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Business and Regulation
Regulatory Reform

Regulation is the “hidden tax” that governments impose on families and private firms. State and local governments clearly have an interest in protecting natural resources, regulating public health and the spread of disease, and facilitating the efficient operation of markets to deliver the high-quality goods and services that consumers demand. But regulatory policy often seems to be made in a vacuum with little examination of how governmental policies themselves might be causing problems. Furthermore, there are few realistic comparisons of the probable costs and benefits of proposed rules. In North Carolina, the legislature has taken a first step toward regulatory reform but still splits significant authority among a number of regulatory agencies, some headed by appointees and others by separately elected officials.

The Cost Of Regulation

As of 2000, the State of North Carolina had about 26,000 rules in place, with the number growing each year. One measurement of regulatory growth is the number of pages of new rules published in the North Carolina Register each year. The annual rate roughly doubled between 1987 and 2003. Furthermore, the number of fulltime positions in North Carolina’s state regulatory agencies has grown by 60 percent over the past two decades. In attempting to ascertain how many rules are currently in place, JLF called every conceivable state agency and learned that no one in state government has any idea how many rules have been foisted on the backs of North Carolina citizens, much less what their total cost will be in the year 2004.

We can reasonably expect state regulatory costs to be significant, given what we know about federal rules. By 2002, federal regulations imposed an estimated $869 billion in compliance costs, or nearly $8,300 per household. While taxes currently consume nearly one-third of the average family’s income — more than food, clothing, and shelter combined — regulation makes the total cost of government even higher. In 2004, the average American had to work full-time until July 7 to pay the costs associated with taxation (which has declined somewhat in recent years) and regulations (which have risen significantly).

Of course, the costs of regulation represent only one side of the ledger. Perhaps these costs are justified if the benefits, similarly quantified, exceed them. But the available evidence suggests otherwise. A recent Harvard study concluded that Americans incur opportunity costs of approximately $31.1 billion and 60,200 premature deaths, or 636,000 years of life lost every year in order to maintain our current inefficient regulatory structure. Job losses from excessive regulation are common, especially in industries such as logging and energy. Business owners cite paperwork and regulatory costs as among the highest barriers to new enterprises. And while these regulations are supposed to protect consumers, workers, and the general public, they often do not provide enough benefits to offset lost jobs and higher prices. In a 2004 survey of 300 North Carolina business leaders, they ranked the regulatory burden as the second-most-important factor reducing the state’s economic competiveness (the tax burden was ranked #1) and about 75 percent said that the cost of most government regulations exceeded their benefits.

The Rules Review Commission

In 1995, the North Carolina General Assembly began to address the state’s role in regulatory overkill by enacting a bill that gives the Rules Review Commission the power to review proposed regulations before they became law. But before the law became effective on December 1, 1995, some 24 state departments and boards filed over 2,250 proposed rule changes to beat the deadline. This breathtaking exhibition of the cavalier attitude state bureaucrats have toward regulatory reform is but one more reason lawmakers should take more extensive action to reform state rulemaking and enforcement agencies.

The average number of state regulations proposed annually by agencies fell after the 1995 reforms, though it has been rising recently. Unfortunately, the commission is no substitute for careful deliberation of proposed regulations by North Carolina’s elected leaders. For example, state lawmakers enacted the so-called “Clean Smokestacks” bill in 2002 to impose strict regulations on coal-fueled power plants. The cost to consumers and taxpayers will be about $200 million annually but the benefits will be limited or nonexistent. Air quality in North Carolina has generally been improving for decades, and most recently the state has seen declining violations of even the tighter federal standards on ground-level ozone. The new regulations will not appreciably affect human health, but they will further inhibit the state’s economic development.

Recommendations

1. Eliminate regulations other than those necessary for promoting public health and safety and combating fraud in markets such as financial services. Where possible, compliance mechanisms other than fines, such as consultations with private firms and educational programs for professionals, should be employed. Sunset all new state rules after two years to allow an assessment of their real-life costs and benefits.
2. Amend the 1995 statutory language strengthening the Rules Review Commission to define legislative intent more clearly and to provide the commission with a staff and budget commensurate with its important and challenging responsibilities.
3. Require cost-benefit analysis for all state and local regulations, and set up a regulatory reform commission in each jurisdiction to put together a regulatory budget that would place a cap on the total regulatory cost a state or locality can impose on its citizens.
4. Consolidate state departments and agencies with similar regulatory missions. For example, banks, savings and loans, credit unions, insurers, stockbrokers, and financial advisors are all part of a developing financial services marketplace, and should be regulated by a single department.

To view higher quality graphs, download Agenda 2004 [560KB Acrobat].