kamala harris announced Her latest economic proposal, announced last week, was to increase the maximum upfront tax credit for starting a new business to $50,000.
This higher deduction is intended to offset the costs that entrepreneurs face in the first year of business. It has been widely cited that these costs the study For Shopify, that can reach $40,000 when you factor in everything from product and shipping costs to staff salaries and marketing.
While the debate surrounding Harris' proposal will likely revolve around the question, “Is this tax credit a good idea?” it may be more productive to ask two questions: And can the government do anything to reduce that number? ”
As the cost, complexity, and frustration of licensing, permitting, and inspection processes at the state and local level continue to rise for new small businesses, we find that many cities and states are finally asking this question.
of city jobs The Project, which is part of my organization and is a bipartisan project to help cities streamline the business start-up process, shows that it's expensive to start a small mom-and-pop restaurant in one of 20 cities across the country. It turns out it's possible. $5,000 or more Permit and license fees alone can run upwards of $20,000 in a city like San Francisco.
A barbershop can require an average of 55 different regulatory steps across eight different government agencies. This assumes that entrepreneurs can go through the process without making mistakes or redoing the necessary paperwork.
Shopify research According to the survey, nearly a quarter of all small and medium-sized startups say these types of license and permit fees are “unexpectedly high” and that government red tape at various levels expressed surprise at how often requirements overlap between the two.
These costs are often difficult for entrepreneurs to anticipate or budget for. That's because few cities are able or willing to fully prepare the process before business owners begin applying for permits, and many end up abandoning the process midway through due to high fees. Delays result in increased rent due to lack of income to offset them.
as an entrepreneur kansas city “For over a year and a half, I went to City Hall and they wouldn't take no (for an answer).” Imagine how many people stopped at that number. We lost so many (small businesses) because of the first no. ”
The good news is that there are policy solutions to these challenges that local and state governments can enact without waiting for a new tax bill to pass Congress.
This year, Washington, DC funded the BEST Act. law This reduced duplicate and unnecessary business license categories, reduced high license fees, and eliminated fees for new businesses with less than $10,000 in revenue in their first year.
But progress may be slower elsewhere.
In Maryland, a bipartisan coalition of state legislators introduced a bill earlier this year that would: Reduce first-year application fees In some businesses completely. Died in committee. And in the 2023 Nevada bill, Waive license fees for veteran-owned businesses For the first five years, they didn't even get a public hearing.
Such reforms often require policymakers to make sacrifices in the short term (through license fees and permits) to benefit everyone in the long term (through increased entrepreneurship, economic opportunity, and tax revenue). This may result in a loss of income due to a reduction in fees. But the evidence we've seen from reforms so far suggests it's worth the sacrifice.
In 2012, Chicago Mayor Rahm Emanuel launched a major business licensing reform effort, eliminating 60% of license types and saving businesses $2 million. Chicago at the time was considered an outlier Even in large cities with 117 types of licenses and strict licensing requirements.
Further reforms continued in 2017; Harvard University Case Study This initiative has “dramatically improved the regulatory process for small businesses and entrepreneurs, significantly improving the business environment.
And despite being short-lived Decline in license revenue In 2013, the City of Chicago saw a rapid recovery in corporate tax revenue in 2014, and continued to see steady growth, significantly higher than in the year before charter reform, until 2020, when the COVID-19 pandemic disrupted the global economy. It seemed to be progressing. In fact, revenues had already recovered in 2022, and just a few years after Emanuel's first reform efforts, license revenues were already higher than in the pre-reform years.
When it comes to supporting this country's entrepreneurs, especially those starting small and micro businesses, city officials don't have to wait for an act of Congress or a presidential election to save the day.
They have the power to start a new business cheaper, faster and easier in America today. Streamlining outdated, costly, and duplicative regulatory burdens is the first step.
Chad Reese is the Associate Director of Operations at the Institute for Justice.
