Arizona Is a Model for Red Tape Reduction

Tuesday, July 31, 2018
Authors: 
James Broughel

Arizona has one of the best regulatory climates in the country, which may help explain why their economic growth rate has surpassed the national average. James Broughel and Catherine Konieczny explain what Arizona does so well in a new opinion. 

Read it here: Arizona is a model for red tape reduction

Regulator Discretion at the State Level

June 28, 2018

Periodic review of administrative rules is important to ensure that public policy is achieving desired outcomes. Such review can also improve the design of new regulations, as lessons from past experience are used in the creation and implementation of new rules and programs. A 2010 report showed that, as a result of either a governor’s executive order or a state statute, 40 states had processes for the periodic review of rules. In many cases, however, these reviews are quite limited in scope, focusing narrowly on impacts on small businesses; in some cases, the review requirements are not seriously enforced and meaningful review does not occur. In recent years many governors have taken further steps to guarantee that rules are reviewed on at least a one-time basis.

In order to be successful when reviewing existing regulations, regulatory agencies must competently identify the rules under their purview, determine which ones need updating or eliminating, and, critically, take action to modify or repeal those rules. In some cases, however, regulators lack the legal authority to take this last step, i.e., to make substantive changes to regulations, because rules can be required by federal or state law.

The Case of Arizona

An example of a state that requires periodic review of regulations is Arizona. State law provides that every five years state agencies review their own rules to determine if any should be amended or repealed. At the end of their reviews, agencies submit a report to the Governor’s Regulatory Review Council summarizing their findings and describing any proposed course of action. The statute governing the review process requires, among other things, that agencies provide the “authorization of the rule by existing statutes” in their reports. Thus, these reports offer important insights into the extent to which state regulations are authorized or required by state or federal law.

The most recent review of Arizona regulations took place in 2017. In late 2017, the Arizona Governor’s Regulatory Review Council produced a report summarizing information gathered from state agencies. The report shows that, as of March 31, 2017, Arizona has 10,917 rules.

With respect to the authorization for these rules, the report organizes the rules into four categories: agency discretion, state statute, federal statute or regulation, and definitions or applicability.

While all regulations must have some statutory basis, the agency discretion classification means that the decision of whether to adopt a given regulation is left up to the regulator by the legislature, or that a statute delegates general lawmaking powers to an agency without mandating that a specific regulation be promulgated.

By contrast, the state statute classification means that a governing state statute requires a specific rule in an agency’s chapter of the state code, and therefore state law must be changed before an agency can significantly alter or eliminate a rule.

Similarly, the federal statute or regulation classification means that a rule is required by federal law, is in place because of a condition for the state to receive federal grants or other incentives, or exists as part of an agreement between the federal government and Arizona. These rules also have authority stemming from state statute, but their original authority begins with a federal mandate.

Finally, rules whose authority traces to definitions or applicability are typically issued at the discretion of the regulating agencies, but rather than add additional regulatory burdens on the public, these rules serve to add clarity to the language of other regulations or to more clearly identify who is impacted or what activities fall under the scope of regulations.

Results of Arizona’s Review

Arizona’s review determined that 57 percent of regulations on the books existed at the discretion of the state regulating agency, 29 percent were mandated by state statute, and 9 percent of rules cited federal laws or agreements as authorizing the regulation. Just 5 percent of rules were classified as relating to definitions or applicability.

Judging by these numbers, it appears that state regulators have considerable discretion in Arizona, though some exceptions exist at specific agencies. For example, 83 percent of the state Water Infrastructure Finance Authority’s rules are required by the federal government, as are 80 percent of the Emergency Response Commission’s rules, 58 percent of the state Radiation Regulatory Agency’s rules, and 52 percent of Department of Environmental Quality’s rules.

Relating to state law, 87 percent of the Private Investigator and Security Guard Hearing Board’s regulations are required by state statute, as are 63 percent of the State Boxing and Mixed Martial Arts Commission’s rules and 53 percent of the Department of Emergency and Military Affairs’s rules.

Lessons from Other States

While the findings from Arizona’s review are informative, Arizona may not be representative of all states. For example, West Virginia is a state that generally requires legislative approval before new regulations can be adopted. Thus, agencies have far less discretion to change or modify old regulations in West Virginia compared to Arizona because so many of the regulations in the West Virginia Code of State Rules are required by state statute.

Similarly, since 2017 Wisconsin has been a state that prohibits promulgation of regulations estimated to cost $10 million or more unless the legislature passes a bill that allows the regulation to proceed. While this requirement may make it harder for some large regulations to be promulgated, those regulations that are adopted through this process (which will also be some of the most consequential regulations) will also be harder for regulators to change in the future because the rules will have an explicit legislative endorsement.

While there may be benefits to processes—such as those found in West Virginia and Wisconsin—that significantly reduce state regulator discretion, such policies may also have the unintended consequence of tying the executive branch’s hands in future efforts to amend regulations as needed by changing circumstances. 

By contrast, the governor in Arizona has considerable authority when it comes to rule changes. For example, after the Governor’s Regulatory Review Council reviews agency rule reports, the council has the authority to order an agency to amend or repeal a rule that is deemed materially flawed. If the agency fails to do so by a specified date, the rule automatically expires.

Conclusion

The point of having periodic reviews is to improve regulations according to changing circumstances as new technologies, products, and business models emerge. Improvements could take the form of rolling back obsolete rules, reducing regulatory burden without diluting necessary protections, replacing cumbersome requirements with nimbler and smarter ones, or even strengthening regulations. 

Even when a rule is required by law, the agency may still have discretion over certain aspects of the rule. On the other hand, even when the agency has broad discretion over how and whether to regulate, the agency must still adhere to administrative procedures in the state, which are set up to ensure checks and balances, public participation, and government accountability.

State legislatures should provide instructions to the executive branch regarding how to prioritize and conduct rule reviews; at the same time, state agencies should maintain a degree of discretion to modify rules as needed to fulfill their mandates, and they should routinely make recommendations to the legislature regarding regulatory improvements that require statutory changes. 

It is not easy to strike the balance between statutory authority and administrative discretion. The first step toward finding that balance is to account for who has authority over each rule in the state administrative code; herein we offer such a picture for Arizona.

It’s Time to Rethink the Nutrition Facts Panel

January 29, 2018

This comment is in response to the Food and Drug Administration Docket No. FDA-2017-N-5094. The request for comment seeks input to identify existing regulations and requirements for review, modification, or repeal. A significant body of the FDA’s rule docket is implementation of the Nutrition Labeling and Education Act of 1990 (NLEA). Specific changes to food labeling have not been retrospectively reviewed to determine whether their intended benefits were ever realized. For the FDA to meet its public health mission, any regulatory action must show both a significant impact on consumer behavior and improvement to individual health.

The Program for Economic Research on Regulation at the Mercatus Center at George Mason University is dedicated to advancing knowledge about the impact of regulation on society. As part of its mission, the program conducts analyses of the regulatory process from the perspective of the public interest. This comment, therefore, does not represent the views of any particular affected party or special interest group but is meant to assist the US Department of Health and Human Services and the FDA in reviewing its body of regulations.

Review of labeling rules represents an opportunity for the agency to reevaluate the burdens imposed by regulation and the distortionary effect of these burdens on the development of the industries they regulate. Our research has found that the regulatory impact analyses developed in support of packaged food labeling, beginning with the NLEA rules, used flawed models of consumer behavior that resulted in inflated predictions of health benefits from consumer label use. Neither the predicted changes in behavior, particularly for the 1990 NLEA rules and subsequent modifications, nor the resulting improvements in health outcomes have been realized.

Concern

Since the inception of nutrition labels in 1973 (for foods with claims), the evidence has failed to support the predictions that labels would positively impact consumer food choices and health outcomes. For example, per capita fruit and vegetable consumption has declined 5.5 percent between 2004 and 2014 (total vegetable consumption is down 6 percent). In addition, since the early 1990s, obesity rates have risen from about 28 percent to over 35 percent, and one in six children ages 2 to 19 is now obese.

With the first required nutrition labeling for packaged foods in 1973, former FDA Commissioner Charles C. Edwards noted that the “experience under this new regulation is required before expansion to all foods on a mandatory basis can be considered.” This advice was not heeded before implementing regulations pursuant to the Nutrition Labeling and Education Act, but now, with more than 40 years of data, it is time to take a broad look at the current approach. In particular, does it really make sense to ask consumers to track and heed individual nutrients, macronutrients, and calories as well as doing the necessary math to make Daily Values work for them?

Below we have addressed some specific questions asked in the request for information.

Is the regulation still current, or is it outdated or unnecessary in some way?

The ideas promoted by current nutrition labeling appear to go beyond scientific consensus on diet-health relationships. For example, at best, the results are mixed as to whether posting calorie counts has public health benefits. In addition, it is by no means clear that added sugars (as opposed to total sugars) information will be useful to consumers, and an increasing number of studies challenge saturated fat guidelines associated with the Nutrition Facts Panel (NFP).

Food labeling standards are ineffective and unnecessary if consumers (1) do not process label information reliably, (2) have little interest in nutritional information, (3) have little concern about health effects that may only be realized decades in the future (i.e., the temporal discounting of alleged health claims), or (4) lack information on the acute or long-term health effects of the labeled product for them personally.

In order for the standards to achieve positive health outcomes, the following conditions must be met:

  1. Some percentage of consumers must see the label.
  2. Some percentage of those consumers must read the label.
  3. Some percentage of those must understand the label.
  4. Some percentage of those must act on the label.
  5. The information on the label must be correct.
  6. Some percentage of consumers must not use compensation mechanisms to offset the action they take.

There is some percentage (probability) that applies to each of the above steps. Those percentages must be multiplied together to calculate the probability of a positive outcome. If we assume a 50 percent chance for most of them—a generous assumption—then there is only about a 1.6 percent chance (50 percent applied to each) that there will be a positive outcome.

Have there been advancements and innovations in science, technology, or FDA or industry practice, or any other changes that suggest repeal of or modification to the regulation may be warranted or appropriate?

Research subsequent to the enforcement of the NLEA shows that consumers are selective in their use of NFPs, using either front panel claims or information on one or two macronutrients to determine the overall healthfulness of a product rather than making holistic decisions that balance their consumption of all nutrients. Many consumers who claimed to use nutrition facts were not observed actually using the nutrition facts label when selecting foods. While many people (65 percent) said in the 1990s that they used the food label to avoid certain contents, that figure has declined through 2006 and dropped to 48 percent in 2013—although this could mean that consumers now knew what they wanted to eat and had no more need for labels.

Have regulated entities had difficulties complying with the current regulation? If yes, identify what entity or entities have had such difficulties and the nature of the difficulties.

The difficulty with the proposed labeling changes, for firms, would generally be the costs of complying with the regulations. Such costs would have to be paid for out of retained earnings, as it is difficult to borrow for changes that are not expected to increase sales. These additional costs would be the most burdensome for smaller, less established firms, but all packaged-food product manufacturers would be affected because they would be required to retest their products to update their labels. By its own analysis, the FDA shows that 74 percent of private-label food products, 78 percent of branded dietary supplements, and 84 percent of private-label dietary supplements would require label changes to be in compliance. If rules were expanded to require restaurants to provide calorie counts on menus, the number of producers impacted would increase even more.

Longer compliance periods offer higher net benefits and a reduction in regulatory burdens, which would translate into lower food prices for consumers. At a 3 percent discount rate, a four-year compliance option would provide $500 million in additional net benefits, as opposed to a two-year compliance period.

Could the goal of the regulation be achieved by less costly means that would provide the same level of public health protection? If yes, provide examples of alternatives that may reduce costs to industry while retaining the same level of public health protection.

The only alternatives that have been considered in previous changes to labeling rules are (1) longer periods for firms to become compliant and (2) small changes in the specific levels suggested for a particular nutrient. The FDA should consider alternatives that allow for voluntary standards and innovation in labeling that could produce more useful labeling than the FDA currently produces. There are many voluntary front-of-package symbols that have been privately developed in the US and evaluated in two consensus studies by the Institute of Medicine. One such system has been developed by the American Heart Association (Heart-Check), but the FDA sent out a general warning letter in 2008 telling manufacturers that they must be careful not to make an implied claim. First Lady Michelle Obama urged the FDA to create a national system that would replace the vast number of such voluntary symbols, but such an initiative has yet to be undertaken by the agency.

What factors should FDA consider in selecting and prioritizing regulations and reporting requirements for reform?

The FDA should prioritize review of rules that have not been retrospectively reviewed to determine whether their intended outcomes have been realized. Within this body of rules, those that have the largest compliance cost should be considered first. These include all of the incremental changes to the nutrition facts panel and other food labeling standards that comprise 21 CFR § 101.

Proposed Solution

Before any further labeling rules are considered for modification, the FDA must understand the impacts of current rules on consumer health (i.e., heart disease, cancer, obesity, and diabetes). We recommend that the FDA commission a comprehensive study that examines the overall impact of nutrient-based food labeling. Numerous experts agree that labeling of nutrients has been a poor approach since the beginning. Consumers don’t eat nutrients, they eat food. Alternatives to current labeling should be considered that are more easily understood by consumers, lead to more holistic decisions about what is healthy for an individual to consume, and better follow the scientific consensus on behaviors that lead to improved individual health.

As discussed above, one alternative to consider might be to replace or supplement current food labels with front-of-package symbols that are easy to understand and are based on the entire food rather than nutrients and macronutrients.

Untangling Hair Braider Deregulation in Virginia

November 28, 2017

Occupational licensing laws make it illegal for an individual to work in an occupation before meeting minimum standards for entry. Workers whose occupations are subject to licensing range from physicians and dentists to cosmetologists and barbers. Though some licensing proponents claim that licensing improves the quality of services delivered to consumers, this argument is weak for certain occupations. In fact, occupational licensing may limit employment opportunities in a labor market already experiencing a dwindling participation rate.

Edward J. Timmons and Catherine Konieczny investigate the effects of licensing hair braiders in Virginia. Virginia removed licensing requirements for hair braiders in 2012. The study uses this regulatory change to compare counties in Virginia with bordering counties in North Carolina, West Virginia, and Kentucky in order to estimate whether removing licensing requirements had a significant impact on the number of salons, the number of salon employees, or the wages of those employees. This comparison provides a one-of-a-kind examination of the impact of Virginia’s deregulation of hair braider licensing on economic outcomes.

Key Findings

  • Following Virginia’s deregulation in 2012, the number of beauty shops in Virginia counties grew 7 percent more than the number in neighboring counties in bordering states.
  • Expensive occupational licenses significantly impact enterprising proprietors, who are prevented from opening new establishments.
  • Evidence suggests that deregulation created more opportunities for smaller owner-operated beauty salons in Virginia, because it was associated with a more than 8 percent increase in proprietor density.

As shown in figure 1, thirteen states require aspiring hair braiders to obtain a cosmetology license. Fourteen states have specific hair braiding licenses that are generally less burdensome than the requirements for cosmetologist licensing in the state. Though there are debates about the unique risks of hair braiding for consumers, cosmetology training addresses neither those risks nor the unique skills involved in hair braiding.

Hair Braiding Risks Are Overblown

A recent study performed by the Institute for Justice (IJ) explores whether hair braiding presents risks to consumers. After reviewing the data for nine states and Washington, DC, from 2006 to 2012, IJ finds that

  • only 95 complaints were filed against hair braiders (meaning approximately 1 percent of licensed hair braiders received complaints), and
  • all but one of these complaints were filed by competing cosmetologists, not by consumers.

IJ’s study also finds large differences in the number of hair braiders in Mississippi and in Louisiana. Mississippi, which has no licensing requirement for hair braiders, had 1,200 hair braiders in 2012. Louisiana, which has a licensing requirement for hair braiders, had only 32 hair braiders. 

The results of the IJ study further reinforce the finding that hair braider deregulation has enhanced economic opportunity for hair braiders in Virginia.

Conclusion

As policymakers in the rest of the country reconsider hair braider regulation, these results provide very clear guidance. Not regulating the hair braiding profession is superior to imposing burdensome regulation, such as requiring a cosmetology license (as in West Virginia) or a separate hair braider license (as in North Carolina).

Ideas for Regulatory Review at the US Department of Transportation

November 3, 2017

This comment is in response to DOT-OST-2017-0069. Specifically, two Department of Transportation rules—the Corporate Average Fuel Economy (CAFE) Standards of the National Highway Traffic Safety Administration (NHTSA) and the Train Crew Staffing Rule of the Federal Railroad Administration (FRA)—should be reviewed as opportunities for deregulation.

The Program for Economic Research on Regulation (PERR) at the Mercatus Center at George Mason University is dedicated to advancing knowledge of the impact of regulation on society. As part of its mission, PERR conducts analyses on the regulatory process from the perspective of the public interest. This comment, therefore, does not represent the views of any particular affected party or special interest group but is meant to assist the US Department of Transportation in reviewing its body of regulations.

Review of these two rules represents an opportunity for the department to reevaluate the burdens imposed by regulation and the distortionary effect of these burdens on the development of the industries they regulate. Both rules create a countervailing risk—a consequence that results from a regulatory action and is not already accounted for in the direct cost of the action. For CAFE and railroad staffing rules, countervailing risk takes the form of inappropriate safety measures and investment diverted from precautionary safety.

Corporate Average Fuel Economy Standards – RIN: 2127-AK29

Originally proposed to reduce emissions through improved fuel economy, the CAFE rule adds to traffic congestion and causes technological lock-in from frontloading standards implementation. The assumptions used in the final benefit-cost analysis should be reviewed retrospectively to see if external changes in fuel costs used in the original estimation have lowered the achieved benefits, or if the expected behavioral changes in consumers have occurred in any degree. While one option, if the costs outweigh the benefits, might be complete withdrawal of the rule, therefore relying on market forces to set performance standards as demand for fuel efficiency increases naturally, the rule could be modified to use alternative implementation plans that encourage technological diversity.

An alternative to the current rule could be a system of voluntary CAFE goals in which vehicle models that exceed CAFE standards bear a “CAFE compliant” emblem similar to that of the Energy Star program for electronics and household appliances. Consumers who desire a visual confirmation of fuel economy the most would seek out models with such emblems, allowing manufacturers of high-fuel-economy vehicles to easily match those vehicles with consumers. The department could also allow a grace period for manufacturers to invest in alternative fuel vehicle technology: manufacturers could demonstrate to DOT that, rather than complying with an increased CAFE standard, they instead invested in alternative fuel vehicle technology the amount that compliance would have cost.

Currently, this poorly implemented rule disproportionately burdens consumers, the actual users of the cars whose designs are altered to comply with efficiency standards. Changes to vehicle weight, structure, and material composition change the handling of the vehicle and may lead to higher death and injury rates. The engineering costs manufacturers face to comply with the rule were considered in the original analysis of the rule, but costs to consumers were forgotten.

Train Crew Staffing Rule – 49 CFR 218, RIN: 2130-AC48

Significantly, the staffing rule increases the cost of operating trains by requiring a minimum crew size of two unless a specific exception is made. This burden, however, is not the largest cost of the rule—the countervailing risk generated by diverted investment is much larger. By requiring a greater expenditure on personnel, railroads are forced to reallocate scarce resources away from those activities that are historically associated with improved safety, such as track and equipment maintenance or other infrastructure investments. The additional safety that the new rule creates by having more staff available must be weighed against the losses in safety caused by this deferred investment. In particular, two offsetting effects deserve consideration: deferred investment in infrastructure, including track and equipment maintenance, and deferred investment in safety-enhancing technology and innovation.

The regulatory impact analysis that accompanied the rule did not sufficiently show that the alternative to the rule—allowing single-member crews—was inherently less safe than multimember crews; the analysis also did not consider the cost of diverted investment described above. Without such proof, the alternative of allowing single member crews should be pursued, allowing investment dollars to find their highest-valued use.

The burdens of complying with this rule fall directly onto railroad operators, but the costs of countervailing risk and reduced safety affect all individuals who interact with trains, crewmembers, passengers, and automobile drivers. The dispersed costs to individuals outside of the operating industry were not considered in the original analysis, making this rule ripe for retrospective review and possibly repeal.