Arizona Chamber of Commerce and Industry

California Shows What Not to Do in Area of Government Regulation

March 3, 2010
by Glenn Hamer

In January, I wrote about efforts in the Legislature led by Rep. Andy Tobin to improve Arizona’s regulatory environment.  His bill, HB 2260, seeks to install some long term fixes on Arizona’s regulatory environment to make the state more attractive to employers tired of grappling with endless reams of red tape.

Thankfully, Arizona is already on the right track when it comes to making smart regulatory reforms.   When she assumed office last year, Gov. Brewer, mindful of the costs of businesses attempting to comply with potentially costly regulations in the face of a deep recession, issued a moratorium on new rulemaking.  The Legislature, to its credit, extended that moratorium in last year’s budget.

This morning, HB 2260 passed the House with bipartisan support and garnered two-thirds of the votes in that chamber, putting it one step closer to reaching the governor’s desk.  Rep. Tobin’s bill, once in law, can be an effective tool in Arizona’s economic development toolbox. 

A new Policy Brief by the Arizona Chamber Foundation shows just how important a business-friendly regulatory environment is to promoting a healthy state economy, as well as how overregulation can be potentially devastating to a state’s bottom line.

Written by the former Small Business Administration’s Office of Advocacy Regional Advocate Michael Hull, the Foundation paper looks at how Arizona can improve its economic diversity by putting in place reforms to the rulemaking process that can help the state avoid the pitfalls experienced in California, where a steady migration of jobs out of that state has been occurring over the last 20 years.

According to Hull’s findings, the costs of a bloated regulatory environment have been tremendously damaging to California’s economy. 

Citing a 2009 study by Varshney and Associates, Hull writes that the annual cost of California regulations – direct, indirect and induced – is over $492 billion, which is almost five times California’s general fund budget and almost a third of the state’s gross product.

But the pain of overregulation isn’t just felt in the state budget.  California regulations result in an employment loss of 3.8 million jobs.  And the red tape especially hurts small business.  The total cost of regulations in California in 2007 was over $130,000 per small business.

Hull’s paper finds that states like Arizona can avoid California’s fate by instituting a rigorous cost-benefit analysis (CBA) before promulgating a new rule.  California does not use CBA, and most of that state’s agencies are enforcing state rules that are far more stringent and costlier than similar federal rules.

Hull discusses the benefits of designating a third party to conduct the CBA, which the Tobin legislation calls for.  This would be positive for Arizona by shifting away from the current practice of having the affected state agency determine the impact of a rule, which has lead to the practice of overestimating a rule’s benefits while underestimating its costs.

The kind of reforms Rep. Tobin is promoting can, according to Hull, improve Arizona’s potential for increased job growth.  When regulations advance without a thorough CBA and result in new unfair and costly barriers, Hull writes, the risk of starting a business can become greater than any potential reward.

And Rep. Tobin proposes that state agencies should be prohibited from adopting rules that are more stringent than federal law without express statutory authority, a move Hull’s paper finds beneficial. 

“Every rule that Arizona has on the books that is more stringent than the federal government’s puts Arizona at a competitive disadvantage versus other states,” Hull writes.

This Great Recession has shown that Arizona has to be aggressive when it comes to diversifying its economy.  A key part of that overall strategy can be implementing a regulatory review system that will be a model for other states to follow.

Glenn Hamer is president & CEO of the Arizona Chamber of Commerce & Industry.