Published
March 07, 2024
This opinion article was published in Newsweek on March 7, 2024.
For more than a decade following the 2008 recession, the number of applications filed to start new businesses each year (around 2-3 million) barely kept up with business exits. But ever since the third quarter of 2020, the U.S. has experienced record high levels of new business applications. A new record was set in 2023 with 5.5 million new business applications and there is deserved optimism over the promise new firms provide for job creation, community building, and innovation—all the "golden eggs" of entrepreneurship.
Unfortunately, there are some who do not trust the organic growth provided through free enterprise and want to shape, through federal regulation, how businesses hire, how they operate, and how enterprises grow through acquisition or diversification.
The attempted federal micromanagement of business is not new. Forty-four years ago, Congress took steps to ensure that federal red tape would not dampen the economic contributions of small business by enacting the Regulatory Flexibility Act (RFA). At the bill signing, former President Jimmy Carter stated that, "Small businesses are vital to the growth and to the future of our country" and that regulations "can impose a disproportionate and unfair burden on small businesses."
The RFA sought to correct that disproportionate burden by encouraging federal agencies to transparently consider the impact of new mandates on small businesses and to minimize negative impacts without compromising the underlying regulatory objectives.
Back in 2017, the U.S. Chamber of Commerce Foundationpegged that compliance with federal regulations cost an annual $1.9 trillion. A recent estimateupdates that number to more than $3 trillion per year, and the cost per employee to comply with federal regulations is three times greater for small firms than for the average manufacturer. That, combined with regulatory costs emanating from the Biden administration described as a "regulatory tsunami,"is a clarion call to update the RFA.
Even though the Office of Advocacy of the U.S. Small Business Administration (SBA) is trying to convince federal regulators to minimize red tape, their efforts seem futile. An examinationby the National Federation of Independent Business (NFIB) revealed that federal regulators were called out by SBA's Office of Advocacy for violating the RFA 28 times last year with no consequences.
Loopholes in the RFA allow regulators to bypass the law's requirements and misrepresent the costs of new mandates because agencies only publish the direct impact on regulated firms, and judges are hamstrung to punish agencies for ignoring small business concerns.
The Basel III Endgame rulemaking issued by the Fed, FDIC, and Office of the Comptroller of the Currency is a recent example of how agencies are exploiting the "only disclose costs on firms directly regulated" loophole. Banking regulators published their perceived impacts on large banks, but deliberately withheld information about how new mandates will make small business loans more expensive, as Natalie Kaddas, a manufacturer in Utah, who chairs the U.S. Chamber of Commerce Small Business Council, explained in a statement for the record.
A recent proposal from the Federal Trade Commission adds new red tape for small businesses looking to sell or scale through mergers (HSR pre-merger reporting requirements). Under the RFA, the agency "certified" without any real analysis that adding red tape and making the filing costs five times more expensive would not harm small businesses. Smaller firms can cry "foul," but there is nothing that allows a judge to force the Federal Trade Commission (FTC) into considering less onerous approaches.
The good news is that a bipartisan group of lawmakers is trying to update the RFA. The Prove It Act (S.1863 and H.R.7198), sponsored by Senator Joni Ernst (R-Iowa) in the Senate and Representatives Brad Finstad (R-Minn.), Nathaniel Moran (R-Texas), and Yadira Caraveo (D-Colo.) in the House, would close the RFA loopholes and provide small business with a meaningful seat at the table where regulatory decisions are made.
The Prove It Act allows small businesses to directly challenge an agency's "certification," forcing regulators to consider less burdensome alternatives. It would bring full transparency to how rules and regulations will impact small businesses.
More than 48 national trade and membership organizations that represent millions of small business owners, along with over 100 local and state chambers of commerce, have signed a letter calling on Congress to update the RFA. Minimizing red tape will enable small businesses to do what they do best: drive innovation, bolster communities, and create jobs. Our elected leaders should celebrate entrepreneurship by signing on to S.1863 and H.R.7198.
About the authors
Thomas M. Sullivan
Thomas M. Sullivan is vice president of small business policy at the U.S. Chamber of Commerce. Working with chambers of commerce and the U.S. Chamber’s nationwide network, Sullivan harnesses the views of small businesses and translates that grassroots power into federal policies that bolster free enterprise and reward entrepreneurship. He runs the U.S.
