The Impact of Regulatory Costs on Small Firms

by W. Mark Crain of the Center for Study of Public Choice, George Mason University, and Thomas D.

Hopkins, Dean, College of Business, Rochester Institute of Technology,

under contract SBAHQ-00-R-0027 (2001, 60 pages)

This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of research papers prepared under contracts

issued by the U.S. Small Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do

not necessarily reflect official policies of the SBA or other agencies of the U.S. government. For more information, write to the Office of

Advocacy at 409 Third Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

Purpose

In November 1995, Thomas Hopkins completed

Profiles of Regulatory Costs, the first study for the

Office of Advocacy calculating regulatory costs by

firm size. At that time, regulatory and paperwork

costs were found to be much more onerous on small

firms than larger firms. The purpose of the new

research was to update the study to see what, if any,

changes had occurred, given legal and economic

changes since publication of the first study.

Overall Findings

Small businesses bear a disproportionate share of the

federal regulatory burden. This result is broadly consistent with the 1995 Hopkins report, as well as with

other studies completed during the past two decades

pursuant to the Regulatory Flexibility Act.

Total costs of federal regulations are estimated to

be $843 billion in 2000, of which $497 billion fell

on business and $346 billion fell on consumers or

other governments. For firms employing fewer than

20 employees, the annual regulatory burden is $6,975

per employee—nearly 60 percent more than that

of firms with more than 500 employees, at $4,463

(see table.)

Regulatory developments and new data since the

earlier study clarify and in some cases, amplify the

basic 1995 findings: regulatory costs continue to

increase and to disadvantage small businesses.

The Incidence of Federal Regulations

by Firm Size, All Business Sectors (Dollars)

Type of Cost per Employee for Firms with: 

Regulation <20 Employees 500+ Employees

All Federal

Regulation 6,975 4,463

Environmental 3,328 717

Economic 1,616 2,485

Workplace 829 698

Tax Compliance 1,202 562

Highlights

• Environmental regulations and tax compliance

paperwork are particularly disproportionate in their

effects on small businesses. Such regulations impose

about 40 percent of the total business regulatory burden. Other regulatory burdens—workplace rules and

constraints on pricing and the products firms can sell

or buy (“economic” regulation)—are distributed

more evenly.

• The report details the distribution of regulatory

costs for four major business sectors: manufacturing,

trade (wholesale and retail), services, and other (a

residual comprising all other enterprises). The findings reveal that the disproportionate cost burden on

small firms is particularly stark for the manufacturing sector. In that sector the cost per employee for

small firms is more than double the cost for large
firms. In the trade sector (wholesale and retail businesses) the regulatory cost differential between small

businesses and larger firms is not nearly so large—in

the range of 11 to 18 percent. The disproportionate

regulatory burden on small firms in the other major

sectors falls between these two levels. No attempt is

made to measure benefits in this study since they tend

to be distributed over the entire population, whereas

the costs fall disproportionately on small firms.

• The cost of economic regulations falls most

heavily on large firms in two major sectors (manufacturing and other). The cost of workplace regulations falls most heavily on medium-sized firms,

which most likely reflects the fact that many workplace regulations explicitly exempt small firms.

Scope and Methodology

Crain-Hopkins focused on direct effects from regulation and paperwork burdens falling on businesses

(regulatory benefits are not evaluated).

Figures for the effect of environmental regulations

were based on OMB estimates for the entire economy. For economic regulations, the researchers used

figures from OECD and OMB as a basis. For tax

compliance, they employed a 2000 report from the

Tax Foundation.

Business regulatory costs were allocated into four

industrial sectors: manufacturing, trade (wholesale

and retail), services, and other (a residual comprising

all other enterprises).

The next task involved allocating the costs of regulations into three size categories: firms with fewer than

20 employees (small), those with 20 to 499 employees (medium-sized), and firms with 500 or more employees (large). The specific allocation procedure

differed for each type of regulation. The general methodology used regression analysis to estimate the relationship between costs per employee and firm size.

Comments from Advocacy

“Clearly, conditions have not improved for small

businesses with the regulatory changes since the first

Hopkins study,” said Acting Chief Counsel for

Advocacy Susan Walthall. “The regulatory playing

field is still tilted toward large and medium-sized

businesses, particularly with environmental regulations and in the manufacturing sector. New ways of

regulating need to be developed so that the burdens

are more equally distributed. Otherwise, the entry of

small business into regulated areas will be discouraged, competition will be reduced, and the innovative benefits of small firm entry will be lost.”

Ordering Information

For researchers in this area, the bibliography is outstanding. The complete report is available online at

http://www.sba.gov/advo/research or from:

National Technical Information Service

U.S. Department of Commerce

5285 Port Royal Road

Springfield, VA 22161

(703) 487-4650, (703) 487-4639 (TDD)

www.ntis.gov

Order number: PB2001-107067

Price codes: TBA