Report: Regulations disproportionately impose costs on small businesses

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A new Competitive Enterprise Institute report identifies ways that federal regulations impose unfair costs and perverse incentives on small businesses every year.

“From an equity standpoint, the regulatory system in America is regressive, redistributing costs from the poor to the rich, as low-income households and small businesses are forced to subsidize policy preferences of the well-to-do,” said James Broughel, CEI senior fellow and author of the report.

The ways in which the regulatory system is stacked against small businesses include:

  • Fixed costs – Regardless of a business’s size, compliance costs often remain the same. Unlike small firms, larger firms can spread out those costs across a larger revenue base.
  • Wealth-driven influence – The affluent exhibit a greater willingness to advocate and pay for regulations governing safety, environmental quality, carbon reduction, and consumer protections.
  • Perverse incentives – In instances where regulations grant special privileges or exemptions to small businesses, this creates an incentive not to grow beyond a certain size. It acts like a tax on growth.

How can Washington fix these problems?

  • Congress could help by giving more oversight power to the Small Business Administration’s Office of Advocacy, such as the authority to demand changes to regulations.
  • Congress should more clearly define the standard for when a regulation has a significant economic impact on small businesses. Similarly, third-party oversight is needed since agencies often “certify” a regulation won’t affect small businesses, when in fact it will.
  • Finally, Congress should amend the Regulatory Flexibility Act to explicitly require agencies to minimize the cost of their rules to small businesses.

View the report, Champagne Regulations on a Beer Budget: The disproportionate burden on small businesses, by James Broughel