Virginia’s Cost of Doing Business Still Moderate

Despite higher taxes, a soaring residential real estate market, and an overheating labor market in Northern Virginia, the Old Dominion’s “Cost of Doing Business Index” actually has declined in relation to other states, according to the Milkin Institute’s 2005 rankings. Virginia ranked 24th in the country, with an index 5.3 percentage points below the national average. Last year, Virginia ranked 21st.

Hawaii and New York scored at the top of the list both this year and last. Maryland ranked 17, while North Carolina ranked 30. The Index measures wage costs, taxes, electricity costs and real estate costs for industrial and office space.

See the list.

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  1. Jim – Do these figures have an actual relationship with business growth? Based on Milken, businesses looking to lower costs will go to South Dakota, North Dakota, Iowa, Montana, or Idaho. Pardon me if this appears… not true.

    Even in Virginia, business growth is concentrated in the area(s) with the highest “wage costs, taxes, and real estate costs for industrial and office space”. I don’t know regional electricity cost.

    Just off the cuff, it seems labor availability (creating the conundrum of locating near competition), access to markets, transportation, and communication are more important than costs. Then there’s the ‘cost’ of regulatory compliant: permits, licences, land-use, and operating conditions; and of course the very real cost of business tax.

    Is there anyone who tries (there aren’t many apples-to-apples comparisons) to approximate actual competitive advantages between states or areas?

  2. Subpatre:

    I have read some such reports, but I would have to look them up again.

    From what I recall, businesses face a sort of tension between low costs and availability of markets and services and labor. In addition, there is an issue of inertia: it takes a long time and considerable impetus to cause such a thing as the recent relocation of Boeing Headquarters.

    In today’s service oriented economy there is less incentive or need to be located where agglomerations are. The giant mutual funds Vanguard and American Century are not located in the New York financial district, for example.

    A number of hedge funds have moved to Connecticut, just so the top managers can work near their suburban homes, golf clubs, and yachts. This has resulted in a reverse commuting pattern from the financial districts to Connecticut, and it will eventually result in some changes in housing patterns as workers follow their jobs (or not, because of Conn. high taxes).

    The usual pattern is that housing responds to prices and costs first, then retail goes to follow the market, then other businesses move to tap the labor pool. Again, size is an issue because inertia makes it harder to move a large business.

    Looking at the list, we see that Alaska and Hawaii have high costs, presumably due to their extraordinary locational challenges, the rest of the top ten are densely populated states, Except Minnesota. Minnesota has a higher tax burden index than any state below it on the list except Vermont and Wyoming where wage costs are low, probably due to lack of opportunity.

    Other businesses need the advantages of co-location, but I suspect these are mainly manufacturing concerns. In the case of Washington, the outdated need for physical meetings drives a lot of congestion. Even here, BRAC exposes that costs (and security) eventually drive relocations.

    One thing we don’t know is why, how, or when the costs developed. Are landlords gouging their tenants because they know it is difficult to move? Are tax districts taxing businesses because they know where the deep pockets are? Or did businesses choose to locate in places with high costs for other reasons?

    My theory is that costs go up with complexity and complexity goes up with density, so the higher costs are an artifact of business locations, not a cause, and also that the higher costs create a rational driver for people and businesses to move eleswhere (sprawl).

    EMR claims that prices are higher because that is where people want to be, and he is partly correct. On the other hand higher prices equally cause other people not to want to be there, and price setters have an advantage because they know the cost of relocation and inertia: it takes a long time to change settlement patterns.

    We have seen manufacturing move from the unionized North to the ununionized south and then to still cheaper labor markets as the costs of communicating with overseas locations declined and as developing countries improved their reliability and quality.

    I don’t think there is any doubt that costs play a part in location decisions, just not the only part. There is an entire industry of consultants to help businesses make location decisions and they use complex financial models to make those decisions.

    If those models weren’t so expensive to access, maybe our government planners should use them. In any case we can expect that Virginia’s moderate costs, (excellent transportation system?), high quality labor base, and natural beauty will continue to draw growth. Now the question is do we want to continue to try to kill those advantages with the artificial costs of regulatory compliance, or can we find a way to grow and retain our natural advantages?

  3. Jim Bacon Avatar

    Many factors go into site location decisions, and the general cost of business is only one…. Increasingly, companies are looking for access to a skilled workforce. In the case of the biotech or IT industries, those skills can be highly specialized and found only in a number of places. Therefore, an IT company requiring employees with a background in advanced aspects of IT programming, networking and business strategy cannot even consider locating in a region lacking those human resources. Once the choice is narrowed down to a half dozen cities, though, the cost of doing business in those cities can be the decisive factor in deciding between those cities.

    The Milken Institute measures a lot more than just the cost of business. The Institute tracks scientific and engineering resources, human capital and a host of other factors.

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