States Where Regulations Harm Small Businesses The Most

The federal and state governments continue to impose ever-more burdensome regulations on businesses across the country.

Overall, in 2014 alone, the Obama Administration imposed an estimated $181.5 billion in proposed and final regulatory costs on the U.S. economy according to a study by the American Action Forum. And, the federal regulatory onslaught continues in 2015. For instance, the EPA has issued new costly rules that, if implemented, would force trucks and vans to lower their carbon dioxide emissions by 24 percent by 2027.

Many states continue to grow their regulatory burdens as well. Local minimum wage increases – which simultaneously raises costs on businesses, harms many low-wage workers, and harms consumers – have passed in California and Washington. New York prohibits hydraulic fracturing (fracking) techniques that have been an important driver of the U.S. economy since the 2009 recession. Other states, such as California, are pursuing regulations that would reduce the viability of the popular ride-for-hire services Uber and Lyft.

In contrast, states such as Texas, North Dakota, and Virginia impose regulations that are not overly burdensome and encourage economic growth and development. And, there are important lessons that the states with overly burdensome regulations can learn from these pro-growth states.

The variability in regulations across the 50 states, the laboratories of democracy, provides valuable information regarding which regulations are associated with slower business growth and development and which regulations are associated with faster business growth and development. A study I recently completed for the Pacific Research Institute, the 50 State Small Business Regulation Index compares all 50 states based on the impact from each state’s regulatory environment on small businesses.

The Index creates a common platform, based on 14 regulatory components, to compare each state’s regulatory burdens on small businesses in order to highlight which regulatory environments are associated with slower small business growth, and which regulatory environments are associated with more robust small business activity. The study focuses on small businesses because, while regulations are an impediment to economic growth, they are particularly problematic for small businesses that lack the scale to efficiently manage the administrative burdens and finance the higher costs created by onerous regulations.

The ten lowest ranked states (California, Connecticut, Hawaii, Maine, New Jersey, New York, Oregon, Rhode Island, Vermont, and Washington) scored poorly across most of the 14 regulatory components measured in the Index. Unsurprisingly, these bottom ranked states experienced significantly slower small business growth compared to the top ranked states.

So what are the bottom ranked states doing wrong?

First, and perhaps most importantly, none of the lowest ranked 10 states in the Index is a right to work state. Right to work laws have a statistically significant and positive impact on economic growth—studies continually show that states with right to work laws experience faster growth than states without right to work laws. (See for instance, for instance, Richard Vedder, Matthew Denhart and Jonathan Robe’s “Ohio Right to Work: How the Economic Freedom of Workers Enhances Prosperity” from March 2012.) The top regulatory reform priority for each one of the bottom ten ranked states should be to pass right to work laws.

These states, as a group, also burden their small businesses with: excessive family leave mandates; larger energy regulatory burdens; stricter land use regulations; more expensive workers compensation regulations (except for Oregon); and, higher unemployment insurance costs (except for California).

Surveys continually find that regulations, such as those currently promulgated by the ten lowest ranked states, are a top concern for small business owners. Due to the large litany of anti-growth regulations in the lowest ranked ten states, significant improvements to their regulatory environments require broad-based reforms across all of these regulatory areas.

On the other end of the rankings, the top ranked states, which generally score well across all of the regulatory categories, experienced more vibrant small business growth.

Small businesses are a vital growth engine for the U.S. economy. The Small Business Administration (SBA) estimates that between 1993 and 2011, small businesses created 64 percent of all of the new jobs in the U.S. Beyond being a driver of jobs, small businesses are also a driver of productivity growth. According to the SBA, small businesses develop more patents per employee than larger businesses, and the patents small business develop tend to be more significant than large firm patents.[iv]

Given small businesses’ traditional role as the economy’s job creators and innovators, and the economy’s current lack of job growth and innovation growth, the large regulatory burdens on small businesses are disconcerting.

The 50 State Small Business Regulation Index highlights an important part of the solution to the current national growth quandary. As opposed to expanding anti-growth regulations, the bottom ranked states (and the federal government) should implement the pro-growth regulations of the top ranked states that perform effective economic oversight without dis-incenting economic growth.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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