SOME STEPS TO HELP FIX R.I.'S ECONOMY

The Providence Journal, Commentary Page, June, 1999

The potential problems facing Rhode Island that I have outlined are not insurmountable. What is required is fiscal will and leadership along with the courage to accurately assess how well our state is doing compared to other states (non-parochial) and how to focus more on long-term solutions (non-myopic). As I stated earlier, Rhode Island currently finds itself in a window of opportunity where we can finally begin to plan proactively. What do I see as viable steps in this process?

• In the short-run we should continue to use excess sales tax revenue to pay off the remaining DEPCO debt. Once repaid, the entire 0.6 percent of the sales tax formerly directed to DEPCO should be allocated to public educational funding at all levels
  Consider the benefits of following this approach. Even in bad times, there would be a fairly sizeable amount of funding generated for education, making it far easier for us to move the state's proportion of primary and secondary education funding back to 60 percent. And, as the state’s percentage contribution rises, cities and towns and will be better able to reduce their property tax rates. If necessary, legislation could be passed that mandates a tradeoff between increases in the state’s funding proportion and percentage declines in property tax rates. This could be a critical element in the long overdue process of modifying the pervasive view that we can only afford to spend more on public higher education in good times, when we have extra money. Finding a way to sustain the current quality of public higher education in this state is critical to our future since the external benefits generated by public higher education are so substantial. My proposal will finally provide Rhode Island with an explicit link between consumption spending, which we do a great deal of, and investment expenditure, which we tend to do too little of. Diverting this excess to the auto excise phase out would be a huge mistake.
  

• Eliminate our "piggyback tax" and phase in a flat rate similar to that of Massachusetts.  While not necessarily "fair," reduce the tax liability on higher income persons for both income and capital gains taxes
  The potential supply-side effects of this measure should be obvious to anyone familiar with Rhode Island's current incentives for venture capitalists, corporate executives, and others. The basis for the success of this measure is the old saying: "A rising tide lifts all boats." While that might not necessarily be valid for the nation, when you are one of the worst performing state economies of this decade, as Rhode Island is, your economy very likely has an above-average amount of buoyancy. We can phase in a flat tax rate and reduce it over a several year period.
  

• If the auto excise phase out is to work, go "double or nothing"
  It should already be readily apparent to Rhode Islanders that we cannot afford to fund even the direct costs of this phase-out. To make it affordable, we will need to advance into this more gradually. I propose that we phase this in over a fourteen-year period (double), not the unrealistic seven years (nothing) that is currently proposed.
  

• Contrary to what is now being said, Rhode Island does not have a structural deficit. Our problem is an inadequate fiscal dividend that needs to increase
  The same persons who are so favorably disposed toward the auto excise tax phase-out have now decided that one of Rhode Island's most pressing problems is a structural deficit. This is factually incorrect. We are at full employment, we have a budget surplus, therefore, we have a structural surplus. What they are buying into without realizing it is that continuation of the phase-out will itself produce a structural deficit. We should never approve of this change.
  
  These persons need to ask why, during these best of times, can Rhode Island not afford this phase-out. The answer is that by continually failing to define ourselves in the information age, we have (endogenously) created slower economic growth than we would have had, had we defined our dominant niche and pursued it. This slower growth has resulted in a smaller economy, which generates less tax revenue than had we grown more rapidly. This, of course, is the lack of fiscal dividend. Had we defined ourselves earlier, we would have had surpluses earlier in this recovery and they would have been larger than the ones we are experiencing now.
  

• Stop relying so much on large construction projects
  While so many people in this state view large projects as grand-slam home-runs, a more appropriate baseball analogy is that large development projects for Rhode Island are like high fast balls: we can't hit them and we can't lay off them. If all of these have been grand slams, why is our ranking in the 1990s among the worst of any state in the nation?

The time has come for us to be more selective in the pitches we swing at. While we still have time, we can't afford to wait too much longer. I urge our governor and state legislature to redirect their emphases now towards the needs I have identified above. In this way, we will become more proactive in dealing with current and future events. A critical first step will be to end "parochia," the parochial and myopic focus that has caused us to become so vulnerable to future problems. Our current strength allows us to take this broader view. But, we must begin to act right away: a recovery is a terrible thing to waste.

by Leonard Lardaro