Costs Associated with Regulatory Risks
A significant portion of an organization’s enterprise risk management efforts in both time and dollars may be spent on compliance and regulatory risks. While regulatory risks are often thought of in terms of financial reporting risks, there are many other regulations with which organizations must comply. Compliance with federal regulations costs companies hundreds of billions of dollars annually. The cost of these regulations is important not only to companies, but also to consumers as many of these regulatory compliance costs may be passed down to them. Part of the reason for the immense costs of federal regulations is that regulations provide a means of funding government programs without using tax dollars, but instead providing funding through compliance costs. This is essentially a form of off-budget taxation that minimizes public scrutiny.
There are some comparative numbers that put the size of these regulatory costs in perspective. A rough estimate of federal regulatory costs in 2007 is $1.157 trillion, divided amongst economic, environmental, tax compliance, and workplace costs. These regulatory costs are equivalent to 42% of the $2.731 trillion in federal spending in 2007, approaching half the size of budgeted government. Regulatory costs in 2007 were approximately equivalent to individual income taxes, exceeded the $342 billion in corporate income taxes by more than threefold, and approached 2005 pretax corporate profits of $1.32 trillion. Furthermore, regulatory costs were equivalent to approximately 8.5% of the $13.67 trillion gross domestic product for 2007. In addition to these off-budget compliance costs, there are on-budget amounts spent by federal agencies to produce and enforce these regulations. In 2007, federal departments and agencies spent $37.9 billion writing and enforcing social and environmental regulations and $6.6 billion administering economic regulation.
Part of the reason for the immense cost burden of federal regulations is attributable to their sheer number. The number of regulations is indicated by the size of the Federal Register, which is the daily record of all proposed and final federal rules and regulations. The Federal Register has annually averaged over 22,000 pages devoted solely to final rules in recent years, suggesting a significant quantity of final rules and their associated costs. In each recent year, there have been approximately 4,000 final rules, with a total of over 51,000 final rules issued from 1995 to 2007. Each December “The Regulatory Plan and the Unified Agenda of Federal Regulatory and Deregulatory Actions” appears in the Federal Register detailing recently completed rules as well as those anticipated in the next year. The 2007 Agenda included 3,882 regulations somewhere in the process from the pre-rule to the just-completed stages.
“Economically significant” rules are those anticipated to have yearly impacts of at least $100 million each. The 2007 Agenda shows 159 new economically significant rules under consideration, which indicates an additional annual cost burden of at least $15.9 billion. This represents a 14% increase in the number of economically significant rules from the previous year. The Congressional Review Act (CRA) of 1996 requires agencies to submit reports to Congress on their major rules, which are typically these economically significant rules. The CRA also gives Congress the opportunity to review and reject these major rules by passing a resolution of disapproval, but only one rule has been rejected. Of the major rules issued since 2001, 74 have increased regulatory burdens while only 23 have been deregulatory, reducing burdens. One benefit of the CRA is that these rules are more easily accessible, as they are maintained in a Government Accountability Office database.
While regulatory costs are important to businesses of all sizes, the impact of these costs on small businesses can be even more significant. In 2004, businesses with less than twenty employees had per-employee compliance costs that were 40% greater than those for larger firms. This is after the Regulatory Flexibility Act of 1980 requiring federal agencies to assess the effects of their rules on small businesses. The number of rules affecting small businesses has dropped 12% from 2003 to 2007, but 19.5% of the rules on the 2007 Agenda still impact small businesses.
The significant impact of these regulatory compliance costs and their overall lack of visibility suggest a need for increased disclosure, transparency, and accountability related to federal regulations. Because federal regulations are not subject to any authoritative regulatory accounting, estimates of net benefits or costs are difficult to estimate reliably. Official summarization and public disclosure of regulatory data would help by creating pressures for better data. Another helpful step would be for Congress to require, or the Office of Management and Budget to initiate, publication of a summary of these data to increase the transparency of these “hidden taxes”. Another way to improve disclosure would be to redefine the term economically significant and perhaps classify rules into more finely tiered categories.
The importance of increased disclosure of federal regulations is evident as in 2007 regulatory agencies issued 3,595 final rules whereas Congress passed the President signed into law 188 bills. Therefore, the bulk of lawmaking is being done by the unelected who do not answer to voters. Furthermore, there is currently incentive for Congress to encourage issuing new regulations instead of increasing government spending in order to avoid budget deficits. A good way to promote accountable regulation and control the off-budget regulatory state would be to make Congress directly answerable to voters for the costs agencies impose on the public, possibly by requiring Congress to vote on agencies’ final rules before they become binding.
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Source: Clyde Wayne Crews Jr., “Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State,” Competitive Enterprise Institute Report, 2008.