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How Do States Compare in Their Competiveness?

In anticipation of Chief Executive’s annual Best and Worst States survey in 2013 we examine the progress since out 2012 ranking of three key states in the midwest that have made progress: Wisconsin, Michigan and Indiana.

Wisconsin has become the belle of the economic ball in the Upper Midwest because of the state’s aggressive fiscal overhaul led by Gov. Scott Walker. But at least two other states in the region whose governments also now are dominated by Republicans, Michigan and Indiana, have been transforming themselves into business-development mavens and challenging the buzz around the Badger State.

Walker has been able to turn Wisconsin’s previous economic malaise into job creation and business optimism by closing the state’s $3-billion budget deficit and curbing the cost and power of its influential public-employee unions.

Michigan has been doing something similar under Gov. Rick Snyder, also elected in 2010. His big gambit was eliminating the state’s onerous and complicated Single Business Tax on receipts in favor of a flat rate of 6 percent for most corporate entities.

Neither place, however, has accomplished what Indiana did under former Gov. Mitch Daniels: flipping his domicile to right-to-work status. The Hoosier State’s turnabout in 2010 is throwing an attractive new spotlight on Indiana for company location scouts.

Wisconsin, Indiana and Michigan have a long way to go to become as business-friendly as, say, Utah or Georgia. They have huge legacy costs in demographics, high taxes and high wages; and both Wisconsin and Michigan electorates voted for President Obama. But independent evaluators of fiscal fitness say that each is headed in the right direction.

“They’re all exemplars of how states coming out of the industrial era address a whole new set of criteria for how you prosper in a post-industrial era – still having a lot of industry and manufacturing, but fostering more entrepreneurship and innovation and quality of life,” said Graham Toth, president of Growth Economics Inc., a Warsaw, Ind.-based …..

Wisconsin continues to grab the most headlines in part because of the acrimonious campaign by public unions to unseat Walker in a recall election last summer after he instituted his first wave of reforms. Then, in late 2012, Walker kept the heat on by promising to pursue “massive tax reform.”

“We’re going to continue to lower property taxes, and we’re going to put in place an aggressive income-tax reduction and reform [because] we believe we can continue to be one of the leaders in the country, not just in reform but ultimately in results,” Walker announced in a mid-November speech on the premier dais at the Ronald Reagan Presidential Library in California.

Walker also wants to “put in place a group of small-business leaders to help me sort through all the existing regulations to figure out what are needed and what are just bureaucratic red tape,” he told Chief Executive. He also wants to get out in front of a burgeoning wave of baby-boomer retirements with a major new effort to “match skill sets and dramatically put people to work in all the jobs that will be opening up in the next year or two.”

Casting himself as the state’s de facto chief economic-development officer, Walker cheerleads for a new advertising campaign by Wisconsin, starring some of its successful corporate icons, that is running in Minnesota and northern Illinois – two states relatively unattractive to business where companies are fairly easily poached these days.

But Walker prefers making Wisconsin’s existing employers feel appreciated, from small-engine maker Briggs & Stratton in Milwaukee to ABC Supply, a multi-billion-dollar roofing contractor in Janesville, Wis., that is privately owned by his biggest political funder, Diane Hendricks.

“It would be cool to land a company that brings a thousand jobs from another state, and we’ll take it if we can get it,” Walker said. “But most of our new jobs will come from companies already in Wisconsin, and from small- and medium-sized businesses.”

Wisconsin’s ad campaign doesn’t go after neighboring Michigan. One reason is that Snyder, a former CEO of Gateway Computer, has managed to transform business expectations of his state in just two years. The tax overhaul rocketed Michigan up to No. 7 from No. 48 in the Tax Foundation’s ratings of state business-tax burdens.

“That’s one of the largest jumps I’ve ever seen,” said Scott Drenkard, economist for the Washington, D.C.-based Tax Foundation. “Plus it was done the right way, without special carve-outs for big industries.”

Now Snyder is trying to pass a major personal-property-tax reduction favored by business. But even after defeating a November ballot proposal that would have enshrined collective-bargaining rights in the state constitution, Snyder refrained from turning the tables and making what likely would have been a fruitless right-to-work push in one of the most labor-friendly states in the country.

“He believes in folks having the right to collective-bargain, but also that the outcome from the election was in fact the best one for Michigan,” explained Michael Finney, executive director of the Michigan Economic Development Corp.

In Indiana, a term-limited Daniels used his eight years to overhaul a sluggish approach to business development. In that time, Indiana has slashed its corporate tax rate by nearly 25 percent, cut property taxes by one-third and placed a permanent cap on rates, established one of the highest R&D tax credits in the nation, and implemented a $10-billion infrastructure-improvement plan without raising taxes or borrowing money to pay for it.

Its enactment of a right-to-work law was America’s first in 10 years and made Indiana the northernmost state of the 23 to do so. Evidence that right-to-work status boosts a state’s actual economic performance is inconclusive at best, Toth said, “but it’s a symbolic statement that you’re a pro-business state.”

Overall, reforms in Wisconsin and Michigan “have been huge,” said Jonathan Williams, director of tax and fiscal policy for the American Legislative Exchange Council, in Washington. “But in terms of the overall magnitude of the changes, Indiana still really has them both beat at the moment.”

COMPARISON-BOX

Wisconsin:

Major pluses: Overhauled pensions and union rules for government workers, including restrictions on monopoly unionism. Passed law requiring two-thirds supermajority of both chambers to raise income, sales or franchise tax rates. Jumped from No. 41 to No. 24 in Chief Executive “Best States, Worst States” list in 2011 and then rose to No. 20 in 2012. Walker graded “B” in Cato Institute 2012 report card on governors.

Major minuses: State and local tax burden ranked as fourth-worst in nation at 11 percent by Tax Foundation. Ranked No. 43 on Tax Foundation’s business-tax climate list.

Biggest-employment industries: Printing, paper product manufacturing, foundries, dairy-product manufacturing, electrical-equipment manufacturing.

Michigan:

Major pluses: Vanquished Michigan Business Tax. Corporate taxes now ranked No. 7 by Tax Foundation, a 40-spot improvement over 2011. Snyder graded “B” in Cato Institute 2012 report card on governors. Ranked No. 12 on Tax Foundation’s business-tax climate list. “Pure Michigan” advertising campaign alone has put it on some site scouts’ lists.

Major minuses: Stayed at No. 46 in Chief Executive “Best States, Worst States” list in 2011 and 2012. State has recovered only one-third of jobs lost in 2000s. Auto bailouts mean fewer and lower-paying jobs. Green jobs aren’t going to work out. State and local tax burden ranked as 12th-worst in nation at 9.7 percent by Tax Foundation.

Biggest-employment industries: Motor vehicle and parts manufacturing, metalworking machinery manufacturing, office-furniture manufacturing.

Indiana:

Major pluses: Became 23rd right-to-work state in 2011. Cut corporate-tax rate by 25 percent. Ranked No. 6 in Chief Executive “Best States, Worst States” list in 2011 and nudged up to No. 5 in 2012. Daniels graded “B” in Cato Institute 2012 report card on governors. State and local tax burden ranked No. 25 in nation at 9.5 percent by Tax Foundation.

Major minuses: Daniels made 2011 tax package, including big corporate-tax rate cut, revenue neutral with offsetting tax increases. Unemployment-insurance taxes increased significantly in 2011. Great Recession ravaged crucial recreational-vehicle manufacturing base in northern Indiana. Has very limited access to Great Lakes.

Biggest-employment industries: Motor vehicle and parts manufacturing, iron and steel mills, foundries, powertrain manufacturing.

Sources: Bureau of Labor Statistics; Economic Modeling; Tax Foundation; Cato Institute, Chief Executive.

COMPARISON-GRAPHIC

Per Capita Personal Income, 2011:

Indiana: $35,689

Michigan: $36,264

Wisconsin: $39,575

Per Capita Personal Income Growth, 2007-2011:

Indiana: 1.49 percent

Michigan: 1.31 percent

Wisconsin: 1.81 percent

Population Growth, 2007-2012:

Indiana: 3 percent

Michigan: -1 percent

Wisconsin: 3 percent

Labor Force Participation Rate, September 2012:

Indiana: 62.2 percent

Michigan: 59.9 percent

Wisconsin: 68 percent

Unemployment Rate, September 2012:

Indiana: 8.2 percent

Michigan: 9.3 percent

Wisconsin: 7.3 percent

Education Attainment Growth, 2007-2012:

Indiana: 0 percent

Michigan: 3 percent

Wisconsin: 4 percent

Job Growth, 2007-2012:

Indiana: -3 percent

Michigan: -6 percent

Wisconsin: -4 percent

Sources: Economic Modeling; Growth Economics

Gross Domestic Product Growth:

No. 20: Indiana

No. 21: Wisconsin

No. 37: Michigan

Annual growth in nominal GDP, 2010

High-Tech Manufacturing Employment:

No. 4: Michigan

No. 14: Indiana

No. 44: Wisconsin

Percent of total covered manufacturing employment in high-tech manufacturing industries, 2010

Business Tax Burden:

No. 8: Indiana

No. 19: Michigan

No. 19: Wisconsin

State and local business taxes per dollar of private economic activity, 2010

Unit Labor Costs:

No. 8: Indiana

No. 31: Wisconsin

No. 47: Michigan

Unit labor cost index, 2009

Workers’ Compensation Premiums:

No 2: Indiana

No. 28: Michigan

No. 32: Wisconsin

Average workers’ compensation rate paid per $100 of payroll, 2009

New Business Owners:

No. 26: Michigan

No. 26: Wisconsin

No. 31: Indiana

Kauffman Foundation Entrepreneurial Activity Index, 2010

University Research and Development:

No. 9: Wisconsin

No. 12: Michigan

No. 27: Indiana

Research and development expenditures by universities per $100,000 gross domestic product, 2009

Industry Research and Development:

No. 4: Michigan

No. 12: Indiana

No. 21: Wisconsin

Industry research and development expenditures per $100,000 GDP, 2007

Homeownership Rate:

No. 6: Michigan

No. 16: Indiana

No. 24: Wisconsin

Homeownership rate, 2010

Advanced Placement Overall:

No. 18: Wisconsin

No. 28: Michigan

No. 32: Indiana

Passing AP test scores per eligible student, 2010

Broadband Connections:

No. 35: Wisconsin

No. 36: Michigan

No. 41: Indiana

Number of broadband internet lines per 1,000 residents, 2010

Golf Courses:

No. 9: Wisconsin

No. 10: Michigan

No. 17: Indiana

Number of golf courses and country clubs per 100,000 residents, 2010

Source: Growth Economics

About dale buss

dale buss
Dale Buss is a long-time contributor to Chief Executive, Forbes, The Wall Street Journal and other top-flight business publications. He lives in Michigan.