Manhattan Institute

Home-Based Businesses Are Coming

As Covid-19 accelerates remote working, are cities prepared?

With the rapid spread of Covid-19, working from home is having a moment. With most major cities now under stay-at-home orders and nonessential businesses closing down across the country, millions of Americans are working remotely for the first time. Will it stick?

Indeed, even before the coronavirus and self-quarantining, more and more Americans have been running businesses from home. According to recent research, the number of home-based businesses nearly doubled between 1992 and 2012, constituting one in six businesses by 2014. Evidence from this period indicates that such businesses are more likely to be run by people otherwise excluded from conventional work: single parents, the disabled, the unemployed, and caregivers, among others.

The steady rise of home-based businesses has clearly escalated in recent years. Pull up Google Maps for any suburban neighborhood and see for yourself. In one neighborhood in Lexington, Kentucky, for example, notification bubbles rise above a half-dozen single-family homes for businesses such as African hair-braiding, artisanal candle-making, and software development. Though growing, such home-based businesses remain largely invisible, in part because they are often illegal under current zoning laws. In addition to the risk of fines and penalties, this leaves many home-based entrepreneurs unable to secure financing to expand their businesses.

In a study for Utah State University’s Center for Growth and Opportunity, we explored these regulatory barriers to entrepreneurship and possible avenues for reform. The challenge for home-based businesses, it turns out, is that many zoning ordinances were written before World War II. As a result, the provisions regulating when and how people can work from home are often antiquated. Few current lists of permitted businesses even mention the Internet.

Where certain home-based businesses are allowed, a host of detailed regulations makes legally operating them nearly impossible. In most cities, for example, it’s illegal to have any clients, customers, or employees visit as part of operations, making popular home-based businesses like daycares and tutoring prohibited in residential areas. Equally common are bans on businesses involving sales, keeping inventories, or using technology not normally found in a home.

If these rules were too strict from the start, the issues have only intensified during the digital age. Services like eBay and Amazon have allowed more Americans to run retail businesses from home—and made bans on residential-based retail increasingly out of step with reality. The same applies to many other popular small businesses, from tax preparation to computer repair—both now online services. Outdated restrictions are now having a detrimental effect. In a recent case in northern Virginia, for example, regulators spent two years fighting with a home-based direct-sales operator. Her offense: storing dresses in her home. Meantime, in Nashville, regulators find themselves in a multiyear battle with a music producer over recording musicians in his home studio.

Ironically, while northern Virginia and Nashville spent 2017 trying to stifle home-based entrepreneurs, they were simultaneously offering billions in subsidies trying to lure a second headquarters for Amazon—itself a former home-based business. Obsolete codes could undermine the Amazons of tomorrow. Iconic brands like Disney and Harley Davidson, which both began as home-based businesses, might not exist today were they subject to these laws.

The good news is that reform is in the air. In cities like San Diego, regulators have largely scrapped old rules and costly permits. In Arizona, state policymakers came close to adopting a law that would allow “no impact” home-based businesses to operate statewide. Other states, such as Colorado and California, have developed workable rules for common home-based businesses such as “cottage foods” and daycares. But these encouraging trends remain the exception. For every San Diego, there are a half-dozen cities like Charlotte, which conditions home-based entrepreneurship on a tight set of regulations and a $145 permit.

If yesterday’s futurists overstated the extent to which the Internet would usher in an era of remote working, perhaps we underappreciate its virtues today. As many Americans experiment with working from home in the weeks and months to come, an untold number may join the ranks of home-based business operators—and never return to a conventional office. Are cities ready for that?

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