Burdensome regulations cost consumers money in the form of higher prices, fewer choices, or less quality. A recent research study, The Impact of Regulatory Costs on Small Business, estimates that businesses with less than 20 employees spend nearly $7,000 each year, per employee, just to comply with federal regulations and mandates. That's 60 percent more than the $4,463 estimated for firms with more than 500 employees. This is before the impact of state and local regulations which add thousands on top of that figure.
That extra sending means higher prices for consumers and lower wages for workers. In addition, it takes capital out of entrepreneurs' pockets, preventing them from additional investment and from creating new jobs.
The good news is that some states are begining to address this regulatory "tax" on small business by giving small business owners a bigger voice in shaping proposed regulations, and giving them the tools to fight unfair or ridiculous regulations that don't make sense.
The bad news is that Virginia is lagging behind the rest of the country — especially in our region. In the latest Small Business Survival Index published by the Small Business and Entrepreneurship Council, Virginia dropped from 14th to 15th this year. While 15th is nothing to hang our heads about, we should strive to make the Commonwealth more business friendly — attracting more jobs, more investment, and making our economy even stronger.
Just a few weeks ago Rhode Island became the latest state to become more small business friendly when Gov. Donald Carcieri signed a new regulatory flexibility law. It requires state agencies to consider how regulations would affect small businesses before issuing new rules.
Six other states have enacted similar laws this past year, including two in the region — Kentucky and South Carolina — legislation is pending in 11 other states, but not here in Virginia. In addition, West Virginia adopted a measure by executive order. The Commonwealth should follow suit — sign an executive order or pass legislation to make the Virginia a more business friendly environment. The time is ripe considering that our neighbors are taking the lead.
Our leaders don't have to reinvent the wheel. The U.S. Small Business Administration Office of Advocacy has created model legislation for the taking. The legislation provides four benefits to small businesses.
Del. Chris Saxman, R-Staunton, who is planning to introduce the legislation in January, says, "As a small business man, I understand all too well the dramatic impact that regulations can have on a business. I think it is long overdue in Virginia that we have more reasonable and flexible laws that can help businesses thrive in a 21st century economy."
First, each agency that intends to adopt or amend a regulation must give 30-day written advance notice to the governor's office and an equivalent of an Economic Development group. If either the governor's office or the economic development office determines that the proposal may have a significant adverse impact on small business, the agency must then prepare a detailed analysis and consider using alternatives to minimize the impact.
Second, at the minimum, the 30-day period allows any interested party to submit data, to view, or to make arguments for or against proposed changes to the regulatory structure, thus ensuring a dialogue will take place between the small business community and the regulatory body. In addition, it gives small businesses a chance to have a potential political advocate in the governor's office and government agencies.
Third, the legislation gives small businesses a right to appeal particularly burdensome regulations through normal administrative channels. But if they fail, they may now appeal in state court. In essence, small businesses now have the right to judicial review of agency-level decisions.
Fourth, state agencies will conduct housecleaning on the regulations on the books. Agencies will have to periodically review what's already on the books, looking for outdated and cumbersome regulations. A review of this kind will give agencies an opportunity to eliminate regulations that may be outdated.
According to the US Small Business Administration, adoption of a similar rule at the federal level has saved small businesses $31 billion in foregone regulatory compliance costs over the last three fiscal years ('01-'03).
Tom Sullivan, SBA's chief counsel for advocacy argues that these savings results in "more jobs and growth." Reduced regulatory burden frees up money in a small business' budget to invest more. In addition, Sullivan argues that the new legislation "guarantees small business a seat at the table" and will result in "better decisions" when regulatory decisions are made.
Beyond the benefits to small businesses, there is a significant benefit to the state as well. Providing small business input before rules are adopted saves the state from expensive reevaluation and analysis of regulations. In addition, the removal of outdated and poorly written regulations should result in fewer enforcement expenses.
The Commonwealth should waste no time in implementing this change. Doing so will foster small business investment, job growth, and generally a more competitive business environment.
Geoffrey Segal is director of privatization and government reform at Reason Foundation.