New Jersey’s economy heavily relies on the strength of its small businesses. According to data from the U.S. Small Business Administration, these enterprises make up 99.6% of businesses in the state and employ 49.2% of the workforce. However, a recent report from the Garden State Initiative titled “New Jersey’s Red Tape & Fees are Hurting Small Businesses” reveals concerning indicators for the future of small businesses in our state, largely due to burdensome government taxes, regulations, and fees. Fortunately, there are practical policy reforms that can reinvigorate small businesses and drive economic growth.
While it is widely known that New Jersey has had one of the least favorable business tax climates in the country for years, independent studies have ranked the Garden State as the second worst state for entrepreneurship and the fourth worst state to start a business.
These rankings have tangible consequences, as reflected in census data. While there has been a significant increase in business applications since the pre-pandemic era, indicating a desire to start businesses in our state, the formation of new businesses, as measured by the Census, is declining. This suggests that while people are interested in establishing new businesses, the process of becoming a business in New Jersey is becoming increasingly challenging.
Several factors contribute to hindering small business development in our state:
First, the cost of registering and maintaining a small business or LLC is comparatively high when compared to neighboring states. Registering a business in New Jersey is more expensive than in New York and Pennsylvania, our immediate neighbors. While Delaware has higher registration fees, it offers savings for businesses by not imposing state or local sales tax. Therefore, small businesses conducting numerous sales may find the higher Delaware registration fee more cost-effective than paying sales tax.
Second, New Jersey faces a labor shortage due to unnecessary job mandates. Small businesses account for 85% of all hiring, serving as an entry point for many individuals entering the workforce. However, the shortage of available workers poses a challenge for aspiring entrepreneurs. In our current low-unemployment environment, reducing red tape can help reintegrate unemployed individuals into the workforce.
Third, certain laws, such as occupational licensing laws, create barriers to job creation. The Institute for Justice reports that licensed occupations in New Jersey result in a loss of 422 calendar days each year due to regulatory burdens. For instance, security alarm installers in New Jersey face one of the highest burdens in the nation, requiring 1,460 hours of education and four years of experience. In contrast, New York mandates only 81 hours and no experience, while Delaware requires simple registration and Pennsylvania does not necessitate a license for these services. Similar challenges exist in lengthy licensing processes for locksmiths.
Fourth, recent legislation has not adequately supported small-business entrepreneurs. Despite the Democratic-controlled Legislature and Senate passing a bill to establish a permanent commission that would review regulations and rules hampering economic growth, Governor Phil Murphy vetoed it in 2021. Reevaluating burdensome and anti-growth regulations could alleviate the challenges faced by small businesses in our state.
While our elected officials have introduced a new small business manual proposal in Trenton to address common queries regarding permits and other concerns, they have yet to effectively tackle the pressing issues entrepreneurs face.
Danielle Zanzalari, Ph.D., is an assistant professor of Economics at Seton Hall University and a contributor to the Garden State Initiative. Eileen Kean is the New Jersey State Director for the National Federation of Independent Business.