Small business: it’s not just taxes, but regulations and training too

As a prominent member of the media (or more likely someone on a particular e-mail list) I received an advance notice of a study being released tomorrow; one which pinpoints some of the root complaints of small business owners around the country and, more importantly, grades states on how willing they are to help small businesses start up and prosper.

The study, which was a joint effort between the Kauffman Foundation and Thumbtack.com, a company which bills itself as “a place where you can hire help locally,” surveyed over 6,000 small business owners with some of the main goals being to find out:

  • In general, how would you rate your state’s support of small business owners?
  • Would you discourage or encourage someone from starting a new business in your state?
  • How would you rate your company’s financial situation today?

In all, the study counted up 21 different metrics, ranking each state and 40 cities across the country in their business-friendly attitudes. Locally Maryland graded out as a C- overall, which translated into a ranking would put them between 31st and 33rd. There were two other states with a C- and 12 states which had a D or F grade; meanwhile, six states did not receive a grade – Alaska, Hawaii, North Dakota, South Dakota, West Virginia, and Wyoming. Presumably they didn’t get a large enough survey sample from these smaller states. (The same holds true in our little corner of the state, as there were no responses south of Talbot County and only four on the entire Eastern Shore.)

Our state, surprisingly, did best on training programs with a B+ grade. I wasn’t shocked to see a low D+ grade on licensing, though. (The complete methodology and analysis is here.)

What did surprise me, however, was the fact Delaware only ranked as a C. But their tax code was given an A+ grade. Other adjacent states received overall grades of C (Pennsylvania) and A (Virginia.)

So why is this important?

Every so often, particularly when a new administrator takes over, we hear the government promise to make life easier for businesses by streamlining the process. But it seems that these words are just so much lip service in most cases – sure, you may see a “one-stop shop” but there are still reams of paperwork to fill out, license fees (read: government revenue) to collect, and other non-productive busy work for a prospective business owner to do. Obviously, a city or state which makes it easier to go through these hoops will eventually accrue an advantage over adjacent areas – it’s most painfully obvious in Maryland, which seems to lag behind neighboring Delaware and (particularly) Virginia in job creation.

The Founding Fathers had a vision of each state being its own laboratory of government, competing in how best to serve the public good. With respect to business climate, it’s obvious some are better than others and that’s one reason why some states are more prosperous.

However, with that being said, one also has to examine the goals of each state as well. If a state is interested in promoting job creation under the belief that a rising tide lifts all boats and their prosperity comes from the people doing well and contributing a small share of that wealth to the public coffers through reasonable taxation, that’s one philosophy I tend to agree with. On the other hand, if states figure that those who embark on business are cash cows to be milked until old Elsie crumples over from exhaustion, they do reasonably well until word gets out and people become fed up. The corollary effect of this philosophy is one where the public finds only large-scale businesses such as chain stores can be successful, because they have the overhead necessary to deal with these government-created issues whereas a mom and pop operation does not. Eventually that stifles competition, ¬†leading to collusion and a system of corporate cronyism.

Maryland seems to fall into the latter category, and there’s only one key reason they can get away with it. If it weren’t for having the seat of federal government power close by Maryland would be an economic basket case much like most of the Eastern Shore, with little industry or development to speak of. That’s because business policies are set to take advantage of the economically captive audience of the I-95 corridor. Martin O’Malley and other Democrats speak of ‘One Maryland’ but in reality there are at least three, and perhaps four: the western section, which could prosper if allowed to exploit its natural resources, the center of the state which relies on government to succeed economically, and the Eastern Shore, where agriculture and tourism reign supreme. Southern Maryland is sort of a blend between the latter two because of Washington, D.C. and its sprawling growth down the Potomac River.

Granted, there are local economic factors in play as well: while Virginia is a relatively prosperous state as a whole, I wouldn’t characterize their Eastern Shore as thriving. Localities are the same way – as businesses open up around the outskirts of Salisbury, the downtown area dries up. Needless to say, government policies are far from the only reason people decide to locate a business where they do. But they can make a difference in whether an enterprise succeeds or not. If taking eggs from the golden goose is all government seems interested in, don’t be surprised when the goose starves to death.

Small startup businesses already have a difficult time getting established in this economy, and the question becomes whether their efforts are helped or hindered by government. Over time, localities have tried a number of different approaches to attracting business like setting up infrastructure for industry on a speculative basis, establishing tax abatement policies, becoming a lender of last resort, and so on. All these can be helpful, although they aren’t exactly making the playing field more level.

Taking the step into entrepreneurship is already stressful enough, so the goal of government should be one of making the process as simple and painless as possible. Fortunes have been built in America based on good ideas, and government should take its place in line for its rightful share instead of taking advantage of those who have a dream.

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