Tailored regulation may not spell relief
Small businesses often get special treatment when it comes to government regulations and policies. They may be exempt from rules facing larger companies, get more time to obey new regulations or qualify for help to meet regulatory requirements.
Small companies need these breaks, the thinking goes, because they have less money and fewer employees to use to comply with government rules. And those compliance costs often have been shown to be higher per employee at small businesses.
For example, the cost to comply with proposed changes to the barrier removal requirements of the Americans With Disabilities Act could be as much as four times higher per square foot for small firms than for large companies, according to a study released last week by the Small Business Administration’s Office of Advocacy.
Advocates often push for public policy at the state and federal levels to ensure that small businesses are protected from these proportionately higher regulatory costs, which could hamper growth. Small firms are important job producers and society’s primary innovators. They also employ about half of all private-sector employees.
So exemptions, delays, tiered systems and other special processes are put in place.
But does this regulatory relief achieve its goal?
That’s the question posed in a new book from Santa Monica-based Rand Corp., “In the Name of Entrepreneurship? The Logic and Effects of Special Regulatory Treatment for Small Business.”
Released Monday, the book concludes that sometimes the intent -- to level the playing field or even actively benefit small businesses -- falls flat.
“Obviously small businesses are very politically important at the local, state and national level, so policymakers generally are very eager to demonstrate they are doing something to support small business,” said Susan M. Gates, a co-editor of the book and director of the Kauffman-Rand Institute for Entrepreneurship Public Policy ( www.rand.org/icj/centers/small_business/) at Rand.
“But it can be very easy to implement policies, then not track how they are doing,” she said.
Gates and her colleagues looked into four regulatory areas: health insurance, employment, environmental protection and corporate securities.
What they found was surprising.
State healthcare reform put in place in the 1990s was meant to help small businesses. But it has had the unintended effect in some cases of producing insurance products so unattractive that small firms added employees to avoid having to participate, Gates said. Previous research had found the regulations didn’t have the intended positive effect in terms of reducing premiums or increasing availability, she added.
The Rand team also found that healthcare savings accounts, which have been pushed by some policymakers as the answer to providing affordable health insurance for small businesses, initially have been more popular with large companies.
In the area of employment regulations, analysts looked at workplace safety rules. Small sites have long been thought to have more fatalities than larger sites, Gates said. Federal workplace safety regulators put a small business’ single site in the same regulatory tier as same-size facilities that belong to medium-scale or large firms, which are likely to have multiple sites.
A closer look showed Gates and her team that the small-business sites had fewer fatalities than same-size sites owned by medium-size companies.
“We suggest that it would certainly be worth considering whether regulatory policy should continue to focus on establishment size without considering other issues,” Gates said.
The 331-page book, which can be downloaded for free at www.rand.org, is a compilation and analysis of the center’s work and previous studies since it was founded in 2004.
The goal is not to dispute the need for small-business friendly regulations or reform, Gates said, but to call for more research into the actual effects of such rules.
Though regulations have multiplied over the last several decades, research on their effects has improved but not kept up, the book notes.
“In order to strike this balance between effectively restricting firm behavior through regulation and the desire to encourage small businesses, policymakers need to better understand how small firms differ from larger ones, both in terms of the effect of their behavior and in terms of the cost burden that the regulation places on those firms,” Gates said.
Regulatory reform and efforts to measure and possibly soften the effect of government rules are not new issues. The SBA’s Office of Advocacy pours many resources into tallying the cost of regulations to small businesses and lobbying for changes.
In California, several agencies have small-firm advisory councils, and the governor-appointed small-business advocate’s job is monitoring the effects of regulations on small firms.
Still, as the book notes, the regulatory environment for small business is fragmented and lacks coordination across government entities. Most of the rules with which small firms must comply were created to change behavior at larger companies.
Though policymakers may want to consider the effect of regulation on small business, the information needed to develop policies appropriate for small firms is “sorely lacking,” according to the book.
Even the definition of a small business varies widely among government agencies.
Though the SBA typically considers a firm with fewer than 500 employees to be small, the Environmental Protection Agency might judge a business’ size on the amount of pollution it emits. To be certified as a small business in California, your firm must have 100 or fewer workers and average annual gross receipts of $12 million or less over the previous three tax years.
Gates hopes to encourage the search for more evidence on small-business regulation.
“We found that there were a lot of assumptions made about what would benefit a small business and how and why small businesses need to be treated differently in a regulatory and policy context,” she said.
What’s next? Under Gates’ direction, the center is working on several other small-business policy issues, including a look at the cost of health insurance for small firms compared with large ones and whether health insurance is a barrier to entrepreneurship.
The center also will study university technology transfer systems, exploring the link between federally funded research and the development and commercialization of patented technology.
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