On the most reliable measures of business climate, Arizona ranks in the middle of the states. The most important business location factors that can be influenced by public policy are labor force quality and availability, and physical infrastructure quality and availability. Education is a key component of labor force quality. Arizona ranks quite poorly among the states on educational attainment, quality, and achievement. Arizona’s physical infrastructure is rated as average, but it is at risk of becoming a deterrent to economic development due to limited public-sector investments over the last few decades.

The next most important category of location factors is business costs. Arizona ranks in the middle of the states. However, on the public-policy-determined component of business taxes, Arizona compares favorably.

In order to raise the state’s economic competitiveness, investing in Arizona’s public educational system is the top priority. The second priority is to invest in physical infrastructure, especially transportation. However, after three decades of frequent and significant tax cuts that resulted in large reductions in public spending, Arizona’s state government does not currently have the ability to increase its investments in education and infrastructure. Since both business and individual tax burdens are low in Arizona, considerable increases in public revenue could be achieved without producing a negative economic effect. Similarly, if revenue increases were implemented in a progressive fashion, the standard of living of lower-income Arizonans would not suffer.

Once the state invests significantly in education and infrastructure, it should have more success in its economic development of high-paying, 21st-century jobs. Currently, traded clusters — which drive the economy and mostly pay considerably higher wages than nontraded clusters — make up a below-average share of Arizona’s economy. They disproportionately consist of less-skilled and lower-paid activities relative to the national norm. The state has relatively few strong traded clusters as defined by employment concentration.

Among the traded activities that Arizona might continue to target or newly target in the future are aerospace vehicles and defense; semiconductors and related information technology; medical devices; communication services; and higher-paid industries in the financial services, insurance services, and business services clusters.

An improved ability to compete for high-paying traded clusters should reverse Arizona’s downtrend in measures of productivity and prosperity, which currently are considerably below the national average.