April, 2022

The Regressive Effects of Regulations in Illinois

  • Dustin Chambers

  • Colin O'Reilly

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KEY FINDINGS

Regulations have unintended consequences, and these consequences can disproportionately affect low-income households. For example, more regulations are associated with higher consumer prices, fewer small business start-ups, and fewer new jobs. Recent research also shows that a greater regulatory burden is associated with increased poverty rates and higher levels of income inequality.

Within the state of Illinois, federal regulation growth since 1997 is associated with 274,033 more people living in poverty and a 4.8 percent increase in income inequality.

POVERTY

Given the growth of federal regulations affecting Illinois residents and businesses between 1997 and 2017, we estimate that regulation growth over this period is associated with an additional 274,033 people living in poverty in 2019 (1,415,838 actually in poverty versus 1,141,805 if there had been no regulation growth) and an increase in the poverty rate of 2.21 percentage points (11.4 percent actually living in poverty versus 9.19 percent if there had been no regulation growth).

The Mercatus Center’s Federal Regulation and State Enterprise (FRASE) index measures the effective federal regulatory burden upon a state (defined as “the degree of impact federal regulations have on a state’s economy relative to federal regulations’ impact on the national economy”). Using the FRASE index, researchers have found that states with a higher incidence of federal regulations tend to exhibit higher poverty rates. Specifically, a 10 percent increase in the effective federal regulatory burden upon a state corresponds to about a 2.5 percent increase in the poverty rate.

From 1997 to 2017 (the period for which FRASE estimates are available), the effective federal regulatory burden upon Illinois increased by 96 percent and is associated with an increase in Illinois’s poverty rate of 24 percent.6 As of 2019, the overall poverty rate in Illinois stood at 11.4 percent. If the increase in the regulatory burden had not occurred, our research suggests that the poverty rate could have been as low as 9.19 percent in 2019.8 Though this may not seem like a large difference in relative terms, it would have amounted to 274,033 fewer people living in poverty in Illinois in 2019.

INCOME INEQUALITY

We estimate that the accumulation of federal regulation affecting Illinois residents and businesses between 1997 and 2017 is associated with a 4.8 percent increase in income inequality.

Using the FRASE index, researchers have found that states with a higher incidence of federal regulations also have higher levels of income inequality. Specifically, a 10 percent increase in the effective federal regulatory burden upon a state corresponds to an approximate 0.5 percent increase in the state’s Gini coefficient (the most commonly used measure of income inequality).

 In view of the link between rising poverty and federal regulations, the increase in income inequality in Illinois is not surprising. From 1997 to 2017, the effective federal regulatory burden upon Illinois increased by 96 percent, and that increase is associated with a 4.8 percent increase in Illinois’s level of income inequality. As of 2018, Illinois was the 10th most unequal state in terms of income inequality (1 = most inequality, 50 = least inequality).1