06/06/2002
House Committee on Small Business
"The Cost of Regulation to Small Business"
June 6, 2002
Prepared Remarks of Mr. Andrew Langer
National Federation of Independent Business
Mr. Chairman and Members of the Committee:
It is my pleasure to be testifying here today before the Committee on Small Business Subcommittee on Regulatory Reform and Oversight on the subject of the impact of regulations on small businesses. I am here representing the National Federation of Independent Business, the nation's largest organization of small business owners. NFIB has 600,000 members, and is represented in each of the fifty states. We are a 501C(6), membership-driven organization, meaning that my role here is to represent the determined interests of those members.NFIB represents small employers. Our typical member has five employees and reports gross sales of around $350,000 per year. Our average member nets $40,000 to $50,000 annually. While there is no benchmark used to define a small business, our membership is very much a reflection of American small business when compared to data compiled by the United States Census Bureau.
We believe it is important to distinguish the type and size of businesses NFIB represents. Too often, federal policy makers view the business community as a monolithic enterprise that is capable of passing taxes and regulatory costs onto consumers, without suffering negative consequences. For small business this is not the case. NFIB members are not publicly traded corporations; they are independently owned and operated. They do not have payroll departments, tax departments or attorneys on staff.
Being a small business owner means, more times than not, you are responsible for everything - taking out the garbage, ordering inventory, hiring employees, and dealing with the mandates imposed upon your business by the federal, state and local governments. That is why simple government regulations, particularly when it comes to the paperwork they generate, are so important. The less time our members spend with "government overhead," the more they can spend growing their business and employing more people.
Growing businesses lead to job creation, which is one of the major roles small business plays in our national economy. Small business is the leader in job creation because it is the embodiment of the entrepreneurial spirit. Small firms with fewer than 500 employees employ 52 percent of the non-farm private sector work force as of 1998, and are responsible for 51 percent of the private sector business share of the nation's gross domestic product.
From 1994 to 1998, about 11.1 million new jobs were added to the economy. Small businesses with 1-4 employees generated 60.2 percent of the net new jobs over this period and firms with 5-19 employees created another 18.3 percent. It is because small businesses have such deep impact on employment and the national economy that we feel it is critical that the policies you shape account for the impact the law will have on small business.
As you hopefully know, unreasonable government regulation, especially onerous paperwork burdens, continues to be a top concern for small businesses. Regulatory costs per employee are highest for small firms, and our members consistently rank those costs as one of the most important issues that NFIB ought to work to change. Therefore, we are pleased to be able to offer our perspective on the impact the regulatory state has had and continues to have on small businesses.
Just last week, NFIB submitted comments to the Office of Information and Regulatory Affairs (OIRA) at OMB on their draft report to Congress on the state of regulation and offered recommendations for review. Our comments are appended to this testimony as Attachment A. We continue to be pleased with the efforts being made by Dr. Graham and OIRA, especially in working with the Small Business Administration to help rein in agency over-reaching, and our comments reflect that.
One of our concerns is that OIRA, an organization that "gets it," may not have the manpower necessary to take on the Herculean task of reforming a regulatory state that continues to grow - and we would ask that among the recommendations that your committee ultimately makes is to help OIRA by giving it the tools necessary to do what is a vital job.
How Our Members Feel
Each year, NFIB polls its members, and in 2001 we released the results of our poll on the impact of regulation on small business. This poll is appended as Attachment B. We found that 44 percent of our members view regulation as a serious or somewhat serious problem. Most small-business owners are unhappy with the hassles regulation creates for them rather than the limits it places on their freedom of action.
Many identify the extra paperwork created by regulation as their primary concern. More note the difficulty understanding what is needed to be in compliance and the dollars expended to comply. Some believe the primary problem associated with regulation is the time delay it causes, and a number feel the difficulty locating new regulatory requirements and the limits placed on their actions as the principal difficulty regulation creates for them.
Size and Cost of the Problem
Approximately half of those small business owners who participated in our poll identified the federal government as the biggest culprit behind their regulatory burden. The volume of government regulations is enormous. The Code of Federal Regulations alone extends 19 running feet and other governmental units add more length to the shelf space federal regulations already occupy.
According to the Cato Institute's Wayne Crews, 996 rules are expected to have significant economic impact on small businesses. This is down 5 percent from 2000. However, from 1997 to 2001, the total number of rules rose by thirty-five percent![1]
Crews' report states:
The Department of Transportation and the Environmental Protection Agency account, respectively, for 244 and 185 of the 996 rules that affect small business - far outstripping other agencies - rules in small business impacts. The runners up are the Federal Communications Commission with 117 rules affecting small business, the Department of Health and Human Services with 108, and the Department of Commerce with 89. Those five agencies together account for 743, or 74 percent, of the total number of rules that will affect small businesses.[2]
We know that the cost of regulation to small business, not just in terms of dollars expended, but in hours consumed, aggravation encountered and opportunities lost, are vast drains on these operations. In a 2001 report commissioned by the Office of Advocacy at the SBA, W. Mark Crain and Thomas D. Hopkins, it was found that for businesses with fewer than 20 employees (a number representing more than 90 percent of all businesses in America), the cost of regulation per employee was $6,975.[3] For firms with more than triple that number, the cost fell by nearly one-third.
These burdens make the federal government appear monolithic, not to mention difficult to deal with and fraught with potential pitfalls when you do. Our members fear exposure to errors in what they report, and they especially fear retaliation by agencies for complaints against overzealous regulators, or those whose actions are arbitrary or patently unfair. This presents groups like NFIB with a challenge.
We know from the established record that such abuses do occur, and we have received reports from members that they have been so targeted. We are concerned that we do not hear from more out of a fear of retaliation. We hope that this will begin to change, as small business owners see the improvements being made in the resources available to them, such as the SBA Ombudsman's office, and efforts being made by other agencies.
The Source of the Problem -- Death By a Thousand Pin Pricks
Small-business owners cannot look to a single place for their regulatory requirements.
Rather they must look to several bodies within at least three political jurisdictions - federal, state, and local. Of these three, owners most often identify the federal government as the major source of their problem.
One important aspect of understanding the small-business problem is locating where it is generated. But many small-business owners argue that regulation is death by a thousand pin pricks; it is not so much a single regulation or regulatory agency but the sheer volume of them coming from every direction. When offered the choice of describing their regulatory problem as stemming from a small number of regulations and/or agencies or the overall volume promulgated from multiple sources, owners split almost evenly.
Small-business owners name tax-related regulations most often as the type of regulation providing them the greatest headaches. Health, safety, and environmental regulations present significant difficulties as well. The Crain-Hopkins study confirms this, stating, "the cost disadvantage facing small business is driven largely by compliance with environmental regulations and tax-related paperwork."[4] Finally, regulations associated with the terms and conditions of employment, like the Family and Medical Leave Act, pose problems.[5]
Moreover, NFIB continues to examine the impact that multiple agencies and duplicative regulatory regimes have when dealing with single actions, instances, or individual subjects. It is difficult for one business to improve its operations, for instance, when a particular activity which can be improved must jump through multiple regulatory hoops in the process. If a small business owner has to file paperwork to EPA, OSHA, the Department of Transportation, and perhaps another agency or two, it becomes too problematic and difficult for that small business owner to take those steps that could lead to a marked improvement. It becomes even more difficult when these small business owners are faced with regulations that contradict each other. We hope that responsible parties will consider studying this problem, and we are happy to provide additional information to further that goal.
Most small-business owners primarily concerned with environmental or land use regulations have two specific issues in mind - zoning/land use issues, and chemical/waste disposal. While there are obvious overlaps, e.g., run-off and clean water, it seems clear that small-business owners are most concerned with environmental regulations that encroach on property rights. While the impact of regulation tends to be felt on an industry-specific basis, most of our members agree that it is the paperwork burden associated with regulation in general which is problematic.
A prime example of this is the proposed heightened standard for reporting requirements for lead under the Toxics Release Inventory. This new standard alone will require, by EPA+s own estimates, sixty hours in preparation of the paperwork required to be filed. Further, while the EPA has been magnanimous in casually allowing filers to re-do their paperwork should mistakes be made (rather than holding them strictly liable for paperwork errors, as is true with most environmental regulations), this means that owners who have made errors will have to spend another week of their time writing, instead of engaging in their business. Clearly, this is problematic, especially for a rule that has a marginal environmental benefit.[6]
Tax Paperwork
NFIB members consistently list the paperwork associated with tax preparation as their biggest regulatory headache. What began in 1913 as a two-page form backed up by 14 pages of law has now become a 17,000-page maze that requires 703 different forms. More than seven times longer than the Bible, the tax code's 5.5 million words have created a nightmare of complexity that saps the economy+s strength by punishing work, saving, investment, risk-taking and entrepreneurship.[7] The private sector pays $250 billion just to comply with income tax laws. The average cost of compliance for small and medium-sized corporations is $7,240 for every $1,000 in taxes they pay. [8]
Congress could make great inroads into relieving tax-related paperwork burdens on small businesses by, for instance, increasing Section 179 expensing limits. A majority of NFIB members exceed the current small-business expensing limits in only three months. The limit currently is $24,000. Congress should immediately raise the threshold to $50,000 and index it for inflation. This will allow additional investments to be expensed, enabling small businesses to expand and create new jobs. This will lower the cost of capital for tangible property and eliminate depreciation record-keeping requirements. This change will also increase small business owners' ability to compete in today's high technology markets.
Also, Congress could address AMT Relief/Repeal. According to the Joint Committee on Taxation, fewer than one in 150 taxpayers is subjected to the AMT today. By 2007, however, that number is expected to grow to one in 14, with the largest increase coming from taxpayers earning between $50,000 and $100,000. The individual AMT is a remarkably complex and obtuse provision in a tax code not known for its clarity. It requires taxpayers to calculate their taxes twice, and then pay the larger amount. While originally designed to ensure that wealthy Americans pay a reasonable level of their income in taxes, the AMT has the side effect of hitting taxpayers -- increasingly middle-class taxpayers -- when they can least afford the bill. The AMT literally kicks taxpayers when they are down.
Congress should also establish a Standard Home Office Deduction. Business location currently complicates common tax deductions. Home-based businesses incur expenses that would be easily deductible if the businesses were not located in a home. Many business owners do not take legitimate deductions because of the complexity of the paperwork involved in doing so. The complicated record keeping now required by the IRS to qualify for a home office deduction is a barrier to many who would qualify but don't have the time and staff to do the paperwork. That barrier would be removed if a "standard deduction" for home-based businesses were allowed. Like the 1040 standard deduction, the deduction would be optional. Owners could choose to continue to deduct the depreciated amount plus operation costs, as they are currently allowed to do. Or they could choose the new standard deduction.
Finally, we recommend that Congress clarify the Independent Contractor Definition. One of NFIB's top legislative priorities has consistently been to better define who is an independent contractor. The current 20 common law factor test for determining who is an employee versus an independent contractor has for too long handcuffed small businesses. These instructions are at best vague and unclear, making it difficult for small employers to honestly know whether they are complying with the rules.
Understanding and Complying with New Rules
Since most small-business owners play no part in rule development, the first element in the regulatory process for the large majority is discovering or finding out about a regulation that potentially affects them. In this regard, owners can either actively go out and seek new or changed regulatory requirements or they can respond when they encounter previously unknown demands. The overwhelming majority not surprisingly follow the latter course.
In our survey, eighty-two percent of small businesses reported that their approach can best be described as coming across new rules in the normal course of business. Few claimed to search agency websites (as opposed to the internet in general), or regularly perused publications relating to their business. Many simply waited for the regulatory agency to notify them of new rules or regulations. Unless small-business owners are systematically searching for regulatory information, it is not likely that they would visit such a site.
We are encouraged that the SBA is taking proactive steps to assist small business owners in their ability to find out about and comply with new rules and regulations. According to my colleagues there, they are working on a new internet-based portal system which will allow these employers to search for, understand, and learn how to comply with new regulations - a one-stop shopping place for small business to learn about new rules and regulations. Once the system's effectiveness has been evaluated, NFIB will most likely steer its members and other interested parties towards it.
OIRA
NFIB is very pleased with the interest taken in small business issues by OIRA. Their formalized relationship with the Office of Advocacy at the SBA is a key step in ensuring that the regulatory burden faced by small businesses will be taken into consideration when new regulations are being addressed. Overall, OIRA's commitment to openness and transparency can only serve to benefit the small business community, which continues to view the federal regulatory state as a near-impenetrable morass of laws and regulations, hard to understand, difficult to deal with, and costly.
NFIB is in favor of the decision to once again utilize "Return Letters" as part of OIRA's regulatory toolbox. We agree that agencies must take their responsibilities seriously in creating quality analyses of regulations - and "Return Letters" should prove effective in helping to bring this about. We are also encouraged by the public availability of these "Return Letters", and their easy access on OIRA's website. We hope to see OIRA continuing to rely upon this tool in coming years.
We also applaud OIRA's efforts to be more proactive, and use "Prompt Letters" to "suggest regulatory priorities". It is incredibly helpful for regulatory stakeholders to gain a sense of OIRA's priorities for agency decisionmaking, and the openness of the "Prompt Letter" approach is vastly more informative than the former, informal approach. While we understand the hesitation OIRA faces due to potential legal ramifications, we believe that the benefits far outweigh the risks involved.
We are encouraged by OIRA's efforts to bring a scientific approach to its overall regulatory review efforts. In the same way that unbiased fact-based analyses by other agencies have been beneficial in mitigating the impact of onerous and unnecessary regulations on the economy, the use of truly scientific cost-benefit analyses by OIRA can have extraordinary results. We believe it is absolutely essential to determine whether the benefits of regulations clearly outweigh their costs. We hope that OIRA will exercise careful oversight in the selection process for your Scientific Advisory Panel, and bring together esteemed professionals for reviewing OIRA's various interests. We also hope that small businesses are consulted in this process as well.
Conclusion
The NFIB appreciates the opportunity to share its concerns with Congress. With the cost of regulation being such a high priority for our 600,000 members, we are glad that we could bring our perspective to the Committee, and we are even more glad that you recognize the tremendous impact the regulatory state has on our members and the small business community in general. I would also like to thank William Dennis and Bruce Phillips on the NFIB staff, whose research serves as the foundation of this testimony.
I would now be happy to answer any questions the committee members might have.
[1] Crews, Wayne, 10,000 Commandments - An Annual Snapshot of the Federal Regulatory State, The Cato Institute, 2002 (Draft at 16)
[2] Id.
[3] W. Mark Crain and Thomas D. Hopkins, "The Impact of Regulatory Cost on Small Firms," Office of Advocacy, Small Business Administration, Washington, DC, 2001, http://www.sba.gov/advo/research/rs207tot.pdf, at 7.
[4] Id.at 10.
[5] An article by NFIB+s Bruce Phillips on the economic costs of expanding the FMLA is appended as attachment C.
[6] The Lead TRI rule is discussed in our OIRA comments, appended at Attachment A.
[7] Dan Mitchell, Time to Sunset the Tax Code, The Heritage Foundation, Executive Memorandum #645, (January 28, 2000).
[8] From the office of the Majority Leader of the House, at http://flattax.house.gov/taxfacts/irsfacts.asp, November 10, 1999, citing information from Commerce Clearing House, Standard Federal Tax Reporter, (1996 and 1997).
