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The Great Red-Tape Robbery

Small-business owners have been saying it for generations: Red tape costs too much. Now a government-funded study not only has confirmed that long-standing suspicion, it also has established that entrepreneurs carry more than their fair share of the regulatory burden.

The study, "Impact of Regulatory Costs on Small Firms," which was commissioned by the Small Business Administration and released in late October, concludes that small companies pay disproportionately more than larger ones to comply with government edicts. With the economy faltering, legislators should consider scaling back the number of regulations that small businesses are required to follow, says the study's co-author, Thomas D. Hopkins, dean of the Rochester Institute of Technology in New York.

THE NUMBERS. Using government data from 2000, the report determined that federal regulations cost businesses with fewer than 20 employees $6,975 per worker each year. Regulations cost $4,319 annually per employee at oufits with between 20 workers and 499 employees. For firms with more than 500 employees, the figure was $4,463.

According to the report, environmental regulations and tax-related paperwork impose the most onerous burdens on small businesses. Other costs -- things like workplace rules, labor standards, civil rights, safety, and regulatory constraints on pricing -- are distributed more evenly, the study concluded.

"These results are very disturbing," says Susan Walthall, acting chief counsel for the SBA's Office of Advocacy. "When the per-employee cost of compliance is nearly 60 percent higher for small business, you have to ask what this is doing to the viability of opening and operating a small business."

SCALE. Why do small businesses carry a greater load than larger ones? Economies of scale, Hopkins says. For example, buying the equipment to solve pollution problems costs the same no matter whether a company has 20 employees or 2,000.

"Small business is the backbone of our economy," adds Hopkins. "Such success is remarkable given the disproportionate burdens that government regulations place on them. Small firms annually spend close to $7,000 per employee to comply with regulations enforced by over 60 federal agencies."

So where do we go from here? Says Hopkins: "Whether all this regulation is delivering the protections intended in reasonable ways deserves closer attention in light of the size of its cost."

Click here to read the SBA report online. By Robin J. Phillips in New York

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