Economic Havoc of COVID-19
Last year, Pennsylvania celebrated record low unemployment, but one year later, the impacts from COVID-19 closures are telling a very different story. In April, the official unemployment rate reached 15.1%, swinging the state from a record low to a record high. While some economic decline was inevitable, Pennsylvania’s mitigation strategy resulted in more economic damage than was necessary. According to the Federal Reserve Bank of Philadelphia, the length of the shutdown was partially responsible for higher unemployment claims than many other states experienced.
At the beginning of April, over 80% of small businesses were at risk of closing if the shutdown continued for five more months. As of July, the U.S. Chamber of Commerce reported about 60% of small businesses were concerned about closing permanently. According to Yelp data five months after the initial survey, it looks like about 60% of total businesses have closed for good.
As of 2018, small businesses accounted for almost the entirety of businesses in the state and were responsible for almost half of total employment. If the state wants to rebuild the thriving economy of 2019, then providing a climate of growth for the state’s small businesses through regulatory reform is vital.
PA Businesses and Regulations
Even for those that manage to survive, it won’t be easy for them if the state places a high regulatory burden on their operations. According to the Mercatus Center’s QuantGov database, Pennsylvania has the 11th-highest number of total restrictions, with almost 163,000 rules. These regulations place a disproportionate burden on small businesses.
Having these many regulations makes the system difficult to maneuver, both for those trying to abide by the rules and those trying to enforce them. The only people many regulations seem to benefit are select groups who use them to reap benefits for themselves, often at the expense of others.
A 2009 study from the National Bureau of Economic Research found that occupational regulations in the form of licensing significantly influenced the labor market and wage determination. This influence of special interests increases income inequality across states, according to another study from 2003. Even apart from occupational licensing, a 2018 study found that industry regulations result in an hourly wage increase of $1.19 for every standard deviation increase in regulation. While benefiting select workers, this arbitrary wage increase doesn’t benefit those excluded.
On a national level, using the government to protect certain industries and employees worsens poverty. A 10% increase in federal regulations was associated with a 2.5 percent increase in the poverty rate according to a 2019 study. Additionally, a 1999 paper from the AEI-Brookings Joint Center for Regulatory Studies found that over half of regulations would fail a neutral cost/benefit analysis. They also found that regulations overall are a net benefit to society, meaning that the few effective regulations disguise the economic drag of the ineffective ones.
The growth of burdensome regulations since the 1980s resulted in an average reduction in economic growth of 0.8 percent. Over time, that impact grows, and in 2012, for example, the economy was $4 trillion smaller than it would have been minus the regulatory burden.
The key to solving this is effective regulatory reform. Federal actions to reform regulations are expected to raise real household incomes by $3,100 over the next five to 10 years by increasing real incomes by 1.3%.
Thankfully, current legislative efforts are focused on three ways to reduce the current array of regulations to streamline the state rules and make it easier for businesses to rebuild and put Pennsylvanians back to work following COVID-19.
- Reduce Current Regulations
There are multiple pathways to reduce regulations. A current proposal in Pennsylvania is modeled after the federal strategy of requiring that two regulations be repealed for every new one. This rule isn’t new; it was also used in British Columbia, and according to the Mercatus Center, it was at least partially responsible for the period of economic growth that followed the policy.
Senate Bill 119 introduced by Senator John DiSanto would institute the one-in, two-out rule for Pennsylvania, which after six years will sunset into a one in one, out rule. While lawmakers have worked with agencies to repeal regulations such as fireworks restrictions and food rules that make it difficult for businesses to roll outnew products, this bill provides an opportunity for comprehensive streamlining instead of isolated efforts.
Lawmakers are also introducing ways to amend or repeal current regulations. House Bill 430, introduced by Representative Kerry Benninghoff, provides a route for committees and the General Assembly to repeal existing rules.
Additional bills that could work in tandem with HB 430 are House Bill 1055, introduced by Representative Kate Klunk, and Senate Bill 251, introduced by Senator Kristin Phillips-Hill. Both bills establish an Office of the Repealer with a one-in, two-out rule and a requirement to review existing regulations.
To make these bills stronger, there should be a set standard of weighing the costs with the benefits, making regulatory reviews as objective as possible. While the bills state that the office should establish “logical, quantitative, and qualitative rules,” establishing an objective threshold—such as a net neutral impact—would remove some uncertainty.
Additionally, this new office will cost the taxpayers roughly $695,000 in the first year. Lawmakers should look for cost-effective ways to combine efforts with the existing regulatory agency—Independent Regulatory Review Commission (IRRC)—while achieving the overarching goals of streamlining the repeal process.
- Focus on Economically Significant Rules
Not all regulations are alike, and some require more scrutiny than others. The Regulations from the Executive in Need of Scrutiny (REINS) Act is a piece of federal legislation that attempts to do just that by requiring additional oversight for rules that are considered economically significant. House Bill 806, introduced by Representative Dawn Keefer, and Senate Bill 5, introduced by Senator John DiSanto, replicate these efforts at the state level by requiring the General Assembly to approve any economically significant regulation, defined as an impact of $1 million or more per year for the state, municipalities, and/or the business community.
Senate Bill 609, introduced by Michele Brooks, has a similar focus on economically significant regulations. This bill would require regulations with a $1 million or more annual impact to undergo an automatic review after three years. The goal is to require large regulations to undergo additional oversight to ensure that they are having their intended impact and are instituted cost effectively.
To make the bill even stronger, it should require a legislative vote for regulations that fail to meet a certain standard. As it currently stands, the bill would require a report to be made with its recommendations, but it is crucially important to compel actions against regulations that are hurting Pennsylvanians.
- Reform Small Business Regulations
The time burden on regulations—even beneficial ones—lands on businesses, particularly small ones, with a 36% higher regulatory cost per employee than large businesses. At a time when many businesses are struggling to stay open, it is even more important to make the process of navigating these regulations as easy and transparent as possible. San Diego offers one example of how this reform could work.
In 2016, the city instituted an online platform where users can learn requirements and apply for various permits. In the first year, the city had a goal of increasing the number of businesses it assisted by 5%, but the actual increase was 111%.
If something similar had been in place in Pennsylvania, it could have alleviated the confusion suffered by local business owners Sean Tracy and Andrew Knechel. These two entrepreneurs both applied for liquor licenses, but their applications were rejected for six months with no explanation. The answer finally came when a staffer from their state representative’s office discovered that two licenses could not be issued to the same address. After building a wall to separate their spaces, the businesses could finally get up and running.
Thankfully, this problem could be nearing a solution. House Bill 509, introduced by Representative Greg Rothamn, and Senate Bill 252, introduced by Kristin Phillips-Hill, would create an online tracking system for state permits to alleviate confusion and reduce hours spent navigating the complex permitting process. In a similar vein, Governor Tom Wolf’s PA Business One-Stop Shop was launched in 2018. This was designed to help businesses start and relocate easily to the state. While similar, the current proposal would be specifically focused on navigating the permitting process.
Creating an online platform to track applications, ensuring the application is complete, finding out the reasons why an application is not in conformance, and providing contact information for an employee assigned to answer questions would all go a long way toward taking the guesswork out of the current process. However, the key is in implementation and ensuring the site truly does take the guesswork out of permit applications.
Senate Bill 253, also introduced by Kristin Phillips-Hill, seeks to make the regulatory process easier on the state’s entrepreneurs. This bill would establish a compliance officer for each agency whose role it would be to educate affected businesses about new and existing regulations. Most noteworthy is that the compliance officer would be required to issue opinions regarding a business’s obligations, and the failure to issue an opinion would serve as sufficient defense in any enforcement proceeding.
This creates an incentive to have regulations that are easily understood by the applicant, which would alleviate much of the confusion Pennsylvanian businesses currently experience.
Conclusion & Next Steps
Overall, the regulatory environment in Pennsylvania needs to be streamlined and the processes based on solid analysis. Reducing the regulatory burden in the state will improve its business climate and unleash economic growth.
Following the reduction of current regulations, lawmakers should keep in mind that the next step is to make sure the state doesn’t repeat the same mistakes moving forward. This is done through regulatory process reform.
One of the key aspects of regulatory reform commonly referenced in the literature is an accurate cost-benefit analysis, which can only be done through rigorous economic impact studies. According to Robert W. Hahn from the AEI-Brookings Joint Center for Regulatory Studies, economic analysis doesn’t have a significant impact on the current regulatory process, but even if it did, a lack of uniform rules and an agency responsible for replicating results means that conclusions from these analyses may not hold up to serious scrutiny.
Findings from the Mercatus Center echo Hahn’s conclusions and add to them by focusing on a burden of proof for the rulemaking agency, meaning that regulations should be focused on solving actual problems, not potential ones. Additionally, the analysis of an existing issue or problem should be done before any new rules are proposed in order to avoid finding a solution for a problem that doesn’t exist.
The current process in Pennsylvania ignores most of these best practices for transparency and reform. A good starting point would be to require proposed regulations to pass a neutral cost-benefit analysis that is reviewed and replicated by a third-party agency. If those regulations fail that test, then they should require legislative approval to be instituted.
 The other factor that the Federal Reserve found was Pennsylvania’s promptness of filings.
 Alternative strategies include aiming for a set percentage of reductions that need to be achieved within a certain period. Virginia tried this with the goal to cut 25 percent of discretionary regulations. Additionally, Idaho and Arizona used regulatory resets, which mean some or all regulatory codes sunset and can be reauthorized only if they meet certain standards. Idaho had a regulatory reduction of 40% after the legislators failed to reauthorize the entirety of the regulatory code. While the Idaho example may not be replicable across all states, the sunset provision did provide the opportunity needed to achieve significant reductions.