Expert's Corner: How Much Do Manufacturers Value State Competitiveness?
September 18, 2012
Do competitiveness rankings of states’ tax and spend policies influence manufacturers in determining where to locate or expand their operations? The answer is yes, writes GovPro.com’s Michael Keating.
You see them often: rankings of states based on best business tax climate or best tax policies for manufacturers. Govpro.com recently issued a ranking of states that spend the least per-capita on government. Hint: Nevada came out on top, followed by Texas, Georgia, Florida and Illinois. How important are these rankings for manufacturing executives when they're deciding where to locate or expand a plant?
“We don’t typically get calls from C-Suite executives who say, 'I just was reading X magazine and saw that Y state was ranked in the Top 3 states to do business…do you think we should move there?'” Kathy Mussio, managing partner at Fair Haven, N.J.–based Atlas Insight, LLC, told IMT. Her firm is a global provider of site selection, credit and incentive consulting, and economic development consulting services.
“Manufacturers have a number of reasons that motivate them to look to relocate or expand; most of those reasons are internally business-driven and don't allow for a blank canvas of the world from which to draw,” Mussio added. “That said, when you consistently see certain states at the top of the rankings, it does leave a [positive] impression.”
Another consultant with an opinion on state competitiveness rankings is Mark M. Sweeney, senior principal at Greenville, S.C.-based McCallum Sweeney Consulting. His firm provides site selection services to firms worldwide.
“Rankings are often noticed by company executives, and may add to an already existing consideration for a new location. However, sound location decisions are complex, and the influence of rankings tends to diminish as the decision process gets very involved," Sweeney noted. "It is important to be clear that a decision to expand or relocate will arise from a host of business factors (markets, competitors, etc.), and not from someone seeing a ranking.”
Sweeney offers the following advice to manufacturers and other companies: “Don’t make a location decision based on a ranking! Hire a specialty location consultant to get you to the optimal location for your project, taking into account all the factors that need to go into such a decision.”
Government tax and spending policies do affect a manufacturer’s fortunes, said Kim W. Beck, president and CEO of Napoleon, Ohio-based Automatic Feed Co., in testimony before the U.S. House of Representatives’ Committee on Ways & Means in July. Beck’s firm designs and manufactures coil-pressing equipment for the auto industry.
“In any discussion of tax reform, fiscal restraint must be part of the equation,” Beck said. “The real problem is not a lack of revenue, but out-of-control spending.” Beck told the committee that government spending has nearly doubled over the past 12 years, and revenues have not kept pace.
He noted that “We cannot put people back to work and get this economy moving again if high taxes and other costs of doing business continue to sap manufacturers' ability to compete. What American small manufacturers need right now is tax relief and tax certainty.” Beck urged Congress to extend the Bush tax cuts, the R&D tax credit, the 100-percent bonus depreciation and increased Section 179 expensing.
Tax and government spending policies in states can motivate manufacturers to pull up stakes, according to Scott Drenkard, an economist at the Washington-based Tax Foundation. “We certainly see a lot of anecdotal evidence. The most dramatic example was in Illinois at the beginning of 2011. The state approved a sharp personal income tax increase and raised its corporate income tax rate, too. And what we saw after that was an exodus of firms from Illinois to neighboring states that had better tax codes.”
“Undeniably, taxes and spending influence location decisions,” King R. White, president of the Dallas, Texas-based Site Selection Group, LLC, said. “Indiana, for example, found itself on the short end most recently when numerous companies located to Kentucky to avoid Indiana business taxes, most notably the tax on tangible business property. Indiana has since rectified this imbalance along with several others (e.g. right to work).” White’s firm strategically manages business location decisions.
State tax incentives and abatement are important factors in domestic plant location and investment decisions, Walter Galvin, vice chairman of St. Louis, Mo.-based Emerson Electric, told IMT. “States with a positive business environment — characterized by overall low taxation and low regulatory costs — are definitely advantaged in terms of business location and investment decisions. Other factors include the quality and cost of labor, proximity to suppliers and customers, land development costs and the ease of doing business.”
Many factors go into a location decision, says McCallum Sweeney Consulting’s Mark Sweeney. “For manufacturers, it starts with market access (inbound and outbound), appropriate site availability, infrastructure (transportation, energy, utility — all critical to manufacturers) and labor markets (re-emerging as a significant concern for companies).”
Lisa Anderson, a senior supply chain and operations executive and founder and president of Claremont, Calif.-based LMA Consulting Group, said she’s “seen countless companies evaluate where to locate facilities and/or whether to move out of state, especially from California. Undoubtedly, a state’s tax and spending policies influence the decision.”
Anderson, whose firm serves as strategic operations experts for a variety of companies, noted that firms that relocate are often congregated around areas with significant tax benefits. “In today’s new normal business environment, it is far more challenging to stand out in the crowd and grow business profitably. Thus, executives are negligent if they do not take all factors into consideration, including tax advantages and other policies that would impact manufacturers.”Michael Keating is senior editor for Government Product News and a contributing editor for American City and County, both published by Penton Media Inc. His mid-year 2012 forecast is available at GovPro.com. Go here for his IMT 2012 outlook on government selling. Keating has written about do-it-yourself market research for manufacturers and manufacturer-distributor relationships for IMT. His latest IMT item was about whether there is too much red tape in landing government contracts. Keating has written articles on the government market for more than 100 publications, including USA Today, Sanitary Maintenance, IndustryWeek and the Costco Connection. Mike can be reached through his website, MikeKeat.net.