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State regulations cost $493 billion, 3.8 million jobs


By Jan Norman, Orange County Register , September 26, 2009


The total cost of state regulations on businesses is $493 billion and 3.8 million jobs according to the first-of-its kind study. The entire document is available at:

That’s an average of $134,122 per California business, $13,801 per household and $4,685 per resident each year.

The California report is significant, according to the Governor’s Office of Small Business Advocate, because small businesses are 98 percent of the state’s enterprises and provide 52 percent of the jobs.

The study parallels a 2005 federal report on business regulations commissioned by the Office of Advocacy within the U.S. Small Business Administration. That report concluded that federal regulations cost $7,647 per employee for businesses with fewer than 20 employees.

This state report is based on data used by Forbes magazine’s annual ranking of state for business friendliness. It does not single out specific regulations that drive up costs.

Among the California conclusions:

  • The direct cost of the regulatory environment in California is $176.966 billion in lost gross state output each year. The direct cost does not account for second order costs.
  • The total loss of gross state output for California each year due to direct, indirect, and induced impact of the regulatory cost is $492.994 billion.
  • In terms of employment this total output loss is equivalent to the loss of 3.8 million jobs for the state each year. A loss of 3.8 million jobs represents 10% of the total population of California. In terms of labor income, the total loss to the state from the regulatory cost is $210.471 billion. Finally the indirect business taxes that would have been generated due to the output lost arising from the regulatory cost is $16.024 billion.
  • The total regulatory cost of $492.994 billion is four to four and a half times the total budget for the state of California, and almost five to six times the general fund alone. Further, given the total gross state output of $1.6 trillion for California in 2007, the lost output from regulatory costs is almost a third of the gross state output.
  • The indirect business taxes lost could have helped fund many of the state’s departmental budgets. As an example, the indirect business taxes lost are 60 times the budget of the Office of Emergency Services, and would have paid for almost half the budget of the Department of Education.
  • The total cost of regulation was $134,122.48 per small business in California in 2007, labor income not created or lost was $57,260.15 per small business, indirect business taxes not generated or lost were $4,359.55 per small business, and finally roughly one job lost per small business.
  • The total regulatory cost of $492.994 billion translates into a total cost per household of $38,446.76 per household, or $13,052.05 per resident. The total cost per household comes close to the median household income for California.

The study was done by Sanjay Varshney, dean of business administration, and Dennis Tootelian, director of the Center for Small Business at California State University , Sacramento .

“This study sheds light on the realities of regulations on small business in California ,” said Marty Keller, the governor’s small business advocate.

The California office of the National Federation of Independent Business was more blunt. “This study validates what NFIB and small business has been saying all along, that small businesses face insurmountable costs and disincentives to grow in our state when it comes to regulations,” said state Executive Director John Kabateck. “We understand that some regulation is needed to have a fair and balanced market, but there needs to be a reality check…

“ California needs a functioning system of evaluating the cost of regulations before they go into effect, and the Legislature would be well served to analyze the compliance cost of proposed laws before they mandate businesses to comply.”

Gino DiCaro of the California Manufacturers & Technology Association, added, “Over the past few years of California’s manufacturing and economic decline, the state’s regulatory environment has been pinpointed as a primary reason for the high costs and unpredictability that makes the state an uncompetitive place to do business - small or large. One producer of construction aggregates in the state, Vulcan Materials, testified in an Assembly Jobs Committee hearing in June that it ‘is not uncommon for the permitting process to involve millions of dollars and in some cases to take as long as 10 years to secure the necessary permits, many of which address duplicative regulatory aspects.’”