Good for Business: How States Can Be More Business Friendly
The strength of a state’s economy is closely linked to the strength of its business sector. Cultivating an environment that encourages business creation and growth involves numerous factors, from tax rates and regulatory complexity to the quality of the labor force and transportation infrastructure.
When it comes to evaluating state business climates, Rhode Island is frequently ranked as one of the worst states for doing business. In order to address the perception that the state is unfriendly to the private sector, we must understand where it comes from. What issues make Rhode Island a challenging place to do business? What strengths does the state have that it can continue to build on? What have successful states done to attract and support business that Rhode Island might learn from? By understanding the factors that contribute to the state’s challenging business climate, we can explore potential solutions for making Rhode Island an appealing place to do business, thereby fueling economic and job growth.1
RANKING RHODE ISLAND’S BUSINESS CLIMATE
To evaluate the business environment in Rhode Island and how it compares to that of other states, we turn to two well-known indexes: CNBC’s “Top States for Business” and Forbes’ “Best States for Business.” These rating systems attempt to determine how attractive each state is for businesses by combining a number of measures culled from publicly available data, covering factors from the cost of doing business and access to capital to the labor supply and prospects for growth.(a)
(a) The World Bank produces an “Ease of Doing Business Index” that ranks the regulatory environment in countries around the world. According to their index, the United States has the 7th most business-friendly environment.
FIG. 1 RHODE ISLAND’S PERFORMANCE ON CNBC’S TOP STATES FOR BUSINESS INDEX (2014)
FIG. 2 RHODE ISLAND’S PERFORMANCE ON FORBES’ BEST STATES FOR BUSINESS INDEX (2014)
In 2014, Rhode Island ranked among the bottom two states on the CNBC index for the fourth year in a row.2 The state’s poor performance in Business Friendliness, Workforce, and Economy, coupled with a last place score in the Infrastructure & Transportation category, led to its low overall ranking. A low score on the Business Friendliness measure suggests a high level of litigation and regulation in the state, while poor performance in the Economy category indicates a low credit rating, economic growth rate, job creation rate, and/or residential real estate market. The Workforce category incorporates factors such as a state’s government-sponsored worker training and placement programs, union membership levels, and right-to-work laws. On the positive side, Rhode Island holds an advantage in the CNBC rankings in the Education and Quality of Life categories and has made considerable improvements in Technology & Innovation in recent years.(b)
Rhode Island ranked 46th on the 2014 Forbes index, and has placed among the bottom five states on this list for the past six years.4 The leading drivers of Rhode Island’s poor performance are scarce labor supply, a stringent regulatory environment, and unfavorable growth projections for jobs, incomes, and gross state product (GSP).(c) The Forbes index does, however, rank the state above average – 20th in the nation – on Quality of Life, which incorporates factors like cost of living, poverty and crime rates, and cultural and recreational opportunities.
To understand the challenges Rhode Island faces, we can compare it to a state like Utah that consistently ranks as one of the best places to do business.(d) In 2014, Utah was identified as the most business-friendly state by Forbes and placed third in the CNBC index. On the CNBC list, Utah had a competitive advantage in the Workforce, Economy, and Business Friendliness categories, all areas where Rhode Island performed poorly. A key driver of Utah’s attractiveness for large corporations is its corporate tax rate, which is among the lowest in the nation. The state also boasts an impressive job growth rate, pro-business climate, and low energy costs. Its economic development efforts have successfully attracted high-growth technology and financial services companies.5
(b) In Joseph Roberts’ index measuring overall innovation potential, Rhode Island performs fairly well in the Human Capital category, which measures the education and skill level of the workforce. The state also ranks highly on the Ideas Index, which tracks investment in research and development and the production of patents.3
(c) In analyzing labor supply, Forbes evaluates both the quality and number of workers. Relevant measures include college and high school degree attainment, net migration over the past five years, projected population growth over the next five years, and the percentage of the workforce represented by a union.
(d) The top five states on the CNBC index were Georgia, Texas, Utah, Nebraska, and North Carolina. The highest ranked states on the Forbes index were Utah, North Dakota, North Carolina, Virginia, and Colorado.
FIG. 3 THE BEST AND WORST STATES TO DO BUSINESS
Forbes Magazine,4 CNBC2
KEY AREAS FOR IMPROVEMENT
Rhode Island fairs poorly on many indexes that rate state tax burdens. In a 2013 report from the Small Business & Entrepreneurship Council measuring state policy environments for small businesses, the state ranked 40th. sup>6 This low score was driven in part by Rhode Island’s rank among the bottom five states for corporate income and corporate capital gains tax rates, state and local property taxes, and taxes and fees on cellular telephone service. A 2014 Tax Foundation study also ranked Rhode Island in the bottom ten for corporate tax rates, unemployment insurance, and property taxes.7
Taxes affect private sector growth because they cut into profits and can influence where companies choose to locate. Property tax is particularly detrimental because it is not based on a company’s performance or earnings, but simply on the size and location of its fixed assets. While the appeal of lowering taxes for businesses seems clear, the degree to which tax rates influence corporate decisions about where to locate has been tested empirically numerous times without a conclusive result.8 Companies may make their relocation decisions years before they move, in which case subsidies and tax cuts serve as “icing on the cake” rather than a deciding factor.
FIG. 4 COMPETITIVENESS OF RHODE ISLAND TAX RATES
Small Business & Entrepreneurship Council6
It can be costly, in terms of both time and money, for businesses and workers to comply with government regulations. Excessive regulation can therefore stifle economic growth. The Forbes and CNBC indexes rank Rhode Island 50th and 49th, respectively, when it comes to regulatory environment. A survey of Rhode Island small business owners found that 40% considered the state’s regulatory system “poor” compared to other states. Over 20% of local business owners identified either state regulations or local ordinances as the top challenge to their businesses.9
Specific regulations that Rhode Island small business owners found frustrating include the local meals and beverage taxes, unemployment and disability insurance regulations, and requirements around contractor registration and construction standards.10 The Reason Foundation also ranked Rhode Island among the states with the most requirements for occupational licensing, which can serve as a barrier to people entering new professions. 11
FIG. 5 PERSPECTIVES ON RHODE ISLAND’S REGULATORY ENVIRONMENT
Rhode Island Office of Regulatory Reform9
The CNBC index ranks Rhode Island last in the Infrastructure & Transportation category. The quality of the state’s infrastructure is also rated poorly by the Federal Highway Administration and the American Society of Civil Engineers.12 The state’s geographic location is beneficial, as it is positioned on the major highway of the New England region, I-95, as well as Amtrak’s Northeast Corridor route. This offers an advantage in transporting workers within the state and attracting skilled workers to commute from other states. Nevertheless, there remains a severe lack of proper public transportation to reach major firms within Rhode Island, such as CVS, Amica, and Fidelity. This affects low-wage workers who lack access to cars, as well as executives on short-term assignment or in for business meetings, who may have a difficult time finding transportation around the state.
CULTIVATING A MORE ATTRACTIVE BUSINESS CLIMATE
Improving Rhode Island’s overall business climate will require a multi-pronged approach that directly addresses weaknesses and builds on existing strengths. One key focus might be reducing the regulatory and tax burden on businesses. The state may want to explore the possibility of altering its corporate tax rate, franchise tax, and other taxes in order to encourage private investment, especially involving small and medium enterprises. 13 The state could also consider reforming the unemployment insurance system and reducing the complexity of the tax code and regulatory systems, particularly those that affect the process of starting a business.
Another important component of the business environment is programs and policies that encourage entrepreneurship and ease the path for people starting new businesses. Rhode Island’s existing rules often require new entrepreneurs to access many different departments and agencies in order to get the proper permits and paperwork. Instead, there could be a one-stop center and website that streamlines the process and gathers in one place information about how to open a business in Rhode Island.
Some states support new businesses through programs that facilitate networking and mentorship opportunities, recruiting business executives to share their expertise and connections with new entrepreneurs.(g) Other states have programs to help connect small businesses with capital, particularly alternatives to debt financing.(e) Initiatives that can encourage small- and medium-enterprise growth also include business incubators, patent assistance, and support for the commercialization of new technology.
Rhode Island might also consider creating a Special Economic Zone (SEZ), Enterprise Zone, or other economic growth zone in an area like Quonset Park or the Exit 8 strip on Highway 295.(f) By offering tax incentives, relaxed regulations, and other business-friendly policies to companies that operate in these zones, states can attract foreign investment and fuel job growth.(g)
Another way for Rhode Island to attract businesses and drive innovation would be to focus on improving the quality of its workforce. This could include providing more education and training opportunities for low-skilled workers and taking advantage of existing university programs to activate the highly-skilled labor force. The state could expand on programs like bRIdge by providing support for local firms to create internships, so students have access to experiential learning, and offering incentives to hire these students after they graduate. Tax credits and student loan repayment programs have been used to attract and retain college graduates in other states.17
(e) Maryland created a networking tool called the Maryland Entrepreneurs Resource List that connects experienced executives with young entrepreneurs. In 2012, Massachusetts provided $1 million for a program that connects entrepreneurs with mentors, and an additional $1 million to support paid internships at startups.14
(f) North Carolina and Alabama offer state-sponsored grants to expanding businesses that are expected to create a significant number of jobs. South Dakota has low-interest loans available for startups and growing businesses.15
(g) The latest approach to creating economic growth zones is special economic mega-zones (SEMZ), which are geared toward global production networks.16 Rhode Island could create a high-tech SEMZ that makes use of T.F. Green Airport, the Port of Providence, and supply chain linkages from various industries in Massachusetts and Connecticut.
Rhode Island might also want to investigate ways to enhance its infrastructure and transportation system. For example, creating a transportation hub in a suburban area such as Lincoln Mall could offer additional routes to underserved areas. Expanding the routes of the Rhode Island Public Transit Authority (RIPTA) and collaborating regionally to improve offerings by the Massachusetts Bay Transportation Authority (MBTA) would benefit daily commuters and encourage workers from other states to commute into Rhode Island. As for out-of-town visitors, while T.F. Green airport is often ranked highly by travelers, ticket prices are high and offerings are limited compared to other regional airports.19 The state could provide incentives to attract new airlines and routes and perhaps consider expanding the facility to make room for larger aircraft.(h)
(h) T.F. Green was ranked as America’s 4th best airport by Travel and Leisure and 7th best airport by Conde Nast Traveler.
(i) According to the Bureau of Labor Statistics, Rhode Island’s unemployment rate dropped significantly over the course of 2014, from 9.3% in December 2013 to 6.8% in December 2014. The current unemployment rate, which stood at 6.3% in March 2015, is still substantially higher than the state’s rate of 5.2% before the recession.
(j) Over 40% of the 20,000 nonfarm jobs created in the state in 2014 were in the Educational and Health Services and Leisure and Hospitality sectors. However, Rhode Island wages in these sectors – as well as other sectors that employ many state residents, such as Health Care and Social Assistance, Retail, Trade, Accommodation and Food Services, and Manufacturing – are not significantly higher than the national average annual private sector wage of $45,769.20
A PATH TOWARDS JOBS & ECONOMIC GROWTH
The consequences of Rhode Island’s current business climate are visible in its struggle to regain ground in the wake of the Great Recession. The state had one of the highest unemployment rates in the country in the years during and after the recession.19 While job creation has picked up significantly in the past year and a half, the goal of reaching pre-recession employment levels has remained elusive.(i) Just as importantly, many of the jobs that have been created are in low- and middle-wage sectors, like education and hospitality.(j) Rhode Island’s business climate has likely played a role in its economic struggles in recent years. By using a targeted approach to address the specific challenges faced by businesses in the state, Rhode Island can foster a more business-friendly climate that supports job creation and economic growth.
- Joseph W. Roberts, Suchandra Basu, and Ramesh Mohan (2015) “Strategies for a Competitive Rhode Island: Assessing Innovation Potential with Emphasis on Energy and Ease of Doing Business,” Providence, RI: The Rhode Island College & University Research Collaborative.
- CNBC (2014) “America’s Top States For Business 2014,” CNBC, June 3. The rankings combine 56 measures in 10 broad categories. They were developed with input from the National Association of Manufacturers and the Council on Competitiveness. For more on CNBC’s methodology see: Scott Cohn (2014) “America’s Top States for Business 2014: Our methodology,” CNBC, June 3.
- Joseph W. Roberts (2015) “Building Blocks For An Innovative Economy,” Footnote, June.
- Forbes “The Best States for Business and Careers,” November 12. For more on Forbes’ methodology see: Kurt Badenhausen (2014) “Ranking The Best States For Business 2014: Behind The Numbers,” Forbes Magazine, November 12.
- Kurt Badenhausen (2014) “Utah Heads the Best States for Business 2014,” Forbes Magazine, November 12.
- Raymond J. Keating (2013) “Small Business Policy Index 2013,” Small Business & Entrepreneurship Council (SBE).
- Scott Drenkard, Liz Emanuel, and Jordan Yahiro (2014) “State and Local Sales Tax Rates Midyear 2014,” Tax Foundation Fiscal Fact, no. 438, Washington, DC: The Tax Foundation.
- Terry F. Buss (2001) “The Effect of State Tax Incentives on Economic Growth and Firm Location Decisions: An Overview of the Literature,” Economic Development Quarterly. For a perspective on the decisions of a specific firm see: Roberto A. Ferdman (2014) “Have taxes your way: Why Burger King wants to become a Canadian citizen,” Washington Post, Aug. 26.
- Rhode Island Office of Regulatory Reform (2014) “Findings of the 2014 Small Business Survey,” Providence, RI: Rhode Island Office of Management and Budget.
- Kaylen Auer (2014) “Survey Shows Strong Regulatory Impact on RI Small Businesses,” Providence Business News, May 16.
- Adam B. Summers (2007) “Occupational Licensing: Ranking The States and Exploring Alternatives,”Washington, DC: Reason Foundation.
- Nicole Martino (2015) “The Path To Better Bridges,” Footnote, April 7.
- Leslie Wayne (2012) “How Delaware Thrives as a Corporate Tax Haven,” New York Times, June 30.
- Catherine Clifford (2013) “10 Best States for Starting a Business” Entrepreneur, April 30.
- Biggins Lacy Shapiro & Company “State Economic Development Incentives,” [website accessed May 20, 2015].
- Peter J. Rimmer and Howard Dick (2010) “Appropriate Economic Space for Transnational Infrastructural, Projects: Gateways, Multimodal Corridors, and Special Economic Zones,” ADBI Working Paper Series, no. 237 Tokyo: Asian Development Bank Institute.
- John Rappa (2012) “Incentives for Hiring or Retaining Recent College Graduates,” OLR Research Report, 2012-R-0533, Hartford, CT: Connecticut General Assembly, Office of Legislative Research.
- Kelly J. Fredericks (2015) “How to Restore T.F. Green’s Past Glory,” Providence Journal, February 1.
- Neil Mehrotra (2015) “Rhode Island Unemployment: Is There Labor Market Mismatch?,” Footnote, March 23.
- Rhode Island Department of Labor and Training (2014) “Rhode Island Employment Trends and Workforce Issues,” Cranston, RI.
What factors influence business relocation, and in which sectors should Rhode Island compete for companies seeking a New England presence? What can we learn from examples of this success?
What non-monetary incentives could Rhode Island provide to support business relocation to the state?
Type of Research
- Responds to questions of Policy Leaders with research projects that closely align with state priorities
- Provides implications for challenging state issues