February 10, 2020

Prompting a Regulatory Reset in Arizona

Testimony before the Arizona State Senate, Committee on Government
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Chair Farnsworth, Vice Chairman Borrelli, and members of the committee:

Thank you for the opportunity to submit this testimony. My name is James Broughel, and I am a senior research fellow at the Mercatus Center at George Mason University and an adjunct professor at the Antonin Scalia Law School. My research focuses on state regulatory institutions, economic growth, and the economic analysis of regulations.

My testimony today centers around Senate Bill 1211 (SB1211), which is currently being considered by this committee. Specifically, I have three main points to convey:

  1. The accumulation of unnecessary regulations can slow down economic growth and can weaken the effectiveness of regulations that are justified to protect health, safety, and the environment.
  2. Despite real progress in recent years to reduce red tape, Arizona’s regulatory institutions could be strengthened to ensure that regulatory clutter does not continue to accumulate.
  3. A regulatory reset—which involves sunsetting the entire code of regulations—is an effective way to conduct periodic spring cleaning of unnecessary regulations. Such an approach has been successfully implemented in Idaho and Rhode Island, and constitutes a sensible, bipartisan way to ensure removal of obsolete regulations.

The Costs of Regulatory Accumulation

The accumulated body of regulations in a state has an effect on the economy that is greater than the sum of the effects of each individual regulation. The effect of regulation on the economy can be thought of as akin to dropping pebbles in a stream. The first pebble is insignificant, a thousand pebbles may slow the flow, but a hundred thousand pebbles could dam the stream even when that last pebble was, by itself, also insignificant.

The empirical connection between regulation and economic growth is well documented in the peer-reviewed academic literature:

  • A 2013 study in the Journal of Economic Growth estimates that federal regulation slowed the growth of the US economy by 2 percentage points per year on average from 1949 to 2005. This estimate suggests that, had federal regulation remained at its 1949 level, 2011 GDP would have been about $39 trillion larger, or 3.5 times larger, than it actually was.
  • A study published by the Mercatus Center estimates that economic growth has been slowed by 0.8 percentage points per year on average by federal regulations implemented since 1980. That number suggests that had the federal government imposed a cap on regulation levels in 1980, then by 2012 the economy would have been $4 trillion larger, which amounts to $13,000 per person in the United States.
  • Researchers at the World Bank estimate that the economies of countries with the least burdensome business regulations grow 2.3 percentage points faster annually than countries with the most burdensome regulations.
  • The authors of a study published in the Quarterly Journal of Economics say the following about gains (or lack thereof) from more stringent regulation: “We do not find that stricter regulation of entry is associated with higher quality products, better pollution records or health outcomes, or keener competition. But stricter regulation of entry is associated with sharply higher levels of corruption, and a greater relative size of the unofficial economy.”

In addition to slowing economic growth, the accumulation of regulations prevents regulators from doing their jobs effectively. Regulators should be prioritizing those justified regulations that promote public health, keep the environment clean, and maintain safe workplaces. However, all regulations carry the same force of law and must therefore be treated equally. This means that in practice counterproductive regulations distract regulators from doing their jobs to the best of their ability.

State RegData

Much of the research focusing on the effects of regulation on growth looks at the national level, largely because historically there have not been good ways to measure and compare regulation at the state level. However, that is beginning to change as a result of work being done by me and my colleagues at the Mercatus Center.

In 2019, my colleagues and I launched State RegData, a first-of-its-kind effort to quantify regulation across the 50 states. State RegData scans and analyzes legal text, in this case state administrative codes. In this way, modern technology is allowing us to overcome barriers traditionally associated with parsing millions of words of regulatory text.

As an example of these barriers, generally speaking state regulatory codes are too large for any single individual to read from start to finish. The online version of the Arizona Administrative Code (AAC) contained 5.6 million words in 2017. It would take an ordinary person about 312 hours—or almost 8 weeks—to read the entire AAC, assuming the person reads regulations 40 hours per week as a full-time job. This creates an impediment to researchers like myself who want to make sense of all the laws on the books. This is also a problem for entrepreneurs who need to understand the law to maintain compliance when starting or maintaining a business.

As part of our project, we pull key information from state codes, including word counts and counts of regulatory restrictions, which are instances of the terms shall, must, may not, prohibited, and required. These restrictions can signify legal constraints and obligations of various kinds. Using machine-learning algorithms, we are also able to estimate which industries are most targeted by state regulation and assess which types of regulation are most prevalent.

Arizona had 63,919 regulatory restrictions in its administrative code as of mid-2017. To put that in context, the average state has roughly 131,000 restrictions, putting Arizona lower than the average state. That said, Arizona has about 20,000 more restrictions in its regulatory code than South Dakota, the least regulated state as of mid-2019. In late 2019, the state of Idaho claimed to surpass South Dakota as the least regulated state, at 41,000 restrictions. It is worth noting again that Arizona’s numbers are from 2017, so it’s possible that the numbers have changed somewhat since then. More data will be available in the near future.

A Regulatory Reset

Governor Doug Ducey has made regulatory reform a top priority of his administration. Since taking office in 2015, he has signed multiple executive orders related to regulatory reform and has also prioritized reforms to the state’s occupational licensing regulations. The most recent executive order related to regulatory reform was signed in January of 2020. Among other things, the order continued a moratorium on new regulations that has been in place since 2015, and it established a process whereby for each new regulation requested by an agency, three will be recommended for elimination.

Governor Ducey has certainly taken productive steps to rein in red tape. However, there are at least two reasons to believe that a regulatory reset, like the one proposed in SB1211, could help take reforms to the next level. These are

  1. the default policy for regulations is that they remain on the books, which biases the regulatory system toward maintaining the status quo; and
  2. enhanced legislative oversight of the rulemaking process would return some authority over rulemaking to elected representatives and, by extension, to the people of Arizona.

A problem with many regulatory systems is that agencies have a “status quo bias.” That is, the path of least resistance is often to maintain the current stock of regulations on the books. Even when regulators know a regulation is not working as intended, they often have little incentive to admit it, as this could draw unwanted scrutiny (including budget cuts) from legislators or negative attention from the media and the public. Thus, the best option for them is often to just let things be.

The way to overcome this problem is to switch the burden of proof for regulations, and that can be done with the assistance of sunset provisions, which are automatic expiration dates for regulations. Without a sunset provision, regulations remain on the books by default unless regulators repeal them through the regulatory process. Repeal can be hard to do since administrative procedure acts are sometimes set up with the specific intention of locking in existing regulations.

A lack of sunset provisions at the federal level helps explain why 68 percent of federal regulations have never been updated. But with a sunset provision, regulations are discarded by default unless they are forced back through the regulatory process where they have to be justified anew and can be amended to accommodate changes that have occurred in the marketplace since the regulation was enacted. Clutter is thereby removed quickly and easily, and regulations are modernized on a routine basis.

Some states have even experimented with mass sunsets, which I refer to as a “regulatory reset,” where the entire administrative code expires all at once. Mass resets and sunset provisions may sound like dramatic policy, but in fact they been tried and proved successful in other jurisdictions.

Idaho has a sunset provision, for example, that provides that all state regulations expire on July 1 of each year unless extended by an act of the legislature. At least three other states have similar sunset provisions: Utah, Tennessee, and Colorado. In 2019, the Idaho legislature even opted not to pass a rule reauthorization bill. As a consequence, 19 percent of rule chapters, 10 percent of pages, and 19,000 regulatory restrictions were allowed to expire virtually overnight. Remaining rules were extended through the issuance of emergency regulations promulgated by the executive branch.

This has all gone incredibly smoothly. All told, as part of its regulatory reforms, the governor’s office claims to have cut or simplified 75 percent of all rules and eliminated 250 rule chapters, 1,804 pages of regulations, and close to 31,000 regulatory restrictions. Furthermore, the state legislature now has an opportunity to play a critical role in reviewing the governor’s changes when it decides whether to reauthorize the new administrative code in 2020. Idaho now claims to be the least regulated state in the nation, and it is hoping to lock in these successes by institutionalizing what it calls a “zero-based regulation” approach. The idea is that every few years, regulations should go away by default unless they can be justified anew. That is precisely the aim of sunset provisions in general and of Arizona SB1211 in particular.

The only area where Idaho’s regulatory reset could have perhaps gone more smoothly is with respect to time. After the legislature failed to reauthorize the code, the Little administration had slightly more than two months to determine which rules to keep and which to let expire. That’s why states might want to consider a reform closer to the Rhode Island model. Rhode Island initiated a regulatory reset too, but agencies were given far more advance time to review their rules and arguably were able to cut more red tape as a result.

In 2016, Rhode Island put an expiration date on its entire code, set to occur on December 31, 2018. This was done as part of an effort to create an online regulatory code, but it was also meant to be a red tape cutting exercise to streamline rules for businesses. By the time the reset had taken place, the state had eliminated 31 percent of its total rule volume. Notably, SB1211 seems to be similarly structured to the Rhode Island reset.

Also notable is that the Rhode Island and Idaho resets did not ignite significant controversy. This is likely because so many of the regulations allowed to expire were uncontroversial ones. For instance, Idaho had regulations on the books related to a game show that never existed. It had regulations governing pay phones (remember those?), rules related to the attire of the state’s deputy veterinarian, and even 20-year old regulations addressing nonnative snail populations that never turned out to be a significant pest problem in the state.

Of course, at some point regulations that are more controversial should be scrutinized as well, and this helps explain why Idaho is ramping up its use of tools like economic analysis. But it is quite telling that so many regulations could be eliminated in these two states without hardly anyone raising any significant concerns. This suggests a considerable amount of regulations on the books are obsolete. But don’t be fooled, such regulations can nonetheless be costly by adding unnecessary complexity to the legal system.

There is reason to believe Arizona is well positioned for a regulatory reset, as state agencies already possess a wealth of information as a result of their five-year periodic review process. This information can assist them in the process of identifying which regulations to allow to expire. For instance, agencies already have information about which regulations are mandated by state or federal law and which are discretionary. Discretionary regulations are those the agency could modify or remove without a legislative change. Figure 2 presents the breakdown of Arizona regulations by original authority.

It is concerning that more than half of the regulations on the books in Arizona are discretionary. This suggests that the legislature has delegated away much of its authority to make law. A regulatory reset combined with an annual sunset provision could help to address this problem because it simultaneously encourages the expiration of many discretionary rules while also restoring some of the traditional constitutional balance of power between the executive and legislative branches of government.

Conclusion

Arizona has made real progress trimming red tape over the past several years. The state should be proud of its accomplishments. However, there is more work to be done, as institutional features of the regulatory process lead to regulatory inertia. Even those regulations that virtually everyone agrees have outlived their usefulness may be maintained simply because that is the path of least resistance.

Forcing a regulatory reset can shift the current focus away from maintaining the status quo and toward creating a dynamic regulatory system responsive to ever-changing marketplace conditions. Furthermore, Arizona is well positioned to enact such a reform given the wealth of information agencies already possess as a result of reviews in recent years.

States such as Idaho and Rhode Island prove that this can work, and they have been leading the nation when it comes to regulatory reform. Arizona remains a step behind. However, SB1211 before this committee has the potential to make Arizona a leader in regulatory reform across the nation. That would be quite an accomplishment.

Thank you for the opportunity to submit this testimony. I welcome any questions you may have.