What Makes a City Business Friendly?
This is a guest blog post by Jon Lieber, Chief Economist at Thumbtack.
Every year local lawmakers are flooded with studies purporting to tell them what makes their city a good (or in some cases, bad) place for business. The same city can receive a high grade in one report and a low grade in another - this year San Jose ranked 1st in one ranking of “Best US Cities for Small Business” and 121st in another ranking of “Best Cities to Start a Business.” It can be difficult to keep all the different rankings straight.
Thumbtack has developed an annual survey in partnership with the Ewing Marion Kauffman Foundation that differs in one fundamental way from these other lists - this survey asks small business owners directly what they think makes for a friendly business environment. By asking the owner-operators of these businesses about their perceptions of the local business climate, we learn from them what works and what doesn’t work about their governments.
This year nearly 13,000 small business owners participated in our survey - these are largely service professionals such as photographers, personal trainers, and house cleaners who use Thumbtack to find new business. The surveyed group largely reflects the geographic spread and demographic diversity of business owners nationwide, and from their responses we graded 82 cities and nearly every state along 11 metrics of the area’s friendliness towards small business.
For the third year in a row, we found that service professionals valued three things above all others in their local government: a licensing system that is simple and makes compliance easy; a tax system that has clear rules and is easy to understand; and training and networking programs that help service professionals get their businesses up and running, comply with the local rules, and meet other professionals in their industries.
Licensing and regulation
About half of the service professionals in the sample reported that they were required to be licensed by at least one level of government. Of this group, 62 percent said they faced licensing requirements from more than one level of government, while a full 25 percent said they were licensed by all four levels of government we asked about - city, county, state, and federal.
Although professional licensure requirements tended to reduce friendliness scores overall for those who faced them, the comments included with survey responses revealed that licensed professionals were of two minds - one group tended to say the government should back out of their business altogether, while the other group wanted to see an increase in enforcement to prevent unlicensed professionals from undercutting them on price. In general, service professionals did not express a desire for an unregulated marketplace, but wanted regulations that were easy to comply with and did not consume time they could be spending on a job. One pro said that the two days he wasted pulling permits for installing a hot water heater was two days he could’ve been working and earning a living for his family.
Taxes and Training
The effects of licensure requirements were so strong that they were actually twice as important as the friendliness of the tax code in determining perceptions of overall friendliness. When it came to taxes, tax rates were not a major complaint of our respondents - 2/3rds of all professionals say they pay their “fair share of taxes.” Instead what mattered more was the ease of understanding and ease of complying with local tax laws. Professionals who felt they understood their taxes were more likely to say a city was friendly towards them.
Finally, the largest factor under a local government’s control that affected overall friendliness scores was the availability of training and networking programs to help professionals succeed. 57 percent of survey respondents said they had never before run their own business - these professionals wanted to focus on serving their customers, and said they appreciated help from local community organizations in understanding and following the rules of the road for businesses. Professionals who said they knew of training and networking programs offered by the government ranked their governments 10 percent higher than those who didn’t.
The Kauffman Foundation’s Index of Entrepreneurial Activity shows that entrepreneurship can be a safe harbor for cities during difficult economic periods - as individuals lose their jobs during economic downturns, entrepreneurship tends to rise as they turn towards self-employment to keep their skills up or help pay the bills, and it declines again as the labor market recovers. This suggests that cities that create the right environment for entrepreneurs will be better positioned to weather challenging economic periods. Listening directly to entrepreneurs as the Thumbtack survey does can help cities understand which policies are making them small business friendly and which are keeping small business at bay.
Headquartered in San Francisco, Thumbtack is a consumer service that helps millions of people accomplish the personal projects that are central to their lives. Thumbtack introduces customers to experienced professionals who are available, interested and qualified to meet their specific needs. Whether looking for a painter for their home, a math tutor for their child, or a DJ for their wedding, Thumbtack provides anyone in the U.S. with an easy and dependable way to get started, compare options, and hire with confidence.
NLC's Big Ideas for Small Business report provides helpful strategies for how cities can create a more business friendly environment.
About the Author: Jon Lieber is chief economist for Thumbtack, where he studies trends in the labor market, entrepreneurship, and the small business economy. He has previously acted as an economic policy advisor for the United States government, serving in the U.S. House of Representatives, the United States Senate, and the President's National Economic Council at the White House.