Will Washington be manufacturers’ location of choice?
There’s an old saying about the three keys to business success: “Location, location, location.” Merchants and realtors know it: Location makes all the difference in the world. For example, if you operate a small cafe on Main Street with plenty of parking and traffic, your chances of making it significantly improve. If you are a realtor, you are more likely to sell a house located in a safe neighborhood close to good schools.
The same holds true for setting up manufacturing facilities, malls or distribution centers. You want to locate close to your customers, suppliers and shipping points. If you own a vegetable packing plant, you don’t want to truck corn, carrots or peas hundreds of miles to your facility. The time and transportation expenses would make your operation cost-prohibitive.
As Gov. Gregoire and state lawmakers struggle to hold onto jobs and revive our faltering economy, they should remember one very important fact: The costs of doing business, whether from wages, taxes or government regulations, dictate where companies locate. If costs get too high, employers will cut jobs, close down or move out.
Consider that just a few years ago, Washington’s asparagus processing industry was thriving in Toppenish and Dayton. Now, it’s gone. Our region’s aluminum industry used to provide hundreds of good-paying union jobs. Today, only two Washington plants remain in operation. Since 1991, The Boeing Company has shed nearly 30 percent of its jobs in Washington.
Highest minimum wage
Washington’s minimum wage law continues to hobble labor-intensive businesses struggling in this economic downturn. Nowhere is that more evident than in Clarkson, a stone’s throw away from Lewiston, Idaho.
If you own a pizza delivery business in Clarkston, you pay Washington’s minimum wage of $8.55 an hour, the highest in the country. Your competitor, just 50 yards across the Snake River, is required to pay only $6.55 an hour.
That $2 per hour may not seem like much, but add Washington’s high unemployment insurance rates and workers’ compensation taxes and you may not be able to compete, especially in these tough times. You may have no other choice but to move to Idaho to survive.
What really singes the hides of many small business owners in the rural parts of our state is that Washington’s minimum wage is based on the consumer price index for Seattle, which is not representative of the economy in places like Clarkston or Ilwaco.
“If the minimum wage were the only cost differential, that would be one thing,” said AWB President Don Brunell, “but it’s not.” Lewiston merchants collect 6.5 percent in sales taxes. Clarkston’s sales tax is nearly 8 percent. Washington also has a business and occupation tax that is collected on gross income. Idaho only taxes profits.
Unemployment insurance supported by employers
Washington employers are also saddled with the nation’s second-highest unemployment insurance rates at $803 for each worker. Compare that to California at $315 and South Carolina — where a large part of Boeing’s new 787 Dreamliner fuselage is manufactured — at $225.
That major difference led former Boeing Commercial Airplane President Alan Mulally to bluntly say in 2003 that Washington’s business climate “really sucks.” Mulally’s statement shocked lawmakers because only two years earlier Boeing had uprooted its corporate headquarters from the banks of the Duwamish River in south Seattle and set up shop on the shore of Lake Michigan in Chicago.
Democratic Gov. Gary Locke and the state Legislature reformed unemployment insurance during the 2003 session, which helped convince Boeing to assemble the 787 here, but the core of those changes were reversed by the Legislature in 2005.
While Mulally’s characterization of the state’s business climate was shocking, it was not new. In 1991, Boeing CEO Frank Shrontz warned that Washington could become an “aerospace rust belt” if state leaders failed to address the high costs that were hampering the state’s ability to attract and retain companies.
His message was clear. Washington was becoming too expensive to build airplanes.
Then in 1999, Boeing CFO Debby Hopkins told business leaders that Washington needed to “sharpen its competitive edge.” That was just two years after Boeing merged with McDonnell Douglas Corp., giving the company other viable places ready to build airplanes.
Location is a choice
In his presentation last November, current Boeing Commercial Airplane President Scott Carson recognized the progress lawmakers have made since 2003, but told of a changing, more competitive world — a world where location is a choice.
Translation: If rising production costs and disruptions by strikes, traffic congestion or worker shortages jeopardize a company’s competitiveness, that company must move to where it can compete. Today, more than half of Boeing’s 163,000 jobs are outside Washington.
So, what’s the solution?
First, Carson suggested the governor and lawmakers need to develop a sustainable budget that preserves essential public services without raising taxes. That is becoming increasingly difficult because the state’s projected budget deficit has ballooned to nearly $6 billion.
Because of the state’s tax structure, employers are more heavily taxed than individuals, and tax increases hit employers the hardest. While lawmakers might be tempted to target employers with higher taxes and fees, the ultimate victims will be the working people of our state. Increasing taxes will jeopardize existing jobs, stunt job growth and delay the recovery.
Second, legislators need to reform state unemployment and workers’ compensation programs to prevent uncompetitive increases in employer costs. Rising costs will force Washington employers to shed jobs or move out of the state.
Third, Carson urged the state to complete all authorized and funded transportation projects as soon as possible.
Fourth, he urged the state to recommit to education accountability and target higher education investments to programs that contribute to economic growth. “Education systems need to support a healthy, brighter economic future for Washington residents,” he said.
Finally, Carson was frank about the 27,000-member machinists’ union strike that lasted 57 days and the threatened walkout by Boeing’s 21,000 aerospace engineers. “The only big winner in any Boeing strike is the competition,” he warned.
Electricity advantage eroding
“I’d add another,” Brunell said. “The availability of low-cost and reliable electricity has offset Washington’s higher operating costs for almost a century, but higher electric rates are substantially eroding that edge.”
The aluminum industry, which requires large amounts of electricity, is the “canary in the coal mine,” Brunell said. In 2000, the Pacific Northwest had 11 aluminum plants, providing hundreds of good-paying union jobs. Today, the aluminum industry is a shell of what it was a decade ago.
Carson’s recommendations are not new. Shrontz and Mulally presented a similar list of legislative priorities in 1991 and 2003. Reading between the lines, Washington faces further erosion of Boeing jobs and the loss of production and assembly operations to other states if current conditions persist.
Boeing can command the attention of media and public officials, but company officials are speaking on behalf of all private job-producing, taxpaying employers in our state. In reality, small businesses create the greatest number of jobs. Main Street — not Wall Street — will drive our economic recovery, but state lawmakers must ensure that those employers stay sound.
AWB, WashACE and Boeing have laid out the answer to our state’s economic dilemma. Now it’s up to the Legislature and the governor.
In today’s troubled economy, costs matter more than ever and small differences in operating expenses influence whether a company comes here or stays here. Location may not be a matter of choice as much as it is a necessity.
