The Cost of Bureaucratic Delay | Foundation for Government Accountability

The Cost of Bureaucratic Delay

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The Estimated Impact of Delaying by Just One Week the Creation of a Start-Up Business in Florida

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Abstract

What is the impact of one week of government-caused delay in the creation of a start-up business in Florida?

Ralph Desiano, owner of Naples Flatbread and Wine Bar in Naples, Florida, will likely tell you it’s significant.  Mr. Desiano planned to open his popular local restaurant in the fall of 2008, a perfect time to take advantage of the influx of hundreds of thousands of hungry snowbirds and tourists.  Instead, he was delayed four months because of a slow and bureaucratic permitting process, and almost missed prime season entirely.[1]

How much did this bureaucratic delay cost Ralph Desiano?  How much did it cost the bureaucracies responsible for the four-month wait?

This paper estimates of the cost of one week of delay in creating a start-up.  The one-week costs to unemployed Florida workers is measured, as well as the cost to federal, state, and local governments.

The cost of a one-week delay to an unemployed worker is an estimated $900 in lost wages and benefits, while the total combined cost in lost wages and benefits for a typical start-up staff is $2,700.  A week of delay to all start-ups costs the state of Florida up to $9.9 million.  The one-week cost to the federal government is about $47.7 million.  The costs of delay to county governments are as much as $1.74 million, and $670,000 to municipal governments.

Introduction

Start-ups are the drivers of job creation in Florida.  In 2009 (the latest year of available data), start-ups created 173,236 net new jobs.  One of the most important factors to an entrepreneur deciding whether or not to start a new business is the cost.  An entrepreneur creating a new business must incur significant direct and indirect costs before he or she makes the first dollar of revenue.  The cost of delay is an important part of the indirect costs paid by a start-up, as an entrepreneur must apply for and receive the many various  licenses, permits, registrations, inspections and approvals  required for the particular business and industry into which the start-up will enter.  Depending on the industry, it may be weeks, months, or longer before a new business opens.  Increasing the cost of delay increases entrepreneurs’ start-up costs and discourages economic initiative.  Reducing the cost of delay would encourage economic initiative, start-up activity, and faster private-sector job creation.

Cost to Unemployed Workers

The cost of delay to an unemployed worker is the value of lost time, measured in lost wages and benefits.

From the Bureau of Labor Statistics, the average annual wage for Floridians is $40,270.[2]  The corresponding weekly wage is $774.42 ? $775.

The percentage of unemployed workers who qualify for unemployment insurance benefits is known as the recipiency rate.  Florida’s recipiency rate was 48 percent for all programs.[3]  Average weekly unemployment compensation in 2011 in Florida was $225.72.[4]  Thus, an individual drawn randomly from the population of unemployed workers would have a 48 percent chance of receiving unemployment benefits.  Expected unemployment benefits for a random Florida worker are therefore the average amount of weekly unemployment compensation times the recipiency rate:

$225.72 × 48% = $108.

With this figure, the net cost of lost time to the unemployed worker is the average weekly wage minus the expected unemployment benefit:

$775 – $108 = $667.

A conservative estimate of a standard benefits package (e.g. health insurance) increases compensation by 30 percent.  Including benefits, the net cost of lost time to the unemployed individual is the average weekly wage plus the value of a benefits package minus the estimated unemployment benefit:

$775 (1 + 30%) – $108 ? $900.

The cost of a one-week delay to an unemployed worker is about $900, including benefits.  The cost of a one-week delay to all 173,236 unemployed workers who would eventually find jobs because of start-up activity is more than $155 million.

Cost to the Typical Start-Up Staff

An entrepreneur is assumed to be unemployed while he works on starting a business.  The cost of delay to an entrepreneur is the value of lost time, measured in lost wages and benefits, and any lost profits.  Therefore the likely cost of delay to an entrepreneur is at least as great as the cost of delay for a typical unemployed worker, which is $900.

The employees who will eventually be employed by the start-up may also bear the cost of delay.  The average start-up created in 2009 had five employees in its first year.

Unemployed workers who will find a job at the start-up must remain unemployed for an additional week and therefore also incur a cost of delay.  Employees who switch jobs to work at the start-up will bear no cost of delay.  However, unemployed workers who fill the vacancies created by workers moving from an established business to the start-up bear the full cost in lost wages and benefits.  The cost of delay to start-up employees is the combined value of lost time to the entrepreneur and to the future employees (either currently unemployed or working elsewhere).

If all new start-up employees were previously unemployed, the cost of delay to the five workers who remain unemployed for an additional week is their total lost earnings—lost compensation times the typical start-up workforce of five employees:

$900 × 5 = $4,500.

This number provides a maximal cost of the delay.

If all new start-up employees switch from other jobs, excepting the entrepreneur, only the entrepreneur bears the cost of delay.  This gives a minimal cost of delay to the employees of the start-up of $900.

Including benefits, the cost to the start-up for one week of delay is between $900 for a start-up with one previously unemployed worker and $4,500 for a start-up with five previously unemployed workers.  Taking the midpoint of this range provides a fair estimate of $2,700.

The cost of a one-week delay to a previously unemployed entrepreneur is at least about $900, including benefits.  Using this number, the cost of a one-week delay to all 34,231 entrepreneurs who created a start-up in Florida in 2009 is a combined $30.8 million.  Using the midpoint estimate of $2,700 in combined lost wages for a start-up staff of five, the aggregate cost of delay to employees at new start-ups in 2009 is $92.4 million.

Cost to Florida State Government

A week of delay affects the finances of the state of Florida through lost tax revenue and continuing unemployment compensation.

Start-ups in Florida created 173,236 jobs in 2009.  With a recipiency rate of 48 percent for unemployment compensation, a one-week delay for each of the jobs created would have increased total combined state and federal unemployment costs by the weekly unemployment compensation amount times the recipiency rate times the number of jobs created by start-ups:

$225.72 × 48% × 173,236 = $18,769,358 ~ $18,800,000.

Unemployment Insurance (UI) programs are administered by the state of Florida.  Funding for regular unemployment insurance programs is a cost to the state of Florida, with the exception of those UI programs for former federal employees and ex-service members.  These constitute a relatively small portion of the total unemployed workers eligible for UI.  The recipiency rate for regular Florida UI programs was 19 percent,[5] so a one-week delay for each of the jobs created would have increased the unemployment compensation paid by the state of Florida by the weekly unemployment compensation amount times the recipiency rate for state UI programs times the number of jobs created by start-ups:

$225.72 × 19% × 173,236 = $7,429,423 ~ $7,430,000.

This calculation assumes that all workers hired by a start-up are unemployed.  To be considered unemployed, workers must be looking for work.  Workers who are not looking for jobs are discouraged workers.  Discouraged workers are not counted as part of the workforce, so the recipiency rate overstates the percent of workers who are out of work and receiving unemployment benefits.  As a result, this estimate of $7.4 million dollars represents an upper bound of the  direct cost to the state of Florida.

These figures are reduced by the extent to which start-ups hire discouraged workers over unemployed workers.  For example, if 10 percent of employees hired by start-ups are discouraged workers, then the cost of $7.4 million to the state of Florida is reduced by 10 percent.  The assumption here is that start-ups hire predominantly unemployed workers and a trivial number of discouraged workers.

Estimating the lost sales tax revenue to the state of Florida requires calculating the amount in sales tax paid from the average annual Florida salary of $40,270.  The weekly tax revenue collected from a single worker at average income and standard deductions making $40,270 is $16.28.  The weekly tax revenue from an unemployed worker receiving unemployment benefits is $4.74.  Given the overall recipiency rate of 48%, the net loss in weekly sales tax revenue from an unemployed worker is $14.01.[6]  (A breakdown of the assumptions used to calculate this figure is provided in the Notes and Sources section.)

The net lost sales tax revenue of a one-week delay to the state of Florida is the weekly estimated net sales tax revenue collected from an unemployed worker times the number of jobs created by start-ups:

$14.01 × 173,236 = $2,426,813 ~ $2,430,000.

One week of delay to start-ups costs the state of Florida about $2.4 million in lost sales tax revenue.

Table 1 summarizes the cost of delay to the state of Florida.  Delaying the creation of all Florida start-ups by an additional week in 2009 would have cost the state $7.43 million in additional unemployment compensation and $2.43 million in lost sales tax revenue.  The total combined cost of an additional one week of delay to the state of Florida is therefore up to about $9.9 million.

Cost to the Federal Government

Unemployment benefits not funded by the state are funded by the federal government.  Unemployed workers who exhaust their Unemployment Insurance (UI) from state programs may be eligible for additional unemployment compensation through the Emergency Unemployment Compensation (EUC) and Extended Benefits (EB) programs.  Workers must first exhaust state unemployment insurance before receiving emergency unemployment compensation, and then exhaust EUC before receiving extended benefits.  The Emergency Unemployment Compensation program was created in 2008 and is 100 percent federally funded.  Funding for extended benefits is typically split 50-50 between state and federal budgets, the American Recovery and Reinvestment Act of 2009 began temporary 100 percent federal funding of EB.[7]

The cost to the federal government in additional unemployment compensation of a one-week delay would be the total amount of unemployment compensation paid (state and federal) minus the amount funded by the state of Florida:

$18,769,358 – $7,429,423 = $11,339,935 ~ $11,340,000.

As with the calculation for the cost to the state of Florida, these figures are reduced by the extent to which start-ups hire discouraged workers over unemployed workers.

For this calculation, we focus on federal tax revenues from income tax, Medicare, and Social Security taxes.  Income taxes are paid by all workers, but Medicare and Social Security taxes are paid by workers and employers.

After standard deductions, the federal government collects $4,746 in income tax per year, $2,497 in Social Security   taxes, and $583.92 in Medicare taxes from a typical Florida worker earning $40,270 per year.  Additionally, his employer would pay another $2,497 in Social Security taxes, and $583.92 in Medicare taxes.  Total federal revenue from these taxes would be $10,907.84 per year, or $209.77 per worker per week.  Total lost tax revenue to the federal government for an additional week of delay is therefore the weekly amount collected by the federal government in taxes per worker times the number of jobs created by start-ups:

$209.77 × 173,236 = $36,339,049 ~ $36,340,000.

One week of delay to start-ups costs the federal government about $36.3 million in lost tax revenue.

Table 2 summarizes the annual cost of delay to the federal government.  Delaying the creation of Florida start-ups by an additional week in 2009 would have cost the federal government $11.34 million in additional unemployment compensation and $36.34 million in lost tax revenue.  The total cost to the federal government of an additional one-week delay is therefore about $47.7 million.

This calculation only includes the cost of additional unemployment compensation and lost tax revenue.  It does not include tax revenue on unemployment compensation, which is insignificant.  While unemployment compensation is subject to federal income tax, the average unemployment compensation received by unemployed Floridians is less than the standard deduction for single individuals.[8]  In fact, despite this omission, this is likely an understated estimate of the cost of a one-week delay to the federal government, since unemployed workers have a higher probability of becoming eligible for housing assistance, food stamps, Medicaid, educational grants and scholarships, and other federal programs.

Cost to County and Municipal Governments

Revenue to county and municipal governments is largely funded through property taxes and fees.  As a result, the cost of an additional week of delay has only an indirect impact on county and municipal budgets.

Indirectly, the cost of delay discourages entrepreneurial activity and leads to lower revenues by discouraging entrepreneurs from starting a business and seeking a permit in the first place.  This results in lower overall entrepreneurial activity and fewer new jobs and businesses.  Commercial property values decrease as fewer new businesses are formed and residential property values decrease as fewer jobs are created.

According to the Florida Department of Revenue, the just value, or market value, of all real estate in Florida in 2011 was $1.70 trillion, the assessed value was $1.56 trillion, and the taxable value after exemptions was $1.19 trillion.[9]  Dividing the taxable value by the just value shows 70 percent of the market value of real estate was taxable in 2011.  The relationship between market and taxable values is assumed to be unchanged.[10]

Table 3 shows the taxes levied by county and municipal governments for the fiscal year 2011-12.  This data comes from the Florida Department of Revenue.[11]  About 70 percent of all statewide property tax revenue comes from residential property and 16 percent from commercial property.  Additionally, this table shows that about 73 percent of property tax is collected by county governments and 27 percent is collected by municipal governments.

According to the Florida Department of Revenue, the total value of all residential property in Florida is $1.17 trillion, and the total value of all commercial property is $218 billion.  After exemptions, the total taxable value of all residential property is $891 billion and the total taxable value of all commercial property is $209 billion.  Dividing the taxable value by the market value shows that 76 percent of the market value of all residential property and 96 percent of the market value of all commercial property is taxable.  Additionally, dividing taxes levied by taxable value yields average county mill rates of 6.79 and 6.02 on residential and commercial property respectively, and average municipal mill rates of 2.41 and 3.01 respectively.

The value of commercial property is calculated as present value of the discounted stream of expected rents that the property can generate.  Assuming the property can be rented, these rents are or would be paid by businesses, and a reduction in start-up activity will reduce the demand of businesses for commercial property.  In the short run, a one-week delay affects the present value by reducing the probability that the property will be rented.  In the long run, a one-week delay lowers the amount of commercial property available for rent by reducing the overall level of business activity.  In either case the delay lowers the value of commercial property.

In the short-run, the effect on commercial property values depends on the importance of start-up job creation relative to overall employment in Florida.  In 2009, start-ups accounted for 173,236 of the 6,536,884 jobs in Florida, or 2.6 percent of all jobs.  If a one-week delay reduced start-up job creation by one percent,[12] then revenue on commercial property would fall by 1% × 2.6%.  One percent of jobs would not have been created and therefore those workers would not have required office space.  If this increased delay results in a lowering of overall business activity by one percent, then the value of commercial property would be reduced by the total taxable value of all commercial property times the percent reduction in start-up job creation caused by one week of delay times the percent of all jobs created by start-ups:

$218 billion × 1% × 2.6% = $56.6 million.

Using the above mill rates and a 70 percent ratio of taxable real estate to market value, this reduction in commercial property value would have lowered county government tax revenues by the reduction in commercial property value times the percent of taxable market value of all commercial property times the average county mill rate on commercial property:

$56.6 million × 96% × 6.02 mill rate = $327,551 ~ $330,000.

Similarly, municipal government tax revenues would be lowered by the reduction in commercial property value times the percent of taxable market value of all commercial property times the average municipal mill rate on commercial property:

$56.6 million × 96% × 3.01 mill rate = $163,807 ~ $165,000.

The reduction of residential property values is a little more straightforward.  The one percent reduction of jobs created by start-ups results in a reduction in the total number of jobs by 1% × 2.6% = 0.026%.  All jobs are assumed to pay the same average wage in this analysis, so this reduces overall income by the same 0.026 percent.

A reduction in income reduces demand for housing and property values.  Studies show that a one percent reduction in income typically reduces demand for housing by 0.9 percent.[13]  This is known as income elasticity of housing.  In this case, the demand for residential property is reduced by the reduction in the total number of jobs times the income elasticity of housing—0.026% × 0.90 = 0.023%.  The reduction in residential property value would then be the total value of all residential property times the percent reduction in start-up job creation caused by one week of delay times the percent of all jobs created by start-ups times income elasticity of housing:

$1.17 trillion × 1% × 2.6%× 0.90 = $273 million.

Using the same average mill rates and taxable market value ratio as before, this reduction in residential property value would have lowered county government tax revenues by the reduction in residential property values times the percent of taxable market value of all residential property times the average county mill rate on residential property:

$273 million × 76% × 6.79 mill rate = $1,416,215 ~ $1.41 million.

Similarly, municipal government tax revenues would be lowered by the reduction in residential property values times the percent of taxable market value of all residential property times the average municipal mill rate on residential property:

$273 million × 76% × 2.41 mill rate = $503,335 ~ $500,000.

The reduction in residential property tax value would reduce county tax revenue by approximately $1.42 million and   municipal tax revenue by $500,000.

Table 4 summarizes the cost to county and local governments assuming that the one-week delay reduces start-up activity by one percent.[14]  Under this assumption, the total cost to county governments resulting from declining residential and commercial property values of a one-week delay is $1.74 million, and the total cost to municipalities of a one-week delay is $670,000.  Total cost to county and municipal governments together is $2.41 million.

Cost of Delaying a Single Start-Up by One Week

The calculations thus far are the costs of delaying all 34,231 Florida start-ups created in 2009 by one additional week.  The cost of delaying a single start-up by one week is calculated by dividing the cost of a one-week delay to all start-ups by the number of start-ups.

Table 5 gives the cost of delaying a single Florida start-up by one week to federal, state, county, and municipal governments.  A one-week delay of a single start-up costs the federal government $1,393.00 in lost tax revenue and additional unemployment compensation.  A one-week delay costs the state of Florida $288.00 in lost sales tax revenue and additional unemployment compensation.  A one-week delay costs county governments $51.00 and municipal governments $19.00 in lower residential and commercial property tax revenue respectively.

Conclusion

Regardless of which layer of government is at fault, bureaucratic delays and inefficiencies have a ripple-effect.  While unemployed workers and the state and federal government are the most victimized by the cost of delay, all parties should be concerned that such delay reduces economic initiatives and carries with it significant costs.  Future reforms should identify the primary causes of delays to start-up creation and promote greater efficiency and accountability to ensure such delays are minimized.

The estimated cost of a one-week delay to an unemployed worker is about $900 and the cost to the typical start-up workforce of five is $2,700.  These costs are significant to a start-up business, which has scarce capital and no revenue.

A week of delay costs the state of Florida $2.43 million in lost sales tax revenue and up to $7.43 million in unemployment compensation for a combined cost of up to $9.9 million.  At the federal level, a week of delay costs $11.34 million in   unemployment compensation and up to $36.34 million in lost tax revenue, added together to create a combined cost of $47.7 million.  This number is likely understated, however, because is does not consider the additional net costs incurred by the federal government for the distribution of other entitlement programs—food stamps, Medicaid, public housing, etc.—to unemployed workers.  The state of Florida incurs a $288.00 cost as a result of a one-week delay per start-up while the federal government incurs a $1,393.00 cost.

The costs to local governments are much smaller.  The average county government experiences just a $51.00 cost as a result of a one-week delay of a single start-up, and the average municipality experiences just a $19.00 cost of delay.  In total, a week of delay costs county governments approximately $1.74 million and municipal governments $670,000 in lost residential and commercial property tax revenue.

Bureaucratic obstacles and inefficiencies slow the permitting and licensing process, with the most significant costs falling on unemployed workers in forever lost income, and the state and federal governments in increased unemployment   compensation costs and forever lost tax revenue.

Start-ups are Florida’s top job creators.  Future publications of the START-UP FLORIDA series will examine other ways in which bureaucratic regulations and policies impact start-up businesses, and specific reforms that will put people back to work, and lessen the strain on government budgets.

 

Appendix A

Appendix B

Appendix C

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes and Sources

1 Gruss, Jean, Skill, Luck and Divine Intervention, Gulf Coast Business Review, January 6, 2012.

2 Bureau of Labor Statistics, “May 2010 State Occupational Employment and Wage Estimates – Florida.” See the “All Occupations” wage  estimate.  Available at: http://www.bls.gov/oes/current/oes_fl.htm.  Accessed 1/17/2012.

3 US Dept of Labor, “Unemployment Insurance Data Summary.” From 2010.2 to 2011.2.  We use the average recipiency rate from 2010.2 to 2011.2.  See the Second Quarter Report for 2011 at: http://workforcesecurity.doleta.gov/unemploy/content/data.asp.

4 US Dept of Labor, “Unemployment Insurance Data Summary.”  See footnote 3.

5 US Dept of Labor, “Unemployment Insurance Data Summary.”  See footnote 3.

6 Ghandi, Natwar, “Tax Rates and Tax Burden in the District of Columbia: A Nationwide Comparison 2010,” Government of the District of  Columbia, Sept. 2011.  Gandhi estimates that a Jacksonville resident would pay $1,053 in sales tax on $50,000 of income.  At 6%, this implies that $17,550 is subject to sales tax.  This estimate implies 35% of gross income or 44% of disposable income is subject to Florida sales tax.

7 US Dept of Labor, “100% Federal Funding of Extended Benefits (EB) Extended to March 7, 2012.”  Available at:  http://www.ows.doleta.gov/unemploy/supp_act_eb.asp.

8 $225.72 per week × 52 weeks × 48% recipiency rate = $5,634.  The standard deduction for an individual is $5800.

9 Florida Dept of Revenue, “FL Dept Rev – Florida Property Valuation and Tax Data.”  Available at: http://dor.myflorida.com/dor/property/resources/data.html.

10 This implies that exemptions increase on average with increases in property values.

11 Florida Dept of Revenue, “FL Dept Rev – 2011 County Municipal Data Table 2.”  Available at: http://dor.myflorida.com/dor/property/taxpayers/cmdata/table2.html.

12 This number is not known, but it might actually be too low.  For example, if each start-up took a year longer to start, making the additional delay is 52 weeks, then it doesn’t seem unreasonable to believe that perhaps half of the entrepreneurs would not have bothered to start a business, reducing the start-up activity by 52 × 1% = 52%.

13 De Leeuw, F., “The Demand for Housing: A Review of the Cross-Sectional Evidence,” Review of Economics and Statistics,  53(1), pp. 1–10.  See p. 9 for the income elasticity estimate.  De Leeuw’s estimates are between 0.81 and 0.99.

14 A 1% reduction in start-up activity means both that the probability that an entrepreneur will create a start-up is reduced by 1% and the   contribution of start-ups to overall employment is reduced by 1%.  The first number is a one-year effect, and the second is a permanent     equilibrium effect.

 

About the author

Dr. Joseph Burke is economist at the Foundation for Government Accountability.

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