A long time ago George McGovern ran into blue state Connecticut and his business failed. He explains why here.
From “A Politician’s Dream Is a Businessman’s Nightmare”, by George McGovern, WSJ, June 1992:
In 1988, I invested most of the earnings from this lecture circuit acquiring the leasehold on Connecticut’s Stratford Inn. … In retrospect, I wish I had known more about the hazards and difficulties of such a business, especially during a recession of the kind that hit New England just as I was acquiring the inn’s 43-year leasehold. I also wish that during the years I was in public office, I had had this firsthand experience about the difficulties business people face every day. That knowledge would have made me a better U.S. senator and a more understanding presidential contender.
Today we are much closer to a general acknowledgment that government must encourage business to expand and grow. Bill Clinton, Paul Tsongas, Bob Kerrey and others have, I believe, changed the debate of our party (1) . We intuitively know that to create job opportunities we need entrepreneurs who will risk their capital against an expected payoff. Too often, however, public policy does not consider whether we are choking off those opportunities.
My own business perspective has been limited to that small hotel and restaurant in Stratford, Conn., with an especially difficult lease and a severe recession. But my business associates and I also lived with federal, state and local rules that were all passed with the objective of helping employees, protecting the environment, raising tax dollars for schools, protecting our customers from fire hazards, etc. While I never doubted the worthiness of any of these goals, the concept that most often eludes legislators is: ‘Can we make consumers pay the higher prices for the increased operating costs that accompany public regulation and government reporting requirements with reams of red tape.’ It is a simple concern that is nonetheless often ignored by legislators. (2) For example, the papers today are filled with stories about businesses dropping health coverage for employees. We provided a substantial package for our staff at the Stratford Inn. However, were we operating today, those costs would exceed $150,000 a year for health care on top of salaries and other benefits. There would have been no reasonable way for us to absorb or pass on these costs.
Some of the escalation in the cost of health care is attributed to patients suing doctors. While one cannot assess the merit of all these claims, I’ve also witnessed firsthand the explosion in blame-shifting and scapegoating for every negative experience in life. Today, despite bankruptcy, we are still dealing with litigation from individuals who fell in or near our restaurant. Despite these injuries, not every misstep is the fault of someone else. Not every such incident should be viewed as a lawsuit instead of an unfortunate accident. And while the business owner may prevail in the end, the endless exposure to frivolous claims and high legal fees is frightening.
Our Connecticut hotel, along with many others, went bankrupt for a variety of reasons, the general economy in the Northeast being a significant cause. But that reason masks the variety of other challenges we faced that drive operating costs and financing charges beyond what a small business can handle. It is clear that some businesses have products that can be priced at almost any level. The price of raw materials (e.g., steel and glass) and life-saving drugs and medical care are not easily substituted by consumers. It is only competition or antitrust that tempers price increases. Consumers may delay purchases, but they have little choice when faced with higher prices. In services, however, consumers do have a choice when faced with higher prices. You may have to stay in a hotel while on vacation, but you can stay fewer days. You can eat in restaurants fewer times per month, or forgo a number of services from car washes to shoeshines. Every such decision eventually results in job losses for someone. And often these are the people without the skills to help themselves–the people I’ve spent a lifetime trying to help.
In short, “one-size-fits-all” rules for business ignore the reality of the market place. And setting thresholds for regulatory guidelines at artificial levels–e.g., 50 employees or more, $500,000 in sales–takes no account of other realities, such as profit margins, labor intensive vs. capital intensive businesses, and local market economics. The problem we face as legislators is: Where do we set the bar so that it is not too high to clear? I don’t have the answer. I do know that we need to start raising these questions more often.
Far from addressing the problems that’s been forcing businesses in CT to struggle or close, the state has by and large let the regulatory issues compound and consistently raised taxes one way or another for decades. With the inevitable consequence that businesses are either leaving the state or closing.
This has been the tale of my entire life. Business after business leaving the state. And fewer and fewer new one being started every year. And the ones that do stay in business having a harder struggle year after year. Because of all the job interviews I’ve had all these years and having worked in a hardware store for almost ten years off and on, I’ve seen the struggle first hand.
How much does the regulatory state cost. it’s more than dollars. It’s capital that can’t be used for new machinery or merchandise. It’s having to charge higher prices and lose customers to the big box places. It’s not being able to have as many people to help. All those subtle costs that nobody sees.
When this gets bad enough it’s as if the government is a racket. Rather than providing essential services, it’s just an extortionist asking for ever more protection money. Which basically means that the money can’t be used productively.
The problem is that the appetites of the bureaucrats never seems to satisfied. there always seems to be yet another reason for yet another fee or rule.
If your state is on the blue side of this, what does it say about your state’s future. Does you state have such overwhelming advantages that it can overcome the obstacles that your government erects against the startup and small businessman and woman.
The fact is that there has been no recovery in small business. In fact, small business looks like it’s been hit by a huge boulder. I suspect that the small business situation is even worse than it seems.
The statistics may show that something is wrong, but they can’t give a true picture of the carnage. The reality is represented in shuttered businesses, unemployed people and distraught and depressed former business owners who saw their dream just wasted away.
That’s if the prospective startup even happens:
An aspiring brewer must first obtain approval for a Brewer’s Notice from the Alcohol and Tobacco Tax and Trade Bureau (TTB), a division of the US Department of the Treasury.6 This process may include background checks, field investigations, examination of equipment and premises, and legal analysis of proposed operations.7 She must then obtain a license (and potentially other authorizations) from the alcoholic beverage regulator in the state where she plans to operate her brewery and sell her beers to wholesalers.8 In Virginia, for example, this license can be refused if the state believes the brewer is “physically unable to carry on the business,” is not a person of “good moral character and repute,” fails to demonstrate the “financial responsibility sufficient to meet the requirements of the business,” or is unable to “speak, understand, read and write the English language in a reasonably satisfactory manner.” 9 The state may even refuse to grant a license if it feels that there are enough brewers in the locality and an additional brewer would be “detrimental to the interest, morals, safety or welfare of the public.” 10
Before her first bottle can be sold, the brewer must also obtain approval for her beer label from the TTB and register that same label in states where she plans to sell it.11 Depending on her ingredients and brewing methods, she may also need approval from the TTB for her formula as well.12 Once she is in business, the brewer must ensure that her ingredients and brewing methods comply with regulations enforced by TTB, the Food and Drug Administration, and—in the case of organic beers—the US Department of Agriculture.13 In addition, how the brewer, wholesaler, and retailer market beer is subject to federal and state regulation.
Throughout this process, the brewer will face wait times and fees that add to the cost of entering and competing in the market. To obtain her Brewer’s Notice from the TTB, she must wait approximately 100 days.14 To receive approval for her formula, she could wait an additional 60 days.15 And to receive approval for her label, she could wait another 17 days.16 With regard to fees, the state brewery license will cost $350 if she brews fewer than 500 barrels of beer in one year, $2,150 if she brews between 501 and 10,000 barrels in one year, or $4,300 if she brews more than 10,001 barrels.17
In aggregate, the number of regulatory procedures that we identify (12), the wait times to complete many of these procedures (in excess of 100 days), and the associated costs (e.g., $2,150 for a single license) represent formidable barriers to entry. All of these barriers are in addition to the standard regulatory hurdles that all small businesses must surmount (zoning ordinances, incorporation rules, and tax compliance costs). This means that starting a microbrewery in the state of Virginia requires as many procedures as starting a small business in China or Venezuela, countries notorious for their excessive barriers to entry.18
It shouldn’t be more difficult to start a small business here as it is in China and Venezuela. Especially when here in the states there’s general sense of following the rules and not resorting to the bribery that prevails in China and Venezuela.
I’m sure though, that the hands will come out at some point. When there’s this much corruption potential involved that’s going to be inevitable. We here in the US are used to playing by the rules, but it’s gotten to the point that rules more and more seem to squeeze people and less for maintaining civil society. That’s not a sustainable model for growth.
One would think that in the midst of the ongoing economic crisis the Administration would ease up on it’s ongoing drive to manage the economy. But when has such a small peccadillo as a collapsed economy ever stopped the likes of the zealots in the Administration. They are doubling down with yet more stupid and petty rules and reporting requirements. I’m not sure how this is going to encourage small business hiring, but I’m not an Administration super genius with a horde o f minions telling me what I want to hear.
Julia Tried To Start A Business. She wishes she hadn’t
Last week, the Obama Administration released a campaign piece about the life of Julia, showing how Julia benefited from taxpayer largess and oversight by the state at many points in her life. But the campaign piece was incomplete, and missed the part where Julia attempted to start her own business. Long before she started a web business out of her home, she tried to start a retail business.
Julia always liked the outdoors — remember that taxpayers helped her retire from productive work so she could work in a community garden. Well, as she was growing up, Julia loved to camp outdoors. For years she camped at a lovely lakefront public campground until it was forced to close — unfortunately, the government agency that ran the campground had operating costs that were so much higher than the fees charged to visitors that they couldn’t afford to keep it open any longer.
But Julia had an idea. After forming a corporation (a surprisingly easy task with lots of private companies competing to help one complete the proper legal steps), Julia approached the public parks agency about the possibility of her leasing the campground and reopening it under private management. She was surprised, though, at the tremendous opposition she encountered in the agency. Despite the fact that she was willing to adhere to operating standards and restrictions set by the public agency, she initially encountered tremendous resistance. She had assumed a parks and recreation agency would welcome the opportunity to reopen a park to the public, be she had underestimated the near universal opposition to private enterprise she found among the agency’s employees.
Eventually, though, with a lot of hard work and some help from a local TV station that rallied park users to her cause, the public agency agreed to a one-year pilot of her idea.
So the hard part was behind her, right? Probably not. In fact, Julia expected entrepreneurship to be tough. She was worried about the challenges of hiring good employees, getting financing for new equipment, and marketing her new campground. As it turned out, though, she would have little time for any of these concerns.
Before she could even think about hiring employees, she had to get a federal tax ID number, or FEIN, for her company. This identification number allows her to collect and pay her employee’s Social Security and Medicare taxes, as well as withhold and submit the Federal income tax obligations of her employees. In addition to these reports, she also learned that she had to file a separate report each quarter on her employee’s earnings in order to file and pay Federal unemployment taxes.
But her state has its own income tax, so she had to register for a separate ID number to report and pay employee state tax withholding, and then had to fill out yet another registration for another ID number to file another regular report to pay state unemployment taxes. Her state also has a public rather than private workers compensation system, so she registered for another number so she could fill out another monthly report to pay state workers compensation premiums.
And of course, since Julia intends to make retail sales, she needed to register with the state (yet another number and report) to collect and pay sales tax — though her state calls it a “privilege” tax rather than a sales tax because, as the state’s web site explains, conducting commerce is a privilege that can only be exercised with the state’s permission. She is momentarily encouraged when she finds out her state sales tax does not apply to camping, only to eventually find out this is because the state has a completely separate system (yes, another registration number and monthly report) for collecting and paying lodging taxes. So sales in her campground store will be at one tax rate on one report while campsite rentals in the same park will pay a different tax rate on a different report. Which seems overly complicated until she finds out her county also has a separate sales and lodging tax that are added to the state’s, and must be reported separately under a different registration number to the County. Thank goodness she is not in a city, or she could easily have had to file and pay three separate sales taxes and three separate lodging taxes (city, county, state). If she ever decides to rent boats on the lake, she will have to get another state registration to pay a special state boat rental tax, the percentage of which varies based on whether a boat is motorized or human-powered.
Whew. Julia thought she had finally tracked down all her tax registrations, but she was wrong. Her corporation is an S-corporation, so she files and pays her corporate income taxes on her individual return. But it turns out her state also has a franchise tax on corporations she must pay separately, based on her total revenues. In addition, it turns out that each year she must produce a complete list of all her businesses personal property, from lawn mowers to computers to radios to chairs, and submit this list to the County so she can pay property taxes on all these items. Unfortunately, in her state the property tax bill does not end there. When the public agency was running the campground, the county was not allowed to charge another government agency property taxes on the assets. The agency still owns the property — it is just leasing it to Julia so she can operate it — but the county has a mechanism called the Leasehold Excise Tax to make Julia pay the property taxes the agency doesn’t have to pay.
So twelve registration numbers and 12 monthly/quarterly/yearly reports later, surely Julia has fulfilled all her obligations to the government. Unfortunately, no, because she has not even begun to address licensing issues. To begin, the County will require that she get an occupancy permit for her campground, which must be renewed annually. This seemed surprisingly easy, until someone from the County noticed she had removed an old rotting wooden deck from the back of her store that had been a safety issue and an eyesore. It turns out she was in violation of County law because she did not get a removal permit first. She was required to get a permit retroactively, which eventually required payments to seven different County agencies and at one point required, for a reason she never understood, the collection and testing of a soil sample.
Because she will be selling packaged foods in her store (e.g. chips and pop-tarts), she also has to get a health department license and inspection. She had originally intended to keep some fresh-brewed coffee for customers in the store, but it turned out that required a higher-level health license and eight hours training in food handling. She might have been willing to pursue it, but the inspector told her that to make coffee, she would need to install a three-basin stainless steel wash-up sink plus a separate mop sink in her store, and she decided that coffee would have to wait.
Once through the general health licensing process, she then needed to obtain licenses for individual products. She wanted to sell aspirin, so she had to get a state over-the counter drug sale license. She knew that customers would want cigarettes, so she had to obtain a tobacco sales license. One day as she was setting up, a state inspector noticed she had a carton of eggs in her cooler, and notified her she needed a state license to sell eggs (as Dave Barry would say, I am not making this up). And then there was the problem of beer.
She knew that selling beer would require an alcohol license. In addition to requiring a long, tedious application, getting such a license required that she be finger-printed at the local Sheriff’s office, that she measure the distance in feet to the nearest three stores that sold alcohol and the nearest school and church, and that she attend eight hours of special alcohol sales training. The whole application process took many months — at one point her application was kicked back to her because she included a computer CAD drawing of the store when the instructions require the drawing be made by hand (I repeat, I am not making this up). She finally thought she was home-free, when she found her state requires a public hearing as a final step to determine if the market really needs another liquor retailer. At that hearing, several large, powerful local liquor businesses testified that the market was already saturated and that they already had plenty of competition, thank you very much, and her application was denied.
By the time Julia called it quits, she still had multiple applications pending. She hadn’t yet figured out how to create the stormwater runnoff management plan needed for her stormwater permit. She hadn’t been able to satisfy the state air resources board in permitting her small above-ground fuel tank. And she was still going back and forth with the state department of water resources for her drinking water sampling and testing plan.
Julia gave up her dream of working outdoors, and spent the rest of her life closeted in a room staring at a computer screen. It wasn’t what she really wanted to do, but web design does not require a license (yet) and she could avoid the hassles involved with having employees. The public never got its park back, and the campground still sits closed, the facilities falling apart from neglect. But a few months after Julia gave up, a park agency employee wrote a scathing editorial in the local paper, citing Julia’s failure as a great example of how private enterprise has failed and the need for public agencies to do more.
Julia’s experience is a composite, but is based entirely on my personal, real experiences. Every tax, registration, report, inspection, and license mentioned is a real one my company has had to obtain at some point in our expansion to new states. The only difference is in the story of the liquor license, where after my local competitors initially blocked the license I had the wherewithal to fight and eventually get it issued.
Small businesses are the vitality and diversity of an economy. If you constrain them with burdensome regulations, punish them with heavy taxations and cripple them with bad employment laws, they die and you lose that vitality and diversity. It’s always struck me as ironic that the same people who complain loudly about the WalMart economy don’t understand that it’s the rules and taxes they promulgated and legislated that created the Walmart economy in the first place. It’s only in a high tax and regulation low entropy economy that the efficiencies of a Walmart distribution system outweigh the ability of the more diverse small businesses to better provide for the local customers.
Essentially you’ve created a sterile ground for innovation and creativity, with all that that implies for the future. It may seem like a good idea to mortgage your future for your present, but I’ve never seen a case where that ends well.
The current situation with small businesses is grave. When a large company has a layoff, that layoff makes the papers and the news. Frequently, when a small business goes bust, nobody notices but the customers. Yet when thousands of small businesses shutter their doors and close, there’s no coming back.
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