Governor Sherrill is Targeting Junk Fees, but Where Do Government Fees Stand?

by Megan Whitman
NJPI Junior Policy Fellow

Governor Sherrill recently signed an Executive Order targeting “junk fees,” fees that are either hidden, surprise, or overpriced, and which offer little or no benefit to the consumer. These junk fees can be found almost anywhere in businesses: late fees, service fees, administrative fees, and much more. A White House Council of Economic Advisors analysis found that these kinds of fees cost Americans $90 billion a year, or over $650 per household. Governor Sherrill’s Executive Order requires departments and agencies to run assessments of junk fees in the industries they oversee and propose measures to limit or eliminate them. This is a step in the right direction for consumer protections and for making New Jersey more affordable.

In addition to examining hidden and unnecessary fees imposed by private businesses, policymakers should also take a closer look at the costs the government imposes on entrepreneurs. While not all state fees are unreasonable, some deserve scrutiny when they are significantly higher than those of neighboring states or create barriers that provide little additional value to business owners or consumers. One area of importance is the process of opening a business in New Jersey. From high formation fees to a patchwork of local licensing regulations, business owners face a complex and costly environment imposed by the government before they even open their doors to customers. While some level of oversight and administration is necessary, it is worth asking whether New Jersey’s fees and licensing requirements are appropriately calibrated, or whether they have become an unnecessary barrier to entrepreneurship.

The first step in establishing a business is filing a Certificate of Formation with the state, costing $125 for for-profit entities. New Jersey then requires businesses to file a report each year, costing an additional $75. Entrepreneurs operating in certain industries face another layer of licensing requirements, which are issued by various state boards and departments. Fees vary considerably by profession, with each profession’s governing board setting its own fee schedule. This creates a difficult-to-navigate and costly landscape for first-time business owners. These costs are particularly significant for small businesses and sole proprietors, who often begin with limited capital and must absorb regulatory costs long before generating revenue. For example, to practice cosmetology in New Jersey, there is a $50 application fee and a subsequent $90 renewal fee every two years. To open and operate a cosmetology shop, there is a $150 application fee followed by a $200 renewal fee every two years. These expenses are added to the already long list of expenditures: property, income, and sales tax, building and maintenance, daily operational costs, and much more.

However, there is another layer of complexity past the state. New Jersey comprises 565 municipalities, all of which have their own licensing and permitting requirements. These licenses, called mercantile licenses, are issued by city clerks or local government offices, and fees vary substantially by municipality and industry. For example, West Orange requires all of its businesses, regardless of industry, to pay a $100 annual licensing fee. On the other hand, Asbury Park does not have a general mercantile license, but requires certain industries to obtain licenses. The fees for these licenses range annually from $60 for a barber shop to $3,125 for large theaters.

Compared to other states in the region, New Jersey has a high fee and licensing burden. The chart below compares the fees of opening a business in New Jersey with those of opening a business in New York or Pennsylvania.

Despite New Jersey having the same formation fee as Pennsylvania and a lower fee than New York, the significant annual reporting fee of $75 is strikingly high. Over a five-year period, a New Jersey business owner will pay $375 in annual reporting fees, compared to $35 in Pennsylvania and $22.50 in New York.

Continuing with the previous cosmetology example, the chart below compares New Jersey’s licensing fees to open, operate, and work a cosmetology business to regional state fees.

Although this is just one industry, similar trends follow for other industries. The Institute for Justice notes that New Jersey’s average licensing fee sits at $279, slightly higher than New York’s $275 average but over double Pennsylvania’s $116 average.

Governor Sherrill has argued that fees deserve scrutiny when they are excessive, unexpected, or disconnected from the value they provide. While government filing and licensing fees are different from the hidden charges consumers encounter in the marketplace, the same underlying question applies: are the costs imposed on entrepreneurs justified by the services they receive, and are those costs regionally competitive? New Jersey’s annual reporting and license renewal fees are certainly overpriced for the region, and offer more harm than benefit to the consumer with its higher cost burdens. With Governor Sherrill’s promise to limit businesses’ junk fees, work also needs to be done with the state’s own fees.

There are a number of areas for policy reform to make New Jersey more business-friendly and regionally competitive. For example, New Jersey’s $75 annual reporting fee is an outlier among regional states. Reducing this annual fee or converting it to a biennial filing would reduce some of the financial burden on businesses and bring New Jersey closer to the costs of its regional peers. Another idea could be to create a single, digital licensing portal, where business owners can find and apply for all applicable state and municipal licensing requirements. Washington state, for example, has its Business Licensing Service, which allows owners to apply for certain local licenses at the same time as state licenses. With New Jersey’s 565 municipalities, businesses could greatly benefit from a similar system, which would increase transparency and make the licensing process easier and less time-consuming.

Ultimately, as business formation rates decline and closure rates rise, New Jersey’s regulatory environment can no longer be treated as a trivial concern. For many entrepreneurs, the decision to start a business begins with a simple calculation: is the opportunity worth the risk and upfront cost? State policy should make that decision easier, not harder.