The Kansas Business Environment

Prepared for
Kansas Inc.

by:
Norman Clifford, Associate Scientist,
Robert Glass, Assistant Scientist,
Charles E. Krider, Professor of Business

EXECUTIVE SUMMARY

Methodology

A telephone survey of 800 Kansas businesses was conducted during August and September of 1996. The population consisted of those firms which would in general face competition from out of state businesses. A stratified sampling procedure was used, in which the population was broken into six different categories composed of small, medium, and large firms in manufacturing and service industries. The purpose of the survey was to evaluate the Kansas business climate from the perspective of Kansas businesses.

Results

Firms in Kansas generally rated the business environment as good. Firms were especially satisfied with the quality of life in Kansas, the state's labor force, and public education in the state. They also reported generally positive attitudes towards the availability of technology, physical infrastructure, the availability of financial capital, and state and local government incentives. Businesses generally felt that state regulations were a strength rather than a weakness of the state's business environment. A large majority of firms did not export outside the United States and did not feel the need to do so. Businesses were less sanguine about the Kansas tax structure and the relationship between the burden of taxes and the benefits conferred upon business by the state. Although they did not feel that it was crucial to the business environment, firms reported the lack of availability of cultural activities as a weakness of the Kansas business climate. The precise areas that seem in most need of attention, according to the firms that were surveyed, are (1) the property tax on commercial and industrial real estate, (2) the property tax on machinery and equipment, and (3) the availability of air service in the state.

Implications

Although the overall conclusion of this report is that firms in general rate the Kansaas business climate as good, they indicated some specific areas that are in need of improvement. The policy implications, from the point of view of the businesses in the survey, are listed below.

1. The overall Kansas business environment is good; therefore changes should take the form of fine tuning rather than a major overhaul of the state's economic development programs and activities.
The state has had a program of economic development strategies in place for ten years. Thus, the business environment survey could be viewed in part as collecting information on firms' satisfaction with that program. The survey's clear finding that firms are satisfied with the Kansas business environment generally is consistent with the conclusion that firms find the state's overall economic development program to be working well. Thus, the appropriate course is to pursue a modest agenda in specific areas that are found to be lacking.

2. The Kansas business climate would be substantially improved by reducing or eliminating the property tax on business equipment and machinery.
The state and local tax structure was rated the weakest part of the Kansas business environment by the firms in the survey. The property tax on business equipment and machinery was rated as a strong or somewhat negative effect on the firm's investment decisions by 70 percent of the respondents. The rate of investment affects the productivity of labor in the short run, but it affects productivity even more in the long run; for example, as a sequence of lower investments accumulates to cause a very significant reduction in the level and age of the capital stock. Since labor productivity is the single most significant determinant of the well being of the average Kansan, actions that have effects on the level of investment by firms can have important consequences.

3. The property tax on commercial and industrial real estate should be reduced.
The property tax on commercial and industrial real estate was rated as a strong or somewhat negative effect on the firm's investment decisions by 73 percent of the respondents, the highest total for any specific tax. Although some investments in new equipment, such as updating an existing plant, may not require any additional real estate, others, such as an expansion of an existing plant or the opening of a new plant, may require the firm to acquire additional land. Thus, a tax on commercial and industrial real estate could well influence the rate of investment in equipment and thereby affect the productivity of labor.

4. The efficiency of the workers compensation system should be improved to provide reasonable costs to employers while maintaining protection for employees.
The workers compensation tax was rated as a strong or somewhat negative effect on the firm's business decisions by 68 percent of the respondents, and a strong negative effect by 40 percent of the respondents. This was the highest strong negative rating of any individual tax. The revenues from the workers compensation tax directly benefit workers, so simply reducing the tax would not necessarily benefit Kansas workers, since the gains from increased productivity could be more than offset by the losses of workers compensation benefits. Thus, the implication is that the efficiency of the workers compensation system should be improved to provide reasonable costs to employers while maintaining protection for employees.

5. Attention should be paid to the availability of air services in the state.
Air services were rated the lowest among the three kinds of infrastructure on the survey. Even in urban counties, only one in five firms rated air services good or superior in terms of suitability to their business activities. Although it seems unlikely that good or superior air services could be made available uniformly across the state, an effort should be made to identify places where significant improvements can be made.

6. Transportation services for mid-sized counties should be improved.
Firms in mid-sized counties ranked their highway system as inadequate twice as often as firms in either rural or urban counties. They also ranked air services as inadequate more often than either urban or rural firms. Thus, the transportation infrastructure in general seems to be further from the needs of firms in mid-sized counties, and efforts should be focused there.

7. The availability of affordable housing in rural and mid-sized communities should be addressed.
Although 72 percent of the surveyed firms said that the availability of housing was not a constraint on their ability to expand, the seriousness of the housing constraint varies significantly between urban and non-urban areas. While only three percent of firms in urban counties found availability of housing to be a serious constraint, 14 percent of the firms in mid-sized counties and 18 percent of the firms in rural counties reported it to be a serious constraint. Thus, availability of housing is acting as a serious constraint on expansion for a significant number of firms in rural and mid-sized counties, and presumably on the ability of new businesses to locate in those counties.

8. Access to technology should be made available to all firms.
Although fewer than one in five firms reported access to technology as a weakness of the Kansas business climate, it is still significant that a minority of firms see access to technology as a problem. Thus, efforts to make technology available to all firms should be continued and enhanced.