In a time of high unemployment, placing a tax on finding new work seems an obvious misstep. Yet the recession caused by the COVID-19 pandemic has put a large fiscal burden on state and local governments, as states are expecting to see major declines in revenue collections, and it won’t be surprising if states turn to raising fees, such as those on occupational licenses, to close the gap. That would be a mistake—if anything, repealing some occupational licensing laws may provide a (small) boost to tax revenue.
In the United States, state and local governments primarily rely on revenue from sales, personal income, and property taxes to fund government services. But as revenue from these sources (especially the personal income tax) are highly procyclical, they naturally decline during recessions. In an economic downturn like the current one, states often have to look to other revenue sources to fill the gap. In the past, many state governments filled recession-driven gaps in revenue by alternative revenue sources, whether excise taxes or various fees.
Occupational licensing fees are one example of a user fee state and local governments use to collect revenue. A classic user fee is a toll on a toll road, or a cover charge to access a public pool. However, governments also charge fees for regulatory oversight services, like a health inspection, permit approval, or an occupational license. User fees are thought to be efficient, as the people who pay them are the same people who benefit from the particular service.
However, governments often raise user fees beyond the level necessary to pay for the marginal costs of the related service in order to shore up general tax revenue. It would be a mistake to turn to licensing fees–effectively a tax on finding new employment–as a way to plug state fiscal holes. On the whole, occupational licensing regimes cost states revenue by slowing down growth and eliminating jobs.
Raising licensing fees creates a targeted tax on specific economic activity. That’s not good tax policy, especially when the activity in question is starting a new career path. These fees can be burdensome, especially for someone who’s unemployed, working a low-wage job, or just entering the job market. Nevada charges a fee of over $1,000 for a commercial HVAC contractor, and Louisiana charges $1,240 for an interior designer licensing. California has an expansive schedule of fees related to licensing applications and renewals for nurses.
According to a 2015 Monthly Labor Review paper from Robert Thornton and Edward Timmons, one of the reasons some governments have been unwilling to reform their licensing regulations is that those governments use these fees for general revenue.
But using licensing fees as a revenue-raiser is counterproductive. Occupational licensing regulations slow down economic growth, and cost jobs. As a 2018 study from economists Morris Kleiner and Evgeny Vorotnikov found occupational licensing reduces the size of the economy by $184 billion, and by around 2 million jobs.
Ironically, slower growth means less general tax revenue. In a paper for the Pioneer Institute last year, I estimated how much revenue state and local governments lose thanks to lower economic growth from these regulations. In 29 of the 36 states I analyzed using estimates of the costs of licensing from the Kleiner and Vorotnikov paper, I found that they actually net a loss in tax revenue thanks to occupational licensing fees barring workers entry into the market. Keeping people out of the workforce leads to lower income and thus lower revenue from taxes on income and sales, among others.
This is not to say that just cutting licensing fees would pay for itself—the cost of occupational licensing comes from the burden of the training and education requirements in addition to the fees mentioned. However, in most cases, broad reform to licensing—both reducing or eliminating regulatory requirements as well as setting fees equal to the cost of administration—would not cost state and local governments revenue due to the upside benefits of easier entry into the labor market and the subsequent increase in economic activity.
It might be tempting to use licensing fees as a way to raise revenue without being seen as raising taxes. However, raising user fees above the cost of the related service is a tax hike in disguise, and a not particularly well-designed one at that. It’d be a mistake in a time of such high unemployment to place a tax on finding new work.
Alex Muresianu is an Opportunity Fellow at Young Voices, and wrote “How Occupational Licensing Laws Hurt State and Local Tax Revenues: The Public Finance Case for Occupational Licensing Reform,” a paper from the Pioneer Institute. Find him on Twitter @ahardtospell.