Regulations Impact Small Business and the Heart of America's Economy

March 14, 2017

Takeaways

A new report reveals the impact that regulations have on small businesses in America.

Small businesses are the heart of America’s economy. They are on the front lines of commerce, driving economic growth and dynamism while boosting job creation and innovation. Small businesses are also among the first in the economy to feel the effects of slow growth or bad public policy. For that reason, we must find the obstacles in the way of entrepreneurs, starting with regulation.

Over the past year, the U.S. Chamber of Commerce Foundation has conducted a comprehensive literature review in order to understand the full impact of federal, state, and local regulations on small businesses. We complemented this effort by speaking with small business owners and regulatory experts as well as some 64 chamber officials across the country.

The study concludes that onerous government regulations have a disproportionate impact on entrepreneurship and free enterprise in America. We find four key takeaways:

  • Small business is America’s business.
  • Federal regulations hurt small business.
  • State and local regulations are a growing burden in need of research.
  • Advocates can defend small businesses.

 

Small Business is America’s Business

More than 45% of U.S. gross domestic product is driven by the small business sector. About 98% of the country’s businesses have fewer than 100 employees. Nearly half of workers in the American private sector are employed by small enterprises. Historically, small businesses have been responsible for two-thirds of all net new jobs. This ubiquity makes small businesses a key piece of the American economy, playing a critical role in its success and growth.

Each year, more than half a million new business establishments are launched, creating more than 2.5 million jobs. America is home to another 23 million non-employer businesses, which, according to the Census Bureau, run “the gamut from old-fashioned family-run corner stores to home-based bloggers.”

 

Federal Regulations Hurt Small Business

Despite the prevalence of small businesses, the Chamber Foundation’s review of the literature finds that federal regulations and their infrastructure are growing and have a disproportionate impact on small business and free enterprise in America. Federal regulations alone are estimated to cost the American economy as much as $1.9 trillion a year in direct costs, lost productivity, and higher prices. The costs to smaller businesses with 50 employees or fewer are nearly 20% higher than the average for all firms.

The rising burdens of federal regulations come amid a falling pace in new business formation. In 1980, Americans were creating some 450,000 new companies. In 2013, they formed 400,000 new firms, despite a 40% increase in population. Our three-decade slump in firm formation fell to its lowest point with the onset of the Great Recession; even with more businesses being born today, America’s startup activity remains below pre-recession levels.

 

State and Local Regulations are a Growing Burden in Need of Research

Beyond the federal level, small businesses have to deal with a maze of red tape from state and local governments to start a business, apply for a business or occupational license, hire employees, pay taxes, enforce contracts, and even close a business. Regulatory complexity is death by a thousand cuts to America’s small businesses.

This problem is compounded by the estimated 90,106 state and local governments in the United States (as of 2012), each with their own varied authority to promulgate rules and regulations. Their rules and complexity continue to harm to America’s small business.

As part of the Chamber Foundation’s research, we surveyed chamber officials in states across America. These local chamber of commerce leaders—many of whom work on Main Street—agreed that regulations are stifling business. Indeed, some would not recommend small businesses locate in their region due to its business environment.

 

Advocates Can Defend Small Businesses
 

With access to better research and data, reformers and small business advocates will have a better picture of the challenges faced by small businesses across the nation. These findings inform the political and economic debate around improving America's regulatory environment at all levels of government.
 
At the Chamber Foundation, we educate the public on the conditions necessary for business and communities to thrive. That includes studying the degree to which onerous regulations are a stumbling block to economic growth and sharing those findings widely. Understanding America's small business regulatory environment is necessary to strengthening our country's long-term competitiveness. 

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