January 21, 2016

The Impact of Federal Regulation on Nevada

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Federal regulation is applicable in the same way in all 50 states. Each state’s economy, however, includes a unique mix of industries, so federal policies that target specific sectors of the economy will affect states in different ways. 

Federal regulations can, by design, target some industries more than others. For example, the Dodd-Frank Wall Street Financial Reform Act of 2010 directed federal regulatory agencies to create approximately 400 new regulations targeting the financial services sector.1 These new regulations will have a national effect because financial services matter in all states, but they will be felt more in New York than in South Carolina, simply because of the relative importance of the financial services industry in the former state. 

Using the RegData database, we can examine the relative impact of federal regulation on a particular state. RegData creates an industry regulation index by counting the number of words and phrases in the Code of Federal Regulations that indicate a specific mandated or prohibited activity and then by classifying those regulatory “restrictions” according to which industry or industries they likely target. The 10 most-regulated industries in the United States for 2014 are listed in table 1. 

By weighting industry restrictions using the importance of an industry to a state relative to its importance to the country overall, we can produce a single Federal Regulation and State Enterprise (FRASE) index that measures the impact of federal regulation on individual states. The index is thus a ratio of the impact of federal regulations on a specific state’s industries to the impact of federal regulations on the nation’s industries in a given year. A value of 1 would indicate that a state’s private sector is affected by federal regulations to exactly the same degree as the national private sector, while a score higher than 1 would indicate a higher impact of federal regulation on a state’s private sector. 

For 2013, Nevada scored a 0.82 on the FRASE index. By design, the FRASE index for the United States overall in any year will equal 1, so a score of 0.82 indicates that the impact of federal regulation on Nevada’s industries was almost 20 percent lower than the impact on the nation overall. 

While there is some fluctuation from year to year in the ratio of the impact of federal regulation on the state to its impact on the nation, more dramatic growth occurs in the total number of such regulatory restrictions affecting the state since 1997. One way to measure this impact is to scale the weighted restrictions to the total weighted restrictions for the national economy in 1997. Doing so allows us to calculate the growth of the FRASE index relative to 1997. For Nevada, the FRASE index, scaled by total weighted restrictions for 1997, has grown by 74 percent from 1997 to 2013. 

As shown in table A1 in the appendix, this significant growth in the 1997-based FRASE score contrasts with the more modest growth in the current-year FRASE. The constant-basis index diverges from the current-basis version because it takes into account the growth in regulation nationwide over time. For Nevada, therefore, the increasing constant-level basis therefore reflects two upward trends: an increase in overall regulation for the country, and an increase in the Nevada-specific impact of federal regulation. 

So why is the impact of federal regulation lower for Nevada than for the country overall? The answer lies in the particular industries that make up the state’s economy and how regulated those industries are. The numbers of regulatory restrictions affecting the top five industries by contribution to Nevada’s private sector are shown in figure 1, and the contributions of those industries to the state and national private sector are compared in figure 2. 

The accommodation industry plays a unique role in Nevada’s economy. In fact, that industry con- tributes a share of Nevada’s private sector more than 13 times the size of the share it contributes to the private sector of the nation as a whole. However, the accommodation industry is only lightly regulated at the federal level (though it is regulated more heavily at the state level); it faces only a quarter of the federal regulations faced by the median industry. 

In fact, the industry that contributes the most to Nevada’s FRASE score is only the fourth-largest contributor to the state’s private sector: mining, which does not include oil or gas extraction. Not only is mining more highly regulated than the median industry, subject to over 9,000 restrictions, but it is more than 11 times more important to Nevada’s private sector than to the US private sec- tor as a whole. 

So who is doing the regulating? The five agencies responsible for the most industry-specific restrictions are shown in figure 3. 

The top regulator is the Office of Surface Mining Reclamation and Enforcement. With over 3,400 restrictions, that office accounts for more than a third of all industry-specific restrictions. The other top regulators are the Bureau of Land Management, the Mine Safety and Health Administration, the Office of Workers’ Compensation Programs, and the Environmental Protection Agency. 

The landscape of federal regulations can change from year to year, as can the makeup of a state’s economy. As those changes occur, residents of affected states may have to learn new sets of regulations or deal with different regulators. Policymakers from Nevada are well situated to comment on the impact of federal regulation in their state and whether that impact is adequately represented in the current debate about regulatory and legislative impact accounting.2