Let Neighborhoods Work: Bans on Home Businesses Are Out of Control

Building a business out of your garage is a quintessentially American origin story. In many places, it’s also against the law.

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Do you sell cupcakes, run a home photography studio, or tutor kids in your living room? If so, you might be breaking the law.

In the United States, zoning ordinances often treat modest home enterprises as threats to the neighborhood. If you’re just running an online business, local governments generally won’t bother you, but if clients are coming to your home, then they try to limit the visibility and impact of your business. Have these regulations gone too far? Should state governments tell local governments to leave home-based businesses alone, within certain limits?

Major companies have gotten their start in someone’s garage. At this point, it’s almost a mandatory backstory for any Silicon Valley company. Apple, Hewlett-Packard, Google, and Amazon all boast garage-based origins.

And it’s not just fledgling tech startups. In residential neighborhoods across America, home-based businesses are the hidden sinews of resilient local economies, from the mom who takes care of several neighborhood kids while their parents work to the independent tax accountant hanging out his shingle. From the Russian immigrant baking and selling honey cakes to those in the know to a group of families that started a micro-school during the COVID-19 pandemic.

The rise of remote work makes home-based businesses more viable because the potential customer base for small neighborhood retail is growing. More Americans could now benefit from the convenience of doing business close to home. Already, about 50 percent of all small businesses and 69 percent of startups are home-based.

New Hampshire is the only state with a complete dataset of local zoning regulations on home-based businesses, based on a survey of laws conducted by the Initiative for Housing Policy and Practice at Saint Anselm College. About 20 percent of the state’s independent zoning authorities outright ban home-based businesses and occupations in at least one residential district. Twenty towns ban the Hewlett-Packard origin story—a business in a detached garage—outright. Twenty-six more require a special permit.

Other finicky regulations include requirements to build more parking (56 towns) or prohibitions on building more parking (14 towns); requirements subjecting home businesses to site plan review, which comes with a public hearing and potentially costly requirements to run tests and studies (89 towns); and strict limits on the square footage a resident may use for running a business (22 towns set limits at 600 square feet or less).

You can bet that if “Live Free or Die” New Hampshire has these regulations, other states’ rules are at least as onerous. In 2021, Florida legalized home-based businesses in all residential districts but otherwise allows local governments to regulate their operation. New Hampshire, California, Washington, Oregon, and Colorado have legalized home-based child care statewide.

What would happen if we relaxed the rules on home-based businesses?

Japan’s experience may offer a glimpse. American tourists return entranced by the tiny shops and offices that people run out of their homes. In Japan’s “exclusively residential” zoning category, “small shops, dental clinics, hair salons, and day cares are all permitted.” The widespread availability of small shops makes life more convenient if you live in a small house. You no longer have to store all the daily necessities of life within your residence. Jane Jacobs made the safety case for mixed-use neighborhoods in “The Death and Life of Great American Cities.” With more “eyes on the street,” someone is more likely to see anything bad that happens and take action.

Now, there are good reasons for Americans to not adopt Japanese zoning wholesale. Japan’s homicide rate is 25 times lower than America’s. Americans are less likely to tolerate strangers roaming around their neighborhoods. And while Jacobs’s “eyes on the street” thesis explains why mixed-use neighborhoods are safer than downtowns that empty out after work hours, bringing bars and perhaps some other commercial uses into residential neighborhoods appears to increase crime (although higher residential density reduces it).

Still, much of the United States is extremely safe, and it just isn’t plausible that making it easy to start a home day care is going to spawn a neighborhood crime wave. Reasonable limits make sense for home businesses that bring in lots of vehicle traffic, create lots of noise, or attract an undesirable clientele, but if we set aside these problematic uses, why not let people offer more services and sell more stuff out of their home?

Opponents might point to the virtues of “local control.” State legislators, they say, have less knowledge of local neighborhoods and potentially incompatible uses than local officials do.

Indeed, local governments are more competent at regulating commercial uses than homebuilding. Local governments over-regulate housing because they capture only part of the benefits of new local housing while paying the full costs. New property tax revenues and more up-to-date housing stock do benefit a locality, but the benefits of lower housing costs, lower homelessness, and stronger business conditions from new supply accrue to a larger region.

By contrast, localities reap the lion’s share of the benefit of allowing new business, including more employment opportunities, higher property tax revenues, and more convenience and amenities for residents. So we should expect local governments to treat commercial uses better than they do dense residential uses, and that’s generally what they do.

Even so, localities often err on the side of overregulation. Local officials lack the information, the incentives, and the flexibility that market prices provide. They can’t know what services people really want, public hearings amplify anti-change voices, and getting variances is too costly for the average homeowner.

Thus, state legislatures can play a useful role in using their legal and administrative expertise to carve out safe harbors for low-impact uses that local officials may have not even considered.

One example of this opportunity is in-home child care. Many towns regulate in-home child care like any other home-based business. But child care is a low-impact use, and there’s no reason to treat it the same way we would, for example, auto repair. The lack of affordable child care is also a major national economic issue. Thus, it’s no surprise that states have started to set aside local zoning regulations that ban or strictly regulate home child care.

Could states also require or encourage localities to allow entrepreneurs to do business at home in other ways? States have the expertise and capacity to help local governments figure out opportunities to ease the burdens on small-scale entrepreneurship, without turning residential neighborhoods into central business districts. Just ask Bill Gates or Steve Jobs. America’s garages could be launching pads for global enterprise if we have the vision to let them.

From the American Institute for Economic Research