Recently Small Business Trends published an analysis and discussion (“The Small Business Tax: Government Regulations”) of an infographic created by ChamberofCommerce.com. That infographic illustrates something I have been saying for some time now - government regulations are an increasingly onerous burden on small businesses. Anita Campbell of Small Business Trends compares these regulations to a tax on small companies, using the Google definition of a tax as “A compulsory contribution to state revenue, levied by the government on workers’ income and business profits or added to the cost of some goods, services, and transactions.”
Infographic designed by Chamber of Commerce
Well, let’s look at that more closely before we delve into the infographic itself.
While most regulations do not involve direct “contribution” to the government as taxes do, they are actually worse than taxes. This is because regulation costs are imposed whether a company makes a profit or not. They also are generally a “fixed” cost, and not in any way tied to the size of a company. This means that the actual costs are the same whether a business has 10 employees or 1000. With a tax, generally the larger and more successful you are the more you end up paying (creative bookkeeping aside), but also the more able you are to actually handle the requirements of paying that tax.
From the end of 2008 to the end of 2011 the number of federal rules that affect small businesses rose from 753 to 822.
As Campbell points out, when these regulation costs disproportionately impact small businesses, it is the same as imposing an additional tax on them. She points to comments by Professor Scott Shane, the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University and a frequent contributor to Bloomberg Businessweek, that there are four ways that these regulations hit small businesses:
- Small businesses have less revenue to spread regulatory costs over, compared to larger businesses
- Increased government regulations make small businesses less competitive against foreign businesses, which can increase “offshoring” of American jobs.
- Government regulations add uncertainty to the other costs of doing business (Obamacare, anyone?). When businesses are uncertain of how things will go, they do not spend money unless they absolutely have to. Look at all of the trillions of dollars large corporations are holding on to until they see what current regulations will do.
- Finally, there are the laws of complexity and unintended consequences. How many times have we seen a supposedly “well-intentioned” regulation cause nightmares for businesses and individuals? How many times, for example, have we heard of landowners being fined for harming “wetlands” simply because some accident caused flooding on their property and they attempted to fix the problem? Too many
So now let’s take a closer look at that infographic. The first thing you notice is that by a large margin (7%), small business owners put “Complying with government regulations” at the top of the list of challenges in a recent Gallup poll, at 22%. In a similar NFIB poll that number was 20%, so the Gallup data seem to be right on track. In an article in Businessweek, Professor Shane points out that this is an increase from 8% in December, 2008, just before President Obama took office.
Professor Shane also shows how the “red-tape fighter” Obama has done in cutting regulations (“Obama Shouldn’t Embellish His Small Business Record”). From the end of 2008 to the end of 2011 the number of federal rules that affect small businesses rose from 753 to 822. (Maybe this is government math, where a budget cut means going from a budget of $1 trillion to $1.3 trillion in stead of $1.5 trillion.)
How about the actual dollars involved? According to the infographic, the regulatory burden on all businesses from fees is $1.752 trillion (with a ‘T’). The annual direct burden is $970 billion, which breaks down to an average of $161,000 per company or $8000 per employee. That is on top of other fixed costs that businesses incur. Because these are all fixed costs, it becomes an even greater burden on small companies. According to the research done, it costs small businesses (fewer than 20 employees) $10,587 per employee, compared to $7,755 per employee for the larger companies (over 500 employees).
So what is the answer? Clearly a start would be to begin cutting away some of the layers of regulation that all businesses have to deal with. Unfortunately, we have seen that government tends to do just the opposite. But until we can actually begin to make some inroads on the over-regulatory environment, we are going to continue to see small businesses lose ground.
Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,500 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com, on LinkedIn, or at 888-666-9722.