Home-Based Businesses Threatened by Overregulation

Pat Raynor (Courtesy Institute for Justice)

Overregulation of home businesses didn’t make sense before the pandemic. Now, it’s even more misguided.

The pandemic of 2020 will create lasting changes to the economy. More businesses will allow employees to work at home, videoconferencing will replace business travel in many cases, and some big cities will lose people and jobs.

Another trend is the increase in home-based businesses. The number of arts-and-crafts businesses listed on Etsy.com jumped from 2.7 million in 2019 to 4.4 million by the end of 2020. Home-based food sales have also been popular as newly unemployed Americans seek extra income. Meanwhile, Zoom has helped spur the growth of online tutoring, music lessons, and other services.

All told, about half of America’s 30 million businesses are now home-based. Running a business from home offers cost savings, lifestyle advantages, and a lower barrier to entry than many more traditional careers. There’s just one big problem: government zoning rules that ban, restrict, or raise costs for home-based businesses in residential neighborhoods. Such rules accumulated during the 20th century, as governments aimed to strictly separate residential and commercial areas within cities. Business activities were assumed to create noise, congestion, and other annoyances that conflicted with residential lifestyles.

In Nashville, Lij Shaw is a famed music producer who records musicians at his home studio, while Pat Raynor is a hairstylist who serves clients in a single-chair home salon. The two entrepreneurs work at home for cost savings and lifestyle reasons, but until recently were doing so illegally, because Nashville had banned home businesses that serve visiting clients, even when they created no neighborhood disturbances. Based on anonymous tips, the city ordered Shaw and Raynor to shut down.

Fortunately, these two entrepreneurs found the Institute for Justice and the Beacon Center of Tennessee, who took up their cases and fought back. Amid the ensuing publicity and the hardship caused by the pandemic last year, the Nashville City Council stepped in. In July, the council loosened its rules on home-business client visits, and Shaw and Raynor have gone back to work.

Lots of home entrepreneurs in other cities haven’t been so lucky.

Some zoning rules make sense, but many cities have gone too far in squelching neighborhood entrepreneurship, enacting excessively tight rules on businesses in homes. Such rules restrict everything from client visits, parking, signage, deliveries, and employees to building renovations, outdoor activities, materials storage, and the type of business allowed in a particular neighborhood.

In her analysis of home-based businesses, my Goldwater Institute executive vice president Christina Sandefur noted that there is an “often-unspoken assumption that the presence of a commercial transaction transforms an innocent activity into a business that government must oversee.” Someone parking on a residential street to visit a hairstylist, for example, is assumed to be more troublesome than someone parking to visit friends.

Nicole Stelle Garnett has noted that restrictions on home-based businesses reflect a belief “that the ‘good life’ requires the careful segregation of work and home.” But cities are starting to recognize that that belief is outdated. Many are rethinking their restrictions, as least for some businesses, such as home daycares, which were often barred in the past. With high demands for childcare among working parents, 18 states have passed laws to preempt excessively tight local zoning rules that restricted the provision of such services in homes.

There are at least eight reasons for local governments to liberalize rules for home-based businesses.

First, the starting point for public policy should be a respect for individual rights, and private property is a core right. Homeowners should be able use their homes as they see fit, although that right is limited by the equal rights of others.

Second, many of today’s restrictions on home-based businesses were put in place in earlier decades, and have not been updated to reflect subsequent societal changes. The economic shift toward digital and service industries, modern childcare needs, and other cultural developments should be reflected in local regulations.

Third, home-based businesses create opportunities for people to earn a living while caring for young children or elderly parents at home. The latter is becoming increasingly important as America grays, given the exorbitant cost of retirement homes.

Fourth, home-based businesses reduce commuting by business owners, which saves time and money and reduces automobile pollution and congestion. When customers of home-based businesses such as daycares are nearby, they also reap the benefits of shorter car trips.

Fifth, liberalizing regulations for home-based businesses reduces bureaucratic headaches for entrepreneurs. In many cities, entrepreneurs in residential neighborhoods are treated as crooks by the government, rather than as people adding value to their communities. Cities with overly restrictive rules will lose valuable services and income-generating activities if frustrated entrepreneurs leave.

Sixth, when home-based business regulations are too restrictive, businesses go underground. Many home-based businesses break complex zoning rules in one way or another. When that happens, enforcement becomes more arbitrary and unfair, because investigations often start with anonymous complaints from disgruntled neighbors.

Seventh, home-based businesses provide a low-cost option for aspiring entrepreneurs, who might not be able to pursue their dreams if they had to rent a separate space and pay for childcare and commuting. Restrictions that ban or raise costs for home-based businesses eliminate beneficial economic activity.

Eighth, homes are a low-cost incubator to test business ideas before making larger investments. Many great technology companies were launched from homes, including Amazon, Apple, and Hewlett-Packard. That is also true of craft-beer companies. One history of beermaking notes that “homebrewing is how over 95 percent of craft brewers learn their trade.” President Jimmy Carter’s repeal of the federal ban on homebrewing in 1978, followed by state-level deregulation of the practice, created the entrepreneurial boom in brewpubs and small breweries.

Deregulation is also helping the “cottage food” industry expand. Cottage food means home production of foods such as baked goods, canned goods, pies, chocolates, candies, jams, honey, and pasta. While some states such as New Jersey continue to ban just about all cottage-food sales, other states such as Wyoming have made major reforms. Home businesses in the Cowboy State can now sell any type of food except meat within an annual limit of $250,000 in revenues. In Los Angeles, Mark Stambler was shut down by the county government for selling bread out of his home. Stambler fought back and led the effort to liberalize the county’s cottage-food rules. His reputation grew, he won baking awards, and he ultimately founded a successful brick-and-mortar business.

The lesson is that liberalizing the regulation of home-based businesses can help drive a city’s economic growth. Rather than handing out subsidies to big corporations in the hopes of spurring economic development, cities should pursue such reforms. They cost taxpayers nothing, and they promise to benefit the economy we all share.

Chris Edwards is an economist at the Cato Institute and the author of “Entrepreneurs and Regulations: Removing State and Local Barriers to New Businesses.”