The Public Policy

Giving Small Businesses Room to Breathe

Efforts are underway to give the Regulatory Flexibility Act new flexibility.

By 8.13.13

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Federal rules hurt businesses large and small. But they may disproportionately hurt small businesses, which bear the costs of complying with them. While the Regulatory Flexibility Act of 1980 requires federal agencies to consider how rules might harm small businesses, too many agencies exploit loopholes to avoid the requirement. This has to change, and legislation now under review in the House of Representatives could bring relief to American small businesses.

Rules are expensive things. Federal rules cost the U.S. economy $1.8 trillion each year. And the rules keep right on coming; by the end of last year, there were 854 regulations in place that directly impact small businesses. That’s an awful lot of rules, and the costs and burdens of complying with all of them are substantial. According to a report released by the Small Business Association in 2010, small businesses can pay more than $10,000 per employee per year just to comply with federal regulations. And it keeps getting worse. In 2012, 78,961 pages of rules were proposed by the federal government, and that number has topped more than 60,000 pages every year since 1993.

Just figuring out what the rules say and mean keeps armies of lawyers employed. Now, imagine being a small businessman and having to comply with these rules. Almost impossible. Even if industry groups help, the rules cross so many industry segments and proscribe so much behavior that it is virtually certain that no small company president can honestly declare that her company is following all the rules.

This matters to all of us, because too many rules means arbitrary enforcement by government. And almost any federal enforcement action can devastate a company, depending on its size.

Consider what happened to Gibson and Fry’s, two medium-sized companies that were recently challenged by the federal government for violating obscure and ambiguous rules. In 2011, Gibson was raided by armed federal agents for using wood in its Nashville, Tenn., guitar factory. The government claimed the wood was illegal to buy from India, despite the fact that Indian authorities approved the sale. Federal agents impounded Gibson’s equipment, inventory, and raw materials. Meanwhile, the company was forced to spend millions of dollars in legal fees before finally settling with the government to avoid even more legal costs. 

The Fry’s case is even worse. The U.S. Environmental Protection Agency (EPA) demanded several million dollars in payments from Fry’s because it sold fewer than 200 units of a game device cleaner that the government said contained one banned ingredient. Fry’s imported the product from a Canadian company. The standard retailer agreement says the manufacturer is responsible for following environmental rules, but because the manufacturer was bankrupt, the EPA came after Fry’s. Rather than litigate, Fry’s settled for $50,000. This incident underscores how absurd rules allow the federal government to go after companies. The fact that heads of both Gibson and Fry’s are Republican Party donors was not unnoticed by observers.

What affects businesses, especially smaller businesses, has an impact on the economy as a whole. Small businesses comprise 99.7 percent of U.S. employer firms; they are responsible for 64 percent of net new jobs; and they make up 49.2 percent of private-sector employment. They are crucial for the economy and the engine that will drive our economic recovery. Yet job growth among small businesses remains sluggish at best, in large part due to the costs imposed by regulations. In fact, according to one report, 67 percent of small businesses do not plan to hire in the next six months.

While some regulations are necessary, at a certain point it’s hard to see how a crushing load of rules is good for anyone. By 2010, there were more than one million individual regulatory restrictions in the U.S. Code of Federal Regulations. At what point do we say enough is enough?

Perhaps today? There is bipartisan agreement among our elected representatives that something has to change.

The House Committee on Small Business is currently reviewing the Regulatory Flexibility Improvements Act of 2013, introduced in June by Reps. Sam Graves (R-Mo.) and Spencer Bachus (R-Ala.). The bill would improve the 33-year-old Regulatory Flexibility Act (RFA), requiring federal agencies to determine how much proposed regulations would cost small businesses. If the costs are significant, agencies must look for alternatives that are less burdensome. The Act would also improve early stakeholder input and bolster Executive Order 13563, signed by President Obama in 2011, strengthening the RFA’s “look back” requirement.

The RFA as it stands has already played a significant role in protecting small businesses from the costs of regulations. In 2012, the RFA saved small businesses $2.4 billion, according to the Small Business Administration. These savings were the result of just a few agencies taking a closer look at the way their regulations would impact small businesses. The Regulatory Flexibility Improvements Act would ensure that all federal agencies analyze the impact of their regulations on small businesses, allowing businesses to maximize savings so they can grow and create jobs.

Of course, some regulatory oversight is necessary to ensure quality, safety, and fairness among enterprises. But when businesses can’t grow or create new jobs due to excessive compliance costs from rules handed down by various government agencies, it hurts all of us. Government should never stand in the way of business growth and entrepreneurship. The point of rules is to help businesses operate, not to stifle economic growth. Rules must be clear, concise, and understandable. More, they must make sense. Congress must act to improve the RFA and give small businesses the room they need to grow and thrive.

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About the Author

Gary Shapiro is president and CEO of the Consumer Electronics Association (CEA), the U.S. trade association representing more than 2,000 consumer electronics companies, and author of the New York Times best-selling books, Ninja Innovation: The Ten Killer Strategies of the World's Most Successful Businesses and The Comeback: How Innovation Will Restore the American Dream. His views are his own.