Beefing Up Reg Flex

Thomas Sullivan, the chief counsel for SBA’s Office of Advocacy testified on December 6 before the U.S. House of Representatives Committee on Small Business. The topic was “Legislation to Improve the Regulatory Flexibility Act (RFA).”

Sullivan explained the background of this legislation:

“In 1980, Congress enacted the RFA after determining that uniform federal regulations produced a disproportionate adverse economic hardship on small entities. In order to minimize the burden of these regulations on small entities, the RFA mandates that federal agencies consider the potential economic impact of federal regulations on small entities. The RFA also requires agencies to examine regulatory alternatives that achieve the agencies’ public policy goals while minimizing small entity impacts. Agency compliance with the RFA, however, was not judicially reviewable. Since agencies could not be held legally accountable for their noncompliance with the statute, many agencies ignored the RFA and did not conduct full regulatory flexibility analyses in conjunction with their rulemakings. In response, Congress amended the RFA in 1996 by enacting the Small Business Regulatory Enforcement Fairness Act (SBREFA), which provided for judicial review of agencies’ final decisions under the RFA and added requirements for the Environmental Protection Agency (EPA) and the Occupational Safety and Health Administration (OSHA).”

The key suggestions for improvement by Sullivan were summarized by Office of Advocacy as follows:

• Consideration of Indirect Impacts. Under current law, federal agencies are only required to analyze direct impacts, even though there may be foreseeable and costly indirect impacts. In addition, many times, especially with environmental regulation, the duty of regulating is passed on to the states without any corresponding analysis or requirements for states to consider less burdensome alternatives for small businesses. Amending the RFA to require federal agencies to consider indirect impacts will help state officials craft less burdensome regulatory alternatives. The RFA should be amended to require federal agencies to consider indirect impacts and less burdensome regulatory alternatives.

• Review of Existing Rules. Since new regulations are promulgated each year, the cumulative impact can be staggering. It is necessary to amend section 610 of the RFA to strengthen the current requirements mandating federal agencies to periodically evaluate existing regulations to minimize this impact

• Proper Consideration of Small Entities in Agency Rulemaking. Section 3 of Executive Order 13272 (“Proper Consideration of Small Entities in Agency Rulemaking,” August 13, 2002), requires agencies to notify the Office of Advocacy of draft rules that will have a significant economic impact on a substantial number of small entities. It also requires agencies to give appropriate consideration to Advocacy’s comments and address the comments in final rules. Codifying this key component of E.O. 13272 would ensure that small entities have a legitimate voice in the rulemaking process.

The RFA and SBREFA have been positive pieces of legislation for small businesses. The Office of Advocacy also has been urging the states to pass their own versions. Sullivan’s suggestions on December 6 for beefing up Reg Flex are right on target.

AMT and Tax Reform Tidbits from Congress

An Associated Press story today provides some tidbits from the debate over the alternative minimum tax (AMT) in Congress right now.

A bill to patch the AMT for a year failed because Senate Republicans opposed tax increases in the legislation. Senate Minority Leader Mitch McConnell (R-KY) declared: “Republicans will not raise taxes in exchange for blocking a tax that was never meant to be.” Good for him.

The AP also reported: “Senate Finance Committee Chairman Max Baucus, D-Mont., likened the AMT to Frankenstein, saying that ‘unless we act it will destroy the entire tax system.’” He’s absolutely right.

But the article also served up the following from Senate Majority Leader Harry Reid (D-NV) about Senate GOPers: “They find it offensive to have to pay for these tax cuts. This is a $50 billion patch. Shouldn't it be paid for? The answer is obviously yes.” Hmmm, well Senator, why not rein in government spending just a tad, rather than jacking up other taxes?

Finally, the piece closes out with the following: “Senate Republicans offered a formula for bringing the AMT issue to the floor, which included votes on amendments to eliminate the AMT entirely -- which Reid said would cost $1 trillion over coming years -- replace the tax system with a version of the flat tax and make permanent 2001 and 2003 tax cuts on capital gains and dividends.”

Now, that is a great idea. However, the Democrats were not interested. Why not? Why can’t we get bipartisanship when it comes to killing the AMT without hiking other taxes, and on moving from our current mess of a tax system to a simpler, less costly, more pro-growth tax system? Shouldn’t everyone favor that?

Tax Assault on Small Business in Maryland

When it comes to the public policy climate for small business and entrepreneurship, Maryland is a so-so state. With its ranking of 28th on the Small Business Survival Index 2007, which was released at the beginning of November, it’s not atrocious, but it’s far from great. It’s mediocre.

On the plus side, the Index data show that Maryland has no corporate alternative minimum tax (AMT), fairly low property and consumption-based taxes, and low workers’ compensation costs. Among the negatives are an individual AMT, a death tax, a large number of health insurance mandates, high electricity costs, a poor rating on eminent domain legislation, and poor ranking on highway cost effectiveness.

Apparently, Maryland policymakers were not content with being in the middle of the pack. They apparently wanted their state to measure up FAR WORSE when compared to the other states!

So, in case you missed it, a tax package passed late last month by state lawmakers and signed into law by Governor Martin O’Malley will make Maryland a far less friendly place to do live, work, invest and do business.

Consider the increases that were imposed as part of an annual tax increase estimated at $1.4 billion – the largest tax increase since the late 1960s:

• the state’s top personal income tax rate will rise from 4.75% to 5.5%;

• the corporate income tax rate will go from 7 percent to 8.25 percent;

• the sales tax rate increases from 5 percent to 6 percent, while also being extended to computer services;

• the cigarette tax goes from $1 per pack to $2;

• the state’s car-title tax will jump from 5 percent to 6 percent;

Indeed, these tax increases seem specifically designed to raise the costs of work, investment, entrepreneurship and job creation in Maryland. If that was not the intent, it will be the result.

Small Business Thumbs Up on Expanding Trade with Peru

On November 8, the U.S. House of Representatives approved the United States-Peru Trade Promotion Agreement by a vote of 285-132.

Today (December 4), the U.S. Senate joined the House in this common sense, pro-growth vote, passing the agreement by 77-18.

Here’s a big small business thumbs up to those members of the House and Senate who supported this expansion of free trade.

In a statement, Steve Preston, U.S. Small Business Administration administrator, summed up the benefits quite ably:

“The agreement will level the playing field for American small businesses by giving them the same duty-free access that Peruvian businesses have to the U.S. market. It will also help generate job growth by opening new opportunities to entrepreneurs seeking expansion into this important market.

“Peru already plays a significant role in the America’s small business marketplace. In 2005, 38 percent of exports from the U.S. to Peru were by small and medium-sized businesses, notably higher than the 29 percent small and medium-sized business share of U.S. exports to the world. Under this agreement, previous tariffs will be removed and trade will expand between the two countries.

“International trade is becoming an increasingly important avenue for small business growth, with the number of U.S. small and medium-sized businesses that export more than doubling from 1992 to 2005. We must continue pursuing further opportunities to improve market conditions for small business exporters so they can compete in a global marketplace. I welcome today’s vote and encourage Congress to work cooperatively again to pass Free Trade Agreements with Colombia, Panama and South Korea.”

Right on target. Well said, Mr. Preston.

It also is worth noting that the Peru trade agreement does much more for U.S. exports. As CQ Politics noted today: “The Peru trade agreement would grant immediate duty-free treatment to 80 percent of U.S. exports — beef, cotton, wheat and soybeans — to the South American nation. Because of trade preferences extended to Peru and three other Andean nations through February, 98 percent of goods from Peru already enjoy duty-free access to the U.S. market.”

Inflation and Monetary Confusion

If you want to read an analysis that perfectly captures the confused thinking that predominates on inflation, monetary policy and the economy, then check out “Cooler yet the pressure rises: Why a Seventies-style whiff of stagflation may soon be in the air” by Krishna Guha in the December 3 Financial Times.

The piece is rich in the kind of waffling “on the one, but on the other hand” economics that just drives people crazy. And in a quite lengthy piece about inflation, it manages to avoid clearly touching on the actual cause of inflation.

Consider a few points:

• The title of the piece and a few points within the article highlight risks of stagflation, yet it opens noting that “world inflation is uncomfortably high,” but such concerns “would swiftly disappear if the US plunged into a deep recession.” Hmmm. But I thought stagflation was high inflation tied to a no-growth or recessionary economy?

• The piece does an adequate job at explaining a key difference or debate among central bankers – with one camp (mainly the U.S.) focused on core inflation (less food and energy) and others looking at headline inflation. Obviously, the focus should be on headline inflation. After all, inflation, by definition, is a rise in the general price level – not a rise in prices excluding food and energy, which tend to be rather important to individuals and businesses.

• However, the article buys into the mistaken notion that economic growth is bad for inflation. For example, there is a good deal of talk about central bankers being worried about factory capacity utilization and unemployment rates. The notion that the economy is dynamic – for example, that investment and innovation occur, productive capacity expands, the labor force grows, and workers become more efficient – is not considered. For good measure, it is noted: “If growth slows very sharply in any or all of the main economies, unemployment will rise and capacity utilisation will fall, making it less likely that inflation will stay high or move higher.” Hey, what happened to stagflation?

• There was a hint of understanding when the piece mentioned a weaker dollar pushing up the price of oil and adding to U.S. inflation. For good measure, the importance of keeping inflation expectations in check was highlighted. But these points were largely undeveloped.

• Finally, the author wrote: “Indeed, the big debate within central banks today - deeper than, though related to the argument about headline versus core inflation - is the extent to which they can exploit the apparent stability of inflation expectations to cut rates aggressively, at least for a while, in response to any threats to growth.” Guha is correct in saying that this is a major debate. Unfortunately, it speaks to how far astray thinking about monetary policy can wander from sound fundamentals.

Let’s straighten out a few things here. First, inflation is caused by money supply growth outpacing money demand. That is, too much money chasing too few goods. So, economic growth is good, not bad, on the inflation front. Second, higher energy prices do not cause inflation. Rather, either higher energy prices result from inflationary monetary policy, or higher energy prices get monetized with inflation then accelerating. Third, and critical, monetary policy should be exclusively focused on maintaining price stability. By establishing price stability, monetary policy in turn helps economic growth. Monetary policy should not be concerned with, and is ill-equipped to be fine-tuning or manipulating economic growth.

Policy changes directed at economic growth are the domain of fiscal policy – such as tax relief, rolling back costly regulations, expanding free trade, and slashing wasteful government spending – not monetary policy.

When monetary authorities – such as the U.S. Federal Reserve – try to do both inflation and growth, the results tend to be quite ugly.