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No Shore Thing

from the magazine

No Shore Thing

Manufacturers consider bringing jobs back home, if states can give them a break. Winter 2015
Photo by Daniel Foster

In 1985, Walmart founder Sam Walton promised that the retailer would bring jobs back to America by selling more domestically produced goods. The effort eventually fizzled when the store couldn’t find enough competitively priced American items. But today, saying that it wants to spur the economy, Walmart is trying again—and it may have better luck this time, since the manufacturing environment in the United States is better than it has been in 40 years. Fully reviving America’s manufacturing sector, however, may depend on state governments.

Walmart wants to capitalize on a trend known as “reshoring,” which has already returned tens of thousands of jobs to the United States. By reshoring the manufacture of several of its products, GE Appliances has created about 1,000 jobs in its Appliance Park facility in Louisville, Kentucky. Caterpillar is opening a $200 million plant in Athens, Georgia, that will employ about 1,400 factory workers making tractors formerly produced in Japan. Whirlpool has brought back production of commercial washing machines and KitchenAid hand mixers from Mexico and China to a factory in Ohio.

Several factors explain the trend. Rising wages have eliminated some of the advantages of sending jobs overseas. As China’s economy has grown, average pay for industrial workers there has risen as much as threefold since 2001. At the same time, energy costs have dropped in the U.S., thanks to booming natural-gas production—a boon to firms making fertilizers, petrochemicals, and aluminum. The Industrial Energy Consumers of America, a trade group, calls reshoring “just the beginning of the manufacturing renaissance the country needs for job creation and exports.”

American firms are also discovering that they can serve customers better and improve quality control by locating some plants closer to home. And some U.S. companies have grown uneasy over operating in places like China. “China is often perceived as a lawless place where anything goes,” observes a study by the Reshoring Initiative, where “individuals are frequently not prosecuted” for violating regulations and laws, such as those governing patent and copyright.

Reshoring could produce as many as 1 million new American manufacturing jobs by 2020, estimates the Boston Consulting Group. But firms looking to bring jobs back to America can face roadblocks. Though the U.S. has lost manufacturing jobs through offshoring—the shifting of jobs overseas—for decades, some states still impose excessive taxes and regulations on industrial firms that drive up the costs of operating here. State legislators show a growing tendency to saddle industrial firms with high taxes, a politically popular, though economically destructive, way to keep taxes on residents (and voters) low. A 2011 study by the Minnesota Taxpayers Association found that 39 states hit commercial firms with higher property-tax rates than they impose on residences. Manufacturing facilities, which often need lots of space, are especially sensitive to high property taxes. According to the Tax Foundation’s annual ranking of state business environments, New Jersey has the highest property-tax burden, followed by Connecticut, Vermont, Rhode Island, and New York. But even some states that score well in the Tax Foundation study take a large proportion of their local taxes from businesses. New Mexico, for instance, collected 62 percent of its property taxes from industrial and commercial firms.

Another disincentive to reshore jobs is pricey unemployment-insurance taxes, which can make employing a worker in America expensive compared with other countries. The rates that firms must pay for unemployment insurance vary widely by state, topping out at 12.27 percent in Massachusetts, followed by 10.89 percent in Pennsylvania and 9.79 in Rhode Island. Certain states also take a bigger bite out of wages with this tax. New Jersey assesses its unemployment taxes on the first $30,900 of wages, while Louisiana applies its tax only to the first $7,700 that a worker earns.

Regulations—including labor-market restrictions, licensing and permit policies, and local liability laws that make lawsuits against firms more likely—are another obstacle. A study by the Mercatus Center at George Mason University ranked California, West Virginia, New Jersey, and New York as the most heavily regulated states. The costs can be substantial. In 2009, two California State University finance professors found that regulations cost companies operating in California, on average, $135,000 a year. Firms, especially smaller ones located in states with such disincentives to further investment, may never bring jobs back because the expense of employing workers in their home state may be too high. Variations in taxes and regulations will create heated competition among states, as firms focus on bringing jobs back to the most hospitable places.

States often justify their web of regulations and high costs on manufacturers as necessary to protect workers. But America already provides far more safeguards for industrial workers than do developing countries. Bringing work home is a plus for workers’ rights and safety, as well as a boost to our economy. States need to learn that lesson.

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