Housing Complex

Debunking the “D.C.’s Dead Last in Business Friendliness” Meme

Not the scourge of small businesses, I promise.

On a fairly regular basis, business leaders and certain councilmembers will cite studies that put D.C. at the bottom of the heap in terms of "business friendliness," usually as part of an argument that taxes are too high and regulations too onerous. Another of these studies was just released by the Small Business and Entrepreneurship Council, a research and advocacy group that spends much of its time trashing regulation of things like fracking and greenhouse gases.

Now, I don't mean to brush off concerns that D.C. sometimes makes building, trying, and starting new things rather difficult. But let's not kid ourselves that these "studies" are objective rankings that our policymakers ought to take very seriously–this latest, at least, is based on an ideological free-market framework that represents only one dimension of what makes a place good for business. Let's take a look at the SBEC's methodology, shall we?

  • The primary metrics used to put together the ranking are taxes on income, property, sales, capital gains, unemployment, and "death." It's fair to look at the overall tax burden, but capital gains and estate taxes affect primarily wealthy investors who trade on Wall Street and then die with a large amount of assets, not "small businesses." I'd argue that most entrepreneurs probably aren't thinking much about those when scoping out a place to launch a startup.

  • The index also weighs "protecting private property," docking a state for its willingness to use eminent domain. They didn't include D.C. in this ranking, but if they had done so honestly, it should weigh in D.C.'s favor: The Department of Housing and Community Development has been using eminent domain (along with taxation) to return properties to productive use, which is as effective an economic development strategy as any.
  • Quality public education is an important factor in a business' willingness to come to a given place. But the SBEC's  "education reform" metric focuses almost exclusively on "choice and competition" in education, meaning vouchers, charter schools, and home schooling. That's one way of looking at educational quality, but not an unbiased one.
  • The index includes points for "highway cost efficiency," or the performance of roads for the amount of money spent on them. The District is also not included in this metric, but other forms of transportation are not weighed at all, and if they were, D.C. would do well: Businesses are very attracted by proximity to Metro and good bus lines. Not including public transit is a huge oversight in the study.
  • The SBEC considers more government employees to be a negative for business friendliness, using them as a "proxy for regulations," and also figuring that government workers are inherently less productive. They explain: "After all, with regulations, rules, and mandates come regulators, i.e., those dreaming up, writing, passing, monitoring, and enforcing such measures...But the costs of government employment reach beyond the mere number of regulators. A large number of government employees also means that a significant share of individuals are basically performing far less productive work than if they were in the private sector." The District obviously gets dinged on this point–the city's main industry is government–but not in a way that would discourage entrepreneurship. First of all, the vast majority of D.C.'s government employees are busy regulating the rest of the country, not the city itself. Second of all, how does the presence of a bunch of people with comfortable incomes who need goods and services create a hostile environment for small businesses, exactly?
  • Being the only solely urban jurisdiction on the index, the District also doesn't fare well on the crime metric.
  • Besides the things it does consider, the study is also notable for the things it doesn't: Rent, for one, which is a huge business cost (and admittedly not one that would raise D.C.'s ranking). Business incentives, of which D.C. has a dizzying array. There's also the regulatory review process of getting permits and licenses, which SBEC has no way to measure. I already mentioned public transportation.  These are things that don't square with the SBEC's ideological approach, or the idea of objective rankings generally, and so weren't included.

More holistically, let's look at the kinds of places this study prizes: South Dakota, Nevada, Texas, and Wyoming fill out the top four. If D.C. wanted to be more like those places, I suppose we could slash taxes and regulations. But would that really make the District a more attractive location to start a business? Census results show that D.C.'s population is coming back, beating the average growth for the Northeast region. Given that the District is now a very fertile place to start a business, but is also troubled by some serious inequalities, why not leverage that attractiveness to help others tap into growth?

UPDATE, 1:30 p.m. – Commenter Allison brings up a good point: Getting permits and licenses in D.C. can be really expensive. But such fees aren't measured in rankings, because it's difficult to find comparables in other states. If we're going to talk about D.C.'s business climate, let's talk about real things, not made-up indices.

Photo from Awiseman under a Wikimedia Commons license.

  • thankYOU

    FINALLY!!!!! I have been soooooo tired of CM's repeating this ridiculous study. Thank you for this article....please send it to all CM who clearly didn't take the time to read and unpack the biased study.

  • Allison

    As someone who recently tried to start a small business in DC, I actually agree with the results (if not the formula for getting there.)

    I was told over the phone by two different DCRA employees that it would cost $150 in one-time fees to start my home-based business. When we filled out the forms and went to DCRA, we were told that I was wrong, 'no one would ever tell you that' and it was actually $700 every two years. For a hobby that made net ZERO money last year, but wanted to be legitimate so that I can GIVE DC MONEY for sales tax, it's ludicrous that it would cost me $350/yr for the priviledge of giving DC money.

    In California, where my sister has a small business in her home, the cost is $35. Yes, that's right, $35. And I bet DCRA wonders why there aren't more small businesses in DC, or why there are so many businesses operating illegally and not collecting sales tax. Want a way to fill the budget gap? Give a one-time amensty to small businesses (or better, reduce start up costs to less than $100), to encourage business owners to remit sales tax to the government. Very simple, yet DC just doesn't care enough about its economic growth to make this process simple.

    For me, I decided it wasn't worth it, and will not be expanding into a business.

    Long rant, big problem.

  • Rick Mangus

    You don't need a study to figure-out that this town has a hostel and anti business climate, just read some of the stories in this column!

  • JustMe

    The formula, of course, is ridiculous: if Wyoming and South Dakota are such awesome places to start a small business, then why is everyone starting and working for small businesses in California and New York?

    On the other hand, just scroll down to the Big Bear Cafe thread to see why there is something to the point that DC is a bit small-business-hostile.

  • Skipper

    Allison: How does that $700 amount break down?

  • JustMe

    According to DCRA's website, it costs $110/year to maintain a business license with about an additional $115 the first year in application fees. So it works out to $225 the first year and $110/yr thereafter.

    The problem is that in DC, when someone says, "I'm starting a business!", everyone from the local government to the neighbors thinks, "this person must be up to no good."

  • Rick Mangus

    'JustMe', you are so right on that comment, but DCRA forgot to include the DC Shakedown fee for the first year!

  • RT

    DCRA needs to be dissolved and started from scratch. Starting a new business shouldn't be penalized. They have such a hater, anti-business, punative mentality for EVERYTHING. They should be on their knees helping you do things, not just there to say no to everything and finding reasons you can't.

  • Skipper

    Is the issue DCRA or the DC laws and regulations they have to enforce?

  • small biz owner

    DePillis has obviously never started, owned, or operated any kind of independent business in DC.
    Even an Avon Lady, selling a few lipsticks, needs about $700 in licenses to get started. A stay-at-home mom needs a license to do data entry on her home computer for cash while her kids nap. Not like they're practicing medicine or law.
    Take a chance on not getting the license? The penalties are steep. Don't report it on your DC income tax? They'll nail you if someone sends in a 1099.

    It starts with the smallest businesses and increases as they get larger.
    Most of the DCRA fees are not honest efforts to protect consumers. They're "revenue enhancement" for a greedy government that thinks business has endless deep pockets.
    Why do you think all those tall office buildings exist across the river?

  • JustMe

    Why do you think all those tall office buildings exist across the river?

    Is THAT where all the home-based businesses are moving to?

    A stay-at-home mom needs a license to do data entry on her home computer for cash while her kids nap.

    Wrong. Consultants (like people who get 1099s) do not need a business license. Only people who have registered businesses with a separate tax ID number need one. Personally, I think any more than $100 in up-front costs to register a business is absurd, but let's not just make stuff up. Joe Contractworker who files a schedule C under his own name doesn't need a business license.

  • Sally

    It's an odd juxtaposition reading this story on how hard it is to do business in DC and then reading the stories on the pawnshop in Ward 4 and the Big Bear Cafe in Ward 5.

  • Rich

    SBEC should be called a position paper mill, not a "'research' and advocacy" group.

  • JustMe

    it's almost as though the SEBC isn't actually trying to come up with valid metrics to let entrepreneurs know where they have the greatest likelihood of economic success but is trying to push some kind of political/regulatory agenda!

  • acer

    regardless of how they got there, the basics of the article are true. i own 3 small businesses in the district and am taxed TO DEATH already. i for one appreciate CMs standing up for us.

    its easy as a freelance activist journalist to tear these studies apart and accuse CMs of citing them incorrectly, but in the real world, where people have businesses and families to take care of (you do not, CP reporter), these things actually matter.

  • Allison

    "Just Me" - It's not true that only businesses w/ a separate tax ID need licenses - a sole propreitorship's tax ID number is their Social Security Number, but they still must get a license.

    "Skipper" - The costs include:
    1) $55 for trade name registration (one time),
    2) $66 for the Home Occupation Permit (one time, unless you move),
    3) $110 for a General Business License (charged every other years - this is actually $324 after additional application fees) if you don't fall into one of 14 categories, which you most likely will. For my vintage clothing hobby, I would have had to be a 'Secondhand Dealer class B' which is $497 plus $154 in fees (including a 10% "technology fee").
    4) You also have to register to pay sales tax, which is free.

    So, bare minimum, it would be $445 ($324 of which is bi-annual); for a vintage business it would be $772, ($651 of which is bi-annual). Other specific BBLs are also quite expensive.

    So, not only is it VERY expensive to start (and maintain) a business, it is also labyrinthine and confusing - and the DCRA staff is, frankly, incompetent (I've dealt with at least 4 staff who told me wildly different things, and they all direct you to the website which is difficult to navigate.)

    I can't even imagine how many small (and micro) businesses never get started, move out of DC or operate illegally due to this expensive, confusing system. There really needs to be either a much simpler, cheaper system, or the BBL needs to have a "micro home business" category that's $25 to register.

  • http://dcra.dc.gov Mike Rupert

    Allison,
    Thanks for your comments. You never went to DCRA you sent your husband and we tried to helped you immediately after you contacted us, but you insulted us, used profanity and hung up on us numerous times after we kept trying to call you back. If you're going to air criticism, please be honest. You could have your license today. Our offer still stands to help walk you through the process.

    - Mike, DCRA

  • JustMe

    these things actually matter.

    Interestingly, though, you clearly felt the business opportunities in DC were better than elsewhere, otherwise you'd have started your businesses in those places or simply left. People's aren't exactly banging down the door of South Dakota trying to get in to start their businesses in, unless they're a credit card company.

    "The best place to start a business" is always going to be the place with access to customers/clients, good infrastructure, and qualified employees. The SEBC's agenda is not just to promote entrepreneurship but also to advocate for the agendas of their conservative political allies to prove their "loyalty," so of course their "rankings" are going to be focused on low estate taxes, charter schools, and highways.

  • Allison

    I am appalled that Mr. Rupert of DCRA felt it was appropriate to publicly release details of my private life and the content of a private conversation with him (and did so inaccurately). I cannot imagine that this is standard practice for public servants in DC, or even us civilians - not one commenter besides Mr. Rupert called out someone specific on this blog or made the topic personal.

    Note that Mr. Rupert does not contradict my (and other commenters') assertions that the cost of setting up and maintaining a business in DC is extortionate and that the process is confusing. I think this speaks volumes.

  • Publius

    DCRA: Are these fees accurate to start a home-based internet retail business?
    -$165 to register as an LLC
    -$70 application fee for secondhand dealer class B license
    -$25 endorsement fee for secondhand dealer class B license
    -$497 for secondhand dealer class B license
    -$33 for the home occupation permit application
    -$33 for the home occupation permit
    -$55 for trade name registration
    TOTAL: $878...am I missing anything?

    DC COUNCIL: Does this sound like a friendly business climate? Do you really think that everyone is lining up to pay these fees? Isn't it possible (likely) that while thousands of small business have chosen to register, thousands more are operating illegally in the District of Columbia? Are you still scratching your heads trying to fill the budget gap? Hmmm, I wonder what all of those illegal business do with that 6% they say they are collecting as sales tax...

  • Sally

    Publius: The "DC Council" is not reading this blog. they're too busy getting ready for their prom this weekend and raising all sorts of transition cash. If you want to make those fees lower, then call your councilmember directly and advocate for it. Of course, then you're going to have to explain how the city will make up the difference in the resulting lower revenue since we have to pay for just about every feel-good liberal idea that our bleeding hearts on the Council want you to pay for.

    Alison: You're essentially bitching about the costs of doing biz in DC and the DCRA guy didn't refute that. Fine. The DCRA guy points out that you were a rude snot on the phone and you didn't refute that. Fine. Bottom line: Are you really not going to be doing business in DC? Or are you simply not going to get a license to do so?

  • http://distcurm.blogspot.com/ IMGoph

    lydia: a great article, again. one nit to pick—the northeast region, if we're talking census regions, is not the one that the district is in. DC is in the southeast region (as maryland and virginia are as well).

  • Allison

    Sally:

    I was trying to take the high road by only responding to substantive issues, since that's the kind of conduct I would expect from other commenters.

    And, I am really not going to operate a business in DC, though I expect (as Publius notes) there are thousands who do choose to operate illegally (in which case DC doesn't get any fees or collect any sales tax.)

    Did you have any substantive suggestions for either how to reduce the cost of starting a business or how to improve the business environment in DC?

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