Office of Advocacy

Testimony of

Chairman Gonzalez and Members of the Subcommittee, good morning and thank you for giving me the opportunity to appear before you today. My name is Thomas M. Sullivan and I am the Chief Counsel for Advocacy at the U.S. Small Business Administration (SBA). Congress established the Office of Advocacy (Advocacy) in 1976 under Pub. L. No. 94-305 to advocate the views of small business before federal agencies and Congress. Because Advocacy is an independent entity within the U.S. Small Business Administration, the views expressed by Advocacy here do not necessarily reflect the position of the Administration or the SBA. This testimony was not circulated for comment through the Office of Management and Budget (OMB).

To address the cumulative regulatory burden borne by small business, agencies need to periodically review their existing rules to see how they impact small businesses. Section 610 of the Regulatory Flexibility Act(1) directs federal agencies to review their current rules periodically and consider whether changing circumstances – such as altered market conditions, improved technologies, and new industry practices – have made revisions to the rules necessary. Historically, federal agency compliance with section 610 has been limited. A July 2007 report issued by the Government Accountability Office (GAO) found that federal agencies’ reviews of their current rules, including the periodic reviews required under section 610, are neither as useful nor as open to public involvement as they should be.(2)

Accordingly, on August 16, 2007, Advocacy launched the Small Business Regulatory Review and Reform (r3) initiative, designed in part to improve compliance with section 610 and further the goals of periodic reviews. The r3 initiative is a long-term project to help agencies pinpoint existing federal rules that warrant review – and to revise those rules if they are found to be ineffective, duplicative, out of date, or otherwise deficient. Through r3’s public rule reform nomination process, small businesses and their representatives can point out existing agency rules that they feel should be reviewed and revised. In the first year since Advocacy began the r3 initiative, small business stakeholders have nominated over 80 rules for review and reform. Ten of those nominations were chosen in February 2008 to be priority rules for review and possible reform. Since February 2008, we have been working with our counterpart agencies to conduct reviews of the ten rules and, where necessary, begin the process of revising those rules. Advocacy is currently accepting additional public nominations from now until December 31, 2008, to be considered as Top 10 candidates for 2009.

Going forward, Advocacy believes that the r3 program will be an important tool for keeping agencies’ attention focused on section 610 of the RFA and improving the quality of reviews of existing regulations. For this reason, Congress, the Office of Advocacy, and small business have a common interest in ensuring the long-term success of the r3 program.

Background. Small businesses are extremely important to the U.S. economy. Economic data shows that 99.7% of firms that have employees are small businesses.(3) Small businesses employ over half of the more than 145 million American workers.(4) The small business sector is the primary engine of job creation, growth and innovation.(5) Despite the importance of small business to our country’s economic strength, the 2005 Advocacy-funded study by W. Mark Crain, The Impact of Regulatory Costs on Small Firms,(6) found that, in general, small businesses are disproportionately impacted by the total federal regulatory burden. The overall regulatory burden was estimated by Crain to exceed $1.1 trillion in 2004.(7) For small firms, employing fewer than 20 employees, the annual regulatory burden in 2004 was estimated to be $7,647 per employee – which is 45 percent greater than the $5,282 per employee burden estimated for firms with more than 500 employees.(8)

For over thirty years, the Office of Advocacy has voiced the concerns of small business over the ever-increasing cumulative federal regulatory burden. During that time, Advocacy has had success in working with federal agencies to evaluate their planned rules and reduce the impacts of these new rules on small businesses while still accomplishing their regulatory objectives.(9)

Unfortunately, persuading federal agencies to periodically evaluate the impacts of their existing regulations on small business has proven to be a greater challenge. Section 610 of the RFA, enacted in 1980, requires agencies to look at their existing regulations after 10 years to see if they are outdated, ineffective, or duplicative. Agency compliance with section 610’s periodic review requirement has varied substantially from agency to agency, with some agencies reviewing few of their current rules. The Government Accountability Office (GAO) released a report in July 2007 which highlighted the need for clearer standards and enhanced public participation in the section 610 review process. The report, Reexamining Regulations: Opportunities Exist to Improve Effectiveness and Transparency of Retrospective Reviews is available at: www.gao.gov/new.items/d07791.pdf.

The r3 Initiative. In response to the GAO’s findings, the Office of Advocacy developed the r3 initiative to (1) assist agencies and small business stakeholders to better understand and benefit from section 610 reviews of existing rules, and (2) give interested small entities the opportunity to nominate existing agency rules for review and potential reform. The r3 program is meant to encourage agencies to undertake more meaningful section 610 reviews, and to consider tailoring the reviews of existing rules they conduct for other reasons to satisfy the section 610 criteria. Small business stakeholders would also be encouraged to suggest rules that should be reviewed, and reformed if they are found to be outdated, ineffective, or duplicative. The r3 initiative was officially launched on August 16, 2007. Advocacy developed and released a section 610 “best practices” document in October 2007 to assist agencies in meeting their periodic review obligations under the RFA. This best practices document is included as Attachment A and can also be found at: www.sba.gov/advo/r3. On October 16, 2007, the Office of Advocacy hosted a roundtable to provide representatives from small business associations, government, and academia with the opportunity to learn about r3. We also met with numerous small business groups to inform them about the Initiative and about the process for submitting r3 review nominations. By December 31, 2007, the close of the period for nominations for 2008, Advocacy received a total of 82 nominations for review and potential reform.

The 2008 Top 10 r3 Rules for Review/Reform. After review and analysis of the 82 nominations received, the Chief Counsel for Advocacy selected the following nominations to be the 2008 Top 10 rules for review and reform, listed here in alphabetical order by agency:

Environmental Protection Agency – Update Air Monitoring Rules for Dry Cleaners to Reflect Current Technology. EPA should revise outdated or inaccurate testing requirements so that dry cleaners can have a valid method for demonstrating compliance;

Environmental Protection Agency – Flexibility for Community Drinking Water Systems. EPA should consider expanding the ways for small communities to qualify to meet alternative drinking water standards, provided that the alternative standards are protective of human health and are approved by State authorities;

Environmental Protection Agency – Simplify the Rules for Recycling Solid Wastes. EPA should simplify the rules for recycling useful materials that, because of their current classification, must be handled, transported, and disposed of as hazardous wastes;

Environmental Protection Agency – EPA Should Clearly Define “Oil” in its Oil Spill Rules. EPA should clarify the definition of “oil” in its oil spill program, so that small facilities that store non-petroleum based products are not unintentionally captured by spill program requirements

Federal Aviation Administration – Update Flight Rules for the Washington D.C. Regional Area. FAA and other agencies should review the flight restriction rule for the region surrounding Washington, D.C. to determine whether the rule could be revised to avoid harming small airports within the region;

Federal Acquisition Regulation (FAR) Council – Reduce Duplicative Financial Requirements for Architect-Engineering Services Firms in Government Contracting. The duplicative retainage requirement should be removed or reduced in Architect-Engineering services contracts, as has been done for other services.

Internal Revenue Service – Simplify the Home Office Business Deduction. The IRS should revise their rules to permit a standard deduction for home-based businesses, which constitute 53% of all small businesses;

Mine Safety and Health Administration – Update MSHA Rules on the Use of Explosives in Mines to Reflect Modern Industry Standards. MSHA should update its current rules to be consistent with modern mining industry explosives standards;

Occupational Safety and Health Administration – Update OSHA’s Medical/Laboratory Worker Rule. The current rule should be reviewed to determine whether it can be made more flexible in situations where workers do not have potential exposure to bloodborne pathogens; and

Office of Federal Procurement Policy – Update Reverse Auction Techniques for Online Procurement. The current reverse auction techniques should be reviewed to determine whether a government-wide rule is necessary to create a more consistent and predictable online process.

The 2008 Top 10 rules were evaluated on the basis of several factors: (1) whether the rule being nominated has ever been reviewed for its impact on small business, (2) whether technology, economic conditions, or other factors have changed since the rule was originally written, (3) whether the rule imposes duplicative requirements, (4) whether the rule could reasonably be tailored to accomplish its intended objectives without adversely impacting so many small businesses or small communities, and (5) the overall importance of the rule to small business and small communities. Each of the Top 10 rules were chosen on the basis of one or more of these factors. Some of the 82 nominations were rejected because they did not meet Advocacy’s nomination criteria (e.g., they would require new legislation or other Congressional action, or the nominator did not offer any viable alternative to the current rule). Other nominations were not selected as Top 10 rules because Advocacy is already working with agencies to implement the suggested reform or the agency has indicated that the suggested reform is already underway. The nominations that were not chosen as 2008 Top 10 rules have nonetheless given us valuable insight into the regulatory issues of concern to small business, which has helped Advocacy prioritize its current regulatory agenda.

Since February 2008, Advocacy has met with small business stakeholders and agency representatives to underscore the importance of reviewing and reforming the 2008 Top 10 rules. Based on Advocacy’s previous experience with similar regulatory reforms, we know that it can take an agency several years to complete the required rulemaking procedures to revise a regulation. We anticipate that some of the 2008 r3 Top 10 rules for review/reform will not be revised within one or even two years. Therefore, it is important that small business stakeholders understand what is happening with their recommended reforms and stay active in the process.

In order to track agencies’ progress, the current status of each year’s Top 10 rules for review/reform will be tracked and posted on Advocacy’s website, www.sba.gov/advo/r3. The updated status of the Top 10 rules will be published on Advocacy’s website twice a year. The first status update on the 2008 Top 10 rules will be available this August. Advocacy encourages small businesses and their representatives to follow the progress of the reviews/reforms.

Looking Ahead. On July 7, 2008, Advocacy announced that we are accepting nominations for the next group of rules to be reviewed/reformed. Nominations will be accepted until December 31, 2008. Those nominations will eventually form the basis for the 2009 Top Ten rules for review/reform. The process will continue each year, with nominated rules being selected as Top Ten rules for review and reform.

Going forward, Advocacy believes that the r3 program will be an important tool for keeping agencies’ attention focused on section 610 of the RFA and improving the quality of reviews of existing regulations. Given the importance of periodic reviews of current rules, Congress, the Office of Advocacy, and small business have a common interest in the long-term success of r3.

Attachment A: Section 610 of the Regulatory Flexibility Act: Best Practices for Federal Agencies

ENDNOTES

1. 5 U.S.C. § 610. The Regulatory Flexibility Act, Pub. L. 96-354, was enacted in 1980, and was amended by the Small Business Regulatory Enforcement Fairness Act of 1996, Pub. L. 104-121. The section 610 periodic review requirement has been law since 1980.

2. Government Accountability Office, Reexamining Regulations: Opportunities Exist to Improve Effectiveness and Transparency of Retrospective Reviews (GAO-07-791), pages 35, 43-44 (July 2007).

3. See Office of Advocacy, Small Business Frequently Asked Questions available at http://www.sba.gov/advo/stats/sbfaq.pdf.

4. Small business share of total employment from Office of Advocacy, Small Business Frequently Asked Questions available at http://www.sba.gov/advo/stats/sbfaq.pdf. Total employment figure from Bureau of Labor Statistics, June 2008, Employment Situation Summary (www.bls/gov/news.release/empsit.nr0.htm).

5. See Office of Advocacy, Small Business Frequently Asked Questions available at http://www.sba.gov/advo/stats/sbfaq.pdf and Small Serial Innovators: The Small Firm Contribution to Technical Change (February 2003) available at http://www.sba.gov/advo/research/rs225tot.pdf.

6. The Impact of Regulatory Costs on Small Firms (September 2005) available at http://www.sba.gov/advo/research/rs264tot.pdf. The 2005 Crain study is the most timely and comprehensive measure of the total cost of regulations on the U.S. economy, reflecting the state of the economy in 2004 and covering virtually every category of regulations impacting small business. The report uses data gathered from numerous sources, including the Office of Management and Budget (OMB), the Organization for Economic Cooperation and Development (OECD), the Council of Economic Advisors, the Census Bureau, and various resource organizations.

7. Id.

8. Id.

9. See Keith Holman, The Regulatory Flexibility Act at 25: Is the Law Achieving its Goal?, 33 Fordham Urb. L. J. 1119 (2006).