How well is the Northeast doing? Its $3 trillion economy, fueled by the Knowledge Economy centered on the cities of New York, Boston, Philadelphia and Washington, D.C, and the heavy lifting provided by still-vital manufacturing prowess, produces some 20 percent of the goods and services. Much of America’s wealth is produced here, and much value accrues here. Three of the nation’s wealthiest states, based on per capita income are here: Connecticut, Delaware and the territory of Washington D.C. Of the country’s 75 wealthiest counties by per capita income, 44 lie in the Boston-Washington corridor.
But look a little closer, and the picture turns less rosy. In 2012, the last full year for which economic growth is available, U.S. GDP grew 2.5 percent. It’s notable that every one of the 11 states that constitute the Northeast registered below-average growth. Maryland topped the regional rankings at 2.4 percent; the giant economies of New York and New Jersey both limped along at 1.3 percent; and Connecticut, alone among the 50 states, showed a negative GDP of -.1 percent.
Led by aggressive governors doubling as their states recruiters-in-chief, Texas and Florida—as well as other sun-belt states—have been siphoning off a substantial chunk of the region’s economy, luring a steady stream of corporate chiefs to expand or relocate in warmer climates. Not surprisingly, much of the nation’s job-creation activity has taken place away from the Northeast. When Bright.com, an aggregator of job postings and resumes, calculated which cities offered job hunters the most opportunities, greater Seattle topped the list. Greater Schenectady, alone among Northeastern cities, made the top 30.
Chiefs in the Northeast are increasingly beset by wanderlust, eyeballing states and regions around the country—and sometimes overseas—for expansion opportunities, or to relocate headquarters and operations entirely. It’s not just incentives and subsidies that draw them out of the region. Chiefs complain about such issues as aging infrastructure, punishing climates and housing costs that deter new or relocating employees. Tax rates are, and have long been, an irritant; of the 10 worst states on the Tax Foundation’s state business tax climate index, five are in the Northeast. Add to that such factors as unionization and government bureaucracy, and the pace of out-migration comes as no surprise.
Many of the Northeast’s chief appeals—as a location for headquarters, for access to capital, for access to technological innovators and as a gateway to export markets—have diminished in recent years. Other regions have caught up and, in some cases, edged ahead. Yet, technology companies continue to move their headquarters to New York, Boston and Philadelphia, observes Dennis Donovan, head of worldwide site selection services at Wadley-Donovan-Gutshaw Consulting in Bridgewater, New Jersey. “The Northeast is one of the few areas in the country that offer companies a global platform for conducting business,” Donovan says. “Given supply-chain demographics, there are more and more regional suppliers” for whom a Northeast location can mean meaningful reductions in fulfillment times.” He adds, however, that, “unless you are serving a regional market, and have a compelling reason to be here, it’s very tough to compete here.”
The region’s historically high tax burden, once justified by superior infrastructure, arguably better educational systems and more expansive government services, have become increasingly archaic and onerous. The Tax Foundation’s annual State Business Tax Climate Index names New York and New Jersey the worst and second-worst states, respectively, in the country ranked by business tax. Of its 10 lowest-ranked states, no fewer than six are in this quadrant.
“The Northeast is the most competitive marketplace in the world, bar none,” says Thomas Stringer, a New York-based site selection consultant and principal at Ryan, a tax advisory firm. “This is testament to our history as an economic powerhouse. We’ve always had the talent and the capital and we’ve done well. We’ve done very well. As a result, perhaps we’re a little more complacent, a little less scrappy.”
Often criticized for handicapping their own employers by dint of heavy taxation burdens, sluggish permitting processes, and overly zealous bureaucratic processes, state governments across New England and the Middle Atlantic states increasingly market themselves, without irony, as business friendly. All of the Northeast states have developed economic revitalization plans over the last several years, intended to help startups get off the ground and to deter established businesses from entertaining the offers of roving economic development teams from other states and, increasingly, other countries.
Karl Seidman, president emeritus of the Northeast Economic Developers Association and a senior lecturer on urban planning at M.I.T., contends that the region’s governors have become increasingly solicitous to business. “There has been quite a lot of attention over the last few years on retention of existing business and attraction of new businesses,” he says.
“The Northeast has a lot of assets including its skilled work force, its university and public school systems and the opportunity to live car-free lives in walkable urban centers,” he continues. “Governors in every state know their political fortunes are tied to how well the state does in terms of business retention and job creation. They want to get it done, and they want to get it done right.”
Top-ranked by Chief Executive readers in the Northeast, New Hampshire has historically functioned as an extension of the Greater Boston area. The Granite State has lagged behind Massachusetts in post-recession economic recovery; only now is it regaining all the jobs lost in the Great Recession. Manufacturing productivity continues to grow, although hiring is, and is expected to remain, sluggish. Fastest growth will take place in business services, leisure and hospitality, education and healthcare. New Hampshire’s lack of sales tax has burnished the state’s reputation for being anti-tax. The Tax Foundation ranks it 7th lowest in tax burden in the country and 8th in its State Business Tax Climate Index. New Hampshire spends upwards of $39 million a year on business incentive programs, the most popular being corporate income tax credits
and cash grants.
Job growth continues to edge forward at under 2 percent annually, while the unemployment rate seems stalled at 7 percent in Delaware, where more than half the nation’s publicly-traded companies are incorporated—courtesy of the state’s pro-business corporate law. Dominated by companies owned or controlled by the DuPont industrial family, the state’s $66 billion GDP is driven by banking, chemicals, pharmaceuticals, technology and healthcare. Increased worker compensation costs darken prospects in the construction industry. The Tax Foundation ranks Delaware’s tax burden 20th lowest in the U.S. and ranks it 13th on its Business Tax Climate Index. Delaware spends over $43 million per year on incentive programs, according to The New York Times, predominantly cash grants, loans and loan guarantees, as well as corporate income tax credits. Top incentives go to the finance industry.
Maine’s chief industrial products are paper, lumber and wood products, electronic equipment, leather products, food products, textiles and biotech products. Key employers include shipbuilders and construction firms. Maine assembled four consecutive quarters of positive job growth in 2013, the first year that’s happened since 2008. Job growth is expected to continue this year and next at the rate of about 4,000 new jobs annually. The Tax Foundation ranks Maine’s tax burden 9th highest in the country, and ranks the Pine Tree State 29th in its State Business Tax Climate Index. Maine spends over $504 million per year on incentive programs, according to The New York Times, primarily sales tax refunds and exemptions. The lion’s share goes to manufacturers.
Rhode Island continues to lag the rest of New England in economic recovery. Growth of gross state product remains tepid, and unemployment is still high at 9 percent. The New England Economic Partnership forecasts “moderate” hiring over the next few years, paced by job hiring in construction, financial services, office services, leisure and hospitality, education, healthcare and technology. Rhode Island’s 7 percent sales tax, second-highest in the U.S., handicaps retailers and burdensome estate taxes hasten out-of-state retirements. The Tax Foundation ranks Rhode Island 6th highest for tax burden out of 50 states, and ranks it 46th in its State Business Tax Climate Index. Rhode Island spends over $356 million annually on incentives, according to The New York Times. The most popular programs are sales tax refunds and corporate income tax credits. Food companies are the top recipients.
Energy, food, forestry and transportation are Vermont’s key industries. Vermont’s labor force and its overall population declined last year, deepening concerns of local business leaders. The New England Economic Partnership forecasts economic growth in most sectors except government through 2017, with construction, leisure/hospitality, business services and natural resources adding jobs. The Green Mountain State spends over $407 million per year on incentive programs, according to The New York Times, primarily sales tax refunds and exemptions. The top recipients are manufacturers, followed by agricultural interests.
Heavily reliant on federal government spending, Maryland’s economy suffered from federal budget cutting and other effects of sequestration last year. Sector growth is led by transportation services, concentrated on the Port of Baltimore and connected intermodal services. The Free State is also a major center for life sciences research and development, home of the country’s fourth-largest biotech cluster. Administrative services, largely dependent on the federal checkbook, employ large numbers. Regulatory and tax changes have added complexity and increased tax bite, according to the Tax Foundation, which ranks Maryland 15th best in the nation, and 41st in its State Business Tax Climate Index. The Maryland Chamber of Commerce is pressing to reduce the corporate tax rate. The state spends over $554 million per year on incentive programs, according to The New York Times. Corporate income tax credits and sales tax refunds are the most popular programs; agricultural concerns are the top recipients.
After keeping below the national unemployment rate since the start of the Great Recession, Pennsylvania rose above it in September 2012 and is still struggling to restore jobs lost since late 2007. Hydraulic fracking of the Marcellus Shale formation has created new jobs and generated enormous wealth, as well as produced turbulence and unexpected downsides. Natural gas prices have dropped. The state’s key industries, including Energy, Advanced Manufacturing, Technology and Agri-business comprise a $570 billion economy, sixth in the nation. Education and healthcare continue to expand, and tourism is on the rise. In terms of tax burden, the Tax Foundation ranks Pennsylvania 10th highest in the country and 24th on its Business Tax Climate Index. The Keystone State spends around $5 billion a year in order to attract or retain companies, according to The New York Times. Sales tax refunds and corporate tax credits are most popular, targeting manufacturers in particular.
Connecticut’s economy is shrinking. The Nutmeg State ranks 50th in the Department of Commerce’s Bureau of Economic Analysis. High taxes, budget gimmicks, regulations and unfunded government pension liabilities exasperate business owners and entrepreneurs across the state. Employment growth post-recession continues at about two-thirds the national rate, set back by ongoing job loss in the finance and insurance sectors, traditionally Connecticut’s wheelhouse. The Tax Foundation ranks Connecticut’s tax burden 3rd highest in the country, and ranks the state 42nd on its Business Tax Climate Index. Connecticut spends over $850 million per year on incentive programs, according to The New York Times. Most popular programs are sales tax refunds and exemptions, and corporate income tax credits.
New Jersey trailed the nation in most economic indicators in 2013. Housing was a sore point; the Garden State has the second-highest percentage of homes in foreclosure than any other state after Florida. Real GDP rose at barely half the national rate. Job growth lags the U.S. pace; employment remains submerged below its pre-recession peak. Even the IT sector has retreated, disgorging 3,600 jobs. Hurricane Sandy destroyed enormous swaths of the state’s housing and infrastructure, providing construction jobs—albeit temporary—in its aftermath.
On the bright side, manufacturing exports are growing again. Healthcare, logistics and life sciences companies are posting Help Wanted signs. Geographically, the state’s position between New York City and Philadelphia benefits companies that need access to both markets; it’s also a strong location for national distribution, says incentives advisor Jim Damicis, a senior vice president with Camoin Associates. New Jersey executives gripe about taxes, and the Tax Foundation bears them out; the state is ranked second highest of the 50 states, and its business tax climate ranks second to last. Gov. Chris Christie has proposed 10 percent corporate tax cuts and a 10 percent property tax credit in—he has said little on the subject. New Jersey spends nearly $700 million per year on its Grow NJ incentives program. Grow NJ “is gaining a lot of momentum in the business community,” says Adam Tkaczuk, Northeast practice head for business incentives at Duff & Phelps. “They’re tough but fair, and projects are well-funded once you qualify.” Corporate income tax credits and sales tax refunds were the most popular incentives; top beneficiaries were print media companies and biotech firms, according to The New York Times database.
Contrary to public image, Washington, D.C., is not strictly a government town; only one out of every six workers is on the public payroll, according to A1Source. Still, many companies depend on government contracts; contractions in federal spending hurt, and last fall’s sequestration kneecapped economic activity. Headquarters to nearly a tenth of the nation’s Fortune 500 businesses, Washington—the nation’s first planned city—also hosts many association headquarters, national law firms and major banks. Other professional service providers are major employers. In recent years there has been growth in Information Technology and Telecommunications. Metro D.C. continues to spread out into the northern Virginia suburbs. M&A dealmaker David Braun moved his office to Tysons Corner in McLean County, Virginia after 15 years across the street from the White House. In three years, “I’ve seen enormous growth in terms of corporate headquarters moving in,” he says. New neighbors include Hilton Hotel Corporation’s worldwide headquarters, and the Gannett Company building is within view. The Tax Foundation ranks the District of Columbia 20th lowest out of 50 states, and 44th in the Business Tax Climate Index.
Massachusetts’ recovery from the Great Recession has been fitful; the Bay State has outpaced the national economy in job growth and real GDP in some quarters, lagged behind in others. The labor market has favored employers, who have steadily raised their hiring standards. Knowledge is the currency of the realm in Massachusetts, which continues to graduate a steady stream of some of the nation’s best-educated and top-earning professionals. Key economic sectors are biotechnology, finance, healthcare and tourism. Deeply reliant on federal dollars to support its health, defense and higher educational sectors, last year budget cuts, tax increases and spending prohibitions sucker-punched the state economy. Executives grimace at state taxation levels; the Tax Foundation ranked Massachusetts 8th highest in tax burden and 25th in State Business Tax Climate Index. The recently enacted computer and software services tax was slammed as “most burdensome in the nation” by the Massachusetts Taxpayers Foundation. Massachusetts spends at least $2.26 billion per year on incentive programs, according to The New York Times. Sales tax refunds and corporate income tax credits are the most popular subsidies. The top beneficiaries are manufacturers, followed by the energy industry.
New Yorkers bid farewell to popular billionaire mayor Mike Bloomberg last November; his successor Bill DiBlasio, a career politician, took office calling for new taxes on the wealthiest New Yorkers. While New York City residents have seen their per-capita income outpace the national rate over the past two decades, upstate residents have fared less well; the Empire State has lagged the nation’s post-recession recovery in recent quarters and the manufacturing sector has eroded enormously.
New York’s demographics are troubling. Its population is graying and prone to migration. While inbound migration has more than offset outbound, recent arrivals are generally poorer and non-English speaking; those exiting generally relocate in states with lower taxation, reduced regulation and brighter economic visages. In terms of business environment, the state’s high taxes, regulatory zeal and reputation for bureaucratic nitpicking hamper economic growth.
New Yorkers pay the highest property tax rate in the nation, according to the Tax Foundation, shelling out 12.8 percent of their income to the government. The state ranks dead last in the Tax Foundation’s 2014 State Business Tax Climate index. In January Gov. Andrew M. Cuomo announced a $2 billion slate of economic growth and tax reform proposals, calling for slashing both property and corporate tax rates. The plan would freeze property-tax rate increases, provide a tax credit for New York City renters, and raise the exemption for estate taxes from $1 million to $5.25 million. The governor also proposed cutting the top corporate income tax rate to 6.5 percent from 7.1 percent and to eliminate taxes altogether for manufacturers upstate. A series of business-incentive proposals would tap the brainpower of the state’s university system, spur technology-based industries, encourage companies to expand without relocating and encourage start-ups by cash grants.
Site History: Campbell opened its headquarters and operations in Camden, New Jersey, in 1869 and has remained there. In 2007, the company completed a $132 million expansion, adding an 80,000-square-foot employee center and acquiring several adjacent properties slated for development as an office park.
Why New Jersey?: Campbell values the access its Camden location provides to Washington, D.C., New York City and Philadelphia, just across the river. The company extolls the region’s transportation infrastructure and proximity to such colleges as Rutgers, the University of Pennsylvania and St. Joseph’s.
Bottom Line: “We applaud the efforts of New Jersey state officials to be pro-business. In working with local and state governments, we strongly supported the new economic development reforms in the recently passed New Jersey Economic Opportunity Act of 2013. The economic development incentives and tax credits under the Act will make Camden and the Gateway Office Park we are working to develop adjacent to our headquarters an alluring home for companies.”
Site History: FuelCell Energy was founded in Danbury, Connecticut as Energy Research Corporation in 1969, operating out of a 72,000-square-foot facility it still owns. The company was reincorporated in Delaware in 1999 and renamed FuelCell Energy. It maintains power-generation plants in nearby Torrington as well as Bridgeport. An additional plant was recently opened in Hwasung City, South Korea.
Why Connecticut?: FuelCell Energy has remained in Danbury to tap the “skill set and stability of our work force, about 250 well-educated people.”
Bottom Line: “There has been improved communications between government and private industry in Connecticut, not just to save jobs but to create jobs. I talk with the governor and his commissioners on a fairly regular basis. When we had to put people on a shorter work week in the Spring of 2012, for example, they worked with us to pay some of the differential so people kept their benefits. We’ve also had projects that couldn’t get done in the initially specified time frame, and they got certain legislation passed so we could continue and get financing.”
Site History: Ed Price founded PCI, a custom chemical-manufacturing company, in 1996, in a 5,000-square-foot chemical plant in Leominster, Massachusetts. After a 2005 fire destroyed the plant, the company moved to an acquired 70,000-square-foot facility in Newburyport.
Why Massachusetts?: Price built his company locally to tap over 20 years of chemical development and manufacturing experience he’d obtained at other companies in metro-Boston. The region’s strong cluster supports a deep specialized labor pool and provides valuable networking opportunities.
Bottom Line: “Our main advantage is our location and being within Boston’s huge Life Science cluster. As the FDA has made the regulatory environment more stringent, communication with clients has become more important. We’re active in the Mass Biotech Council and meet often with clients, prospects, investors and collaborators. There’s a huge amount of outsourcing in this industry, and we’re part of that.”
Site History: Red Lion Controls was founded in York, Pennsylvania in 1972. The industrial-control manufacturer company has acquired companies in New York, Alabama and St. Louis and consolidated them in York, employing about 200 people.
Why Pennsylvania?: Competitive labor and fixed costs, large engineering labor pool and good logistics.
Bottom Line: “There are several advantages to manufacturing in Pennsylvania. Real estate and overhead costs are very reasonable; we are able to get very competent staff for manufacturing and engineering. Engineers tend to stick around without the churn of Silicon Valley. As for logistics, we can ship in and out very easily. We do an awful lot of next-day delivery and this is valuable.”
Site History: Dave’s father, Albert Thuro, a machine-tools engineer, founded TMP in 1971 as a hydraulic-fittings manufacturer and aircraft defense supplier. In 1976, the company purchased a 9,000-square-foot manufacturing facility in Amityville, New York. In 1982, the company purchased and moved into its present plant, a 25,000-square-foot building in nearby Brentwood. In 1998, TMP doubled its footprint, expanding into an additional 27,000 square feet of adjacent assembly space. Since 2010, it has invested nearly $4 million in new machinery, equipment and plant renovations.
Reason for Location: The company’s roots span over two generations are in the Long Island/New York market.
Bottom Line: “We stay in New York because of the highly skilled work force and access to lower-skilled labor. What we do is very specialized and getting entry-level help is very important to us. The region has a large population of Hispanics and we can hire very diligent, hard-working people at $9 an hour. I’m not sure you could hire for less in the south.”
What do you do when you’re responsible for economic development in a region that’s been battered by economic downturns and lagging the national pace of recovery?
All 11 states of the Northeast have introduced new economic stimulation plans, programs and policies over the past three years. The programs typically focus on advanced technology, but not always; emphasize mentoring, knowledge-sharing and tactics to tap regional brainpower and networking prowess; seek to integrate federal funding into state and local initiatives; and focus on targeted industries and clusters.
Variously, the programs seek to foster greater collaboration between educational systems and private enterprise, streamline government processes, reduce red tape, foster exporting, help entrepreneurs get funded and reduce the tax bite to startups. Others aim to encourage informal networking and mentoring, promote regional identity, or leverage the people-moving power of their mass transit systems.
For these programs to succeed, they need to “address their regulatory processes and make government easier to navigate, make investments in their infrastructure and make sure tax rates are not too onerous for business owners,” says Karl Seidman, an Urban Studies and Planning professor at M.I.T.. As past president of the Northeast Economic Developers Association, Seidman oversaw a landmark research survey called, “Innovation in State Economic Development,” which was released last fall, and assessed new state plans. The study is available through NEDA.org. Here are some highlights according to the NEDA.
Start-Up NY deploys incentives and 10-year tax deferrals to stimulate university-linked business investment and start-up activities within designated campuses, mainly upstate. In addition to universities, as many as 20 state properties will be designated tax-free communities and partnered with universities to encourage startups. Employees at Start-Up NY communities will be exempt from income taxes. The state’s long-standing business incubator program will be expanded to include ten new high-tech innovation centers. The New York State Innovation Venture Capital Fund will provide $50 million annually for seed and early-stage funding. Tax credits for film post-production have been increased by more than $18 million annually. A program called Global NY focuses on encouraging export deals between startups and overseas markets, while seeking to entice foreign direct investment in the state.
Connecticut introduced Small Business Express, a $180 million funding effort that offers loans up to $350,000. A subsidized training and employment program allows manufacturers to defray training costs for new hires. The First Five program was expanded to provide tax incentives to additional larger companies that create at least 200 new jobs within two years or invest upwards of $25 million. A $250 million initiative called Connecticut Innovations was launched to recruit fast-rising technology firms. The $200 million Connecticut Bioscience Innovation Fund now finances targeted bioscience projects aimed at lowering healthcare costs or improving healthcare delivery. A $50 million allotment new goes to bridge repair and upgrades. CTNEXT provides free growth-advisory services including mentorship by serial entrepreneurs and innovation vouchers worth up to $10,000 for consulting and other business services.
The New Jersey Economic Opportunity Act of 2013 streamlines five existing economic development incentive programs into two: Grow NJ, coordinating retention and incentive programs and job creation strategies and Economic Redevelopment and Growth, a “key developer incentive program.” Both plans focus on cluster development, targeting life sciences, transportation/logistics, finance, manufacturing, technology and healthcare industries. Revised in 2011, the state’s Business Retention and Relocation Assistance Grant Program, or BRRAG, awards business tax credits and incentives to businesses that create at last 25 new jobs. A $1.75 billion Urban Transit Hub tax credit program waives taxes for projects constructed within nine designated transportation hubs.
Pennsylvania has passed a series of business tax reforms, including elimination of capital stock and franchise taxes, increase in the net operating loss cap, deductions for start-ups and tax simplifications. Its new Small Business Champion Network helps entrepreneurs and startups launch businesses and tap government services, consolidated state loan programs into a single $1.1 billion pool and increased funding for tourism efforts that double as business recruitment. Other programs include Innovate PA, which sells tax deferrals to insurance companies and earmarks revenues to venture funds and biotech incubators. The state’s R&D Tax Credit program was expanded to $50 million, with $11 million earmarked for small businesses. A $12 million Place-Based Initiative called Partnerships for Regional Economic Performance Regions (PREP) assembles economic development service providers across the state to orchestrate hyper-local business matchmaking services. Discovered and Developed in Pennsylvania (D3PA) funds $10 million a year to programs that promote entrepreneurship, increase technology transfer or strengthen communities economically. Research for Advanced Manufacturing in Pennsylvania (RAMP) connects local manufacturers with the technologies and brainpower of Carnegie Mellon and Lehigh Universities. —WS
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