June 3, 2012

Charles Lawton: Small businesses add their two cents to 'friendliness' rankings

Business climate rating schemes usually start with a collection of statistical definitions. They might, for instance, claim to be related to a state's or city's "business friendliness," total tax collections as a percent of total income, or highest marginal income tax rate.

The rating agency then bundles these measures, often giving some a greater weight than others, and compiles an overall rating by which it then ranks the states and/or cities measured.

Such ratings are done by media outlets seeking attention for virtually every special interest -- business, vacation, retirement, recreation and even culinary.

Most surveys' predominance of "objective" measures is what makes the Thumbtack business survey so interesting. It is not based on standard data sources chosen by a rating agency and simply deemed to be important to all businesses (or vacationers, retirees or diners). It is, rather, based on a nationwide survey of small business owners, thus reflecting not "objective" conditions (taxes or regulations) applying to all, but the "subjective" opinions of those on whom the conditions actually have an impact.

Thumbtack.com is a relatively new (started in 2008) business that provides a centralized listing of local professional service providers, from attorneys to web designers to personal trainers. In cooperation with the Kauffman Foundation, Thumbtack conducted a nationwide survey of small businesses between November 2011 and January 2012. Thumbtack provided a link to the survey on its website and collected more than 6,000 responses.

The strength of the survey, Thumbtack notes, is "that it derives from a segment of the business community that is often ignored in other rankings -- because most other authors of indices like ours simply do not have access to a large number of small businesses that operate in the real world every day."

Obviously, this "strength" is also the survey's weakness since its results will reflect only the views of Thumbtack.com's existing customers and only those who chose to complete the survey. Nonetheless, it is interesting to see how Maine stacks up in survey results.

In most respects, survey findings are not surprising. In answer to the question, "In general, how would you rate your state's support of small business owners?" from a high score of 5 "very supportive" to a low of 1, "very unsupportive," Maine earned a score of 3.4. This score placed Maine 4 percent below the total survey average of 3.6, 21 percent below the "friendliest" state -- Idaho, which scored 4.3 -- and 7 percent above the "least friendly" state -- Rhode Island, which scored 3.2.

These relatively small variations in scores illustrate the fact that rankings -- Maine ended up 35th on the small business friendly scale -- don't mean very much since relatively small changes in a few responses can change a state's ranking substantially.

It is interesting, however, to see how scores vary by "type" of friendliness. Relative to the national average, Maine is only 3 percent lower than the national average in zoning and land use friendliness and 4 percent lower in health and safety regulatory friendliness. But in environmental regulatory friendliness, we are 9 percent below the all-survey average. And in employment, labor and hiring regulations, we are 8 percent lower.

It is particularly notable, in this regard, that for the question, "How much in addition to salary does it cost to hire a new employee?," Maine scored 7.7 -- approximately a 40 percent premium over pure salary cost. This was approximately 12 percent higher than the all-survey average and ranked Maine last among reporting states. But the top-ranked state, with a score of 9.3 -- approximately a 20 percent premium over pure salary -- was Rhode Island, the state with the least overall small business friendly score and a state with an unemployment among the nation's highest.

In general, I think this survey could, over time, become a useful antidote to the "objective" rating schemes.

Recognizing the bias created by the self-selected nature of the responses, it will nonetheless be useful to see how this selection of Maine businesses changes (or doesn't) its responses to these questions over time.

We can analyze the characteristics of this set of businesses -- How many Maine responses are there? What industries do they represent? How old are their owners? What is the male-female distribution of the owners? What is their expectation for the coming year's business prospects? Using what we learn, Maine policy makers can focus not on the tools by which they implement policies (tax rates or regulations) but on their outcomes (the views of the businesses affected). This could prove to be a very valuable feedback loop if we choose to use it.

Charles Lawton is senior economist for Planning Decisions, a public policy research firm. He can be reached at:

clawton@planningdecisions.com

 

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