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Commentary: Reform South Carolina's business licensing system

S.C. Statehouse (copy) (copy)

South Carolina needs to reform its business licensing system because what we have now is like requiring drivers to get a driver’s license in every state they wanted to drive through each year in advance, with different renewal periods and reporting requirements and associated taxes based on different factors.

This year, the South Carolina Legislature may consider much needed reforms to our antiquated and burdensome system of business licensing. The current system hampers entrepreneurship and the growth of small business, putting South Carolina at a competitive disadvantage. A report I authored on this issue, “Reforming South Carolina’s System of Business Licensing,” shows some of the major areas that need improvement, and reforms in other states such as North Carolina provide a road map to alternatives. The system is unnecessarily costly to taxpayers, consumers and small businesses.

What we have now is somewhat similar to a system where drivers would have to get a driver’s license in every state they wanted to drive through each year in advance, with different renewal periods and reporting requirements and associated taxes based on different factors.

Over 200 municipalities and many counties in the state require a business to obtain a license to conduct business in their jurisdiction. The purpose has nothing to do with ensuring the quality or legitimacy of the business, but simply to make the business pay taxes on their gross revenue earned in the jurisdiction.

A single small business that is a local service provider in a metro area like Charleston or Columbia may have to have as many as 30 different business licenses (or more) to serve the entire metro area. Complying with this multitude of local government offices is unnecessarily confusing, cumbersome and time-consuming.

Even the local governments themselves waste substantial resources in administering and enforcing this duplicative system — money that could better be used for other, more important services. My estimates suggest that roughly 6% of local revenue is being wasted on duplicating efforts and enforcing this system.

A standardized portal run by the state in which each business has to obtain only one license in the area where it files its state income tax return (which is accepted by other localities), pays the total tax bill and reports revenue by jurisdiction, could improve this process. It could work to create uniformity across the jurisdictions, rate classes, expiration dates, appeals process and income classification, and allow for businesses to go online, getting all of their licenses and paying through the state portal with revenues distributed back to each locality somewhat similar to our current local option sales tax.

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In the reform process, a more rational and uniform classification system and basis for the tax should be adopted. The current system is selective and subject to local political influence, particularly when it involves cases of large firms.

Also, because the tax is based on gross revenue, not net income, it results in double, triple or even higher levels of taxation when one business purchases goods or services from another. The logging company pays the tax on its revenue when it sells logs to the sawmill; the sawmill pays the tax on its revenue as it sells the boards; the home store pays the tax on its revenue when it sells them to a contractor; the contractor pays the tax on its revenue when it provides services to a homebuilder; and finally the homebuilder pays a tax on revenue when the final home is sold.

This tax pyramiding creates perverse incentives favoring vertically integrated firms that avoid the recorded transactions. The system does not provide a clear and rational link between the fees charged and the public services the license actually provides that are not already covered through other forms of business taxation. The rate differentials   across types of businesses are usually based on a census-defined business classification system that has no relation to the true costs or burdens.

Local governments have no incentive to improve the system on their own; it must be done through state-level legislation, for which there is both historical precedent and a constitutional responsibility. North Carolina just took steps to substantially improve its system of business licensing and we should as well to remain competitive.

Consumers are not only harmed by the multiplicative tax built into the price of the goods they buy, but also pay higher prices because the system discourages competition among businesses, resulting in an even higher cost of living for state residents. Reforming this system would result in substantial costs savings for businesses, consumers, taxpayers and local governments, and promote entrepreneurship and competition in the state.

Russell S. Sobel, Ph.D., is a professor of economics and entrepreneurship in the Baker School of Business at The Citadel. He has authored or co-authored over 250 books and articles, including a nationally best-selling college Principles of Economics textbook. His recent research focuses on the areas of state economic policy reform and entrepreneurship.

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