Are Restrictive Zoning Regimes Hurting Small Business?

Date: January 24, 2017

We frequently hear from small business owners wrestling zoning problems. As we’ve explained previously, an especially confounding problem is that local zoning boards often retain broad discretion to approve or disapprove required permits—which means that business owners are often in a vulnerable position. In many cases, this means landowners are asked to scale back their plans, or to make other to make other costly concessions to get a necessary approval. And while in some cases there may be grounds to contest a permit denial—or even to seek compensation—in most cases there is little recourse if the zoning board has acted consistent with the enacted code.

We know anecdotally that it is difficult, costly and time consuming to obtain necessary permits—especially for new construction or major renovations. But do these regulatory burdens impact the broader small business community? Does this impact you if you are simply renting or paying a mortgage on existing facility?

Economists would say yes. Draconian permitting regimes operate to artificially restrict the available market of property that may be put to socially beneficial use. And basic supply and demand principles dictate that these imposed restrictions operate not only to burden developers, but also to inflate costs for anyone seeking to buy or rent commercial properties.

Interestingly, economists of all ideological stripes are now largely in agreement on the impact of restrictive zoning regimes—though most have focused more specifically on the impact on the affordable housing crisis affecting so many communities. Even the Obama Administration recognized that overly restrictive regimes operate to drive-up housing costs. As this article notes, housing costs have risen 340 percent since 1996 in San Francisco—in large part because of restrictions making it more difficult to build new housing units.

The same principles apply for commercial properties. If it’s more difficult and costly to develop commercial properties, those costs will inevitably be passed on to the buyer and often small business tenants who must then pay inflated rents. More broadly, a recent study by Chang-Tai Hsieh and Enrico Moretti found that overly restrictive zoning in America’s major cities were impeding mobility in the labor force and negatively affecting U.S. Growth Domestic Product.

Interestingly, studies show that zoning regimes have become more complicated since the early 1970s and that these increasingly restrictive regimes are a drag on the economy in many ways that one might not initially consider. For example, when restrictive zoning inflates housing costs within any given community, the cost of living necessarily rises within that community—which we have seen increasingly results in political pressures for legislative bodies to consider raising minimum wage. But of course, that solution only worsens the situation by imposing added economic strain on small business, which kills jobs as prices inflate across the board for everyone.

Moreover, if you can barely afford to pay rent, you are more likely to seek out public assistance programs. Thus, there is also a connection between restrictive zoning regimes and added stress on state and local budgets, which is concerning for small business owners because they’re already concerned about taxes. In sum, there is a growing body of literature making the case for liberalization of municipal zoning codes. But it will be interesting to see whether these proposals take hold in the cities and counties in most need of reform.

In any event, NFIB Small Business Legal Center will continue fighting for property rights because we know that often a business’ most valuable asset is its property. You should have every right to make any reasonable use of your land that you might like. That’s why we are so aggressively working to ensure that business owners rights are protected in eminent domain proceedings, and in the permitting process. For more on our work in defending property rights, check out this previous post.

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