Research on State Regulatory Flexibility Acts

Microeconomic Applications Inc., May 2013

Purpose

The impact of government regulation falls harder on small businesses than large ones because small businesses lack economies of scale. In small firms, the costs of complying with a regulation are spread over fewer employees or sales, whether measured in dollar expenditures, employee hours, or some other metric. Regulatory requirements may take the form of extra paperwork, new work processes, or product modifications, and these cost small firms more on a unit basis to initiate than they cost large firms. To alleviate such disproportionate effects of regulatory compliance on small business, a federal law, the Regulatory Flexibility Act (RFA),¹was enacted in 1980, as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA).

The RFA requires agencies to consider the impact of proposed regulations on small entities. The law has spared small businesses from many burdensome costs, while preserving the health, safety and other broad goals of regulations. This burden reduction is made possible through “flexibility” in regulatory requirements, for example, staggering the effective date of a regulation, exempting businesses below a certain size from some requirements, simplifying compliance requirements, or creating limited safe harbors.

The RFA charges the Office of Advocacy, housed in the Small Business Administration, with monitoring the implementation of the law, and in the 2000s, the office launched a concerted effort urging states to adopt similar consideration in state-level rulemaking processes.³ This report examines these state efforts.

Background

The Office of Advocacy published a study in 2002 which analyzed and evaluated state efforts to mitigate the regulatory burden on small businesses.⁴ The findings of this study revealed that very few states were actively implementing protections for small businesses against burdensome regulations. It also suggested that genuine protection for small businesses was the product of well written legislation and executive orders, as well as support from the governor’s office.

In 2002, the Office of Advocacy launched a model legislation initiative utilizing a model state regulatory flexibility bill. The model bill incorporated many elements of the RFA in a simplified form. It was published for general use in 2005, along with supporting documentation; a guidance document to assist the states with adoption and implementation was published in 2007.

By 2008, a majority of states had some form of small business regulatory flexibility on their books. The purpose of the present study is to see what changes and improvements have stemmed from the various regulatory flexibility initiatives.

Overall Findings

• State regulatory flexibility programs differ greatly in many dimensions, although many are based on the same foundation, the Office of Advocacy’s model bill. Some programs were implemented by executive order, others by legislation; all, however, are missing at least some of the elements found in the model bill.
• Executive branch support for regulatory flexibility is essential to success. At a minimum, state leadership must regard regulatory flexibility as a legitimate activity in its own right and give priority to making regulatory flexibility infrastructure effective.
• In addition, to be effective, regulatory flexibility must be recognized as an activity distinct from other small business assistance, and, as such, be given support and resources at the departmental level.
• Guidance on regulatory flexibility is lacking in most state programs. The most common forms of guidance are checklists or templates for reporting analyses; these do little more than repeat the statutory requirements without elaboration or explanation.
• A small business regulatory advocate is an essential element in the regulatory flexibility infrastructure.

Fewer than one-fifth of states have such an advocacy position or office. An advocate works with agency staff—from early in the rulemaking through the public hearing process—to understand regulatory flexibility principles and practices.

A comparison of New Mexico’s Small Business Regulatory Advisory Commission and Missouri’s Small Business Regulatory Fairness Board shows the necessity of executive support. New Mexico and Missouri have very similar regulatory flexibility statutes. However, while Missouri’s Regulatory Fairness Board flourished, New Mexico’s Regulatory Advisory Commission foundered. The origins and compositions of each group followed very different courses. Missouri’s statute was adopted after two years of operation with strong gubernatorial support under an executive order. In addition, the Missouri board’s membership includes the chair of the minority business advocacy commission. New Mexico’s advisory commission, on the other hand, was established with no context and no experience.