Business Climate

WPC's Center for Small Business focuses on improving Washington's small business climate by working closely with business owners and policymakers. The Center provides accurate information and analysis on the state's regulatory climate, tax structure, health insurance systems, and more.

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Regulatory Costs All Over the Map

March 11, 2010 in Blog

If you've been following the tiff over better business climates between Idaho's Governor "Butch" Otter and our very own Governor Chris Gregoire, you'll probably have noted that Governor Gregoire noted Washington's favorable Forbes ranking (ad nauseum) and more specifically, our high ranking in regulatory costs (5th) compared to Idaho's (35th).

According to Forbes's regulatory cost index, that category is based on "Measures regulatory and tort climate, incentives, transportation and bond rating." Not a bad mix of variables, but not comprehensive and Forbes does not get into the details of how they judge each variable in relation to the others. 

One such study that d!
oes get into a more comprehensive look into regulations is the Mercatus Center with its "Freedom in the 50 States: An index of personal and economic freedom."

Where does Washington rank (with #1 being best, #50 worst)? In fiscal policy Washington ranks 37th overall. In regulatory policy we rank 45th (6th worst). Economic freedom we are at 41st, and personal freedom we rank at 35th. Overall, Washington ranks 44th.

For regulatory policy, the Mercatus Center includes labor regulation, health insurance mandates, occupational licensing, eminent domain, the tort system, land and environmental regulation, and utilities. I would argue that this is a more comprehensive look at our regulatory environment. 

Now, we've target="_blank">written many times about relying on natio!
nal rankings to assess our business climate. Basically it boils down to this: Yes, the PR is good, and no, Washington is not the worst place, nor the best place for businesses. But how can we improve? There are many studies and reports out there that provide a snapshot of where we can improve. But using one good ranking to provide cover for discussion on "is Washington a good place for business" may come back to bite you when that ranking falls because of tax increases or other poor policy decisions. 

UPDATED: Life Sciences and Research Targeted with 100% Tax Increase

March 9, 2010 in Blog

If you were up late last night (technically this morning I guess) you could have seen the House pass its tax package on a 52-45 vote. 

There is much to discuss about the 162 page bill that can be read here, but interesting enough amongst the menu of tax increases is a tax on the very life science industry the Governor has been pushing for several years. 

The language in the bill doubles the B&O tax 0.5 percent, from 0.484% percent to 0.984% percent (a 100% tax increase) for non-profit research and development, while for-profit R&D will see a 33% increase in their rate, from 1.5% to 2.0%:

"Scientific research and development services including but not limited to research and development in the physical, engineering, and life sciences (such as agriculture, bacteriological, !
fit research and development should be under the 0.484% catego!
ry, not the 1.5% category, which means the 0.5% increase represents a doubling of the tax rate, not thirty-three percent increase.  However, for-profit research and development is under the 1.5% service category and would see a 33% increase if this bill becomes law.

Legislature proposes $130 million of fee increases

March 8, 2010 in Blog

Long has there been arguments over what constitutes a "fee" increase versus a "tax" increase. It seems each year the legislature fights over the definition, even if the minds are made up about increasing whatever it is they end up calling it.

Senate Bill 6444, the supplemental operating budget, includes $130 million in fee increases over the next ten years. Many of these will hit the business community right in the pocketbook -- and so it doesn't really matter if it is a "fee" or "tax" increase; the point is that someone has to pay.

Some highlights ($$ total over 10 years):

  • Acupuncture license fee -- $1.2 million
  • Adult family home license fee -- $44.2 million
  • Animal massage practitioner license fee -- $230,000
  • Boarding home license fee -- $9.6 million
  • Dental license fee -- $8.3 million
  • Farmworker housing fee -- $1 million
  • Mental health counselor license fee -- $2.2 million
  • Nursing license fee -- $26 million
  • Nursing Assistant license fee -- $10.2 million
  • Nursing Home license fee -- $11.4 million
  • Optometry license fee -- $655,000
  • Respiratory Therapist license fee -- $2.2 million
  • Child care provider license fee -- $5.4 million

Not all fees are bad. Sometimes the fees go towards programs or expenses that incur costs from a specific activity -- one that a general tax should not pay for. But, as in the tax discussion, the increase in fees should be weighed carefully against the benefits of levying the fee because it just raises the cost of doing business.

SBA Underlines Need for Small Business Expansion for True Job Growth

March 8, 2010 in Blog

A new statistical report from the U.S. Small Business Administration's Office of Advocacy underlines the link between job growth and small firm expansion. Often the conversation revolves around asking "how good is Washington state for business start-ups?" And while it is always important to lower the artificial barriers to market entry for new and aspiring entrepreneurs, the new SBA report points out that for true private sector job growth the focus should be on small businesses expanding their workforce. 

From December 2007 to December 2009, the United States lost 7 million net jobs. In that same period Washington state lost 95,950 jobs. Lawmakers on both sides of the aisle are looking at policies to recoup some of those lost jobs. So, how best to go about t!
his?

According to the SBA report, targeting growth in small business is a wise investment; even more so than in new businesses. As the report points out, "Most small firms start small, stay small, and close just a few years after opening." But this is offset by the fact that "Almost all businesses start small...over the last 20 years, 95 percent of new employer firms started with fewer than 20 employees."

There is a very strong basis for the claim that firm formation has a strong impact on overall job creation, but then again, about half of new firms survive five years or more. So, the SBA points out that, in actuality, "the bulk of job flows takes place in existing firms' expansions and contractions." In fact, depending on what data set you look at, small businesses (using the under-500 employee federal standard) account for 65% or 88% of new net jobs nationwide. 

The authors of this report echo WPC assertions that !
small businesses are a logical group to look to for job recove!
ry as they have historically carried our economy out of recessions. Looking back, during the previous recession it was firms with fewer than 20 employees that led the jobs recovery, while businesses with more than 500 employee continued to bleed jobs and firms with 20-499 also lost jobs (but to a lesser extent as the big guys). The recession prior to that, in the early 1990s, it was the firms sized 20-499 that lead employment expansion, while the very small and very large firms dragged behind. 

Because our current recession is steeped so heavily in credit market woes, the authors expect to see net job gains primarily in the 20-499 sector, as opposed to the under-20 sector.

One interesting side note, however, is the declining size of new startups. Essentially, even as more people start businesses, the number of employees in those new businesses is becoming less and less. Pure speculation on my part is that the advent of the Internet, home-based businesses, !
and the simple fact that fewer people can do more through technology has something to do with this.  

Two other good resources regarding data analysis of small firm hiring and the impact on the economy include, "Where Will the Jobs Come From," and "Jobs Created From Business Startups in the United States," both from the Kauffman Foundation. 

Minimum wage debate: Focus on short-term gain hurts teens' futures

March 5, 2010 in Blog

A great editorial in today's Wall Street Journal (subscription required) on the teen unemployment rate in America and how minimum wage laws are adversely affecting our future workforce. 

The editorial states,

"A higher minimum wage has the biggest impact on those with the least experience or the fewest skills."

When the feds increased the minimum wage from $5.15 to $5.85 the overall national unemployment rate was under 5% and the teen rate was at 14.9%. 

"But as the minimum wage increased even as the overall job market began to worsen, the damage to teen job seekers became more severe. By the time the third increase to $7.25 from $6.55 took effect in July 2009, the teen jobless rate was 24.3%, and by October it peaked at 27.6% before dropping to 26.4% in January."

But this sad situation is even worse for those in the African-American community.

"[Black teens'] jobless rate climbed from 38.5% before the third wage hike to 49.8% in November 2009, before falling back to 43.8% in January. For black male teens, the rate climbed to 52.2% in December from 39.2% in July."

Those are some telling and frightening numbers. Couple those jobless numbers with the fact that fewer than half of black students finish high school and you have a recipe for disaster (disaster being that black males are much more likely to end up in jail than any other ethnicity). 

So then, why does Congress continue to implement policies that contribute to teenage unemployment? For short-term publicity gains. 

Again, the Journal opines that,

"A Congress that has spent $862 billion to create jobs thus managed with its wage increase to harm tens of thousands of entry-level job seekers. And it did so in the name of "compassion" and a "living wage." In many cases that wage has since become zero."

It's unconscionable to favor short-term gains over the longer term effects here. We are sacrificing temporary wage increases for a few so that the least-skilled can get left behind. And those are the ones who truly need a chance to break into the labor force and learn valuable lessons -- lessons that a government-imposed wage hike cannot teach.

More on the minimum wage
National unemployment rate of 9.4% pales in comparison to teen rate 24%
Colorado minimum wage drops as living costs fall
Don't shut out those looking for experience in the workplace

House Tax Package Targets Businesses, Non-profits, Venture Cap Investments

March 5, 2010 in Blog

Earlier this week the House released its smorgasbord of tax increases to help fill the $2.8 billion budget deficit. Largely lost among the 150+ pages of HB 3191 are sections 2101 and 2102, which would cap the investment income B&O deduction for non-financial institutions at $250,000 and tax any returns above that at 1.5% (the highest B&O rate).

As of now there is no cap on how much a non-financial business may deduct. According to the Department of Revenue (page 113), this deduction is "provided for interest, dividends and capital gain income earned by persons who are not engaged in banking, loan, security or other financial business." Basically, unless your business makes more than 50% of its revenue through loan income, you qual!
ify for this deduction. 

DOR also says that "The B&O tax is intended to apply for the privilege of engaging in business. This deduction reflects the perspective that investment income by nonfinancial firms is not considered as engaging in business."

Finally, DOR says that revenue could be increased through repealing this deduction but "compliance might be problematic." The Department does not elaborate on what kind of problems could be expected. 

Much of the concern revolves around "what qualifies as investment income?" For a business, non-profit, or other corporate entity, it is wise (and usually required) to have liquid assets invested in some form of interest-bearing vehicle; aka savings account. This may sound simplistic but just as most households hopefully have money stashed away for emergencies or a rainy day, businesses and non-profits similarly hold onto a reserve account as a similar precaution. This !
money is often set aside into various accounts that pay intere!
st. 

Chances are, unless you have a large business or non-profit organization, your reserves are not earning more than $250,000 in interest. Using some simple math and assuming a 4% rate of return (remember when financial analysts used to use 8%?) a business would have to have about $6.25 million in reserves to hit the $250,000 level. 

Now, you might say, "hey, $6.25 million is a lot of money," and to an individual citizen it may be. But many businesses have far far more than that on hand. Heck, over in Redmond, Microsoft has over $30 billion cash and cash equivalents on hand. They are not a business that makes money off of loans and investment income, but they probably pull in a tidy sum just from their reserves. Still in question is whether universities, most of which have substantial endowments, would continue to be exempt as well. As an aside, the a href="http://f2.washington.edu/treasury/sites/default/files/1q10bor.pdf" target="_blank">University of Washington's Consolidated Endowment Fund is a little under $2 billion. And don't forget about the mother of all non-profits, the Gates Foundation, with cash and other investments totalling over $30 billion.

Also still questionable is how Venture Capital would be affected. Washington VC firms invested over half a billion from Q3 2008 to Q2 2009. That's 7th most in the nation, but 4th most per capita. High levels of VC funding is one of the reasons why Seattle continues to attract high-tech firm startups. How would these investments in future companies be affected by this tax increase? We don't yet know that either.

House Democrats expect to raise $58 million from this proposal during the remainder of the current b!
iennium (until June 30, 2011) and $126 million during the 2011-13 bienn!
ium. The plan is to link the money raised from capping the deduction to various education expenditures such as smaller class sizes and levy equalization. 

The reality is that any tax increase, whether through repealing "loopholes" or raising rates, will have a detriment effect on somebody. This is why WPC has been advocating for reining in government spending for years, so that policymakers wouldn't have to choose winners and losers in the tax policy game. 

Tempered reaction to latest unemployment numbers

March 3, 2010 in Blog

A majority of yesterday's headlines proclaimed that the state had seen its first "positive job growth numbers in a year." While technically true, the increase is small relative to the overral jobs picture, down 170,000+ since the turmoil began, and the unemployment rate actually continued to climb. 

To be sure, even a faint improvement month-over-month is good news when compared to the drastic decline in private sector jobs. But we are still nowhere near out of the woods, at least jobs-wise. As we've stated before, you will see productivity and output grow before j!
obs largely recover their previous levels (which is still years away).

Over at Crosscut, Stephen H. Dunphy writes that 

Another measure shows the true problem with the economy these days: the unemployment rate that counts unemployed people as well as those working part-time for economic reasons and those who have quit looking for work because they are discouraged. That number stood at 16.2 percent statewide, the same as the national average. In Oregon, that rate is 20.7 percent; in California, 21.1 percent.

He also points out that Washington will benefit from exporting to!
surging Asian economies. That will help some of our states la!
rger businesses (Microsoft, Boeing, et. al.) as they export both manufactured goods and software overseas.

But before we begin popping champagne corks, Dunphy points out, correctly I might add, that

"An estimated 359,500 people (not seasonally adjusted) in Washington were unemployed and looking for work in January, Employment Security said. More than 305,000 people received unemployment benefits in the state in January.

A final caution from Employment Security: Remember, one month is !
not a trend, so don’t get too excited about fluctuations in the numbers from month to month."

Also, Nikki Reading over at TVW a> links to an interesting Wall Street Journal article showing average unemployment rates by state with a year-over-year comparison. Interesting to see how all the states were affected. 

Sightline's critique of new taxes gets numbers wrong

March 3, 2010 in Blog

Eric de Place over at The Sightline Institute took exception to our recent Legislative Memo, “Tripling Hazardous Substance Tax Would Boost Gas Prices.”  In particular de Place claims we were “obviously” wrong in our analysis in two specific areas; claiming that the proposed tax would increase gas prices four to six cents per gallon and in our data regarding the total amount of pollutants entering the Puget Sound through stormwater.

But a closer look shows that the criticism is a bit reckless.

Sightline claims we are wrong to say that the proposed tax “would increase gas prices by four to six cents per gallon.”  De Place writes:

“…it’s obviously false to anyone who bothers to perform some simple arithmetic. All you need to do is multiply the tax increase (1.3%) by the wholesale price of gasoline (about $2.30).... the correct answer is that the impact would be less than 3 cents per gallon." 

There are several problems with Sightline’s over-simplification of the math.  First, he conveniently ignores the recent trends in wholesale gas prices.  According to the U.S. Energy Information Administration(EIA), the average wholesale price for gasoline in 2008 was $2.69/gal on the West Coast for all gas products.  During 2008 the wholesale price topped out at $3.63, which would equate to a 4.7 cent tax increase at the pump under the current proposal. He conveniently picks the low point of recent gas prices for his estimate.

Second, while it may be true that 2008 numbers represent the current high-water mark in wholesale gas prices, it cannot be ignored that oil industry is a volatile market and most predict prices will increase in the near future. Many agree with this assessment, including, ironically, de Place.

One year ago he argued that the EIA has historically underestimated the price of gas.  In his blog post, entitled, “Future Gas Prices,” de Place bemoans the low EIA estimates of gas prices.  In late 2008 the EIA predicted that prices would top out just over a $3/gal, well under the $4/gal mark that prices actually reached in 2008.  De Place at the time wrote:

“as anyone not living under a rock is aware, the average retail price of gasoline is currently above $4 per gallon….the EIA also publishes a "high price" forecast, just in case something untoward should happen. Boy, I sure hope that high price forecast doesn't materialize because it shows future gas prices getting up almost, but not quite, to $4 a gallon by... wait for it... sometime around 2030.”

Finally, de Place points to the state’s Department of Revenue (DOR) as the definitive authority on price increases based on the proposed tax.  He notes:

 “Not surprisingly, that's also what the state's Department of Revenue says: 3 cents, at most.”

However, an email sent by Drew Shirk, DOR’s Legislative and External Affairs Liaison said, “We estimate that every one percentage point increase of the hazardous substance tax rate will likely result in about a 2.5 to 3.5 cent increase in the retail price/gal.”  That means, at least before politics took over DOR’s gas price projections, the tax proposal would raise prices at the pump by as much as 4.6 cents/gal, not the 3 cents they are now predicting.

The second point questioned by Sightline is our analysis of the Department of Ecology’s re-calculation of pollutants entering the Puget Sound through stormwater.  They claim we are guilty of “cherry-picking” our numbers and misrepresenting the actual amount of pollutants that enter the Sound.  Here too, de Place is wrong in his criticism.

Our analysis of Ecology’s re-calculation highlights that an error was found in the first two phases of the Department’s toxic loadings reports.  In our Memo we note that David Dicks, Director of the Puget Sound Partnership, wrote in July of 2009 that:

“Nearly 150,000 pounds of toxic chemicals – including petroleum, lead arsenic and fertilizers – enter the Puget Sound each day.”

In addition, this is the same claim that Director Dicks and others made when the Partnership released their Action Agenda in December of 2008.  At the time, the claim of 150,000 pounds represented the low end of the range based on phase two of the toxic reports.

However, after re-calculating the toxic loading reports, the claims regarding the amount of toxics entering the Puget Sound on an daily basis has been revised down from the 150,000 pounds to 39,000 pounds.  The re-calculation was published in January of 2010.  Our use of 39,000 lbs/day (14.2 million lbs/year) is consistent with what proponents, like Washington Conservation Voters and the House Democratic Caucus, have been using all along.

Sightline is correct that we could have better clarified our use of the table from Ecology’s re-calculation.  In our Memo we wrote, “The table below shows the change in pollutant loading to the Puget Sound after the recalculation.”  What we should have said was the table shows the re-calculation of oil and grease in the Puget Sound.  This was a minor oversight on our part, but one that should have been caught and will be corrected.

That does not change the fundamental reality, however.  Oil and grease represent more than 90 percent of pollutants, so the revision of those numbers is a dramatic and wholesale change of the data. Sightline’s critique is tantamount to saying, “yeah, but what about the other nine percent?”

None of Sightline’s claims attempt to undermine the basic argument we made.  The truth is that hundreds of millions of dollars are spent on stormwater improvements today and the state’s roadmap guiding this work was flawed and has been re-calculated, drastically reducing the amount of toxics entering the Puget Sound.

Policymakers have a choice.  Based on current funding levels and the scientific record, lawmakers should reevaluate their pursuits to increase the tax burden on citizens and business of the state, until we can be certain that the costs are appropriate to the challenge.

As for Sightline’s claims that we are in error in our analysis, we have in the past enjoyed an open dialogue and communication with them.  It is too bad they chose not to use the open dialogue to correct such a minor oversight.  Had they e-mailed their concerns or questions, we could have addressed them. Instead they shot first and missed the mark.  As a result, it looks as if it is Sightline is the one “cherry-picking” numbers and playing politics to avoid the truth.

Feds grant WA $84 million for broadband expansion

March 2, 2010 in Blog

The U.S. Department of Commerce's National Telecommunications and Information Administration announced today a grant of $84 million to the Northwest Open Access Network (NoaNet) "to deliver new and enhanced broadband capabilities to some of the more remote regions of the state by adding 830 miles of figer and eight new microwave sites to their existing high-speed network."