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.