Regulations hit small businesses and low-income households hardest

There are about 33.3 million small businesses in the United States, comprising 99.9 percent of all American businesses. About half of all employees work for a small business, which combined contribute about 43.5 percent of US GDP. As a result, small businesses are some of the most important players in the US economy. Unfortunately, they are also some of the most burdened by regulations.

Regulations can be thought of as a hidden tax, with costs that go unseen by the public because they are built into the prices of products and services we purchase. However, these costs don’t affect society evenly. Rather, they tend to fall disproportionately on some groups more than others. A new report for the Competitive Enterprise Institute, “Champagne Regulations on a Beer Budget: The disproportionate burden on small businesses,” examines the regressive effects of regulation on small businesses.

The report finds that the poorest households and smallest businesses bear a disproportionate share of regulatory costs. Low-income individuals spend a larger portion of their budgets on the higher prices caused by regulations compared to the affluent. Small businesses with less revenue have a harder time absorbing compliance costs than their larger competitors.

Moreover, the benefits of regulations often accrue primarily to the well-off, who exhibit a greater willingness to pay for outcomes like increased safety or environmental quality. Thus, regulations tend to redistribute resources from the poor to the rich. Regulations also create incentives to stay small, as regulations often kick in only once a firm reaches a certain size, thereby acting as a tax on the firm’s growth.

Federal agencies rarely study these distributional effects, despite numerous directives to do so. The Regulatory Flexibility Act, which requires agencies to analyze impacts on small businesses, lacks teeth, and agency compliance with the law is spotty.

However, recent research has done a better job. One study estimated small firms face an average regulatory cost per employee of $9,093, compared to $5,246 for large firms. Furthermore, regulations make industries more concentrated and less competitive, explaining 31 to 37 percent of the rise in market power in recent decades.

More broadly, research has estimated that the Biden administration is adding regulatory costs at a rate of about $600 billion per year, potentially reaching $60,000 per American household over eight years. In contrast, the Trump administration reduced regulatory costs by about $11,000 per household over four years. Academic research confirms the substantial drag of regulations on economic growth, likely amounting to trillions of dollars in lost output annually. Small firms are among those hit hardest.

Lawmakers in Congress should pursue reforms to alleviate these burdens, such as by adding third party oversight of agency Regulatory Flexibility Act certifications, allowing for more public challenges of inadequate small business analysis, and explicitly requiring agencies to minimize costs to small businesses when regulating. Only through these kinds of greater accountability measures can we ensure small businesses receive the fair treatment they deserve.

To learn more, read the full report here.