Education, Energy and Economy Lead Washington to Top Spot in Best States Ranking

The Evergreen State takes the top spot again in the U.S. News Best States ranking on the strength of its tech sector and other industries.

The sun rises over Seattle. The Seattle area’s quality of life combines with large tech employers such as Amazon and Microsoft to draw a huge amount of tech talent to the area and retain those educated at the University of Washington, home to a computer science program ranked sixth in the nation by U.S. News.

SEATTLE—BUOYED BY ITS rapidly expanding economy, Washington state is on a winning streak.

For the second time, Washington has been named No. 1 in the U.S. News Best States ranking and is the first state to earn the top spot twice in a row.

Washington's low-carbon energy system and robust secondary education systemcontinue to rank among the nation's best, as does the state's economy, the fastest growing in the nation. Shortcomings have proved persistent, too, as the state's high living and labor costs leave it in the middle of the pack when it comes to opportunity for its residents, according to the Best States rankings.

With its progressive politics, flat taxes and industry-oriented university system, Washington has solidified its place as a tech-sector powerhouse. Amazonrecently surpassed Boeing Co. – already struggling with the grounding of its 737 Max jet before the coronavirus pandemic curtailed air travel – as the state's largest private employer, by number of employees. Google and Facebook employ thousands of workers in the Seattle area, an expansion state leaders hope to see continue.

Beyond the big names, the state has also emerged as a national leader in business incubation. The state, ranked fifth for venture capital per U.S. News, saw nearly 200 businesses receive venture capital funding in 2020. That strength comes as tech entrepreneurs who made their fortunes during the state's rise look to grow a new generation of Washington-born businesses.

"In the almost 15 years I've been in venture now, it just keeps growing. There are more opportunities, more founders," says Tim Porter, a managing director at Madrona Venture Group, one of Washington's oldest venture capital firms. "Even through this super challenging year, Seattle and Washington are going to come out on the other side stronger."

Building a Broad Base

Washington has sustained a 5% annual growth rate in its gross domestic product during the five years preceding the coronavirus pandemic, according to data from the Bureau of Economic Analysis. Chris Green, who leads the Office of Economic Development and Competitiveness in the state's Department of Commerce, ticks through the industries that enabled the state's economic expansion.

Tech is booming, of course, but the state has also seen expansions in the life sciences, clean energy and space projects. Despite the trade war with China, the state's agricultural sector remains strong. Timber and other forest products – the driver of the Evergreen State's economy a century ago – are enjoying a renaissance.

It's a dramatic change for a state once tied to a single industry – aerospace – and employer – Boeing.

"We were a manufacturing and aerospace state, and that still is true," Green says. "But the emergence of these big, monolithic tech companies based here and companies that are setting up their secondary locations in Washington have really been a boon to the state."

In the decade since the 2008 recession, the state has focused on diversifying its economy to soften future downturns, Green says. That recession was born in part in Washington state; Seattle-based Washington Mutual was America's largest savings and loan company before its implosion early in the financial crisis. WaMu's collapse became the largest bank failure in U.S. history.

The pandemic recession has landed more softly on Washington, though itsunemployment rate has still spiked to 7% and is among the highest in the country. Green says the current downturn is in part a "small business recession," that will require a fresh response.

Still, Green is hopeful Washington can rebound once COVID-19 is contained. Madrona Venture Group's Porter shares this hope.

'A Critical Mass'

Since 1995, Madrona has funded and guided 15 companies through to an initial stock offering. Madrona nurtured real estate titan Redfin (which shares Seattle with its chief competitor, Zillow) and Accolade, a Seattle-based health technology company valued at $1.2 billion when it went public in July. Madrona co-founder Tom Alberg, who joined Amazon's board the year after Madrona was founded, often notes that not every investment has been a "home run," but that, "if you don't invest in a HomeGrocer" – a Seattle-area startup that cratered spectacularly following a 2000 IPO – "you'll never invest in an Amazon.com."

The big tech successes in Seattle and its suburbs have helped entrepreneurism flourish in Washington.

While Washington trails California, New York, Massachusetts and, narrowly, Texas in startup funding, statistics in The PwC/CB Insights MoneyTree™ Reportshow Washington saw $3.4 billion in venture capital investment flow to 194 companies in 2020. The state has ranked in PwC's top 10 for startup investment every year since 1995.

As Porter describes it, Washington's economy has "hit a critical mass," and now has businesses building businesses.

The Seattle area's quality of life combines with large tech employers such as Amazon and Microsoft to draw a huge amount of tech talent to the area and retain those educated at the University of Washington, home to a computer science program ranked sixth in the nation by U.S. News. While many recruits stay with their employers, Porter says, "a lot of folks leave and start their own businesses."

"Seattle is just a great substrate for building businesses," Porter says.

Equity remains elusive in tech, and in much of the rest of Washington life. Washington's gender gap in employment is among the largest in the nation, and only in Colorado, California and Hawaii is housing less affordable. Housing costs have continued to increase during the recession.

Venture capital has broadly gone to white men. Nationally, only about 13% of venture capital dollars go to startups with a woman on the founding team, a Harvard University research group found, and only 1% of venture capital-backed founders are Black.

Porter says Madrona and many of his contemporaries have been working to inject racial and gender parity into the industry, both because of ethical considerations and because diversity makes good business sense.

"Companies that start with a diverse employee base and inclusive culture do better over time," he says. "It's been a top-of-mind issue here in Seattle, and it should be."

Seattle's progressive streak has, in that regard, been a strength for the tech industry. But so has Washington's regressive tax structure.

New Taxes on the Horizon?

The conflict between those competing realities had been intensifying for years, as elected officials and activists called for the imposition of an income tax or capital gains tax. Neither exists in the state, which is funded primarily through sales taxes and, at the local level, property taxes.

Tensions over a succession of tax proposals were already a defining political division in Seattle. Now, with state coffers drained during the pandemic, state lawmakers are considering imposing a 9% tax on capital gains beyond $25,000.

Advocates say that revenue is badly needed to shore up social services and provide housing, and invest in overdue improvements to state infrastructure. Rising quickly on that to-do list are improvements to the broadband infrastructure in a state that includes vast swaths of rural land.

On paper, Washington's broadband system is the nation's best. Federal Communications Commission records show 100% of the state is served by broadband internet. But that's not the whole picture.

FCC records show that 2% of urban residents and 33% of rural residents can only access the internet at relatively low speeds. An analysis conducted by Microsoft for the state shows that to be too rosy a view; in Ferry County, an economically stagnant rural area in northeastern Washington described by the FCC as having 100% broadband coverage, only 2.2% of residents were able to hit the 25 megabits per second download speed the FCC maps suggested they could attain.

A massive investment is necessary to deliver working internet to the state's rural communities, including many of its 29 tribal reservations, and underserved urban areas. The Washington Independent Telecommunications Association, a telecom industry trade group, puts the price tag at $5 billion.

While the total cost is daunting, the pandemic demonstrated the inequity in the current system, state Sen. Lisa Wellman said.

"We had children sitting in cars in parking lots doing their homework" because they couldn't access the internet at home, Wellman said during a Feb. 3 hearingin the state Legislature. "This was not acceptable. … This is not what we want for education."

Wellman's fix, one endorsed by some Republicans and conservative Democrats, is legislation that would enable nonprofit utilities already providing electricity and water to sell broadband internet.

Aaron Wheeler, an employee of the Suquamish Tribe, told lawmakers he could have high-speed internet wired to hundreds of tribal members before summer if the Legislature relaxed restrictions keeping public entities out of the broadband market. Though the fiber optic lines run under tribal land and residents can see Seattle across Puget Sound from the reservation, the antique equipment serving them can't accommodate telehealth appointments or online learning.

Broadband could, in Wellman's view, reinvigorate large areas of the state currently cut off from the booming Seattle economy that again made Washington the best state in America.

By freeing creating space for publicly owned broadband, she said, "we can change the face of rural Washington."