Pennsylvania’s logistics industry is strong while its manufacturing sector has room for improvement, according to a new report. The state’s tax structure among likely factors for the discrepancy between sectors.
Researchers with Ball State University’s Center for Business and Economic Research (CBER) in Indiana gave manufacturing in the commonwealth a C- grade this year, down from a C in 2015. At the same time, Pennsylvania’s logistics sector scored an A.
This is the ninth year the report has been issued. It grades states on a range of industrial and economic variables, based on data collected from public- and private-sector sources.
“No place gets an A in everything,” CBER Director Michael Hicks said.
A strong logistics sector and strong manufacturing often go hand-in-hand, Hicks said. So the gap here points toward some underlying problems for Pennsylvania, he explained, chiefly involving taxes and workforce issues.
The Keystone State earned a D for worker benefit costs and a D- for tax climate under the study, with the tax ranking placing Pennsylvania in the bottom 10.
As for worker benefit costs, Hicks said factors such as lower educational attainment and smoking — frequently linked — drive up expenses for companies through increased health insurance liabilities.
But taxes are a particular concern, he said.
Holding down growth?
“I think it’s fair to state that in Pennsylvania the effective tax rate is rather burdensome,” Hicks said.
While Pennsylvania, like many states, offers tax-abatement programs for business, Hicks noted that they may not help those industries that need it most.
“The problem is that most job growth in manufacturing comes from existing companies,” which may not have access to incentives aimed at new startups, he said.
Sales taxes, too, also hit businesses harder than many realize, with companies paying one-third or more of total taxes, he said.
That analysis will sound familiar to regular observers of the state’s business and political scene.
When Harry Moser, founder of the Reshoring Initiative, met with state legislators in March to talk about bringing manufacturing jobs back to the U.S., he pointed out that the top reshoring states between 2007 and 2014 were mostly in the South and Southeast — states which are right-to-work jurisdictions with lower taxes and lower wages.
He stressed that slashing taxes isn’t a cure-all , pointing out that some Northeastern states such as New York and Ohio — which have broadly similar economic and regulatory environments — did more reshoring than the Keystone state.
“My concern is that Pennsylvania could do better,” Moser said. “I think if you had one thing you could do in this state, it’s more workforce development.”
Advanced manufacturing emphasized
And that is an issue the CBER report also tackles, with the state scoring a C for its human capital.
The study pays special attention to advanced manufacturing — an industry sector with high levels of STEM-related (science, technology, engineering and mathematics) occupations and research and development investment. On that note, Hicks has a clear message for all states: white-collar jobs are growing in the advanced manufacturing sector, while blue-collar occupations have declined.
“These data underscore the importance of talent development efforts with a focus on educational attainment,” Hicks said. “In the long run, a well-educated and ready workforce matters more than any other single factor in the health of advanced manufacturing firms.”
While the report gives Pennsylvania a C for productivity and innovation, it also gives the state an A for sector diversification, and a B- for its global reach.
As reported late last month, Pennsylvania companies exported fewer goods to eight of the commonwealth’s top 10 global markets in the first quarter, but nevertheless saw an increase in exports to the United Kingdom ($622.5 million, up from $431.2 million in the first quarter of 2015) and China ($539.6 million, up from $470.1 million).
Those countries are the state’s third- and fourth-largest export markets, respectively, after Canada and Mexico.
The state’s top three export categories are chemicals, machinery and computer and electronic products.
Manufacturers’ Association reaction
Tom Palisin, executive director of The Manufacturers’ Association, a York-based group, said the report shows similarity in manufacturing rankings between Pennsylvania and surrounding states, underscoring the higher costs and common challenges faced by Northeastern jurisdictions compared with the South and Midwest.
Pennsylvania’s C- was matched by West Virginia, while New Jersey earned a C, Maryland a D and New York came away with a D- grade. Ohio, meanwhile, earned a B, which points to another trend Palisin discerned.
He said that “Pennsylvania and surrounding states don’t have the large auto sector boosting their economies like Michigan (A), Ohio (B), Indiana (A), South Carolina (A), etc.”
Palisin also pointed out that this state’s strengths differ across the regions. In southcentral Pennsylvania “has a much higher concentration of manufacturing” than the state overall, at 18 percent of the regional economy, so if competing alone “we would be better off in this report,” he said.
He acknowledges the many hurdles facing the state, as illustrated in the report, including business climate, state budget issues, and challenges with productivity, noting “a large number of job shops and contact manufacturers.”
“Our large universities also have to do a better job too at helping manufacturers with R&D, new product development and technology transfer,” Palisin said.
