Not Low Business Costs

I finally had the time to take a look at the annual competitiveness report published by Business Leaders for Michigan. The one that gets so much publicity because it shows Michigan has a cost of doing business 4% higher than the national average. Which they argue is what Michigan most needs to fix to grow its economy.

Their own report shows how untrue that is. They only provide data for ten states that they designate as comparison states for Michigan. The ten (in the order they list them) are: North Carolina, Massachusetts, California, Texas, Illinois, Alabama, Tennessee, Georgia, Indiana and Ohio.

Of the comparison states the one with the lowest business cost score is North Carolina, 14% below the national average. The two comparison states with the highest business cost scores – far higher than Michigan – are California and Massachusetts (18% and 17% above the national average). If they are right that Michigan’s moderately high business costs are the chief cause of Michigan’s economic decline, then Massachusetts and California should be in ever worse shape and North Carolina should have one of the nation’s best economies.

The exact opposite is the case! Their two highest business costs states are the only comparison states in the top ten nationally in per capita income and North Carolina is thirty fifth. The differences: per capita income in Massachusetts $16,000 higher than North Carolina, California $8,000 higher.

So what about per capita income growth rates? (Some – including Business Leaders for Michigan – argue that Michigan should benchmark itself against high growth states.) From 2001-2008 Massachusetts ranks 24th, California 33rd and North Carolina 44th.

How about the metric that most of the public uses to measure economic success – the unemployment rate? In February 2010 Massachusetts 9.5%, North Carolina 11.2%, California 12.5%.

Lets look at all ten comparison states. North Carolina is one of seven below the national average in their business cost scores. Of the seven all are below the national average in per capita income. Six – Texas at 26th being the exception – are in the bottom twenty.  The tenth state is Illinois whose business cost score is at the national average. It is 14th in per capita income.

The three comparison states with the highest business costs scores are the three states with the highest incomes – by far.  So much for low business costs being the key to Michigan’s economic revitalization!

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Lou Glazer

Lou Glazer is President and co-founder of Michigan Future, Inc., a non-partisan, non-profit organization. Michigan Future’s mission is to be a source of new ideas on how Michigan can succeed as a world class community in a knowledge-driven economy. Its work is funded by Michigan foundations.

This Post Has 7 Comments

  1. Business Leaders for Michigan believes our state’s economy & job market will only grow by improving our overall competitiveness in a global marketplace. We don’t just focus on costs. We identify the importance of having a competitive transportation infrastructure, education system, government structure, living environment and business climate to accelerating economic growth.

    We examined over 100 factors that drive business decisions to develop the Michigan Turnaround Plan. That analysis showed that Michigan scores average to below average on nearly every indicator – including business costs.

    The data contained in our benchmarking report, which was used to complete the Michigan Turnaround Plan, clearly identifies that on costs alone, Michigan companies pay 3-4% more in before tax profits than the AVERAGE US state and as much as 10-20% more when compared to the states we most often compete with for jobs. While costs alone do not determine where businesses choose to invest, our point was simple: our above average cost structure combined with average to below average site location assets is a weak position to grow jobs.

    One more thing to consider: Adjusted for cost of living differences, the Top Ten Per Capita Income States are: Wyoming, Massachusetts, Virginia, Connecticut, Illinois, Kansas, Nebraska, North Dakota, South Dakota and Oklahoma! The average business tax ranking of these ten states was 17th in the US, with four among the Top Ten best business tax climates.

    Michigan’s path to prosperity lies in being globally competitive on the factors that drive investment (and that includes costs!).

  2. I really like it when business organizations talk about North Carolina as the target for business costs. North Carolina does have relatively low business taxes…on the company. But its top rate for it’s income tax is 7.75 percent, and that kicks in at a relatively low level…$100,000 for married filing jointly.

    So as a business owner, I would pay lower business taxes in NC, but much, much higher income taxes — 78 percent higher!

    I think this is actually a very good thing. Let’s lower business taxes overall, but tax incomes more. After all, who benefits most from a strong university system, public safety, a good education system, a good fire department…a single mom who rents and has few possessions, or someone with a good income, nice house, and expectation that their children will attend a good college.

    But most of those advocating for lower business taxes oppose efforts to increase income taxes. That’s a prescription for low taxes, poor services and a lower quality of life — the same prescription that Mississippi has followed for 50 years, during which its per capita income has scrapped the bottom without change.

  3. One other addition. As you drill down into the Business Leaders competitiveness report, it seems that the 104% of national average business cost figure is based on 2006 information regarding average labor costs (75 percent), energy costs (15 percent) and state and local taxes (10 percent).

    It would seem that the 2006 figures are pretty out of date. It’s hard to see how our labor costs are higher than the national average given per cap income losses recently. And the state and local tax information would seem to be at least a little out of date, since the Tax Foundation is reporting now that Michigan’s state and local taxes are the same as a percent of income today as Indiana!

    I wonder if an updated figure would change our position compared to other states?

  4. Huge differences in the desirability and kinds of potential workers found in CA and MA compared to NC. And Same goes for MI… I don’t think this article touches on anything that really helps us take a side on the matter.

    1. That is the point of the post. The factor that matters most in determining who is prosperous and who isn’t is talent/human capital, rather than business costs as argued by Business Leaders for Michigan. Human capital is the asset that most underpins knowledge-based enterprises. The sector of the economy that is creating most jobs and has the highest wages.

  5. Dave Waymire raises the right question for Doug Rothwell: aren’t business costs far different from 2006? With labor weighted at 75 % of the calculation, the dramatic decline in high wage auto employment, the new UAW contract with new hires starting at $14/hour vs $28, and with reduced benefits, with wage cuts throughout the private and public sectors, it is extremely likely that Michigan’s “costs” are now below average.

  6. Yes, if Michigan wants low skilled manufacturing to continue to drive our economy, we will need to compete on costs. That means continual declining wages and falling standards of living. Low costs are increasingly how manufacturing must compete. If, however, we want a rising standard of living we must compete by attracting highly educated workers and knowledge based industries. These industries require highly skilled educated workers. They will pay higher salaries as the compete for highly skilled workers, raising the states standard of living. Some manufacturing may fit into the high skill high wage category, but the number of jobs in such factories will probrbly continue to decline.

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