South Carolina’s System of Business Licensing Russell S. Sobel, Ph.D. Professor of Economics and Entrepreneurship Baker School of Business The Citadel

What Explains Prosperity? An Inquiry into the Nature and Causes of the Wealth of Nations (1776)

SC’s PCPI: Rank 46th – 81% of U.S. Average

South Carolina’s Declining Rate of Growth SC had 15th highest rate of growth among US states in 1980s Now 13th slowest growth rate in US). SC also has the 6th lowest labor force participation rate in the US

My Work… Policy, Growth, & Entrepreneurship

Problem 1: Complexity South Carolina’s current system of business licensing is overly complex, making it costly and burdensome for businesses to comply with (and for localities to enforce). Particularly harmful to smaller service businesses relative to major single location firms

To serve all of the area within a short drive from their home office, a Charleston service provider would need to obtain 30 county & municipal business licenses. The counties of Charleston and Dorchester, and the municipalities of Awendaw, Bonneau, Charleston, Edisto Beach, Folly Beach, Goose Creek, Hanahan, Harleyville, Hollywood, Isle Of Palms, James Island, Jamestown, Kiawah Island, Lincolnville, McClellanville, Meggett, Moncks Corner, Mount Pleasant, North Charleston, Ravenel, Reevesville, Ridgeville, Rockville, Saint George, Saint Stephen, Seabrook Island, Sullivan’s Island, and Summerville.

The different time periods & procedures for renewal. Unclear rules that differ by area, especially deliveries. Requires keeping track of revenue by municipality. But not even based on actual revenue. Uncertainty for infrequent areas – substantial fees if late renewal, no refunds if not used – must have to even bid on projects. Local business owners estimate that they spend a minimum of 3 to 4 hours per year, per license, to simply comply with the procedures.

Why inefficiency matters….the case of Romania

Complex for governments too - Local governments waste substantial resources in administering the system that could better be used for other more important local government services. Even the book aimed at helping local governments understand the rules of the business license system, The Municipal Association of South Carolina, Business License Handbook is a 102 page document. In some cases, municipalities allow the county to renew and collect their licenses; however, this practice is limited and is far from solving the problem. Estimates of statewide administration and enforcement costs of roughly $20 million, or roughly 6.5% of license revenue collected.

Problem 2: Gross Basis Business license fee taxes are based on gross revenue, not net income, and result in double, triple or even higher levels of taxation when one business purchases goods or services from another. [e.g. it is a “Pyramid” or “Turnover” tax] Complicating the issue, some local ordinances explicitly state the basis as ‘gross income’ (e.g., City of Goose Creek) while others state the basis as ‘gross receipts’ (Mount Pleasant). Violations of horizontal equity – high vs. low cost, vertical integration, profit vs. loss Meets the economic textbook definition of double taxation, but governments are insistent that it is not because it taxes different BUSINESSES

Problem 3: Inequities & Politics In the city of Charleston, for example, there are seven ‘rate classes’ and dozens of specific rates and exemptions for selected industries. BASED ON CENSUS CLASSIFICATIONS – NOT EVEN TAX PRINCPLES Examples: Class 1 includes food stores and auto dealers Class 2 incl. travel agencies, apparel stores, restaurants Class 4 includes tobacco, printing, and auto repair Class 7 includes taxis and billiard tables

Problem 3: Inequities & Politics Numerous exceptions and special rates for specific industries, including for radio telephone communications, railroad companies, night clubs, insurance companies, computer programming, and insurance. Local residents (voters) get lower rates than non resident businesses (usually double the rate). Favors for politically connected firms….."According to Mayor Keith Summey, the reduction targeted for Select Health is needed because the business license fee is based on gross revenues...putting an unfair burden on the company...Some council members have questioned whether the change is fair to other businesses, or even legal. 'We’ve already done a business license reduction for four big entities,' …'Now, one of them is coming back for another reduction.'" Baumol and why selective policies hurt

Problem 4: Competition & Scale The current system discourages competition that would benefit consumers, resulting in a higher cost of living for state residents. Additional harm because of Adam Smith’s ‘extent of the market’

Other Factors The current system does nothing to ensure quality or legitimacy of the business, simply to extract revenue. The current system does not provide a clear and rational link between the fees charged and the public services the license actually provides that are not already covered through other forms of business taxation. Particularly harmful to small entrepreneurial businesses that generate low-skill employment Has become a major and fast growing tax, costing each household in SC $500 annually (in indirect tax revenue, actual burden higher as it includes costs of compliance and administration).

Reform Local governments have no incentive to improve the system on their own. North Carolina, Alabama, and others have either reformed or have proposals for reform at the state level. Moving to a system in which each business must obtain only one license, in the area in which they file their state income tax return, that is then respected by other jurisdictions would result in substantial costs savings for both businesses and local governments, and promote entrepreneurship and competition. Similar to local option sales tax framework Drivers License Analogy

Thank You / Q&A Russell S. Sobel, Ph.D. Professor of Economics and Entrepreneurship Baker School of Business The Citadel