pay Paul
Thursday, March 17, 2016
If I pay individuals to be my friends, and then I tell the world they are my friends because I paid them, is that something for which I should be proud? Does it make me a popular person?
Isn’t that what RI government is doing every time it provides a tax credit or a tax stabilization agreement, or designates an area as an enterprise zone? Sure, we might keep a business here or we might attract a new business there (although the languishing I-195 land indicates otherwise) but does that help improve RI’s economy?
Last week, the Governor announced that Citizens Bank was staying in RI because we paid them to be our friends. As a matter of fact, we are going to pay them for 20 years. That is the mindset of our government and has been for a while now. We seem to be in a never-ending cycle, particularly with Providence, of paying businesses to stay or paying them to come here. And, it’s happening at the state level as well - with the Governor’s new Rebuild RI tax credit program and the TIF (Tax Increment Financing) program and old programs like the historic tax credit and the film credit.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTIt’s embarrassing. And if history is any indication, it will do nothing to improve the state’s economy. It is simply a move to take money from the general public and give it to companies specified by elected leaders.
Insider Deals Thrive When Government Decides Who Wins and Who Loses.
Tax credits and Tax Stabilization Agreements (TSAs) only create more of what RI doesn’t need - insider deals and cronyism. You only need to look at how difficult it is has been to put the kibosh on TSA extensions in Providence. The same benefactor names are seen over and over again, requesting extensions and requesting TSAs on new projects. That’s how the game works.
And the biggest part of that problem is you and I provide the tax dollars so that our elected leaders can make more and more friends that keep them in their elected office. And, as long as they stay in office, they can give more handouts/subsidies/tax breaks to those friends. If it sounds like a vicious cycle, that’s because it is.
What RI and its cities and towns need to do is create the economic landscape in which businesses want to come willingly, because they see a profitable future - we build it, they come, and we won’t have to pay them to be our friends.
Handing Out Tax Breaks Like The Corner Drug Dealer.
According to the Lincoln Institute’s “Rethinking Property Tax Incentives For Small Businesses", elected officials find tax incentives appealing for the obvious reason that the cost of these arrangements is much less apparent than a budget line item. Whereas a direct expenditure made for economic development would be open to discussion in the budget process, a tax stabilization agreement spans a number of years and is not necessarily discussed at a municipal financial meeting.
According to the report, there is some evidence that once a municipality starts using property tax incentives, it is unlikely to stop. Once one company receives a tax break, others are more likely to follow creating a self-perpetuating cycle. Again, Providence is a perfect example of this never-ending cycle as more requests for TSA extensions persist and new TSA requests abound. The state has even applied significant pressure on Providence to provide more and more TSAs whether it be for the Pawtucket Stadium deal or the I-195 land or the Providence Port.
The Lincoln Institute report summary states that the majority of studies suggest that property tax incentives have little impact on local economic growth. Some studies have actually shown that property tax abatements and enterprise zones worsen a locality’s fiscal health.
Tax Breaks Where No One Has Their Eye On The Ball.
In a recent article, former Providence Director of Administration D’Amico explained that “the projected value of many of the [tax stabilization] deals at the time they were agreed to were woefully underestimated and failed to offer an accurate assessment of how much the city would be losing in tax revenue in the long term.”
So it’s no wonder that, until recently, the City of Providence didn’t even have their TSAs in one central place, never mind have an expected initial cost/benefit analysis for each agreement or a follow-up analysis to verify whether or not the deal produced a net benefit to the Providence residents.
That situation is a travesty given the crushing burden on each and every Providence resident and business resulting from having the dubious distinction of having the 4th highest commercial tax in the country (according to a study by the Lincoln Institute of Land Study and the 6th highest tax burden on families.
The Lincoln Institute’s report explains that because incentives like TSAs are not generally very transparent, they are often made without clear economic justification. “This process may be unduly influenced by political considerations, with incentives granted to well-connected firms or campaign contributors”. Accordingly, they cite a 2010 study that found communities in states with more corrupt political cultures were more likely to offer incentives.
Do you think Providence and the State of RI fall into that category? In a recent article, the Providence Journal noted that after requests under the Open Records Law, the Commerce Corporation of RI (formerly the EDC) refused to name companies or agencies seeking Raimondo’s “Rebuild RI Tax Credit”. As Rhode Islanders, we consider that part of the political culture. Outsiders see that as riddled with the possibility of undue influence from well-connected firms or from campaign contributors.
How Much Does a Tax Stabilization Agreement Cost You?
A 2014 self-analysis of Providence tax stabilization agreements found that compliance monitoring of requirements stipulated in the city’s agreements, was either non-existent or deficient. Many of the recipients were not in conformance with the agreement. Some, after receiving significant tax reductions, were still past due even with the minimal taxes they were required to pay.
One example included taxes being paid at 1/50th what the true tax was. Another example included the Biltmore with a TSA of $124,000 vs the true tax of $740,000, and that was past due! The BlueCrossBlueShieldRI building received a nearly $2 million reduction in its 2013 tax payment and its tax stabilization agreement runs another 7 years, through 2023.
Window Dressing.
At the risk of turning to the Lincoln Institute’s report too many times, there is one last tidbit that may have relevance to the State of RI and Providence Plantations - the idea that “politicians may grant incentives regardless of the economic rationale…..and claim that they played an instrumental role in attracting a new facility to the community, even if a firm may have located there without incentives.”
Is this what is happening with Governor Raimondo and Mayor Polisena? In an article, Citizens Bank said they had no intention of leaving the state, yet the Town of Johnston is providing them with a 20-year tax stabilization agreement (which neither the bank nor Johnston Mayor Polisena will discuss openly), the state is paying half of the infrastructure cost to build new ramps to I-295, and the Narragansett Bay Commission (you and I) will pay to run the sewer line.
All parties praised the new construction jobs that will be created and the new business that will be generated from the workers. However, those construction jobs would have been created no matter where Citizens decided to build in RI, and those workers were already spending in Cranston so they are simply moving their purchases to Johnston.
It seems the result of this deal is Rhode Islanders take on more infrastructure costs and residents of Johnston (or maybe even RI taxpayers if Raimondo provides them with the Rebuild RI credit) pay for workers that might dine locally at lunch time. On the face of it, it doesn’t seem like a big economic benefit to the RI taxpayer.
Lower Tax Rates For All.
It would appear that RI government prefers to continue the use of schemes rather than employ a basic strategy of lower tax rates for all Rhode Islanders. That’s because it is politically painful to create a lower tax environment. It is premised upon reducing the current levels of spending, reducing the waste and fraud, reducing the size of government, and most importantly, eliminating the crony deals that keep elected officials in office. Ask your tax assessor how much it costs your municipality in tax stabilization agreements (include the reduction in taxes for affordable housing as well). You might be very surprised at what you are subsidizing.
Related Slideshow: 5 Economic Projects - Can Raimondo Get Them Done?
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