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December 30, 2003
Twenty Three Years is Long Enough!
It has been twenty three years since the 1980 passing of the Regulatory Flexibility Act by Congress, which was established to create a level playing field for small businesses facing federal regulations. In 1996 this law was given more backbone with the passage of the Small Business Regulatory Enforcement Fairness Act, which adds the teeth of judicial review to regulatory fairness. However, a gaping hole exists in regulatory fairness. Many states have not followed the federal government's lead on this critical small business issue.
As of July 2003, regulatory flexibility is fully active in only seven states. Thirteen states, including my new home state of Tennessee, have no regulatory flexibility statute in place. The remaining thirty states have various degrees of regulatory flexibility in place.
So why is this an issue? A 2001 study by Crain and Hopkins found that small businesses spend $7,000 per employee in regulatory compliance. This is $2,500 more per employee than large companies are forced to spend. Much of this disparity is from the impact of environmental regulation compliance. The study found that small businesses spent over four times as much as larger firms per employee on environmental compliance. However, tax compliance is also a disproportionate burden on small businesses, costing them over twice as much per employee as larger companies. These disparities create a clear disproportionate burden on smaller companies, putting them at a decided competitive disadvantage.
A specific example of the impact of one-size-fits-all regulation is cited by the Office of Advocacy of the Small Business Administration. The state of New York had passed regulation to enhance safety requirements for trailers and towing on state highways. Not a bad idea, especially for any of us who have ever been scared half to death by unsafe trailers swaying wildly behind an old pick-up truck as it is being towed down the highway. However, the law as written also regulated a farmer wanting to tow a manure spreader across a highway from one field to the next! The law was modified to exempt farmers in such cases, which saved these small business owners approximately $120 million. Any of us who have even owned a small business can probably give similar examples.
To push this important reform ahead, the Office of Advocacy of the Small Business Administration drafted a report entitled Small Business Friendly Regulation: Model Legislation for States. This effort has already made progress, as twelve states introduced new legislation in 2003. This legislation would simply create procedures to analyze the availability of more flexible regulatory approaches for small businesses. Any significant new regulation must go through an economic impact review of its impact on small business. The model legislation also creates judicial review similar to that recently enacted at the federal level to assure compliance.
Over 93% of all businesses in every state in the union is a small business. This web log has cited numerous studies as to the economic engine that is entrepreneurship in the USA. The Office of Advocacy web site offers a review of the level of regulatory compliance in each state. It also provides information on how to move such legislation ahead in those 37 states that do not have full regulatory fairness legislation in place.
This issue was recently brought to my attention by Bill Hobbs through his blog site.
Posted December 30, 2003 01:56 PM
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at Belmont University in Nashville, Tennessee. He consults with a variety of businesses on start-up and growth related issues, and with larger corporations on re-establishing entrepreneurial cultures within their organizations. Dr. Cornwall's current research interests include entrepreneurial finance and entrepreneurial ethics. He has authored or co-authored four books.
