As we review the best and worst independent business legislation of 2009,it’s also time to begin to consider what ideas are likely to resurface during the 2010 session.
Independent businesses are the backbone of South Carolina’s economy and the key to increasing wealth and creating private sector jobs. According to the Small Business Administration, small businesses account for 97 percent of employers in South Carolina. These include businesses that employ 500 or fewer persons. But what is really important here is not the size of the business, but its attitude toward government. An independent business is one that does not want government incentives or special-interest tax breaks. Rather, independent businesses seek a low tax rate for everyone and a regulatory environment that encourages free market competition.
Best Ideas for 2010
1) Eliminating cumbersome regulations: South Carolina businesses are overburdened by outdated regulations that hinder transparency and create uncertainty for business owners. A good start toward improving the state’s regulatory environment would be to periodically review existing regulations and provide for a sunset provision on all new regulations. Rather than considering such comprehensive reform, however, legislators have taken a piecemeal approach to lifting regulations that affect only a handful of businesses. One example is H 3429, which would permit tattoo parlors to sell tattoo-related merchandise. Another is H 4204 (new for 2010), which would permit in-state wineries to use raw materials not exclusively grown in South Carolina and also to sell the final product out of state.
2) Listening to independent business owners: Last year, the General Assembly promised to pass a “Small Business Red Tape Reduction Bill,” taking testimony from numerous business owners on what government could do to encourage small business growth. The result? Not only did the bill not pass, the final version did not include any meaningful reform. Reconnecting with independent businesses – precisely those that aren’t represented by lobbyists – is necessary if the General Assembly really hopes to foster economic growth.
3) Loosening licensing requirements: As discussed in Unleashing Capitalism, professional licensing requirements in South Carolina hinder free market competition and drive up prices. Consider that cosmetologists are required to have 1,500 hours of training to get licensed while massage therapists are required to have 500 hours of supervised study. Another onerous licensing requirement limits to $5,000 the repairs homeowners and others can undertake on residential buildings without having to obtain a license. Legislation (H 3492) to loosen this cap died in committee.
4) Lowering taxes for all businesses: One bill (S 150) introduced this past session sought to apply the same insurance premium tax breaks extended to corporate taxpayers to those small businesses who pay at the state income tax rate. This bill is a bad idea, but indirectly shows why we need to fundamentally reform the entire state tax structure. Eliminating the corporate tax altogether would be a good first step. But because many small businesses pay state income taxes, this reform should be accompanied by a lowering of the personal rate as well. Click here for more tax reform recommendations.
Worst Ideas for 2010
1) Using regulations to hinder competition: Last year, H 3452 increased the biennial license fee for manufacturers of alcoholic beverages from $1,000 to $50,000. Such a large increase indicates that this legislation was about more than just raising revenue, but likely crafted as a means of forcing small manufacturers out of business – thus limiting competition and driving up prices. Another bill (S 45) aimed at limiting competition (supported by the American Society of Interior Designers but opposed by the American Institute of Architects) would require licensure (and regulation) over interior designers.
2) Raising the minimum wage: This curious piece of legislation (H 3669) would have established a state minimum wage of at least $7 an hour and extended a tax credit to employers who paid less than the minimum wage in the preceding tax year. The federal government had already decided back in 2007, however, to increase the minimum wage to $7.25 – effective July 24, 2009. So, either this bill is a backdoor attempt to provide tax credits to thousands of businesses or an initial foray aimed at eventually raising the state minimum wage above the federal level. In any case, economist Henry Hazlitt has shown that minimum wage legislation actually increases unemployment for lower class workers.
3) Passing more targeted tax credits: Even targeted tax credits that seem to accomplish a good end are a bad idea. Take H 3210, which would provide a $1,000 tax credit per employee to small businesses that offer health care. Looking deeper, this bill is problematic for several reasons. To begin with, these tax credits, as do all special-interest tax credits, shift the tax burden to other businesses and consumers. Moreover, they distort the insurance market and would likely lead to an increase in the price of small business insurance (subsidized plans must have a minimum actuarial value of $3,000). A better way to lower costs for all consumers is to deregulate the insurance market. Finally, the bill encourages the current practice of using employers to provide health insurance coverage when a better alternative is to decouple the two by allowing all consumers to use pretax income to purchase their own health insurance. Instead of picking winners and losers by passing special interest legislation, the General Assembly should create a business climate that is friendly to all firms, but especially independent businesses.
To read more about small business legislation, click here.