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Low taxes, deregulation not only keys to attracting businesses

The year is 2012. Arizona, in its quest to attract businesses to the state, has cut taxes and decreased regulation. But the flood of corporate investment the state’s leaders expected has not come, and the businesses they hoped to attract now reside in places such as North Carolina, Texas and California.

Business experts say that could be the scenario if Arizona doesn’t take a more comprehensive approach to economic development. Talk of attracting new businesses to the state – especially from California, with its high taxes and heavy regulation – invariably leads to calls for lower taxes and deregulation. But economic development experts warn that those staples of the pro-business crowd won’t be enough without making the necessary investment in infrastructure and business incentives such as tax breaks or deferrals.

Barry Broome, president and CEO of the Greater Phoenix Economic Council, said Arizona has attributes that help foster economic development, such as low personal income tax rates and low levels of regulation, but the attitude that drives those policies is more anti-government than pro-business. Broome said an “old school” attitude toward economic development that focuses on small businesses has led policymakers to concentrate heavily on tax rates while eschewing more comprehensive economic development programs that are specifically designed to bring in sustainable industries with high-wage jobs.

“I would not consider Arizona policymakers pro-business. I would consider them anti-government,” he said. “A lot of their philosophies around anti-government have led to high degrees of economic freedom, and those high degrees of economic freedom have been good to business. But they’re not motivated to be pro-business.”

John Boyd Jr., of the Boyd Company, a New Jersey-based business consulting firm, said keeping taxes low is an important part of economic development, but he described taxes as a “lower-ranked variable” for businesses looking to relocate or make new investments. More important to would-be corporate citizens of Arizona, he said, are good schools, well-kept roads, a plentiful workforce, low cost of labor and a host of financial incentives.

“It’s one of many variables,” Boyd said of low corporate income and business property taxes.

Arizona already has some built-in advantages. The state has a favorable labor climate, Boyd said, which is often the most important factor for businesses. Arizona has relatively low labor costs – its median wage of $15.40 an hour in 2007 ranked it 29th among the states, according to a study by the Community Action Association of Alabama – and it is a right-to-work state, meaning union membership cannot be a requirement for any job. And with an expansive freeway system and massive airport, Phoenix has the transportation infrastructure on which businesses are often dependent.

But deficiencies exist as well, and the first one that many business experts point to is in the types of financial incentives and economic development programs offered by Arizona. The Arizona Department of Commerce is always quick to emphasize the financial incentives that companies are eligible for if they move to the state, said interim director Kent Ennis, but “it’s fair to say we don’t win deals based on incentives.”

“Arizona … is a very incentive-light state,” Ennis said.

One area where many states have implemented strong tax incentives, and where Arizona has fallen behind, is solar energy. Politicians and business leaders for years have spoken of Arizona becoming the Persian Gulf of solar energy, but other states, such as New Mexico, Oregon, Nevada and Utah, are stealing the show.

Signet Solar, for example, considered several states, including Arizona, as possible locations for a manufacturing plant. But it was tax credits targeting solar companies that brought it to rural New Mexico, said Clark Krause, president of the New Mexico Partnership, an economic development advocacy group.

“There are several renewable (energy) policies,” Krause said, “that help different parts of the industry, depending on what you’re doing, from solar farms to manufacturing to installation.”

Of course, Arizona is not devoid of financial incentives for new corporate investment. Intel in February announced a $3 billion expansion to its facilities in Chandler, and company officials said they were attracted in part by financial incentives, such as tax credits for research and development and Arizona’s foreign trade zone program.

The foreign trade zone program allows any business operating in one of the six zones in Arizona to be eligible for property tax reductions of up to 80 percent. And Arizona’s enterprise zones, which encompass a large portion of the state, offer tax credits of up to $3,000 for every job a company creates, along with other incentives.

Greg Weiner, the Department of Commerce’s director of business attraction, said the enterprise zones were meant to encourage investment in low-income areas.

To qualify for income-tax credits, businesses in the enterprise zones must employ fewer than 200 people, pay only above a certain level – $7.18 to $14.76 an hour, depending on the county – and cover at least 50 percent of an employee’s health insurance.

For the property tax breaks, a business must be independently owned and operated, meaning another company cannot have more than 50 percent ownership, and have fewer than 100 employees, unless the business is minority or woman-owned.

Broome said Arizona has little to gain by providing incentives for low-paying jobs, as opposed to the high-wage, white collar jobs the state should be seeking. “The community-wellness impact of large pools of $12-14-an-hour jobs is minimal,” he said.

The key to attracting high-wage jobs, and to diversify Arizona’s housing-dependent economy, is to offer major tax breaks and other incentives through economic development programs, Broome said. He points to Texas as an example of a state that uses its enterprise zones effectively.

“Texas has the most expensive real and personal (business) property tax rate in the nation. So if you’re going to make a … $100 million investment, their enterprise zones can eliminate that real and personal property tax,” he said. “On Intel’s $3 billion investment in Chandler, they’re not paying real and personal property taxes on that investment. It’s being eliminated by the foreign trade zone.”

Texas is far from the only state that uses major tax breaks as an incentive for corporate investment. Alabama eliminates property taxes for up to 20 years in some cases, a strategy Broome said has helped the state become one of the top U.S. states for auto manufacturing. Nevada, which levies no income tax on businesses or individuals, will do the same for up to 15 years.

Chuck Swenson, a professor at the University of Southern California’s Marshall School of Business, said Arizona is not competitive in terms of enterprise zones and tax credits. For all the talk heard in Arizona about how much better the state’s business climate is than California’s, it falls short of its massive neighbor in terms of enterprise zones and incentive programs, Swenson said. For example, Arizona offers a $3,000 per employee hiring credit for its enterprise zones, while California offers $38,000.

“If (Arizona) wants to compete with California on that front, they definitely have to ratchet up the credit rate,” said Swenson, who frequently advises businesses on finding suitable locations and taking advantage of financial incentives. “I’ve actually talked to CFOs and tax directors of pretty big companies, and they explicitly … take into account tax breaks.”

Few states have drawn more attention with their economic development programs than North Carolina, which has become one of the foremost technology and financial hubs in the U.S.

Kathy Neal, a spokeswoman for the North Carolina Department of Commerce, said the state helped foster economic growth by doing things like collaborating with universities and community colleges, and providing government grants for high-wage job creators.

North Carolina’s strategy focuses heavily on high-tech industries and companies that engage in a lot of research and development. In the late 1950s, North Carolina brought together the University of North Carolina, North Carolina State University and Duke University to create Research Triangle Park, one of the foremost research facilities in the U.S. that has attracted corporate titans such as General Electric and DuPont.

One of that state’s incentive programs takes the withholding taxes from a company’s employees and gives it back to the employers in the form of a grant for creating jobs with salaries of $50,000 or more. Like Arizona, North Carolina also offers tax incentives for research and development.

“They should’ve been dead,” Broome said of North Carolina. “Those guys were into tobacco and textiles, and really converted themselves.”

One problem that Arizona faces when competing with its neighbors for corporate investment is the “gift clause” in the state Constitution that prohibits state or local governments from offering subsidies to private sector industries.

That clause was the basis for a December court decision that prevented Phoenix from offering $97.4 million subsidy to the Thomas J. Klutznick Company to help pay for a massive development project called CityNorth. After the ruling, the company said the loss of so much funding would likely force Klutznick to downsize the project.

“When we’re competing on a multistate project, sometimes we’re competing with abatement in other states,” said Weiner of the Arizona Department of Commerce.

Fortunately for Arizona, financial incentives, much like tax rates, are only one part of a larger puzzle.

Boyd, who advises companies in finding locations for new investments, said states that are trying to attract businesses should focus on fundamentals, such as workforce, transportation, infrastructure and tax climate, instead of trying to “lead with incentives.”

Dennis Hoffman, an economics professor at Arizona State University’s W.P. Carey School of Business, said businesses are primarily interested in whether they can make money in a particular market.

“Once they make that decision and they figure out where they want to go, then a business goes to government officials and says, ‘Hey, guess what? We’re not going to move here until we get some real tax breaks,’” Hoffman said.

The biggest driver, Swenson said, is the availability and cost of labor, an area where he said Arizona has an edge. In addition to Arizona’s status as a right-to-work state, which Swenson said businesses view as lowering labor costs, the state has exceptionally low rates for workers’ compensation and unemployment insurance.

State Rep. Nancy McLain, a Bullhead City Republican, moved with her husband to Arizona about 10 years ago, but the couple still runs a janitorial services business in Pomona, Calif.

When McLain talks about Arizona’s superior business climate, the first thing she mentions is this state’s lower workers’ compensation rates. Though California’s rates have dropped significantly in recent years – McLain’s have gone from $21 per $100 in wages paid to about $11 – they are still higher than the rates in Arizona, she said.

Workers’ compensation rates vary depending on the type of business that is paying, but according to the Greater Phoenix Economic Council, Arizona has the seventh-lowest workers’ compensation premiums in the country. At the same time McLain was paying more than $21 for every $100 in wages, a friend who ran a similar business in Arizona was paying just $7, she said.

“Our workers’ comp system is a lot fairer to employers, I believe,” McLain said. “I think that’s a great incentive.”

Some states, such as North Carolina and Oregon, have found success in collaborating with community colleges to create programs that train employees for local businesses.

When the jetliner titan Airbus announced a new facility in eastern North Carolina that would require 1,000 employees, the company and the state worked with a nearby community college to establish a program there to train prospective employees, Neal said.

Similarly, Broome believes Arizona should partner more with its universities, especially ASU, to exploit the strength of its business and engineering programs. Arizona’s community colleges produce a plethora of graduates with two-year technical degrees as well, he said.

Boyd said ASU’s efforts to turn the university into a top-rate research institution have grabbed the attention of businesspeople across the country.

“The premium is on skill sets and highly qualified white collar workers. Arizona State University is making a name for itself in terms of its business parks and what it’s doing downtown,” he said.

Infrastructure also is a major advantage for Arizona, Swenson said. While the landlocked state can’t compete with California in access to deepwater ports, Arizona’s extensive freeway system and Sky Harbor International Airport are on par with the transportation infrastructure anywhere in California, Swenson said.

But infrastructure may not be one of the state’s strong points for long.

Marty Shultz, a lobbyist for Pinnacle West and an advocate for comprehensive economic development, said Arizona and the Phoenix-metro area will need new freeways and improvements to existing ones to accommodate expected population growth. And while Sky Harbor has a massive expansion program planned, Shultz said smaller facilities, such as Phoenix-Mesa Gateway and Deer Valley Airport, will need to expand as well so they can act as “reliever airports.”

“Our current system is adequate for the times,” Shultz said. “But as the infrastructure proponents will tell you, the planning and putting money in place (for expansion) should begin now.”

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