This from Ken Block --
My business employs 12 very highly compensated software engineers, and generates almost $2 million of direct economic activity every year (payroll, benefits, rent, taxes, insurance….), most of it spent locally. My business has long term contracts, over half of which encompass work from out of state. My software business has spun off a manufacturing startup which is selling specialized traffic signals for recreational trail/public road intersections around the country.
RI is ideally situated to have a much larger tech economy than it does. Our proximity to Boston and New York, combined with our relatively more affordable housing market should make RI an obvious option for tech businesses. Alas, we are not for several reasons:
1) Rhode Island’s tech economy does not have the critical mass to sustain its own growth. With critical mass, tech companies beget more tech companies. The vibrant mini-economies of Research Triangle, RT 295/495 in Boston, Silicon Valley, etc. fuel their own growth as tech companies are attracted to these areas due to the presence of so much tech talent. We do not have enough tech companies for critical mass to a large extent because….
2) Rhode Island is extremely business unfriendly and the tech marketplace is very price sensitive. My business must compete with software engineering firms in Massachusetts, Idaho, India, Poland, Ireland and just about anywhere else people with the proper educational background can sit together in an office tied into the Internet. My business-related taxes are close to 20% higher in RI than if my company and residence (residence because my ‘S’-Corp profits flow down to my personal income taxes) were located in Mass. This difference places my company at a competitive disadvantage with similar companies based in Mass, as well as those overseas or in lower tax areas of the country.
How can we grow a specific industry like tech? (I chose tech because I know the industry. The same principles laid out below should apply to most other industries that RI decides to target).
The bottom line is that if RI is to attract a lot of tech businesses in an effort to attain critical mass, RI must be better than cost competitive with our neighboring states. If businesses can save money by moving their operations to RI, they will do so. This is the exact opposite effect of what is happening to the RI manufacturing industry, which continues to lose jobs while businesses move out to less expensive areas.
One idea I have would be to provide, after equalizing RI’s tax burden for businesses and owners with MA, state income tax rebates to companies for their in-state payrolls for any new jobs created in the industry. This would provide a positive financial reason for businesses to locate an office and personnel in RI. Since RI would not have these jobs with our current tax scenario, the state is not really losing any revenue by offering the income tax rebate. New jobs would mean an influx of new residents to the State, with a fairly high income level. These new residents would buy homes, easing our housing debacle and spend money locally, boosting the overall local economy. The new businesses would need office space, which would help to alleviate the overabundance of business space for lease in the State.
Also, the State, if it really wants to attract new business, needs to provide incubator space for these businesses. An effort needs to be made to convert some of our abandoned mill space not into yet more condo developments, but incubator space appropriate for the type of businesses that we are trying to attract.
I have had discussions with some folks who claim that the income tax rebate idea is essentially a money grab, but this is just capitalism at work. In the same way that the average person will usually choose a less expensive item when faced with the choice of buying two items of similar function and quality, businesses must consider the financial aspects of any move, and more often than not will choose the least expensive option when deciding on an office location (although the educational level of the workforce is also a very critical factor, especially for tech).
All of the above is predicated on equalizing the State’s business tax load with Mass, which is predicated on getting control over the State’s out of control spending. In effect, Rhode Island has been deficit spending for close to a decade now, only ‘balancing’ the books by using accounting gimmicks or completely exhausting windfall monies like the tobacco settlement funds to pay for ongoing, annual expenses.
To truly attract new businesses, RI needs to clean up her act.
Ken Block
President, Simpatico Software Systems, Inc.
Chairman, Moderate Party of RI
