Date: October 1, 2015
Session 9 – Practice Location and Government
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Session 9. Practice Locations and Government
By Scott McDonald
Most doctors believe that the ideal location will be one that has no completion. In the course of these podcasts, you have probably learned that while too much competition is usually a bad thing, it is not the worst thing. Not having sufficient patients to treat is by far the worst thing. In fact, if you find a location that has NO competition, the first thing you want to ask yourself is, “Why is there no one else here?” Typically, there is a reason. On the other hand, locations that have many competitors may not be your ideal site but it would be worth asking the question, “Why did everyone else seem to think this was a hot area?”
You can learn a great deal from this discussion with yourself. A little research usually brings the answer. For this session, we are going to discuss some aspects about practice sites that are illustrating why some parts of the country are growing by leaps and bounds and why other parts of the country seem to be emptying out, or at very least are changing their demographic character from great to not-so-great. One of the big ones is government policy. Some of these are going to affect practices directly. Others are going to touch upon practices only indirectly. To illustrate this point, certain states in the U.S. are growing very quickly. Others are losing population or are stagnant. First the big winners of growth:
District of Columbia
North Dakota is on top with an annual growth rate of 8.38%. The District of Columbia has grown next by 8.03%. Texas (5.73%), Utah (5.4%), and Colorado (5.31%) are next. In fact, for the top 15 states, they are all in the West and in the South. So what do they have in common? With the exception of Washington, DC, they are all right-to-work states. And in case you missed that session, this means that one does not have to belong to a Union to get a job. The net result is that jobs are far more plentiful. Their unemployment rates are right around 3.5 to 3.9%. We have discussed this before in another session. But that does not tell the whole story.
When you are trying to determine the likelihood of having a successful practice, there are some direct benefits to those states. For one, the cost of living tends to be lower. There are many ways to describe cost-of-living but let’s make it simple: When the ratio between the cost of housing is low and the Median Household Income is relatively high, the cost of living is desirable. As an illustration, in some states, the Median Cost of Housing (owning a home price) is three times the Medan Household Income. In some states, the ratio is five times. In Manhattan, there are 900 foot apartments that go for about $1,200 per month to rent. In parts of Texas, you can purchase a three bed-room, two bath home with half an acre for $900. Some people respond, “Hey, who wants to live in Texas? I love the big city, 24-hour excitement of the City that Never Sleeps.” Terrific! But when it comes to setting up a practice or finding one that is offered at a reasonable price, the cost-of-living and the overhead of business real estate is going to come into the equation. The free-market has something to say about the consideration of overhead and the cost-of-living. In locations where there is significant demand, the cost of living will tend to float upward. But it isn’t always the determining factor and that is why we are talking about this now. Other factors that are often functions of government come into play. One of the more obvious ones is Tax Burden. There are four major categories of taxation that is broken out state-by-state. These are Individual Income Tax, Corporate Income Tax, Sales Tax, and Property Tax broken out Per Capita.
So, why are some states growing while others are struggling? Let’s see if there is a correlation between high taxation and growth:
North Dakota has a 3.22% Individual Income Tax, 4.53% Corporate Tax, 5% Sales Tax.
Texas has NO Individual Income Tax , No Corporate Income Tax, and a 6.25% Sales Tax.
Utah has a 5% Individual Income Tax (which they may repeal within a year), 5% Corporate Income Tax, and a 5.95% Sales Tax. As an aside, Colorado is lower in nearly every category of taxation.
By contrast, California has 13.3% Individual Income Tax, 8.84% Corporate Income Tax, and 7.5% sales Tax (due to go close to 8%)
New York is 8.82% Individual Income Tax, 7.1% Corporate Income Tax, and 4% Sales Tax.
The question begs itself, do tax rates make a practice location more or less desirable than another? We believe that answer is a definitive YES! On the other hand, while we can fine a strong correlation between tax rates and the desirability of practice, we cannot always point to the tax rates as being the cause of growing or shrinking populations. After all, the District of Columbia has 8.95% Individual Income Tax, 9.975% Corporate Tax Rate, 5.75% Sales Tax rate and the second highest Property Tax Rate in the U.S. But we suspect that DC is an aberration. This is not a city that runs on the free-market system. The government jobs have been growing as have government contractors. It seems to be free from the normal conditions found in the nation’s economy. For this reason, it is dangerous to put in the same statistical categories.
What about the minimum wage?
For those 10 states that show the slowest or least growth, all have raised or are considering raising minimum wage. These include Rhode Island, Connecticut, Massachusetts, Michigan, Vermont, and West Virginia. California will have the minimum wage to $10,00 effective January 1, 2016. Massachusetts will be up to $11 by January 1, 2017.
By way of contrast North Dakota, Texas, and Utah along with most of the fastest growing states have their minimum wages at $7.25.
I don’t intend to turn this into a political discussion on the merits of higher or lower minimum wages or taxes. Nevertheless, when we are asked to make a recommendation on which states will be more welcoming of a new practice or any business for that matter, we have to take into account government policies. They are either growth friendly or they are not. As all accountants who work with practices repeat, if the biggest single line-item on your chart-of-accounts is personnel, the rate of pay matters, particularly when a practice is most vulnerable. Add to this that lease rates which are directly related to commercial property taxes, and it becomes even simpler to add or subtract states from consideration. Some of our friends and clients were surprised when we moved DoctorDemographics and Scot McDonald & Associates from California to Utah. I explained to them that our Individual Income Tax was about 1/3 as much, our Corporate income tax was about half as much, and our sales tax was a full 2% less. The end result is that we could hire a much larger staff to serve my customers better.
Having explained all this, please accept my assurance that there are potential practice sites in every state. But it is also true that there are some states that will prove more friendly to the opening of new practices.
We are updating all of our State Briefings at this time. In short, I am adding new data and some revisions to the copy to reflect what we are seeing in the U.S. The purpose of these Briefings is to give you an indication of which parts of state hold the most promise for opening a practice. They are not really to help you choose between states. That is best done in a Telephone Consultation. If you have states you are interested in or you have some practice model you wish to pursue, the Consultation is a quick way to get the answers you need.
This is Scott McDonald. And don’t forget to like us on Facebook.