Kamala Harris announced her latest economic proposal last week — an increase in the maximum up-front tax deduction for new business startups to $50,000.
This higher deduction is intended to offset the costs that entrepreneurs face in their first year of operation. Those costs, according to widely cited research by Shopify, can climb to $40,000 when accounting for everything from product and shipping costs to staff payroll and marketing.
While the debate around Harris’s proposal will likely center around the question of “Is this tax deduction a good idea,” it might be more productive to ask two questions: “How did we get to that $40,000 figure in the first place? And can government do anything to bring that number down?”
It turns out that’s a question many cities and states are finally beginning to ask, as the cost, complexity and frustration of the licensing, permitting and inspection processes at the state and local level continue to climb for new small businesses.
The Cities Work project — a nonpartisan project that helps cities streamline their business startup process that is part of my organization — found that starting a small mom-and-pop restaurant in one of 20 cities across the country could cost more than $5,000 in permit and license fees alone, a number that jumps to more than $20,000 in cities like San Francisco.
A barbershop can require an average of 55 different regulatory steps, spread across eight different government agencies — and that’s assuming the entrepreneur can get through the process without making any mistakes or redoing any of the required paperwork.
Shopify’s research found that nearly a quarter of all small business startups cite these types of license and permit fees as “unexpectedly costly,” expressing surprise at often duplicative requirements between different levels of government red tape.
Those are costs that entrepreneurs often have a difficult time anticipating or budgeting for, as few cities are able or willing to lay out the process in full before business owners begin applying for permits, leading many to abandon the process midway through as fees add up or delays lead to more rent costs without any revenue to offset them.
As one entrepreneur from Kansas City put it, “Over a year-and-a-half of me going to City Hall and not taking no (for an answer). Imagine how many people stopped at the no. We lost so many (small businesses) because of that initial 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 get through Congress.
This year, Washington, D.C. funded the BEST Act, a law that cut duplicative and unnecessary business license categories, reduced high licensing fees and eliminated fees for new businesses with less than $10,000 in revenue their first year.
But progress elsewhere can be slow.
In Maryland, a bipartisan coalition of state representatives introduced a bill earlier this year that would have cut first-year filing fees for some businesses entirely. It died in committee. And a 2023 Nevada bill that would have waived veteran-owned businesses’ licensing fees for their first five years of operation never even got a hearing.
Reforms like these often force policymakers to make a sacrifice in the short term (lost revenue from reduced license and permit fees) to benefit everyone in the long term (through increased entrepreneurship, economic opportunity and more tax revenue). But the evidence we’ve seen from previous reforms suggests it’s a sacrifice worth making.
In 2012, Chicago Mayor Rahm Emanuel launched a massive business licensing reform effort that eliminated license types by 60 percent, saving businesses $2 million. At the time, Chicago was considered an outlier even among large cities with intense licensing requirements with 117 types of licenses.
More reforms followed in 2017, and a Harvard case study found the efforts “resulted in dramatic improvements to the regulatory process for small businesses and entrepreneurs and a significant improvement in the business climate.
And despite short-lived dips in licensing revenue in 2013 and business tax revenue in 2014, Chicago quickly recovered and appeared to be holding steady well above pre-licensing reform years until 2020 when the COVID-19 pandemic disrupted the global economy. In fact, revenues were already bouncing back as of 2022, and just two to three years after Emanuel’s initial reform efforts, licensing revenue was already higher than in pre-reform years.
When it comes to helping the country’s entrepreneurs, particularly those starting small or micro businesses, city officials don’t have to wait around for an act of Congress or a presidential election to save the day.
They have the power to make it cheaper, faster and simpler to start a new business in America today. Streamlining outdated, costly and duplicative regulatory burdens is the first step.
Chad Reese is the associate director of activism at the Institute for Justice.