The Costs of Federal Regulations on Small Businesses

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Have you ever wondered how much money your HVACR small business spends to comply with the myriad of federal government regulations that come out of Washington?

You might think the biggest chunk comes from what you pay your payroll personnel, accountants, and financial advisors just to make sure the IRS doesn’t come knocking at your door. But the truth is that amount doesn’t compare with the compliance costs for all the economic, environmental, or health and safety rules.

A fascinating recent report by the National Association of Manufacturers (NAM) found that federal regulations cost the U.S. economy $2.028 trillion in 2012 (in 2014 dollars), an amount equal to 12 percent of GDP.

What may be surprising to many HVACR contractors, the report indicates that the costs of complying with all these regulations fall disproportionately on small businesses.

According to The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business, the typical small business pays $1,518 per employee each year just to comply with the federal tax code. But that same small business will pay more than $5,662 per employee a year to comply with economic regulations, and $3,574 per employee per year to comply with environmental regulations.

Overall, federal regulations cost employers of all sizes $9,991 per employee annually. But the per-employee cost for smaller firms (those with less than 50 employees), is nearly 20% higher, at $11,724 a year.

When you go into business, you may not realize there’s a silent partner with you, siphoning off your capital and limiting your potential.
Between 2004-2013, federal agencies published more than 37,000 new rules, including 569 that the government’s own analysis determined would have an economic impact of more than $100 million within a year, or would result in a major increase in costs or prices for consumers, individual industries, or would result in adverse effects on competition, employment, investment, productivity, or innovation. But the number of “major” rules barely scratches the surface. The government isn’t always required to perform an economic analysis to justify the imposition of new rules and this type of impact is only assessed 1% of the time.

One of the more incredible findings in the NAM report is the scarcity of data measuring and compiling the costs of federal regulations. There is no central accounting of the total costs of federal regulations. The Office of Management and Budget (OMB) and the Small Business Administration’s Office of Advocacy are required to report to Congress annually on the cost of regulations to the economy, but their reviews are limited in scope. That’s why this report is so important – it’s the first time anyone conducted a comprehensive review of the impact of federal rules and tabulated the cost to small businesses.

Regulations often impose “paperwork” costs when they require an entity to maintain records, submit information, or use software and man hours devoted to record keeping and the completing and filing of various government forms. The OMB estimates the time needed for non-tax code compliance in 2011 at 9.14 billion hours in paperwork.

There are measures in place to make sure some agencies account for the potential impacts of new rules. The Regulatory Flexibility Act requires federal agencies to consider “non-regulatory” alternatives to new rules and regulations if they impact small businesses. And in cases when the U.S. EPA and Occupational Health and Safety Organization propose new rules, the agencies may have to convene a special panel of small business stakeholders for their input. But even these extra steps designed to protect small businesses aren’t enough to stem the tide.

For years, the contractors of HVACR industry flew under the regulatory radar. But in the past five years, the number and scope of proposed rules pointed directly at the HVACR industry and its contractors has increased at an alarming rate. In the last three years, the Department of Energy has issued 41 rules regulating the HVACR and water heating industry. In the coming months HVACR contractors can expect to see several significant proposed rules from the U.S. EPA, the Department of Energy, and the Department of Labor.

There’s a storm brewing in Washington over the rulemaking process. Lame duck presidents always take advantage of their last two years to issue controversial rules to solidify their legacy. Republicans in Congress are likely to pass legislation to modernize the rulemaking process to make it more transparent and accountable. That’s why it so imperative that HVACR contractors pay attention to what’s going on so that together as an association we defend the interests of this unique industry at this crucial time.

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Posted In: ACCA Now, Government