Small Business in Washington State

2017Key Findings from the Association of Washington Business

Washington’s economy is supported by small businesses, and it was small business that pulled the state

through difficult economic times. According to the Brookings Institution, the nation’s small business sector is one of the great strengths of the U.S. economy, historically accounting for 64 percent of net new jobs. New and young small businesses have generated 40 million jobs in the past 25 years, representing 20 percent of gross job creation.

According to 2013 data, small businesses in Washington state numbered 555,285, or 98 percent of all businesses. They employed 1.3 million workers or 51.7 percent of the state’s workforce. There was a net 43,690 new jobs created by small businesses and, as the most trade dependent state in the country, Washington’s small employers make up 89.9 percent of all exporters in the state. A robust 20.4 percent of the state’s workforce is employed by firms with fewer than 20 employees.(Source: Small Business Administration)

It is important to note that small businesses accounted for 63.3

percent of net new jobs from the third quarter of 1992 until the

third quarter of 2013. This review of our 2016 small business

listening tour underscores the importance of small business

to our state’s economy and the struggles the state’s smallest

operators are encountering that prevent them from growing

and retaining jobs. Our state’s diverse industry portfolio, led by

professional, scientific and technical services, underscores the

state’s attitude of entrepreneurship and innovation.

As the state’s chamber of commerce representing nearly 7,000

employers, the Association of Washington Business (AWB) works

to ensure the state supports the needs of industry. Washington

state’s business climate, workforce training needs and business

expansion are just a few of the issues AWB addresses through

its advocacy work and as a representative on state-level boards

and organizations.

Highest Percentage of Small Establishments Surviving from 2013-14

Washington 87.4%

Delaware 84.7%

Wisconsin 83.1%

Connecticut 82.1%

Utah 81.8%

South Carolina* 81.5%

Massachusetts* 81.5%

New York 80.7%

Texas* 80.6%

South Dakota* 80.6%

* Indicates a tie

new and young small businesses have generated

u.s. jobs in the past 25 years40 million

Source: The Brookings Institution

historically, small businesses account for of net new jobs. 64% more than

of the state’s workforce is employed by firms with fewer than 20 employees.

20%

Most Smalls Among Exporting Firms, 2012 (%)

California 95.9%

Florida 95.4%

New York 94.3%

Texas 93.1%

New Jersey 92.4%

Illinois* 90.0%

Washington* 90.0%

Massachusetts* 89.6%

Michigan* 89.6%

Ohio 89.3%

* Indicates a tie

This report presents a snapshot of the state’s small business make up, while offering a glimpse into where we need to be in the future to remain globally competitive and a world leader in innovation. Working together with key stakeholders, AWB seeks to ensure a regulatory and tax climate that is favorable to businesses for many generations to come.

Kristofer T. Johnson President, Association of Washington Business

washington’s small employers make up nearly

of all exporters in the state90%

they employed

of the state’s workforce

1.3 million51.7%

or

98% of all businesses in washington state in 2013

small businesses represented

Overview and Key FindingsIn May and June of 2016, representatives from AWB and its research arm, the AWB Institute, held focus groups with hundreds of representatives from small businesses located in 15 cities across the state. The goal: To hear first-hand from Washington state small-business owners about the economic, regulatory and workforce challenges they face.

ellensburg

yakima

wenatchee

mount vernon

spokane

colville

everett

bellevue

vancouver

tri-cities

pullman

tacomaolympia

aberdeen

port angeles

washington state’s regulatory environment is

structured in a way that creates a challenging

relationship between the employee and employer.

The small business sector in Washington state is a key component of the state’s economic health. However, Washington’s business regulatory environment, including tax, workplace and environmental rules, constricts business and job growth. The majority of small-business owners stated that the main reason they located to the state or decided to start a business in Washington was because of the quality of life. Other factors such as the low cost of energy, access to global trading gateways, and an entrepreneurial environment encourage small business growth in Washington state. It is important to continue to seek policies that give small businesses the opportunity to grow and prosper in our state.

Washington state small businesses participating in the focus groups identified the following issues as their top areas of concern:

• Business regulations in Washington state create an anti-competitive environment with other states because of higher financial burdens.

• Washington state’s workplace regulatory environment is structured in a way that creates an adversarial relationship between the employee and employer.

• Soft skills (also categorized as employability skills), along with impending retirements and an inadequately-supplied workforce pipeline, must be addressed to ensure the next generation of workers is prepared to support existing and new small businesses in the state.

• The cost of health care continues to increase while at the same time access to care and services are decreasing.

Given these findings, it is crucial that the business, regulatory and workforce development environment in the state support policies that encourage business growth, innovation and job creation.

What does regulatory reform look like to you?

“More freedom/power for businesses to operate and grow, less power in centralized state regulators… Create a more level playing field for the regulated and less for the regulators.”

— Pullman Business Owner

What do you see as a challenge with regard to Washington’s regulatory climate?

“Very regulated with increased codes which are written to be vague and hard to interpret.” — Tri-Cities Business Owner

Washington’s Business Regulatory EnvironmentThe regulatory landscape that exists in Washington state creates an envi-

ronment in which our small businesses are at a competitive disadvantage

to bordering states. Workplace regulations such as minimum wage, paid

sick leave and workers’ compensation and business regulations such as

the state’s Business and Occupation tax (B&O), environmental rules, and

health care requirements, continue to grow the financial burden on the

state’s small businesses. AWB works with its members to develop poli-

cies for the state that maintain and enhance business competitiveness

and regulatory fairness.

What does regulatory reform look like to you?

“Removing the state sales tax — it will have to happen at some point as larger numbers of state residents choose to send and spend their money out of state to get a discount. How many businesses will the state kill before it finally fixes this unfair tax that rewards tax avoidance and penalizes locally-owned retailers?” — Pullman Business Owner

Small businesses and industries located in Washington state enjoy the benefits of a desirable place to live, no

personal income tax, and the opportunity for innovation and entrepreneurship built upon our state’s drive to

be a global leader in manufacturing, software production and agriculture production.

Challenges such as permitting costs, erratic tax incentives, incompatible state-by-state policies and the

imbalanced nature of the state regulatory environment create additional costs for small businesses, forcing

businesses to look elsewhere when they reach the point of expansion. Several specific elements of the regula-

tory process were noted by our members as fundamental issues that are noteworthy in policy discussions:

• High minimum wage;• Excessive Business and Occupation taxes and a lack of incentives and exemptions;• Unrealistic environmental requirements; and• Expensive health care system

Workplace RegulationsMinimum Wage: Initiative 1433 was passed by voters in the November 2016 election. The initiative increased minimum wage to $13.50 per hour by 2020 (4 years) for anyone 18 and over. The wage increase applies to all employers in Washington state.

Starting in January 2021, the minimum wage will be adjusted up according to the consumer price index (CPI).

The CPI adjustment is consistent with the current law.

Paid Sick Leave: An additional component to I-1433 requires employers to pay sick leave at a rate of one

hour for every 40 hours worked, beginning in January 2018. The initiative requires that an employer allow

an employee to carry over a minimum of 40 hours per year of unused sick leave and does not contain a cap

on how much sick leave can be earned in a year.

I-1433 will have a severe impact on small business in Washington state. It fails to provide any teen wage,

training wage, or recognition of the additional cost, beyond wages, that employers pay. While it does apply

statewide, it does not prevent local jurisdictions from setting a more stringent rate as Seattle and SeaTac have

already done. The patchwork of different wages will continue.

Washington’s manufacturing sector, which includes several small firms, will be particularly hard hit by this

arbitrary increase. Manufacturers compete globally and must price their products and services accordingly.

We have seen manufacturers decide to not expand or move out-of-state to remain competitive.

Further, Washington businesses that border Idaho are competing with the federal minimum wage of $7.25

per hour. This hurts the small-business owner who cannot absorb the higher coast for labor. As employers

are required to provide a higher minimum wage, they are driven to cut other benefits to survive. The increase

will also result in wage compression. Those who have worked hard and received wage increases are now

earning the same as those who are newly hired.

What does regulatory reform look like to you?

“The combination of wages and sale tax discounts on purchasing out of state makes doing business in Washington questionable.”

— Pullman Business Owner

Jan. 1, 2017 $11.00 per hour

Jan. 1, 2018 $11.50 per hour

Jan. 1, 2019 $12.00 per hour

Jan. 1, 2020 $13.50 per hour

The minimum wage will increase as follows:

washington employmentby size of firm (2013)

500+ Employees 48%

100-499 Employees 16%

20-99 Employees 17%

1-19 Employees 21%Source: Small Business Administration

What does regulatory reform look like to you?

“Healthcare — we are in a crisis and there is no end in sight. Costs have to decrease or small business cannot compete.”

— Ellensburg Business Owner

What does regulatory reform look like to you?

“Less paperwork, not more. Less regulation, not more. Simplify processes for businesses to complete taxes, licenses, etc., so it takes less time.” — Port Angeles Business Owner

Workers’ CompensationWashington state continues to have a compulsory workers’ compensation system that is one of the most expensive and administratively complex in the nation. Participants from the listening sessions reported rates 30 percent more than Oregon and 50 percent more than California. The last major workers’ compensation reforms were passed in 2011, yet some of the largest cost-saving reforms have not produced the promised savings or increased efficiencies. The fact that Washington state pays out at least two times the number of lifetime pensions of any other state is one example of the dysfunction in the system. Furthermore, there are cases in some industries where workers receive more money from workers’ compensation than by working. Small business in particular is hurt by the

regressive workers’ compensation system in Washington state. We want to ensure that the benefit package to Washington workers can continue, that the state fund remains solvent, that costly fraudulent claims are addressed in a timely manner, and that workers and employers pay affordable premium rates. However, to achieve these goals, real cost reductions and increased efficiency in the workers’ compensation system are necessary and will result in a better outcome for both injured workers and employers.

participants from the listening sessions reported

worker’s comp rates

more than oregon

more than california.

30%50%

and

Business RegulationsTax StructureWashington’s employers are under constant tax pressure. Washington collects the fifth highest business share of state taxes, and the seventh highest business share of state and local taxes among the 50 states (Council on State Taxation). It is imperative that statewide and local officials resolve the unfair tax burden on small business in a way that bolsters Washington’s ability to attract, maintain, and grow economic opportunity statewide, compete with lower-cost states, and uphold certainty and fairness for taxpayers.

Tax incentives from sales and use tax have been extremely beneficial to the establishment and growth of small business in Washington. The manufacturing and equipment (M&E) tax exemption was instituted to help small manufacturers make investments in equipment that would help spur growth in jobs and revenue. The most recent review of the M&E exemption (2008 Manufacturing Tax Study) showed that in a four-year period the exemption created 58,100 new jobs and added $27.5 billion to the economy. The success of the M&E exemption is a good example of how tax preferences, incentives and exemptions, can benefit the state’s economy.

in a four-year period, the m&e tax exemption created

58,100to the economy.$27.5 billion

new jobs and added

Water Quality Rule

In November 2016, the Environmental Protection Agency (EPA) finalized strict water quality rules for

the state of Washington. The EPA adopted parts of the state’s proposed water quality plan, plus even

stricter limits than what the state had proposed. AWB worked with its partners and state lawmakers to

ensure the proposed rules would balance the protection of the environment without restricting business

growth and expansion. Unfortunately, the EPA passed rules that are stricter on PCBs (Polychlorinated

Biphenyls), arsenic and mercury, rules that will be costly and difficult for major employers and city

wastewater treatment plants to meet. In the case of PCBs, the EPA rule is 25 times more stringent than

the state’s proposal.

What does regulatory reform look like to you?

“Stop with all the environmental agendas that are what the government is pushing for… Health care costs — everyone has insurance, but no one can afford medical care… Raising the salary level, subject to overtime, is hurting employees in my company more than me.” — Vancouver Business Owner

What does regulatory reform look like to you?

“It leverages the talent of the industries and supply chain that integrate into our education system… Reform is innovation.”

— Olympia Business Owner

Carbon TaxIn 2016, several attempts were made, through legislative and initiative action, to implement a carbon tax. This would create an economy-wide carbon tax on greenhouse gas emissions from the delivery or combustion of electricity, natural gas and petroleum products, as well as manufacturing processes around the state. It would essentially create a new tax on energy that would increase the cost to all business.

While environmental rules and regulations may not have a direct impact on small business, the increased costs, such as transportation, and goods and services, that result from such regulations impact the financial health of all small businesses. AWB will continue to work with its partners to ensure this does not happen and report how it unfairly impedes small business growth.

Health CareParticipants in the small business listening sessions in all 15 regions stated that health care costs had increased dramatically, with one business reporting a 40 percent increase with the use of the state’s health care system. As components of the federal Affordable Care Act (ACA) are debated and interpreted, the state’s health insurance system is in a constant state of flux. Ensuring choice and health care options, safeguarding affordability and cost containment while protecting the private sector delivery and purchasing systems are key components to a healthy, sustainable system. Washington is recognized as a leader in providing exceptional medical care and research, yet Washington is also noted as being a state with some of the highest costs for care. Washington’s employers, employees and taxpayers deserve a competitive, predictable and affordable health care system.

Workforce Washington state is the home of innovation, providing dynamic

employment opportunities for those in the state and those wishing

to move to Washington. Iconic companies like Boeing, Microsoft,

Starbucks and Amazon exemplify the state’s spirit of innovation.

All of these companies started as a small business. Richard Branson

has said, “Small businesses are nimble and bold and can often

teach much larger companies a thing or two about innovations

that can change entire industries.”

The growth of Washington as a home for global corporations has

led to a robust small business sector. Employment projections in

Washington for 2018–2023 show a robust demand for workers

with postsecondary education. As businesses, industries and

workplaces become increasingly complex, employers need

workers with skills and education that allow them to adapt and

excel in evolving environments. More than three-quarters of

all projected job openings will require at least some education

beyond high school, with two-thirds requiring mid-level education

or higher.

A new report from the Georgetown Center on Education and the

Workforce highlights the fact that, after several years of slow

growth following the Great Recession, we are now seeing a surge

in openings for good, high-paying jobs with benefits. Employers

participating in the small business tour remain concerned about

deficiencies in the soft skills of new workers. Critical thinking,

problem solving, team work, collaboration and communication

skills are becoming increasingly necessary for small businesses

to expand. Technological advances are revolutionizing many

industries, transforming the nature of employee tasks, the kind

of activities they engage in and their responsibilities.

“In 2009, a PET scan was $75 — in 2015 it was $1,600. My employees can’t afford that. In 2016, we’ve gone to a platinum plan, but in a year or two it will be subject to a Cadillac tax and we won’t be able to afford that.”

— Vancouver Business Owner

“We train each employee to be competent at all

aspects of the office, but finding people who

show up on time and actually want to work

has been trying at times. Computer skills are always a premium.”

— Pullman Business Owner

more thanof projected job openings

will require some education beyond high school

will require mid-level education or higher

3/4

2/3

Next Steps It is imperative that state and federal officials foster a regulatory

environment that supports small business growth so Washington

can continue to be a global leader in innovation, business develop-

ment and job growth. AWB will continue to work with its partners

to advocate for business-friendly policies that encourage innovation

and job growth including:

• Supporting a regulatory environment that provides oppor- tunities for new business, for existing businesses to grow and for job growth and career opportunities for our citizens.

• Working with the state’s workforce and education system to foster partnerships with business and enable the system to develop a workforce with skills that are in demand by business.

• Working with state and federal officials to enact rules and regulations that ensure health care is affordable and accessible to all.

“Many qualified people left our field during the recession and supplies of qualified personnel are smaller. We’ve had to reach out of state to get people.”

— Ellensburg Business Owner

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