Business Licenses Are Still an Effective Tool—For Crushing Entrepreneurship

Red tape remains a powerful deterrent to starting businesses and creating jobs.

Serial failed businessman Samuel Clemens might have a lesson or two to offer to his hometown of Hannibal, Missouri. Thwarted in his riverboat-piloting career, unsuccessful as a miner, and disappointed (to put it mildly) in his investments in an automated typesetting machine, "Mark Twain" could have told officials in his old stomping ground that making a living is hard enough without government officials demanding that entrepreneurs come checkbooks in hand to beg, "mother, may I?" for permission to do business.

Yet, under pressure from the state, Hannibal officials are doing exactly that, even as evidence grows that licenses and regulations are the biggest barriers faced by small firms—especially the startups that create jobs and fuel prosperity.

A November 8 article in the Hannibal Courier-Post notes that "City Hall is engaging in its annual saber-rattling campaign against businesses operating in the city of Hannibal without an up-to-date business license." Annual it is, indeed. A similar article ran in 2014, and another appeared a year before that.

Ironically, while I couldn't find a similar piece in 2012, the Courier-Post did publish a column citing a survey of small business owners in which "one-third of respondents mentioned regulation or licensing in their comments, with most offering strong criticisms of their state's regulatory environment."

I'd like to think Samuel Clemens would have connected those dots.

In fact, licensing and red tape is a serious concern for small businesses. Last month, respondents to an annual National Federation of Independent Business (NFIB) survey told the organization that the single most important problem they faced involved government regulations and red tape. In July, "regulatory burdens" ranked among the "three most significant challenges to the future growth and survival of your business" named by respondents to a similar Small Business Association survey.

Likewise, the Thumbtack.com Small Business Friendliness Survey finds that small business owners are "frequently frustrated by unnecessary bureaucratic obstacles." The survey found that "Professionals who weren't required to have a license judged their cities and states in a more favorable light" than those subject to licensing requirements (unsurprisingly, those subject to "very easy" licensing requirements share that sense of satisfaction).

This matters because owning a small businesses means food on the table and independence for millions of people. The higher the barriers to getting a business started, the harder it is for people to feed themselves and take charge of their economic lives.

Startup businesses, in particular, are disproportionate creators of jobs—"almost 20 percent of gross job creation," according to a 2010 paper. Older businesses, large and small, build prosperity, but young businesses put large numbers of people to work. So it was disconcerting when entrepreneurship went into a multi-year nosedive, with the proportion of U.S. firms less than one year old falling by nearly half between 1978 and 2011.

That plunge was interrupted last year as startups surged again in a sign—all-too-rare these days—of real economic health. But with job growth still sputtering, why chance crushing that fragile rebirth under regulatory dead weight and bureaucratic demands that entrepreneurs brave enough to put everything on the line to start a new business? It's not like we're unaware that they don't like those burdens—we've already asked, and they've answered.

Echoing armies of economists on the issue of occupational licensing, the White House pointed out this summer that "most research does not find that licensing improves quality or public health and safety." That's not to say that such rules don't have an impact since, the report added, "By one estimate, licensing restrictions cost millions of jobs nationwide and raise consumer expenses by over one hundred billion dollars."

So, is Hannibal, Missouri backing off its efforts against unlicensed businesses? I asked City Manager Jeff LaGarce exactly that. Hannibal does not plan to eliminate business licenses he told me—and he compared the city's enforcement of the "negligible" charges involved to Reason's subscription fee: "if readers of your magazine failed to renew their subscriptions, it's likely their subscriptions would be terminated."

That seems an odd comparison since you don't need a Reason subscription to read without fear of arrest, but you do need a license in Hannibal to run your business with risking unpleasant visits from the cops.

LaGarce also pointed out that Hannibal is only the designated enforcer of state-wide red tape.

"Today, at renewal, we must obtain affidavits from business owners that they are not illegal aliens; nor do they employ illegals.  While justifiable, this is State-mandated red tape that delegates this statewide law to municipalities.  The MO Legislature could have just as easily had their own Department of Revenue do this, or state licensing offices, etc., but they chose cities for this role.  We also require an affidavit of 'No Sales taxes Due' to the State of Missouri; which is another State mandate required of cities.  And several years ago, the State enacted a law requiring every business having 5 or more employees to carry workers' compensation insurance.  Guess who was charged with enforcement of those provisions?  And naturally, at the point of municipal business licensing.  Eliminate the State requirements, and it's a pretty easy process for businesses."

But the state requirements are in place, and likely a higher barrier to compliance than the licensing fees imposed by cities like Hannibal. Unwilling or unable to jump through the hoops required to ask the government for permission to operate, some people are driven out of business—or forced to operate illegally, without official paperwork.

That's a problem that small business people across the country could tell you extends well beyond Hannibal, or even the state of Missouri.

Too bad Samuel Clemens isn't still around to eloquently explain why entrepreneurs don't need the added hassle of regulatory nonsense when they're trying to make a living.