Regional Report: The West

Chief Executive’s newest Regional Report offers an in-depth look at the pros and cons of doing business in California, Nevada, Utah, Colorado, Wyoming, Idaho, Washington, Oregon and Montana. In California, people call it the Big Wake-Up Call.

After half a century headquartered in a Los Angeles suburb, Toyota North America announced in May that it would relocate to new facilities north of Dallas, Texas. CEO James Lentz attributed the decision to the company’s need for consolidation, ease of collaboration and logistical improvements. He wanted to centralize the auto manufacturer’s operations, now spread out among several states, bringing it closer to global suppliers and transport channels. Lentz insisted he had no problem with California’s business climate, nor was the $40 million incentive package offered by Texas Governor Rick Perry more than a minor factor in determining the move.

The chief informed state and local officials of the relocation plan just moments before announcing it publicly. Inevitably, the news rankled. Talk of companies leaving California and taking their jobs with them is dry kindling in the state fireplace, a reliable “don’t get me started” conversation starter. Talk of the seemingly endless cycle of new tax bills, service cutbacks and regulatory proposals spur a highly vocal reaction to what many denounce as the country’s most anti-business environment. Chief Executive readers ranked the Golden State—the nickname is difficult to cite without a smirk—perennially last in the Best & Worst States for Business rankings.

Once synonymous with economic opportunity and personal striving, California today is a state where pride of place among business owners is considered, if not gauche, then hopelessly naive. Circumstances color the reaction. The epicenter of America’s post-war car culture, Southern California was once home to Japan’s Big Three, two of them Torrance neighbors. In recent years the auto-manufacturing cluster has effectively evaporated. Nissan, formerly based in Gardena, relocated to Tennessee in 2005.

Last year, Honda began emptying its Torrance North American headquarters and replanting itself in Ohio. Toyota’s move impacts about 3,000 employees based in the company’s 100-acre facility—2,000 in sales and marketing, another 1,000 in financial services. A smaller number of employees in Kentucky and New York will also be affected.

More than 36,000 corporations left California from 1990 to 2010, about a tenth of them resettling in Texas, according to the corporate-move database maintained by Oakland business analyst Don Walls. Along with the absence of corporate real estate tax, Texas’s often-cited benefits include lower living costs, fewer regulations and the tough-to-define-but-everyone agrees-it-counts pro-business environment.

For all the attention paid to Texas, nine-tenths of the corporate traffic goes elsewhere, according to Walls’ data. Individuals follow the economic carrot towards other western and Rocky Mountain states. After Texas and Nevada, the top magnet states were Arizona, Oregon, Washington, Colorado, Idaho and Utah. While Texas pulled in the most transplants, the dollars went disproportionately to Nevada—about $5.7 billion of California capital between 2000 and 2010, according to a study done by the Manhattan Institute. One interpretation: wage earners follow specific jobs, while entrepreneurs create startups closer to home.

A mix of fresh, local talent and experienced California transplants characterizes the start-up sector across the Western and Rocky Mountain states. Washington’s appeal to Silicon Valley refuges makes the state “a magnet for entrepreneurs and highly qualified technical people,” says Michael Schutzler, CEO of the Washington Technology Industry Association.

California (No. 50)
Washington’s rapidly expanding technology cluster outpaces the ability of schools to produce qualified workers. “We go on recruiting expeditions all over the country and fill our companies with people from everywhere else,” he adds. Keynote speeches at association events have featured such icons as Bill Gates, Howard Schultz and Jeff Bezos. Opportunities in neighboring and nearby states suck in talent and capital. In California, outbound companies outnumber inbound about 10 to one, estimates James Renzas, principal of the RSH Group, an Orange County site-selection consultancy.

Companies “don’t feel they’re getting their money’s worth from their California taxes,” says Renzas. Last year’s personal income tax increase, the downsizing of statewide as well as local economic development programs and the expansion of competitive relocation offers from other states helped additionally sour the state’s image in the eyes of business owners and chiefs. The Global Warming Solutions Act, with its mandated greenhouse gas emissions reduction schedule, is particularly galling.

“California now relies on its past to attract companies,” he says. “You can only do that for so long.” John Kabateck of the National Federation of Independent Business calls California a “tragic paradox.” “We are a state of great natural beauty, abounding in research hubs, a well-educated work force, enormous entrepreneurial vitality and incredible amenities,” says Kabateck, who represents the state on behalf of the organization. “But what’s disheartening is that these elements are overwhelmed by the burdensome and onerous business climate.” He lists his grievances: sales tax, income tax, corporate tax, oil and energy tax, minimum wage and others, each the highest, or among the highest, of any state.

“California is anti-business,” asserts Matthew Szuhaj, director at Deloitte Consulting in the San Francisco Bay area. “There are a host of things the state could do to improve its business climate, but the economy is not hemorrhaging. There is still a robust eco-system for innovation. Consider that the amount of venture capital invested in California today is greater than all other states combined.”

Talk of California’s tarnished appeal eludes Ryan Black. The SoCal native never looked beyond his San Clemente roots when seeking a corporate headquarters for Sambazon, the fruit juice company he and his brother cofounded in 2000. “Southern California is a beautiful place,” he states. “I travel around the world. I think where we live is a little crowded, but I wouldn’t trade it. It’s wonderful.”

Nevada (No. 8)
The fastest-growing state for nearly two decades before the Great Recession, Nevada more recently has led the country in per capita job losses, shedding 200,000 during the downturn. The state still depends heavily on gambling and tourism, which employs one out of four workers. State GDP growth lags the national average, and April’s 8.5 percent unemployment rate was higher than every state but Rhode Island. Favorable cross-sector hiring news in early spring offered Nevadans some encouragement; signs of a construction industry rebound are evident. Nevada’s tax burden ranks 42nd out of the 50 states and is No. 3 in the Tax Foundation’s Business Tax Climate Index.

“Nevada doesn’t have a corporate income tax and that makes a huge difference,” says site selection consultant Deane Foote. Still, this fall, a margin tax initiative imposing a two percent revenue tax comes to a vote, which “a lot of business owners will watch carefully,” says Mike PeQueen, principal of Hightower Advisors in Las Vegas. Nevada spends at least $33.4 million per year on incentive programs, predominantly sales tax refunds, exemptions and other discounts, according to The New York Times. New legislation allocates incentives to movie production, targeting Southern California’s cluster.

Utah (No. 13)
Utah’s economy continues to expand. The state’s $111.8 billion dollar GDP grew at a 3.4 percent clip last year, a Rocky Mountain high. Durable-goods manufacturing accounted for nearly a third of the increase. Utah dominates many state business-climate rankings, topping the ALEC-Laffer State Economic Competitiveness Index seven consecutive years. Still, local leaders worry about underfinanced education, lack of church-state separation and the need for tougher environmental controls. “Some people have problems with the Mormon influence,” says consultant Foote. Utah’s tax burden ranks 23rd lowest out of 50 states, and the state ranks ninth in the Tax Foundation’s Business Tax Climate Index. Utah spends at least $207 million per year on incentive programs, predominantly sales tax refunds, exemptions or other discounts, as stated by The New York Times. Top incentives go to manufacturers, in particular, aerospace concerns.

Colorado (No. 16)
Legalization of marijuana brought the state much attention, new revenue expectations and anecdotal accounts of higher, inbound migration. Such factors as proximity to California; a well-educated workforce; Greater Denver’s public transportation system; and integrated rail, road and airport connections exert appeal. “The natural environment and recreational opportunities are huge plusses,” says Howard Gelt, real estate attorney and State Economic Development Commission member. State GDP is $258 billion. Government has targeted advanced manufacturing, bioscience, defense, energy and agriculture, as well as such creative fields as design and publishing. Colorado’s 6.2 percent March unemployment rate surpassed the national average, 6.7 percent. Jobs grew at a 3 percent rate last year, outpacing predictions. Colorado’s tax burden ranks 19th lowest out of the 50 states, and the state ranks 19th on the Tax Foundation’s Business Tax Climate. Colorado spends at least $995 million per year on incentive programs, predominantly on sales tax refunds, exemptions or other sales tax discounts, per the The New York Times. Top incentives go to manufacturers and agricultural interests.

Wyoming (No. 18)
Wyoming “has been in a slump the last couple of years,” notes JPMorgan Chase in its Wyoming Economic Outlook. The slump “likely reflects disruptions caused by the inroads made by natural gas as a source of electricity generation.” Wyoming’s $32 billion GDP grew just 1.4 percent over the past 12 months. JPMorgan Chase predicts better times ahead: “The robust energy outlook is a plus for the state.” Unemployment fell to 4 percent in March, significantly below the national rate. Wyoming’s tax burden is the lowest in the country, and the state topped the Tax Foundation’s State Business Tax Climate Index. Wyoming spends at least $89.4 million per year on incentive programs, predominantly sales tax refunds, exemptions or other discounts, stated The New York Times. Top incentives go to trucking companies, alternative energy concerns and manufacturers.

Idaho (No. 28)
Idaho’s economy, after decades of strong performance, has slowed to a crawl. Idaho’s GDP, at $58.2 billion, continues to grow at a lackluster pace, slower than all but three states. The Gem State “lags the nation and the West on the road to recovery” and will continue to do so over the short term, says economist Brian J. Greber, director of ECONorthwest research center at Boise State University. Key Idaho industries are agriculture, food processing, lumber and wood products, machinery, electronics manufacturing and mining. Idaho’s tax burden ranks 24th highest out of 50 states, and the state ranks 18th in the Tax Foundation’s State Business Climate Index. Idaho spends at least $338 million per year on incentive programs, predominantly sales tax refunds, exemptions and other discounts, according to The New York Times. Top incentives go to trucking firms and agricultural concerns.

Montana (No. 31)
Montana’s small-but-robust economy ($34 billion GDP) paced the national economy pre-2008, but those days seem long ago. Government is the major employer, followed by health care, retail, mining and agriculture sectors. Bankruptcy filings have been at least double the national rate since 2009. Health of the energy sector is a major economic determinant. Unemployment, chronically low by national standards, has been steadily dropping since the winter of 2010, and it was 5.1 percent in March. Montana’s tax burden ranks 37th out of 50 states, and the state ranks seventh in the Tax Foundation’s Business Tax Climate Index. Montana spends at least $101 million per year on incentive programs, predominantly cash grants, loans or loan guarantees, per The New York Times. Top incentives go to oil, gas and mining interests.

Washington (No. 33)
Washington State’s economy continues to grow slowly, with employment rising in most sectors, except for aerospace and the federal government. Despite sector growth, aerospace giant Boeing has been transferring jobs out of state, recently announcing that its headquarters will move, and Microsoft has taken down the “Help Wanted” signs. Local economists see continuing revenue and workforce growth by Amazon and point to resurgent software, construction, financial-service firms, hotels and restaurant sectors. Hiring is costly; the minimum wage of $9.32 leads nation. Washington’s GDP was $325 billion in 2012. The Tax Foundation ranks Washington’s tax burden 26th out of 50 states and ranks the state sixth in its State Business Tax Climate Index. Washington has neither personal nor corporate taxes, but it does collect alternative revenues, including a business & occupation tax and a gross receipts tax. The state spends over $2.35 billion per year on incentive programs, according to The New York Times, predominantly for sales tax refunds, exemptions and discounts, as well as corporate income tax credits, rebates and reductions. Top incentives go to manufacturers and agricultural concerns.

Oregon (No. 38)
Oregon continues to create jobs, making up for Great Recession losses. Last year’s 2.3 percent growth rate outpaced the 1.6 percent national average, accelerating in March to its strongest pace in nearly a decade. State economist Mark McMullen calls the expansion “a full-speed recovery” in a state struggling to sustain growth outside of its capital, Portland. Advanced manufacturing, clean technology, forestry products, high technology and outdoor gear and activewear are the state’s five targeted industries. Oregon’s GDP was $195 billion in 2012, growing at a 4 percent clip that outpaced the other Far West and Rocky Mountain states. Oregon’s tax burden ranks 16th highest out of 50 states, according to the Tax Foundation, and its business tax climate ranks 12th.

Oregon spends at least $865 million per year on incentive programs, per The New York Times, predominantly property tax abatements and corporate income tax credits. Top incentives go to film and construction industries.

Aloha, Renewable Energy
Hawaii once had a strong sugar and pineapple-plantation agriculture. Today, much of that land lies fallow. According to Peter Rosegg, Hawaiian Electric spokesman, that land may once again be returned to fuel and agriculture. At Campbell Industrial Park in western Oahu, Hawaiian Electric has built and operates a 110-megawatt combustion-turbine power plant that runs on renewable biodiesel, including waste products such as animal fats and agricultural run-off. The power company intends to develop local biofuel suppliers using native organic materials. Biofuel candidates include jatropha, a hardy tropical bush with oil-filled seeds; switch grasses and algae. Hawaiian Electric has contracted several suppliers and continues to seek more.

Near total dependence on imported crude oil impacts daily life on the islands for everyone, adding to the urgency of engineering renewable-fuel solutions, Rosegg continued. “To offset oil’s high prices and extreme volatility, all new contracts for renewable energy such as wind, solar, waste to energy and geothermal are long-term, fixed price agreements that provide a growing hedge against oil. Many renewable-energy contracts we have signed in recent years are already competitive with oil prices, and will become even more so as oil continues its erratic upwards spiral,” says Rosegg.

Alaska Employment: Less Government, More Private Sector
Traditionally dependent on public-sector employment, Alaska is moving toward a more market-oriented economy, as government spending in the 49th state continues to shrink. Federal spending contracted 4.9 percent last year and this year’s forecast calls for 3.8 percent shrinkage. Most of the spending cuts involve support for military bases. “The military is a massive player in Alaska’s economy,” says Dianne Blumer, state labor commissioner. In addition to employment on bases, “many civilian jobs are tied to the military,” she adds. In a state where 1 percent annual growth impresses, the oil and gas sector—a signature Alaskan industry—grew 3.5 percent last year, o setting jobs lost to federal cutbacks. The healthcare sector is booming, having created more than 10,000 jobs over the past decade. Leisure and hospitality jobs are also expected to grow, especially in food services and bars.

Attracting cruise ships is an economic driver. Nearly a million cruise ship passengers visited the state last year and tra c could exceed that benchmark this year, for the first time since 2008. “The Alaska visitor industry has become one of the state’s most important economic engines, bringing in new dollars from outside the state and creating a significant amount of jobs and spending,” notes the McDowell Group, which studied Alaska’s visitor industry last year. Among their findings: cruise passengers spend less in Alaska than airline passengers, on a per-person basis.