Opinion

You’re Killing Me: Regulations, Government Unions, And Taxes Quash Small Business

Chuck DeVore Vice President, Texas Public Policy Foundation

Since our founding, the American Dream has been entwined with self-employment — whether as a farmer, a shopkeeper, a doctor, or an inventor — Americans have been at home in our “commercial republic.”

The mounting tide of often opaque federal and state rules is making it tough for small business.

A California study estimated that regulatory compliance costs in the Golden State dinged the average small business for $134,000 per year. This has contributed to what Jon Lieber, chief economist of Thumbtack.com, a firm that links consumers to businesses, said is, “a crisis of entrepreneurship in the United States (with a) broad collapse of self-employment across industries and states…” with “Small business owners … frequently frustrated by unnecessary bureaucratic obstacles.” This has contributed to an ongoing decline in business starts.

Lieber is describing the “soft despotism” that Alexis de Tocqueville wrote of in Democracy in America 180 years ago when he foresaw a nation tied down by “a network of small complicated rules.”

But, it doesn’t have to be this way.

Thumbtack.com published their latest annual survey of 17,633 small business owners to determine the states that are the most — and least — welcoming to small business.

This year, and the previous three years the survey was completed, Texas and Utah were rated by small business owners as the best states for small business. New Hampshire also received an A+ grade this year.

At the bottom, with an F rating for the past four years, were California and Rhode Island. They were joined this year by Connecticut and Illinois.

What makes a state friendly for small business ownership? Training and networking are foremost — often provided by an active local chamber of commerce. Importantly, the regulatory climate eclipses tax rates as a concern, with ease of compliance for licensing and labor rules driving the perception of business friendliness. Business owners were most unhappy in areas with complex licensing requirements or capricious enforcement. Lastly, small business owners appreciated local and state governments that make an effort to create and maintain user-friendly regulatory compliance websites that decrease the cost of regulatory compliance.

Why should the general public care about a state’s friendliness to small business? Two reasons: first, Thumbtack.com found through a bivariate regression that “states with higher friendliness scores have substantially higher growth rates than their less friendly counterparts”; and second, “As more American middle class jobs face the threat of automation and competition from overseas, self-employment could become a viable path to make a living for millions of Americans.”

Comparing Thumbtack.com’s extensive survey data to 64 metrics including poverty rates, demographics, economics, and education, shows the significant importance of three factors: state and local taxes as a share of income (data from the Tax Foundation); business regulations (confirming Thumbtack.com’s findings with data from the Fraser Institute); and the percent of state and local government workers that are unionized. This last statistical connection is interesting and raises the question: why are states with a heavily unionized government workforce unfriendly to small business? Do unionized government employees feel immune from the repercussions of bad customer service? Are they overly hostile to small business owners?

Screen Shot 2015-08-18 at 3.21.20 PM Screen Shot 2015-08-18 at 3.21.11 PM Screen Shot 2015-08-18 at 3.20.58 PM

The findings are clear: if states and cities want to encourage economic growth, they need to make themselves friendly to small business by simplifying regulatory, licensing and tax compliance and by reining in government employees who view themselves as masters of the citizens they’re supposed to be serving.

Chuck DeVore is a vice president with the Texas Public Policy Foundation and served in the California State Assembly from 2004 to 2010