On Monday, April 28, the Rhode Island Public Expenditure Council (RIPEC) released comments on the Governor’s FY 2015 budget as proposed. As the state deliberates this budget’s proposed reforms, continued attention must be granted to future budgetary risks, including the out-year costs of casino gaming in Massachusetts; the long-term implementation costs of the Affordable Care Act; financial assumptions associated with the outcome of pending pension reform litigation; the repayment of debt service on the 38 Studios loan guarantee; and anticipated transportation funding shortfalls. Preparing for long-term challenges must also be balanced against the need to prioritize competitiveness by improving Rhode Island’s cost-of-doing-business, including the tax climate.

By most measures, Rhode Island’s economy struggles to compete with neighboring economies. As the state’s central policy document, deliberations over the FY 2015 proposed budget must prioritize ways to improve Rhode Island’s economic competitiveness.  To this end, RIPEC suggests fundamental tax reforms, including, but not limited to: reducing the corporate income and sales tax rates to be competitive with neighboring states, and addressing burdensome provisions in the estate tax, such as removing the cliff. These changes would improve tax friendliness, and would remove the instances in which Rhode Island’s business climate is an outlier.

The demands of long-term fiscal challenges, and the opportunities created by enhancing economic competitiveness suggest that a dual policy approach is required in budget deliberations. The state should not only be concerned with reducing future expenditure growth—it should focus on ways to strategically grow its economic base through a more competitive business climate. This approach will require difficult policy choices related to the areas of the state budget that are driving growth.

A review of the past ten years of inflation-adjusted expenditure categories suggests that the state’s expenditures have increased by 18.6 percent. This growth is primarily driven by the grants and benefits expenditure category, which accounted for 51.8 percent of expenditure growth over the past ten years, and general operations expenditures, which accounted for 44.0 percent of inflation-adjusted expenditure growth. Capital expenditures and debt service combined also resulted in expenditure growth, representing 11.8 percent and 7.4 percent of overall growth, respectively. Alternatively, local aid expenditures have declined by 10.8 percent on an inflation-adjusted basis since 2005. These trends suggest that grants and benefits and the state’s general operations budget should, therefore, be the focus of cost containment efforts.

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