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.

What's New

The Impact of the National Health Care Law on Businesses in Washington State

June 10, 2010 in In the News
Insider Online (Heritage Foundation)
Insider Online (Heritage Foundation)
Thursday, June 10, 2010

People respond to incentives? Who knew?

June 8, 2010 in Blog

The Puget Sound Business Journal reports that

"The number of pending home sales in Western Washington plummeted in May
as federal tax credits for home buyers expired.

The number of pending sales in the 21 Western Washington counties
surveyed by the Northwest Multiple Listing Service (NWMLS) fell to 5,242
last month, down more than 44 percent from 9,438 in April. In King
County, the number plummeted to 2,169 from 3,855 a month earlier."

Similarly, last year with the "Cash for Clunkers" (CARS) program, Washington auto dealers saw a huge increase during the eligibility period for the tax incentive as cautious consumers came out of the woodwork. Environmental benefits (or lack thereof) notwithstanding, the tax incentive proved to be a boon to the auto industry -- at least in the short term.

But, as our state's chief economist, Dr. Arun Raha, pointed out last year (page 26), the CARS program merely shifted auto purchasing from the future (meaning now and the past few months of 2010) to the present, at that point late Summer, early Fall 2009.

Dr. Raha says that

he data] shows a blip due to the Cash for Clunkers program which temporarily boosted sales and registrations. Not only is that program no longer in effect, but it undoubtedly pulled sales forward, reducing sales in later months."

Keep these two examples in mind as we look forward to 2011. Dr. Art Laffer (of the eponymous Laffer Curve) in The Wall Street Journal predicts the long-feared "double-dip" recession due to the President and Congress' unwillingness to extend the Bush tax cuts. Why? Because businesses will take steps to realize as much income as they can during 2010 at the expense of income in 2011, which will be taxed at a much higher rate.

What happens in January 2011? The highest federal personal income tax rate will g!
o to 39.6% from 35%. The highest dividend tax rate increases t!
o 39.6% from 15%. The capital gains tax rate will rise to 20% from 15% and the estate tax goes from 0% to 55%.

Laffer says,

"If people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be."

It is clear that people and businesses respond to incentives, especially when their personal or corporate incomes are on the line. This is why high-wealth individuals fled New Jersey in the last several years for low-tax states, why some family-owned businesses have left Washington for states with no estate tax, and why some businesses are looking to relocate from California, as a high-tax state, to Washington and Idaho, states with les!
s of a tax burden.

In the first two examples, tax incentives (essentially temporary tax cuts) spurred economic activity, generating revenue for businesses and government. In the latter example, tax increases will surely artificially depress economic activity, leading to more strain on government and the private sector.

Policymakers from D.C. on down to city hall can make the smart decision to forgo increasing costs on a business community that is already nervous about the future. Smart, streamlined and predictable tax policy is important in economic development, especially during recessionary periods.

How government officials increase home prices

June 7, 2010 in In the News
Kitsap Peninsula Business Journal
Kitsap Peninsula Business Journal
Monday, June 7, 2010

The Impact of National Health Care Law on Businesses in Washington State

June 6, 2010 in Publications

After fourteen months of debate, and with narrow partisan support and substantial bipartisan opposition in Congress, President Obama signed major health care reform legislation into law.  Polls consistently show the President’s health plan is unpopular with the public.  At no point in the history of the United States has such broad, wide-sweeping social legislation become law by such a slim political margin.

New Study Highlights Seattle's Competitive Advantages/Disadvantages

June 2, 2010 in Blog

International consulting firm KPMG recently released, "Competitive Alternatives," a new study gauging several city's competitive advantages and disadvantages in the global marketplace. Seattle scored relatively well in overall U.S. average scores, but ranked poorly among the 20 largest metropolitan areas. We also ranked 13th most expensive city among the top 41 global cities. Tokyo was the most expensive -- San Francisco the worst U.S. city; while Monterrey, Mexico was the lowest-cost city overall, Tampa, Florida earning top spot among U.S. cities.

This is important as businesses that rely on major metropolitan areas look for competitive alternatives, Seattle doesn't appear to be among the more competitive cities. The study looks at several different factors, mainly tax burden, labor costs, facility costs, transportation costs, utility costs, va!
rious HR rules and regulations and overall public policy.

One startling finding, however, shows that the U.S. in general is not competitive in several areas. In manufacturing, Canada, the Netherlands and Australia lead in the effective corporate tax rate category. In Corporate and IT Services, again Canada, the Netherlands and the UK lead. The U.S. does register well in R&D tax credits, but that's about it. We've written before about the need for corporate tax reform in the U.S. We simply aren't competitive in that category on a global scale. And Washington state would directly benefit from that because, as Governor Gregoire has said repeatedly, we are a global-oriented state. We do more business abroad per capita than any other state.

Washington state would greatly benefit from !
federal corporate tax reform. It would make Seattle and the Ev!
ergreen State an even more appealing place to start or expand a business.

Distortionary Consequences of Increasing Government's Presence

May 25, 2010 in Blog

A very interesting and telling paper out of the Harvard Business School and the National Bureau of Economic Research takes a closer look at how government spending affects corporate investments. The result is fairly predictable but not unimportant and should serve as a warning to those in both state and federal government (as well as those in the private sector) who think that all the economy needs to turn around is a higher level of government spending.

"Do Powerful Politicians Cause Corporate Downsizing?" is the name of the HBS/NBER paper and is worth a read. The authors use a unique approach by taking a look at congressional chairmanships and the effect upon the chairman's district in regards to government money inflows and how the corporate world reacts. The result of a new chairman!
ship often results in a "spending shock," which tends to "significantly dampen corporate sector investment and employment activity."

This may sounds counterintuitive, since committee chairmen are often expected to, and lauded for, bringing home the bacon. But what the study's authors find is that the federal money replaces private sector investment. Why would a company spend its own capital to compete with the federal government, which can simply print its own money? Or, why spend your investor's dollars when the feds will pick up the tab? In the first instance, many times the resulting action is a plateau (at best) of private activity or a decrease in the form of layoffs (at worst).

There is no doubt, as the authors point out, that some firms stand to benefit from increased government spending. But the average firm contracts during government spending shocks, and the winners often reach the winner's circle via intense Congressi!
onal lobbying instead of through market merit.

There is!
a lot of data in this surprisingly easy-to-read study, but I'll leave you with one section that sums up nicely their analysis:

"The central finding of this paper is that positive shocks to the seniority of a state's congressional delegation cause large and persistent increases in government allocated funding to the states, and significant retrenchment on the part of the corporations headquarted in the state. This retrenchment appears to be a response to the large and persistent increase in federal funding that the state receives following the shock.

Following the appointment of a senator to the chair of a powerful committee, we estimate that his state experiences, on average, a 40-50 percent increase in its share of congressional earmark spending, and a 9-10 percent increase in its share of total state-level government transfers. At the same time, firms residing in the state cut their capital expenditures by 8-15 percent, reduc!
e R&D by 7-12 percent, and increase payout by 4-13 percent. Employment and sales growth are also impacted, as corporations scale back employment growth by 3-15%, and sales growth falls by up to 15%."

There is a reason why WPC and others consistently warn about the increasing footprint of government. We simply cannot ignore the real-world consequences of increased government expenditures, and more importantly, unpredictable "spending shocks" upon the private sector.

Temporary Census Jobs Help Washington's Unemployment Rate Fall to 9.2%

May 18, 2010 in Blog

Today the Employment Security Department announced that Washington netted 5,800 jobs in the month of April, bringing the rate down from a seasonally-adjusted 9.5% to 9.2%. Despite the net gain, this still represents a year-over-year loss of 48,400 jobs from April 2009 to April 2010.

Though there was a 5,800 net job gain in April, the industry with the second-biggest gain was government. Interestingly enough, many of the 1,600 new government jobs are actually temporary census jobs. Leisure and hospitality was up 1,800; construction up 1,400; retail trade up 1,300, manufacturing up 1,200.

Industries that lost jobs this last month included financial activities, down 1,400; transportation, warehousing and utilities, down 500; other services, down 300.

ESD Commissioner Karen Lee rightly points out the importance that both construction and man!
ufacturing added jobs last month. Both of those industries have been decimated by this Great Recession.

But, as we've pointed out before, though many in the business community are starting to see the light of day, this year's Legislature just enacted hundreds of millions in tax increases on the business community and their customers.

So we will see how the B&O service-industry tax rate increase along with sales taxes on candy, gum, bottled water and more will affect future economic growth. Just take a look at what's happening in the fight over the soda pop industry and the tax exemption they "were guaranteed". Turns out they were mislead, or someone just didn't d!
o their homework, and now the soda pop industry is filing an a href="" target="_blank">initiative to repeal the new tax. 

While this report is positive news, Washington still has a long way to go. And temporary census jobs just aren't going to cut it. It seems that policymakers often take a "get-rich quick" approach to job creation, rather than focusing on policies that will help produce long-term, sustainable jobs. The long-term approach is not sexy when there's an election in six months (with primaries in three months) but our economy can't be bailed out by anything other than year-over-year private sector economic growth.

PUD zapped customers in East Jefferson County

May 12, 2010 in In the News
Port Townsend Leader
Port Townsend Leader
Wednesday, May 12, 2010