Biz Study: Big Burdens, But Unclear Assumptions

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A long awaited study of the costs to small businesses from state regulations is finally out, and on first blush seems to reinforce the argument that state lawmakers should scale back their meddling ways.

But the study appears thin on an actual roadmap forward for policymakers, and may not help untangle the complicated issue of which regulations are superfluous, and which ones... even if costly... serve a worthy purpose.

The document, wonkishly titled Cost of State Regulations on California Small Business Study, was quietly made public late yesterday. You can read it here.

Its unceremonious release, while a tangent to this story, is nonetheless intriguing. The study was commissioned by a 2006 bill, AB 2330 by Assemblymember Juan Arambula (I-Fresno). The bill set aside $85,000 for completion of the study, and set a deadline for its submission to Governor Schwarzenegger and legislative leaders of no later than October 1, 2007. But that deadline has long since passed. In fact, the California chapter of the National Federation of Independent Business became so tired of waiting that it filed a formal public records act request with the Schwarzenegger administration almost two weeks ago for the report. The cover page of the report says it was completed "September 2009."

So why the delay? The governor's press secretary, Aaron McLear, said this afternoon that the administration spent a lot of time "verifying the information" contained in the report before releasing it.

Now, back to the actual report. The summary says it all, at least in the eyes of the business community:

The study finds that the total cost of [business]regulation to the State of California is $492.994 billion which is almost five times the State's general fund budget, and almost a third of the State's gross product. The cost of regulation results in an employment loss of 3.8 million jobs which is a tenth of the State's population. Since small business constitute 99.2% of all employer businesses in California, and all of non-employer business, the regulatory cost is borne almost completely by small business. The total cost of regulation was $134,122.48 per small business in California in 2007, labor income not created or lost was $4,359.55 per small business, indirect business taxes not generated or lost were $57,260.15 per small business, and finally roughly one job lost per small business.

In other words: California politicians, you're killing business. You're going to hear that version of the message a lot in the coming days and weeks, especially once the long-awaited tax reform proposals of a blue ribbon commission are released by week's end.

The study lists the authors as Sanjay Varshney and Dennis Tootelian, both faculty members at California State University, Sacramento. The two men also wrote a study analyzing the possible economic impacts of California's landmark global warming bill, AB 32, that sparked considerable debate. Varshney promised to return my call today, but hasn't done so yet. Look for his insight, hopefully tomorrow, as an update to this posting.

So how do the authors reach their conclusions? The 33 page report (85 pages if you include the charts) relies heavily on Forbes Magazine and its annual report of the best -- and worst -- states in which to do business. The 2008 report ranks California #40 in the nation, and that's the relative placement the authors used for their calculations.

"Forbes data is reliable," says the study, "in that it uses credible sources of secondary data that are well recognized and respected as credible independent research in the business world."

Perhaps, but Forbes' proprietary methodology isn't entirely transparent. Its website does note the sources for its rankings: data from both the federal government and nonprofits like the Tax Foundation and the conservative-leaning Pacific Research Institute.

The CSUS academics have taken the Forbes rankings and applied a very complicated mathematical formula that assumes numeric values for the following: Business Cost, Economic Climate, Growth Prospects, Labor, Quality of Life, and Regulatory Environment. How are the numeric values assigned? I have no idea... and I've read the report three times. The result of those calculations, it says, is that even Forbes' #1 state for business friendliness, Virginia, comes out with a regulatory climate that's a net loss to the state of $4.4 billion. Because California is #40 on the Forbes list... the study's authors multiply $4.4 billion by 40 and come up with a $176.97 billion downside for business regulation California.

And that's only the direct cost of regulations, says the study. It goes on to use other formulas to calculate the potential loss of jobs, the impact on the state budget, even the cost per household in California. But again, all calculations are based on the above process... and, at the core of it all, the Forbes rankings.

Those rankings include a purported measurement of "the cost of regulation to small business." But which regulations are being included? This may be the biggest unanswered question in the California study. There's no explanation of which regulations produce more costs, and which ones produce fewer costs. Without such information, the study offers little in the way of guidance for state lawmakers in making California more business friendly. Getting rid of all regulations is both impractical and a political non-starter. Highlighting specific regs, or even categories of regulations, though, might have made for a useful starting point in policy debates.

It's also worth noting that this California study doesn't detail the differing impacts on small businesses versus big businesses, unlike a national study from 2005.

Business groups already seem to be pronouncing the report to be the long awaited smoking gun. The NFIB has scheduled a Capitol news conference for Thursday morning to discuss the study. Others are already weighing in. "This report reveals one of the major impediments to protecting and growing the economy," writes Gino DiCaro on the blog of the California Manufacturers & Technology Association. DiCaro adds: "The research... concluded that on average, each small business spent $134 thousand on regulations in 2007."

Well, not exactly. The authors took their global calculation... almost $493 billion... and simply divided it by estimates of the number of businesses in the state, thus arriving at the $134,000 per business. That may not mean that an average small business would have earned that much more cash had all regulations been erased. It also may not mean the state's economy would have seen a comparable infusion of cash. And even so, the discussion ignores a key question: should all regulations be erased... or just some?

Inside the halls of politics, the report is emboldening legislative Republicans. Case in point: this morning, Assemblymember Dan Logue (R-Chico) issued a statement saying that he was still reviewing the report. This afternoon, he penned an op-ed on the study with the following title: "California Businesses Waterboarded by Governmental Overregulation."

The governor's office is only saying that report might help influence future policy. And that might be true. But for now, while its conclusions are shocking, its rationale for making those conclusions isn't quite clear.

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About John Myers

John Myers is senior editor of KQED's new California Politics & Government Desk. He has covered California politics for most of the past two decades, serving previously as Sacramento bureau chief for KQED News and most recently as political editor for KXTV News10 (ABC) in Sacramento. In 2014, he was named one of the nation's top statehouse reporters by The Washington Post. Follow him on Twitter @johnmyers.

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