The definition of an essential business during the COVID-19 pandemic is carrying intended and unintended consequences.
Under North Carolina Gov. Roy Cooper’s March 27 executive order, an essential business fits into one of four categories: health and public-health operations; human-services operations; vital government operations; and critical infrastructure operations.
While most individuals, civic officials and economists likely agree on the necessity of the first three categories, the gray area is in the interpretation and implementation of essential infrastructure operations.
Cooper’s order lists 29 specific business and industry categories as essential, along with a general category citing retail-sector services performed by a company or individual, such as repairs and mowing yards. Those businesses are encouraged to allow employees to work from home to the extent possible.
Most city and county governments in the state have adopted the vast majority of the categories in the executive order as part of their stay-at-home directives.
A list of essential businesses for Winston-Salem and Forsyth County can be found at /www.cityofws.org/2680/Stay-At-Home-Order-Provisions.
Some are a no-brainer, such as letting banks, credit unions, grocery stores, gas stations, critical trades, and makers and sellers of everyday household products stay open.
Some might be a little puzzling, such as liquor stores, common areas of a mall and bookstores that sell educational materials.
Gun and ammunition shops are allowed to be open as long as they adhere to federal social-distancing guidelines, although Wake County considers those businesses nonessential.
Other businesses are pursuing N.C. Revenue Department approval for essential-business designation, whether they be video-game retailers, movie theaters, bars, fitness centers, tattoo parlors, beauty salons.
Their common goal: keeping their doors open to attract enough sales to pay their employees, rather than having them becoming among the more than 350,000 North Carolinians who have been laid off from work or are experiencing furloughs or pay cuts because of the pandemic.
“These debates are inevitable,” said Michael Walden, an economics professor at N.C. State University in Raleigh. “It is in every business’s interest to be designated as essential, I see even more arguments if the designations are done locally.”
Blurring the lines is that Cooper’s order allows local governments to further tighten statewide stay-in-place restrictions for their communities, but they can’t loosen them.
For example, Guilford and Mecklenburg counties and Greensboro and High Point have halted all in-person automobile-dealership sales, while permitting repair work and online sales transactions.
Mecklenburg’s restrictions do not allow auto dealerships to have sales staff on-site.
By comparison, Forsyth County and Winston-Salem allow car dealers to conduct in-person negotiations and test drives as long as local and federal social-distancing guidelines are maintained. Dealerships are listed as essential within the modes of transportation category.
“We expect (dealerships) to follow social-distancing requirements, limit number of individuals in facilities to less than 10, practice strong sanitizing, etc.,” Winston-Salem Mayor Allen Joines said Tuesday.
There are differing social-distancing restrictions as well for real-estate agents and brokers attempting to sell and buy homes for clients.
Andy Ellen, the president and general counsel of the N.C. Retail Merchants Association, told legislators last week that having business restrictions in place for one community but not in a neighboring one, is creating an unlevel marketplace.
“There are inconsistencies with these limitations that have created a piecemeal patchwork of laws, such as local curfews and businesses deemed essential by the governor’s executive order but not seen as essential by a separate county or municipal ordinance,” Ellen said.
“Localities are making decisions in a vacuum without understanding underlying ramifications,” he said.
Ellen encourages Cooper and legislators to disallow local governments from setting tighter restrictions, so as to maintain a statewide marketplace balance of essential and nonessential business activity.
Permitting neighboring communities to have different restrictions can be as much of a public-health issue as an economic one, according to economists and advocacy groups.
“Allowing localities to define essential businesses is a bad idea for a couple of reasons,” said Zagros Madjd-Sadjadi, an economics professor at Winston-Salem State University.
“It pits communities against communities and contributes to the spread of disease. If I cannot buy a car in Greensboro but can drive over to Winston-Salem to do so, I might be tempted to drive there,” Madjd-Sadjadi said.
“Thus, I could be spreading the virus from community to community, thus essentially defying the more restrictive stay-at-home order.”
Madjd-Sadjadi said that “the least restrictive, not the most restrictive, orders are the one that are in effect, which is not the intention of state rules.”
“Indeed, the state ought to preempt local control and institute a statewide stay-at-home order for consistency and to limit the spread,” he said.
Mark Hall, a law and public-health professor at Wake Forest University, said that “there is reason to be concerned about the potential for local definition of essential services to play favorites to particular businesses.”
“The temptation to seize customers from competitors in nearby markets, and then the need to protect local business from lost sales, could undermine the will of most communities to restrict local business leaders who do not willingly pause operations,” Hall said.
What is manufacturing?
Manufacturing appears to be an eye-of-the-beholder category for an essential business designation, often depending on the product being made.
“It is one thing to shutter retail stores, where the public has a lot of interaction, and quite another to shutter manufacturers,” Madjd-Sadjadi said. “When we finally bring our economy back fully online, if we do not have a robust supply of products that are immediately available from manufacturers, our retail sector will suffer greatly.
“After all, a shop without goods is a shop without customers.”
Another complication in defining essential businesses is when they are viewed through the lenses of public-health concerns.
There has been criticism for allowing tobacco and alcoholic-beverage manufacturers to remain open, when shutting them down temporarily could encourage some people to reduce their consumption.
Another blurring of the lines come from local and state governments being dependent on excise taxes from liquor and tobacco products.
The Distilled Spirits Council of the United States, an alcoholic-beverage industry trade group, said Pennsylvania is the only state to shut down all liquor stores. Newsweek reported that 32 states have carved out protections for liquor stores in their stay-at-home orders.
Social distancing is affecting liquor sales in Forsyth, with customers stocking up.
Gregory Bradsher, the administrator for the Triad Municipal ABC Board, said sales seem to be consistently balanced in the time since the governor first declared a state of emergency in North Carolina on March 11.
“Liquor sales overall have been somewhat consistent because of social distancing,” Bradsher said. “It’s been a balancing act with zero sales from restaurants and bars and something of an uptick in retail sales.”
Economically, the shift from bars and restaurants to direct sales at liquor stores could actually help cities and small towns.
In Winston-Salem, 75% of all liquor sales find their way into the city’s general fund. Lisa Saunders, the chief financial officer, said the city collected about $2.5 million last year, but she wouldn’t speculate about whether that would rise this year.
In a related development, the N.C. Association of ABC Boards and state Sen. Rick Gunn, R-Alamance, are recommending that bars and restaurants be allowed to sell back to local ABC stores alcohol they bought since Jan. 1.
The association passed a resolution recommending that bottles be returned “for a refund at current retail price, less the mixed beverage tax.” For that to happen, local ABC boards would have to adopt local policies to implement the buyback program.
“This program would help struggling bar and restaurant owners raise needed cash to withstand the economic shutdown,” Gunn said. “This is the hardest-hit sector in our economy, and this is a simple step we can take now to help deliver some relief.”
In fiscal 2017-18, North Carolina gained $455.7 million related to tobacco excise-tax revenue and its share of the annual Master Settlement Agreement payments from tobacco manufacturers.
The MSA payments are dependent upon several variables, foremost being the number of traditional cigarettes sold in the United States.
Thus, a prohibition on tobacco manufacturing would deal North Carolina and other states a significant tax-revenue blow considering they are offering to delay collection of taxes on businesses to help their current cash flow.
Sales of traditional cigarettes have picked up with the issuing of stay-at-home orders related to the COVID-19 pandemic, tobacco industry analysts said Tuesday.
For the week that ended March 22, traditional-cigarettes sales volume rose 1.1%, according to Piper Sandler & Co. analysts. By comparison, the industry experienced an 8.2% decline for the week that ended March 1.
“We expect potentially higher consumption rates in addition to stockpiling, too, as smokers spend more time at home during quarantine, away from restaurants, offices and places with smoking bans,” Piper Sandler analyst Michael Lavery said.
Both British American Tobacco PLC, the owner of Reynolds American Inc. in Winston-Salem, and Imperial Brands PLC, the owner of ITG Brands LLC of Greensboro, said recently they have not seen any material effect on group performance to date from the COVID-19 pandemic.
Reynolds spokeswoman Kaelan Hollon said the company’s operations will continue, as its companies are included among essential businesses and operations.
Reynolds confirmed last week that two nonproduction employees had tested positive for the virus and are in self-isolation.
Madjd-Sadjadi said he supports liquor and tobacco manufacturing being considered as essential businesses.
“Essential is not a designation that ought to be based on normative beliefs,” Madjd-Sadjadi said. “Instead, it needs to be based on objective evidence.
“Any addictive drug, and both alcohol and nicotine are addictive drugs, is definitely an essential drug for the drug addict,” he said. “Requiring individuals to go cold turkey without supporting mechanisms in place and in the absence of an outlawing of the drug has its own potential consequences.”
Who should decide?
“There’s an inherent danger in allowing people at any level of government to determine what is and is not an essential business,” said Mitch Kokai, senior policy analyst with the John Locke Foundation, a conservative-leaning research group based in Raleigh. “Every legal business is essential to its owner and employees, to the extent that they derive their livelihoods from that business.
“Each of these businesses contributes in some way to the private-sector economy, which drives the economic growth that funds all of the government programs that are attracting so much attention during the pandemic,” Kokai said.
He said some business and industry sectors end up on the list of essential businesses “because of effective lobbying.”
“There’s no objective scientific test that can separate essential from nonessential businesses,” he said.
“Most of us realize that the COVID-19 pandemic requires emergency government action. But that doesn’t mean we should expect government leaders to gain some special insights during times of emergency that they lack during normal times.”
Mark Vitner, senior economist for Wells Fargo Securities in Charlotte, said he comes down on the side of more local flexibility on restrictions for essential businesses.
“Public policy decisions are best made locally because conditions are so much different across the state,” Vitner said.
“That said, we do not want people traveling from one community to another to buy vehicles. Hopefully, over time, the restrictions will become more uniform across the state.”
“Many manufacturing operations are highly automated and workers can do their work and still keep their distance.”
Vitner said the debate may be better defined as between permitted functions and prohibited functions.
“That would take arguments away from trying to determine what makes an activity essential and move it more towards what vital activities can continue because they are either done remotely or in an environment where workers can do their jobs safely,” he said.
“As frustrating as it is, it is important to remember that policymakers do not have a road map to work from.
“There is no precedent to this in modern times.”