Regulations disproportionally hurt small businesses

Federal agencies created 29,014 new federal regulations, averaging 70 a week over the past eight years. These regulations range from importation of kiwis from Chile, cost of living adjustments of royalty rates pay for published musical works, reporting and recordkeeping requirements, to health insurance and environmental protection. The Office of Information and Regulatory Affairs (OIRA), an agency within the Executive Office of the President, determined approximately 10% of these regulations adversely affect the economy by at least $100 million a year (i.e., economically significant rules).

 The Regulatory Flexibility Act requires federal agencies to determine if a rule would have a significant effect on a substantial number of small businesses. During the past eight years, federal agencies created 5,340 rules that affected small businesses, 841 of those were economically significant. In other words, small businesses have to use their limited resources to navigate 13 new federal rules every week. Centers for Medicare & Medicaid Services, Food and Drug Administration, and Environmental Protection Agency were among the most active agencies and the most common topics included reporting and recordkeeping requirements, administrative practices and procedures, and government procurement.

 Regulations are necessary to the society. Businesses have to comply with law and regulations to produce safe and sound products and services for their customers. But excessive regulations and red tape have shown to have severe adverse effects on consumers, competitiveness, and economic growth. Small businesses, the backbone of the U.S. economy, should not be using their scarce resources on dealing with red tape but rather to maintain, improve, and innovate products and services to compete at home and abroad. Deregulation and cutting red tape should be top policy priorities for federal as well as local governments to boost economic growth.

New Report: Enterprising Cities -- Regulatory Climate Index 2014

Cities are the engines of economic growth and prosperity in the United States. Our urban economies thrive on innovation, expansion of small businesses, and entrepreneurship. Our economic achievement is inherently tied to a legal infrastructure and regulatory environment that is sensible for entrepreneurs and small businesses. ndp | analytics and the U.S. Chamber of Commerce Foundation are proud to release the Enterprising Cities: Regulatory Climate Index 2014 (the Index), which compares and ranks the efficiency of local regulations applying to small businesses in ten cities across the United States. 

The Index measures three components (number of procedures, time, and costs) that are required to comply with five areas of business regulation in each city. The Index assesses the areas of starting a business, dealing with construction permits, registering property, paying taxes, and enforcing contracts. The results act as a barometer for the overall business environment and point to areas where reform is necessary for competitiveness. 

The main results of the study are:

Among the 10 cities in the 2014 Index, the most efficient cities across all 5 areas of business regulation are Dallas and St. Louis. The cities of Raleigh, Boston, Atlanta, and Detroit have moderate levels of regulatory efficiency. Chicago, Los Angeles, San Francisco, and New York City have the least efficient regulatory environments.

There are sizable variations in the design, practice, and costs to fulfill basic regulatory requirements for small businesses. Geographical and historical influences seem to account for much of this variance. The basic regulatory steps for opening and operating a business remain relatively similar across the cities measured. In recent years, these places have begun to adopt smarter business regulations and to streamline bureaucracies; however, the scope for improving their business environments remains significant.

Each city evaluated has its own clear strengths and weaknesses. For example, Los Angeles and San Francisco have the best practices for opening a business, yet both cities have the highest requirements and costs to obtain construction permits. St. Louis has the best practice for the registration of properties but scores below average in enforcing contracts. Chicago ranks highly for enforcing contracts while ranking lower for starting a business. 

All cities provide small businesses with information and materials to comply with their regulations. Yet the websites and publications are often disorganized, missing information, or unclear to third parties. Few cities provide detailed information on the procedures, expected waiting time, and administrative costs for construction permits. Overall, no city provides comprehensive information. 

At a time when America’s entrepreneurial dynamism is in decline, the costs of housing in our cities is soaring, and governments are challenging the existence of transformative companies, this project is more important than ever. The ease of doing business in America’s cities will help determine the future of America’s economic growth. The success of these places depends on improving existing regulatory processes, simplifying application and compliance with local laws, and trimming the barriers to entry for entrepreneurs.

Tesla, Local Regulations, and the New Normal for Innovators

Tesla’s latest spat on its direct-sales model with the state of New Jersey is dumb, but it’s nothing new for the company or other rising start-ups. The case is another piece in a growing trend of local regulations stifling innovative companies. As the sharing economy has grown and technological innovation has made electric cars affordable and reliable, local governments and regulators have found ways to impede their ability to reach consumers. Some research has discounted the impact of local regulations on start-up companies and entrepreneurs, while others have highlighted significant regulatory burdens facing small businesses.

You cannot discount the real world examples of cases where state and local governments issued regulations that impair business operations of growing companies. There are Uber’s feuds with city governments and taxicab monopolists in Chicago, DC, Denver, Miami, Nashville, and San Francisco. Airbnb is facing its share of problems in New York City. California’s Bureau for Private Postsecondary Education is leading a crack down on ‘learn to code’ bootcamps. Let’s not forget the culinary innovators in local food truck scenes that are constantly hopping over regulatory hurdles.

In the case of Tesla, auto dealers are worried that this case will set a strong precedent for automakers circumventing dealers to directly sell to consumers. This despite the fact that buying a car is one of the least enjoyable consumer experiences. Tesla has faced similar issues in Arizona, North Carolina, Texas, and other states. In fact, Cornell University’s Journal of Law and Public Policy notes, “the franchise laws of at least 48 states ban or limit Tesla sales—get this—to prevent unfair competition. Franchise laws require automakers to sell their cars exclusively through dealership networks.” There will be plenty of more battles down the line. Overall, these restrictions will hurt Tesla’s long-term viability to offer an automobile that will be more affordable in the coming years due to economies of scale and product innovation.

The surprising nature of these regulatory battles is that the come at a time when state and local governments are devoting significant energy and resources to streamline regulations and promote technological advancements to aid the local permitting process. What’s even more startling is that nearly every major city is supporting entrepreneurial incubators and vying to attract important venture capital funding to foster vibrant start-up environments. Yet local governments are doing all they can to limit the ability of start-up companies to grow and provide citizens with access to new services. Isn’t that a pity?