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Regional Operating Expenses: A Case Study

Business Operating Costs In The Four U.S. Regions Can Vary By Millions

By Lee Burlett

So you want to save between $4 million and $8 million in five years for your manufacturing operation? Try moving or expanding it to the American South, where the difference in costs for fixed expenses such as labor, workers' compensation, unemployment insurance, corporate taxes and construction/leasing is dramatically lower in the South than what you may be paying now in any of the other three U.S. regions.

The following is a case study centering on five fixed expenses and how those expenses compare in the four U.S. regions: South, Midwest, Northeast and West. The five fixed expenses are payroll (average per region), workers' compensation (average per region), unemployment insurance (average per region), corporate taxes (average per region) and construction costs (average costs to build your facility per region). For the study, we will be comparing these costs for a 100-employee, 100,000-square-foot facility in SIC 37. Final regional tallys can be found at the end of this article.

LABOR COSTS

Regardless of where you locate your next expansion, you're going to have a payroll. Other than state income tax liability, nothing can be done to offset how much you end up paying your employees. Pay too little and you're not going to get the labor quality you need. Pay too much and it will undoubtedly have a negative effect on your bottom line. Pay competitive wages, those that slightly exceed the state average for the type of job you're creating and you'll be well on your way to finding the quality of labor you are seeking.

Let's look at average annual pay and average manufacturing wages in the four regions of the U.S. Not surprisingly, as you can see by the adjoining chart No. 1, the Northeast leads all U.S. regions in average annual pay with $38,410.

CHART NO. 1

Average Annual Pay

Annual Pay For 100 Employees

Northeast $38,410 $3,841,000
West $32,500 $3,250,000
Midwest $31,780 $3,178,000
South $31,200 $3,120,000
Source: Bureau of Labor Statistics 2001

MANUFACTURING WAGES

But since this is a manufacturing facility we are using in the study, let's take a look at average manufacturing wages in the four U.S. regions.

CHART NO. 2

Manufacturing Labor Costs

Annual Pay Annual Payroll For
100 Employees

Northeast $45,040 $4,504,000
West $39,995 $3,995,000
Midwest $43,340 $4,334,000
South $37,710 $3,771,000
Source: Bureau of Labor Statistics 2001

CONCLUSION

As you can see by studying chart No. 2, the South features the lowest manufacturing wage of any U.S. region. In fact, the South's average manufacturing annual pay is about $7,500 less per employee than what employers pay in the Northeast. That's a savings of almost $750,000 a year in payroll when operating a 100-employee manufacturing plant in the South as opposed to the Northeast. Over the course of five years, it's an additional $3.8 million in payroll you'll shell out in the Northeast when compared to the South for a 100-employee operation. In five years your 100-employee Southern-based business will save $2.8 million in payroll when compared to the Midwest and $1.1 million when compared to the West. You might be interested to know that Connecticut has the highest annual manufacturing average pay in the U.S. at $55,700 and Mississippi has the lowest with $29,400.

WORKERS' COMPENSATION PREMIUMS

This might be every company owner's least favorite fixed extraneous cost item. As you can see by studying chart No. 3, workers' compensation costs to a company vary greatly with each U.S. region.

By adding each state's annual workers' compensation outlay for a 100-employee company in SICs 35, 36 and 37, we came up with an average per state. Each state's average was then added to the other states in that region to come up with an annual regional average for workers' compensation outlays. It must be noted that in almost every state, workers' compensation costs for SIC 37 are much higher than SICs 35 and 36. This increases each region's annual average above the average of what companies in SICs 35 and 36 would pay annually in workers' compensation in almost every case.

CHART NO. 3

Average Annual Workers' Compensation Premiums

Northeast $324,972
West $331,857
Midwest $327,600
South $278,747

For companies with 100 employees in SIC 35-37. Source: Bureau of Labor Statistics 2000

UNEMPLOYMENT INSURANCE PREMIUMS

While not as frustrating and costly as workers' compensation premiums, unemployment insurance is no walk in the park for a business owner employing 100 people. As you can see by the information found in chart No. 4, unemployment insurance premiums vary widely from region to region.

For a manufacturer employing 100 people in the Northeast, expect to pay, on average, $29,176 annually on unemployment insurance premiums. Unemployment insurance premiums in the West aren't much cheaper than those found in the Northeast for a 100 employee company. There you'll pay $28,087 on average annually. It drops significantly in the Midwest where companies employing 100 will pay on average $15,071 annually. It isn't until you look at the South's annual average for a 100 employee operation before you realize just how low these premiums can go. In the South, expect to pay about $10,654 each year in unemployment insurance for a 100 employee operation.

CHART NO. 4

Average Annual Unemployment Insurance Premiums

Northeast $29,176
West $28,087
Midwest $15,071
South $10,654

For companies with 100 employees in SIC 35-37. Source: Bureau of Labor Statistics 2000


It must be noted that the Northeast's annual unemployment insurance premium average is skewed by the incredibly high cost of those premiums in Connecticut, New Jersey and Rhode Island. The same can be said for the West's annual average, which factored in Alaska, Hawaii, Oregon and Washington's absurdly high unemployment insurance premiums.

CONCLUSION

Summarizing, you'll pay $18,522 more in the Northeast, $17,433 more in the West and $4,417 more in the Midwest for unemployment insurance premiums each year than you would in the South for a 100-employee business.

CORPORATE INCOME TAXES

Corporate taxes run the gamut in the U.S. Some states, such as Texas in the South, Nevada, Washington and Wyoming in the West, and South Dakota in the Midwest, are free of corporate income tax. On the other hand, states in the Northeast such as Connecticut, Massachusetts, New Jersey, New York, Pennsylvania and Rhode Island tax corporate revenues nine percent or more.

Chart No. 5 shows an average corporate state tax rate for each region of the U.S. We have gone further to show the total average annual corporate tax expenditure per region for a 100 employee manufacturing operation theoretically grossing $10 million each year, without regard to certain state income thresholds, levels or write-offs.

CHART NO. 5

Regional Corporate Tax Rate

Including All *Only States **Annual Taxes For Company
States With Corp Tax Grossing $10 Million

Northeast 8.69% 8.69% $869,000
West 5.08% 6.60% $660,000
Midwest 6.24% 6.81% $681,000
South 5.36% 5.31% $531,000

*Regional corporate tax rate only factoring in states that have corporate tax rate. **Not including any state mandated levels or thresholds. Costs are annualized. Source: U.S. Dept of Commerce

CONCLUSION

As you can see by the adjoining chart No. 5, the West took low honors for corporate income tax for all U.S. regions followed by the American South. However, the West's average is skewed somewhat because three states in the West (Nevada, Washington and Wyoming) don't have a corporate income tax. The South (Texas) and the Midwest (South Dakota) are the only other regions with a state void of corporate income tax. Every state in the Northeast charges a corporate income tax, with the lowest tax rate of 6.215 percent belonging to Maine. Conversely, Connecticut, with 10.5 percent, has the highest state corporate income tax rate in the nation. With all states void of corporate tax thrown out of the equation, chart No. 5 also shows a regional corporate tax average rate and an average tax paid for companies grossing $10 million.

REGIONAL CONSTRUCTION COSTS

While there are many communities throughout the U.S. that offer incentives relative to the costs incurred in building a factory or a warehouse facility, few of those programs will directly affect the cost of the structure itself. Most of those incentives deal with other infrastructure improvements such as road, sewer and other infrastructure.

The following profiles the average cost of building a tilt-up factory or warehouse in the four regions of the U.S. Regional figures were tabulated by averaging the cost of building the facility in a suburban location in the 10 largest markets of each region. The total cost indicated is based on a 100,000 square foot facility. The total cost includes average regional real estate taxes, insurance (fire and liability), structural and roof maintenance and common area maintenance expenditures on the building for five years. The cost does not include any equipment in the facility.

CHART NO. 6

Average Regional Construction Costs
100,000 Square Foot Tilt-Up Concrete Structure

Northeast $4,778,000
West $4,697,000
Midwest $4,165,000
South $3,189,000

Note: Average cost based on building a 100,000 s.f. structure in a suburban location in the top 10 markets of each region. Taxes, insurance and maintenance over five-year period included in total cost. Source: Landauer

CONCLUSION

By studying chart No. 6, clearly there is a big difference in the cost of building a 100,000 square foot facility in the Northeast, West and Midwest than in the South. On average, the most expensive U.S. markets in which to build such a facility are New York, Boston, Detroit, Minneapolis and San Jose. The least expensive places to build in the 40 largest U.S. markets are Tampa, Jacksonville, Memphis, Columbus, Ohio and Salt Lake City.

COSTS OF LEASING EXISTING FACILITIES

For most of this case study, where applicable, we have used the top 10 markets in each U.S. region to find an average expenditure for each region. For the sake of variety and fairness, let's find an average cost for each U.S. region in leasing existing warehouse or factory facilities by using lease costs found in smaller markets. We'll take the same 100,000 square foot facility and find an average annual net lease based on lease averages found in five small markets representing each region.

Northeastern markets used in the study include Buffalo, New Haven, Syracuse, Portland, ME, and Harrisburg. Representatives of the West include Colorado Springs, Stockton, Tacoma, Medford and Reno. Charleston, SC, Chattanooga, Monroe, LA, Fort Smith, AR, and Corpus Christi represent the South and Grand Rapids, Fort Wayne, Des Moines, Lansing and Omaha are representing the Midwest in this study.

CHART NO. 7

Average Annual Leasing Costs For 100,000 Square Foot
Warehouse/Factory

Northeast $384,000
West $401,000
Midwest $312,000
South $202,000
Source: Landauer

As you can see by examining chart No. 7, the South is your low price leader again. Of the markets used in this study, Monroe, LA is far and away the cheapest place to lease a warehouse or factory, followed by Fort Smith and Corpus Christi in the South, and Fort Wayne in the Midwest. Of those used in the study, the most expensive markets to lease a 100,000 square foot warehouse or factory include New Haven, Colorado Springs and Lansing.

FINAL CONCLUSION

So let's tally these costs up. After five years of operating a 100-employee, 100,000 s.f. manufacturing concern that's grossing $10 million in revenue annually, payroll, workers' comp, unemployment insurance, state corporate taxes and your building are going to cost you $33,413,740 in the Northeast. On average, you're going to pay $29,771,435 for those same expenses in the West and $30,953,355 in the Midwest. But in the South, those expenses are only $26,146,005 after five years.

In other words, by opting for a Southern location for your company, you'll save $7.3 million in five years when compared to the Northeast, $3.6 million in savings over the West and $4.8 million when compared to the Midwest. It's your money!

You can e-mail Mike Randle, Editor of Southern Business & Development, with comments on this article at mike@sb-d.com

Columbus, MS

Old Dominion Electric Cooperative

 Opelika, AL

Fayetteville, NC

Guntersville, AL

Aiken, SC

South Carolina

Alabama Development Office

Martinsville-Henry County, VA 

Marion, AR

The Memphis Region

Entergy Louisiana

 New Braunfels, TX

North Carolina

Mid America Industrial Park

Tennessee Valley Authority

McAllen, TX

Tupelo, MS

Tennessee-Tombigbee Waterway

Northeast Tennessee Valley

Tunica County, MS

Winston-Salem, NC

Little Rock, AR

 Louisiana

Roanoke, VA

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