Testimony of
                                
                       Thomas M. Sullivan
                   Chief Counsel for Advocacy
                       Office of Advocacy
               U.S. Small Business Administration
                                
                             Before
             The Committee on Small Business of the
                  U.S. House of Representatives
                                
                               On
Agency Compliance with the Small Business Regulatory Enforcement
                      Fairness Act (SBREFA)
                                
                                
                          March 6, 2002
                           10:00 A.M.

      Chairman Manzullo, Ranking Member Velzquez, Members of the

Committee,  good  morning and thank you for  the  opportunity  to

appear  before you today to discuss the Small Business Regulatory

Enforcement Fairness Act (SBREFA).

     First, let me tell you what an honor and privilege it is for

me to have been appointed Chief Counsel for Advocacy by President

Bush.  Since my confirmation just over one month ago, I have  had

an  incredible  experience.   I am grateful  for  the  tremendous

support  I  have had from Members of Congress; from Administrator

Barreto;  from  the  staff  of  the  Office  of  Advocacy;   from

government leaders; and from our many small business organization

and trade association friends.

     

     Although I had worked with Advocacy on many issues  while  I

was  Regulatory  Policy  Counsel for the National  Federation  of

Independent Business (NFIB), and more recently Executive Director

of  the  NFIB  Legal Foundation, as Chief Counsel I  have  a  new

appreciation  for the talent and energy of Advocacy's  staff.   I

want to give special thanks to my deputy, Susan Walthall, who  is

with  me here today.  Susan served as Acting Chief Counsel  until

my confirmation, and she did a great job in keeping the Office of

Advocacy  running  smoothly  during this  transition  period,  in

addition to helping me prepare for the challenges ahead.

     

      Last  October,  the  Office of  Advocacy  held  a  day-long

symposium marking its 25th anniversary.  The theme of this  event

was "Advocacy at 25: Looking Back, Looking Ahead" and we did just

that.   Although  I  had  not yet had  my  confirmation  vote,  I

attended  as a "civilian" along with more than 200 other Advocacy

stakeholders  and small business advocates from  the  government,

academic  and  private sectors.  In addition to working  sessions

organized  around  Advocacy's regulatory  and  economic  research

missions, there was an excellent presentation on an important new

study  released  that day on the costs of regulatory  compliance,

and  an address by Dr. John Graham, Administrator of OMB's Office

of Information and Regulatory Affairs, with whom, I might add, we

are working closely.

     But  perhaps  my favorite session that day was a  roundtable

featuring  all  four of my confirmed predecessors,  former  Chief

Counsels Milt Stewart, Frank Swain, Tom Kerester, and Jere Glover

-  all  of  whom I am proud to call my friends.  As  I  begin  my

tenure as the fifth confirmed Chief Counsel for Advocacy, I  must

tell  you that I am humbled, not only by their achievements,  but

also by the enormity of the challenges ahead of us.

      I  am committed to addressing these challenges with renewed

energy.   We are working now on a strategic plan for the  future,

and are aggressively seeking ways to fine-tune our activities and

refocus  our  limited resources to get more bang  for  the  buck,

while  at  the  same time maintaining the quality  of  Advocacy's

work, continuity in our ongoing activities, and commitment to our

core missions.

      I  commend the Committee for its review of SBREFA  at  this

time.   As  we  are  both  looking back and  looking  ahead,  and

renewing  our commitment to serve America's small businesses,  it

is  appropriate  that we examine together how  one  of  our  most

important legislative tools has been working after more than five

years'  experience, with a view towards possible fine-tuning  and

improvements.

The importance of SBREFA

     SBREFA  has  made a difference - a big difference,  both  in

opening   the   rulemaking  process  to  greater   scrutiny   and

participation by those it affects, and in achieving  quantifiable

reductions  in the regulatory burden on small business.   Perhaps

even  more  important,  SBREFA is helping change  the  regulatory

culture in at least some government agencies, an outcome far more

significant  than individual rulemakings.  We want regulators  to

think  about the effects of their proposals before they act,  and

our experience has shown that SBREFA helps accomplish this goal.

     

     SBREFA amended the 1980 Regulatory Flexibility Act (RFA)  in

several significant ways.  First, it gave the courts jurisdiction

to  review agency compliance with the RFA, thus providing for the

first time a legal mechanism to ensure agency compliance with the

law.   Second, SBREFA mandated that the Environmental  Protection

Agency   (EPA)   and   the   Occupational   Safety   and   Health

Administration  (OSHA)  convene "Small Business  Advocacy  Review

Panels"  to  elicit  information from  small  entities  on  rules

expected  to  have a significant impact on them,  and  to  do  so

before  the  regulations are published for public comment.   This

formalized  for  those two agencies a process  to  involve  small

entities  early  in  the  agencies' deliberations  on  the  small

business  impacts of regulatory proposals, and it forced agencies

to   consider  equally  effective  alternatives.   Third,  SBREFA

reaffirmed  the  authority of the Chief Counsel for  Advocacy  to

file  amicus  curiae  (friend of the  court)  briefs  in  appeals

brought  by  small  entities seeking  relief  from  agency  final

actions.

     

     Each of these three SBREFA provisions has had its effect and

has  made  a  positive  contribution to our  efforts  to  control

unnecessary regulation.  The judicial review provision  has  been

particularly   important.   Small  businesses  are   increasingly

seeking  judicial review of agency compliance with  the  RFA  and

having some success.  Several court decisions have remanded rules

to  agencies  for failure to comply with the RFA.  The  potential

for judicial review provides a significant incentive for agencies

to  do  more in-depth small business impact analyses and to  take

other  steps  to strengthen their in-house regulatory development

processes.

     

     Similarly,   Advocacy's  authority  to  join  in  litigation

against agencies charged with failure to comply with the RFA  has

given  pause  to  those  that  in the  past  ignored  that  Act's

requirements.  This amicus authority, which we use sparingly,  is

one  more  powerful  incentive for  agencies  to  consider  their

actions carefully.  Advocacy's first brief was filed in Northwest

Mining  Assoc.  v.  Babbitt.  The court agreed  with  the  issues

raised  by  Advocacy and remanded the rule to the  Department  of

Interior.   In  other  instances, the mere threat  of  using  our

amicus  authority has been sufficient for an agency to reconsider

its position.

     

     One  measure  of  the  effect that the judicial  review  and

amicus  authority  provisions of  SBREFA  have  had  may  be  the

newfound  interest  of  regulatory agencies  in  RFA  and  SBREFA

training,  a phenomenon which, not surprisingly, blossomed  after

the  Northwest  Mining decision in 1998.  Advocacy has  developed

materials  for this purpose and conducted training  sessions  and

individualized counseling for hundreds of regulatory  development

specialists,  attorneys, program managers and  high-level  policy

officials  from agencies throughout government.   Many  of  these

agencies  also  now  participate in Advocacy's informal  industry

roundtables,  in  which those involved in developing  regulations

can meet, listen to, and learn from those who will be affected by

their actions.  It is difficult to quantify the effect that  this

early  exchange  of  information has on mitigating  the  cost  of

regulation  to small business, but we are convinced  that  it  is

real.

     

     This  brings  me to a theme that I believe is  of  paramount

importance  -  early  intervention in  the  rule-making  process.

Important as the judicial review and amicus provisions of  SBREFA

are,  it  would be far preferable if we never had to use them  at

all.   If  agencies  consistently honored their  responsibilities

under the RFA and actively involved small businesses at each step

of the rule development process, there would be little need to go

to court.

     

     The  review panel provisions of SBREFA, which now apply only

to  EPA  and OSHA, promote this approach and provide a model  for

early  intervention with a proven record of success.   The  panel

process  has confirmed that: (1) credible economic and scientific

data,  as  well  as  sound  analytical methods,  are  crucial  to

rational decision-making in solving regulatory problems; and  (2)

information provided by small businesses themselves on real-world

impacts is invaluable in identifying equally effective regulatory

alternatives.   It  is important to emphasize that  although  the

regulations that result from panel deliberations are likely to be

less  burdensome to small business, public policy objectives need

not be compromised.

Regulatory savings and SBREFA

      Although EPA and OSHA are the only agencies now required to

use  the  panel  process,  SBREFA  is  affecting  all  regulatory

agencies.   Agencies logically wish to avoid judicial  challenges

to  their  rules and are taking greater care to comply  with  the

RFA.   But beyond this pain-avoidance incentive, we are beginning

to see a genuine desire on the part of some agencies to listen to

small  business concerns and work with Advocacy to  craft  better

rules.   Regulations have been changed to minimize their  impacts

on  small  entities, and I would like to share with you just  two

examples: an important IRS rule on cost versus accrual accounting

methods,  and  a  Department  of  Transportation  (DOT)  rule  on

providing    transportation   services   to   individuals    with

disabilities.

     Internal Revenue Service rule.  The Internal Revenue Service

recently announced a change allowing simplified tax filing for up

to  500,000 additional small businesses beginning with  tax  year

2001 returns.  IRS Notice 2001-76 allows certain small businesses

with gross receipts of $10 million or less to use the cash method

of  accounting for income and expenses, instead of the costly and

complicated  inventory and accrual method.  Until  now,  the  IRS

could  impose  the more stringent method, accrual accounting,  on

businesses with more than $1 million in receipts.

      Under  accrual  accounting,  a business  generally  reports

income  when  it  has  a  right to receive payment,  and  deducts

expenses when it has a fixed and determinable liability for them.

This obviously can become very complicated, requiring specialized

accounting assistance.  Further, it can create cash-flow problems

for small businesses.

      Allowing  more small businesses to use the cash  accounting

method  was  one of the recommendations of the 1995  White  House

Conference on Small Business.   The Office of Advocacy and  White

House Conference delegates have been active in urging the IRS  to

make this change. Advocacy also supported congressional action on

this  issue  in testimony before the Senate Committee on  Finance

last  year,  so  we are very pleased that the  IRS  has  been  so

responsive in this instance.  Although this change will primarily

be  of  benefit  to  small  service providers  -   businesses  in

manufacturing,  wholesaling, retailing and mining  are  generally

excluded - we still welcome this provision, which helps  so  many

small businesses.

      Department of Transportation rule.  Another example of  how

an  agency's good-faith effort to comply with the RFA as  amended

by   SBREFA   has   made  a  difference  is  the  Department   of

Transportation's  revision of a proposal to implement  provisions

of  the  Americans With Disabilities Act (ADA).  DOT  proposed  a

rule   requiring  that  over-the-road  buses  be  accessible   to

passengers with disabilities, and that companies using such buses

(motor  carriers, tour operators, etc.) provide accessible  over-

the-road  service.  Advocacy commented that the rule as  proposed

would  have  had a serious impact on the small bus industry,  and

that   it   would   have   caused  small  operators   to   reduce

transportation available to the public as a whole - especially in

rural  areas.  Advocacy proposed that a service-based alternative

would  provide better transportation to all passengers, including

those with disabilities.

      Advocacy  then arranged a conference for DOT officials  and

small  business  representatives to discuss  the  various  issues

involved  and  alternatives  to  the  proposed  rule  that  could

accomplish DOT's objective of providing service to the  disabled,

while not unduly burdening small motor carriers and precipitating

unintended  reductions  in service to the  general  public.   DOT

agreed  to  review  the costs projected by the small  businesses.

After  careful  study,  the  agency then  crafted  an  innovative

approach that achieved its regulatory objective while striking  a

balance  among competing public policy objectives.  This approach

was  incorporated in DOT's final rule and included both  an  "on-

call service" feature and a phase-in period.

      DOT's  final rule transitions the private bus  industry  to

full  service for passengers with disabilities, while in the near

term  maintaining service for passengers who rely  on  small  bus

companies  for  essential needs.  In addition, the  industry  has

estimated  that  the  revisions made to DOT's  original  proposal

resulted  in  savings  of approximately $180  million.   Advocacy

commends DOT for its efforts to work with small business and  our

office in the spirit, as well as the letter, of the RFA to  reach

a solution to this difficult, but solvable problem.

      These  are but two examples of agencies adopting  a  common

sense  approach  to  regulation which  has  and  will  result  in

substantial  savings  to small business,  one  using  a  "tiered"

approach  and  the other a phase-in linked to a unique,  problem-

specific solution.  Advocacy's annual Regulatory Flexibility  Act

reports detail many more such examples.

     We  estimate  that  during fiscal years 1998  through  2001,

modifications  to  federal regulatory proposals  in  response  to

RFA/SBREFA  provisions, and consultation with Advocacy,  resulted

in  cost  savings totaling more than $16.4 billion, or more  than

$4.1  billion  per year on average.  Many of these  savings  have

been  counted  only  once,  though in fact,  had  the  underlying

proposal  been  finalized  without  small  business  input,   the

resulting costs would have been recurring from year to year.

RFA/SBREFA compliance still needs improvement

     I noted earlier that SBREFA is helping change the regulatory

culture in at least some government agencies.  It is important to

note,  however, that this cultural change is by no means  uniform

within  or among regulatory agencies.  One of the largest hurdles

to  be  overcome  remains agency resistance to the  concept  that

regulatory  alternatives  that  are  less  burdensome  on   small

business  may  in  fact be equally effective in achieving  public

policy  objectives.  Other agencies simply haven't "internalized'

their   RFA   responsibilities  and  don't  seem  to   view   its

requirements as germane to their mission.

     As  we  reported in our 20th anniversary RFA report  for  FY

2000,  a  number of agencies consistently ignore the requirements

of the RFA.  Two regular offenders are the Federal Communications

Commission  (FCC)  and  the  Centers for  Medicare  and  Medicaid

Services    (CMS),   formerly   the   Health    Care    Financing

Administration.

     FCC.   FCC regulations have not included adequate discussion

of  potential small business impact.  Its analyses frequently are

of  the  cut-and-paste variety, offering no specific or  relevant

information  pertaining to the substance of the rule.   Vagueness

in its notices is a problem.

     

     For example, last November the FCC proposed major changes to

the  current intercarrier compensation regime, in which providers

of  phone services compensate each other for the origination  and

termination of calls that begin on each others' networks.  First,

from  the information provided, Advocacy is not convinced that  a

complete   restructuring   is   necessary.    Additionally,   the

rulemaking  itself  lacks  specifics.  Instead,  it  makes  broad

inquiries to which a response is requested.  It is impossible  to

ascertain  what the impact on small business is because  of  this

vagueness.   Advocacy  recommended  that  the  FCC  recast   this

rulemaking  as a "Notice of Inquiry" to gather information.   The

Commission  could then use the comments received in  response  to

its  original Notice of Proposed Rulemaking to analyze the  small

business impacts in a regulatory flexibility analysis.

     

     FCC  has  also failed to comply with Section 212 of  SBREFA,

which  requires that agencies publish compliance guides for small

business  to  help  those regulated better understand  the  rules

which these agencies promulgate, a subject to which I will return

shortly.

     CMS.   Turning  now  to  CMS.   An  advisory  committee   on

regulatory reform has been formed at the Department of Health and

Human Services to identify overly burdensome Medicare regulations

promulgated by that agency.  This is a positive development,  but

frankly,  a  number of these overly burdensome regulations  would

not be on the books today if CMS had complied with the RFA.

     

     For  example,  in  the  case of the  Medicare  reimbursement

methodology  for  portable  x-ray  providers,  CMS  has   ignored

Advocacy's  comments and recommendations since  1998.    Advocacy

commented  on  the  proposed rule, indicating  that  the  overall

reduction  in Medicare reimbursement for portable x-ray  services

amounted  to  as much as 54 percent in some cases, and  that  the

agency  had  not prepared an adequate analysis of the  impact  on

small   entities.    GAO  also  published  a   report   in   1998

acknowledging   (with  some  uncertainty)  that  portable   x-ray

providers  may  not be able to continue supplying services  as  a

result of the reduced payments.

     

     CMS  published  a final rule in this case which  essentially

ignored  the  comments  of  Advocacy and  industry,  so  Advocacy

submitted additional comments indicating that, under the RFA, the

agency  was required to address comments received in response  to

the  initial  regulatory  flexibility  analysis.   Eventually,  a

transition  period for implementation was allowed after  a  post-

final rule discovery that a transition payment provision had been

left  out  of  the  rule.  This "fix" still did not  address  the

overall  issue of the need for an impact analysis.   In  December

2001,  Advocacy  was again forced to comment  on  a  new  payment

regulation  -  this time a direct final rule,  where  the  agency

waived  the Administrative Procedure Act requirement for a notice

of  proposed rulemaking.  Once again, the agency failed to assess

adequately  the  impact  of  the rule  on  small  portable  x-ray

providers.

SBREFA Section 212 concerns

      Before  I conclude, I would like to offer a few remarks  on

Section  212  of  SBREFA, which requires  that  agencies  publish

compliance guides to assist small entities in understanding rules

for  which  final  regulatory flexibility  analyses  (FRFAs)  are

required.   This  topic is timely because of a recently  released

GAO   report   entitled  "Regulatory  Reform:  Compliance   Guide

Requirement Has Had Little Effect on Agency Practices."   As  the

title  suggests,  GAO has found that agencies are  not  complying

with Section 212, and I regret that this seems to be the case.

     The  problem is not restricted to the six agencies that were

the  subject of GAO's review.  It is pervasive in other  agencies

as  well.   A  particularly egregious example  is  the  so-called

"small   entity  compliance  guide"  published  by  the   Federal

Acquisition Regulation Council (FAR Council).  In 1999,  the  FAR

Council  published  in the Federal Register a  list  of  all  the

previous  years'  regulations  with  an  asterisk  beside   those

regulations  containing a final regulatory flexibility  analysis.

In other words, the list itself was the compliance guide.

     

     In  yet  another example, the FCC's Office of Communications

Business Opportunities has created a web page to serve as a  one-

stop  location  for all of the agency's compliance  guides.   The

agency  claims that the site can be especially helpful  to  small

businesses, and that it satisfies the requirements of Section 212

of  SBREFA.  Although the Small Business Compliance Guide list is

of  impressive length, with 285 entries, more than  half  do  not

address  compliance questions at all.  Of  these 285 entries,  31

(or  11 percent) are consumer fact sheets aimed at consumers,  72

(or  25 percent) are news releases aimed at the media, and 43 (or

15  percent)  are  public notices with general information.   The

remaining  49  percent are links to issue pages, site  maps,  FAQ

pages,  and  economic working papers.  Some links are broken  and

lead nowhere.  Few, if any, of the links on this site are devoted

to  small  business  issues.  FCC's assertion that  this  website

somehow  satisfies its Section 212 obligations  comports  neither

with the letter nor the spirit of SBREFA.

     Frankly,  I  find  it embarrassing that government  agencies

must  be forced to publish guides to help small businesses comply

with  their  rules.   But recognizing that  Section  212  is  not

working  as  intended, Advocacy wants to work with  Congress  and

regulatory  agencies to make sure that this problem is  resolved.

If  additional legislation is needed to clarify the  requirements

of  Section  212, then Advocacy would urge that consideration  be

given  to  the need for an oversight role.  An annual  report  to

this  committee  from each agency with respect to its  compliance

guide  efforts might be productive.  Also, further guidance  from

Congress  on  where and when the guides should be  published  and

what  they must include might help alleviate agency confusion  as

to  their  responsibilities.  Section 212 can  hardly  be  called

esoteric.  What is really needed is a good faith effort to do the

right thing.

     

Conclusion

     In conclusion, I would like to refocus our discussion on why

we  have a SBREFA and an RFA, or why for that matter an Office of

Advocacy  - why do we go to all this trouble?  Perhaps  the  best

answer is the simplest - the bedrock importance of small business

to our economy, both at the national and community levels.

      These  are the basic numbers, and though we small  business

advocates on both sides of the dais have heard similar statistics

many  times,  I want to share with you the latest data  we  have.

Small businesses:

O    Represent more than 99 % of all employers;

O    Employ 51% of private sector workers;

O     Comprise nearly all of the self-employed, which are  7%  of

  the workforce;

O    Provide about 75% of net new jobs;

O    Provide 52% of private sector output;

O    Represent 96% of all exporters of goods;

O    Obtain 33.3% of federal prime and subcontract dollars.

     Small  business  is and has historically been  our  Nation's

primary  source  of  innovation, job creation, and  productivity.

It   has  led  us  out  of  recessions  and  economic  downturns,

offsetting  job  contraction by larger firms, and  providing  new

goods   and  services.   It  has  provided  tremendous   economic

empowerment  opportunities for women and minority  entrepreneurs.

It  plays  an  invaluable  role in our defense  industrial  base.

Small employers spend more than $1.5 trillion on their payroll.

  

     All  these  are  good reasons for us to  work  to  ensure  a

healthy  and  competitive small business sector.  Small  business

does  not  want preferential treatment - small business  wants  a

level  playing field.  The cost of regulation is a good  case  in

point.   A  recently released, Advocacy-sponsored study  on  this

subject by W. Mark Crain and Thomas D. Hopkins disclosed that the

cost  of federal regulation to firms with fewer than 20 employees

was  almost $7,000 per employee, more than 50 percent higher than

the  per  employee cost to businesses with 500 or more employees.

This  disproportionate  burden is  a  huge  impediment  to  small

business  realizing its full potential.  Although small  business

has  done  a  remarkable job in coping with this problem,  it  is

tantalizing  to think of what productive and innovative  energies

would be unleashed if we could reduce this burden.

     

     That is why we are in business at Advocacy, and that is  why

the  Congress wrote the Regulatory Flexibility Act and the  Small

Business  Regulatory Enforcement Fairness Act  -  to  help  small

businesses  realize  their  full  potential.   Like   the   small

businesses  we  serve,  we  must be flexible  and  innovative  to

respond  to new challenges as they arise, but we must  also  keep

focused  on our core mission.  I pledge the full cooperation  and

assistance of the Office of Advocacy in your deliberations on how

best to accomplish this.

     

     This  concludes my prepared testimony.  Thank you again  for

inviting  me here today, and I am pleased to answer any questions

you may have.