The Regulatory Flexibility Act at 25: is the law achieving its goal?

AuthorHolman, Keith W.

    The Regulatory Flexibility Act (RFA), (1) which marked its twenty-fifth anniversary in September 2005, was designed to "level the playing field" for small businesses competing against larger, more sophisticated, and more politically powerful businesses. Recognizing the importance of small businesses in the U.S. economy, Congress enacted the RFA in 1980 to ensure that federal agencies consider the needs of small business and other small entities (2) when new regulations are written. At a basic level, the RFA requires federal regulatory agencies to satisfy certain procedural requirements when they plan new regulations, including: (1) identifying the small entities that will be affected, (2) analyzing and understanding the economic impacts that will be imposed on those entities, and (3) considering alternative ways to achieve their regulatory goal while reducing the economic burden on those entities. Although the RFA does not require federal agencies to choose the regulatory approach that is the least burdensome to small entities, the overarching goal of the RFA has always been to shift the culture within federal regulatory agencies towards an appreciation of the value of small entities and to instill within them a desire to act accordingly. As viewed today, after twenty-five years of implementing the RFA, is the law succeeding in this goal?

    Section II of this Article explains why small businesses need the RFA. Section III provides a brief overview of the 1980 RFA, the 1996 amendments to the RFA, and Executive Order 13,272, signed in 2002, which was designed to further internalize the RFA's procedures within federal agencies. Section IV discusses recent successes of the RFA. Section V considers remaining weaknesses in the current RFA. Section VI suggests further targeted legislative improvements to the RFA. The Article concludes that in the wake of Executive Order 13,272, the RFA is succeeding in spurring most federal regulatory agencies to improve their treatment of small entities. While some agencies have not yet fully embraced the RFA and made it part of their agency culture, small entities and the American public have greatly benefited from the law.


    1. Small Businesses Are an Important Part of the U.S. Economy

      Small businesses have long been a critical part of the U.S. economy. Using data from preceding years, the U.S. Small Business Administration reported in 1982 that small businesses employed about half of the American labor force, produced almost half of the nation's goods and services, and, according to one study, generated over eighty percent of new jobs. (3) Small businesses also tended to innovate at a higher rate than medium or large businesses. (4) Twenty-five years later, small businesses are still an important driving force in the American economy. Small businesses comprise 99.7 percent of all employer firms in the U.S., they employ half of all the private sector workers, and have generated sixty percent to eighty percent of the net new jobs annually over the last decade. (5) These small firms pay forty-five percent of the total U.S. private payroll, and create more than half of the non-farm private gross domestic product (GDP). (6) Small firms continue to innovate more than large firms, producing thirteen to fourteen times more patents per employee than larger firms. (7) These small firm patents are more likely to be driven by leading-edge technology than large firm patents are. (8) Moreover, during economic downturns, small businesses often fare better than large businesses; increases in small business employment and self-employment often serve to lead the economy out of recession. (9)

    2. Small Businesses Have Been Inundated By Federal Regulations

      The 1970s witnessed a flood of new federal agencies and ambitious new regulatory programs. New agencies were created with sweeping remedial missions, including the Environmental Protection Agency (EPA), (10) the Occupational Safety and Health Administration (OSHA), (11) and the National Highway Traffic Safety Administration (NHTSA) (12). Agencies were equipped with powerful new statutory authorities such as the Clean Air Act (13), the Clean Water Act, (14) the Endangered Species Act, (15) the Resource Conservation and Recovery Act, (16) the Occupational Safety and Health Act, (17) the Employee Retirement Income Security Act, (18) and many others. By the end of the 1970s, scores of agencies had issued thousands of regulations, and small businesses were complaining about the rapidly growing volume and complexity of regulations. As one observer noted, "it was a regulatory Wild West." (19) Agencies were intent on promulgating rules as quickly as possible to meet statutory deadlines, with little coordination or practical guidance on how to comply with new requirements. Also, agencies often failed to distinguish between small businesses and larger businesses when they developed rules, believing that a "one-size-fits-all" regulatory solution was adequate. Thus, small businesses, which often were not significant contributors to the problem an agency sought to address, were heavily and unnecessarily burdened by new regulatory requirements.

      The tide of rules issued by federal agencies did not ebb after the 1970s. Agencies have continued to issue thousands of new regulations each year. In 2004, for example, agencies promulgated over 4,100 final rules, down slightly from the total in 2003. (20) Every year, the EPA alone lists more than 400 new rules that it plans to issue; EPA listed 416 such rules in 2004. (21) Similarly, the 2004 Federal Register contained 75,676 pages. (22)

    3. Small Businesses Are Disproportionately Impacted by Regulations

      By the early 1980s it became clear that small businesses bear a greater burden in complying with regulations than their larger counterparts. In the first "State of Small Business" report, the U.S. Small Business Administration observed that:

      Most [federal] regulations have stipulated the same compliance requirements for small business as for large corporations. The relative burden is much greater, however, because compliance costs cannot be spread out over larger quantities of output. In short, small business has found itself at a competitive disadvantage because of the existence of efficiencies of scale in regulatory compliance. (23) Subsequent economic research has confirmed that America's smallest firms bear a disproportionately large share of regulatory costs. The most recent study indicates that firms with fewer than twenty employees spend $7,647 per employee each year to comply with federal rules, while companies with 500 or more employees spend $5,282 per employee. (24) This research, which updates similar 1995 and 2001 reports, suggests that small business shoulder a forty-five percent greater regulatory burden per employee than their large business competitors. (25)

    4. Small Businesses Are Often Poorly Represented in the Regulatory Process

      Given the overwhelming number of rules being developed by the federal agencies each year, it can be very difficult for small businesses to understand how they will be affected and how they can have a voice in the rulemaking process. Most small business owners do not regularly read the Federal Register and cannot afford to hire a regulatory attorney to represent them in the rule development process. The key to persuading federal agencies to consider less burdensome regulatory alternatives is to suggest those alternatives early in the rulemaking process. Too often, small businesses only find out about a forthcoming regulation at the end of the rulemaking process, when it is too late to get the agency to consider alternatives. One account of this situation, written in 1964, still happens today:

      Often businessmen come down to Washington when they are almost purple with apoplexy. A particular piece of legislation or an administrative ruling has been either passed or under consideration for weeks, months, or perhaps even a year. When it is about to be finalized--or even after it has been passed--the businessman shows up in Washington for a 'last-ditch effort.' He must necessarily be aggressive and antagonistic, in conflict with a policy or program whose cement has virtually hardened. (26) Unless the concerns of the small business are presented to the regulatory agency early in the rulemaking process, the "cement will harden" and the agency will often not address the concerns. To make matters worse, small entities must vie against larger businesses for the attention of regulators, and their objectives are often in conflict. Large companies with full-time regulatory compliance staffs may actually welcome new rules as a means to disadvantage and perhaps eliminate their small business competitors. While trade associations can be helpful to small businesses, many associations are controlled by large companies, leaving small businesses without a clear voice.


    Faced with the problems discussed above, by the late 1970s small business asked Congress for a new law to "level the playing field" with large businesses. (27) The model for the 1980 Regulatory Flexibility Act was the National Environmental Policy Act of 1969 (NEPA), (28) the landmark environmental statute. NEPA requires federal policymakers to consider the environmental impacts of their actions. (29) Under NEPA, agencies must first decide whether their proposed actions are likely to significantly impact the environment. (30) If there will be no significant impact, the agency can issue a "Finding of No Significant Impact," thus concluding the environmental review. (31) Conversely, if the agency anticipates a significant environmental impact, the agency must prepare an Environmental Impact Statement (EIS)...

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