Economy / Energy / House Committee on the Judiciary / Regulation

Hidden Costs: Regulatory Impacts on Small Businesses

When pitchers and catchers report to spring training sights in Florida and the southwest, it is easy to feel like the sun is just a bit warmer and spring is right around the corner. For millions of small business owners across the United States however, the early months of 2013 have already felt like the dog days of summer as these entrepreneurs sweat out the stifling heat of expanding regulatory burdens. Despite inter-agency commendation, regulatory proposals remain consistently lacking in transparency and analysis.

The Small Business Administration’s (SBA) Office of Advocacy strives to ensure that the nation’s top regulators do not forget the economic importance of small businesses by seeking transparency in agency estimates of regulatory burdens on these entities. This February saw the release of the Agency’s annual report on implementation of the Regulatory Flexibility Act (RFA). This 1980 provision requires agencies to consider the impact of regulation on the small business community, either by certifying that any proposed regulation will not have a significant impact on a substantial number of small businesses, or by publishing a thorough impact analysis of the regulation.

The most recent report, produced for Fiscal Year 2012, is an administrative pat on the back by the Office of Advocacy. The SBA concludes its report by asserting its satisfaction that most agencies had complied with requirements of the RFA and lauding recent legislative developments which have strengthened the RFA’s effectiveness. Critically, the SBA asserts that FY 2012 saw the elimination of $2.4 billion in first year regulatory costs.

Costs remain dangerously debilitating.

On February 28th, Dr. Douglas Holtz-Eakin of the American Action Forum presented a more disconcerting view of U.S. regulation to the House Judiciary Committee. Dr. Holtz-Eakin explained that under the Obama administration the cumulative regulatory burden on the economy has expanded by $520 billion. Despite the $2.4 billion, which the SBA asserts it saved small businesses, regulators still managed to impose $215.9 billion in rulemakings on the economy in FY 2012.

While these statistics highlight the continuing burden on the U.S. economy overall, the danger for small businesses lies in the lack of transparency in these agency rulemakings and their accompanying analysis.

The Environmental Protection Agency (EPA) recently released its Emissions Standards for Stationary Sources and was able to escape RFA analysis because it suggested that entities would simply choose to build new facilities rather than pay the costs of compliance. AAF estimates that this is foundationally correct, naming at least 100 facilities facing retirement. However for the 14,000 employees directly affected, this regulation is undoubtedly significant.

The SBA report on RFA compliance was not kind to the Department of Health and Human Services, the principle administrator of the Affordable Care Act (ACA). The report notes that HHS fails to notify the SBA of proposed rulemakings and often gives inadequate consideration to SBA advocacy comments. While ignoring the SBA, HHS managed to publish 11 rules, which it admitted triggered RFA analysis, imposing a total burden of $1.9 billion in costs to small businesses. These impacts are just one piece of the Affordable Care Act burden of $24 billion on private entities.

As small businesses navigate the ACA’s deep pool of new regulations, they must prepare for a title-wave of Dodd-Frank regulations; 29 new rule-makings were unable to be certified by agencies as not significantly affecting small businesses. Despite imposing $6.5 billion in costs, Agencies were unwilling to provide any more thorough analysis and instead admitted only the possibility of private sector impacts.

As an example, the SBA advocated for the revision of the analysis provided in the Conflict Minerals rule. This rule, SBA explains, does not adequately account for the down-stream costs to small businesses as active participants in a large scale supply chain. It appears these advocacy efforts were ignored by the agency but the costs are real. A recent study by Tulane University concluded that the total economic impact of this rule is $8 billion, two-thirds of which will be shouldered by small businesses.

When the above numbers are combined with the $12.5 billion in regulatory costs imposed since January, it is clear that the mission of the SBA’s Office of Advocacy is an important one. Despite the congratulatory tone of the SBA’s report however, this data is sobering and must instruct the nation’s top regulators as they balance their objectives with the very real burden they impose on the nation’s economy.

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