As the nation evaluates the new President’s First 100 Days and Washington looks ahead to the next 100, we must ask a simple question, do we want vibrant small businesses in America or not?
The complexity and cost of the regulatory burden placed on each small business shows the evidence of our answer. When the regulatory burden drowns out productivity and innovation, the flowery rhetoric we often hear from politicians about small businesses is seen for what it is: lip service. When each new idea in business is met with an unforgiving mountain of requirements, regulations, and forms, the staff of a small florist, restaurant, or pet store spends less time on the core mission of the company and more time on compliance. That ultimately means less productivity, slower economic activity and fewer employment opportunities since small businesses and start-ups were responsible for creating 55 percent of all jobs in the U.S. since 1970.
The new regulatory burdens on the U.S. economy last year were estimated at $8 to $11 billion, according to the White House’s Office of Management and Budget. But those figures do not include the cumulative burden of the thousands of existing regulations or local and state regulations.
One study estimated that the total cost imposed by federal regulations was more than $2 trillion in 2012. In addition, when federal agencies estimate the effect of their new regulation, they can only take into account the direct cost of their regulations while ignoring the multitude of additional indirect costs.
A new report by the American Council for Capital Formation (ACCF), released Monday, collected numerous studies which demonstrated a negative effect of regulation on small businesses and entrepreneurs. According to the Council of Economic Advisors, new business formation has declined since the late 1970s, in part because of increased regulatory barriers. Entrepreneurs and small business owners are unable to spread out the fixed cost of compliance like large businesses. Securing additional cash to pay for compliance is also much more difficult for small businesses.
ACCF found that regulatory improvements can work effectively by reducing duplicative or unnecessary regulations. One example is the Environmental Protection Agency’s (EPA) finding that a requirement for both automakers and gasoline stations to capture gasoline vapors at the pump was duplicative. The EPA determined that automakers had installed a vapor-recovery system that achieved the environmental goal of the regulation. As a result, it allowed an exemption that ultimately saved each gas station around $3,000 a year, without any harm to the environment.
Unfortunately, reducing duplicative and unnecessary rules seems to be the exception, not the rule. Most federal regulations have never been evaluated to determine whether they are duplicative, have achieved their desired effect or if they are cost-effective. Congress does require major regulations that carry significant costs for small businesses to undergo additional review to reduce potential economic harm. However, many agencies have used loopholes and skirted this requirement by neglecting to account for the full economic effects of a proposed rule.
While the United States currently leads the world in “opportunity entrepreneurs,” that status is threatened by the growing regulatory burden. To remain competitive in a global economy, the United States must provide a better economic atmosphere where the entrepreneurial spirit can flourish. Americans should be able to run a dry cleaners, a nail salon, a local gym, a small manufacturing company or a family owned convenience store without the constant fear of their Uncle Sam putting so much compliance burden on them that only large corporations can survive.
Take for example the EPA’s revised definition of the “Waters of the United States” rule (WOTUS), which expanded the Clean Water Act to include all streams and wetlands. While protecting our water is vitally important, the EPA claimed the revised rule would not have a significant impact on small businesses because the regulation’s multi-million price tag would not be directly associated with compliance. Since the costs to small business were deemed to be “indirect,” no additional review to protect small business was pursued, as required under the Regulatory Flexibility Act.
Large companies have a team of lawyers and compliance officers who consistently track changes in federal law; small businesses do not. But, small businesses can face a large fine if they make a paperwork mistake or miss a deadline. It is time for the government to re-set the priority on safety and security, instead of fines and penalties. Small businesses should have the option to fix a paperwork mistake, instead of just facing stiff fines.
The recently introduced “Small Business Regulatory Flexibility Improvements Act” (S. 584) would require federal agencies to keep a realistic view of small businesses. This Senate bill has already been endorsed by National Federation of Independent Business, American Farm Bureau Federation, National Association of Homebuilders, and more than 180 other organizations representing small businesses from every sector of the economy. S. 584 seeks to modernize the process for designing new rules, including a requirement that federal agencies account for the full cumulative costs and the effects on small businesses. It also requires outreach and consideration by those drafting new regulations to make sure that cost-effective alternatives are fairly considered.
It’s time we stop talking about helping small businesses and start doing something that actually reduces the regulatory burden that stifles jobs and holds back our economic recovery. Everyone wants safe working spaces and fair competition. But, improving the way rules are written will help ensure that the mountain of regulations doesn’t destroy the small businesses and entrepreneurs that provide the good jobs and economic growth we need.
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Sen. James Lankford, (R-Okla.), is chairman of the Regulatory Affairs Subcommittee and lead sponsor of the Small Business Regulatory Flexibility Improvements Act. John Graham is the former Administrator of the Office of Information and Regulatory Affairs (OIRA) under President George W. Bush, current Dean of Indiana University’s School of Public and Environmental Affairs, and Senior Advisor to the American Council for Capital Formation.