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Winds of Change: Utah’s growing cost-of-doing business problem

The Utah economy celebrated its eighth anniversary of economic growth in June, the second-longest in state history. Currently, the state economy is creating about 45,000 jobs a year. Unemployment remains low at 3.2 percent and inflation-adjusted wages continue to rise. The nice economic winds have been blowing and business is strong.

I sense a change in weather in the next 12 to 24 months led by a tight labor market, rising interest rates, the end of the “Trump rally” and something no one is talking about—the rising costs of doing business in the Beehive State.

Moody’s Analytics tracks the cost of doing business at the state level each year. I’ve followed their index for over two decades and have noticed movement in recent years. Utah is becoming more expensive. The rising cost of doing business will challenge business expansion and recruitment efforts in coming years.

Prior to the Great Recession, Moody’s estimated Utah’s cost of doing business in 2006 to rank 38th among states and the District of Columbia. Thirteen states had lower costs; 37 states had higher costs, led by Hawaii and California. Among western states, Idaho, New Mexico and Wyoming had lower costs than Utah.

Today, Utah’s cost of doing business ranks 30th among the 50 states and the District of Columbia, a change of eight spots in nine years. Now, among western states, Washington, Nevada and Oregon have lower costs of doing business than Utah. Equally important, Texas, Missouri, Kentucky, and even Pennsylvania and Ohio have lower business costs.

It will be difficult for Utah to retain its competitive advantage for new business investment if business costs continue to outpace competitors.

What’s behind the numbers?

The Moody’s cost of doing business index includes three primary costs: labor, energy, and state and local taxes. Office rents are also an important cost, but are difficult to summarize at a state level. For the most recent data (2015), Utah continues to rank well in energy costs (44th among states and D.C.), but these costs are rising. Utah ranked 48th in energy costs in 2006.

The biggest jump in Utah’s relative business cost among states and D.C. is unit labor costs. In 2006, Utah ranked 35th among states and D.C. in labor costs. That ranking has now climbed to 28th, seven spots in just nine years. At this pace, Utah would claim the median spot for unit labor costs among states in a few years. That would be an astounding shift.

Interestingly, Utah’s relative state and local tax burden rank has improved in the Moody’s rankings. Utah had the 12th highest tax burden among states and D.C. in 2006, placing Utah in the upper quartile of high tax states. Utah has now dropped four spots to claim the 16th ranking. I credit this drop to the major income tax reduction that occurred during Gov. Jon Huntsman’s service.

While making Utah more economically competitive in the short term, the Huntsman tax reduction could cause problems over the medium and long term if we fail to adequately fund public services, most notably public and higher education. Without well-trained human capital, the state’s long-term economic prospects sour. The balance between keeping taxes low and investing in our future workforce will continue to challenge state leaders.

What to do about it?

The relative cost of doing business changes based on competitive market conditions and public policies. There are several things Utah policymakers can do to help Utah remain competitive:

Regulations – Regulatory reform is among the quickest and easiest ways policymakers can reduce the cost of doing business. I applaud the efforts of our governor, the Utah Legislature, the Salt Lake Chamber and Utah League of Cities and Towns to stop unnecessary regulations, improve those we have and create a data-driven process for future regulatory actions.

Immigration reform – Immigrant labor fills vital worker shortages and, in doing so, creates more economic opportunity for everyone. Utah’s congressional delegation should continue to support smart immigration reform policies that shore up our border and expand visas and guest worker programs.

Post-secondary education training – Utah should keep investing in post-secondary training opportunities, particularly for first-generation college students. We need more people in the labor market and fewer people on the sidelines, skimping by on public assistance or criminal activities. Utah’s population-to-employment ratio is still below pre-recession levels, but people need to be trained for gainful employment.

Affordable housing – Each year housing becomes more expensive. This burden places upward pressure on wages and discourages people from moving here. Local government controls land-use planning, but if cities and towns fail to pursue affordable housing policies, state officials should intervene with powerful incentives to encourage it.

The nice economic winds continue to blow, but I fear the tailwind is gradually shifting to a headwind. Decision makers in Utah would be wise to keep an eye on and effect policies that give us the best shot at successfully managing rising business costs.

Natalie GochnourNatalie Gochnour is chief economist for the Salt Lake Chamber and an associate dean in the David Eccles School of Business at the University of Utah.