Regulatory Climate Index 2014: Detroit
The manufacturing renaissance, as a result of the assembly line, created a thriving automotive industry that made Detroit one of America’s most prosperous urban areas. Greater Detroit’s economy is powered by the automobile, energy, health care, manufacturing, and professional services industries. In 2012, Detroit generated $208.3 billion on gross metropolitan product. The city serves as the gateway to Canadian markets in Greater Toronto and cities in Ontario and Quebec. More than 25% of North America’s merchandise trade between the United States and Canada passes over Detroit’s Ambassador Bridge. Greater Detroit’s population totals 4.2 million, with more than 700,000 living in the city.
Detroit has fallen on hard times in the past few decades: the city’s population has decreased rapidly since the turn of this century, and economic downturns have hampered the local economy. A pivotal point was Detroit’s filing of Chapter 9 bankruptcy in 2013. Despite the city’s financial woes, there is a reason for optimism. While no other major American city has experienced recent decline like Detroit has, a community of entrepreneurs and start-ups are reenergizing and revitalizing the city and its future prosperity.
Benchmarking Against Other Cities
Among the cities under review, the 2014 Regulatory Climate Index ranks Detroit in sixth position, with the first place representing the most efficient regulatory environment.
Detroit is the sixth-ranked city in the report, with an average cumulative performance of the 10 cities covered in the report. The city performs near the top in Starting a Business and Paying Taxes.
Where Detroit is Doing Well
- Detroit requires the lowest number of procedures and waiting time in the area of Starting a Business. The city requires an administrative fee that ranks as one of the lowest of the 10 cities assessed in the report. As a result, Detroit ranks just behind Los Angeles and San Francisco for Starting a Business.
- Detroit ranks second in the area of Paying Taxes, which translates to a low tax burden for entrepreneurs and small businesses. Detroit and other cities in Michigan have a moderate corporate tax rate and a low unemployment tax rate in comparison with other cities. Further, the city has the lowest sales tax rate across the 10 cities covered in the report.
Where Detroit Needs Improvement
- Detroit ranks near the bottom in Dealing with Construction Permits, a position driven by its high number of procedures, waiting time for permits, and overall cost. The total cost of construction permits is 1.3% of total construction costs, which is on the higher end of the cities covered in this report.
- Detroit ranks poorly in the area of Registering Property, which is a result of longer waiting times and higher costs for businesses. Local professionals noted that accessing property records at the Register of Deeds in Detroit is often unpredictable, with inaccurate and out-of-date records. As a result, many title companies must purchase commercial databases. Additionally, the city has a high real estate transfer tax compared to those of the other cities covered in the report. Both of these factors contribute to Detroit’s performance in this area.
- While Detroit has the lowest administrative costs for Enforcing Contracts, the city has some of the highest numbers of procedures and waiting time for the business area. Entrepreneurs and small businesses can expect to wait an entire calendar year before the final enforcement of judgment on a contractual dispute in Detroit.
Many viewed Detroit’s bankruptcy as the final straw that broke the back of America’s most famous single-industry town. Pessimism is easy when a city is $18 billion in debt and cannot pay its bills. Detroit’s bankruptcy and acceptance of its longstanding fiscal woes is an important signal to investors and entrepreneurs that the problems are being addressed. And while these issues won’t be solved overnight, these actions may allow for the local economy to have a fresh start.
The Detroit Regional Chamber of Commerce along with Detroit Economic Growth Corporation, Invest Detroit, and the Downtown Detroit Partnership are advocating for the transformation of downtown area into a vibrant and economically prosperous community. The New Economy Initiative for Southeast Michigan is investing $100 million to transform regional Detroit into an entrepreneurial hot spot. Entrepreneur and venture capitalist Dan Gilbert is another key player in the effort to transform Detroit. Gilbert, with his diverse portfolio of companies, has invested more than $1 billion to help return Detroit to prosperity. Start-up accelerator Bizdom and venture capital firm Detroit Venture Partners are helping Detroit regain its entrepreneurial edge.
The renewed focus in revitalizing downtown Detroit has seen dozens of companies relocating from the suburbs into downtown offices. There is an energy and excitement from Detroit’s start-up community coalescing around revitalizing its downtown core. The city would benefit from an increased effort to streamline and increase efficiency for local regulations to make Detroit a vibrant, diverse business environment.
Detroit is in the middle of the pack among the cities covered in this report. Detroit’s regulatory environment is on two different sides of the spectrum. On the one side, it is easy to start a business and pay taxes in the city. On the other side, it is difficult and costly to apply for construction permits and register property from the sale of a commercial building. Moreover, while the city has low administrative costs for commencing the enforcement of contracts, it is a burdensome and long task to see to completion. As noted, Detroit is at a crossroads, given the city government’s fiscal situation. This represents an opportune moment for Detroit to enact reforms that would improve its regulatory environment for start-ups and small businesses.