Academic journal article New England Economic Review


Academic journal article New England Economic Review


Article excerpt

As a part of my comments on the papers by Ronald Fisher and Michael Wasylenko, I should like first to review the facility location process, highlighting the effects of taxation. I will then comment on the effects of public services on economic development. The analysis will be based on my practical experience at Deloitte & Touche/Fantus Consulting and on the firm's data base showing the relative importance of location factors as they have related to company location decisions by Fantus clients. These clients have hired Fantus to assist them in siting manufacturing facilities, distribution centers, office/service centers, and research and development laboratories.

Location Criteria: The Role of Taxes

The "art" of facility location was first developed by Fantus Consulting, and its techniques are now used by site seekers everywhere. The basic approach of selecting a location by the matching of company needs with community characteristics is universally accepted, as is the axiom that the selection process is one of elimination: The site seeker starts with a universe of locations and systematically eliminates those with the greatest disadvantages and the fewest advantages for the project, until the single location with the most advantages and the fewest disadvantages emerges. It is this location that is selected for the new operation.

Companies seeking a location use a myriad of criteria to evaluate locations; some have lists of hundreds, but for most, the list is usually less than 50. These factors are divided into three basic categories: operating costs, operating conditions, and quality of life. Operating costs include such items as labor costs, utility costs, occupancy costs, tax costs, and transportation costs, in the case of manufacturing. Operating conditions include quality of the work force, dependability of utilities, attitude of local officials, and executive travel times. Quality-of-life factors may include cultural activities, education capabilities, sporting opportunities, and housing availability and cost.

Location criteria are different for different business sectors and different companies within any sector, as well as at different stages of the site search. This greatly complicates any effort to discern causal relationships between any given location criterion, such as tax levels, and economic activity or growth. Indeed, what might be a direct relationship for one situation or set of studied circumstances might be quite different for another - and in fact for most others.

Site selection is a dynamic process, not a static approach. The "art" of geographic elimination requires a set of screens that systematically eliminate the least favorable locations. At each level of screening, the site location criteria are different, as is the relative importance of each criterion. This is exceedingly important to recognize when trying to evaluate the effect of taxation, or any other location criterion, on economic development.

The Location Process: Initial Screening

The initial stages of the screening process are commonly described as "defining the area of search," that is, identifying the broad region and the individual states that comprise that region. At this level, the relative importance of each location factor or criterion will be different for each individual project. The focus typically is on macro wage differentials, usually at the state level, transportation variations (in the case of manufacturing facilities), and key "fatal flaw" criteria as developed by the company/consultant; for example, right-to-work state, proximity to a university. with an engineering school, port facilities, available buildings, and so on. Taxes will be brought into the analysis, but only on a comparative basis. Usually, no detailed tax evaluation will be made at this level of screening.

In terms of taxation, the analysis usually consists of a series of tables showing the following for each state under consideration: corporate income tax (rate, federal deductibility, formula); personal income tax (rate); unemployment tax (rate, payroll); and workers' compensation (code, experience rating). …

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