Regional Report 2015: The Southwest

TEXAS: STILL ON TOP

Through the halls of the Dallas Federal Reserve Bank and into the conference room walked the A-list of the Texas business establishment last September. In came Mike Ullman, chief of JCPenney; David Seton, CEO of Fluor; and Thomas Falk, corner-office man from Kimberly-Clark. The chiefs mingled with Fed officials, were glad-handed by economic professors and business school deans and stood up and delivered plummy Texas-centric growth forecasts from the podium.

Striking the default twangy/triumphalist tone that has come to characterize economic conversations in America’s most pro-business state, the conference started out putting the 49 states not named Texas in their place. A dean from the local McCombs School of Business noted that, at long last, we’re starting to see phrases “like optimism, revenue growth, more hiring and GDP increases” being applied to the rest of the U.S. “Without Texas,” he added, “the nation’s economy would be stuck in slow motion.”

WHY TEXAS: “Dallas is a strategic place to base a business like LRS, given the high concentration of hospitality businesses.”

As they say in Houston, it ain’t braggin’ if you can do it. And Texas has indeed been doing it throughout this young century. For the tenth year in a row, the readers of Chief Executive rated Texas the No. 1 state in which to do business. Our readers also ranked the Lone Star state one of the seven best states for startups. If economic development were an oil field, Texas would be gushing.

By many indicators, possessor of the nation’s most robust economy, Texas was expected to add as many as 400,000 new jobs last year, more than any state save California, with its high-flying Silicon Valley, and shale-rich Nebraska. Most new jobs are homegrown, at small-but-growing Lone Star companies. But the lion’s share of attention these days goes to suburban Dallas, where Toyota is filling more than 4,000 positions at its still-under-construction location, selected after decades in Southern California. The move, like so many corporate transfers over the past decade, originated with now-departed Gov. Rick Perry’s relentless Texas salesmanship, free use of incentives and a long-running, CEO-whispering road show.

There are so many jobs that even Texas has to go outside to fill them. From around the country and around the globe, people move to Texas at the rate of about 1.4 million a year. Residents of perennially funky Austin gripe that their way-cool town is losing hipster cred as hordes of young software entrepreneurs flow in, altering the character of the city Willie Nelson calls home. Even Houston is in the picture, anointed America’s coolest city—say what?—by Forbes in 2012. Houston’s reign was short lived—just one year of coolness. But in 2014, the business magazine again short-listed Houston and added Austin and Dallas (of all places) to its Top Ten of Cool. Okay, it’s Forbes. But still. Generating the most new jobs is, no surprise, the energy sector. Warehousing, utilities, construction, professional and business services and leisure and hospitality added to the continuing employment surge.

Few economic-development conversations start in Texas without citing the state’s tax structure. You’ve heard it before, you’ll hear it again: Texas lacks both corporate tax and individual income tax. Some celebrate this policy; others raise their eyebrows and cite compensatory costs, such as sky-high property taxes and the gross receipts tax. The Tax Foundation ranks Texas’s tax burden 4th lowest out of 50 states, and ranks the state 11th in business tax climate. “Texas is a very desirable place for companies to relocate due to business climate and tax structure, among the many reasons,” says John Rocca, managing director of CBRE’s strategic consulting, location analysis and economic incentives office in Los Angeles. “It’s a low-cost and favorable operating environment. It’s ideally located between the coasts. From the incentive perspective, it’s also quite attractive. In terms of the Southwest, Texas is the leader, hands down.”


The Lone Star State’s 21st century economic trajectory has been fueled by such factors as export productivity, tax advantages to employers and its former governor’s economic proselytizing. To many in the business community, Rick Perry is—despite being hauled up on abuse-of-power charges in his last days in office—a Texas icon.

“I’ve worked with six Texas governors and Rick Perry has done more economic development than the prior five combined,” rhapsodizes Austin-based economic development consultant Angelos Angelou. For all of Perry’s CEO-whispering and free hand with incentive disbursements—historically he spent more than half the state’s budget on grants and subsidies, tallying over $19 billion a year as recently as 2013—the economic boom in Texas is not primarily a tale of cash-back deals. Economically, Texas in 2015 is much as it was in 1915—a state whose fortunes are very much tied to energy.

The No. 1 producer of oil and gas in the nation, Texas reversed a decade-long slide of oil-related revenues in 2010, just as Perry took office and shale fracking took off. The mining doubleplay has solidified Texas’s position as top U.S. fuel producer, accounting for oil and well over one quarter of its natural gas.

WHY OKLAHOMA: “I knew what I would be able to gain from a lower-cost but strong technology operational environment and strong technology workforce.”

Jobs in this sector outpaced the rest of the state’s employment growth by a factor of five. These are high-paying jobs, too. Sector revenues, combined with high property taxes, helped fund the state’s aggressive soliciting of out-of-state employers, effectively diversifying the economy. Angelou shrugs off the suggestion that the wave of relocating employers—locals call the influx “The Texodus”—reflects pay for play. “It’s not about incentives anymore,” he insists. “Companies go where they can attract talent.”

While execs pay special attention to relocation pitches coming from states that eschew taxes, most recognize that there is no free lunch. High property taxes and the state’s gross receipts tax claw back potential savings.

Where Texas stands out may well be the efficiency with which local recruitment efforts synchronize with state outreach initiatives. While Governor Perry made his well-publicized rounds of Fortune-500 chiefs, most small and midsized companies played small ball, connecting with small-town government officials and their economic development field reps.

When their corporate searches drilled down to the last round, the governor’s office weighed in with matching offers, tapping such sources as the now-legendary Texas Enterprise Fund. Usually, the combined offers prevailed.


Texas’s small cities and rural, job-hungry regions are the most aggressive dealmakers in the Southwest, if not the country. “It’s not unusual,” says site selector Angelou, “to get 10-year abatements of 80 percent” off local taxes. He adds: “There are places where I can get 20-year tax abatements.”

It’s more than money deals. Texas’ small-town mayors and economic development reps know how to make red tape disappear, telescoping the permitting process down to a couple of weeks. “I was able to help a Dallas company, Dimension Capital Partners, get all the necessary permits for their data center done in less than two weeks,” reports Angelos. That half-billion dollar project breaks ground later this year.

WHY ARIZONA: “There was a little less competition for the quality people here and our people are little more committed.”

High-flying CEOs need good places from which to launch their flights. Texas boasts a top-notch aviation infrastructure that avoids the hassles and inconveniences of most big-city air hubs. If one day, someone writes an ode to an international airport, the poem will be penned in Dallas-Fort Worth. “The access to connecting flights from DFW is terrific, in part because this is the home of American Airlines,” declares Greg Bustin, a consultant with Texas roots and plenty of frequent-flyer mileage. Love Field might even inspire a love song. Recent renovations completed in advance of local favorite Southwest Airlines’ expanded schedule have sweetened the task of flying around the country as Southwest Airlines serves more business destinations.

After 14 years of Rick Perry’s firebreathing leadership, the eyes of the Texas business community are now on his successor, former attorney general Greg Abbott. “The Texas engine has been running well. Any politician who tinkers with it does so at his own risk,” says Bill Miller, co-founder of HillCo Partners, a lobbying firm headquartered in Austin.

Business leaders expect Abbott to continue Perry’s economic development policies, including liberal use of incentives and subsidies, says Miller. He may, however, face increased scrutiny and calls for greater transparency. But no one wants to upset the Texas apple cart. “Texas is the most prosperous, most growth oriented and most job-creation focused state in the country,” Miller declares. “We won’t put up with less.”


ARIZONA: BOOM BACKLASH

Arizona experienced what economists call “a correction” last year. After years of rapid growth and overbuilding, demand caught up with supply. Housing starts petered out and construction industry activity sagged. George Hammond, director of the University of Arizona’s Economic and Business Research Center, forecasts the state economy to resume this year through at least 2017, at a pace exceeding national growth. His long-run forecast sees the state’s continuing to add jobs and residents well ahead of the national average, although the pace will slow down.

Positives include benefits stemming from the most recent tax reform, which dropped the corporate income rate below 6 percent. Arizona “has the ability to offer more aggressive incentive packages than in the past, including R&D tax credits and zero-based corporate tax rates, and we are going to do that,” says Broom.

Quite a few other cities have experienced housing downturns, notes Barry Broom, president of the Greater Phoenix Economic Council. Broom predicts that within five years, the Phoenix metro area “will be back in the top five metro regions for job growth.” The state continues to add jobs in healthcare, financial services and high tech, and Arizona State continues to graduate more holders of four-year degrees than any college in the country. “The overall economic health of the metro region and the state,” he says, “is relatively strong.”

Phoenix hosts the Super Bowl this year (Feb. 1, 2015), showcasing the city’s resort-style appeal to a national audience of corporate chieftains. Ken Van Winkle, managing partner of the Lewis Roca Rothgerber law firm and legal counsel to the city’s Super Bowl Host Committee, anticipates the national exposure will generate corporate relocations. The Tax Foundation ranks Arizona 17th out of 50 states, and ranks its business tax climate 22nd. Arizona spends over $1.47 billion annually on incentive programs.

OKLAHOMA: MORE THAN OKAY

Oklahoma’s economy is driven by oil and gas; Oklahoma is doing well. The state’s economy grew at a rate of 4.2 percent in 2013 over the previous year, compared with the national 1.8 growth; only three states showed bigger gains. Job creation was led by the leisure and hospitality sector followed by the construction industry; IT jobs led the retreat.

Oklahoma Chamber of Commerce president Fred Morgan sees developing strength in aerospace and defense, bioscience, manufacturing, transportation and distribution and financial services. The state is also a major agricultural producer, which exposes its economy to future water shortage disruption. Mining-sector jobs—that includes most energy-sector employment—are expected to rebound this year, with employment gains of 3.6 percent, according to economist Russell Evans at Oklahoma City University. Workers compensation reform has pleased employers and helped make the state more competitive, says Norman.

Incoming governor Doug Ducey gained business support on the campaign trail by talking up economic diversification, “not just more construction,” says Stuart Goodman, co-founder of Goodman Schwartz Public Affairs, in Phoenix. He also promised no tax increases. The Tax Foundation ranks Oklahoma 38th out of 50 states and ranks its business climate 36th. Oklahoma spends over $2.18 billion annually on incentive programs.

ARKANSAS: BANKING ON ITS BIG BUSINESSES

Arkansas benefits from its location near the center of the North American market, supported by excellent transportation links. The presence of six Fortune 500 companies, including the world’s largest corporation—Walmart—attracts supplier clusters and generates an annual flow of well-trained professionals and executives who part ways with their employers and become consultants and entrepreneurs. The state ranks among the lowest for cost of doing business and cost of living. On the minus side, workforce readiness is an issue: education quality and high school completion rates remain problematic, despite being prioritized by every governor since Bill Clinton. Continuing weakening in the forestry-products sector has sapped economic value from the state, encouraging droves of people to leave the work force through age, attrition or relocation. Meanwhile, employers struggle with a work force many feel is not up to the challenges of today’s economy.

“WHY NEW MEXICO: The startup environment is a bit challenging, but there are a lot of enthusiastic investors.”

Funds have begun to trickle out to long-under-used community colleges to provide training tied to job-creation goals of specific employers. Arkansas needs more funding and more programs like that, says Grant Tennille, executive director of the Arkansas Economic Development Commission.

The start of construction this fall on the $1.3 billion Big River Steel Mill in Mississippi County has energized the business community; the plant will eventually hire more than 500 permanent workers. The project was financed by a combination of public and private monies, including $125 million in state bonds, $12 million from the county and $2 million from the City of Osceola. Business leaders supported Asa Hutchinson in his successful gubernatorial campaign, and expect his support for tax reform, more flexible environmental regulations and sharper emphasis on job creation. “As a campaigned for governor promising he’d start every day phoning business leaders,” says Randy Thurman, cofounder of Government Solutions, a Little Rock lobbyist. “I believe business development is his first priority.” The Tax Foundation ranks Arkansas 12th highest out of 50 states, and ranks it 35th in business tax climate. The state spends over $431 million annually on incentive programs.


NEW MEXICO: DESPERATELY SEEKING JOB GROWTH

Perennially finishing near the bottom of many economic rankings, New Mexico finished dead last in the nation in 2013 for job growth, and it is the only state to show a net loss of jobs since 2009. Companies such as Solo Cup and Merillat Cabinets have shut local employers such as HP, Intel and Eclipse Aerospace have gone through major layoffs in the past several years. Dependent since the 1940s on federally funded research programs at Los Alamos, Scandia National Laboratories and the Air Force laboratories, New Mexico is more dependent on federal spending than any other state.

Natural-resource exploitation, through mining and tourism, accounts for the state’s next largest chunk of revenue; still, most new jobs since 2011 have been in healthcare and social services. Emphasis in recent years on supporting high-tech startups—many of them commercializing R&D advances out of the labs—has produced a slight job-creation uptick; the University of New Mexico’s Bureau of Business & Economic Research predicts job growth will approach 1 percent this year and stay there midway through the next decade. To attract out-of-state employers, the non-partisan Think New Mexico calls for streamlining fees and filings into one portal and establishing post-performance tax rebates for relocating and expanding-in-place job creators.

New Mexico “is competing well and offering a lot of incentives” to attract relocators, says site-selector Angelou. In November New Mexicans elected Gov. Susana Martinez to a second term; business leaders expect she’ll accelerate efforts to woo out-of-state employers using discretionary funds, as well as press for education reforms. The Tax Foundation ranks New Mexico 14th lowest in tax burden out of 50 states and ranks its business tax climate 38th in the country. New Mexico spends over $253 million annually on incentive programs.

Warren Strugatch :Warren Strugatch is a writer, speaker and consultant based in Stony Brook, NY. He covers economic development, global business, management and marketing.