Although this is an old article, it deserves a reprint as it show the over-burdened regulatory environment of small business and the implications for future growth.

as posted here :

Washington, D.C. Federal regulatory costs on U.S. business grew to $497 billion in 2000. Furthermore, these costs fell disproportionately on small business. These are the primary findings of a study released today by the Office of Advocacy of the U.S. Small Business Administration (SBA).

The report, by W. Mark Crain and Thomas D. Hopkins, entitled The Impact of Regulatory Costs on Small Firms, examines the cost of regulation on small versus large firms across four broad industrial sectors – manufacturing, trade (wholesale and retail), services, and other.

“These research results are very disturbing,” said Office of Advocacy Acting Chief Counsel Susan Walthall. “This new study shows that the cost of federal regulation continues to increase on business and that as this regulatory burden grows these costs disproportionately hit small business.”

The report divides federal regulations into four categories: environmental, economic, workplace and tax compliance. All told, in 2000 federal regulations cost small firms (less than 20 employees) nearly $7,000 per employee annually. Compliance costs for medium size firms (20 to 499 employees) and for large firms (500+ employees) were close to $4,320 and $4,460 per employee respectively.

“When the per employee cost of compliance is nearly 60 percent higher for small business, you have to ask what this is doing to the viability of opening, and operating a small business,” said Walthall at Advocacy’s 25th Anniversary conference. “I do not seek special treatment for small business. However, there must be reasonableness in all regulations relative to the size of the business being regulated,” she said.

The Crain/Hopkins study indicates compliance costs differ with respect to firm size across four major business sectors. In the manufacturing sector, small firms bear a significantly higher regulatory burden as measured by cost per employee than large firms do. Regulatory costs per employee in small manufacturers are more than double the costs in medium size and large firms.

“Small business is the backbone of our economy,” said Hopkins. “Such success is remarkable given the disproportionate burdens that government regulations place on them. Small firms annually spend close to $7,000 per employee to comply with regulations enforced by over 60 federal agencies. That is over 50% more than the burden facing larger firms. Whether all this regulation is delivering the protections intended in reasonable ways deserves closer attention in light of the size of its cost,” he said

The trade sector showed the least cost differential between large and small firms. Here the cost per employee in small wholesale or retail firms exceeded the cost of medium size firms and large firms by only 11 percent and 18 percent respectively.

In the services sector, an area of concern is environmental regulation where the cost differential based on firm size is striking. Environmental regulations cost small service firms three to four times more than the costs to medium size and large firms.

In the area of tax compliance, the impact was the same across all business sectors – the costs fell disproportionately on small firms. In summary, the cost disadvantage on small business in each sector is driven largely by compliance with environmental regulations and the federal tax code.

According to Crain, “Regulatory policies tend to be skewed for the simple reason that regulatory cost accounting is inherently difficult relative to policies that have direct and measurable consequences such as a tax increase. Paying more attention to the real costs of regulations would assist in rationalizing the process of promulgating regulations. The impact of regulations on business and citizen activities is no less real than the impact of fiscal programs.”

What concerns the Office of Advocacy is that the cost of regulations will discourage individuals from starting small businesses and that compliance costs will reduce their ability to compete. Moreover, the burden will cripple small business innovation and ultimately damage the economic engine of the country.

Office of Advocacy research shows that ninety percent of all firms in the U.S. employ fewer than 20 employees. By comparison large firms (those with 500+ employees) account for only 0.3 percent of all U.S. firms.