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Michele Nash-Hoff

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Government Regulations Create Huge Costs for Manufacturers

Posted: 08/25/11 06:05 PM ET

Do you remember playing a game when you were a child where you tried your best not to walk on any cracks in the sidewalk so the "big bad bear" wouldn't get you or you wouldn't break your mother's back? If you lived in a city where the sidewalks were old, there were so many cracks that you had to tip toe to get by without stepping on any cracks. Well, businesses today are being forced to play a similar game with government, and the "cracks" are getting so close together that it's almost impossible to tip toe through the maze of "cracks" that come in the form of government regulations.

The Federal Register contains 81,405 pages of the federal rules and regulations that businesses are required to comply with. Federal regulations strain the economy by creating huge costs that business are obligated to meet and serve as a hidden tax on the economy.

James Hamilton of Freedom Works wrote:

The cost of complying with federal regulation increases businesses' expenses by billions of dollars every year. Some of the compliance cost associated with federal regulation comes out of businesses' profits, but much of the costs are passed down to consumers in the form of higher prices. Compliance costs associated with regulations cut into businesses' profits, while higher prices increase the day to day expenses of all consumers. Because regulations create artificial costs that must be paid by both producers and consumers, they cost the economy money and act as a drag on economic growth.

Between 2001 and 2011, 38,700 new regulations were added to the Federal Register. Of the over 4,000 new regulations that are currently being developed by various departments and agencies, 224 are estimated to cost the economy more than $100 million each. The Obama administration is greatly expanding regulation, with massive new regulations in the works at the Environmental Protection Agency and a host of yet to be written regulations covering financial services to comply with Dodd-Frank Financial Reform Bill.

A study by the Regulatory Studies Program at George Mason University's Mercatus Center in 2001("A Review and Synthesis of the Cost of Workplace Regulations") found that workplace regulations have a significant cost. The researchers surveyed 100 manufacturers in the United States, ranging from 7 employees to 65,400 employees. The survey showed:

• Complying with workplace regulations cost an average of $2.2 million per manufacturing firm or about $1,700 per employee
• Smaller firms (less than 100 employees) faced higher costs than large firms (500 or more) with costs of $2,573 per employee and $1,530 per employee respectively

The survey revealed which types of regulations affect manufacturers the most:

• Worker Health and Safety regulations, including OSHA, accounted for one-third the cost of compliance
• Regulations governing employee benefits ranked second, making up 27% of the cost of compliance
• Civil rights, labor standards, and labor-management relations regulations each made up about 10% of the cost of compliance

A study on "The Impact of Regulatory Costs on Small Firms" by W. Mark Crain, Lafayette College for the Small Business Administration Office of Advocacy showed that small businesses continue to bear a disproportionate share of the federal regulatory burden. The cost of compliance with all federal regulations, economic, workplace, environmental, and tax is an average of $5,633 for all sized firms. However, for companies under 20 employees, the cost was $7,647 compared to $5,282 for companies over 500 employees. In the manufacturing sector, the cost per employee is $10,175; nearly double the average for all firms. For small manufacturers, the cost is $21,919 per employee compared to $8,748 for large firms. For medium-sized firms, the compliance cost per employee is $10,042. In the service sector, regulatory costs differ little from small to larger firms.

Economists Nicole V. Crain and W. Mark Crain study of the net cost of regulations determined that in 2009 federal regulation cost businesses and consumers $1.75 trillion, or nearly 12% of America's 2009 GDP. As a comparison, in the same year, corporate pre-tax profits for all businesses totaled about $ 1.46 trillion.

The Health Care Reform Act that passed at the very end of 2009 vastly expanded the requirement for businesses to file IRS Form 1099s for all payments over $600 annually. The previous law required a business to provide a completed 1099 form to any independent contractors, subcontractors, freelancers, etc. that are not employees and not corporations to whom they made more than $600 in payments over the course of a year. The Health Care Reform Act law extends this requirement to corporations as well.

This means that a business would have to provide a 1099 to their utility company and every other vendor to which they pay more than $600 a year for services. For metal manufacturers, such as machine shops, sheet metal fabricators, stampers, and casting companies, this could mean they would have to provide a 1099 for their vendors of metals, as well as companies that provide surface finishing services such as painting, plating, anodizing, or powder coating.

A survey by the National Association for the Self-Employed (NASE) found that self employed and micro-businesses (under 10 employees) are "expecting this new regulatory burden to greatly or somewhat increase the amount they spend on tax preparation." With over 40% of survey respondents still preparing their own taxes, this added workload will significantly increase the time business owners spent on tax preparation or force them to hire an accountant, adding to their cost of doing business. This is another example how the indirect costs of complying with government rules and regulations are just as burdensome to businesses as are the direct costs of taxes and regulatory fees.

On August 4, 2011, National Association of Manufacturers (NAM) Vice President for Energy and Resources Policy Chip Yost released the following statement after the NAM filed comments on the Environmental Protection Agency's (EPA) proposed Utility MACT rule:

Affordable energy and jobs are top priorities for manufacturers, and the EPA's proposed Utility MACT rule threatens to deal a lethal blow to both. The EPA's Utility MACT proposal is yet another example of excessive overreach that will dampen economic growth and result in job losses.

If implemented, the finalized Cross-State Air Pollution Rule and the proposed Utility MACT rule will cost an estimated 1.44 million jobs by 2020. These two rules will increase retail electricity prices nationwide by 11.5 percent and cost the electric sector a staggering $18 billion per year to comply. This will stifle investment and severely damage our competitiveness at a time when our economic recovery has stalled and the unemployment rate hovers at 9.2 percent.

In addition, in the past three weeks, the Obama administration has announced back-to-back new fuel economy standards for passenger vehicles and trucks. New regulations will require a corporate average fuel economy (CAFE) of 54.5 miles per gallon for passenger vehicles by 2025, and new standards for trucks will require a 10 to 20 percent increase in fuel efficiency before 2018.

The Center for Automotive Research released its latest study focused on the impact of anticipated fuel economy and safety mandates on the U.S. automotive market and industry in 2025
A few of the report's conclusions are:

• The average increase in vehicle cost necessary to achieve the higher CAFE mandates range from $3,700 to over $9,000.
• The higher mandates will increase vehicle prices that exceed the savings in fuel costs (over five years), even if gasoline costs $6.00 per gallon (in 2009 prices).
• Consumers will shun these technology costs by holding onto their used vehicles longer, especially if fuel prices are low (e.g., $3.50 per gallon), resulting in lower sales and a loss of automotive employment. Over 260,000 jobs may be lost if the highest mandate is passed and fuel prices stay low at $3.50 (2009 prices).

The authors recommended moderation in raising fuel economy mandates and conducting a periodic review to assess the rate of technology development and cost reduction of advanced technologies leading up to 2025. The full report is available at www.cargroup.org.

During a meeting with hundreds of manufacturing executives in town to press lawmakers for looser regulations, White House Chief of Staff William Daley listened to one executive after another air their grievances on environmental regulations. "At one point, the room erupted in applause when Massachusetts manufacturing executive Doug Starrett, his voice shaking with emotion, accused the administration of blocking construction on one of his facilities to protect fish, saying government 'throws sand into the gears of progress'...Daley said, "Sometimes you can't defend the indefensible."

The regulations mentioned here are examples of the unintended consequences of lawmakers voting on bills they haven't read. If Federal lawmakers want to "save American manufacturing," they need to wake up to the fact that adding burdensome government laws and regulations will actually reduce the tax revenue the federal government receives by driving manufacturers to export jobs overseas.

 
 
 

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