Legislative post mortems generally report that business interests had a good session. That’s a fair but incomplete conclusion. The progress made this year in Olympia will improve Washington’s economic competitiveness. However, much more remains to be done.
Let’s look first at the accomplishments: Unemployment insurance tax relief, workers’ compensation changes to reduce costs, adjustments in employee compensation and pension reform to create a more sustainable budget, and expanded use of competitive contracting to increase productivity and create private sector jobs.
While collectively significant, in most cases these changes were incremental and modest. They are important because they signal a change in attitude, recognition that state policies directly affect job creation and investment. More important, they acknowledge that our state has in the past far outpaced the mainstream in taxes and regulatory policies imposed on businesses.
The Evergreen State still has a lot of ground to regain in economic competitiveness. How to do so will dominate legislative and gubernatorial campaigns for the next 17 months. When the official unemployment rate stands at 9 percent, all other issues pale. Despite some trend improvement in the stock market and corporate profits, joblessness persists, dampening consumer confidence and demand.
The politics of recovery will focus on stimulating growth and development. States have limited ability to spur job creation with public spending. (Besides, how’d that federal stimulus do?) Lawmakers do, however, have the ability to craft public policies that make states more or less attractive for private sector investment and job creation.
Several recent reports identify successful strategies. While Washington fares well on some measures, overall our state remains a tough place to do business.
Enterprising States, a report for the U.S. Chamber of Commerce, examines “what makes certain states attractive places to locate, relocate and expand.” They examine 32 variables in six categories (growth, exports, innovation and entrepreneurship, taxes and regulation, workforce, and infrastructure). Underlying the research is a simple theme: State-level public policy plays a critical role in economic growth and prosperity.
Calling states the “fulcrum of change and opportunity,” the authors make the case that states must take the lead in creating dynamic economies. Mindful of the toll the recession has taken on state government, study co-author Joel Kotkin, a prominent international authority on economic and political trends, reminds policymakers of a fundamental fiscal reality. “Ultimately, there is only one route to sustainable state economies, and that is through broad-based economic growth,” he writes. “The road to that objective can vary by state, but the fundamental goal needs to be kept in mind.”
Washington does particularly well in entrepreneurship and innovation, ranking No. 10 according to Enterprising States. We’re recognized for strong STEM (science, technology, engineering, and math) job concentration and growth and as an export leader with good economic output per job. The authors cite with approval the state’s tax-incentive programs for investments in technology, biotech, and research and development.
The results are not altogether surprising. The metro area’s technology and aerospace clusters are politically and economically important. For decades now, the region and state have performed well on “new economy” indices. Yet, as Boeing’s Charleston investment and Microsoft’s continued global expansion demonstrate, we cannot take continued prosperity for granted.
The recession has heightened business owners’ cost sensitivity. Productivity gains achieved over the last three years have allowed profits to increase even as job growth stagnates. When hiring resumes, employers will look to expand in states where taxes, labor costs, and regulations are most advantageous.
High business costs continue to exert a drag here. CNBC’s recent report, “Top States for Business 2011,” showed Washington falling five slots, from No. 15 in 2010 to No. 20 this year. Notably, our lowest ranking, No. 43, came on the study’s cost of doing business measure, which considered taxes, utility bills, wages, and rent. Washington also got low marks on the study’s measures of business friendliness and regulation, cost of living, and economic and fiscal health.
Again, the state’s strengths show up in technology and innovation, with CNBC ranking Washington No. 5. Surely not coincidentally, we also ranked high (8th) for access to capital.
Another recent study for the U.S. Chamber identifies critical challenges for policymakers. Drawing on legal experts’ analysis of state employment laws and regulations (collective bargaining, minimum wage, workers’ compensation, and the like) Navigant Economics created an "Employment Regulations Index" for each state. “The direct costs associated with being an employer,” the research concludes, “are much higher in Washington than in most other states.”
That’s not news to business leaders here.
These costs matter, as demonstrated in a recent survey of than 500 CEOs conducted by Chief Executive magazine. On the resulting list of “best states for business,” Washington ranked a disappointing No. 34.
“Not surprisingly, states with punitive tax and regulatory regimes are punished with lower rankings, and this can offset even positive scores on quality of living environment,” writes J. P. Donlon, editor of Chief Executive. “While state incentives are always welcome, what CEOs often seek are areas with consistent policies and regulations that allow them to plan, as well as intangible factors such as a state’s overall attitude toward business and the work ethic of its population.”
The more business-friendly states can also boast of greater economic success. Chief Executive’s best states — Texas, North Carolina, Florida, Tennessee, and Georgia — are well positioned for post-recession job creation. Texas alone accounts for 37 percent of all jobs added since the recession officially ended in June 2009.
The steps lawmakers took this year move our state in the right direction without sacrificing compensation to injured and unemployed workers, environmental protection, or workplace safety. Although many of the measures faced stiff opposition from interest groups, Washington has not moved into dangerous or uncharted territory by reforming some costly and ineffective systems.
Legislative actions to reduce unemployment insurance taxes and reform workers’ compensation will reduce business costs. The effect of the UI tax cut will be immediate. The workers’ comp fix falls short of the ideal and will produce more gradual relief.
Certainly, as Gov. Chris Gregoire acknowledged when she signed it, the adopted state budget unravels much of the progressive agenda of the last six years. And the sharp hits taken by higher education threaten our STEM job clusters, even with partially offsetting tuition hikes and enhanced student aid. Commitments made when revenues surged six years ago could not be kept when the bubble burst. And that’s what accounts for new bipartisan appreciation of the importance of sustained economic growth. Reality set in.
Refocusing priorities alone will not cure the shortfalls in investment in essential intellectual and physical infrastructure or reweave the social safety net. Washington must create the public policy conditions necessary to retain and attract private sector investment.
So, much more remains to be done. Faced with clear evidence that high business costs threatened our growth prospects, the governor and Democratic legislature, with considerable Republican support, came together to begin essential reforms. The work must continue.