PROVIDENCE, R.I. (WPRI) – At the urging of Gov. Gina Raimondo, the R.I. Commerce Corp. is moving to restrict a controversial $42 million incentive program championed by General Assembly leaders.
The program, dubbed the Small Business Development Fund, was added by lawmakers to the state’s fiscal 2019-20 budget during final negotiations this spring. (It is different from the similarly named Small Business Assistance Program, which Commerce RI has used to provide over 100 microloans.)
Raimondo signed the budget into law, but at the time she also slammed the Assembly’s decision to include the tax-incentive program, claiming it will benefit out-of-state investors more than Rhode Islanders.
“I didn’t think it was enough to veto an entire budget, but it’s not good for taxpayers,” Raimondo said Monday.
Michael McNally, a member of the Commerce Corp. board, echoed her concern. “This statute, as written, appears to offer an unwise, unfair agreement: tax credits irrespective of actual performance,” he said Tuesday.
Karl Wadensten — a veteran of the Commerce board who was the only member to vote against the 38 Studios deal in 2010 — said the new program puts too much power into the hands of only a few investment companies. He suggested state lawmakers should go back to the drawing board.
“I’d urge them to bail on this one, save the taxpayers $42 million and rethink it next session,” Wadensten told WPRI 12.
But House Speaker Nicholas Mattiello’s spokesperson, Larry Berman, argued Raimondo’s critique is “off base.”
“The General Assembly included it in the budget because the administration’s economic development policies of the last four years have not done enough to help homegrown small businesses,” Berman said.
The Assembly’s other leader, Senate President Dominick Ruggerio, did not immediately respond to a request for comment. But Senate Finance Committee Chairman Bill Conley, the program’s sponsor, said in May the program is targeted at potential growth industries such as clean energy and defense.
“Too often we see Rhode Island small businesses poised for growth only to leave the state and move to other areas where they can acquire the capital they need,” Conley said.
Proponents argue the state-subsidized private investment funds will provide a much-needed influx of cash for capital-starved small businesses in Rhode Island. But Commerce argues the law is designed so that taxpayers wind up covering two of every three private dollars invested.
Under the law, investors put money into a fund that provides capital to qualifying small businesses. In addition to profiting off whatever returns the businesses generate, the investors also benefit from state tax credits to the tune of 64% of every dollar.
The state, in turn, can recapture some of its investment if the business does well. The law also details monetary penalties should the businesses miss job creation and retention projections.
Rhode Island taxpayers are on the hook for up to $14 million a year in tax credits to the funds’ investors, according to the Senate Fiscal Office.
In what she characterized as an effort to limit the risk to taxpayers, Raimondo led a vote at Commerce on Monday to write regulations which could make it challenging for businesses to qualify for the program without promising the state stronger job creation and economic activity.
“We’ve learned the hard way here in Rhode Island with 38 Studios and other failed attempts, you can’t give money out and hope for the best, which is what this program that the legislature set up did – just give money away and hope business will be created, give out the tax incentives and hope jobs will be created,” Raimondo said.
Rhode Island famously backstopped a $75 million loan in 2010 for the now-defunct video game company 38 Studios created by retired Red Sox pitcher Curt Schilling. The startup failed two years later, leaving taxpayers on the hook to pay back millions to bondholders.
The failed deal has since become a frequent boogeyman when elected officials debate economic development policy in Rhode Island.
“Some of these board members lived through 38 Studios and they don’t want it to happen again,” Raimondo said about the Commerce board.
Tax incentive programs have been a hallmark of Raimondo’s economic development agenda since she first took office in 2015, with programs created such as Rebuild Rhode Island, Qualified Jobs and Real Jobs RI. The Commerce-based programs have awarded millions of dollars in tax credits and incentives to dozens of businesses during her first term.
However, Raimondo argues that unlike the programs she designed, the newly created Small Business Development Fund doesn’t have any built-in accountability measures to protect the state’s interest in the event a business doesn’t succeed.
“Everything I’ve done since being governor, in Commerce especially, is to protect taxpayers,” she said. “Taxpayer money can’t just be doled out, in this case tens of millions of dollars, without some guarantee that jobs will be created, or buildings will be built, or companies will come here.”
Berman disputed that, saying the Small Business Development Fund is designed to fill in the gaps where Commerce programs have not adequately served the small business community.
“As enacted, the program requires Commerce to establish rules and regulations and exercise oversight to ensure its success, and we expect that,” Berman said.
In a shot at Raimondo, he added, “It would be unfortunate if these criticisms were intended to distract from the performance and shortcomings of the existing Commerce programs.”
Programs that opponents say are similar to the Small Business Development Fund have drawn criticism in other states. A 2015 Portland Press Herald investigation of a tax credit program in Maine determined that “sophisticated financiers got millions of dollars in risk-free returns at the expense of Maine taxpayers.”
A 2017 review by the Pew Charitable Trust’s Stateline found that one of the companies which testified in favor of Rhode Island’s new tax credits — Enhanced Capital — pushed programs that “failed to deliver promised jobs and tax revenue.”
Raimondo said the Small Business Development Fund regulations will be designed over the next couple months to ensure “just kind of a basic set of accountability so the businesses will do what they say they’re going to do.”
As part of the statute establishing the new tax credits, lawmakers required periodic reports on the project to be filed with a number of officials, including General Treasurer Seth Magaziner. Through a spokesperson, Magaziner declined to take a position on the program.
“The treasurer supports initiatives to help small businesses in Rhode Island, but believes that all tax credit programs must be designed carefully to assist Rhode Islanders and not out-of-state financiers,” Magaziner spokesperson Evan England said. “The treasurer is eager to see the Commerce [Corp.’s] proposal to ensure strong accountability and efficiency in the program.”
Ted Nesi (email@example.com) is WPRI 12’s politics and business editor and a Target 12 investigative reporter. He is a weekly panelist on Newsmakers and hosts Executive Suite. Follow him on Twitter and Facebook