The Budget.

For the one person viewing this Blog (Hi honey!), I'm still going over the budget.

All I can say is that the current and past Rhode Island governments didn't make it easy. They put in a lot of items that the government shouldn't have ever had any say in and don't have any constitutional power over. Not to mention their propensity to curry Union member votes by approving contracts they had no business approving.

Because of that, it's been tricky trying to figure out the best way to remove or fix these programs without hurting the people who have come to rely on them. Which, of course, is one of the main problems with having a nanny state. People become dependent on assistance from the Government that the government has no business providing...

This assistance then becomes almost impossible to get rid of and it grows over the years which, of course, leads to the government going bankrupt when this assistance begins to outpace the revenue. In that case everyone loses everything, even the things that the Government is supposed to take care of (like the roads, law enforcement, ect).

At least this way, with hopefully this plan, we can ease out of it and do it in a way that saves the state and the people that have become dependent on its government.

Progress so far.

As you can see, steps one through four have to do with expanding our tax base.

The plan, as it sits in my head right now, is split up into phases. These first four steps could be classified as, "Phase 1". In order for our state to meet the minimum needs of it's citizens, we MUST expand the tax base.

The expansion of the tax base works in many different facets. By enacting business friendly policies we stand to not only gain a tax base that comes directly from the businesses but also it's payroll, who it does business with in the state, what the towns make in property taxes, plus the amount of sales tax.

Think of it like this, because a business moves in due to our first three steps (after being recruited according to the Fourth Step).

The State of Rhode Island stands to make not just 5% of all profits created from the new entity (which is below the median in the nation) but now that business is paying payroll taxes to us. Those 300 employees they just hired are paying income tax. That A/C  in the conference room that just broke? They hired a local company to come and fix it, and we get the benefits of that as well.

At lunch a few workers stop at the nearby Cumberland Farms, we get revenue from that as well. They need to grab gas prior driving home... we get money for that as well.

I remember back in 1992 I worked at Speidel, first as a summer job between semesters but then as something more permanent once my life took an unexpected and wonderful turn. At the time it was owned by Textron.

There was a nearby Shell I always filled my tank at. I used to eat at a Gyro shop right across from the Providence Performing Arts Center. My health care was from a state health care provider. The doctors my wife and I went to with that health care provider were local as well, my oldest daughter was born at Women and Infants, ect. ect.

I don't really need to tell you all this, you live it every day as well. With business, comes revenue in all forms from all places.

But as the State government expanded it's hold, continued to raise taxes, and suffocated the place... eventually Textron sold Speidel to a European company who found they could avoid all the hassle and costs of a repressive government by simply producing the watchbands, ID bracelets, ect. overseas. They tried hard to stay in RI too...

Guess what happened to that Shell? To that Gyro Shop? Are either still there? I don't know, I do know that neither are getting a few thousand visits from Speidel workers because that company is gone (except a packaging branch in East Providence, I believe).

So what's on Empire St. now? Curt Shilling's 38 studios (who I really wanted to succeed because not only am I a gamer nerd but I was hoping to apply there when I got out of the Army). A private business where the state government gave millions of tax payer monies to an upstart company in a highly competitive field.

What if our state just lowered the oppressive burden we had on Speidel? Would it still have moved manufacturing overseas? Would we have needed to bribe 38 Studios with millions of dollars or would they have just moved to RI willingly? Could we have had both businesses in Rhode Island and not have had one of them owe us millions of dollars?

The next few steps (phase 2) will deal with our budgetary issues. Stayed tuned only reader (probably my wife).

Step 4: Recruiting Businesses.

For the one person reading the blog, apologies for the long pause in between posts. First my parents came to visit and see my daughter graduate High School and then the Army sent me somewhere so I can learn how to interview for a job and write a resume. I, apparently, can't just say, "I was doing Army stuff" and get hired.

Step Four has to do with recruiting. Recruiting businesses to come to Rhode Island.

While I agree with Mr. Healey that the Lt. Governor position should be eliminated since it's only job is to wait for the Governor to die, I figure we might as well put them to work since we have the position and none of the big spenders want to cut the job out of the State Constitution.

For Step Four, the LtGov will meet with different business leaders around the country and brief them on the changes enacted in Steps One through Three.

This road map will not work unless we can attract more businesses to expand or move to Rhode Island. While the first two steps will probably help the state regardless because the existing businesses will get some relief and be able to expand... the third step will only make things worse this step is successful.

The LtGov is going to have to go on CNBC, Bloomberg, Fox Business, PBS, put adds in the WSJ and Economics Magazine... it just has to be done.

She or he will also have to be able to negotiate with the businesses, to give temporary "perks" in order to push them to make the choice we want them to make. The only prohibition is that the State will NOT spend tax payer money on businesses. We can give tax breaks (in general) or credits (based on how many RI residents they hire) but there will be a bottom to it, meaning that no matter how many requisites they meet to gain those breaks or credits, they have to pay 50% of what they would pay if they didn't qualify for anything.

Meaning... if at the 5% bracket in Step 3 they would owe the state $1 million in Corporate income tax, but their perks make it so they can shave off $800,000 to that... they would still have to pay $500,000 regardless(the 50% "hard floor).

The length of which I would say can be no longer than five years but that's negotiable based on what my one reader thinks.

Step 3. Adjust/reform Corporate Tax Rates (a work in progress).

The state of Rhode Island has one of the highest corporate tax rates in the nation. This works against us mainly in two ways.

First, it discourages businesses both big and small, new and old from setting up shop in our state. Why pay 9% in Rhode Island when they can pay 6% in Georgia or 7.1% in New York?

Secondly, National or International Companies use things like "Licensing Fees" and other such work arounds in order to pay taxes elsewhere. They do this by having a parent office, in say... South Carolina, charge the branch in Rhode Island Fees for using it's name and logo.

That fee is now an expense and it directly reduces the profits made in Rhode Island and increases the profits of the Parent office in South Carolina. Due to this practice the Business now reports a smaller amount to Rhode Island with our 9% Corporate Tax rate but reports a higher amount to South Carolina at it's much lower 5% Corporate tax rate, thereby reducing the Business's overall state tax burden.

Specific to this example, Delaware does not tax on "Intellectual Property" which a logo or Trademarked Product is. Due to that, "Delaware Holding Companies" (DHCs) have popped up. Those DHCs charge the "fees" for the use of the logo or Trademarked name and then pay NO TAXES on that money in Delaware while now paying smaller taxes in Rhode Island and other states.

The way to fix this issue is two fold.

1.  Combined "Sort of, but not really" Reporting.

Combined Reporting makes it so that Corporations with different Branches or other multiple entities are regarded as one single taxpaying entity.

Several states have gone to a type of this model (There are two forms of tax apportionment associated with Combined Reporting, the Joyce and Finnegan models) and it has initially shown an increase in tax revenue from these businesses.

Maryland conducted a study in 2009 and has shown an initial increase of 13% to 20% in tax revenue. Rhode Island has also flirted with this idea in the past and has decided to conduct a study of it's own.

The reason I keep writing, "initially" is because the Combined Reporting method will cause Corporations and other large businesses to eventually move and/or expand elsewhere.

As talked about in the NYT article by Robb Mandelbaum linked above (flirted), "...Amgen, a California-based pharmaceutical giant that has 1,500 employees in Rhode Island, told legislators that “combined reporting would create disincentives for future expansion and investment for Amgen in Rhode Island, dramatically increase our tax liability by unfairly subjecting income that is unrelated to our Rhode Island manufacturing activity to Rhode Island tax, and put our site at a competitive disadvantage with our other manufacturing locations throughout the United States and globally."

Because of the above, there would have to be some changes with a Combined Reporting system. It would not be fair to a company like Amgen to have to pay taxes in Rhode Island for items produced or sold elsewhere plus it does the exact opposite of what this road map is about.

To fix this, Corporate taxes will be applied to the value of any products produced and profit made in Rhode Island but that any fee, loss or cost charged by a Parent Company or another entity owned by by the Parent Company can not be figured into the total profits/products produced unless said cost are for materials needed create any products or to sell in the state.

An example of the exception would be, if a Plant in RI needed a widget produced in a plant in Michigan, and for either book keeping, or they are different companies (under the same parent Corporation) they actually had to pay for the widgets. That cost can be added to the operating cost of the Rhode Island plant but if they were paying the Parent company a fee so that they could call themselves, "Corporation A", since it has nothing to do with the actual production, it would not count when figuring out profits for that plant.

Note to myself and readers: So far, this is the most likely area (worked on so far)to be adjusted and changed. It will be a difficult exercise to get the right balance between taxing what we should be taxing while still inviting them to set up shop in the state.

2. Reform/Adjust the Corporate Tax Rates.

The first part of this is to take into consideration small businesses that report their earnings as businesses and not as individual income. To do this we're going to establish brackets. We also have to define a small business as one that employs more than just the owner or owners, they'll need either one additional person full time, or at least two people part time, none of whom can be a spouse.

The second part is to keep taxes, even at the highest bracket, lower than the national average. Remember, the whole point of these first four steps are to get businesses to open up shop in RI.

If you have one Business in RI getting $1 Million taxed at the current 9%, that's $90,000 but if having it at 5% gets you another two businesses that make a million, not only are you now picking up the payroll taxes and the individual income taxes from the workers but you're making $110,250 in corporate taxes and that's the goal of this whole exercise.

My current suggested brackets (for both C and S type companies) and taxes are.

>$100,000                0%
>$250,000                2%
>$500,000                3.5%
>$1,000,000             5%

Obviously, there are other taxes and fees that would go into this. As I work through the road map, I will research those additional taxes and fees, how they rank nationally and add the changes(if any) to this step.

Step 2. Business Regulation and License "do over".

When doing research on this step, I couldn't get too far. Rhode Island has regulations for EVERYTHING, from hand washing to which direction right and left is.

Okay, I'm joking but it really did feel that way. My point is, RI has so many regulations that if I wanted to go through them all, I would have to take a month out of work.

And therein lies the problem.

The most important part of this plan is to attract businesses to our state. Everything hinges on it. This step focuses on making it not only easier for businesses to operate in our state but also cheaper.

The Governor recently established the Office of Regulatory Reform in 2010. It has yet to actually start to do it's job. and like most Rhode Island governmental offices hasn't actually accomplished anything but spend money.

The first part of this step is to actually put to Office to work. They would have one quarter (3 months) to put forth a proposal to the RAC (see below). Once the 3 month period has expired, whether or not they put forth the mandated proposal, the office will be subject to the demands of, and actually become the staff to... the RAC.

Concurrent with that activity, the Governor's office, members of the Legislature (One selected by each body), members of the Chamber of Commerce (who will provide the Chairperson), and members of the National Federation of Independent Business will form the Regulatory Action Committee (RAC).

Their formation must be complete by the second month of this plan being enacted in order to receive the recommendation of the Office of Regulatory Reform and review it.

They are then tasked to further reduce the amount of strain on businesses by further streamlining regulations, the costs associated with them and review the business licensing laws with the purpose of lessening the burden of RI licensing Constraints.

They have six months after the receipt of Office of Regulatory Reform's proposal to put forth a bill to enact these reforms before the Rhode Island Legislature.

If, after 9 months, no bill has been proposed to the legislature. ALL Regulations will be considered null and void, and licensing will be reduced to one license with a fee of no more than $1,000 a year for any business to operate within the boundaries of the state.

I know some of you may think that is a bit harsh. The reason for it is to force the RAC to act in a timely manner and put forth at least an initial proposal of Regulations and License Reform on items they can all agree on, which would be the Regulations and Licenses in most obvious need of reform or abolishment.

The RAC will remain established for an additional year in order to propose further reforms on items that need more time to debate due to their more contentious nature.

The bottom line is that the RAC's sole purpose is to make it more inviting for Businesses to open up shop in our state. It should be as apolitical as possible.

Step 1. Enact Right to Work legislation.

According to the Governor's FY2013 recommended budget, our expected Revenue for FY2013 is around $3.5 Billion, the spending in the budget amounts to around $7 Billion(both numbers are rounded, and the revenue amount is estimated by the Governor of Rhode Island's staff).

Raising taxes in one of the most harshly taxed states is not an option, as a matter of fact tax reductions will be needed (and will be discussed in later steps). The best way to raise revenue (and as a side effect, reduce unemployment) is to attract businesses to Rhode Island.

While other means of doing this will be discussed,, the easiest and most beneficial is listed as my "Step 1".

A "right-to-work" law is a statute that prohibits union security agreements, or agreements between labor unions and employers that govern the extent to which an established union can require employees' membership, payment of union dues, or fees as a condition of employment, either before or after hiring.

This would mean, no more "closed shops". It also means that both the employer and employee would have more flexibility.

Research by the U.S. Bureau of Economic Analysis (Part of the Department of Commerce) shows that Right to Work states out preform "Compulsory Unionization" states in these categories from 1990 to 2010.

• Employment growth of 25.9 percent for right-to-work states vs. 7.9 percent for all other states
• Per capita income growth of 117.8 percent vs. 104.3 perecent
• Population growth of 29 percent vs. 23.6 perecent
• Manufacturing employment growth of 84.0 percent vs.19.4 percent
• Manufacturing wage per worker growth of 108.7 percent vs. 96.1 percent

As illustrated in a January 20th Article by Susan G. Arledge in the economist section of D Magazine.

Source data can be found here. 

Unions, of course, are against this. They want to maintain their lock on labor, especially in states like Rhode Island where they enjoy considerable power. They have been known to call Right to Work States, "Right to work for less States" or "Right to Fire States". As you can see, the data doesn't support their view.

Businesses move to Right to Work states because they enjoy more flexibility and aren't held hostage by Labor Cabals. The wages are set based on the Free Market and not artificially.

Meaning, they place the wage at a point where they are able to get the necessary workers needed. If their compensation in both pay and benefits are not high enough, the quality and quantity of labor needed for production will suffer.

This is as opposed to wages set artificially, meaning because a Labor Union is able to hold these businesses hostage by threat of strike, they are able to exact wages and benefits that the business can't afford at risk of losing all production by a striking Union.

If you were wondering why it is cheaper for US Companies to produce items overseas then have them shipped half way around the world just to sell them here. This is partly why.

This is, mostly likely, one of the hardest parts of the plan to implement simply because of the aforementioned power of Unionized Labor within our state.

What's to come.

Currently Rhode Island is one of the most taxed states in the Union, in every area. It has one of the highest costs of living, the highest unemployment and debt/deficit spending and is regularly found at the bottom of every list in regards to Education, Health Care, Infrastructure, and business friendliness.

My plan is to develop a step by step process that Rhode Island can use to turn itself around.

If anyone does read this blog (which I doubt), I welcome any and all comments as I work my way through this process. Any ideas will be welcomed and I only ask that you keep criticism constructive.