How Cities Can Take Care of Businesses

The Internet and globalization have both made it possible to operate a business from virtually anywhere and still serve a wide range of customers. Most firms no longer need to be located in downtowns or large financial districts. This flexibility has made it easier than ever for businesses to leave cities that have an unfavorable tax and regulatory climate. American cities in decline are largely victims of their own failure to take a fresh look at how the economy continuously repositions itself in an information-driven, globally competitive world market, and respond with policies that encourage entrepreneurial investment, private sector growth, and local consumption of goods, services, and housing.

What are the best ways that city politicians can take care of the job-creating and tax-producing businesses that are at the heart of any flourishing metropolis? The shortest answer is to keep taxes and licensing requirements simple, fair, and predictable.

[Article continues below video, "Take Care of Business: Reason Saves Cleveland With Drew Carey, Ep. 4]

Taxes

Cities with heavy tax burdens put themselves at a competitive disadvantage with more relaxed localities. Taxes always create disincentives for business growth and expansion. Cities with simple, limited tax structures are much more successful at encouraging business development. Local leaders should be aware of how various taxes can weigh down economic growth. These include:

Business Taxes. The higher the business tax burden—whether through income taxes on the self-employed, corporate taxes, or others—the less likely a business is to open in a city, or remain in a city. Business taxes also place a higher tax burden on low-income individuals, as any business tax is ultimately passed on to the consumer in the form of higher prices.

Local Sales Taxes. Increased costs from sales taxes are a deterrent to consumption because they make goods and services more expensive. Cities with lower sales taxes in competing areas will draw business away from cities with higher rates. So sales taxes can also hurt business.

Property Taxes. Cities often use property taxes as their main source of revenue. But the higher the property taxes in business districts, the greater likelihood that a business will move to a nearby area with a more competitive structure. Residential property taxes also impact economic growth by discouraging individuals from living close to cities and thus closer to small businesses that cater to local residents—like bakeries and barber shops. And commercial property taxes assessed on physical improvements to land—such as construction of a new building or an addition to existing property—are often a deterrent to entrepreneurial activity.

Fees. Localities often times use the word “fee” when the word “tax” is just as applicable. Starting January 1, 2010, Washington D.C. began charging a five-cent tax on plastic bags used at grocery stores to fund a river protection program. Whether called a fee or not, this is an additional charge each purchase for consumers. And the tax is likely to drive some business to nearby Maryland and Virginia, where shoppers can avoid the extra charge.

 Licensing

Entrepreneurism is a vital part to economic growth in cities. Local leaders should work to limit red tape, simplify the regulatory process, and do everything possible to create a hospitable licensing climate for business.

Occupational Licensing. Occupational licensing laws are billed as a means of protecting the public from negligent, unqualified, or otherwise substandard practitioners, but in reality they are usually a means of utilizing government regulation to serve narrow economic interests. By banding together and convincing governments to impose new or stricter licensing laws, existing practitioners (who typically are exempted from the new laws through grandfather clauses) can raise the cost of doing business for potential competitors. These barriers to entry reduce competition, allowing the existing practitioners to keep prices and profits higher than they otherwise would be in a truly free market.

Permitting and Inspection Barriers. Every city has permitting and inspection procedures. But some cities require more permitting and oversight than others. Excessive permitting leads to lost time, energy, and money—all reasons why businesses might leave oppressive cities.

Business Operations Regulations. Entrepreneurs often face challenges getting all the right paperwork required for setting up a new business done property because of a lack of coordination between city agencies. Ideally, cities should have a single department or agency that could provide “one-stop” permitting and licensing along with all relevant information on zoning, inspections, and taxes for small businesses. The easier it is to start a business or expand a business the more vibrant the local economy will be.

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  • ||

    What?! You mean let the economy fix itself? Heartless bastards!

  • Soonerliberty||

    Don't forget racist . . .

  • ||

    Localities often times use the word “fee” when the word “tax” is just as applicable.

    *cough* Obamacare *cough*

  • ||

    I would start by tearing the entire Planning and Zoning code into eensy-teensy pieces.

  • josey||

    Ah-ah-ah -- Haiti, but for the grace of P & Z, go we.

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    It explains nothing, thus explaining everything.

  • Eddie Vedder's Hairdo||

    The fascists and nut balls running our inner cities aren't likely to relinquish their command and control powers ever. Just do what all rational people have done for decades, move.

  • Eddie Vedder's Hairdo||

    The fascists and nut balls running our inner cities aren't likely to relinquish their command and control powers ever. Just do what all rational people have done for decades, move.

  • qwerty||

    Excellent article! Do we even need city governments?

  • FutureSerf||

    These suggestions make too much sense to be enacted. How will the politicians make money on the side if we we keep tax structures and legal obligations minimal? Of course we could just do away them all...

  • ||

    Do we even need city government? Do we need county governments? State governments? National governments? Hell no!!

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    The problem with raising taxes is that consumers are already hurting but yet the municipalities have to either cut back more or take other drastic and non favorable political measures. So its a no win.

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