The Impact of Regulatory Costs on Small Firms

By W. Mark Crain, 

Lafayette College, Easton, Pennsylvania 

2005. [93]pages, under contract SBHQ-03-M-0522 

This report was developed under a contract with the Small Business Administration, Office of Advocacy, and contains information and 

analysis that was reviewed and edited by officials of the Office of Advocacy. However, the final conclusions of the report do not necessarily 

reflect the views of the Office of Advocacy.

Purpose

This research updates and further delineates the 

disproportionality of the burden imposed by federal 

regulations on small business. Previous research by 

the Office of Advocacy, Hopkins (1995) and Crain 

and Hopkins (2001), has established that regulatory 

and paperwork costs were found to be more onerous 

on small firms than on larger firms.

Overall Findings

In the face of higher costs of federal regulations, the 

research shows that small businesses continue to bear 

a disproportionate share of the federal regulatory burden. The findings are consistent with those in Hopkins 

(1995) and Crain and Hopkins (2001).

The research finds that the cost of federal regulations totals $1.1 trillion; the cost per employee for 

firms with fewer than 20 employees is $7,647.

Highlights

• This report details the distribution of regulatory 

costs for five major sectors of the U.S. economy: 

manufacturing, trade (wholesale and retail), services, 

health care, and other (a residual category containing 

all enterprises not included in the other four). The 

sector-specific findings reveal that the disproportionate cost burden on small firms is particularly stark 

for the manufacturing sector. The compliance cost 

per employee for small manufacturers is at least double the compliance cost for medium-sized and large 

firms. In the service sector, regulatory costs differ 

little from small to larger firms.

• The disproportionality of the burden borne by 

small firms, identified in previous Advocacy studies, is further validated in this instance. On a peremployee basis, it costs about $2,400, or 45 percent, 

more for small firms to comply than their larger 

counterparts. The 2001 study, using a slightly different methodology, concluded that the disproportionality rate was higher—nearly 60 percent.

• Environmental and tax compliance regulations 

appear to be the main cost drivers in determining 

the severity of the disproportionate impact on small 

firms. Compliance with environmental regulations 

costs 364 percent more in small firms than in large 

firms. The cost of tax compliance is 67 percent 

higher in small firms than the cost in large firms. In 

the aggregate estimates for all sectors, the cost per 

employee of economic regulations falls most heavily 

on large firms. The cost per employee of workplace 

regulations falls most heavily on medium-sized firms.

September 2005 No. 264

 Cost per employee for firms with: 

Type of Regulation All Firms <20 employees 20-499 employees 500+ employees 

All Federal Regulations $ 5,633 $ 7,647 $ 5,411 $ 5,282 

Economic $ 2,567 $ 2,127 $ 2,372 $ 2,952 

Workplace $ 922 $ 920 $ 1,051 $ 841 

Environmental $ 1,249 $ 3,296 $ 1,040 $ 710 

Tax Compliance $ 894 $ 1,304 $ 948 $ 780 
Scope and Methodology

The report divides federal regulations into four categories: economic, workplace, environmental, and tax 

compliance. The two main components of economic 

regulation are estimated separately; the estimated 

costs of economic regulations affecting international 

trade are mainly derived from the report issued by 

the U.S. International Trade Commission in 2004. 

The costs of domestic economic regulations, in a significant shift from previous estimates, are first estimated by running a cross-country regression analysis 

based on data from the Organization for Economic 

Cooperation and Development. Secondly, gaps in the 

baseline are filled with Office of Management and 

Budget (OMB) estimates. The costs of workplace 

regulations are based on the updated estimates from 

the study by Joseph Johnson (Office of Advocacy, 

2005). Environmental regulations estimates are 

mainly based on OMB reports. Tax compliance 

costs, finally, are based on the 2002 report from the 

Tax Foundation.

The allocation of costs across employment classes 

was made possible by use of Census data published by 

the Office of Advocacy.

In accordance with the OMB’s and SBA’s peer 

review guidelines, the report has been peer reviewed 

by three academics in this field of study. More 

information on this process can be obtained by 

contacting the Director of Economic Research at 

advocacy@sba.gov or (202) 205-6533.

Ordering Information

The full text of this report and summaries of other 

studies performed under contract with the U.S. Small 

Business Administration’s Office of Advocacy are 

available on the Internet at www.sba.gov/advo/research. 

Copies are available for purchase from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

(800) 553-6847 or (703) 605-6000

TDD: (703) 487-4639

www. ntis.gov

Order number: PB2005-108597

Pricing information:

 Paper copy, A06 ($34.00)

 Microfiche, A01 ($14.00)

 CD-ROM, A00 ($18.95)

 Download, A00 ($ 8.95)

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