FACTS ABOUT THE MUNICIPAL ECONOMIC DEVELOPMENT (MED) ZONE

The Valley Alliance for Smart Growth is opposed to Woonsocket's application of the MED Zone legislation to the proposed Dowling Village development. We are also concerned about the MED zone law itself and how, in its current form, it may be misused to the detriment of established businesses.

Dowling Village is a proposed development covering 122 acres in North Smithfield on 146A (south, from the Narragansett electric lines up to the Landmark Rehab Hospital near Park Avenue). It would include large scale retail, condos and a 3 story office building. It would include 7 "big box" stores which, together with their parking lots, cover 39 football fields (roughly 40 acres). The big box stores alone cover 11 football fields; parking lots cover 28 football fields). Dowling Village would be twice the size of Smithfield Crossings. Much of this land is currently undeveloped.

The Woonsocket side of the development would encompass 18 acres and would be designated a "Municipal Economic Development (MED) Zone." The 3 large big box stores on the Woonsocket side would be allowed to charge ½ the normal sales tax (3.5% instead of 7%) for 10 years with the sales tax proceeds being returned to the city to use on improvements within 1 mile of the zone. Woonsocket's Master Development Agreement with the Developer indicates that these will be a large home/garden center (such as Home Depot) and a large electronics store (such as Best Buy or Circuit City).

Background about Economic Development Zones Nationwide
The original MED zone legislation was based on legislation from other states. New Jersey, Michigan and Pennsylvania are listed in the findings of the law. Other states with enterprise zones are Ohio and New York. Michigan and Ohio's Enterprise Zone provides a 50% reduction of personal property taxes. New York's Empire Zone provides a sales tax and property tax reduction to businesses for materials purchased to construct or renovate within the Enterprise Zone. However, NY's Enterprise Zone specifically excludes property intended exclusively as retail space. A shopping mall is not qualifying property. Areas considered for Pennsylvania's Keystone Opportunity Zones must display evidence of adverse economic and socioeconomic conditions within the proposed zone such as high poverty rates, high unemployment rates, percentage of abandoned or underutilized property, and/or population loss. In these zones, businesses making purchases of items subject to Sales and Use Tax will be exempt from state and local Sales and Use Tax for property used, consumed, and utilized in a zone or expansion zone. Businesses will also enjoy tax reductions, exemptions, abatements, or credits in corporate taxes, franchise taxes, financial institution taxes, income taxes, and real estate taxes.

The closest in resemblance to Rhode Island's is that of New Jersey's Urban Enterprise Zone (UEZ). Qualifying retailers in New Jersey's UEZ were allowed to charge ½ the normal sales tax. New Jersey's UEZ, however, was applied to entire cities or towns. A key difference, however, is the fact that New Jersey's law was carefully crafted to avoid harming existing businesses. For example, a community adjacent to 2 or more UEZ's could also qualify for tax relief if its businesses were affected.

Our opposition is based on the following key points:
1. Woonsocket's proposed use is a misuse of the MED zone law
First, the MED zone law is clearly intended for blighted areas. The MED zone law (Section 44-18-30.C) states "Various sections of several towns in the state…are deteriorated, blighted areas which have caused very difficult challenges to economic development." The land in question clearly does not fit the definition of either "blighted" or "deteriorated"; it is an undeveloped tract of 18.6 acres situated off of 146A adjacent to the proposed Dowling Village site and adjacent to the Booth Pond Conservation area. Woonsocket's attempt to apply the MED zone law to undeveloped land violates the spirit of the law.

Second, the MED Zone law itself is tied to the Redevelopment Projects Law (45-32). The MED zone law states: "The city or town council….in creating a MED zone, shall have the power and authority of a redevelopment agency, as provided in sections 45-32-1 - 45-32-50, to undertake the redevelopment of a MED zone". The redevelopment law speaks of redevelopment plans and redevelopment areas. It is impossible to re-develop land which is un-developed. The city's own Master Developer Agreement with Bucci MED Zone LLC speaks of "revitalization" and "redevelopment" perhaps in an attempt to address the correct application of the redevelopment law, but, nonetheless, the land is undeveloped.

Third, legislators throughout RI recognize Woonsocket's violation of the law's intent. As is true for enterprise zones in other states, it is clear that the MED zone legislation was meant to be a tool for revitalizing a developed, but struggling, area such as a blighted downtown. Representative Roger Picard put it succinctly when he stated in the April 8 Woonsocket Call: "… it appears to be something different than what we envisioned when we originally voted for it.". Representative Rene Menard is quoted in the April 14 Valley Breeze: "The legislation is clearly circumvented". Representative Bruce Long said in an email to a constituent, "Very terrible legislation slipped through the Assembly and became law." Representative Jim Davey said, "When I met recently with a rep from the Governor's staff and a lawyer familiar with this legislation, they were both sympathetic but believed what Woonsocket plans to do with the 19 acres is …contrary to the spirit of the law. They suggested the law be amended in some way perhaps by restricting its application to "built environments".

2. Woonsocket's proposed use creates unfair competition
Woonsocket's application of the MED zone to large-scale retailers creates unfair competition. The MED zone law grants a 50% reduction in sales tax to consumers shopping within the zone. This was meant to be an incentive to get consumers to visit economically depressed, blighted areas. Encouraging retail in a blighted downtown or a in an old mill would not create such a lopsided playing field. It would reward retailers willing to take the risks of developing in such areas. The tax incentive and resulting competitive advantage would be balanced by the less desirable retail location in a "blighted" area.

Instead, Woonsocket's application of the law to the Woonsocket side of Dowling Village will make it a marketing tool for large-scale retailers. The consequence is the loss of retail traffic away from established retailers and retail districts throughout northern RI. Ironically, Woonsocket's proposed use of the MED zone may have the opposite effect of what the law was meant to address. In drawing retail traffic away from established retail districts, it may actually create more blighted areas in northern Rhode Island.

Comparisons have been made between the sales tax incentive of the MED zone to property tax abatements or job creation incentive tax breaks given to large companies for locating in a community. In our view, this comparison is inaccurate. The MED zone sales tax exemption is the only tax break provided directly to the consumer. Thus, it is the only one which can be used as a marketing tool. This creates an unfair and possibly unconstitutional competitive advantage for the big box stores.

3. Businesses and communities throughout RI will suffer.
Woonsocket's MED Zone in its current form will become a large tax drain on state sales tax revenues: $60 million over 10 years. Woonsocket's projections of sales tax revenue are for $3 million/year or $30 million over the next 10 years. This equates to $60 million dollars being lost from state sales tax revenue, in a state struggling with deficits. It is a poor fiscal investment for the state to give up $60 million in revenue for a $30 million benefit to one community.

The tax benefits to Woonsocket are estimated to be less than the Mayor's projections. The state will likely finds ways to make up the shortfall by cutting other state funding to Woonsocket. Currently, more than 85% of Woonsocket's school funding is financed with state dollars. This, or other state subsidies, will no doubt be cut as the state struggles to absorb the impact of the $60 million drain on state tax revenue.

Small businesses throughout northern RI will suffer. A large portion of the sales generating these taxes will not be "new" sales, but rather sales being taken from other retailers in northern Rhode Island. One study reported in The Home Town Advantage (1999) notes that 87% of revenue generated by a home garden chain came from existing retailers. Other studies have corroborated this finding. While the largest sales tax advantage will be for big-ticket items, consumers are likely to purchase their smaller items at the same time. We have determined that Woonsocket small businesses likely to be affected alone currently provide $1.8 million in tax revenue per year to the city. These include home garden and electronic retailers. Thus the Mayor could be sacrificing 49 businesses and an estimated $1.6 million/year in tax revenue (87% of 1.8 million) for $1.4 million/year ($3 million minus 1.6 million)!

Recommendations
* The MED Zone legislation should be changed.
Rhode Island's MED zone legislation was not carefully crafted. The legislation left "loopholes" which the city of Woonsocket is attempting to exploit. Remedies call for legislative change. There are a few legislative options.

The first would be to raise the MED zone sales tax to 7%, with ½ going to the state and ½ going to the city. This is the amendment currently under consideration in House Bill #6364, as proposed by Rep. Picard. Such an amendment is perhaps the simplest and quickest way to a compromise that levels the retail playing field while still preserving a redevelopment benefit to the city. We support House Bill # 6364 as a good alternative that preserves some of the benefit to the city, while reducing the biggest impact on established businesses.

A second possibility is an amendment that: 1) caps store size within a MED zone (to less than 20,000 sq ft.) and 2) adds the words 'or newly renovated building' after 'new construction'. Qualifying cities should be able to renovate existing structures and work with existing retailers in building a MED zone. This amendment would help ensure that MED zones are applied to blighted areas, and encourage local entrepreneurial business growth without the influx of "big box" chain stores. Looking to other states' enterprise areas, NJ's law did not specifically tie the tax discount to new construction. New York's Empire Zone uses the following wording: "the completed construction must result in either the construction of new industrial or commercial real property, or the rehabilitation or expansion of existing industrial or commercial real property." Finally, the law's emphasis to redevelopment could be more strongly emphasized.

* The MED Zone should be applied in a blighted area of Woonsocket, such as
downtown. The Valley Alliance for Smart Growth believes that the MED zone law is being misapplied by the City of Woonsocket. In its present form, the law would best be applied to downtown Woonsocket or to some other area of the city that meets the definition of "blighted" and "deteriorated."