New Report: Enterprising Cities -- Regulatory Climate Index 2014

Cities are the engines of economic growth and prosperity in the United States. Our urban economies thrive on innovation, expansion of small businesses, and entrepreneurship. Our economic achievement is inherently tied to a legal infrastructure and regulatory environment that is sensible for entrepreneurs and small businesses. ndp | analytics and the U.S. Chamber of Commerce Foundation are proud to release the Enterprising Cities: Regulatory Climate Index 2014 (the Index), which compares and ranks the efficiency of local regulations applying to small businesses in ten cities across the United States. 

The Index measures three components (number of procedures, time, and costs) that are required to comply with five areas of business regulation in each city. The Index assesses the areas of starting a business, dealing with construction permits, registering property, paying taxes, and enforcing contracts. The results act as a barometer for the overall business environment and point to areas where reform is necessary for competitiveness. 

The main results of the study are:

Among the 10 cities in the 2014 Index, the most efficient cities across all 5 areas of business regulation are Dallas and St. Louis. The cities of Raleigh, Boston, Atlanta, and Detroit have moderate levels of regulatory efficiency. Chicago, Los Angeles, San Francisco, and New York City have the least efficient regulatory environments.

There are sizable variations in the design, practice, and costs to fulfill basic regulatory requirements for small businesses. Geographical and historical influences seem to account for much of this variance. The basic regulatory steps for opening and operating a business remain relatively similar across the cities measured. In recent years, these places have begun to adopt smarter business regulations and to streamline bureaucracies; however, the scope for improving their business environments remains significant.

Each city evaluated has its own clear strengths and weaknesses. For example, Los Angeles and San Francisco have the best practices for opening a business, yet both cities have the highest requirements and costs to obtain construction permits. St. Louis has the best practice for the registration of properties but scores below average in enforcing contracts. Chicago ranks highly for enforcing contracts while ranking lower for starting a business. 

All cities provide small businesses with information and materials to comply with their regulations. Yet the websites and publications are often disorganized, missing information, or unclear to third parties. Few cities provide detailed information on the procedures, expected waiting time, and administrative costs for construction permits. Overall, no city provides comprehensive information. 

At a time when America’s entrepreneurial dynamism is in decline, the costs of housing in our cities is soaring, and governments are challenging the existence of transformative companies, this project is more important than ever. The ease of doing business in America’s cities will help determine the future of America’s economic growth. The success of these places depends on improving existing regulatory processes, simplifying application and compliance with local laws, and trimming the barriers to entry for entrepreneurs.

The Adverse Effects of Reducing the Mortgage Interest Deduction

Tax reform is on the table, again. The mortgage-interest deduction (MID), as expected, continues to be a contentious issue for policymakers. In his latest proposal, Rep. Dave Camp (R-MI) calls to reduce the limit on qualified home mortgages for MID to $500,000 of principal from the current level of $1 million. While the prospects for a complete overhaul of the tax system are unlikely before the 2014 midterm elections, understanding issues like the MID are important for future debates.

The Wall Street Journal’s recent piece on the MID helps explain the divergent policy perspectives on the deduction as a policy instrument. The Brookings Institution argues that the MID needs to be revamped or replaced. Brookings argues that homeownership in the U.S. is not higher than those in other developed countries who do not have the MID. On the opposite side, the Hudson Institute provides another perspective that supports the benefits of the MID. The Hudson Institute points out that it’s incomplete to just compare the MID in the U.S. and other developed economies to analyze the homeownership. For example, while the United Kingdom and Canada do not specifically have the MID, they do have specific policies that encourage overall homeownership.

While the jury is still out on the magnitude of the impacts of the MID, the elimination or reduction of the MID will affect the real estate markets, millions of American homeowners and renters, and ultimately the health of the U.S. economy. The elimination or reduction of the MID is an equivalence of a tax hike policy that will affect the purchasing power of homeowners and renters negatively. When the component of housing expenditure increases, the negative income effects will reduce purchases of other items across all income groups.

Since housing expenditures make up a larger share of total household expenditures of the middle-income than higher-income groups, the relative values of the MID are in fact larger for the middle-income groups. Under the current U.S. tax code, the MID can only be claimed if a taxpayer itemizes their deductions. The limit of the mortgage principal might need to be expanded, and not reduced, to benefit the lower-income groups who do not itemize their tax filings. Policymakers must understand and measure the potential short- and long-term impacts of the elimination of the MID on the housing market and broader economy before tax reform passes through Congress.