The Need for a Regulatory Efficiency Initiative

The regulation of health, safety, commerce, and taxation is one of the fundamental functions of government. In the past, with growing tax revenues, it was easy for governments to add increasing levels of regulation and build new bureaucratic agencies. Regulatory efficiency was not a very important factor. Federal and state policy makers could expect ever increasing revenues, generated by a steadily growing economy, because of improved business productivity. When a regulatory lapse occurred, rather than correcting the problem with an existing agency, law makers often created a new agency infrastructure with over-lapping responsibilities. If states didn’t like the way the Federal government was regulating an issue, or just wanted the ability to collect their own fees, they would often establish a duplicative regulatory agency. Once agencies were established, they often found new ways to grow their programs, staffs and budgets.

In the past businesses were also able to absorb the cost of complying with inefficient regulation, and pass it on to their customers. American manufacturers dominated world markets and most of their competitors faced the same level of regulatory costs. Sometimes increased regulations were even supported by businesses as a way to increase the costs of entry for new competitors and protect their markets.

That time is now gone! Governments, at all levels, are facing severe long-term fiscal challenges and need to drastically reduce expenditures that do not have a high public benefit. The economic benefits of the US led industrial and technology revolutions that drove our economy over the last 100 years are expiring. American businesses and workers now have to compete with businesses throughout the world. Competing businesses in many of those countries have the advantage of lower regulatory costs and comparably skilled labor forces with lower total labor costs. Since many regulations are focused on employment issues, they often unintentionally provide a reason for businesses to actually reduce their employee levels through the use of new technology, independent contractors, or off-shore workers.

There has been much discussion recently about the competitive burden that our high level of regulation places on our economy. Congressional leaders of both parties have called for reductions in the regulatory burden, particularly on small business. President Obama recently announced a new Executive Order on “Improving Regulation and Regulatory Review”. The Executive Order requires all federal agencies to consider costs and benefits and to choose the least burdensome approach, and to keep the regulatory process transparent, streamlined, and flexible. The President also called for a review of the efficiency of current regulations to determine if they should be revised or repealed.

Rather than blaming all regulations for economic impact, the most logical approach is to first identify and correct the “non-value-added” inefficient, duplicative, or unneeded regulations that do not have a significant impact on intended outcomes. Non-value-added costs result from duplicative agency overhead costs, inefficient or duplicate reporting procedures, and inconsistent data standards between different agencies or different levels of government.

What causes in-efficient and or un-necessarily burdensome regulations?

Many of the non-value-added costs in our regulatory structure result from a lack of information and coordination in the legislative adoption process. New laws and regulatory structures usually result from the well-intended work of staffers for a few individual lawmakers. Unfortunately, they often lack adequate support staff and the strategic knowledge of all the existing regulatory agencies and processes, that is necessary to integrate their objectives into an efficient Federal and state regulatory structure. They also often lack a good understanding of the potential cost burden their regulatory proposal may actually impose on both the agency that will have to administer it, and businesses or individuals who will have to comply with it This has become even more of a problem with tax or revenue related regulations as a result of congressional “pay-go” requirements. Tax provisions are now often selected for inclusion in non-tax legislation not because they are logical, well developed, tax policy, but because they have a revenue scoring needed to offset the cost of the primary purpose of the bill. A recent example was the poorly conceived expansion of Form 1099 business purchase reporting which was used to offset part of the PPACA health care reform bill, and which was later repealed by Congress.

What can Congress and state legislatures do to remove non-value-added regulatory costs and prevent their re-occurrence?

· Recognize the problem of in-efficient regulation, and the need for correction, by adopting resolutions clearly stating their policy intent to improve regulatory coordination between their agencies, between different levels of government, and between all states, on state level regulatory issues. The goal should be to minimize the total governmental cost of regulatory enforcement and the total non-value-added burden on the private sector.

· Designate a specific agency to be responsible for reviewing regulatory legislation, and coordinating the overall efficiency of the regulatory structure. The agency should be required by statute to provide regulatory efficiency consultation and advisory reports, to lawmakers before they enact new regulatory laws, and to agency staffs before they adopt new regulations. This would be similar to the budget impact estimates provided at the federal level by the Congressional Budget Office, or tax revenue estimates provided by JCT. The agency should be able to provide accurate and non-partisan information to help lawmakers understand, prior to bill adoption, how new regulations and their reporting and enforcement processes could be coordinated with other agencies and jurisdictions. The agency could also provide a balanced impact estimate comparing the potential benefits of the change to the total governmental administrative cost and private sector compliance cost. For the Federal Government, the most logical review agency to provide this information might be a new Regulatory Efficiency division of the Congressional Budget Office, or the Office of Management and Budget. To better evaluate the burden impact on the private sector, a dual review prior to adoption might also be provided by the SBA Office of Advocacy which already has responsibility for after-the-fact regulatory reviews of small business impact. Repeated studies have shown the highest relative cost burden of regulation always falls on small and mid-size businesses. State legislatures should also designate a specific regulatory advisory agency. For most states, the logical agency would probably be a part of their Department of Administrative Services, or their legislative fiscal review staff . Several state government associations also exist which could provide some coordination and model legislation for the states.

· Once processes are in place for reviewing and coordinating new regulatory proposals, the agency should review all existing regulatory processes, agency structures, and reporting processes for potential modernization and coordination improvements.

· Develop harmonized regulation and tax definitions; data sharing agreements; and joint filing and information updating processes between the Federal and state governments, and between the states. Inconsistent regulatory and tax regulations and duplicative filing costs are particularly burdensome on multi-state businesses and taxpayers. If a state needs more revenue, it is less burdensome to get it by changing their tax rate, than by changing the details of the tax structure, resulting in extra accounting expenses and potential loss of tax benefits from inconsistent codes. The current trend of states trying to extend nexus for income and business activity taxes to out of state businesses is particularly concerning because of its very high level of non-value added cost and negative impact on interstate commerce.

· Adopt agency budgets, and federal – state reimbursement formulas based on the optimum use of shared development costs, integrated systems, and combined reporting. The cost/benefit ratio of technology and regulatory processes in general increases significantly with economies of scale when development and ongoing costs are shared in a coordinated program. Many regulatory processes also would benefit from integrated data systems that can easily communicate between agencies and multiple states. Many current agency budgeting or intergovernmental reimbursement formulas actually create an incentive to be inefficient. A good example is the Federal reimbursement for state Medicaid payment administration. Rather than requiring the states to use a single federally funded software program, Congress provided reimbursement for each state to develop its own software. As a result, only two states use the same software program, resulting in 49 times the software development and periodic update costs. Even more important, the different systems also make it more difficult for multi-state vendors to bill transactions and for the Federal government to detect duplicate billing errors and fraud.

· Carefully evaluate the total public administrative and private sector compliance costs of all regulatory proposals, prior to adoption, in relation to their potential benefit. Congressional scoring, and the process in most states, usually estimates only the governmental tax revenue change, without including all the additional public costs, private costs, and general economic impacts that will result from the change. Prior to adopting new regulatory changes, lawmakers should have available to them impartial research on existing regulations and regulatory agencies, both Federal and state, to determine if existing agencies can appropriately satisfy the regulatory need in a more efficient way. Before adopting a new regulation, particular attention should be given to the total cost burden on the private sector and the secondary impacts it is likely to have on future business hiring and investment decisions.

Regardless of what Congress or the states do to change specific regulations, it is time to adopt a Strategic Regulatory Efficiency Process to help American businesses, and American workers, compete in the new world economy.

Eric Blackledge

National Small Business Network

P. O. Box 639 Corvallis, Oregon 97339

Email Eric@NationalSmallBusiness.net

Phone 541-829-0033