Businesses need to do a lot to operate in the District, such as filing permits, getting licenses, and accommodating inspectors. For instance, a typical grocery store may need a grocery store license, a deli license, a cigarette retail license, a patent medicine license, plus health inspections and perhaps a liquor license. Each item has a separate cost. The current system is very confusing and sends people to lots of different departments, forms, and IT systems with different passwords. It is tough to navigate, especially for small businesses without a lot of resources or preexisting knowledge of the system.
Each year, businesses pay upwards of 48 million dollars for various licenses to enforce regulations (and more for permits, but we will not cover them here). Many of these collections go in “restricted use” special purpose revenue funds, which typically can only pay for the government apparatus that enforces each specific regulation—inspectors, cashiers, adjudicators, application forms, licenses, etc.—and nothing more. In this way, the District’s businesses pay for the costs of enforcing the regulations they are subject to.
One of the most common regulatory requirements is the basic business license. Most types of businesses need it to operate in the District. By issuing licenses, the city government theoretically can track all the businesses in the city, including what they do and where they are. The license renewals serve as check point for compliance with regulations and taxes. Businesses pay an estimated $12.5 mill-ion annually to the Department of Consumer and Regulatory Affairs (DCRA) to obtain or renew their basic business licenses. In turn, DCRA is instructed by law to use these funds only to “defray the costs of licensing and license enforcement,” and nothing else.
The Technology Fee
In 2010, the District added a 10 percent mark-up to the basic business license fee as a “technology fee.” This fee’s stated purpose was to cover the cost of upgrading the basic business licensing system. It was also a way to give a temporary boost to District revenues, which had been declining due to the Great Recession.
When first proposed and approved, the technology fee was supposed to expire after three years. In 2013, however, DCRA moved to extend it, and the D.C. Council recently passed legislation (at the request of the Mayor) confirming that the fee is now permanent.
Eight years have passed since the adoption of the technology fee, and it is hard to find any clear evidence of how the city uses the money from this fee. Looking at the budget books, we see that the District is set to collect an estimated $71 million in business license fees from 2011 to 2017, and will collect another $50 million more over the next four years. This means that businesses have already paid over $6.5 million in the technology fees for potential improvements of the way they obtain licenses online, and will put in another $4.6 million more to support this elusive goal.
Basic Business Licenses Revenues, and the Estimated Portion Attributable to the 10 percent Technology Fee
Portion Attributable to 10% Technology Fee**
|Table Notes: * Fiscal years 2017 to 2021 are estimates. ** Assumes that the technology fee is collected and kept in the BBL special purpose revenue fund.||Source: Various Budget Books|
Despite the $11 million in current and potential collections, since 2010, no regular plan has emerged on the use of revenue from the technology fee, and no accounting exists on how the city has so far used these revenues. Scouring budget books do not tell us much.
The best we can say is that the funding has gone to support existing business processes and outdated IT systems, plus some irregular investment in new technology. The worst, that it has gone to pay for short-term fixes or other priorities.
Slow and Steady Progress, But No End in Sight
Business owners have reason to be skeptical that the technology fees they pay truly go towards improving their experience with the D.C. government. Since 2011, each year businesses have contributed increasingly more money towards the basic business license fund. Unfortunately, the technology has not improved at the same pace.
To be sure, the District has made slow and steady progress toward improving the ability of owners to maintain their businesses in good standing via internet-accessible systems. One outcome is the D.C. Business Center website, officially launched at the very end of FY 2016. (I evaluated that project on behalf of the DC Auditor in a report published in February 2017 titled “Planning, Buying, and Implementing New Information Technology: A Case Study of the D.C. Business Center”).
The District began this project August of 2014, as a follow up from the Business and Regulatory Reform Task Force report. The task force called for a single online portal where a business can conduct all its regulatory and compliance activity. This means being able to submit applications and supporting documentation to the District government, and to pay for the appropriate fees online so that business owners do not have to visit each of the relevant D.C. government agencies in person. In addition, the task force suggested that a business should only maintain a single login with the D.C. Business Center system to access all relevant D.C. government agencies, regardless of the separate IT systems working in the background. A business should be able to enter its information once and expect it to be accessible by all relevant D.C. government agencies.
The good news is that the investment thus far has successfully replaced an infamously ineffectual online form that the DCRA had developed inhouse. In its place is a fully functional system for applying for, paying for, and issuing a basic business license for the most common and non-complex situations. The D.C. Business Center also includes a checklist system that instructs prospective business owners which D.C. government agencies must provide approvals so that their business entity is compliant with local laws. These are welcome improvements for business owners.
However, some of the basic recommendations of the task force go unsatisfied. Businesses still must deal with the different IT systems of different agencies and not a single, unified D.C. system, as was promised. The features and ease-of-use available through the D.C. Business Center fall well short of the ideal consolidated platform that is possible with today’s technological capabilities. Satisfaction among business owners remains low as business owners must continually navigate the maze of D.C. government agencies – often in person, and too frequently taking valuable time away from running their business to wait in slow-moving queues to speak with a government representative. The vision of a “single login” has not happened, meaning the business must still maintain a long list of separate usernames and passwords to access the various business-focused systems provided by D.C. Government.
The case of the missing technology fee
Why is it so hard to track what the technology fee is (and isn’t) being used for?
Because IT projects have a long shelf life, the District can classify them as “capital” projects. This means the city can use money it borrows against its future tax collections to fund IT projects. In the case of the D.C Business Center portal, since businesses put money towards its improvement, there should be no need to use borrowed money. But it does. t. In 2015, DCRA received $1 million of borrowed money. But why do this? The businesses have been paying significant amounts in technology fees. Why does the city have to borrow to pay for the project?
The published budget for fiscal year 2015 stated that $39 million would be needed to pay for the D.C. Business Center online portal. In 2015, in addition to the $ 1 million, DCRA used basic business license money it collected in previous years to get the project going. In all, the city spent $4.5 million in the D.C. Business Center (despite collecting $6.5 million in technology fees). The project went dormant in fiscal years 2016 and 2017 (no budgeted funds).
The FY 2018 proposed budget adds another $675,000 in borrowed money for the improvement of the D.C. Business. To boot, the project description reads exactly the same as it did in 2015, yet the total estimated cost of the project has been reduced from $39 million to only $2 million. Does DCRA really have a plan to meet the recommendations of the Business and Regulatory Reform Task Force, or has the scope of the project been greatly reduced? And how can the full cost of the project be $2 million when the District has already spent more than $4.5 million on the project?
We should expect our government to be transparent, and not impose unnecessary costs on businesses or residents. During its deliberations over the FY 2018 budget, I encourage the D.C. Council to ensure that the D.C. Business Center online portal is presented in a way that clarifies the answers to these questions and demonstrates that there is a reasonable path forward to achieving meaningful results. A good first step would be to include an additional source of funding for this project, recognizing an annual influx of technology fee funds coming from the basic business license fund. Based on the previous analysis, this should be $1.1 million per year to reflect the collections that are intended for technology enhancements. Doing this will ensure those responsible can more effectively plan for the long-term betterment of the D.C. Business Center online portal, and will also ensure that the actual amount of project spending can be more transparently viewed by the public.
If these additional fees are not necessary to fund the technology improvements, then the technology fee should be retired. While any fee paid to the District government take away from profits, I expect businesses won’t complain about the 10 percent extra as long as they get value in return.
Note on permits
The District also charges the 10 percent technology fee as an add-on to permits. Permit fee collections are considered non-tax; in government finance parlance, it means money collected through fees and not taxes, but it goes to support the general functions of the government, not just activities associated with issuing permits. In 2018, DCRA is slated to collect $38 million in permit fees. If this includes the 10 percent technology fee, then the amount collected for technology enhancements would be $2.5 million per year. Based on the permit fees DC residents and businesses are paying between 2011 and 2021, the technology fee generated another $35 million for improvements. Again, there is no matching spending in the budget. These collections should also be routed to a capital project intended to deliver technology improvements.
The District’s budget mentions another project in DCRA (CR0-ISM07-IT SYSTEMS MODERNIZATION, page 48-CRO) described as a $20 million capital investment for “…the continued, multi-year implementation of a variety of mission critical information technology systems involving District licensing, permitting and inspection functions.” There are no deliverables. The city has put $1.5 million in pay go capital, and $11 million in borrowed capital. In her 2018 budget, the Mayor is asking to increase the budget authority for the project by $3.5 million (from about $18 million to $21 million). She also proposes to spend $7.5 million pay go funds on this project. During those four years, permit fees will generate $13.6 million in technology fees.
[enforce regulations] The special purpose revenue funds here include (listed from the biggest to the smallest) the Basic Business License Fund, the Insurance Assessments, the Board of Medicine Fund, the Occupations and Professions Licensure Special Account, the , ABC – Import and Class License Fees, the Board of Pharmacy Fund, the Corporate Recordation Fund, the Vending Regulations Fund, the Professional Engineers Fund, the Real Estate Guaranty and Education Fund, the Appraisal Education Fund, and the Emergency Medical Services Fees. The reader can find the descriptions of who pays into these accounts and how the money is used in the OCFO’s Special Purpose Revenue Fund Reports.
[basic business licenses] See Table 3-17 on page 3-41 in the executive summary for the Mayor’s Fiscal Year 2018 budget submission, available here.
[technology fee] The technology fee initially applied not only on business licenses, but also on corporate filings and permit applications.
[the Great Recession] See page 4643 of the District of Columbia Register, Volume 56, no 22, available here.
[as was promised] In addition to DCRA and the Office of The Chief Financial Officer, some must deal with the Department of Transportation (public space permits, for example), Department of Health (occupational or safety licensing), the Department of Small and Local Business Development (to register as a certified small and local business), the Alcoholic Beverage Regulation Administration (to get an alcohol license), the Department of Housing and Community Development (to get a rental permit), Office of Contracting and Procurement (to do business with the city), Department of Energy and Environment (myriad of environmental permits) among others.
[borrowed money] Under capital project CR0ISM11.