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he recent controversy surrounding urban sprawl and Smart Growth has brought urban revitalization issues to the forefront of public-policy debate. Although critics of the current Smart Growth movement abound, a consensus has emerged that reinvigorating central-city economies is critical to the health of regional economic growth and the prosperity of residents in the 21st century.[1] However, discussions surrounding revitalization strategies focus almost exclusively on housing and new programs that encourage mostly middle-income people to stay in or relocate to the central city. For example, Maryland’s much heralded Smart Growth plan includes the “Live Where You Work” program that offers tax incentives to households that buy homes near their employment in the central city. The Location Efficient Mortgage attempts to reduce borrowing costs for families buying homes in central-city neighborhoods near mass transit stops. Even urban-growth boundaries are designed to channel private investment into existing urban areas by foreclosing development opportunities in suburban and rural areas. These strategies, however, focus primarily on redistributing economic activity within a city or region.
Less attention has been given to the importance of creating an economic and political climate that encourages new wealth creation in central-city neighborhoods. This is surprising given a now long history of revitalization efforts in the United States. Issues of revitalization on the local level can be traced to the turn of the 19th century, when the Progressive movement made housing code reforms a critical issue in local politics. Similarly, in the 1920s and 1930s, zoning laws were adopted in many cities as a means to protect neighborhoods from encroaching industrial and commercial uses. Large-scale revitalization efforts supported by the federal government began in earnest in the 1940s with urban renewal and continue in the form of state-sponsored enterprise zones and federally sponsored empowerment zones, although their impacts on cities and neighborhoods are hotly debated.[2]
Many of the downtown revitalization efforts have focused on encouraging new investment in physical buildings, converting warehouses to lofts and other urban housing for middle- and upper-income families, and creating entertainment and professional enclaves. Meanwhile, neighborhoods have languished outside most downtown areas. Current inner-city residents tend to be poorer and less well educated than residents of the broader metropolitan area. Thus, even if Smart Growth policies successfully stimulate middle-income gentrification, or encourage investment by major corporations, many inner-city residents will still face dim employment prospects or may be forced out of housing because their incomes can not compete with higher-income households in a higher-cost housing market. Empowerment zone initiatives focus on expanding access to business financing, housing, and public-works projects that provide broad access to services by established businesses.[3]
Future earnings and employment prospects outside downtowns are even dimmer given current economic trends: manufacturing jobs continue to decentralize to suburban and rural areas of the nation as firms locate close to skilled and educated work forces.[4] Even if jobs did not decentralize, many current inner-city residents would still have trouble competing in an increasingly skill-based economy. Not surprisingly, many urban policy initiatives targeted toward poorer and less well-educated populations tend to focus on increasing the skills and education levels of current residents.
Although critics of the current Smart Growth movement abound, a consensus has emerged that reinvigorating central-city economies is critical to the health of regional economic growth and the prosperity of residents in the 21st century.
A. Entrepreneurship and the Competitive Advantage of Cities
An alternative strategy to revitalizing inner-city neighborhoods focuses urban policy on wealth creation at the grassroots level by stimulating entrepreneurship and new business formation in neighborhoods. Since Michael Porter’s seminal work The Competitive Advantage of Nations demonstrated the potential viability of many inner-city neighborhoods in the early 1990s, many companies and policy analysts have taken a renewed interest in the economic potential of the central city, particularly its neighborhoods.[5] In fact, given the strength of national and local economies, many large corporations are using franchising to mine minority entrepreneurs as a way to tap into new markets, particularly among inner-city and ethnic communities.[6] More recently, some programs have emerged to assist very small and new start-up ventures, also called “microenterprises.”[7]
Entrepreneurship rates, however, are not spread evenly among ethnic and minority groups. While about 11 percent of all Americans are self-employed, a common indicator of entrepreneurship, almost one-quarter of Koreans living in the United States are self-employed. Some groups, such as Asians, are traditionally overrepresented (statistically) among the self-employed and entrepreneurial. Immigrant groups generally tend to have higher rates of entrepreneurship and self-employment than Native Americans.[8] In St. Louis, an estimated 15,000 immigrant Bosnians are fueling the revival of one urban neighborhood.[9] On the other hand, other groups, particularly native African-Americans, are underrepresented.[10]
Many factors contribute to the likelihood that certain groups will be over- or under-represented among American entrepreneurs, including family background, income, and education. Policy factors, however, may also be important even if indirectly.[11] Governments on all levels can encourage or discourage entrepreneurship by dismantling or erecting obstacles to business formation.
Among “entry level” businesses that require little education and few specialized skills, these policy variables may be most clearly evident in the taxicab industry. Numerous cities, for example, explicitly limit entry into the industry by capping the number of taxicabs and taxicab companies that can operate or by erecting complicated, politically charged review procedures for new applicants. These policies effectively shut out new businesses unless potential entrepreneurs have the income, skills, time, and legal expertise to negotiate them effectively. The burden of these rules falls most heavily on those with the fewest resources, often low-income minority groups and recent immigrants. Existing businesses are protected under these laws because they have the resources to manipulate the system. Some ethnic groups, particularly native-born African-Americans, may be particularly burdened by these regulations because they lack the community network and political influence to promote more open and entrepreneur-friendly policies. Thus, one reason African-Americans may be underrepresented among small business owners and operators may be because they are heavily concentrated in the nation’s largest, more highly regulated cities. Other types of federal and state regulations may also impact entrepreneurship, including minimum-wage laws, occupational safety rules, and environmental permitting processes.
The likelihood of starting up and operating a small business is lower in cities where the regulatory process effectively requires entrepreneurs to become lawyers, accountants, planning consultants, and work-force trainers just to get legal approval to start a business. In addition, these entrepreneurs are expected to attend to the traditional tasks of producing, marketing, and selling their product or service.[12] “Merely registering and legally operating a small business in an inner city is daunting,” notes Harvard business professor Michael E. Porter.[13] “It is truly ironic,” he continues, “that the areas in the United States that are most in need of business redevelopment are the most overregulated
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Advantages to Home-based Businesses The advantages of home-based entrepreneurship are many. For home-improvement contractors, the home serves as a convenient base of operations to calculate estimates for jobs and deploy workers and materials to job sites. Nail salons could even operate out of the home given their small space requirements and low volume of customer activity. Similarly, home-appliance repair, electronics repair, or auto stereo/CD installation services can all operate out of a garage, in a basement, or in an office/work space inside the home. Home-work offers benefits from low start-up costs and flexible work hours to direct savings on personal expenditures.1 Home-based businesses are often overlooked in discussions of business forecasting, economic activity, and entrepreneurship.2 This is not surprising since persons who work from the home face a maze of legal uncertainty from federal, state, and local regulations. These regulations range from outright bans on home-based work, to specifying necessary architectural modifications that must be undertaken for home-based businesses, to the amount of space that can be used for work, the number of people who can work in the home, and limitations on advertising. Some categories of work are banned entirely by federal, state, or local statute. With the status of home-based companies in legal limbo, many people are reluctant to report home-based business activities. Three factors make it likely that home-based businesses have become an even larger if still underreported segment of the nation's economy during the last decade. These include: (1) dramatic changes in communications and computing technology that have occurred making telecommuting viable; (2) the ongoing shift from a manufacturing toward a service economy; and (3) the emergence of a nontraditional workforce (i.e., more women entering the workplace, fewer two-parent, single-earner households, and older Americans staying economically active longer). It is also likely that work from home will continue to grow as a segment of the economy but that many home-based businesses will never be started or will fail due to unnecessary or outdated regulations, unbeknownst to economic analysts and unmourned by consumers. Consumers and the government (which forgoes the tax revenues) alike lose when regulatory barriers provide disincentives to home-based work.
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B. Regulation and Entrepreneurship
Government regulations can have a debilitating impact on economic growth and entrepreneurship despite the most noble of intentions. By preventing entry, and raising entry costs (including extensive and onerous application procedures), local laws and regulations can have the unintended impact of greatly increasing costs that stifle business formation. These regulations have an especially pernicious effect on small businesses with slimmer profit margins and less capital and other resources (including time) to comply with rules and regulatory mandates. Rochester Institute of Technology economist Thomas Hopkins estimates that the annual cost of federal regulations alone exceeded $700 billion in 1999, or more than $7,000 per household.[15] More importantly, Hopkins estimates the average cost to businesses varies inversely with size:
- Businesses with 19 or fewer employees face an average regulatory burden of $5,545 per employee; [16]
- Businesses with between 20 and 499 employees face an average annual regulatory burden of $5,195 per employee; [17]
- Businesses with 500 or more employees face an average annual regulatory burden of $2,921 per employee.[18]
In addition, many small businesses have an incentive to stay small. Some regulations do not apply to businesses under certain sizes, and any increased profits from modest growth could easily trigger greater regulatory burdens at all levels of government. The Manhattan Institute's Walter Olsen notes that current law encourages businesses to stay small:
Occupational Safety and Health Administration regulations kick in at 10 employees, the Americans with Disabilities Act and the Civil Rights Act at 15, age bias and the health insurance continuation provisions of the Consolidated Omnibus Budget Reconciliation Act of 1986 at 20, plant-closing-notification and family-leave mandates at 50, and Employee Retirement and Income Security Act and Equal Employment Opportunity Commission reporting at 100.[19]
Indeed, informal and illegal economies for products and services often purchased in the legal economy thrive in many cities precisely because business owners want to avoid the high regulatory costs of the legal economy. In New York City, for example, the number of illegal sweatshops increased from just 200 in the 1970s to over 3,000 in the 1980s, employing more than 50,000 workers.[20] An estimated 90 percent of all inside renovation work by small construction companies in Manhattan was performed without permits.[21] Overall, the underground economy in the United States could approach a half-trillion dollars.[22]
The implications are important for urban development and revitalization. Job growth in cities is closely associated with the birth of new firms.[23] More importantly, most jobs are created by small firms that grow to become medium-sized firms.[24] To the extent the state and regulatory process inhibits the growth of firms by providing incentives for them to stay small and underground, the regulatory system could undermine long-term growth and redevelopment of inner-city neighborhoods.
During times of relatively strong economic growth, the costs of regulations to society are largely hidden.[25] Many would-be entrepreneurs find jobs with existing firms or work as independent contractors rather than negotiate the regulatory maze that includes incorporation, permitting, licensing, public hearings, and other steps. The number of potential entrepreneurs who decide against starting a new venture simply because of the regulatory hurdles is impossible to count. Business failures during economic good times are often attributed to poor planning or undercapitalization when, in fact, an important contributing cause is the cost of satisfying governmental mandates or complying with regulations.[26] The impact of the regulatory process on entrepreneurship in entry-level occupations is even more complicated by the fact that different levels of government regulate different occupations. Cities may be the primary regulator of home-improvement contractors, for example, but state agencies may take the lead in other areas such as barbering or cosmetology. Thus, the regulatory climate of a city may be adversely impacted by rules, procedures, and guidelines imposed at the state or regional level as well as the city level. To more clearly understand the role public policy plays in supporting or discouraging entrepreneurship for less skilled and less educated citizens in cities, the following sections examine more fully the policy climates for entry-level entrepreneurship in four cities: Atlanta, Boston, Dallas, and Los Angeles.[27]
Part 2
Entrepreneurship and Regulation: The Case of Taxis
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ne of the more difficult problems that policymakers and elected officials face is in understanding the myriad of ways local regulations impact small businesses. Few ordinances or state laws are subjected to comprehensive analysis, and almost none has been evaluated with respect to its impacts on self-employment opportunities in inner-city or minority neighborhoods. Although passed into law with good intentions, these regulations may have significant negative impacts on entrepreneurship in inner-city neighborhoods by erecting insurmountable barriers. While, as Section Seven discusses in more depth, many cities have responded by creating programs to target these businesses (e.g., microenterprise training or loan programs), regulations impact a broader range of businesses; their impact is felt beyond the relatively small number assisted through these other programs. Moreover, few programs assist in minimizing the regulatory burden new entrepreneurs face from complex, detailed, and often antiquated city ordinances. While some programs, such as one-stop-capital shops, help microentrepreneurs negotiate local ordinances, many programs are ill-equipped to negotiate complex state laws or local ordinances.
The urban taxicab industry provides a unique lens through which the regulatory climate of a city can impact economic opportunity. The taxicab industry is one of the most heavily regulated low-skilled businesses in the nation, a legacy, in part, of its early treatment by city governments as a public utility. Moreover, taxicab regulation is almost always regulated at the city level, not the state or regional level.[28] Thus, local regulation is almost always a product of local politics.
In principle, the skills needed to operate and run a taxicab business are minimal. Those with a thorough knowledge of their city, a good driving record, a safe car, and a little entrepreneurial “chutzpah” should be able to start up a taxicab company with ease and with surprisingly little initial capital (less than $10,000 for a used car, radio/cell phone, and insurance). A single-car cab company would, at first glance, be the quintessential microenterprise. Moreover, a taxicab business would seem to be a prime example of a microenterprise with growth potential. By providing high-quality service and tapping into new markets, a taxi entrepreneur could expand from one to two to three or more cars relatively easily.
In practice, most cities regulate this industry to the point
where entry is difficult, if not impossible. In some cases, entry is illegal:
the local government sets a maximum number of licenses, and if the cap is
binding, no one can legally start a new taxicab business. In Atlanta, the city
has capped the number of taxicab licenses at 1,600 (see below). These
artificial scarcities have created a dynamic illegal market in many cities as
unlicensed entrepreneurs try to meet unmet consumer demand. The City of Los
Angeles, for example, grants franchises to taxicab companies with a minimum
number of cabs. By some estimates, the number of gypsy cabs (illegal taxicabs)
plying the streets of Los Angeles nears 4,000, almost double the number of
taxicabs legally permitted.[29]
Importantly, in many cities, the prevalence of gypsy cabs is a long-standing
tradition, and many regulators let them operate because they do not compete
with lawful transportation services.[30] Unfortunately, the
nature of illegal businesses almost always limits their ability to expand.[31]
Taxicab regulation and deregulation are also politically
controversial. An organized trade association of established taxicab owners,
the International Taxicab and Livery Association (ITLA) based in Maryland, is
poised to frustrate any attempt to lower barriers to entry and increase
competition.[32]
Even without the formidable lobbying power of the ITLA, local cab companies are
ensconced in the local political system and actively and resourcefully oppose
deregulation and new competition. State governments have rarely interfered with
local government regulations of taxicabs or other businesses, even when the
regulations explicitly undermine competition.[33] Thus, once in
place, local politics make deregulation difficult to achieve.
The taxicab industry is one of the most heavily regulated low-skilled businesses in the nation, a legacy, in part, of its early treatment by city governments as a public utility.
The following section does not debate the merits of taxicab regulation and deregulation. That issue has been taken up in separate venues.[34] Rather, the discussion below focuses on the regulatory obstacles created to limit entry into a profession that would otherwise have relatively few natural obstacles if it were allowed to operate in a free market.
Each city has unique ways of regulating its local cab
companies. Traditionally, the more onerous regulations have included:
- Twenty-four hour service requirements where taxicab companies are required to provide round the clock, seven-days per week service;
- Citywide service requirements that effectively prohibit part-time and niche companies from providing services to specific markets or neighborhoods;
- Public hearings for all new applications to start a new business, where applicants bear the burden of proof to demonstrate that a market exists for their services, allowing anyone to object to the application, including the fledgling company’s competitors;
- Zoning ordinances that prevent small businesses from operating out of their homes;
- Caps on the number of vehicles permitted to operate;
- Minimum fleet sizes requiring new cab companies to invest in substantial numbers of new cars (often 15 or more) before they can begin providing a service);
- License fees, which can range from as little as $100 per company to $1,500 or more; and
- Off-street parking requirements for out-of-service cabs that virtually eliminate the possibility of running a home-based business or microenterprise.
Cities show a striking level of creativity in establishing the regulatory environment for taxicabs. A survey of eight large cities in Ohio identified 18 major regulations.[35] Every city required some form of licensing for both drivers and companies. The licensing fees, however, varied significantly, from $25 in Youngstown to $250 per car in Dayton.[36] Akron charged $250 to license a company, and then $10 per car. Beyond general licensing requirements, individual cities varied significantly in the types and combinations of regulations (Table 1). Three quarters of the cities required metered fares and imposed a maximum price. Half of the cities required companies to file financial reports and regulated the color schemes of cab companies. Fewer than half required some of the more onerous and burdensome regulations, including 24-hour service requirements, public hearings on new licenses, and proof of public need and necessity.
In general, taxicab regulations fell into three categories: price, internal company operations, and industry structure. Price regulations are straightforward: local governments set maximum or minimum prices. Some local governments set the price of taxi services by ordinance. Others set a maximum price, but allow supply and demand to determine prices lower than the locally set maximum. Still others allow the market to determine the rate.[37] Most cities opt for some form of price regulation.
Cities were active micromanagers of most
facets of the industry. Regulation of bus-iness operations was far more varied,
but still reflected the legacy of public-utility regulation. Some required
companies to file financial reports with the city. In some cases, taxicab
entrepreneurs must open their financial records to show that the business will
be solvent, explain marketing strategies, and produce market analysis to
support their application in public hearings that include their competitors.
Almost all required the use of radios to dispatch cars even when alternatives
were available, practical, and cheaper. Cities and their regulatory agencies
commonly determine the minimum number of cabs a company must have to be
licensed, what areas of the city the company can serve, hours of operation,
prices, and service levels.
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Regulations as Barriers to Entry: The Case of Dayton, Ohio Local regulations often combine to form powerful barriers to entry. For example, in the City of Dayton (Ohio), merely complying with local regulations added almost $67,000 to the start-up costs of owning a taxicab business. The most significant fiscal impact resulted from regulations that mandated separate dispatching services; almost three-quarters of the added costs could be attributed to the personnel needed to maintain a full-time dispatching service.[38] Purchasing enough cars to maintain service levels added another 22 percent to the cost of the business. Importantly, a 24-hour service requirement effectively mandated a multicar firm, driving up labor costs and the expense of acquiring cars. Additional costs were incurred as a result of the city’s requirement that cab companies maintain separate dispatching services with radio equipment (when alternative low-cost technologies such as cell phones could substitute). |
Other regulations also could dramatically increase costs. For example, if the city had imposed an effective cap on taxicab licenses, the supply of cabs would be less than the market demand for cab services. The price for licenses would increase as existing licenses would be sold to prospective taxi entrepreneurs. In cities where licenses are transferable (e.g., Columbus, Ohio), these market prices would be determined through legal sales in a private market. In other cases, where licenses are not transferable, these prices would be established in a black market. The market prices for licenses could easily add $5,000 or more per vehicle.[39] In New York City, taxicab licenses (also called medallions) cost more than $175,000 on the black market.[40] In Boston, the city auctions off cab licenses in an open market, but restricts supply to keep prices high, often upwards of $175,000. These prices are far beyond the financial wherewithal of even the most resourceful independent cabbie.[41]
Some cities are explicit about the exclusion of small business owners from the taxicab market. In Los Angeles, the city bids out taxicab services to companies with between 70 and 800 taxicabs, enfranchising between three and 30 cab companies. Thus, all taxicab services might be provided by a small number of firms in a city of more than three million people. The city of Los Angeles essentially manages the entire taxicab market through the regulatory process, leaving little, if anything, up to the spontaneous innovation of the private market. Of course, with city taxicab regulations running in excess of 50 pages, few start-up entrepreneurs would have the time or financial resources to wade through the regulatory maze to obtain a permit (see below).
In sum, cities regulate taxicabs in a variety of different ways, depending on the local political climate and the influence of local cab companies and other special interests. The following case studies further illustrate the impact of regulation in this industry.
Cities regulate taxicabs in a variety of different ways, depending on the local political climate and the influence of local cab companies and other special interests.
1. Boston
In most cities, taxicab regulation is a municipal responsibility. In Massachusetts, the state Department of Telecommunications and Energy (DTE) regulates Boston’s taxi market in a rare case of state involvement in this industry. The DTE imposes a cap on the total number of taxis on the streets of Boston.[42] The limit is enforced by a ceiling on the number of taxi medallions established by the Boston police commissioner, which gives their owners the right to operate a taxi, or to lease that taxi to others to drive as employees.
A three-tiered process
for licensing cabs and drivers exists in Boston. In the first step, the
prospective cab company operator must obtain a medallion, which gives him the
legal right to own and operate a taxicab company in the City of Boston. In the
second step, the medallion holder must obtain a separate license to allow him
to operate a taxi company and hire or contract with drivers. Thus, Boston
separates the ownership of the medallion from the license to operate a
company—the medallion is an entitlement to apply for a license to operate a
taxi company. The Hackney Division of the Boston Police Department enforces the
medallion rule. Not surprisingly, medallion owners are often not the same
people that operate the company. Finally, in the third step, each of the
potential drivers must obtain a license from the city before they can operate a
taxi and collect fares. Most Boston cabbies are not owner/operators, but
employees of (or contractors with) medallion owners. In the City of Boston,
1,775 medallions make Boston’s the largest taxi system in Massachusetts.[43]
At first glance, with 3.1 taxis per 1,000 residents, Boston is better served than Dallas, at least as well served as Cambridge (2.52/1000), and better served than the adjoining town of Brookline (3.03/1000). Taxi service is generally viewed as adequate only in the city’s downtown and at its airport. In the city’s many outlying neighborhoods, however, residents complain about difficulty in obtaining taxi service.[44] These complaints may well be justified.
Boston is fundamentally different from all other jurisdictions in Massachusetts because Boston 1) contains large residential areas (e.g., Dorchester, Hyde Park, West Roxbury, Brighton, and many others); 2) is the economic center of New England’s largest metropolitan area; and 3) contains large, regional transportation facilities (e.g., Logan Airport, South Station, Back Bay Station, and North Station). Downtown, the airport, and train stations generate demand for taxis that inevitably surpasses that of typical residential areas. Thus, Boston’s special problem arises: the distribution of taxis is skewed away from residential neighborhoods to service the downtown and airport.
Even city officials acknowledge that getting a taxi in the city’s outer boroughs (the non-downtown residential areas) is extremely difficult. The location of the city’s cab stands—places where taxis await requests for service is indicative of this problem. Of 72 cab stands in the city—not including Logan Airport—45 (62 percent) are located in Boston proper (downtown) or other regionally significant areas.[45] West Roxbury has just one taxi stand, despite the fact that it would be as large as Brookline if it were an independent jurisdiction (Brookline has 26 taxi stands). Dorchester, which would be the second-largest city in the state were it not part of Boston, has only eight taxi stands. Brighton and Charleston have two each.
Boston’s Hackney Division estimates that, at any given time,
as many as 70 percent of all taxis are serving either downtown Boston or the
airport. That leaves only 30 percent of the city’s 1,716 taxis—515 cabs—to
serve all the outlying residential neighborhoods. Because non-downtown neighborhoods,
taken together, comprise 86 percent of the city’s total population of some
550,000, the actual cab density ratio, on average, for non-downtown Boston is
closer to one taxi per thousand persons—approximately one-third of what
Brookline and Cambridge provide their residents.[46] Even this may understate the problem because
many areas of the North and South Ends are not close to the taxi stands,
leading to the likelihood that residents in these neighborhoods, too, have to
endure long waits after summoning cabs by phone. Moreover, many Boston
cabs—such as those taking passengers home from Logan Airport—may actually be
serving residents of other cities and towns, such as Brookline, Cambridge, or
Newton. Thus, the real service ratios for these cities may be even higher
relative to Boston.
The problem of underserved residential neighborhoods is unlikely
to be resolved even by what might appear to be a bold stroke undertaken by the
administration of Mayor Thomas Menino (see the discussion in Section 6). In
response to complaints about taxi service and to demands from potential
owner-operators for easier entry, the city authorized the sale of 260
additional medallions. Of those medallions authorized for sale, 151 were sold
in two 1999 auctions. The high price of the medallions, however, ensures that
new taxis, like the present ones, will have to seek out the most remunerative
markets—downtown and the airport, leaving residential neighborhoods with no
greater level of service. Plans to mandate that taxi service be provided to
outlying areas are unlikely to lead to anything more than an enforcement
problem for police. The economic incentive—in fact, the economic necessity
created by the high medallion cost—will inevitably lead owners and drivers to
where there is a greater density of potential fares, longer trips, and bigger
tippers.
Thus, residents of outlying areas of Boston face a
persistent problem: many simply cannot get medallion cabs to respond to
requests for service in a timely fashion. Others resort to so-called gypsy
cabs. In fact, Roxbury and Dorchester have benefited from gypsy cab service for
more than 15 years, which are popular at local grocery stores and neighborhood
shopping areas.[47]
2. Dallas
Dallas provides another example of how local governments regulate taxicabs. Despite its generally favorable business climate and booming local economy (see Section Four), prospective company owners must negotiate a maze of regulations if they want to operate legally.
To obtain a license, entrepreneurs must apply to the city council for a permit, have a minimum of 25 cabs ready to cruise the streets, and specify that they will own, control, or otherwise operate the proposed taxicab service. The latter requirement ensures, in principle, that licenses are not sold to independent operators (see the discussion below of taxicab licensing in Atlanta). The application must include a nonrefundable application fee of $150. Once approved by city council, the owner must pay the city a franchise fee of $240 a year per taxicab authorized by the permit (although the city allows franchisees to pay this fee in installments, see box).
The example of Dallas-based King Cab is useful. King Cab operates 36 cabs on the road. At $240 per cab, licensing costs equal $8,640 per year. Licensing costs would increase to $12,000 if King Cab operated all 50 cabs that the city council has approved. More importantly, since the city requires companies to have a minimum of 25 cabs before it will grant the cab company a license to operate in the city, start-up companies are faced with a minimum of $6,000 in licensing fees. Taxicab companies also have to obtain equipment essential for business, like radios, meters, and dispatch equipment.
The fees pale in comparison to the additional costs imposed by other city regulations. When asked what was the most costly regulation his company has to comply with, the response of Jim Richards, manager of the Yellow Cab Compnay, was vehicle standards. “This means basic car maintenance of each cab,” said Richards. “The city mandates that the cab should be no more than five years old. We keep cabs that are no more than three years old because they inspect them three times a year.”[48]
If the cab company uses a five-year old standard model car, the capital costs would increase start-up costs by more than $168,000.[49] Insurance would add at least another $3,000 per car, bringing the start-up cost for a new cab company in Dallas to more than $245,000 (Figure 1). These costs are solely attributable to the regulatory mandate of the minimum-car requirement. Yet, these estimates are probably conservative. In Dallas, taxicab companies often maintain vehicle fleets with newer vehicles (see below). A three-year old Ford Taurus (model year 1998) would cost about $9,500 in average condition and $10,500 in clean condition.[50] Thus, the capital costs associated with the 25-car minimum with newer cars would add at least $70,000 to the start-up costs of the company, bringing the total cost of starting a new taxicab company in Dallas to more than $330,000. These costs are almost solely attributed to regulation.
Figure 1: Selected
Costs to Comply with 25-car Minimum
Requirement for Dallas Taxicab Companies 
Source: Calculations based on adding 24 cars to meet the minimum fleet size requirements, interviews with Dallas taxicab company operators, and Official Used Car Market Guide (Gainesville, Georgia: Black Book National Auto Research, May 1, 2000). See footnotes in text.
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Taxicab License Requirements in Dallas
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City council and license fees are only one part of the overall process. The director of the transportation department in the Dallas Office of Economic Development must also conduct an investigation and make “findings of fact” concerning “public convenience and necessity” and other factors, including:
- The number of taxicabs presently operating in the city and the impact of new companies on wages and working conditions of existing taxi drivers, taxicab companies, and public mass transportation;
- The adequacy of existing public transportation services, including existing holders, to meet the city’s transportation needs;
- Whether existing companies can render the proposed additional taxicab service more efficiently or effectively than the applicant;
- The effect of the proposed additional taxicab service on traffic conditions; and
- The character, experience, and fiscal responsibilities of the applicant.
Once the transportation director completes his investigation and reports his findings of fact, the city council is required to hold a public hearing to consider whether a franchise or annual permit should be granted. The applicant for a franchise or annual permit has the burden of proving that the public convenience and necessity require the proposed taxicab service and that the applicant is qualified and financially able to provide the service proposed in the application. Thus, the regulatory process establishes a presumption against entrepreneurship and spontaneous innovation. The concept of consumer accountability is virtually absent from the regulatory framework. Not surprisingly, in practice, public convenience and necessity requirements have served to protect existing cab companies from competition.
Dallas taxicab companies face rate limitations that are also approved by the city council. In 1999, the initial pickup and first-mile costs were $1.50. The fare increases by 30 cents for each additional one-quarter mile and one and one-half minute traffic delay (or waiting time). There is also a $1.00 charge for each extra passenger. For airport service, an ordinance establishes minimum “flag drop” (i.e., pickup) charge at each airport (and a minimum charge of $5.00 for all trips originating at Love Field). Companies can propose rate changes by filing the proposal with the city secretary and the director for consideration by the city council.
Taxicab franchisees also face regulations concerning driver qualifications and equipment.[51] According to Yellow Cab owner Jim Richards, all taxicab drivers are independent contractors, a common practice in the taxi industry. Thus, they do not receive company-sponsored benefits such as health or life insurance. Chapter 45 of the Dallas City code requires approval of company/driver contracts by the director of transportation and requires the taxi company to indemnify the city and hold the city harmless for any claim or cause of action against the city arising from conduct of the driver.
Ironically, Dallas cab franchises usually operate below legal capacity: each company's cab fleet is less than the number of cabs approved by city council. In such a restricted market, cab companies would be expected to put as many of their cabs on the streets as possible. Instead, local taxicab companies have chosen to further limit taxicab availability and access. The Dallas city council has approved permits for 17 licensed cab companies authorizing a citywide taxicab fleet of 2,793 cabs (about 2.65 cabs per 1,000 population). Only 1,951 cabs, 69.8 percent of the total, are on the road, or about 1.85 cabs per 1,000 population. King Cab, one of the city’s smallest, has 50 authorized cars approved, but only 36 (72 percent) are on the road. Yellow Cab, the city’s largest, has 394 of its 545 approved cabs (78.8 percent) on the street.
The regulatory climate in Dallas, like Boston, leaves little up to the spontaneous activity of the local transportation market. This regulatory climate is strikingly inconsistent with the city’s reported free-market reputation.
3. Atlanta
Although Boston and Dallas heavily regulate entry into their local markets, Atlanta may be one of the most highly regulated taxicab markets in the nation. Like Boston, Atlanta requires prospective taxicab owners to go through a multistep licensing process. First, the entrepreneurs must obtain a Certificate of Public Necessity and Convenience, or CPNC.[52] The CPNC operates like a medallion: the certificate gives the owners the legal right to operate a taxicab on the streets of Atlanta. The ordinance also caps the number of CPNCs at 1,600 and sets a minimum price of $6,000 per certificate (Section 162-61).[53] Certificate owners can renew their CPNC by paying the city $100 per certificate each year.
The CPNC and the rules regulating their use are formidable barriers to opening a taxicab company in Atlanta even without the city-imposed cap. The price of the certificate is a minimum price, and the City of Atlanta sells the certificates based on the market price at the time of sale. Fortunately, certificates can be bought and sold by their owners, but the city can revoke or suspend the certificates for several reasons. The city also requires that all owners of certificates operate a taxi (or other vehicle for hire) at least six months out of the year.[54] If the certificate is revoked or suspended, an application for a new CPNC will not be considered by the city for at least three years.[55]
The second step of the process requires entrepreneurs to obtain a license to operate a taxicab company ($100).[56] This license is in addition to the general business license required by the city (see Section Six). As in Dallas, company permits will not be granted unless the company owns or leases at least 25 taxicabs and operates seven days a week, 24 hours per day.[57] The city also requires the company to be fully staffed with employees, including a dispatcher, and submit to the city a copy of the lease (or affidavit of ownership) for the property that will house the company. Moreover, the property must be large enough to accommodate the office plus off-street parking for each of the vehicles when not in use. This requirement virtually eliminates any possibility of running a business from a home or starting a taxicab business on a small scale.
Local taxicab regulations virtually eliminate the possibility of experienced taxicab drivers or neighborhood entrepreneurs without significant financial backing from starting a new company to service niche or new markets.
The initial capital costs of starting a taxicab business in Atlanta are dramatically higher than in either Dallas or Boston. The 25-car minimum alone requires start-up capital of at least $150,000 to obtain the CPNCs to run a company.[58] If the company chose to own its cars and purchased cars six-years old in its first year, it would incur additional costs of $150,000.[59] The costs of land would easily add tens of thousands of dollars to this figure given the space requirements for off-street parking. The investment needed to start a cab company in Atlanta could easily approach a half million dollars or more by purchasing newer cars, outfitting them with radio dispatching equipment, leasing office space, and hiring employees to run a full-service cab company.
In sum, local taxicab regulations virtually eliminate the possibility of experienced taxicab drivers or neighborhood entrepreneurs without significant financial backing from starting a new company to service niche or new markets.
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Other Regulations Add to Burdens of Starting a New Cab Company in Atlanta The financial costs are only one component of the regulatory burden for taxicab entrepreneurs in Atlanta. Other regulations include:
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B. Lessons From Taxicab Regulation
One reason taxicab regulation is so diverse is that cities have attempted to tailor their rules and regulations to local political conditions. A second reason is that the regulations suffer from inertia and “capture.” Regulations serve the interests of existing cab companies, and they have powerful incentives to lobby local government officials to maintain the current system. Oligopolistic markets—markets dominated by a few firms with high barriers to entry—are common in most cities. Denver’s market, for example, was dominated by three cab companies for 45 years before the state legislature allowed a competitor to enter the market. In Madison, Wisconsin, a new cab company has not entered the market since the late 1970s. In fact, as the debate over deregulation began to heat up in Madison, the city raised its cab company license fee from $500 to $1,500, dramatically increasing the financial burden for start-up entrepreneurs with little capital.[60]
Similarly, few taxicab drivers complain, because they know that agitating for deregulation may well cost them their jobs. Rules are sufficiently detailed that cab-company owners can find enough infractions of policy (e.g., sloppy record keeping) as excuses to fire drivers. Moreover, in cities with more detailed rules and paperwork burdens, the potential traps are even greater. For example, some cities limit the number of hours that cab drivers can work. Thus, in addition to keeping logs of customer pickups, fares, and dropoffs, drivers must also keep records of hours worked. Often, complying with these regulations serves little purpose other than meeting the regulatory hurdles established in local ordinances.
The experiences of these cities allow for several general observations about the impact of regulations on entry into local markets:
- Regulations rarely address performance and quality issues. Taxicab regulations illustrate that many regulations address quality issues only indirectly. Rather than focus specifically on quality and performance issues, local regulations focus on compliance with the ordinance. For example, 24-hour service requirements imply that this mandate will ensure access to taxicab service around the clock. Yet, many residents in cities with these requirements continue to complain about long wait times or lack of service in poor and minority neighborhoods.
- Regulation tends to focus on compliance with rules. This tends to reinforce the micromanagement of industry by local officials. As regulations are enacted, staff is needed to ensure compliance. Not surprisingly, the more complex the regulatory system, the more active local regulators and review commissions are in the day-to-day operations of the business. Thus, limitations on driver hours require detailed records by companies tracking the work hours of drivers. Local officials then need to tabulate time sheets and records to ensure compliance. Similarly, more extensive regulation invites further intrusion of local officials into the normal business of the firm. Prescriptions for using certain technologies (e.g., radio dispatching) require local officials to closely monitor cabs and cab company owners to ensure they do not use cell phones to generate trips and fares.
Similarly, few taxicab drivers complain, because they know that agitating for deregulation may well cost them their jobs.
- Regulatory approaches are diverse. Cities and states have dabbled in numerous types and forms of regulation. Some have imposed caps, others have regulated hours of operations, and still others simply have required radio dispatching. Moreover, specific regulations have different impacts depending on the local economic environment. A shortage of taxicab licenses in Boston is artificially boosting prices to $150,000 or more per medallion. On the other hand, while the City of Cleveland had a cap on licenses, the number of licensed cabs was below the minimum (in part due to other onerous regulations making entry difficult for small operators). This diversity does not imply that rules are less burdensome in restricting entry. On the contrary, the diversity simply implies that the impact is felt to different degrees and in different ways, depending on the market.
- Regulation can significantly complicate business ownership. In a regulated environment, particularly one as regulated as the taxicab industry, business owners are engaged in much more than producing a product or a service for consumers. Business owners also devote significant hours of time and other financial resources (e.g., attorneys, consultants) to comply with regulations on top of the logistical problems involved with operating a service business.
- Regulation favors existing businesses. The more complicated regulations are, the greater the comparative advantage existing businesses have. By operating an established business, business owners have proven their ability to negotiate the maze of red tape necessary to keep their businesses operating. New businesses need to spend hours learning the ropes, often to the detriment of providing quality services to their customers.
The taxicab industry may be an extreme case: most industries are not as heavily regulated. Nonetheless, the case provides important lessons and a useful lens through which regulations over other businesses and industries can be evaluated. The following sections explore these issues and questions in more detail by focusing on the regulatory framework imposed on other businesses in four cities: Boston, Dallas, Atlanta, and Los Angeles.
Part 3
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B |
oston, at least superficially, evinces great enthusiasm for the concept of entry-level entrepreneurship. “I am committed to providing the economic opportunities that can help our citizenry improve its quality of life,” Boston Mayor Thomas Menino wrote in Doing Business in Boston.[61] The city’s approach to providing such support, however, has been confined largely to efforts to guide prospective entrepreneurs through licensing and occupation requirements while leaving in place the arguably daunting, and in many cases unnecessary, maze of regulations.
As the case of taxicabs demonstrated, Boston can regulate entry-level occupations as tightly as any U.S. city. Taxi medallions, for instance, are limited in number and, as a result, now sell for more than $180,000.[62] The right to sell food or goods on the street is limited to a few locations and can cost up to $500 a month.[63] Zoning laws preclude most home businesses. Overlaid on all of this is a web of state-level restrictions from the Commonwealth of Massachusetts, licensing everything from cosmetologists to in-home day-care operators.
And yet Boston is by no means a city without an active and vital commercial life on the streets of its downtown and outlying residential neighborhoods. On weekend evenings, immigrants throng around the informal pushcarts and stalls of the Haymarket meat and produce district. Farmers’ markets, providing a venue for the sale of local foods and crafts, have become a prominent new activity both in the heart of the city’s downtown and in 12 residential neighborhoods. The local transit authority is now encouraging street entertainment in Boston’s subway stations.
Although a major deregulatory effort at the state level fell flat in 1995, remnants of 18th and 19th century street life, ensconced as Boston tradition, have persisted, finding new niches in the modern era.[64] Entrepreneurs have found loopholes in laws that have allowed them to flourish despite official resistance. These loopholes have set important precedents that have helped move urban policy in Boston in a new, entrepreneur-friendly direction.
Nevertheless, license and permit laws pose significant barriers to entrepreneurship, including in-home family child-care, on-street sales of merchandise and food, cosmetology, in-home food preparation, and other in-home based businesses.
A. Regulation in Boston and Massachusetts
More than 80 occupations, professions, and trades, ranging from physicians to ticket agents, from concrete technicians to pet shop owners, are subject to licensing, regulation, or both in Boston and Massachusetts.[65] Here entry-level occupations such as in-home family day care, on-street sale of merchandise and food, home-based catering, and cosmetology are considered.
1. In-home Family and Child Care
Two types of childcare outside the home exist in Boston. Childcare or day-care centers often attract the most notice, in part because they may be large, run by relatively well known national firms, or found in a workplace. But the far more common type of childcare is that provided in private homes, either by relatives or—more to the point of this report—by neighbors providing what is known as “family day care.” As with the inadequate taxi service in Boston residential areas, daycare, too, is in short supply. A 1996 survey by the Cambridge-based Child Care Resource Center found that day care vacancy rates were low (3 percent of total available slots) and places were thus difficult to locate, forcing parents to accept settings they might not prefer. Efforts to draw entry-level, lower-income women, in particular, into the family day-care field, have encountered the high wall of regulation. Opening a family childcare center is “a tough, tough business,” Boston’s director of jobs and community service has observed.[66]
To become a licensed family day-care provider in Massachusetts, one must apply through the “caring for children process.” Navigating this process is not easy, especially for those who may have limited formal education and live in modest homes. Applying is a two-step process. First, one must apply to obtain an application form. Obtaining the application for the full application form requires that one knows to contact the Massachusetts Office for Children. No municipal agency (such as a local Health Department) is empowered to offer such a license. The license application and approval process is highly centralized. A potential day-care provider who even knew that licensing was necessary, and who consequently called a local city or town hall, would likely have to make a long series of phone calls—general city hall number, referral to a local agency, referral to the general Office for Children number, and referral to the regional office—before even being sent the application for a license application.
Although the only requirement for formal training from the state is a three-hour orientation for prospective providers, the Office for Children arguably makes it difficult for prospective licensees. The full license application form, though clearly designed with the interests of young children paramount, is daunting to the point that it may work against its own intended goals by encouraging providers to operate without formal certification.
Consider the
application’s length. The explanation of requirements runs nine pages; the
application form itself is 10 pages with seven sections.[67] Neither contains a
phone number of someone to contact with questions. What accounts for this
length and detail? The answer involves what is clearly well-intentioned
standard-setting, standards that assume parents cannot assess the quality of
childcare providers on their own and that providers have no incentive, lacking
minute standard-setting by the state, to provide high-quality care on their
own.
Consider also some of the license requirements. Providers must specify, in writing, how the children’s days are to be structured. “Describe in detail how you would spend your day with daycare children. Include activities for all age groups, meals, snacks (a nutrition plan is required), diapering, toileting, outdoor play and naps.” Providers must even specify how long “time-outs” for disobedient children will be (one minute for each year of age of the child), as well as providing a minimum number of flashlights per floor. Limits on other household members who can help with childcare seem overly strict: not only must “household member assistants” be at least 17 years old, but they can be used no more than 25 hours per week, a limit that would seem to work against family day care operating as a family business. Moreover, some requirements seem difficult for urban residents in particular, who compose a large percentage of public-assistance recipients, to meet. "Outside playspace," for instance, must constitute 75 square feet per child. Those without sizeable yards could struggle to meet such a requirement.
Providers must even specify how long “time-outs” for disobedient children will be (one minute for each year of age of the child), as well as providing a minimum number of flashlights per floor.
At the same time, the Office of Child Care Services has continued to receive reports of significant numbers of non-licensed, in-home childcare facilities. This experience raises the question of whether the current complexity of the licensing process discourages those on the front lines of childcare in lower-income communities from applying. State officials acknowledge that they regularly become aware of non-licensed childcare providers, usually as a result of complaints. Complaint numbers are notable: unlicensed programs brought to the attention of the state’s Office of Child Care Services totaled 349 in 1996 and 319 in 1997.[68]
Operating informally may be convenient but, pushed outside the mainstream by onerous licensing requirements, childcare providers cannot declare their income should they seek financing for improvements, nor can they declare it to banks should they seek a mortgage for home purchase or renovations. Moreover, because they are operating in the informal economy, they do not pay taxes on what they earn.
2. Street Vendors
Despite limitations on the number of street vendors permitted in Boston, the city, by comparison to many others in the United States, is notable for the number of on-street merchants who do market their goods. They cluster around the Park Street subway station and Boston Common and around the Downtown Crossing commercial area. They appear on First Night—the city’s New Year’s Eve celebration—and can be found outside Fenway Park, and somehow show up at busy intersections selling roses on Valentine’s Day and lilies for Easter Sunday.
Through regulation and a complex two-level permitting process in Massachusetts, however, the state may have discouraged many others who might like to get a start or earn extra income through an on-street business. Vendors cluster only in the most lucrative areas. These areas are also the most difficult for which to get a permit. Moreover, there are questions to be asked about the operation of the most prominent vendor areas, as to whether they have been fairly apportioned or run so as to encourage the maximum number of vendors. While on-street businesses will never offer a large number of jobs, they nonetheless help establish an atmosphere of entrepreneurship in a city and offer a way up for those starting out. The need for public safety and order must be balanced with the goal of job creation.
As matters stand, becoming a legal “vendor, transient vendor or hawker” in Massachusetts is a fairly complex task—one that would require a person starting out in such a business to deal first with state government, then local government. To become a “hawker” or “peddler,” one must begin at the state level by obtaining a license, good for one year, from the state’s Office of Consumer Affairs. One must post a $500 bond and pay a license fee that ranges from $55 to $62. There is also an insurance requirement ($200 to $300 a year), as well.
Having obtained a license at the state level—which authorizes an individual to enter the business—one must obtain a permit for the activity itself, this time at the local level from the Licensing Division of the Boston Department of Public Works. If one wants to prepare and sell food, an array of additional local authorities, housed in separate parts of municipal government, must approve. A local health inspector (in Boston, the Inspectional Services Department) must grant a health permit. A written “food managers” course is required. A license for the facility as well as the individual must be granted by health authorities. If cooking is involved, the fire prevention division of the local fire department must grant a propane permit. All in all, selling food can add $400 or more to the financial cost of vending on Boston’s streets.[69]
3. Home-based Catering and Sale of Homemade Food
One way that an on-street vendor might wish to base his business might be through the sale of foods prepared at home for sale on the street. In fact, the sale of baked goods and other homemade foods is among the most time-honored ways to supplement income. It can be the means to spawn successful restaurants or catering firms. Nonprofit organizations of almost any imaginable stripe—whether churches raising money for a special charitable project or students raising money for a class trip—have long relied on the sale of homemade food. It is an area ripe for the entry-level entrepreneur, as well, for the obvious reason that almost everyone has a kitchen and could prepare, at home, foods for sale, whether to neighbors or local businesses. In-home catering could be as small an enterprise as baking cookies but could become as large as private, in-home dinners delivered to customers.
In Massachusetts, however, there is a problem with this scenario. Article X of the Massachusetts Public Health Code explicitly and completely prohibits the in home preparation of food for sale, except under conditions that make it impractical. Specifically, one must demonstrate to local authorities that an entirely separate, second kitchen, including sink and stove, has been set up for commercial preparation of food in the home. These regulations have little direct connection to legitimate health and safety issues with respect to food preparation. Commercial-grade kitchens can be as unhealthy and unsafe as residential kitchens, yet this regulation adds significant costs for start-up entrepreneurs. One’s existing kitchen simply may not be used for commercial purposes regardless of how safe or clean the food preparation is. Not even a few pies could be baked, legally, and supplied to a local restaurant.
At the same time, despite such regulation, the last 10 years have seen a resurgence of baked goods for public sale in the farmers’ market venues described above. Markets publicize their sale of “muffins, cookies, jams, breads and turkey products.” Yet there is an emerging double standard evidenced by these efforts. Inner-city entrepreneurs who might wish to operate a catering or baking business from their homes face the insuperable barrier of installing a second kitchen in their home. Farm families are not subject to similar regulations and are somehow presumed to operate facilities that are safe and sanitary.
There is little doubt, however, that in-home catering is a thriving, if illegal, sector in Boston, serving as an important point of entry for entrepreneurs. In some cases, entrepreneurs are testing the market to determine whether their products are of good enough quality to attract customers. In other cases, illegal in-home caterers may be operating as a regular business, without any intention of expanding. “Everybody starts off illegal at catering,” says one caterer in Boston’s West Roxbury section, which has grown from an in-home business to a commercial operation with its own take-out restaurant and 32 part-time employees.[70] Even when such a firm surfaces and becomes legal, however, it faces a law which requires a catering firm to obtain a special, temporary permit each time it caters a function in a jurisdiction other than the one in which it is based.
Food preparation and sale have served as traditional means for lower-income and immigrant groups to create products of interest to more affluent markets. Thus, restrictions on catering and in-home food preparation become an important issue. To date, there has been no effort to legitimize the informal markets that have developed; their participants remain at risk of prosecution and face problems in obtaining expansion financing because of their “gray market” status.[71]
Local policies enhancing the entrepreneurial climate for small businesses are hard to identify in-home food preparation. However, the advent of farmers’ markets and the informal tolerance that has greeted the sales of homemade baked goods are steps in the right direction. So, too, is the development of a trade group—the Federation of Massachusetts Farmers’ Markets—an avowed proponent of outdoor sale of such products. These developments may help spur reforms in the future that could further encourage entrepreneurship in this area.
4. Hair Braiding
African-style hair-braiding emerged as a singularly popular style in the black community of the 1990s. (This popularity, by the way, is international. Hairbraiders can be found in London, Kingston, and Johannesburg, as well as New York, Boston, and Los Angeles.) Prominent African-American female role models, from Whitney Houston to Cheryl Miller, can be seen with their hair in intricate cornrow braided styles. Those who fashion such hair are skilled craftswomen who have, in all likelihood, apprenticed to other women, in passing along a black community tradition. Hairbraiding, like in-home childcare, offers a chance for women to capitalize on skills they have learned informally but for which there is clearly a market demand. Often, hairbraiding can be done in one’s own home, without any significant capital investment. “Kitchen salons surge in popularity,” headlined the Boston Globe in October 1995, “as black women seek out natural look.”[72]
In-home African-style hairbraiders, however, run afoul of two major forms of regulation—the steep requirements for traditional, nonbraid-related cosmetology training, which must be met to obtain a license to perform hair-related work, and zoning laws that govern in-home businesses.
A hairbraider, to be licensed, would have to learn manicuring, makeup, permanent waves, hair coloring, and other skills that seem clearly distinct from braiding.
To become a licensed cosmetologist in Massachusetts, one must—in addition to such modest costs as $50 for a hairdresser’s license and $89 to take the test administered by the state Board of Cosmetology—spend $5,000 to $8,000 for a 1,000-hour course at an approved cosmetology school. A legally required apprenticeship mandates a two-year period before a licensed cosmetologist is permitted to operate a business. These are requirements that could seem appropriate were it not for the fact that training at traditional schools of cosmetology has nothing to do with African hairbraiding. African-style hairbraiders do not learn their skill at such schools, and the skills taught there do not pertain to African-style braiding. A hairbraider, to be licensed, would have to learn manicuring, makeup, permanent waves, hair coloring, and other skills that seem clearly distinct from braiding. The effect of this steep, yet irrelevant, requirement is that most hair braiders operate illegally. They are then forced to remain circumspect in opening their doors or advertising their wares. No matter how successful one is in the underground economy, one can never make the next step toward mainstream status and obtain bank loans, for instance, if regulation stands in the way. In-home braiders who develop a following and want to expand into their own storefronts, hire others, and start a full-time business are inevitably inhibited by the fact that such prominence can lead to notice by the authorities.
In-home hair salons are a subset of the larger issue of in-home businesses generally. Any enterprise that generates foot traffic in a residential area is likely to generate controversy. If the area is zoned strictly for residential use, in-home businesses are not permitted. Creating exceptions is likely to be a fractious process; even in-home medical offices for psychiatrists and psychologists can be unwelcome by neighbors. Nonetheless, in poorer neighborhoods where there is a need both for an increase in employment opportunities and commercial enterprises, in-home businesses confined in their operating hours so as not to pose a nuisance to neighbors could exist.
In principle, many businesses could begin at home. Few businesses have the financing to start up with complete staffs, workshops, and office area. Technology is making it even easier—sometimes necessary—to start up a business from home: cell phones and pagers give businesses mobility. Computers allow information to be stored efficiently and in small areas. Moreover, most businesses, by starting out small, have minimal space needs. Even a nail-care salon could start out with a chair, good light and ventilation, and the essential tools fit neatly and compactly near the work area.
Local zoning codes, however, often hamstring the start-up of small businesses and limit their potential to expand and grow. Boston’s Article 80 defines an “Accessory Home Occupation” to include “sewing, piano lessons, tutoring, and similar uses which are clearly incidental to the dwelling for dwelling purposes and do not change the character thereof.” While seemingly unobjectionable, this definition hides many other potential pitfalls.
Local zoning codes, however, often hamstring the start-up of small businesses and limit their potential to expand and grow.
For example, Article 10 of Boston’s Zoning Code specifies that home-based businesses cannot:
- Use more than 25 percent of the floor area (or rear yard) of the main building (or lot) for business purposes (Section 10-1);
- Be visible in front or side yards (Section 10-1);
- Employ anyone not living in the home (Section 10-2);
- Maintain inventory (Section 10-2);
- Use windows to display or advertise to attract customers other than “professional announcement signs” (Section 10-2);
- Conduct a business office open to the public (Section 10-2); or
- Have public access or generate traffic flow as a result of the business.[73]
These restrictions are designed to limit any visible sign of business activity outside the home and in the neighborhood, but they also regulate the character, content, and professionalism of the business. For example, Boston’s zoning code arbitrarily prohibits any business with an employee who lives outside the home. The zoning code does not prohibit multiple employees; it just discriminates against employees who do not live in the home. Thus, a business can pay a secretary, receptionist, or bookkeeper as long as they reside in the home. Whether the employee lives in the home or not, the impact on the neighborhood is virtually nonexistent.
Numerous other businesses and occupations could run afoul of the law:
- A home remodeling contractor could not operate from his home if clients came to the home to inspect blueprints or go over cost estimates for jobs. Multiple trips to and from sites and appointments could generate vehicle and pedestrian traffic that officials might consider inappropriate for the neighborhood. A home-improvement contractor would also own and use mechanical or electrical equipment that is not normal for domestic use, or store materials in the house and garage that could exceed the 25 percent space limitation.
- A catering business would find these regulations difficult as well. The caterer’s kitchen might constitute more than 25 percent of the floor area, once cooking and food-preparation areas are considered. (Storage of food could be considered inventory.) Anyone hired to help in the kitchen to prepare food would be an employee not living in the home.
- A retail store would not qualify because more than 25 percent of the floor area would likely be used for the business (e.g., on the first floor), the business involves the receipt, delivery, sale, and storage of merchandise, and customers would come into the house to purchase goods and services. In fact, virtually any service in which the proprietor meets with customers one-on-one would be prohibited under Boston’s zoning code.
- A nail salon/beauty parlor would not qualify because it would produce traffic in greater frequency than normally found in the adjacent residential area. It also might run up against the floor-area limitations.
As a result, businesses that could be easy to start up and require little capital end up eating up revenues for commercial office rent, commuting time, duplicative utilities and telephone expenses, and numerous other restrictions. When combined with more specific licensing regulations for individual businesses, the costs can easily become prohibitive. These regulations also limit the ability of small businesses to expand and encourage them to stay underground.
Businesses are restricted in residential neighborhoods because most zoning codes presume that homes and commerce are fundamentally incompatible and should be segregated. By keeping commercial business outside of residential areas, spillover effects such as noise, traffic, and pedestrian activity can be minimized. Yet, local zoning codes and home-based business regulations rarely focus on the impacts of home-based businesses. Rather, they direct their regulations at the characteristics of the business.
In sum, state and local regulations can produce formidable obstacles to entrepreneurship in Boston. Extending the analysis from taxicab regulation to additional cases such as street vending, in-home day care, catering and home-based food sales, and home-based businesses, we can evaluate Boston’s regulatory climate based on the five criteria outlined in the previous section:
1. Regulations rarely address performance and quality issues. In-home childcare applications were long on inputs, but low on performance criteria. In the case of in-home food services, the Massachusetts health code requires food preparation in a second kitchen, irrespective of the health consequences or effects on food quality. In the case of hair braiding, education requirements for obtaining a cosmetology license have no relationship to the quality of the service provided. Similarly, street vendors are prevented from selling their wares outside of designated areas even when demand might exist for their products.
2. Regulations tend to focus on compliance with rules. Bureaucratic permitting and licensing seems to dominate the state and local regulatory framework: hair braiders must take courses to learn skills they would never apply in their trade; in-home day care providers must negotiate a lengthy application process; and home-based business regulations apply generally to all types of business regardless of tangible neighborhood impact. Instead, regulations focus on across-the-board criteria such as percentage of home space devoted to commercial use, employment of nonresidents, and visible signs of business activity.
3. Regulatory approaches are diverse. Specific regulations appear to vary by industry and business type. State agencies regulate in-home day care services, while the city permits street vendors. The planning department oversees land-use and zoning issues, while the department of health regulates catering and in-home food preparation. Identifying the appropriate agencies for obtaining permits is clearly a daunting task, particularly for those unfamiliar with the state and local regulatory framework.
Businesses are restricted in residential neighborhoods because most zoning codes presume that homes and commerce are fundamentally incompatible and should be segregated.
4. Regulation can significantly complicate business ownership. The application for an in-home day care provider was complicated and burdensome. The state’s director of jobs and community services called it a “tough process.” Not surprisingly, the state receives hundreds of reports of unlicensed day care facilities. Similarly, many of the restrictions on catering services and in-home food preparation are ignored to avoid excessive permitting and regulations that add costs (e.g., second kitchens, event-specific permitting) while adding little to the value of the service provided.