The private business sector in the District of Columbia is like a floundering boat in a rising tide. In the rest of the Washington metropolitan area, business is growing faster than in the nation at large. But within the city, the private sector is not simply stagnating -- it is actually falling behind. Moreover, if the underlying drift is not checked, the District's share of private business will shrink further.
That is the central conclusion to emerge from the "Business Retention Survey" recently completed by my company at the request of the city's Office of Business and Economic Development (OBED). The survey was conducted in late 1980 and early 1981, and the findings are based on responses from 246 firms.
The principal results of the survey were as follows:
About 13 percent of the firms reported that they had expanded their facilities in the District. However, nearly twice as many said they had expanded their facilities outside the District.
With regard to future expansion plans, nearly half of the businesses that answered the specific question (or about a quarter of all the firms in the survey) indicated that they planned to expand their facilities. Of these, nearly half planned to expand outside the city while just under one-third said they would expand either at their current D.C. location or find additional sites in the District.
More alarmingly, about half the firms in the survey reported they were considering moving all or part of their facilities from the District.
The implications are both clear and disturbing. Although businesses are not leaving the District en masse, expansons during the 1970s were located much more frequently in the suburbs than in the city. Thus, the District suffered a decrease in its relative share of private businesses in the Washington metropolitan region. Further attrition is likely unless some new initiatives are undertaken.
A combination of "demand-pull" and "cost-push" factors is encouraging businesses to leave the city. On the demand, the strong expansion of suburban economic activity has served as a magnet in attracting businesses, including some from the District. Population and economic growth in the suburbs outpaced the rate in the District during the 1970s. For example, population in the Maryland and Virginia suburbs increased by 11.9 percent between 1970 and 1980 compared with a decline of 16 percent in the District. Similarity over the same period, total non-agricultural employment in the suburbs rose 54.7 percent. In the city, it increased only 8.6 percent.
On the supply side, cost factors in the District are particularly burdensome on firms. The business community in the city bears the highest tax burden in the Washington metropolitan area. District businesses began the 1970s paying higher taxes on the same volume of business than their competitors in suburban jurisdictions. During intervening years, the tax burden in the city rose more rapidly. By 1980, the average tax burden in Maryland was less than half that recorded in the city. In the suburban Virginia jurisdictions, it was roughly two-thirds of the District-level.
A similar trend is evident in worker's compensations costs in the District.
Rates in the city were higher than in Maryland or Virginia in the early 1970s and the gap widened by the end of the decade. Accordingly, over two-thirds of responding firms in the Business Retention Survey indicated that workmen's compensation was a substantial burden on payroll costs. Firms in construction, transportation, and wholesale trades appear to be the most adversely affected. The higher rates in the District are clearly related to a higher benefit structure, more unfavorable experience ratings based on a higher average number of claims and administrative inefficiency.
The higher cost structure arises partyly from the fact that District workmen's compensation provisions come under the Longshoremen's and Harbor Workmen's Compensation Act. This is one of the worst linkages in the entire U.S. economy. For example, in 1979 (the last year for which figures are available), there were 63,000 occupational injuries and illnesses recorded among the nation's 270,000 longshoremen. This was a claim rate of 23.3 percent. In sharp contrast, the claim rate was only 8.2 percent for all U.S. industry. In air transportation, the rate was 12.2 percent. It was 11.5 percent in automobile manufacturing and 7.6 percent in chemials. In white-collar industries (which are more characteristic of those found in the District), the occupational injury rate was substantially lower. It was 1.7 percent among insurance carriers and 1.5 percent in banking. But since worker's compensation in the District is linked to longshoremen's experience on the nation's waterfronts, employers here are clearly bearing an excessive cost. The reason is, in the words of the report, that "insurance companies want to limit their exposure" to firms covered by the longshoremen's act because of the high volume of claims that come from them.
The District government's Office of Business and Economic Development has mounted a multi-pronged business retention strategy. For example, a Business Service Center assists about 200 new businesses a month in site selection, provision of data and interpretation of regulatory requirements. Further contact is made with existing businesses regarding their problems and concerns. Technical and financial assistance is also provided with the participation of local financial institutions. There are also plans for developing business parks.
The questions then arises as to whether these steps are sufficient. I think not. The issue of attracting and keeping business have goes beyond the present scope of OBED's authority and instruments. It also requires the concerted efforts of the District City Council and the Congress.
For instance, congressional action is required to establish the proper package and mix of tax incentives to aid existing businesses and attract new ones, especially in high growth sectors. The surrounding jurisdictions against which the District competes already have such incentives.
Moreover, the City Council needs to take further action to reform the District's worker's compensation law. Restructuring the law might also require congressional action. All such steps are necessary -- not to stop an avalanche of fleeing businesses but to stem a steady erosion.