Tired of reading? Listen to a recording of this article or download it for later.
By Anastasia Boden and Stephen Slivinski
hen jobs are scarce, many people turn to entrepreneurship and self-employment as a means of earning a living. A regulatory environment friendly to business creation and job growth will be central to local economic recovery for most cities.
Unfortunately, well-intentioned and often overlapping laws frequently stifle people from entering a new trade. Although many of these laws appear independently justifiable, in practice they can create a regulatory thicket that prevents people from pursuing legitimate businesses without improving public health or safety.
There is no better time to support entrepreneurs. In addition to considering withholding fines for good-faith violations of the law and temporarily refraining from enacting any new regulations absent some compelling public health or safety rationale, cities can use the following three strategies to foster business growth and economic resiliency.
Support Occupational Licensing Reform
Occupational licensing laws are generally defended as a means to protect the public’s health and safety. However, studies have indicated they are a poor tool for that end. They tend instead to reduce competition and, as a result, lead to higher prices.
These laws are most often passed at the state level, meaning employees and employers in any city in a state are subject to them. But some city- and county-level occupational licensing rules are piled on top of the state laws. This can lead to duplication and higher costs to starting and running a business. It can also decrease employment opportunities for city residents.
Municipal and county level occupational licensing requirements vary widely, from a low of 3% of regulated occupations in Atlanta to a high of 92% in Miami.
New data from the Institute for Justice helps quantify the extent of city- and country-level occupational registration. Not at all cities regulate occupations beyond the state-level laws. For instance, Portland only regulates three occupations beyond the state’s minimum criteria. Meanwhile, Denver regulates more than 90. A report from the Mackinac Institute shows that Detroit requires licenses for at least 60 occupations, even though half of those already require a license from the state of Michigan.
Most people assume occupational licensure only applies to professions like medical professionals or lawyers. But across hundreds of cities, licensure is required for occupations with relatively low risk of harm. New York City recently cracked down on unlicensed dog walkers. And Detroit requires licenses for window washers, movers, snowplowers and other jobs that could be the difference between a paycheck and public assistance for residents – if licensure didn’t stand in the way.
Promoting Innovation: 4 Tools For Policymakers
To promote entrepreneurship and innovation, cities have a number of tools at their disposal:
Trim The Fat
Eliminate municipal licensing laws where there’s no demonstrable connection to public health or safety.
Eliminate licensure where it’s redundant to state requirements, and allow reciprocity for state licenses.
Look At Alternatives
Consider alternatives to licensure, like registration, private certification or mandatory bond.
Lock It In
Enact a local “Right to Earn a Living Act” to avoid proliferation of licensure laws creating a barrier to finding work.
A Municipal Right To Earn A Living Law
One way cities can protect residents’ ability to earn a living is by creating “sunrise ordinances” that require elected officials to consider various criteria before passing regulations that make it harder for residents and business owners to earn a living.
For example, a city might require lawmakers to demonstrate a public-health or safety threat substantial enough to warrant new regulations, and to prove a significant connection between any new law and that harm, before passing a law affecting the ability to enter a profession. Cities might also be required to consider less restrictive alternatives to licensure, and to engage in sunset review after several years to ensure its laws keep up with changing times.
In 2017, Arizona became the first state to pass a Right to Earn a Living Act. In addition to limiting restrictions on professions to those necessary to serve public-health or safety objectives, the law allows citizens to petition agencies and localities to repeal laws that harm them. If the agency refuses, the petitioner may challenge the law in court under a heightened standard of review.
By encouraging repeal and setting a high bar for laws to pass muster in court, the Act is meant to encourage better regulation and to avoid litigation.
Tennessee has also adopted a Right to Earn a Living Act, and the model ordinance below is based on the language of that law.
(1) The City shall limit occupational regulations with respect to businesses and professions to those demonstrably necessary and carefully tailored to fulfill legitimate public health, safety, or welfare objectives. “Occupational regulations” shall be defined as any law, ordinance, regulation, rule, policy, fee, condition, test, permit, administrative practice, or other provision relating to a market, or the opportunity to engage in any business, profession, or occupation;
(2) Before imposing an occupational licensure requirement, the City shall consider less restrictive alternatives, including registration, bonding or insurance, and certification.
(3) Every other July 1st, the City shall conduct a comprehensive review of all occupational regulations within the jurisdiction for the purpose of determining whether each entry regulation serves a public health, safety, or welfare objective. The City shall repeal any occupational regulation that does not serve a public health, safety, or welfare objective, or modify the regulation to bring it into conformity with Subsection 1.
Encourage Entrepreneurship And New Business Growth
Every city has their own process for someone to start a new business. In some cities, it may only take two steps. In other cities, it can take more than 10.
Even among the cities with a fairly standard set of limited procedures for starting a business, there may be frictions that increase the cost in terms of time. Requiring the filing of forms in person instead of online — or perhaps there is no ability by the city to process the forms electronically — is an example. Unnecessary duplication of reporting is another.
For most cities these permitting processes can take a few days. For places like Baltimore, it takes nearly a month. For a city like San Francisco, it takes over 45 days.
It may seem like these costs are trivial, but they can accumulate over time and over a broad enough scale to create high impediments to new business starts. According to the Doing Business North America study published by the Center for the Study of Economic Liberty at Arizona State University, for most cities these permitting processes can take a few days. For places like Baltimore, it takes nearly a month. For a city like San Francisco, it takes over 45 days.
Substantial differences in these procedures in the time-to-market in a city can be a dampener on long-term business creation — not just in terms of how many businesses are created, but also the speed at which they are created. In the highly-competitive environment for workers, entrepreneurs and capital that cities face, substantial regulatory delays can make a difference.
Large corporations can usually clear these hurdles easily, and city hall is generally willing to help expedite the permitting and paperwork process for the mega-employer moving in.
The same cannot be said for homegrown entrepreneurs and small- or medium-sized business (which, in fact, are usually one and the same). Taken together, these types of businesses are the biggest employers in most cities. Reducing the potential for swift business starts can impact the employment growth generated by those firms.
4 Steps To Reduce Municipal Permitting Burdens
Simple steps can be taken by cities to reduce the permitting burden required of new businesses:
Reduce the number of steps required, not only by reducing the number of forms but by also eliminating the requirements that don’t pass a simple cost-benefit analysis.
Provide expedited electronic filing of required forms to speed the process along.
Create an ombudsman or “navigator” role inside the city government to help new businesses work through the permitting requirements.
Create a “challenge culture” in city government by instituting a public guarantee that a business owner can trust he or she will be moved through the process within a certain strict and brief time frame.
Boost Home-Based Businesses
Self-employment is an important way for people to earn a living in difficult economic times, making it critical that cities support home-based businesses.
Even before COVID-19 required many of us to work from home, telecommuting and home-based businesses had long been on the rise. According to recent estimates, 52% of small businesses are home-based. From tutors, to music teachers, to hair braiders, to transcriptionists, many people are taking the first step to entrepreneurship by starting up at home.
Part of the appeal of home-based businesses is reducing start-up costs, but people also choose to work from home because it gives them flexibility. Evidence shows that home-based business owners are more likely to be people who need an alternative to traditional 9-to-5 jobs. Self-employment within the household allows caregivers, people who are disabled or those with special-needs family members to stay close to family and to choose their own hours.
People may now sell goods online or offer music lessons via Zoom with ease. But antiquated laws in many cities make it difficult, if not outright illegal, to start up a business from home. For example, many laws only allow a home-based business if it is “customary” or “incidental” to the residential use. These vague terms give homeowners little guidance on whether their business is allowed and the standards can be applied in contradicting ways depending on the jurisdiction.
Some cities offer a list of permitted occupations, but they’re frequently narrow or outdated — many laws specifically allow “millinery” (hat-making), or forbid clairvoyance.
Some of these laws are so strict that they even prohibit entirely virtual businesses, like selling used clothes online, uploading tutorials to YouTube or offering collectibles on eBay. In some cities, it’s illegal to have even just one person on premises for business purposes, even though homeowners enjoy an unlimited right to have people over for any other reason. These limitations bar a person from teaching violin at home, or throwing a Mary Kay party.
Some states have eased their home-based business regulations. Utah was among the first to standardize the treatment of home-based businesses across the state, and a similar bill nearly passed in Arizona. Maine and California have taken an industry-specific approach and enacted bills aimed at making it easier for people to sell goods made in home kitchens and to start home daycares.
Cities Can Lead, Even When States Won’t
Local leaders can support self-employment at home by following best practices to allow home-based businesses while also ensuring that there are no substantial impacts on neighbors:
Provide clarity. Eliminate vague language like “customary” or “incidental use” and provide clear, objective criteria for whether a home-based business is allowed.
Establish standards for zero-impact home-based businesses and allow them to operate without a permit.
Establish a permit scheme and reasonable fees for home-based businesses that do not meet zero-impact criteria. When compliance is straight-forward and affordable, business owners have an incentive to submit to the permitting process and cities are better able to enforce their laws.
San Diego Embraces Home-Based Enterprise
San Diego is an example of a city that has modernized its laws to encourage home-based entrepreneurship. Historically, the city forbade employees and customers from visiting a business run from the home, which made it practically impossible to start many categories of home-based businesses. Owners could get around that obstacle by paying $5,000 for a Neighborhood Use Permit – something out of reach for many small start-ups.
That all changed in 2018, when San Diego passed a new ordinance that allows home-based businesses to start up without a permit and authorizes one employee, customer and vendor to visit the premises. A broad ban restricts activities that impose a nuisance on neighbors, and businesses that require more visitors or other special accommodations are able to apply for a special permit.
The reform allows businesses with little impact on neighbors to form and operate more freely.
For a study of home-based business laws in localities across the country, see the Center for Growth and Opportunity’s recent survey, Zoning for Opportunity: A Survey of Home-Based-Business Regulations