Despite State Law, Rhode Island Has Never Evaluated Its Business Tax Incentives

[NOTE: An audio version of this story aired on Rhode Island Public Radio.]

In 2013, Rhode Island lawmakers directed the state’s revenue department to analyze tax incentives created to spur economic development. The idea was to assess whether those incentives were actually working.

Linda Katz, co-founder and policy director of the non-profit Economic Progress Institute, was one of the people who supported the law.

“It’s the bang for the buck,” said Katz, whose organization advocates for policies that benefit lower-income Rhode Islanders. “We want to know if we’re giving away money in order to either attract a company here, keep a company here, try to ignite some activity, that we know that, at the end of getting that tax break, we’re actually better off than we were before the company got here.”

But there’s one key problem: the state has yet to produce a single evaluation required under the law. The first report was due last June.

“The state needs to do a better job of making sure that we’re watching out for the wellbeing of the entire state,” said Doug Hall, the Economic Progress Institute’s director of economic and fiscal policy.

The analysis is supposed to measure factors such as the economic impact of business tax incentives, their cost, and the extent to which money kept by companies actually stays in Rhode Island. The report would also contain recommendations about whether to keep, modify or eliminate specific tax incentives. Hall says this information would make economic development programs more transparent and accountable.

“Historically, this has all happened in a black box, and the citizens of Rhode Island deserve to know what goes on in the box,” Hall said. “And these are the tools we need to help make that happen.”

Tax incentives come in several forms. Some reduce the direct taxes owed by a company, while others lower taxable income. They can also exempt some investments and income from taxes. State officials use these as tools to lure, keep, or help expand businesses. Figures made available for some state incentive programs, show Rhode Island has awarded nearly $350 million in tax breaks since 2008 alone.

Mark Furcolo, who directs the state Department of Revenue, agrees the evaluation of tax incentives is overdue. He took over the department just a few months ago.

“I can’t speak for my predecessor,” said Furcalo. “What I can speak for is that I do think it’s an important report. I think it’s a wonderful report in the fact that we get to put our recommendations into that report. I’m committed to getting it done as soon as possible, and I will get it done.”

Paul Grimaldi, the Department of Revenue spokesman, explained some of the factors that held up the report. Staffing is one. The Office of Revenue Analysis was once down to as few as one full-time and one part-time employee. Taxpayer confidentiality issues complicated information sharing between state agencies. Analysts were also busy with other reports, like a recent car tax analysis.

“I think that the legislature and the policy makers were headed in the right direction with what they wanted. We need the analysis that you’re talking about,” Grimaldi said. “And, as Mark said, we think we’re at the place where we have the staff to do things in a timely fashion.”

In Rhode Island, a handful of large companies have been the primary beneficiaries of the state’s tax incentive programs. Those companies include CVS Health, Fidelity Investments, Citizens Bank, and submarine maker Electric Boat.

At $175 million, Woonsocket-based CVS alone has received roughly half of all incentives made public by the Division of Taxation.

“Tax incentives are really important decisions for states’ budgets and for states’ economies,” said Josh Goodman, senior officer for state fiscal health at the Pew Charitable Trusts, which began researching tax credits and incentives more than five years ago.

Pew assisted Rhode Island in developing its own evaluation program.

“Across the country states commit billions of dollars a year to tax incentives, and they’re one of the primary tools that states use to try to create jobs, attract businesses, grow their economy,” said Goodman.

He points out there is a learning curve involved when states set out to determine the effectiveness of their tax incentive programs. Information gathering can be tricky, as it was in Rhode Island’s case. To measure a program’s effectiveness, analysts also have to develop a methodology that’s going to produce accurate results. According to Goodman, 30 states now have laws in place requiring regular evaluations of tax incentives, like Rhode Island.

Because it has a law on the books, Pew considers Rhode Island to be among states headed in the right direction, even if it hasn’t completed a single evaluation. Still, Doug Hall at the Economic Progress Institute says Rhode Islanders should be thinking more critically about corporate tax breaks and whether they are the best economic development policies to begin with.

“It’s really especially important during times of significant fiscal constraint. When we look at the research around economic development incentives, the record is pretty, pretty fuzzy,” Hall said. “And, if anything, it shows that collectively there’s really not the sort of return that you would expect to see.”

Governor Gina Raimondo has been a strong advocate for incentives. She wasn’t available for an interview for this story, but said in a statement that her programs have created new jobs.

The state Department of Revenue has begun releasing more tax incentive figures in its annual reporting. Officials there now say the target date for the first evaluation of state tax incentive programs is the end of this June, one year past the original deadline.