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The smallest state in the land is in the midst of a giant-size comeback. As Rhode Island shows how nimble it can be in attracting biotech, Hollywood, and residents fed up with high housing costs, Big Dig delays, and more, Massachusetts may be ignoring its neighbor to the south at its own peril.

CONDO MANIA The Bank of America building can be seen between the rising towers of Providence’s Waterplace condominiums.
CONDO MANIA The Bank of America building can be seen between the rising towers of Providence’s Waterplace condominiums. (Photographs by MARY BETH MEEHAN)

When Governor Donald Carcieri looked up at the enormous marble dome of the Rhode Island State House that hot July day, it had been about three months since the Disney crew arrived. Underdog had the largest budget of any motion picture ever filmed entirely in one New England state, and Carcieri and the local film industry were thrilled that Walt Disney Pictures - with its millions of dollars and hundreds of jobs - was there. They gave the director free rein inside the State House, where the crew closed parts of the building, took down a historic chandelier in the rotunda, and hollered out "Quiet on the set" in the middle of the workday. Tourism traffic to the building had dropped off , and government workers had gotten used to stopping in the halls and falling silent at the director's bark. Rhode Island took it in stride.

But what the governor saw that July morning put a chill on his good will. The state flag, which had long flown alongside that marble dome, was gone. In its place was a flag that read "Capitol City" - the film's fictional setting.

It rankled him that the Rhode Island flag had been removed. But what really ticked off the governor were the words on the new flag. For a decade, the state had worked to resurrect itself, to project a new image as a cando creative haven for businesses and residents alike. Seeing the generic "Capitol City" was a reminder of the not-so-distant past. For too many years, that's just what Providence was - a nondescript, unsavory capital city that people drove straight through on their way south to the Cape and New York, or north to Boston and the rest of New England.

Today, through a combination of new tax laws designed to woo creative workers as well as individual corporations and entire industries, an aggressive economic development agenda, a streamlined bureaucracy, and some extremely lucky timing, Rhode Island is building a new identity. The arts, innovation, and business-friendliness are the state's new mantra, and as a growth strategy, it's working like a charm.

Between 2001 and 2006, employment in Rhode Island grew 2.7 percent, the fastest rate in New England. Third Wave Research, a Wisconsin-based economic and demographic research firm, predicts that Rhode Island households with total annual incomes of more than $100,000 will be the fastest-growing segment of the state's population between 2005 and 2010, outpacing that same segment's growth rate in Massachusetts. Rhode Island's gross state product (the value of all goods and services produced) grew by 25 percent from 2001 to 2005, compared with 17 percent in Massachusetts during that period.

In Providence, the evidence is everywhere. A gleaming new office building, the first one constructed downtown since 1991, is about to open as the Gtech lottery company's headquarters. A handful of new high-rise luxury condo buildings are going up in the city center to house empty nesters coming in from the suburbs as well as finance types lured by the cultural scene, the restaurants, and, of course, the jobs. The owner of One Ten Westminster, one of those condo projects, chart the origin of phone inquiries for their $500,000 to $3 million properties; more than a third of the calls have come from Massachusetts, almost as many as from inside Rhode Island. New York City is a three-hour train ride away on Amtrak's cushy Acela Express. And T.F. Green Airport in Warwick is adding an MBTA commuter rail station in its bid to be a user-friendly alternative to Logan Airport. Events like the music festival SoundSession and WaterFire, a public arts celebration featuring 100 bonfires on Providence's three rivers, draw on Providence's three rivers, draw thousands of out-of-town visitors. There are two-night minimums on some popular weekends at downtown hotels, including the newly restored Providence Biltmore Hotel. "Providence has become Boston's SoHo," its edgy, arts- and commerce friendly neighborhood just a train ride away, says Scott MacKay, a political reporter at The Providence Journal.

But Mayor David Cicilline and the business and civic leaders who are members of the Providence Economic Development Partnership want more. (Cicilline redefined what had been the Providence Economic Development Corporation and relaunched it with a broader mission 2002.) The city needs a more aggressive strategy for attracting business and residents from around the region and country, he says, "now that we have this wonderful product to sell." The mayor and the development partnership have started strategizing about how to poach jobs and people from Boston and beyond. More bluntly, the developers of The 903, a luxury condo complex in downtown Providence, have been running an ad in local publications targeting younger Boston residents. The pitch simple: "Fed Up With the Big Dig?"

Actually, yeah. Massachusetts residents and businesses are also fed up with high real estate prices and the property taxes that go with them, a Boston mayor who has a reputation for thinking small, an unwieldy state government, and a Boston homicide rate that's climbing like a baby's fever. Of course, despite its problems, Massachusetts is the economic and cultural center of New England. And Bay State officials don't hesitate to point out that while Rhode Island's renaissance is good for the region, the impact is a drop in Massachusetts's bucket.

"Hats off to Providence," says Ranch Kimball, secretary of economic development for Massachusetts. "Ten years ago, Providence was not a great New England city, and it certainly is now. I admire the fact that civic and business leaders helped that. It's a great place to visit." It's his job to talk about "the big renaissance here in Massachusetts in the way we go about economic development and how we grow jobs," so he changes the subject pretty quickly.

The drive to be a good place to conduct business is a "longstanding issue" in Massachusetts, says Robert Tannenwald, an economist and director of the New England Public Policy Center at the Federal Reserve Bank of Boston. Massachusetts business and government leaders have long worked at what Tannenwald calls "making prospective employers feel more at home here." What's new is competition on this front from Rhode Island, he says, which "in recent years seems to have put its best face forward."

With an economy seven and a half times bigger and a population six times larger than Rhode Island's, Massachusetts ranks higher than its neighbor to the south nearly any way you can think to measure. It has lower unemployment rate, a more highly educated populace, it is considered business friendly by think tanks like the Beacon Hill Institute, and its universities, hospitals, and cultural institutions are world renowned. And despite its progress, Rhode Island faces some deeply ingrained challenges. In 2005, the state had the third highest percentage in the nation of residents on welfare. At the end of May 2006, it had the highest unemployment rate in New England, 5.5 percent. It spends less per capita on K-12 education than any other New England state, and per-capita income, it beats only Maine and Vermont. More than twice as many people commute daily from Rhode Island to work in Massachusetts than go in the opposite direction. In Providence, 40 percent of children live in poverty.

But these statistics only show the effects of the past. Massachusetts has gotten good at resting on its laurels, while Rhode Island - nimble, small, cheap - is now all about potential. And it may well be that Massachusetts ignores its little neighbor to the south at its own peril.

Boston-based Fidelity Investments has a large facility in Smithfield, Rhode Island, that keeps getting bigger. In June 2005, in response to a request from the financial services giant, the Rhode Island Legislature approved a new set of income tax laws. One part of the Jobs Growth Act exempts employees from paying taxes on half of their bonus incomes, requiring companies instead to pay a flat 5 percent tax on bonuses. The act also slashed the marginal income tax rate for employees with annual salaries above 319,000 to 4.95 percent, down from 9.9 percent. These changes apply only to companies that have a total payroll cost of at least $10 million and have added at least 100 new workers since enrolling in the program. Shortly after the June vote, Fidelity announced that it was moving its Personal Investment Division and Pyramis Global Advisors, two segments packed with bonus-earning, high-wage employees, to Smithfield.

The Rhode Island Legislature has in the last few years passed dozens more such income- and sales-tax breaks, many tied to specific industries employers. In May 2006, it passed a tax credit for biotechnology companies equal to 10 percent of a firm's property value if it pays full-time workers at least 125 percent of the state's average annual salary. In June, as part of a broader tax reform package, it passed a state flat-tax option, which will eventually lower the top income tax rate from 9.9 percent to 5.5 percent as long as residents forgo some deductions. This brought the state's income rates close to parity with Massachusetts.

There's a clear focus on attracting high-wage jobs and high-wage earners, which Saul Kaplan, head of the Rhode Island Economic Development Commission, views as the next crucial step in the state's economic resurrection. "While all the rest of the economic development teams [in the country] are trying to fight for the crumb of getting your manufacturing facility," says Kaplan, "what we're trying to do is have conversations with top management to say, 'Come to Rhode Island. We'll help you innovate.'" But not everyone agrees that recruitment through tax incentives or anything else that top management responds to is a purely positive step for Rhode Island. Tannenwald says that though its successful efforts to attract business have definitely boosted the state's economy, "Rhode Island has to ask itself how much and at what cost, to what extent is the state granting incentives and concessions to firms for doing what they would have done anyway?" If Rhode Island officials are asking those questions, they're doing it behind closed doors.

The state's biggest selling point to any industry may turn out to be its size, which makes for easy punch lines - "the phone booth known as Rhode Island"- but also makes it easy for businesses to get things done there. "Because it's a small state, it allows us to really get everyone together in the same room and work out areas that may be an issue," says Kimball Hall, vice president of Rhode Island operations for pharmaceutical giant Amgen. The company acquired a drug manufacturing facility in West Greenwich, Rhode Island, in 2002 and has spent more than $1.5 billion expanding it. The company now employs 1,700 people there.

"Because of our size, you can get things done and get to the decision makers," says Carcieri during a half-hour interview in his office overlooking downtown Providence. (The interview took place two days after a request was made through the governor's press office.) "We have a good working relationship. Even though politically, this is a heavy Democrat state and I'm a Republican . . . when it comes to economic-development kinds of issues, everybody pulls together pretty well. You won't find another state in the nation ... where you can get the entire federal delegation and the decision makers at a state level around the table. In fact, this happens all the time. It's a willingness to sit down, and that's where our size gives us an advantage."

Another tax law, passed in January 2002, gives the most generous historic-building tax credit in the country, equal to 30 percent of total expenditures on rehabilitation of buildings that qualify for the Rhode Island Register of Historic Places or its national equivalent. The program has been approved for more than 200 projects, and unlike federal historic tax credits, Rhode Island's credits are transferable. In addition to commercial space, the credits have resulted in 4,500 units of planned or built housing since 2002, many in formerly dilapidated mills, without using up any new land - one thing that's in short supply in the state, says Ted Sanderson, executive director of the Rhode Island Historical Preservation and Heritage Commission, which administers the program.

All of these changes have attracted more than $7 billion in investment in the last two years, according to the Rhode Island Economic Development Commission, including new or planned buildings, new industrial developments, expansion of existing companies, and private investment in infrastructure. But the state hasn't forgotten the little guy, either. While parts of Rhode Island's economic development plan target technology, biotech, and finance, its sweet spot has turned out to be creative businesses. Artist, designer, musician, filmmaker, writer, entrepreneur, and inventor are all job categories Rhode Island has identified as important to its economic and community resurrection. For people in these jobs, the state's biggest draw is how affordable it can be to live and work there. As of mid-2006, the median sales price for existing single-family homes in the Providence metro area was $291,000, compared with $421,000 in metro Boston, according to the National Association of Realtors.

Among those who have made the move from Massachusetts to Rhode Island, many say they feel the Bay State is no longer a hospitable or affordable place to live. "I was born in Newton," says Nadia Mahfuz, a classical painter who recently purchased a loft in Central Falls. "I think Boston is very conservative. The rents are exorbitant, taxes are too high, and I've found Rhode Island very embracing."

"As an artist," says Peter Roux, a landscape painter from Taunton who in February relocated his studio from roughly 450 square feet in Boston's Hyde Park neighborhood to a 1,000-square-foot studio in an old mill building on Mineral Spring Avenue in Pawtucket, "you stand a much better chance of thriving here than in Boston. I can't do the things in Boston that I can do here. My work is much largerscale here, because I can get a much bigger perspective on what I'm working on. I couldn't have gotten a space this big in Boston." Pawtucket, once a struggling mill town just north of Providence, is staging a turnaround by attracting artists like Roux. Besides its low rents and real estate prices, it is one of 10 cities where Rhode Island's arts-district tax laws apply, exempting artists living in designated areas from paying state tax on income derived from selling their work. The law exempts galleries, too, from charging buyers sales tax.

Josh Silverman moved from Boston to Providence in 2004, then moved his design and branding company, Schwadesign, from the Fort Point Channel area to Pawtucket in June. He now pays $7 per square foot instead of $12 - a relative bargain in Fort Point Channel - for studio space, which has allowed him to get a bigger studio and to take on more work. The building on Mineral Spring Avenue where he works (along with Roux) accommodates more than 75 artists, whose work ranges from painting to design to woodcarving. "Half the reason that I moved here is that this building and area has the same kind of openness and friendliness toward people who make a business out of their artwork or design that I used to find in the Fort Point area," Silverman says, adding that Fort Point just got too expensive.

"Providence is the type of city that's only going to grow," says David Cambria, who co-owns Red Herring Motion Picture Lighting - and yes, his company worked on Underdog. Originally a Bostonian, Cambria moved to Rhode Island several years ago and moved his business, too, last year. "I haven't bumped into one person who has come down here and has said, 'This sucks.' It's incredible. It's a great city."

He's also part of a boom fueled by a film and TV tax credit passed nearly unanimously by the Rhode Island General Assembly in June 2005. It offers what is essentially a 25 percent rebate for nearly every dollar spent by a film company during production in the state. The financial incentive - combined with the experience and connections of the State Film Office's executive director Steve Feinberg - is part of a plan to earn the state that produced actors like James Woods and Debra Messing a new nickname: "Little Hollywood."

Feinberg, a native Rhode Islander and a filmmaker who worked for 22 years in Los Angeles, has taken a page from the Economic Development Commission's playbook. Its hope is to sell Rhode Island to Hollywood decision makers as the most film-friendly state in the country. In addition to talking up its growing talent pool, Feinberg likes to say Rhode Island is a little state but a big back lot. "When you think about Providence, you're thinking about cityscape," says Feinberg. But within a 10-minute drive, "we have farms, and we have mansions, and we have waterfront, and we have all kinds of varied locations. . . . And we're only 48 miles long."

To help on the city level, Cicilline created a Providence Film Squad in April to coordinate with city agencies on permitting, street closures, and police details. This ease of use was a deciding factor when it came time for the Underdog filmmakers to pick between Providence and Montreal - the two finalists. "The mayor and Governor Carcieri and I met personally on the first trip to the state," says Jerry Ketcham, a Disney senior vice president who supervised the film's production. "In Rhode Island, there weren't the kind of restrictions that we faced in Montreal. They said, 'We'll work with you to make sure you can do these scenes on the streets of downtown Providence.' The fact that the community was excited about having us there and not telling us like in Montreal, 'We'll try to fit you in.' It all came down to how friendly they are to the filmmakers," he says.

Even Rhode Island's notoriously difficult unions are making nice. Regular work tends to have that effect. "It's given [our members] a better standard of living," says Stu Mundy, executive officer of Teamsters Local 251, which is responsible for all transportation on films shot in the state. "We've had guys that have made a significant amount of money this year." That should continue. Disney is scheduled to begin shooting another feature film this month in Rhode Island. Other recent productions have included the Showtime cable television series Brotherhood (which has announced plans to film a second season there), the CBS series Waterfront, and five more full-length films.

MASSACHUSETTS ECONOMIC DEVELOPMENT officers scoff at the idea that Rhode Island poses any threat to the Bay State's nascent boom, which has resulted in the creation of just over 58,000 jobs since December 2003, the recent bottom of the state's labor market. (This means that the state has replaced all the jobs lost since a slowdown that started in January 2003 and added about 3,000 new ones. The state is still about 140,000 jobs shy of the high it reached in February 2001.) They say Massachusetts faces no imminent threat from Rhode Island in competition for business, jobs, or residents. Ranch Kimball, from the Massachusetts Economic Development Office, goes so far as to claim that he doesn't pay all that much attention to what's happening south of the border. "I don't really have a detailed assessment of everything they've done down there," he says.

Maybe. But it sure looks as if he and other development officials are paying attention, since several of the recent changes made in the way Massachusetts goes after business look an awful lot like Rhode Island's strategy.

Take, for instance, the Massachusetts Business Resource Team, an organization formed in 2004 that brought together 23 confusing and often competing regional business development organizations scattered throughout the state. Its goal: to create one-stop shopping for inquiries and a clearinghouse for information to be shared and responses drafted quickly. Sound familiar?

"I admire Rhode Island," says Kimball. "Our economy in New England is going to be better if all states are thriving." But he denies that Massachusetts copied its neighbor's Economic Development Commission model. "The way we came up with Business Resource Team is that I spent 50 percent of my time visiting companies on-site in Massachusetts," he says, hearing "complaints about doing business with the state - that we were hard to deal with, didn't explain ourselves well. One business said 15 entities claimed to be the lead economic development entity for the state." So, with Governor Mitt Romney's backing, Kimball created the resource team, Massachusetts's own version of the development commission.

Even Boston may be getting in on the act. In April 2005, Rhode Island's Carcieri announced that his state was going to become the first state in the nation to create border-to-border wireless Internet access. A pilot version, which started in Providence, just rolled out service to its first rural town, Foster. Saul Kaplan of the Rhode Island Economic Development Commission says that shortly after Carcieri's announcement, he was visited by Massachusetts officials eager to hear details. In February 2006, Mayor Tom Menino announced Boston's own wireless initiative. "People were asking me all day, are you worried they're competing?" says Kaplan. "I'm like, 'No. They came down and talked to us, and we shared everything we were doing with them.' We want more connectivity. It's better for the region."

And in the most visible case of catch up, in January 2006, the Massachusetts Legislature passed a new film tax credit that bears a striking resemblance to the one passed in Rhode Island in 2005. (The legislation was first introduced in Massachusetts in 1999 but failed to gain support until last year.) Massachusetts has certainly produced its share of actors and films over the years, and the credit makes it likely that that will continue. But the one thing that could really make the state more attractive to filmmakers - a single statewide film office headed by someone with experience and contacts, like the one in Rhode Island - hasn't materialized. Yet.

By denying that Rhode Island is growing into a serious competitor and by insisting that its good ideas aren't innovative enough to admit copying, Massachusetts economic officials are wearing the worst kind of blinders. They are also missing the opportunity to create a real regional economic strategy with a new ally that is now ready to join Massachusetts, New Hampshire, and Connecticut in presenting a strong economic face to companies and industries that view the entire world as a potential site for expansion.

"I don't see it as a competition," says Rhode Island's Kaplan. "We're part of a broader region, and the whole region has to figure out how to compete, and it needs to be more about innovation. We're sitting, for heaven's sakes, in the knowledge corridor between New York and Boston. Shame on us for worrying about whether a company is located here or 15 minutes from here. It's the wrong game."

That's a noble sentiment, but in fact, Rhode Island is playing the very same game as Massachusetts - despite opening its kimono for Boston's wireless team. Beating the state drum is what state officials get paid to do, and it's what residents expect them to do. Right up to next week's elections, voters all over New England will hear politicians campaigning on the promise to create jobs in their home state, not giving speeches detailing their plans for regional economic cooperation. The interstate battle for businesses, jobs, and residents will rage on, except now there's a new contender in the ring, determined to prove that speed and smarts can be just as effective as mass and strength when it comes to luring people and businesses. Sounds like a great idea for movie - you could call it Underdog.

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