To hear politicians tell it, the No. 1 barrier to small-business growth is taxes. Last year, John Boehner rebutted Obama administration calls for a surtax on millionaires with the claim that “over half of the people who would be taxed under this plan are, in fact, small businesspeople,” so “you’re going to basically increase taxes on the very people that we’re hoping will reinvest in our economy and create jobs.” The White House has tried to counter this with math, illustrating that relatively little of the revenue it wants to raise derives from small businesses with employees. But this debate leaves small-business operators and their employees—few of whom are members of the fabled top 1 percent—as pawns in a larger ideological struggle about the scope and generosity of the welfare state.
It turns out that, when surveyed, small-business owners place relatively little weight on tax issues anyway. They’re much more concerned with something Washington rarely talks about: the country’s spreading thicket of licensing rules.
To be charged a high tax rate on your small-business profits, you need to be turning a tidy profit in the first place. Anyone in that position would surely prefer lower taxes but is fundamentally ahead of the game. The main barrier to entrepreneurship is not that you’ll pay taxes if you succeed—it’s that you might not make any money at all.
The evidence comes from a recent survey conducted by the Kauffman Foundation in partnership with Thumbtack.com. They polled small-business owners about how friendly various state-policy factors are to small firms. Then, instead of home-brewing an arbitrary weighting system, they simply asked respondents to give an overall assessment. The basic pattern of the results is that more politically conservative states score higher. Texas, for example, gets an A+ on overall business climate, while California rates an F. But Minnesota and Oregon score highly, while Mississippi, North Carolina, and Arizona look bad. Swing states are all over the map, with Florida a C and New Hampshire an A.
Perhaps most interestingly, the fact that the overall conditions were rated separately from the individual ones means it’s possible to objectively calculate correlations between the factors.
Texas is full of high marks, but it’s not obvious that the discerning voter actually wants to copy the state’s beloved-by-business environmental regulations. Part of the point of such rules, after all, is that businesses don’t always want to do what’s best for local public health or air quality. In any case, according to Kauffman, “environmental and zoning regulations tended to be the least statistically significant predictors of small business owners’ view of the state’s friendliness.” So you can sleep safely in the knowledge that more pollution isn’t necessary to promote a better business climate.
Licensing requirements, by contrast, are by far the best statistical predictor of business-friendliness, for those subjected to them. And unlike taxes or environmental rules, these have spread like kudzu, with little scrutiny and often scant policy rationale.
A recent comprehensive survey of state licensing practices by the Institute for Justice* reveals little consistency or coherent purpose behind most licensing. Nevada*, Louisiana, Florida, and the District of Columbia, for example, all require aspiring interior designers to undergo 2,190 hours of training and apprenticeship and pass an exam before practicing. In the other 47 states, meanwhile, there’s no legal training requirement. My friends and co-workers living in D.C.’s Virginia and Maryland suburbs appear to get on fine with unlicensed interior decorators, and all across America, amateurs have decorated their own homes without imperiling public safety.
Almost all states—though not Alabama* or the anarchic United Kingdom—require barbers to be licensed, but the specific requirements seem to vary arbitrarily. New York barbers need 884 days of education and apprenticeship. Across the river in New Jersey, it’s 280. But getting one’s hair cut in New Jersey (to say nothing of England) is hardly a life-threatening gamble.
In most of the country, what you need to do in order to work as a locksmith is find someone to pay you to fix locks. But in Oklahoma you have to be 21 years old, New Jersey requires a high-school diploma, and Tennessee makes you take two exams.
These rules correlate strongly with burdensomeness in part for the same reason that they seem so random—they’re often imposed specifically in order to create a burden and stifle competition. Once a licensing regime is in place, existing license holders have an incentive to lobby to raise the bar for entry.
Over time, licensing has become much more common. Morris Kleiner of the University of Minnesota and Alan Krueger of Princeton (and current chair of the Obama Council of Economic Advisers) have found that in the early 1950s, less than 5 percent of the population worked in occupations covered by state licensing rules. Today it’s well over 20 percent. Some of this is surely justified. You need a license to drive a car, so requiring a special license to drive a bus is reasonable. Even there, though, you may wonder why it’s so much harder to become a licensed bus driver in New Jersey than anywhere else.
But a wide range of these rules could be done away with entirely at basically no risk. Regulation is needed when it would make sense for a firm to deliberately engage in malfeasance. Dumping harmful toxins into the air is highly profitable unless it’s prohibited. Financiers can draw huge bonuses by taking on too much risk, only to wreck the economy later. In other occupations, though, shoddy work brings its own punishments. An interior decorator who can’t get recommendations from satisfied customers probably won’t remain an interior decorator for long.
In these cases, licensing rules raise the prices the rest of us pay, make it difficult for successful entrepreneurs to expand their businesses, and are often a major barrier to employment for the most vulnerable populations. New Jersey’s ban on high-school dropouts fixing locks sounds silly, but given the generally bleak prospects facing workers with little education, barring them from whole occupations is a big deal. States should take a good, hard look at their existing codes and ask whether mass unemployment isn’t generally a bigger threat to the public than rogue barbers.
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