Thursday, October 27, 2005

Competing for Business

The AICPA announced this week that it will be moving staff from offices in New York and New Jersey to Durham, North Carolina. The press release can be found here:

This move, promoted as a cost-saving measure that will save over $100 million to the organization over the next fifteen years, was prompted by a combination of “continuing escalation of labor costs in the New York Metropolitan area” as well as some excess office space in a Jersey City office.

I’m glad for this step, as I think that physical location is probably not important for many of the services offered to members. If it keeps my dues down, I am all for that. But this suggests some larger issues that government officials ought to notice.

Given that much of our economic activity is information based, it is easier to move operations to lower-cost locations. That translates to heightened competition among the states. Businesses are more "footlose", as my colleague Ernie Goss describes it.

Competitive factors vary. Some can be changed, but others cannot. For example, the climate in Durham, North Carolina, is more attractive during the winter months. (Plus there is a tradition of great golf in that part of the country!) The Southeast has long had advantages in this dimension, which has helped it to grow.) Query the effect of the recent plethora of hurricanes on business development in coastal regions. Will the savage hurricanes drive out our desire to return to the sea?)

The education of the workforce and living environments are factors that can be changed, but this takes time. Durham has come a long way from the tobacco-based town it once was, as it is part of the research triangle with major universities and commitments to the development of human capital. That doesn’t happen overnight. So start planning now if you want this to happen.

And of course, there is the tax structure. High taxes mean that employers must pay workers more so that they have enough left at the end of the day to live on, after they pay their government "partners". The tax structure is complex, as it permeates down from the state to include numerous other local structures. Though I don’t have time for a complete analysis here, looking only at state income taxes you see only small differences between NJ and NC. In fact, lower income workers may even be taxed less in NJ. North Carolina has a moderate tax rate on income, ranging from 6-8.25 percent, though the highest rate does not kick in until you reach $200K for a married couple. New Jersey, by comparison, has rates that range from 1.4-8.97%, with the top bracket kicking in at $150K for a married couple. However, this ignores the effects of local taxes, which could well be significant. (Compare that to Iowa, where I live, which has a top rate of 8.98% that kicks in at just over $54K. Iowa does allow a lower base because it allows the deduction of federal taxes, but this still results in higher taxes on the kind of worker that you want to attract to your state).

Tax structures can indeed be changed, and those changes can happen over a much shorter time frame than the issues of education and infrastructure. When a high-profile organization makes this kind of announcement, government officials should take notice.

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