Coping with Regulation
Background
The Severity and Nature of the Small-Business Regulatory Problem
The Source of the Problem
Specific Areas of Regulatory Problems
Discovering New and Altered Regulations
Implementing Regulations
Government Officials on the Business Premises
Final Comments
Background
We know that the volume of government regulations is enormous. The Code of Federal Regulations alone extends 19 running feet and other governmental units add more length to the shelf space federal regulations already occupy. We know that the cost of regulation to small business, not just in terms of dollars expended but in hours consumed, aggravation encountered and opportunities lost, are vast drains on these operations. One responsible estimate places the dollar cost for small employers at $5,500 per employee (in 1992). We know that many small-business owners consider government regulation one of their most formidable business problems. The problem also appears to be growing worse, at least compared to other small-business difficulties. Yet, despite its pervasiveness and importance, most of what we know about small business and its regulation is very general. We do not know, for example, why regulation is a concern for small-business owners. We do not know what specific regulatory areas, let alone specific regulations, are more burdensome than others. We do not even know if there are any overwhelmingly burdensome regulations or whether the problem is simply the plethora of rules that must be recognized, understood, and followed. We do not know how owners discover the existence of a new or changed rule and we do not know how they go about learning what they must do to comply. For such important subject matter, there is too much that we do not know. And if we do know little or nothing about such basic issues, our ability to respond with more intelligent regulatory policies is severely hampered. This issue of the National Small Business Poll is, therefore, devoted to gaining insight into small businesses Coping with Regulation.
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The Severity and Nature of the Small-Business Regulatory Problem
Seventeen (17) percent of small employers term regulation a “very serious” problem (Q#1). An additional 27 percent see it as a “somewhat serious” problem while 26 percent more believe the problem is “not too serious.” Twenty-nine (29) percent describe regulation as “not at all serious.” Not surprisingly, size of firm is related to the owner’s view of the regulatory problem’s severity. Owners of larger firms are more likely to describe regulation as a very serious or somewhat serious problem than are owners of smaller firms. Since the smallest firms are sometimes excluded from a particular regulation or are held to a lesser standard, they should be expected to report fewer difficulties.
The precise nature of the problem created by regulation is perhaps the most important, but the least addressed aspect of regulation, at least quantitatively. Small-business owners cite in the survey on which this report is based three primary business problems created by government regulation. Twenty-six (26) percent assert that the greatest single problem regulation generates is the “extra paperwork required” (Q#2). The “difficulty understanding what you have to do to comply” and the “dollars spent to comply” receive the second most frequent cites (22%). As a result, two of the three most mentioned specific difficulties with regulation, constituting almost three-quarters of all respondents, are fundamentally “hassle factors” rather than direct limitations on entrepreneurial opportunity. Only the dollars spent directly affect the expansion or innovative potential of the business.
The “time delays [regulation] causes” is cited by just nine percent. The “difficulty discovering new regulations” draws seven percent of respondents as does the “limits placed on actions you want to take.” The first and last of these three responses reflect limits on entrepreneurial activity. The other is another example of a regulatory hassle.
Limits are the most serious adverse consequence of government intervention on entrepreneurial endeavor because they put potential expansion and innovation out-of-bounds. Hassles are different; they are more likely to encumber expansion and innovation rather than stop them. However, there is an indirect effect; hassles undoubtedly raise costs and absorb a business owner’s most valuable resource, i.e., his time. They may, therefore, limit opportunities over time, particularly as more of the owner’s creative energies are diverted to regulatory activity.
Since many small-business owners do not want to grow let alone innovate, the data are likely to leave a false impression. They serve to minimize the impact of limits on growth and innovation because they are felt most strongly by those who want to grow and innovate.
The severity of the regulatory problem for the individual small employer and its nature are clearly associated. As a general rule, those who find their regulatory problem more severe are more likely to associate it with limits on entrepreneurial activity. Those who find their problem less severe are more likely to associate it with hassles. For example, 33 percent who say regulation is “very serious” also say that “the dollars spent to comply” is the basic issue; just 14 percent of those who reported regulation as “not too serious” identify “dollars.” Thirteen (13) percent of the former group cite “limits” on actions as the problem; only four percent of the latter group do. In contrast, 32 percent of small-business owners who judge regulation as “not too serious” identify added paperwork as the principal nature of the problem and another 30 percent say that it is understanding regulatory requirements. Those who report regulation “very serious” hold a much different view. Just 16 percent of that group mention the added paperwork and 13 percent note understanding regulations.
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The Source of the Problem
Small-business owners cannot look to a single place for their regulatory requirements. Rather they must look to several bodies within at least three political jurisdictions - federal, state, and local. Of these three, owners most often identify the federal government as the major source of their problem. Forty-nine (49) percent say that the federal government creates the most serious regulatory problem for them (Q#3). Thirty-five (35) percent cite the state government and 13 percent local government, including cities and counties.
One important aspect of understanding the small-business problem is locating where it is generated. But many small-business owners argue that regulation is death by a
thousand pin pricks; it is not so much a single regulation or regulatory agency but the shear volume of them coming from every direction. When offered the choice of describing their regulatory problem as stemming from a small number of regulations and/or agencies or the overall volume promulgated from multiple sources, owners split almost evenly. Fifty (50) percent cite the overall volume from multiple agencies; further, 38 percent of all small-businessmen and women hold this view strongly (Q#5). On the other hand, 47 percent note a more focused problem. They describe their problem as a limited number of regulations and agencies; 32 percent of all owners hold that view strongly.
A second manner of identifying the source of small-business regulatory problems is to address the functional areas regulated in contrast to the entity promulgating the regulations. Small-business owners name tax-related regulations most often (36%) as the type of regulation — federal, state, and local — providing them the greatest headaches (Q#4). The second most frequently cited type of regulation (21%) is operational regulations such as occupational licensing or rules governing conduct of a specific industry. These types of regulations are followed in frequency by environment and land use regulations (17%), health and safety regulations (11%), and regulations associated with the terms and conditions of employment (9%). Very few respondents volunteer another category.
The ordering of these functional areas probably will raise eyebrows. This is particularly true of the two least mentioned categories. Despite their ranking, the two seem to be the most common topics of owner conversational complaints. It is possible that this apparent contradiction occurs because the health and safety, and employment topics are the most narrowly defined in the questionnaire. It is also possible that small-business owners regard them more as problems inherent in the law rather than in their regulatory extension. It is further possible that they work with them most often and understand them best thereby reducing problems related to uncertainty. In any event, tax-related regulations most frequently cause the greatest difficulties and employment-related regulations the least.
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Specific Areas of Regulatory Problems
The functional areas assessed above are still very broad. To narrow the problem, small-business owner respondents subsequently identify a specific type of regulation as the most difficult within the selected overarching functional area. Twenty-two (22) percent of those who note tax-related regulations as their primary problem area, for example, select sales and use tax rules as their most difficult specific regulatory problem within the tax area (Q#4c).
This follow-up did not prove totally successful. Small-business owners often did not identify a particular regulation or use one of the available response categories. Instead, they frequently volunteered an item bothering them whether it fit or not. Eight percent who single out taxes as the most burdensome broad regulatory area, for example, also say their specific regulatory difficulty is with the “income tax” rather than a specific part of it, e.g., depreciation. These responses are not “wrong.” They just make tabulation and categorization more difficult. Several plausible explanations exist for this. However, they usually point to the complexity of the subject matter.
Though the tax area draws the most concern, there is little consensus within it. The most frequently cited specific problem is administering a sales and use tax. Forty-six (46) states and a host of localities employ sales and use taxes. But within those jurisdictions, administrative problems with the tax abound. They involve ascertaining what must be taxed (not everything is), how much the tax is to be (rates often differ by product) and who must be charged (not everyone is). Those decisions are continuous and arbitrary. They have even been known to require the small-business owner to recognize the purchaser’s intended use of the item bought. The fall-out for the small employer is endless confusion and notable uncertainty.
Opinion splinters after the sales and use tax. An artificially created category including withholding, employees, payroll taxes, and unemployment compensation is the second most frequently cited (16%). Ten (10) percent of respondents fall into another volunteered and arbitrary category termed “All.” This group includes small-business owners who feel that all of the listed responses are problems and one is no better or worse than the others. No other grouping contains even 10 percent of those who feel that tax regulations, broadly drawn, are their most difficult area.
As fragmented as taxes is the identification of regulations associated with operational regulations. That may be due, at least in part, to the imprecision of the terminology employed (and available) and the large number of areas incorporated under the rubric. Twenty-six (26) percent who select operations rules also choose occupational licenses as the most difficult area of regulation. Occupational licenses, usually a state and/or local issue, have often been used to limit competition in the past. That means it has tended to be a problem of entrants rather than of established business owners. Since this is a population of established businesses and it identifies occupational licensing more often than many better known regulatory problems, the difficulties it creates clearly extend beyond entrants.
Operations rules are also noted by 26 percent of small-business owner respondents. Since the industry-specific possibilities are almost endless, no further inferences are feasible. They could be any one of many industry-specific rules. The exception is rules associated with the financial services industries that eight percent separately note. Given the number of volunteered answers, the entire category almost becomes a catch-all.
Most small-business owners primarily concerned with environmental or land use regulations have two specific issues in mind — zoning, land use, or run-off (38%) and hazardous or toxic substances (29%). The better known clean water (9%), solid waste disposal (8%) and clean air (6%) draw considerably less attention. While there are obvious overlaps, e.g., run-off and clean water, it seems clear that small-business owners are most concerned with environmental regulations that encroach on property rights.
One may question whether the overwhelming identification of land use issues is less the result of regulatory difficulty than disagreement with the intent of the regulations. However, it must be remembered that many small-business owners are directly impacted by such regulations. Respondents express less concern over the more popularly recognized water, air, and garbage disposal. Comparatively few small businesses emit things directly or have large volumes of waste to dispose. Thus, the frequency of direct impact may play a large role in the frequency that each specific set of rules is identified as most important.
Since relatively few identify two functional areas of regulation as being of primary concern, i.e., health and safety (11%) and regulations associated with terms and conditions of employment (9%), dividing them further into more specific topics is tenuous. However, workplace safety or health including Workers’ Compensation issues dominate the area and would likely do so even if the number of respondents were larger. One likely reason for the topic’s prominence is that it impacts everyone, though the legal authority to inspect the millions of home-based businesses is suspect. Other regulatory sets under the general heading are much more likely to be associated with a particular industry. For example, regulations involving drugs or medical treatments, the second most frequently noted set even with relatively few mentions, is of concern to owners in a limited number of industries.
In contrast, no specific regulations dominate the concern of those primarily interested in regulations associated with the terms and conditions of employment. Respondents volunteer specific regulatory measures in over half of the cases. One possible reason is that responding owners understand their problem so well that they want to be more specific than the questionnaire allowed. A second possibility is they are more inclined to identify overarching issues, e.g., paperwork, associated with many specific regulations. Regardless, the data are not constructive in identifying any particular regulatory problem within the broader category.
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Discovering New and Altered Regulations
Since most small-business owners play no part in rule development, the first element in the regulatory process for the large majority is discovering or finding out about a regulation that potentially affects them. In this regard, owners can either actively go out and seek new or changed regulatory requirements or they can respond when they encounter previously unknown demands. The overwhelming majority not surprisingly follow the latter course. Eighty-two (82) percent report that their approach can best be described as “coming across new rules in the normal course of business activity” (Q#6). In contrast, just 12 percent claim to “periodically search relevant materials or Web sites to locate a new rule or regulation” that they must observe. Employee size of firm is not tied to the basic approach used.
Small-business owners stumble over new regulations in a variety of settings and through a variety of means. They do not discover regulations in any particular place; in fact, only 11 percent use a single source (of the six possibilities listed). Rather surprisingly, owners cite almost all sources listed with similar frequency suggesting that these are the places they are most likely to find business-useful information generally. New regulatory requirements are just a piece of the information that they gather there.
Trade publications, newsletters, or Web sites is the most frequently noted “likely” source to discover the existence of new regulatory requirements. Sixty-eight (68) percent cite it (Q#6bC). But other affected business owners (66%) (Q#6bE) and outside advisors such as accountants or lawyers (63%) (Q#6bB) are mentioned nearly as often. Almost as frequently noted are direct contacts from a regulatory agency such as inspectors, advisory letters, or fliers (58%) (Q#6bD) and popular media such as radio or newspapers (55%) (Q#6bA). In contrast, the agency Web site is not a place that they often inadvertently pick up things (15%) (Q6#bF), but then one should not expect them to. Unless small-business owners are systematically searching for regulatory information, it is not likely that they would visit such a site.
Of those who use a single source exclusively, the most frequently named is direct
contacts from a regulatory agency. That source draws over 40 percent of all mentions. Trade publications, etc., and outside advisors are the next two most frequent exclusive sources listed.
Small-businessmen and women who periodically search for new regulatory requirements also frequently review a variety of sources. The two most often used sources include trade publications, trade Web sites, or conferences (71%) (Q#6aD). Special newsletters is the second most frequently used source (61%) (Q#6aC). Notices from an agency mailing list the owner is on (54%) (Q#6aE) and Web sites of pertinent agencies (51%) (Q#6aB) are also often identified by this group of small-business owners. Forty-five (45) percent say that they typically search the Federal Register or a similar state list of rule-makings (Q#6A). That number is surprisingly large, but it must be remembered that the percent claiming to use the Federal Register or state equivalents is 45 percent of 12 percent or about five percent of the population.
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Implementing Regulations
Once a small-business owner discovers a new or different regulatory requirement, he must determine the specifics of the requirement including the means to implement it. Sixty-two (62) percent of the time, small-business owners accept the challenge personally and investigate how they are to comply themselves while 13 percent typically assign responsibility to an employee (Q#8). Another 21 percent find an expert of some type to ascertain compliance requirements.
The most frequent ways small employers learn about the specifics of implementation are very traditional. They read general business printed material, such as magazines, pamphlets, etc. (79%) (Q#7G). Almost as frequently they converse with other business owners who may be affected in the same way. Seventy-six (76) percent report using such discussions (Q#7A).
One frequency level lower (about 20 percentage points) are three other important sources of information on how to comply with regulatory requirements. Fifty-nine (59) percent say that they usually ask the agency making the rule for more information (Q#7B). Fifty-seven (57) percent say that they talk to an “expert” about the new or altered rules (Q#7D). And, 55 percent say that they check with an appropriate trade group (Q#7F). About one-third typically attend a relevant seminar or convention session (Q#7C) to learn about implementing new or changed regulations. The same proportion search the Web for relevant material (Q#7E).
Virtually all small-business owners investigate more than one information source. Just six percent rely exclusively on one of the sources listed.
The data reveal nothing about the information sources employed (and their frequency) by “outside experts” who advise small-business owners nor by employees who implement regulations on the owner’s behalf. While it is probably fair to assume that they are similar to those employed by small-businessmen and women, there could be differences. For example, an employee implementing regulations may not interact with “other” business owners as frequently and therefore might not be able to draw on the experience of others as often. The questions arising are, therefore, important and need to be addressed at some point.
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Government Officials on the Business Premises
One or more government officials entered 42 percent of small businesses within the last 12 months to inspect them, examine their records and/or licenses, or otherwise check compliance with some government rule (Q#9). Larger firms experienced these visits more often than smaller ones. Sixty (60) percent of firms employing 20 or more people had at least one visit within the last year compared to 40 percent of those employing fewer than 10 people.
Not long ago, the Federal Occupational Safety and Health Administration (OSHA) announced that it had the power to inspect businesses located in the home. This trial balloon deflated very quickly. Yet, the data show that 11 percent of home-based employers already experienced one or more regulatory visits within the last 12 months. The data do not tell us the number of visits nor by whom.
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Final Comments
The small business regulatory problem is huge and not likely to be resolved soon. However, the data presented here suggest more and less fruitful actions to pursue. For example, small-business owners tell us that much of their regulatory problem can be resolved by reducing the amount of paperwork that they are required to maintain and/or file, particularly paperwork required by the federal government. Superficially, reducing, if not eliminating, the paperwork problem would then seem to require only a modest effort by appropriate authorities. Past attempts to reduce paperwork burdens have proven elusive unfortunately, largely because record-keeping is usually inherent in the law. A business requires proof of compliance and records become necessary to do so. That means paperwork is often the symptom of a more fundamental regulatory problem, the ultimate responsibility for which rests with the elected officials who enact the laws. While bureaucrats (civil servants) can and will stretch their authority beyond that originally intended by legislators, fair questions become ‘why was the law originally not drafted more tightly to capture the true intent of legislators?’ and ‘why do legislators infrequently make changes to laws inappropriately implemented?’ Thus, the paperwork problem, as other regulatory issues, is best addressed at the time legislation is considered.
Some agencies create and administer a more difficult regulatory structure than others. The data presented here suggest that the Internal Revenue Service (IRS) and comparable state entities are among the worst. However, the data contain a bias to those regulatory sets and agencies that impact everyone directly, e.g., IRS. Some regulatory sets and agencies impact relatively few small businesses, but impact them severely. The primary regulatory threat is to the latter, though the most noise will be heard about the former. Both regulators and those seeking to revise specific regulations must recognize the difference. The policy focus should be on the severe impacts, particularly when they serve to curb business expansion and limit entrepreneurial opportunity.
Small-business owners gather information about new and altered regulations including specific compliance requirements in much the same way that they gather it for other aspects of their businesses. Regulators who wish to communicate with small-business owners must, therefore, use the channels these people typically employ. That means it often takes time “to get the word out.” Despite the legal presumption that ignorance of the law is no excuse, the reality is that many small-businessmen and women will not even recognize a requirement until long after it has been “on the books” and then not completely understand what is required. The more routine and more visible, e.g., tax deposit requirements, the more likely new or altered regulations will be quickly implemented. But many have puzzled over the means of rapid, effective communication with the mass of small-business owners and none have yet done so successfully.
Finally, those developing the survey questionnaire for this report had no idea how often inspectors or similar public officials visited small businesses. Statistics from the Federal Occupational Safety and Health Administration (OSHA), at least as they pertain to safety and health, suggest that such visits are rare. Communications with small-business owners present a much different portrait. The survey established that while a particular agency may not visit a small business often, the plethora of regulatory authorities result in government officials from some agency visiting with notable frequency. These visits are a good topic for future inquiry.