The Dangers of Busting Law-Breaking Businesses

Regulating businesses is necessary, but it can have negative impacts on struggling cities.
March 2015
Detroit has been shutting down businesses that don't comply with city laws. Shutterstock
By Scott Beyer  |  Columnist

Pretend that you are governing a declining American city. You’ve probably witnessed numerous public service failures, like slow-responding police, unclean streets and polluted waterways. Among these failures, your city may also not be fully regulating its businesses, meaning that some are breaking minor laws or even operating under the table. Should it be, then, your top priority to make them comply?

In Detroit, it certainly seems it is. In 2011, the city launched Operation Compliance, an initiative that was meant to address 1,500 illegal businesses by shuttering hazardous ones and modernizing others. After one year, 535 businesses had agreed to come into compliance and 383 had been closed, often on zoning technicalities. Since then, Detroit has continued charging fines and conducting random searches.

Detroit isn’t the only city with such inspectorial zeal. According to University of Chicago law professor Beth Kregor, the Windy City also frequently conducts stings on unsuspecting businesses. At the end of 2014, the city had fined bars for violating state happy hour laws by selling all-you-can-drink specials on New Year’s Eve.

The stated point of these crackdowns is to punish unsafe, roguish or tax-evading businesses. That’s good. But the approach can also be counterproductive for struggling cities. Revenue that would go toward crumbling services instead funds inspectors. The crackdowns mainly impact low-income residents, who both operate and patronize such businesses. And these initiatives often fail to account for why businesses don’t comply in the first place. As I have similarly reported in The Wall Street Journal, Detroit businesses cited hefty fees and long wait times for permits as impediments. In Chicago, permit applications go through multiple departments, not all of which function cohesively. And in Philadelphia, operating a business from home, no matter how unobtrusive, is illegal in many residential areas.

Crackdowns can also be abused to extract revenue. For example, a 2013 Daily News investigation of New York City’s Department of Consumer Affairs found that inspectors were instructed to fine one-fourth of the businesses they visited. Kregor believes that this is the motivation behind many Chicago regulations, including the one requiring two separate permits for overhead signage. Many owners, she says, aren’t familiar with such rules, and end up paying $250 fines.

Given these factors, one might wonder if regulatory compliance is always essential. The answer would be yes, assuming that cities don’t just want a bunch of shadow businesses. But regulations should be enforced using common sense. There is a difference between a business whose faulty wiring could start a fire, and one that is breaking outdated or arbitrary rules. Deciding the difference should be the role of inspectors, says Philip K. Howard, author of The Death of Common Sense.

But if regulations must be enforced to the letter of the law, then they should be reformed. Howard suggests cities adopt one-stop shops for business permits and rewrite codes to provide broad rather than precise guidelines. Kregor says cities should also make application checklists available to entrepreneurs. The point of regulations, after all, isn’t to stifle business, but to establish predictability -- an important concept in cities starving for growth.