Benchmarks: The Cost of Doing Business in Arizona

Marshall J. Vest
Director, Economic & Business Research Center
Eller College of Management

June, 2002

Introduction

This report addresses Arizona 's cost of doing business. Presented are data comparing Arizona to other Western states as well as metro comparisons for selected cities with whom we compete for new business. The final section drills deeper into the issue of wages in Arizona.

Methodology

Data on business costs is taken from an annual report1 prepared by Economy.com . Information for the costs of labor, energy, taxes and office space are included in the assessment. Weightings used to form the index are 65%, 15%, 10% and 10%, respectively, which reflect the importance of each in explaining long-term employment growth. For states, no office rent data is available, so the weights are 75%, 15% and 10%. The index uses a three-year moving average of each component in an effort to minimize volatility; for this report, data from 1998 to 2000 was used. Some 318 metro areas were included in the analysis. No data for non-metro counties is available.

Unit labor costs, defined as labor compensation per dollar of output, is used as the measure for labor costs. The energy component includes commercial and industrial electric rates. The effective tax index is calculated as the total tax burden as a percent of personal income. Included are tax revenues at both the state and local level for personal, property and corporate taxes, and charges, less severance taxes, education, hospital, and intergovernmental transfers. Business contributions to unemployment and workers' compensation programs are also included. Office rents reflect rates for class A office space.

Data for wages is available annually from the U.S. Bureau of Labor Statistics (see references at the end of this report). Published annually for states as well as metropolitan areas, these data are calculated by dividing total wage and salary disbursements by the number of wage and salary workers covered by the unemployment insurance (UI) program. The resulting calculation reflects the average annual wage per worker. These data give a different view of labor costs than the unit labor cost measure used by Economy.com.

Analysis

Business Costs

Data on business costs (average for 1998-2000 time period) shows that Arizona 's costs are virtually identical to the national average, placing it 16 th among all states. Arizona leads a closely-knit pack of five western states behind costly California (Exhibit 1).

Exhibit 1

Colorado 's costs are roughly one half percent below the national average, followed by Washington , Utah and Nevada . Most western states rank in the bottom half. Five are in the lowest quintile. The lowest costs are in Wyoming (50th), where costs are 21% below the national average. Costs in California are 7.2% higher than nationwide, the 9th highest. Business costs are highest in the Northeast United States and lowest in the South.

Arizona 's labor costs and state and local taxes are both below average, but are offset by high energy costs (13th highest). Arizona ranks 30th on state & local taxes, and is one of the lowest in the west2.

Arizona 's "average" score reflects above average costs in both Tucson and Phoenix, while remaining areas of the state are well below average. Both Tucson (2.3% above average and a ranking of 67th) and Phoenix (1.1% and 76th) are saddled with higher costs than nationwide (Exhibit 2). Compared to other selected western metros, only the high-cost coastal California metros have higher costs than Tucson and Phoenix. Seattle, Denver, Salt Lake City, Las Vegas, Portland, Austin and Albuquerque have lower costs. Flagstaff and Yuma are both well below average - 3.6% and 4.5%, respectively.

Exhibit 2

For a detailed analysis of taxes, see "Business Taxes High, Personal Taxes Low in Arizona: A Current Assessment of Arizona's Tax Competitiveness", Arizona Business, Arizona State University, volume 47 number 3, March 2000.

Looking at the four components, Tucson has low labor costs, very high energy costs, average taxes and very low office rents. Phoenix has average labor costs, high energy costs, low taxes, and low rents. Both Flagstaff and Yuma have high energy costs, average taxes and low rents. Flagstaff has low, and Yuma close to average, labor costs.

Since these data are averages over the 1998-2000 period, recent wild swings in energy prices, particularly during the California energy crisis, are not included. Also missing are recent declines in regulated electric rates among Arizona utilities.

Is Arizona a Low Wage State?

Additional data on wages is available from the U.S. Bureau of Labor Statistics, which can be used to address the question of whether Arizona is a low wage state. Although eight percent less than the national average, Arizona's wages rank near the middle of the pack at 22nd among all states, with $32,606 average annual pay per worker for the year 2000. Among western states, California, Colorado and Washington rank above the national average ($35,296). See Exhibit 3.

Exhibit 3

The Phoenix-Mesa metro area ranked 52nd (of some 323) for average annual pay in 2000 (Exhibit 4). Its average wage of $34,915 was 5.6% below the average for all metro areas. Compared to other selected western metros, Phoenix-Mesa has lower wages than the large west-coast metros, Denver and Austin, but higher than Las Vegas, Salt Lake City and Albuquerque.

Tucson 's wages were nearly eight percent below the nation at $29,204, giving it a ranking of 167. Flagstaff ranks 294th with $24,673, and Yuma has one of the lowest wages in the nation (a 316 ranking) with only $21,487.

Exhibit 4

End Notes

1. North American Business Cost Review, 2002 Edition , Economy.com, November 2001. Used with permission.

2. For a detailed analysis of taxes, see "Business Taxes High, Personal Taxes Low in Arizona: A Current Assessment of Arizona's Tax Competitiveness", Arizona Business, Arizona State University, volume 47 number 3, March 2000.

References

"Business Taxes High, Personal Taxes Low in Arizona: A Current Assessment of Arizona's Tax Competitiveness", Arizona Business, Arizona State University College of Business, volume 47 number 3, March 2000, <http://www.cob.asu.edu/seid/cbr>

Markey, Francis X. and Michael Burt, North American Business Cost Review, 2002 Edition, Economy.com. <http://www.economy.com/default.asp>

U.S. Department of Labor, Bureau of Labor Statistics; "Average Annual Pay By State and Industry," published September 11, 2001, <http://www.bls.gov/news.release/annpay.nr0.htm>

U.S. Department of Labor, Bureau of Labor Statistics; "Average Annual Pay In Metropolitan Areas, 2000," published September 28, 2001, <http://www.bls.gov/news.release/anpay2.toc.htm>