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Choose Cost-Conscious Partners to Ensure Economic Competitiveness |
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Written On: March/April 2004 |
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Written By: By Richard S. Davis |
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Every election offers us an opportunity to consider and shape our government, but some years are more pivotal. This year, with economic recovery still fragile, the electoral decisions will be especially consequential for business owners, as the men and women engaged in politics here are the seldom-silent partners of every employer in the state.
In November, new partnerships, lasting two to four years, will be forged. As anyone who has ever been involved in such arrangements knows, some partners help more than others. Some can run the business into the ground. Over the coming months, we determine which candidates can be trusted with keys to the store.
As the nation’s economy rebounds, the issue of our state’s competitiveness grows in importance, because recovery means businesses are once again looking for investment opportunities. Those states that have made economic development a top priority will gain from a renewed interest in business expansion.
Washington has made progress, and we should not take that for granted. It came about because employers, small business owners, farmers and manufacturers shared their experiences with their elected representatives. Fortunately, those elected officials acted on what they heard, despite intense opposition – opposition that continues even after all the votes have been cast.
Economic competitiveness must not become just another “issue du jour,” served one day and forgotten the next. Washington businesses face extraordinary challenges, nationally and globally.
Two recent studies underscore the competitive disadvantages imposed on businesses here. The first, published by the National Association of Manufacturers (NAM), paints a stark portrait of an American manufacturing sector entering the global business race laden with an extra 22.4 percent in domestically imposed costs resulting from the action or inaction of federal, state, and local governments. The second report, by Ernst & Young, provides a 50-state comparison of state and local business taxes, placing Washington in the top 10 on four important dimensions – and in the top five on two of them.
So, American business starts behind in the global competition, and Washington businesses start behind in the U.S. While conditions are improving here, competition is constant and success results from continuous improvement. The exceptional steps taken to win the Boeing 7E7 competition, the tax incentives extended to maintain and nurture the semiconductor industry, and a host of other actions taken over the last few years (unemployment insurance reform, transportation investment) cannot be overlooked, but neither should their effects be overstated. We’ve a long way to go as a state and a nation.
Our international disadvantages are not, as some have argued, solely a function of wage differences. Jeremy Leonard, in his work for NAM, finds productivity-adjusted wages in the U.S. have declined in recent years. This doesn’t mean wages have declined. Rather, productivity – a function of capital investment, raw material costs, and employee innovation – has grown more rapidly than wages. Consequently, American workers are able to outperform their international competition.
Nonetheless, we’ve continued to lose jobs at an alarming pace. The competitive advantages associated with productivity gains, Leonard explains, have been largely offset by “external overhead costs.” The cumulative effect of corporate taxes, employee benefits, litigation (tort), pollution abatement, and natural gas prices amounts to a 22.4 percent cost disadvantage relative to our major trading partners (Canada, Mexico, Japan, China, Germany, the United Kingdom, South Korea, Taiwan and France). “As a result,” he writes, “U.S. manufacturers are at a serious disadvantage in global markets, despite being fundamentally competitive in terms of labor costs and value-added.”
In Washington, where one in five manufacturing jobs have disappeared since July 2000, Leonard’s analysis suggests areas of particular concern. Faced with the same federal tax laws, tort system, and employee benefit systems as many of their U.S. competitors, businesses here also confront one of the nation’s highest state and local tax burdens.
The Ernst & Young study, conducted for the Council on State Taxation (COST) takes a comprehensive look at business taxes. On the four dimensions they examine, Washington consistently ranks near the top. Paying nearly 54 percent of all state and local taxes (including unemployment insurance and workers’ compensation and disability taxes), Washington ranks 10th in the nation; the U.S. average is about 43 percent. Our state ranks fourth in taxes paid per employee ($5,355 compared with a national average of $3,737), and in taxes paid as a share of capital income. When taxes are measured as a share of private sector economic activity, Washington ranks seventh.
Although the state is making progress – business taxes grew more slowly than the national average between 2000 and 2003 – 6.3 percent vs. 8.3 percent – the tax burden imposed on private employers here remains uncompetitively high. The differences are important.
“Ultimately all business taxes are paid by individuals as workers, consumers, or investors. Some states may choose to impose relatively low business tax burdens based upon their goals of economic development and growth,” note the Ernst and Young analysts. “…Other states may choose to impose relatively high business tax burdens, often because they are less concerned about economic competitiveness or believe that those business taxes can be shifted to out-of-state investors and consumers.”
For example, Alaska and Wyoming – ranked first and second on three of the dimensions measured – rely heavily on severance taxes paid by out-of-state concerns. Policymakers in Washington, however, cannot afford to be unconcerned about the costs imposed by government on private employers, who generally cannot shift the burden out of state. Indeed, intense interstate competition – particularly on the borders with Oregon and Idaho – already threatens job creation and investment here.
The 2005 Legislature faces a possible billion-dollar budget shortfall (i.e., maintenance-level spending exceeding revenues). In selecting business partners in the next election, employers should pay particular attention to candidates’ views on job growth and economic competitiveness. Do they view the future with optimism, extending an open hand to allow the economy to grow by lightening excessive tax and regulatory burdens? Or do they show a clenched fist, fighting to extract even more from a stagnant economy, regardless of the long-term consequences?
The choices made next November will shape Washington’s economic future. The most important decision many employers will make is selecting the right business partner. The stakes could not be higher.
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