compliance responsibilities elsewhere should be resolved in favor of the Office of Advocacy.
That was Congress' intent in the original Act, and that should not change.

Once again, the Coalition extends its sincere thanks to the Committee for taking up
this important subject. More important, your thousands of small business constituents thank
you.

This concludes my testimony. I would be happy to accept any questions at this time.



TTte participants in the Regulatory Flexibility Act Coalition are:

American Small Business Association

American Trucking Associations*

National Assocution for the Self-Employed

National Association of Manufacturers

National Federation of Independent Business*

National S\lux Business United*

National Society of Public Accountants

SvLVLL Business Legislative Council

U.S. Chamber of Commerce

Coalition participants who are offering further testimony at today's hearing.



122




STATEMENT OF

MARK W. ISAKOWITZ
LEGISLATIVE REPRESENTATIVE

NATIONAL FEDERATION OF INDEPENDENT BUSINESS



Before: Committee on Small Business

Subject: The Regulatory Flexibility Act

Date: July 28, 1993



600 Maryland Ave S,W, Suite "00 ■ Washington. DC ZOOii ■ 202 5S^ 9000 • Fax 202 5S4 (H96
The Guardian o/ Small Busineis /or Fiflv Yean



123




REGULATORY FLEXIBILITY ACT: SUMMARY OF TESTIMONY

Before the House Committee on Small Business

July 28, 1993

The fact that policy makers are so focused on job creation at the present time should
breathe new life into the debate about regulatory relief and the Regulatory Flexibility Act
(RFA). Small business produced the majority of the 20 million new jobs created in the 1980s.
From 1988 to 1990, small business created four million new jobs. In the early nineties, the
small business jobs machine slowed down at the same time that the number of regulations went
up. Relieving the costs of regulatory compliance is at the root of new job growth. A strong
and enforceable Regulatory Flexibility Act would be a step in that direction.

In 1992, the NFIB Foundation published an extensive survey entitled. "Problems and
Priorities." In it. problems relating to government regulation and paperwork were the fastest
rising area of concern on the survey. Outside of health care and taxes, no problem concerned
small business owners more. Complying with regulations costs our economy at least $400
billion each year, an annual sum that dwarfs the size of the tax increase currently being
considered by Congress. The hidden tax of complying with a regulation is no less a tax than
any other government levy. And when it comes to businesses, this hidden tax is regressive; it
hits the "little guy" the hardest. This is due to what economists call diseconomies of scale.
When regulations present a fixed cost to all businesses, the smaller company will have a per-
unit, per-employee compliance cost that is far higher than that of a large business. Hence the
need for regulatory flexibility.

The purpose of the Regulatory Flexibility Act is to have agencies analyze proposed
regulations, assess potential impact on small entities and lessen the regulatory burden on small
businesses and government entities whenever possible. The act has succeeded in this goal
sometimes, but has failed often. There are two major loopholes in it.

1. Agency exemptions. The Internal Revenue Service and the Department of Defense
have used provisions of the Administrative Procedures Act. incorrectly, in our view, to exempt
themselves from compliance with Reg Flex. This is despite the fact that when the act was
passed in 1980, the Senate Judiciary Committee's report clearly stated, "The Committee believes
that meaningful regulatory reform must be government wide, enforceable, and coordinated with
the legislative framework for the agencies."

2. Lack of judicial review. Section 611 of the RFA prohibits judicial review of
regulations that are alleged to be in noncompliance with the act. A court challenge cannot be
brought against a rule on the grounds that it does not comply with the Regulatory Flexibility



600 Maryland \\v SW, Suite 700 . Washington. DC 20024 • 202 554 9000 • Fax 202 554«l96
The Guardian of Small Business for Fifty Years



124



Act Couple this with the provision that states that agencies do not have to perform a Reg Flex
analysis if they simply certify that a proposed rule has no significant impact on small entities,
and you have the formula for a law that is almost entirely toothless.

There is legislation to fix the RFA. H.R. 830, sponsored by Congressman Tom Ewing,
would eliminate many of the RFA's weaknesses, breathe life into its strengths and change for
the better the regulatory atmosphere as it affects small business. Its most important attribute is
that it would lift the prohibition on judicial review contained in the RFA. NFIB and the small
business community strongly support this legislation.



125




Natkxtal FcdenHoa of
Indepcodcol BaslncM



STATEMENT OF

MARK W. ISAKOWITZ
LEGISLATIVE REPRESENfTATIVE

NATIONAL FEDERATION OF INDEPENDENT BUSINESS

Before: Committee on Small Business

Subject: The Regulatory Rexibility Act

Date: July 28, 1993

Mr. Chairman, my name is Mark Isakowitz and I am a legislative representative for the
National Federation of Independent Business (NFIB). NFIB is the nation's largest small
business advocacy organization, representing more than 600,000 small business owners
throughout the United States.

1 want to begin by thanking you, Mr. Chairman, for inviting NFIB to testify today. You,
along with Mrs. Meyers and the rest of this committee, deserve to be commended for the
attention and scrutiny you are bringing to the Regulatory Rexibility Act (RFA). NFIB has
actively supported the act since it was first drafted by a Small Business Committee member in
the 1970s, and it is in this context that your efforts today are very much appreciated.



600 Maryland Are SW. Suile 700 • Washingcon. IX 20024 • 202-554-9000 - Fax 202 554-0)96
The Guardian of Small Business far Fifty Years



70-914 - 93 - 5



126



Many an observer of the Washington scene has noted the absence of consensus on a
great number of issues this country faces. But there is growing bipartisan agreement about two
phenomena that are taking place in America's small business sector. Number one, virtually all
job growth in this country comes from small business. And number two, the burden created by
federal regulation falls predominantly and disproportionately on the very people who we rely on
to create these jobs, small business owners.

This hearing can be the beginning of a third element of consensus regarding small firms.
And that is to agree upon a solution that would offer much needed regulatory relief to small
business. Such a solution should move us toward a system in which regulations achieve what
they must, but also acknowledge the special problems that they present to small employers, and
then solve those problems before a rule is issued. To that end, my testimony attempts to
answer three basic questions. First, what impact are regulations currently having on small
business? Second, is the Regulatory Flexibility Act of 1980 a useful tool to address that
impact? And if not, what can be done to make the act more effective?

I will focus primarily on the first question of the impact of regulations on small business
for a very simple reason. It is about jobs.

The answers to the second and third questions, relating to the effectiveness of the RFA
and ways to make it more so, have become all too clear over the years. Looking back, NFIB's
basic views on the RPA were basically the same in the early 1980s as they are today. Our
concerns about the law have been consistent, and the law has not changed.



127



But as we consider this issue today, something has changed. This hearing takes place at
a time when the challenge of job creation is central to every debate that takes place in
Congress. Few would disagree that job creation was the key issue in the 1992 election. More
recently, the issue of job creation has become so vexing that the President proposed an
international jobs summit to examine the problems of unemployment and how to face them.

The reason for this focus can be found in a fast glance at recent economic numbers. In
the fourth quarter of 1992, for example, the economy grew by a robust four percent. But from
November to December of that period, the unemployment rate did not improve. Similarly, in
the first quarter of this year, the gross domestic product did rise, albeit by a single percentage
point. But for three consecutive months early this year, the unemployment rate was stuck at
seven percent. And just last week, jobless claims went up. What accounts for the weak job
growth at a time when the economy is growing? There are numerous factors. One of them is
unquestionably the rising tide of federal regulation. And, as I will explain, this rising tide hits
the economy's proven job creators the hardest.

The fact that policy makers are so focused on job creation at the present time should
breathe new life into the debate about Reg Flex. As this committee knows, small business
produced the majority of the 20 million new jobs created in the 1980s. From 1988 to 1990,
small business created four million new jobs. In the early nineties, the small business jobs
machine slowed down at the same time that the number of regulations went up. Relieving the
costs of regulatory compliance is at the root of new job growth. A strong and enforceable
Regulatory Flexibility Act would be a step in that direction.



128



It is in this context that I address the first question - how is regulation impacting small
business. The evidence is abundant and convincing. It comes to NfFIB from our own research,
but also from individual members who are struggling to comply. Last year, the NFIB
Foundation published an extensive survey entitled, "Problems and Priorities." In it, problems
relating to government regulation and paperwork were the fastest rising area of concern on the
survey. Outside of health care and taxes, no problem concerned small business owners more.

Complying with regulations costs our economy at least $400 billion each year, an annual
sum that dwarfs the size of the tax increase currendy being considered by Congress. The
hidden tax of complying with a regulation is no less a tax than any other government levy.
And when it comes to businesses, this hidden tax is regressive; it hits the "litde guy" the
hardest.

The letters we receive from NFIB members speak louder than the statistics. There is the
small construction company that looked into bidding on a small remodeling project at a post
office in South Dakota. He says he received 34 pages of plans, 400 pages of building specs,
and a 100 page book of bidding instructions. Of these instructions, this small business owner
wrote in a letter to the U.S. Postmaster, "If [your] goal is to discourage prospective bidders, I'm
sure [you have been] successful."

Then there is the small ink manufacturer in Pennsylvania who employs more than 20
people and deals with environmental rules on a regular basis. "A small business like ours," he



129



writes, "does not have the resources to remain both profitable and comply with present and
proposed overburdening regulations." This NFB member goes on to make a point that is at the
core of Regulatory Rexibility Act. He says, "The cost of compliance to a small company like
[mine] is far in excess on percentage of sales than that of larger companies with greater



This comment refers to what economists call diseconomies of scale. When regulations
present a fixed cost to all businesses, the smaller company will have a per-unit, per-employee
compliance cost that is far higher than that of a large business. Simply put, small business is
not equipped to deal with federal regulations. Walk into any small business and look for the
accounting department, or the legal counsel, or the human resources division. As this
committee knows, you will not find them. Hence the need for regulatory flexibility.

This leads directly to the second question: Is the Regulatory Flexibility Act a good tool
to lessen the impact of escalating regulation? The only way to answer: yes and no. The
purpose of the RFA is to have agencies analyze proposed regulations, assess potential impact on
small entities, and lessen the regulatory burden on small businesses and government entities
whenever possible. The act has succeeded in this goal sometimes, but has failed often.

There are several instances in which regulators may not have ever understood the
realities of some small industry if it were not for Reg Flex. There are notable cases in which
the Environmental Protection Agency, the Department of Labor, and other agencies have made
changes to regulations that produce final rules that accomplish their goals while making them



130



more practical in terms of small business compliance. And with Erskine Bowles heading up the
Small Business Administration, we are encouraged by the tone that is being set in terms of
regulatory relief and flexibility.

On the other hand, regrettably, there are all too many instances in which the RFA has
been ignored or has simply been of no consequence, despite the intentions of the law and those
who enforce it. These instances, whether we are talking about OSHA's Hazardous
Communication Standard or the Section 89 fiasco, are all too familiar to this committee. It is in
such failures that the weaknesses in the Reg Flex Act can be found, as well as the remedies that
are needed to fix them.

Agencies have figured out numerous ways to get around Reg Flex. In the end, these
loopholes benefit neither the small business owner nor the agency that seeks compliance with its
rules. There are two major loopholes.

1. Agency exemptions. The Administrative Procedures Act (APA), which governs the
regulatory process, makes certain exemptions from its provisions for interpretive rules
(regulations that do not set policy but merely explains or clarifies it) and national security
functions. The Internal Revenue Service and the Department of Defense have used these
provisions of the APA, incorrectly, in our view, to exempt themselves from compliance with
Reg Flex. This is despite the fact that when the act was passed in 1980, the Senate Judiciary
Committee's report clearly stated, "The Committee believes that meaningful regulatory reform
must be government wide, enforceable, and coordinated with the legislative framework for the



131



agencies.

Nevertheless, the IRS, the one government agency that affects every small business
across this land, does not perform a single regulatory flexibility analysis. This absence of a
small business focus and sensitivity is evident in the service industry noncompliance initiative
(SINC), which is supported by the IRS and included in the House reconciliation bill. The SINC
initiative would be a vast expansion of IRS form 1099 reporting, relating to payments made by
businesses to service vendors. This provision, which is seen by some as a simple tax
compliance measure, will be, as The New York Times dubbed it, a "paperwork nightmare" for
small business. This is a perfect example of where IRS proposals and potential enforcement
cries out for Reg Flex analysis. At the Pentagon, small contractors must live with numerous
procurement regulations that do not consider their impact on small entities.

2. Lack of judicial review. Section 611 of the RFA prohibits judicial review of
regulations that are alleged to be in noncompliance with the act. A court challenge cannot be
brought against a rule on the grounds that it does not comply with the Regulatory Flexibility
Act Couple this with the provision that states that agencies do not have to perform a Reg Flex
analysis if they certify that a proposed rule has no significant impact on small entities, and you
have the formula for a law that is almost entirely toothless.

Agencies hide behind the no-small-business-impact certification to avoid compliance
with the RFA. As was the case in Lehigh Vallev Farms v. Block , an agency can incorrecUy
certify that a rule has no significant small business impact, and nothing can be done about it. It



132



is simply not judicially reviewable. As President Clinton wrote in April, "Experience with the
RFA suggests that improvements may be needed in [RFA's] implementation, particularly in
agency compliance with the requirement to perform adequate regulatory flexibility analysis."

These loopholes and the ways in which they have limited the effectiveness of the
Regulatory Rexibility Act are the bad news. The good news is that there is legislation to fix
the act H.R. 830, sponsored by Congressman Tom Ewing, would eliminate many of the RFA's
weaknesses, breathe life into its strengths and change for the better the regulatory atmosphere as
it affects small business. NFIB and the small business community strongly support this
legislation.

H.R. 830 would get rid of the prohibition of judicial review by striking that section from
the law. While this is the single most important step the bill takes, it also makes other
improvements in the law that NFIB supports. It would require that agencies consider not only
the direct effects of a regulation, but the indirect effects as well. It would force the agencies to
work more closely and in greater coordination with SBA's Chief Counsel for Advocacy, who is
responsible for enforcing the RFA. Finally, Congressman Ewing's legislation would reaffirm
the Chief Counsel's authority to file amicus briefs in cases that involve the review of federal
regulations.

On behalf of the more than 600,000 small business owners of NFIB, I urge this
committee to do all it can to make H.R. 830 the law of the land. It is not regulatory relief for
its own sake. If enacted, it would be a step in the right direction on the policy issue that



133



dominates our times: the creation of jobs. While strengthening the Regulatory Flexibility Act is
not all we need to do to give small business a boost, it is certainly a significant ingredient in
the effort to create a climate in which jobs can grow and entrepreneurs can thrive.

Thank you, Mr. Chairman.



134



-^Q^NATIONAL



DID



ROOFING

CONTRACTORS

ASSOCIATION



O'Hare International Center

10255 W Higgins Road

Suite 600

Rosemont, IL 60018-5607

708/299-9070

FAX: 708/299-1183



STATEMENT BY

FRANK E. LAWSON JR.

OF THE

NATIONAL ROOFING CONTRACTORS ASSOCIATION (NRCA)

BEFORE THE

COMMITTEE ON SMALL BUSINESS

U.S. HOUSE OF REPRESENTATIVES

• CONCERNING THE
REGULATORY FLEXIBILITY ACT



JULY 28, 1993



135



Mr. Chairman and Members of the Committee, my name is Frank Lawson
Jr. and I am the owner of The Lawson Roofing Company Inc., in San
Francisco, California. Lawson Roofing is a medium-sized, family-
owned business, established in 1907 by my grandfather. I am
testifying today on behalf of the National Roofing Contractors
Association (NRCA) and am NRCA President through June 1994.

NRCA is an association of roofing, roof deck and waterproofing
contractors. Founded in 1886, it is one of the oldest associations
in the construction industry and has over 3,300 members represented
in all 50 states. Every one of those members is a small, privately
held company; our average member, in fact, employs 3 5 people and
has annual sales of just over $3 million per year.

I appreciate the opportunity to comment on the Regulatory
Flexibility Act. I became familiar with the law when The Wall
Street Journal ran a guest editorial, "So You Want To Get Your Roof
Fixed," by one of my predecessors at NRCA. The editorial shows
the web of regulations for something as simple as fixing the roof
on a neighbor's garage, and I have included it with my statement.

The editorial was read twice into the Congressional Record; read in
its entirety on radio programs in two major markets; sent to every
member of the House of Representatives by another member; and sent
to most federal agencies by the former ranking member of your



136



committee. Due to this and other NRCA efforts to curb over-
regulation, we feel well qualified to address regulatory issues as
they relate to small business.

I am also testifying today on behalf of the Associated Specialty
Contractors (ASC) , to which NRCA belongs. ASC is an organization
of eight national associations of construction specialty
contractors, representing industries employing over 2 million
workers. *

Legislation

As you know, the Regulatory Flexibility Act (RFA) of 1980, or "Reg
Flex," as it is generally called, was passed to make federal
agencies consider the cost impact their regulations would have on

small business before they go into effect and to minimize that

J
impact wherever possible.

When a federal agency proposes a regulation, under the law it must

publish an analysis of the regulation's economic impact on small

business and solicit public input. However, there was no

enforcement mechanism included in the 1980 law. As passed, |

judicial enforcement of the law was specifically prohibited. As a

1
result, agencies can and do disregard its provisions with impunity.

If an agency head simply certifies that a regulation will have no



137



significant impact on small business, the agency may ignore the
provisions of Reg Flex. Agencies have used this loophole to avoid
the intent of the RFA.

The law also requires a review of regulations ten years after they
have been put in place to ensure that no significant cost impact on
small business has occurred. Again, there is no enforcement
mechanism.

NRCA applauds the Small Business Committee's decision to hold a
hearing on this timely issue. Controlling over-regulation is an
essential element in the formula for sustained economic growth.
The 1980 law was an important first step, but as my testimony will
show, it has not fulfilled the true potential envisioned by its
framers.

Agency Estimates vs. Real Costs

When OSHA issued its Hazard Communication Standard (HazCom) in
1987, it concluded that the average first-year cost to an employer
in my Standard Industrial Classification (SIC) would be $169, with
an additional first-year cost of $32 per employee. OSHA further
concluded that my second-year compliance costs would be $14, plus
$3 per employee.



138

Under HazCom, I am required to train any of my employees who might I
potentially handle hazardous materials; I am required to maintain
on every job site a notebook full of Material Safety Data Sheets
(MSDS) that are supplied by manufacturers; I am required to have a J
written training program in place with a copy at every job site;
and I am required to insure that hazardous materials are properly
labeled.

HazCom describes in broad strokes the desired end result of the
law, but does not give you the nuts and bolts of how to achieve
compliance. Consequently, there has been an avalanche of MSDSs. ■
Here are some examples of the thousands of MSDSs I must review in I
order to determine which ones to take to every job site. These
examples are included with my statement.

I have an MSDS for chalk — in fact I have one for each of several
colors of chalk; it seems that if you come in contact with chalk
you should wash the contaminated skin with soap and water. I have
one on oxygen; if you breathe it for too long you can get dizzy,
and must again get some fresh air. I have one on Joy dishwashing
detergent. The committee may be interested to know that prolonged
contact with concentrated Joy dishwashing detergent may be drying
or transiently irritating to the skin. If you spill Joy
dishwashing detergent on your clothes, the MSDS instructs you to
change your clothes. If splashing of Joy dishwashing detergent is
deemed likely, you are instructed to wear chemical goggles. I

4



139



Under the standard, I must decide which of these materials are
hazardous, and then I must train my employees about their hazards.
I presently pay my roofing mechanics $28.89 per hour, in wages and
fringe benefits. According to OSHA's calculations, I will be able
to meet the second-year training requirements by training each of
my employees for exactly six minutes and 14 seconds. This would be
funny if it weren't so preposterous. Here is what OSHA said when
it developed the Hazard Communication Standard: "Simply put,
economic feasibility is established by evidence that the standard
will not threaten the regulated industry's 'long-term
profitability.'" Perhaps OSHA thinks that I'll just be able to