Testimony of
                     Thomas M. Sullivan
                 Chief Counsel for Advocacy
             U.S. Small Business Administration
                              
                              
                              
                U.S. House of Representatives
               Committee on Government Reform
    Subcommittee on Energy Policy, Natural Resources and
                     Regulatory Affairs
                              
                      February 25, 2004
                         10:00 A.M.
                              
                             on

"How to Improve Regulatory Accounting:  Costs, Benefits, and
          Impacts of Federal Regulations - Part II"
                              
     Chairman Ose and Members of the Subcommittee, good

morning and thank you for giving me the opportunity to

appear before you today.  My name is Thomas M. Sullivan and

I am the Chief Counsel for Advocacy at the U.S. Small

Business Administration (SBA).   Congress established the

Office of Advocacy to represent the views of small business

before Federal agencies and Congress.  The Office of

Advocacy is an independent office within the SBA, and

therefore the comments expressed in this statement do not

necessarily reflect the position of the Administration or

the SBA.

     Section 624 of the FY 2001 Treasury and General

Government Appropriations Act, which was enacted as part of

Pub. L.106-554, (referred to as the "Regulatory Right-to-

Know Act"), directs the Office of Management and Budget

(OMB) to quantify annually the costs and benefits of Federal

regulations and to prepare a Report to Congress summarizing

the results.  Among other things, the Report to Congress is

to include an analysis of the impacts of Federal regulations

on small business.  On February 13, 2004, OMB released the

draft Report to Congress, entitled Informing Regulatory

Decisions:  2004 Draft Report to Congress on the Costs and

Benefits of Federal Regulations and Unfunded Mandates on

State, Local, and Tribal Entities (Draft OMB Report).

     The Subcommittee asked that I provide the Office of

Advocacy's assessment of the Draft OMB Report.

Specifically, the Subcommittee requested Advocacy's views on

(1) the adequacy of the Report's regulatory accounting

statement, by agency and program, (2) the adequacy of the

Report's analysis of the impacts of Federal regulations on

specifically-identified groups, including small businesses,

and (3) recommendations for improving future reports to

Congress.

     The Office of Advocacy's review of the Draft OMB Report

has focused primarily on the treatment of small business

impacts.   Consequently, my comments on the overall report

are couched in terms of the adequacy of the Draft OMB

Report's discussion of regulatory impacts on small

businesses and recommendations to help ensure that future

reports quantify these impacts.  My testimony today should

be considered in conjunction with the comments and

recommendations I provided to the Committee on Government

Reform last year on regulatory accounting and OMB's Reports

to Congress.(1)

     In general, Advocacy believes that improving the

regulatory analysis to delineate small business impacts,

together with greater overall adherence to regulatory

accounting requirements, will greatly improve the quality

and transparency of the economic analyses provided to OMB

under Executive Order 12866,(2) and will in turn allow OMB

to develop more comprehensive Reports to Congress.

The Impact of Federal Regulation on Small Business.

     The Draft OMB Report provides a general overview of the

impact of Federal regulations on small entities without

specifically quantifying those impacts.  The Draft OMB

Report acknowledges that Federal agencies need to recognize

the impact of their regulations and paperwork burdens on

small businesses, and lists the statutes and Executive

Orders intended to require considerations of those impacts.

The Regulatory Flexibility Act (RFA),(3)  as amended by the

Small Business Regulatory Enforcement Fairness Act of 1996

(SBREFA),(4) Executive Order 12866, and Executive Order

13272 (5) each call on agencies to tailor their regulations

by business size to impose less burden while achieving

regulatory objectives.

     While the Draft OMB Report recognizes the importance of

the regulatory burden on small business, it does not attempt

to quantify the impact of that burden, beyond citing the

2001 Office of Advocacy-sponsored Crain-Hopkins study.  The

Crain-Hopkins study found that small businesses pay a

disproportionately large share of the total Federal

regulatory burden, which was estimated to total $843 billion

in 2000.(6)  For firms employing fewer than 20 employees,

the annual regulatory burden in 2000 was estimated to be

$6,975 per employee - nearly 60% higher than the $4,463

estimated for firms with more than 500 employees.(7)

      To help address this disproportionate impact, the RFA,

which was enacted in 1980, requires Federal regulatory

agencies to determine the impact of their rules on small

businesses, consider effective alternatives that minimize

adverse impacts, and make their analysis available for

public comment.  The RFA was strengthened by SBREFA in 1996,

and by Executive Order 13272 in August 2002.  Executive

Order 13272 requires agencies to establish written

procedures and policies on how they consider the impact of

their regulatory proposals on small businesses, notify

Advocacy of draft rules that are expected to have a

significant economic impact on a substantial number of small

entities, consider Advocacy's comments on draft rules, and

publish a response to Advocacy's comments in the final rule.

     As referenced in the Draft OMB Report, Advocacy's

recently released its Report on the Regulatory Flexibility

Act, FY 2003 (FY 2003 RFA Report) in January 2004 (8) The FY

2003 RFA Report highlights those agencies that have

successfully evaluated their draft rules' impacts on small

businesses and have adopted less burdensome alternatives.

These less burdensome alternatives saved small business more

than $6 billion in 2003.  Unfortunately, some agencies

continue to fail to conduct small business impact analyses.

The FY 2003 RFA Report documents agencies that do not comply

with the RFA.  Those agencies' failure to conduct an impact

analysis when proposing new rules and regulations makes it

nearly impossible to get an accurate picture of the true

impact of their regulatory actions.

     The Draft OMB Report does not attempt to quantify, on

an annual basis, what the impact of Federal regulation

actually is on small business.  I suspect that OMB's Office

of Information and Regulatory Affairs (OIRA) receives some

rules from agencies accompanied by good economic analysis

and some without.  The Draft OMB Report would benefit from

impact analyses that, at a minimum, should accompany all

major rules reviewed by OIRA (e.g., rules expected to impose

over $100 million in annual costs).  From the Office of

Advocacy's perspective, the Draft OMB Report would also

benefit from small business impact analyses that should be

prepared for rules reviewed by OIRA.

     While Advocacy would have preferred to see a

quantitative analysis of the regulatory impacts on small

business in the Draft OMB Report, I would be remiss if I did

not commend Dr. Graham and our colleagues in OIRA for their

daily efforts to ensure agencies' compliance with the

Regulatory Flexibility Act through interagency review of

proposed regulations.

     On March 19, 2002, the President announced his Small

Business Agenda, which included the goal of "tearing down

the regulatory barriers to job creation for small businesses

and giv[ing] small business owners a voice in the complex

and confusing federal regulatory process."(9)  To accomplish

this goal, the President sought to strengthen the Office of

Advocacy by enhancing its relationship with OIRA and

directing agencies to work closely with Advocacy and

properly consider the impact of their regulations on small

entities pursuant to Executive Order 13272.  Advocacy and

OIRA signed a Memorandum of Understanding (MOU) to ensure

the two offices work closely together as early as possible

in the regulation development process to address small

business issues, particularly as they relate to

disproportionate regulatory burden.(10)  Together, the two

offices are able to work with Federal agencies to make

improvements in their impacts analyses, help ensure that

small business issues are addressed and, where possible,

ease regulatory burdens.  With a focus on information

sharing between Advocacy and OIRA during interagency review

of draft rules under Executive Order 12866, the two offices

work collaboratively to address small business concerns

early in the rulemaking process.  Much of our success in

making Federal agencies more accountable to small entities,

as documented in the 2003 RFA Annual Report, is due to our

close working relationship with OIRA.

     Furthermore, OMB has been responsive to Advocacy's past

recommendations aimed at improving agencies' cost-benefit

data and the analysis of regulatory impacts on small

businesses.  Advocacy believes OMB's recently issued

Circular A-4, "Regulatory Analysis,"(11) will go a long way

to improve agency compliance with Executive Order 12866.

Better cost-benefit analysis will also enable OMB to issue

more comprehensive Reports to Congress.  OMB Circular A-4

includes a section calling on Federal agencies to identify

the effects of rules on small businesses, wages, and

economic growth.  The accompanying Regulatory Accounting

worksheet has a section for agencies to list the impacts of

their rules on small businesses, wages, and economic growth.

The Circular became effective on January 1, 2004, so

increased agency identification of impacts was not included

in the Draft OMB Report.  We encourage OMB to use its return

letter authority to enforce agency compliance with Circular

A-4, including use of a Regulatory Accounting Statement that

includes quantification of the impacts on small business,

wages, and economic growth.

     Advocacy is also pleased that OMB called for

nominations for promising regulatory reforms to address the

regulatory burden confronting manufacturers and to reduce

the overall tax paperwork burden.  Prior nominations

evaluated by OMB are prompting ongoing revisions to

regulations that are likely to reduce the regulatory burden

borne by small businesses, including small manufacturers.

The U.S. Environmental Protection Agency (EPA), for example,

has announced that it is now considering revising paperwork

requirements for businesses that must file annual Toxic

Release Inventory reports, while still providing significant

environmental information to the public.  Advocacy believes

that such regulatory reforms could be effective in reducing

the regulatory burden on small business, particularly in the

manufacturing sector.

The Regulatory Accounting Statement.

      The Draft OMB Report includes a regulatory accounting

statement, as required by the Regulatory Right-to-Know Act.

Unfortunately, as has been the case in prior years, the

Draft OMB Report's regulatory accounting statement reflects

major gaps in the cost and benefit information received from

the Federal agencies.  Agencies that promulgated six of the

twelve major new "social regulations" reviewed by OIRA in

2003 - rules that are anticipated to provide societal

benefits while imposing at least $100 million in new costs

upon regulated entities each year - provided no information

about the cost or benefits of their rules.

     For example, the Health and Human Services' Center for

Medicare and Medicaid Services (CMS) adopted new standards

for the security of health information under the Health

Insurance Portability and Accountability Act of 1996.  The

standards impose new paperwork management requirements on

health care plans, doctors, and other health care providers.

Although CMS acknowledged that the standards would cost

these entities more than $100 million in compliance costs

annually, the agency failed to estimate the costs and

benefits of the standards for OMB.

     Likewise, the U.S. Department of Agriculture's

Agricultural Marketing Service (AMS) issued revised price

formulae for butterfat, protein, and nonfat solids used in

milk, cheese, and butter.  Although the changes are

estimated to impose at least $100 million in new costs, AMS

provided no estimates of the costs or benefits of the action

to OMB.

     Agencies' failure to provide data on the costs and

benefits of their rules potentially harms OMB's ability to

abide by the Regulatory Right-to-Know Act, and it also

contravenes Executive Order 12866, which requires this

information to be provided pursuant to OIRA's review of

major rules.  Moreover, agencies' failure to provide

regulatory accounting information makes rules far less

transparent to the public.   Small entities are particularly

affected when agencies ignore Executive Order 12866

requirements, since a lack of impact analysis means that

agencies are unlikely to satisfy the regulatory flexibility

analysis required under the Regulatory Flexibility Act and

Executive Order 13272.

     While my testimony focuses on ways to better achieve

the goals of the Regulatory Right-to-Know Act, I should also

acknowledge the efforts that are underway within the

Administration to accomplish the Act's objectives.   Every

two years the Office of Advocacy produces a study on the

impact of federal regulations on small businesses.  The 2001

Crain-Hopkins study (12) is being updated and will be

published later this year.  Second, Advocacy's RFA Annual

Reports commend agencies for leadership and shames others

for noncompliance.  The U.S. Department of Commerce's

recently released report, Manufacturing in America,(13)

highlights the need for cost-benefit and regulatory impact

analysis that will be part of the Department of Commerce's

new Assistant Secretary for Manufacturing and Services'

responsibilities.  OMB has returned rules to agencies when

regulatory action is poorly justified.  And the recently

issued OMB Circular A-4 has significant potential to help

address the deficiency in obtaining regulatory impact data.

       

     Congressional oversight is also tremendously helpful.

This hearing sends a message to agencies that analysis does

matter.  The Paperwork and Regulatory Improvements Act of

2003 would compel Federal agencies to analyze the impacts of

their regulations on small businesses and state and local

governments.  This would help identify whether the costs

imposed on small firms by regulations are justified by their

benefits.  If cost and benefit estimates are required for

small entities on regulatory accounting statements, small

business considerations would figure more prominently in

agencies' regulatory calculus.

     

Recommendations for Improving OMB's Future Reports to

Congress.

Increased Use of OMB Return Letters.

     Advocacy strongly recommends that OMB issue return

letters on a rule-by-rule basis to enforce agency compliance

with the Executive Order 12866 and OMB Circular A-4.  We

note that former OMB Director Mitch Daniels advised this

Committee on March 24, 2001, that OMB would issue return

letters to enforce agency compliance with the Unfunded

Mandates Reform Act of 1995, Pub. L. 104-4.   Advocacy

believes that return letters should be issued to agencies

that do not follow OMB's Circular and Bulletin(s) on

accounting for regulatory impacts imposed on small entities.

Improved Regulatory Accounting.

     H.R. 2432 would amend the Regulatory Right-to-Know Act

to require (1) agencies to submit annual estimates to OMB of

the costs and benefits of their regulations and paperwork

requirements, (2) OMB in turn to develop regulatory

accounting statements, and (3) five agencies to undertake

pilot projects to conduct regulatory budgeting.  Advocacy

recommends that the bill also require agency submissions to

OMB (and OMB's corresponding accounting statements) identify

and analyze regulatory impacts on small entities, consistent

with the impact analysis required under the current

regulatory accounting law.

     

Conclusion.

     Advocacy believes that improving the regulatory

analysis of small business impacts, together with greater

adherence to regulatory accounting requirements in general,

will greatly improve the quality and transparency of the

economic analyses provided to OMB under Executive Order

12866, and will in turn allow OMB to develop  more

comprehensive Reports to Congress.

     Thank you for allowing me to present these views.  I

would be happy to answer any questions.

     

ENDNOTES

1.  Testimony of Thomas M. Sullivan, Chief Counsel for
Advocacy, U.S. Small Business Administration, before the
U.S. House of Representatives, Committee on Government
Reform, July 22, 2003, on H.R. 2432, the "Paperwork and
Regulatory Improvements Act of 2003," available at
http://www.sba.gov/advo/laws/test03_0722.html.
2.  Exec. Order No. 12,866, 58 Fed. Reg. 51,735 (Sept. 30,
1993).
3.  Pub. Law No. 96-354, 94 Stat. 1164 (1980) codified at 5
U.S.C.  601 et seq.
4.  Pub. Law No. 104-121, 110 Stat. 857 (1996) codified at 5
U.S.C.  601 et seq.
5.  Exec. Order No. 13,272, 67 Fed. Reg. 53,461 (Aug. 13,
2002).
6.  See The Impact of Regulatory Costs on Small Firms, an
Advocacy-funded study by W. Mark Crain and Thomas D. Hopkins
(October 2001), available at
http://www.sba.gov/advo/research/rs207tot.pdf.
7.  Id.
8.  Office of Advocacy, Report on the Regulatory Flexibility
Act, FY 2003, The Annual Report of the Chief Counsel for
Advocacy on Implementation of the Regulatory Flexibility Act
and Executive Order 13272 (January 2004), available on the
Office of Advocacy webpage, http://www.sba.gov/advo.
9.  President Bush's Small Business Agenda, announced March
19, 2002, can be viewed at
http://www.whitehouse.gov/infocus/smallbusiness/regulatory.h
tml.
10 The Memorandum of Understanding can be viewed at
http://www.sba.gov/advo/laws/law_mou02.pdf.
11. OMB Circular A-4, Regulatory Analysis (Sept. 17, 2003),
can be viewed at
http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf.
12. The Impact of Regulatory Costs on Small Firms, an
Advocacy-funded study by W. Mark Crain and Thomas D. Hopkins
(October 2001).
13.  U.S. Department of Commerce, Manufacturing in America:
A Comprehensive Strategy to Address the Challenges to U.S.
Manufacturing (January 2004).