State and native boundaries to entrepreneurship


State and local governments attract companies with incentive packages. However, these governments impose rules that stifle entrepreneurs starting new businesses, forgetting that Amazon offered billions of dollars for its HQ2 Jeff Bezos Garage.

A new study by the Cato Institute “Entrepreneurs and Regulations” by Chris Edwards, describes the pressures of state and local governments on startups. Elected officials should carefully weigh the benefits of this policy against the burdens. The management of many rules can be significantly improved.

How do regulations harm small businesses? First, there are a lot of compliance burdens at startup. While each additional employee or business location requires compliance, many licenses, permits, and inspections must be obtained before opening. One study found that regulatory costs per employee for small businesses were 29 percent higher than large companies.

Startups also employ more low-wage workers: small companies’ weekly earnings were half the average for the largest companies. Small businesses are hit harder by increases in minimum wages and mandatory social benefits.

Large companies have more political influence and can relieve themselves of the burden of new regulations or obtain exemptions from the regulations. Companies that do not yet exist cannot influence regulation.

Startups have very tight margins and cannot afford any additional costs. Entrepreneurs typically invest their savings, borrow from friends and family, and earn little to begin with. A study found that half of tech company founders made less than $ 6 an hour in their first year.

Alcohol licenses illustrate a different type of burden. Eighteen states limit the number of alcohol permits; the existing permits can be sold at prices often in excess of $ 250,000. Chain restaurants can afford these costs more easily than a female chef who opens her first restaurant.

“Entrepreneurs and Regulations” offers a new measure of state political burdens, the so-called Entrepreneurial Regulatory Barriers Index. The index comprises 13 measures in four areas: perception of the regulatory burden of small business owners, professional licensing, barriers to entry (such as needs certification laws) and policy costs.

The best states for startups are Georgia, South Dakota, and North Dakota; California, New Jersey, and Connecticut are the worst. Alabama ranks 29th, slightly lower than other small business policy indexes. The Pacific Research Institute and the Small Business and Entrepreneurship Council rank Alabama 15th and 11th, respectively. Alabama’s climate for startups is not bad, but it could be better.

Local governments can impose even greater burdens, as Mr. Edwards points out. Consider the sheer number of rules. New York City has 6,000 regulations governing small businesses, while 15 city authorities issue over 250 licenses and permits. Delays are common. Honolulu is scheduled to issue small commercial building permits in 14 days, but takes over 150 on average.

Entrepreneurs often have to pay rent while waiting for permits. In addition to the delay, uncertainty, which economic research repeatedly shows, reduces corporate investment. Many municipal offices do not offer a way to track the progress of applications, so business owners have no way of knowing when or if permission will be given to open.

Government regulations, often zoning laws, interfere with home-based businesses. Zoning historically kept businesses and industry away from residential areas. However, the internet makes it possible to run businesses unobtrusively from home and keep costs down while entrepreneurs explore the potential for their product or service. Complaints from neighbors typically trigger zoning enforcement and highlight the often unpredictable impact of regulations on new businesses.

The Alabama Legislature supported home-based businesses with a Cottage Foods bill this year. The law removes the value of annual sales, increases the number of foods people can prepare at home, and allows online sales. Alabamians can now better participate in the American cottage food boom.

State and local governments may need to keep doing business for the next several years. The Biden government is clearly very regulatory-friendly. As Edwards writes, “Whatever happens in Washington, state and local governments can do a lot to improve the business climate by repealing low-value and harmful regulations.” Regulatory reform can help Alabama’s economy grow.

Daniel Sutter is Charles G. Koch Professor of Economics at the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are those of the author and do not necessarily reflect the views of Troy University.

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