Texas leads best US states for small business; California, New York and Vermont are the worst

Ian Toner, an architect in Philadelphia, recently went to city offices for a permit to build a stoop for a client’s home. The city, he learned, had just imposed new requirements: he would have to get maps from gas, electric, water and other utilities to ensure the stoop would not disturb their underground lines and then resubmit his application. A process he thought would take a day took more than two weeks.

That’s not all. Other new rules require that he prove that his builder has general liability, workers’ compensation and car insurance, and has paid all his taxes. Four times a year he must set aside a half day to ensure he is paying the state’s and city’s myriad taxes correctly. Mr Toner doesn’t question the need for rules and taxes; what galls him is the time and hassle involved in complying with them. "The information exists all over the place and the burden is on me not just to gather it but [to] interpret it. I’m not going to leave here because of this, but they’re all things that could turn a person off of coming here."

America’s states and cities have traditionally tried to attract businesses by offering them tax breaks and other cash incentives. Yet there may be a more effective way, and one which puts no strain on stretched budgets: make life simpler.

Thumbtack, a website that matches customers to businesses, and the Kauffman Foundation, a think-tank, asks thousands of small businesses annually about local requirements for hiring, regulations, zoning, licenses, health insurance and training. They have enough data to compile (somewhat subjective) "business climate" grades for 38 states and 82 cities.

One surprising finding is how little local tax rates matter. Nearly two-thirds of respondents say they pay their "fair share" of taxes, which the survey-takers reckon means they don’t feel over- or undertaxed. But many complain about the difficulty of complying with complex regulations: this was a strong predictor of how small businesses rank their states.

To be sure, low-tax states such as Texas generally score well, while high-tax states such as California and Illinois flunk their tests. This may be because the kind of politicians who like high taxes also like bossing people around. But not always. Minnesota, a high-tax state, earns a respectable "B" for business climate, partly because it is easy to start a business there. Washington and Florida, both low-tax states, earn a "C" and a "C+". Entrepreneurs fault Washington’s harsh zoning laws and gripe that in Florida new firms must jump through hoops like dolphins at SeaWorld.

The lesson for politicians is: "no matter what else you do, make things easy," says Jon Lieber of Thumbtack. "This may seem obvious but a lot of governments don’t do it right. Don’t require a plumber to spend two days at city hall pulling permits when he could be doing jobs."

Too often, state websites are confusing and bureaucrats unhelpful. Dennis Kessler, an accountant in New Jersey, says he usually can’t get through on the telephone to the relevant department. When he does, the information is often misleading or incomplete. He recently spent 30 hours trying to help a client change its corporate status without getting a different federal tax-identification number — only to discover that this is impossible.

Licensing rules are a headache. In theory, they protect the public from incompetence, which is useful if you are hiring a doctor. But increasingly they protect incumbents from competition--the requirement to have a lice nce raises an occupation’s wages by 18%, according to Morris Kleiner and Alan Krueger, two economists. In the 1950s less than 5% of workers required state licenses; now 35% do.

Some make no sense. Celeste Kelly, a horse lover, began offering horse massage, a subject she had studied privately, in 2006; she charges $55 per session. In 2012 the Arizona State Veterinary Medical Examining Board ordered her to "cease and desist" or face heavy fines and possible criminal charges. According to the Institute for Justice (IJ), a libertarian law firm which is suing the board on her behalf, Arizona does not require vets to learn massage, and Ms Kelly may offer it for free; she simply can’t charge for it unless she’s a vet. "Veterinarians I know think it’s ridiculous," she complains. "It’s their political arm that has crafted legislation to be self-protective."

State licensing regimes vary widely. Louisiana requires licenses for 70% of low-wage occupations, according to IJ, including barber, bartender and cosmetologist. In Wyoming, it is a more modest 24%. In Hawaii, licenses require an average of 724 days of experience and education; in Pennsylvania, 113. Enforcement is uneven, too.

Changes to regulations have little effect on economic growth in the short run — cyclical influences such as the state of the housing market or the fortunes of a particular industry (high-tech in California, oil in Texas) matter more.

But in the long run, business-friendliness makes a difference: one study found that states that rank better on indices of taxes, costs and regulations enjoy stronger job growth, after filtering out the influence of industry composition and the weather. Globally, countries that rank higher in the World Bank’s surveys of the ease of doing business grow faster.

Lowering barriers to entry for new businesses gives consumers more choice and cheaper prices. A gourmet-food-truck fad began in Los Angeles with $2 Korean tacos in 2008, and has thrived because the city is flexible about where such trucks can park. By contrast, Chicago forbids food trucks from operating within 200 feet of a bricks-and-mortar restaurant, and requires them to have a GPS to ensure compliance, which makes life very hard for them in the downtown business district.

Businesses lobby for lots of things they should not have: handouts from the taxpayer, handicaps imposed on their rivals. But it is hard to find fault in their plea for simpler rules, swifter bureaucratic decisions, government websites that a normal person can navigate and officials who actually answer the phone.

Clearing away old rules is hard. Their benefits tend to be concentrated (eg, when they protect incumbents); their costs dispersed (slightly higher prices affect all consumers, but only a little). States and cities can, however, slow the pace at which new rules proliferate, for example by estimating their economic impact before enacting them. Last year Iowa’s governor vetoed a bill that would have required licences for drug-abuse counselors, and Arizona made life easier for firms operating in multiple cities with separate sales taxes by limiting them to one tax form and one audit.

The difficulty is that many rules purport to protect the public: from shoddy services, dangerous products or even death. Even if the cost is high and the risk remote, no politician wants to be accused of compromising public safety. Last year Mike Pence, Indiana’s Republican governor, vetoed the licensing of diabetes educators and anesthesiologist assistants, on the grounds the new rules would raise barriers to business and require additional bureaucracy. But a year later, he signed into law a modified version of the measure, minus the extra bureaucracy but otherwise much the same.

Article originally posted in

The Economist

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