The Washington region’s most business-friendly jurisdiction is finding it harder to make friends these days.
Optimism for Virginia was in short supply as a high-powered group of economists and business leaders gathered this week at George Mason University for an unusual summit on the state’s suddenly sluggish economy. With an undertone of concern for the commonwealth’s future, the panelists cited overbearing taxes, a shifting job base and strangling government regulations as the major problems holding back business development and overall economic growth.
In one sign of the times, Virginia’s growth in gross domestic product stalled completely in 2014, with neighboring states West Virginia (up 5.5 percent), North Carolina (up 1.4 percent) and Maryland (up 0.8 percent) in positive territory.
“We’re likely to grow, but it’s not going to be impressive growth,” economic forecaster Terry Clower, a professor of public policy at George Mason University, said at the Monday morning gathering. “Even though we’ve had good news coming out of the region, underlying we are still heavily dependent on the federal government.
“We’re no longer a leader among the major metro areas, so we’ve lost a little bit of those bragging rights,” he added.
The U.S. economy overall was staggered by the Great Recession from December 2007 to June 2009, but Virginia’s sterling reputation as a business-friendly haven in the storm, anchored by its defense industry and federal jobs base, has taken an unexpected beating in the rebound. Particularly painful for Virginia were the federal government’s “sequester” budget limits, still biting into the state’s economic base.
“As the stimulus spending came down, we saw a dramatic change. Between sequester and this little thing called the government shutdown, 2013 and 2014 weren’t exactly stellar times,” Mr. Clower said. “This economy wound up in a position that it hasn’t really been used to seeing for a very long time, if ever.”
As Virginia was posting a 0.0 percent economic growth rate for 2014, the U.S. economy as a whole expanded by 2.2 percent. Analysts said the overall U.S. economy has achieved modest gains, but the commonwealth has failed to keep up with the rest of the country.
Virginia is heavily dependent on the federal government, which accounts for roughly 30 percent of the state’s economy.
Thirteen of Virginia’s top 20 employers are either public-sector companies or contractors that are highly dependent on the public sector, according to a report released last year by Virginia Gov. Terry McAuliffe. But fewer federal jobs and reduced government spending have forced political and entrepreneurial state leaders to rethink their business strategies.
“We’re the No. 1 recipient of Department of Defense dollars,” Mr. McAuliffe said during a discussion at the Brookings Institution in February. “That’s great when they are spending money, but when they’re cutting back through defense cuts and sequestration, we get hit harder than anyone else.
“Our whole emphasis is bringing in businesses and building businesses that are less reliant on the federal government,” he added.
More cuts to come?
The prospect of additional sequestration cuts has local business leaders clearly worried as Virginia aims to reach pre-recession economic levels. A 15.2 percent decline from 2011 to 2014 in federal spending and a significant payroll reduction of $1.16 billion also have worried local businesses.
“Are we going to have sequester in the next year? That’s one of the big questions facing this region,” Mr. Clower said.
Another big question is the quality of the workforce, which McLean investment adviser Stephen Cassaday said Monday is contributing to Virginia’s economic woes.
“There is no question that there has been job growth,” said Mr. Cassaday, president of Cassaday and Co. “Increases in hiring not only in Virginia but nationally have been pretty healthy, but on a microperspective, as a small-business man, we’re having trouble finding qualified workers, especially college graduates.”
Virginia’s traditionally high ranking among the most welcoming states for business investment also has taken a hit. What was once thought of as a perennial leader in U.S. business affairs is now failing to crack the top 10 in some surveys. Forbes and CNBC ranked Virginia as the fourth and ninth best state, respectively, for doing business in 2014, but even here there were warning signs: Forbes ranked the state 33rd in growth prospects for businesses, and CNBC put it in the bottom half among U.S. states for the overall strength of its economy and the cost of doing business.
The uneven pace of the overall U.S. recovery is also being felt in Virginia, the George Mason summit attendees were told.
“You have this sense of frustration around the United States,” said Martin Regalia, senior vice president for economic and tax policy at the U.S. Chamber of Commerce. “I wish I could tell you things are getting better, but they’re really not.”
A report released in May by the Washington-based National Federation of Independent Business said upticks in job creation and small business optimism are signs of an improving economy, but they are “nothing to write home about.”
“The survey results confirm that the economy is moving ahead, but at an uninspiring pace,” said NFIB Chief Economist Bill Dunkelberg.
The report indicates that businesses are growing frustrated with taxes, government regulations and red tape, naming them as the biggest problems facing their companies today.
Virginia ranks 27th among states with the best business tax climates, according to the Tax Foundation’s State Business Tax Climate Index.
“For most of our members, they haven’t seen any significant movement on tax reform at the federal level,” said Nicole Riley, state director of the NFIB in Virginia. “Tax reform at the state level is badly needed for our members.”