How Business Friendly Are Cities? Kosmont-Rose Survey Answers

Larry, for eleven years, Kosmont and Associates – now the Kosmont Rose Institute – has conducted a cost of doing business survey of cities. What do the results of the 2005 survey suggest?

In the 2005 survey, we added 54 new cities. We now have 368 cities across the nation, and the results are showing that many of the larger cities are more expensive. In particular, Los Angeles continues to be the most expensive city in LA County, the second most expensive city in the state and the sixteenth nationally. A lot of that is due to the high business tax, which we have just reformed but not reformed enough to change LA's adverse standing.

What kinds of factors does the survey take into account? What should the readers be paying the most attention to?

The survey enables businesses to make informed decisions about where to set-up or relocate. It is similar to the Zagat guides for restaurants. It compares the cost of doing business in cities based on tax rates: business taxes, utility user taxes, sales tax, property taxes and the costs of the project approval process. This doesn't take away from the importance of quality of life factors like public safety and education, rather it enables businesses to add another dimension to their analysis and focus on the key factors that indicate a jurisdiction's "friendliness" to business, which is important for any company that is about to make a large investment.

What is the competition among cities like? Which states/regions/cities are doing well in terms of welcoming business, and which aren't?

Texas and Colorado are states that are really wiping the floor with us, because they provide good value in terms of quality of life and cost of doing business. Our neighbors-Arizona and Nevada-both have overall cost structures and public approval processes that are much simpler and much less expensive.

However, competition does not only exist with other states. We found in the survey that most cities throughout the nation are suffering from competition with both China and India as well. Low costs in those countries are driving businesses to move portions of their operations offshore, and everyone in the country is feeling the impact. California however is feeling a harder impact because we're an expensive state in a global, competitive economy. It is also difficult for high-cost cities like LA to be competitive when companies now have the ability to go almost anywhere they want - and believe me - they are looking for bottom line cost savings because they're operating in a very competitive environment.

Let's be more specific. What are most businesses considering as they read your city cost of doing business survey?

Let's consider the local situation. Let's say you and I are co-CEOs of a 100-employee service company, and we're looking around at space in Glendale, Los Angeles, Burbank or Beverly Hills. In Los Angeles, if payroll is $10 million we will pay $59,100 dollars in business tax. If we go to Glendale, we will be paying zero. If we go to Burbank, we will be paying a business tax fee of $904. In Beverly Hills, we would pay $66,000. When considering our options we would realize that if there is no reason that we have to be in Beverly Hills or Los Angeles there are other, cheaper places to be. Long Beach would also be much less money.

That is the business decision matrix. At the moment we're seeing it affect the manufacturing sector the most. In Los Angeles, a 100 person manufacturing firm will pay $12,000 a year in business taxes if it is a $10 million a year company. It will also pay a 12.5 percent utility user tax. In comparison, some cities in the Riverside County area have very low utility taxes and no business tax whatsoever. In addition, they have something that we're starting to lose: quality of life defined in terms of affordable housing, business friendly communities, and public safety. That is what is really impacting our inner cities, the inability to compete on the combined basis of quality of life and cost of doing business. It's a double whammy that really hurts L.A.'s competitiveness.

How does the recent competition among California's cities to be the home of the state's stem cell research center confirm your survey findings?

The stem cell center is a unique opportunity for a city like Los Angeles-a high cost city in a high cost state. The stem cell business is research driven and supports medical services and manufacturing. These are both types of, businesses that pay the highest wages across just about every sector. Every dimension of operation in that business pays very high wages, whether it's medical, administrative and so on. Because it pays so well, it relies on employees that are what I call the qualified intelligentsia: people that tend to live in urban areas who are highly educated, and looking for a social and cultural dimension that probably can't be had in the Inland Empire. The bottom line is that stem cell research and the companies that affiliate with that entire line of business are tailor made for an urban environment that is a relatively high cost for business because the employees are here, the quality of life in terms of cultural advantage is here, the social interaction is here, and the academic interface is here. For LA it's what I call the big enchilada. You do not want to miss out on this opportunity because there are not that many.

The other point to be made is that stem cell research is in its early development. It's in its initial start up cycle and where businesses start tends to be where they stay. If you become the initial neighborhood for stem cell companies, you grow as a neighborhood and you guarantee and ensure a future that has a larger number of high paying jobs, which is what we desperately need in LA. Los Angeles County has never really recovered from the loss of the 156,000 or so manufacturing jobs that we experienced between 1999 and 2003. We have gotten some of those back, but in general we still stand at a 100,000 or so job deficit and these stem cell jobs are vital replacements, though the type of employee is different.

I was very disappointed when Los Angeles didn't even make the list of cities competing to be the home of the stem cell research headquarters. We have a very deep reservoir of biotech and medical investment, academic research, and highly educated employees here. In my mind, not only should we have been a contender, but we should really have been a finalist because the growth for that business could be supported quite well by the breadth and depth of this economy.

What should be the intelligent reaction by political and civic leaders in Los Angeles to your survey's findings?

It would be to recognize that, because we're an urban area, because we have infrastructure costs that other newer and growing suburban cities don't, because we have social issues that are more challenging let's say than newer neighborhoods, we must focus on those industries that really want be here and are willing and capable of paying the freight to be here. Business attraction and business retention on a targeted basis is really the future for LA and its environs. LA needs to put together a strategic program that identifies employers that fit the profile of this region and bring together all the private sector tools and public sector incentives possible to help those businesses develop here. We also need a continued outreach program to these very busy business owners so that they have general access and economic and financial resources at their fingertips. That kind of awareness and the programs to support that strategic awareness that would make a difference here and would keep us as competitive as we can be based on our primary advantages and that should be the message. Find the right target and go after it with reckless abandon, because if we don't, believe me, other states and even the Inland Empire will take advantage of our lack of action.

What specific reforms should elected leaders and public policy experts in the state be focused on regarding legislative or regulatory reform?

They need to be focused on quality jobs and creating incentives for companies to stay here and create quality jobs. The focus in California has been more from the employee's perspective: quality benefits, pension plans, workers compensation, and unemployment insurance. I think there's not a business owner or a business group that denies the importance of quality compensation and quality insurance plans. The problem with California is that we've gone over the edge, and the requirements have become so expensive for businesses that we're no longer competitive. Our overtime programs just don't even exist anywhere else in the country. California's economic policy must reflect the understanding that a quality job is the first step toward quality of life. People go where they can get gainful employment and they stay where that gainful employment is augmented by good education, public safety and good housing. But the job is the first leg of the stool and so from a policy standpoint the focus on enticing and keeping these businesses in California by reducing the yoke of regulation and taxation has to be primary. Cities, mayors, councils and city managers must learn not continue to add taxes to local business costs. It's very easy to turn to business taxes as a way to increase revenue. Businesses don't vote. The employees who are the constituents vote. So you exempt the household from paying an additional utility tax but you hit the business. If city leaders could focus on creating inducement programs either through zoning or expedited approvals or even targeted incentives, then they could induce private investment, which creates jobs that create revenue. That is really the way to approach this in the long term, rather than continuing to increase the costs for businesses.

No region or community can do well over time if it exports its best and brightest young people. Your survey suggests that high housing costs are causing talented people to leave. What, in closing, ought civic and political leaders do about housing affordability?

The focus on housing is right behind the focus on jobs and what city leaders have to do is take an inventory of those sites and those neighborhoods where it makes sense to have greater density and expedited processes, and then make those changes. The problem is that most city managers still think that residential units cost more to serve than they generate in taxes, but the irony is that in California, the average price per unit has moved up so high that the household income levels and the property taxes paid by those households are getting to the point where a straight forward $600,000 residential unit begins to pay its freight via taxes and retail sales generated by household spending.

For the past 20 years, communities have been investing in retail because t California's tax structure creates incentives to build retailthe sales tax it generates is retained by local communities. The new rooftops for some of these higher priced and median priced homes actually bring the ability to leverage that prior retail investment because these households can spend money in that community. Years ago, communities were sure that additional residential units meant economic failure. In today's market, where we've already over-retailed the landscape, new housing units actually bring spending dollars that leverage the initial retail investments made by these communities. So it's an evolving perspective.

We just need to open our eyes and say balance is good. Let's make it possible for businesses to invest. Let's not look at taxation first. Let's look at investment incentives first. And on the housing side, let's look at housing as an opportunity to bring new rooftops and long-term residents, which in turn make an investment in the retail facilities we have built over the last 20 years. It's a different perspective but it's a better perspective and it carries with it a long-term vision that's much healthier for both local economies and the state as a whole.