State of the State Analysis: No Recovery Package

Governor Chafee’s State of the State speech, announcing his budget proposal, strikes a fine balance between solutions and inaction. Woefully inadequate as his proposals are, Governor Chafee does appear to have a reasonable grasp of the problems facing our great state.

On social issues, Chafee proposes popular, common-sense solutions like tweaks to gun laws and ending marriage discrimination, but when it comes to his core task, revitalizing the state’s economy, it is a different story. After accurately laying out the multitude of problems facing our state, the governor proposes to do nearly nothing.

Unlike Carcieri and the General Assembly, Chafee understands that we cannot simply dump more problems onto already strapped municipal budgets. Since 2007, state aid has fallen by 60%, devastating communities all around Rhode Island. To fill this $150 million hole, Chafee has recommended $20 million.

Noting that “there is simply no more important investment we can make than in our schools and the potential of our students,” the governor makes a powerful case for investing in education. But his proposal to maintain and fully fund the current school funding formula is hardly a bold investment in the future. Nor is the proposal for a $6 million increase in aid to CCRI, RIC, and URI, which will only materialize if those institutions freeze tuition and make $6 million in cuts.

Chafee correctly points out that Rhode Island’s refusal to maintain our infrastructure winds up costing us more in the long run. “We must invest in our infrastructure,” he insists. However, the $14 million the governor is proposing for maintenance at vocational schools cannot be counted as a serious commitment to infrastructure. That figure is less than a hundredth of what the American Society of Civil Engineers estimates we need spend on water infrastructure alone.

Largely contracted out to a business lobby, the “Moving the Needle” report produced by the state Senate harps on the business tax climate indices, which Republicans have invented so that there can be economic metrics red states will do well on. Chafee is right to reject these silly rankings. And this refusal to play by Republican rules allows him to see that “the property tax is the real major barrier to economic growth.”

This is strong rhetoric. But the governor’s tiny down payment on state aid to cities and towns will do little to alleviate property tax hikes.

Perhaps Chafee’s boldest proposal is to cut the special tax exemption that CVS benefits from and use the revenue to pay for a reduction in the corporate income tax from 9% to 7%. Getting CVS to pay a higher rate is probably a good thing for Rhode Island, although as a free-market liberal, I am highly susceptible to the argument that our current tax code discriminates against retailers for no good reason. If the Woonsocket-based chain agreed to a tax hike in negotiations with Chafee, then we owe them a debt of gratitude.

A cut in the corporate tax rate, however, is rather silly. If you want to reduce taxation on businesses, it would do far more good to the economy to focus on tax cuts that help startups and small businesses or remove market distortions. This is hardly a controversial principle. Rhode Island’s tax code is unusually hard on small businesses, the engine of our economy. For instance, the $500 minimum tax, which is levied even when a business has no profits, is essentially meaningless for large, successful corporations, but can impose a serious burden on small start-ups. Similarly, the network of licensing fees Rhode Island is famous for barely matter to large corporations but can be a nightmare for small ones. Another option that would be more beneficial to small businesses would be to adopt a progressive corporate income tax instead of the flat 9% rate we have now. Chafee could have taken any of these proposals to maximize the effect of his tax cut. Instead, he chose to cut corporate taxes in one of the least beneficial ways. Bolder business tax cuts, apparently, were off the table.

While Chafee clearly understands the problems facing our state—municipal budget cuts, weakened educational institutions, crumbling infrastructure, and an anti-business tax code—he proposes to do basically nothing about any of these problems. The reason is simple. He refuses to end the tax breaks for the rich that created this budget mess in the first place. Without new revenue or debt, there is no way you can fund a recovery package. These are the cold, hard facts of math.

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I am the Rhode Island State Coordinator for the Progressive Democrats of America. My primary interest is Rhode Island's economy and what we can do to fix it.

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