How Regulations at Every Level Hold Back Small Business

Since 1980, the U.S. population has grown by 40% while the number of companies started annually declined 11%.

Sean Hackbarth

Senior Editor, Digital Content, U.S. Chamber of Commerce

Running a small business isn’t easy. Succeeding is even harder. And it’s more difficult when regulations hold you back.

With more than 45% of economy driven by it, small businesses are engines of economic prosperity. But that engine seems to have stalled.

In 2013, 400,000 companies were started, compared to 450,000 that were started in 1980. Population grew 40%, while start-ups fell 11%.

A report for the U.S. Chamber of Commerce Foundation, “The Regulatory Impact on Small Business: Complex. Cumbersome. Costly,” looks at how regulations are throwing sand in the gears of that engine.

Here are four key findings:

1. Government regulations have a sizable impact on free enterprise in America, disproportionately impacting small businesses.
2. Federal regulations alone are estimated to cost the American economy as much as $1.9 trillion a year in direct costs, lost productivity, and higher prices. The costs to smaller businesses with 50 employees or fewer are nearly 20% higher than the average for all firms.
3. Every $1 increase in per capita regulatory expenditures are directly correlated with decreases in the smallest firms (those employing between one and four persons) by 0.0156%, a figure whose burden quickly adds up.
4. Based on the current regulatory climate, nearly one in three chamber executive researchers spoke with as a part of this project say they would not actively encourage new business establishment and relocation in their regions. More than two-thirds reported that federal regulations have become “more” or “much more” significant over the past several years.

The report points out, “Over the last 60 years, the U.S. population increased by 98% while the federal regulatory code increased by 850%, including some 6,081 final rules published between 2015 and 2016.”

It’s even more burdensome for small businesses, which employ half of all private-sector workers:

Related

Small businesses pay on average $11,700 per year per employee in regulatory costs, and the costs of regulation to smaller businesses with 50 employees or less are nearly 20% higher than they are for the average firm. The regulatory costs of federal economically significant rules to small businesses amount to over $40 billion per year.

The regulatory burden isn’t just at the federal level. Regulations from the more than 90,000 state and local governments also weigh heavily on small businesses, the report notes:

An aspiring business owner may face the challenge of having to deal with regulations and rules promulgated and implemented by multiple state and local governmental units, in addition to dealing with federal requirements. While each state and local regulatory climate is different, the very amount of points of contact to be navigated presents a potential stumbling point to small business establishment and growth in all areas of the country.

Higher minimum wages, workers compensation, unemployment insurance, and occupational licensing rules are some of the many state and local rules that disproportionately affect small companies.

These regulatory regimes create hostile business environments, which hold back economic development, job creation, and impede the social ties commerce knits within an area.

What can be done to help small businesses find their way through the red tape maze of regulation?

The first step is collecting the necessary data to show policymakers how small businesses are being held back. This report begins that process.

That way, advocates (like national, state, and local chambers of commerce) will have the facts necessary to make a convincing case to governments that reforms are needed to rev up this critical engine of economic prosperity.

About the authors

Sean Hackbarth

Sean writes about public policies affecting businesses including energy, health care, and regulations. When not battling those making it harder for free enterprise to succeed, he raves about all things Wisconsin (his home state) and religiously follows the Green Bay Packers.