Can California Make Room for Home-Based Businesses?

Can California Make Room for Home-Based Businesses?

According to a recent report by the Public Policy Institute of California, a startling one-in-four Californians now works remotely, with one-in-seven blending office and home-based work. And if you ask Californians what they prefer, a third say they would like to stay fully remote next year, while a quarter say they would like a hybrid arrangement. Admittedly, these figures are nowhere near what they were at the depths of the COVID-19 pandemic, and don’t bode well for the “death of the city” doomsayers. But they do indicate that a lot of remote work is here to stay.

This shift to working from home is part of a larger trend underway even before the COVID-19 pandemic. And this doesn’t just include workers—it also includes entrepreneurs. Since the early 1990s, the number of home-based businesses (HBBs) has boomed, such that half of all businesses now run out of a home. While data is sparse and often dated, evidence now suggests that HBBs are the beating heart of the US economy. Better yet, thanks to their limited capital requirements, HBBs are disproportionately run by groups historically locked out of entrepreneurship, including women and African Americans.

Unfortunately, local zoning rules that assume the strict separation of home and work are often extremely antagonistic to these types of businesses. In a recent survey I conducted with my colleague Olivia Gonzalez, we found that municipalities often subjected HBBs to costly permits, incoherent rules, and arbitrary discretion, if they didn’t ban them altogether. As a result, where entrepreneurs start them at all, HBBs are often forced underground, forever at risk of being shut down by a complaining neighbor and unable to secure capital and grow into home-based powerhouses like Amazon and Disney.

All of this is turned up to 11 in California: In San Mateo, HBB entrepreneurs must submit a detailed floor plan of their home as a condition of receiving a permit. In Pasadena, renters must plead with their landlord for written consent before regulators will administer an HBB permit. In Huntington Beach, HBB permits are largely at the discretion of the planning director, and no business can run out of a garage. And San Luis Obispo imposes some of the strangest HBB regulations I’ve ever seen: in addition to the rules discussed above, HBB entrepreneurs in SLO must post notice and potentially be subjected to a raucous public hearing, even if the business is only conducted over the phone.

Luckily, the pandemic-induced surge in remote work has policymakers in many cities and towns scrambling to reform these laws. Last year, Chicago passed sweeping reforms allowing HBBs to operate out of garages and occupy more space. And up in Ann Arbor, policymakers scrapped arbitrary prohibitions in favor of a nuanced set of standards that lets entrepreneurs ply their trade while protecting neighbors from the impacts that actually matter.

Yet rather than fixing bad local ordinances on a city-by-city basis—an arrangement that preserves a chaotic patchwork of regulations—some states are also stepping up. Last year, Florida adopted HB 403, which allows local governments to regulate HBBs based on measurable impacts, but not to ban them outright, subject them to unworkable fees, or impose arbitrary standards. That is to say, the rights of Floridians who run “no impact” HBBs are protected from local busybodies. A similar bill has been promoted as a model by groups like the American Legislative Exchange Council, with other states soon to follow.

Could California follow a similar path? In so many areas of land-use policy, policymakers in Sacramento have seen the wisdom in setting up guardrails around often-abused local regulations. So why not in protecting the rights of California’s many thousands of home-based entrepreneurs? At a time when entrepreneurship is in decline and our small businesses are struggling to hang on, defining and protecting a “no impact” category of HBBs could help to reverse these disturbing trends. Not every HBB is going to be the next Google or Microsoft, but at the very least, they might just provide economic opportunity to those who need it most.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.