December 4, 2017

The Regulatory Landscape in West Virginia

Testimony before the West Virginia Joint Standing Committee on Government Organization

Chairs, vice-chairs, and members of the committee:

Thank you for inviting me here today to discuss the regulatory landscape in West Virginia. My name is James Broughel, and I am a research fellow at the Mercatus Center at George Mason University, where I study state regulatory issues as part of Mercatus’s State and Local Policy Project.

My message here today can be summarized in three points:

  1. West Virginia has a significant amount of regulation on its books, both in absolute terms and relative to some other nearby US states.
  2. The accumulation of regulations can be a drag on economic growth and prosperity in a state and can even weaken the effectiveness of the most important regulations in place.
  3. Capping the level of regulation is a way to help the West Virginia economy grow, make the state a more attractive place to do business, and encourage a more systematic look back at the rules affecting state residents.

Quantifying Regulation at the State Level

At the Mercatus Center, my colleagues and I have launched State RegData, a first-of-its-kind project to quantify the level of regulation across the 50 states. State RegData uses text analysis software to scan through bodies of state administrative code. Generally, state codes are too large for any single individual to read through from start to finish. For example, the online version of the West Virginia Code of State Rules contains 8.4 million words. It would take a person about 469 hours—or almost 12 weeks—to read the entire code, assuming a person reads regulations 40 hours per week as a full-time job.

At Mercatus we use text analysis programs to pull key information from state codes, such as word counts and counts of regulatory restrictions, which are instances of terms like shall, must, may not, prohibited, and required. These words and phrases can signify legal constraints and obligations of various kinds. We also estimate the industries that are most targeted by state regulation and assess which types of regulation are most prevalent.

West Virginia has 125,700 regulatory restrictions in its administrative code. As a practical matter, the online version of the West Virginia Code of State Rules is one of the more confusing state codes we have reviewed as part of our project.  Many “historical” regulations remain on the West Virginia Secretary of State’s website, despite no longer being active regulations. Additionally, a number of agencies are listed on the Secretary of State’s website that have no active regulations. We were careful not to count inactive regulations as part of our analysis. However, state residents must wade through both active and inactive rules to identify and comply with only those rules that apply to them.

Some of the state’s more than 125,000 restrictions are vital for protecting the health and safety of citizens, but others just make the code unnecessarily complicated or impose costly burdens on the public with no corresponding benefits. Title 32 of the West Virginia Code of State Rules, related to acupuncture, contains 344 restrictions. Title 3, related to barbers and cosmetologists, contains 302 restrictions. The title related to dieticians has 191 restrictions. Surely some of these restrictions are not necessary for safeguarding public health, safety, or the environment. Many occupational licensing requirements exist simply to protect established interest groups rather than to serve the public interest. Such protections often raise the wages of protected occupations but also raise prices for consumers and make it harder for people to enter these professions and obtain well-paying jobs. These negative outcomes disproportionately burden low-income individuals, as well as other vulnerable populations like minorities, military spouses, and immigrants, who all are trying to better provide for their families. Very often no corresponding quality improvements can be detected from occupational licensing regulations.

To date we have examined 18 state codes, and we plan to look at all 50 states in the near future. West Virginia’s code is near the middle of the pack of states examined thus far. While West Virginia’s regulatory code is nearly double Arizona’s code in terms of regulatory restrictions, West Virginia has succeeded in avoiding the regulatory excesses seen in some other states. For example, New York’s code is almost two and a half times the size of West Virginia’s. Nearby neighbors Pennsylvania, Virginia, and Kentucky have more restrictions on the books than West Virginia, but Maryland has about 4,000 fewer restrictions, and North Carolina (which doesn’t border West Virginia, but is close by) has 16,000 fewer restrictions (see figure 1).

Why Regulatory Accumulation Matters

The body of regulations in a state, taken together, has an effect on the economy that is greater than the sum of the effects of each individual regulation. Michael Mandel and Diana Carew of the Progressive Policy Institute in Washington, DC, liken the effect of regulation on the economy to dropping pebbles in a water 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.

As more and more rules are added to the books, complexity increases. Scholarship from the fields of psychology, economics, and organizational science suggests that people are more likely to make mistakes and are less motivated and able to comply when they are required to follow too many rules simultaneously. Thus, reducing the complexity of the regulatory system is likely to be a powerful way to improve compliance, generating better outcomes from rules.

There seems to be a connection between regulation and economic growth as well. A 2013 study in the Journal of Economic Growth estimates that federal regulation has slowed the growth rate of the US economy by 2 percentage points per year on average since 1949. A recent paper published by the Mercatus Center estimates that growth has been slowed by 0.8 percentage points per year on average by federal regulations implemented since 1980. Finally, researchers at the World Bank estimate that countries with the least burdensome business regulations grow 2.3 percentage points faster annually than countries with the most burdensome regulations.

Differences of one or two percentage points in growth may not sound like much, but consider this: From 2006 to 2016, West Virginia’s real GDP growth averaged just 0.7 percent per year. If this trend continues, it will take 100 years for the state economy to double its size. By contrast, if West Virginia’s economy were to grow 3 percent per year, it would take just 24 years for its real GDP to double. This small difference in growth rates is roughly the difference between the economy doubling once in a century and doubling four times in the same time period. In 2016, West Virginia’s real GDP actually contracted 0.9 percent while the country as a whole continued to grow. Years of slow or negative growth mean incomes for state residents are lower than they would otherwise be. Reversing this trend would allow West Virginians to improve their living conditions and create more opportunities for themselves, as well as for their children and grandchildren.

A Cap on Regulation Levels

West Virginia has a track record of pursuing regulatory reforms in recent years. However, another potential reform that has not yet been implemented, but that is worth considering, is a cap on regulation levels. A regulatory cap can prevent excessive regulatory accumulation while also preserving the flexibility regulators need to maintain a modern and up-to-date regulatory system. There are some benefits to this approach:

  • Limiting regulatory accumulation. A cap is a check on the inertial growth of regulations. In Mandel and Carew’s metaphor, a cap prevents too many pebbles from clogging the stream.
  • Demonstrated success. The cap approach has been tried, and proven effective, in other places, most notably in Canada.
  • Locking in the competitive edge. Based on restriction counts, West Virginia looks attractive to businesses because they face a less complex regulatory environment than in some neighboring states, like Pennsylvania, Virginia, or Kentucky. A cap on regulation levels would help lock in this competitive edge and may even lead to reductions in complexity, helping West Virginia achieve regulation levels closer to other states like Maryland or North Carolina.
  • A culture change at state agencies. After the Canadian province of British Columbia instituted a cap on rulemaking in the early 2000s, one public official noted that it changed her role from a regulation “maker,” who simply adds new rules, to a regulation “manager,” who oversees and cares for a portfolio of rules.

British Columbia sought to reduce regulation levels by one-third within three years, which was a more ambitious goal than a simple cap on regulation levels. After hitting this target, the province implemented a policy that one regulatory requirement be eliminated for every new one introduced, and regulation levels have fallen even further in the province. Accompanying the overall reduction in regulation was an economic turnaround. While regulatory reform was one factor among many, it likely contributed to British Columbia’s recent boom. The success of this province’s regulatory effort inspired a similar federal law in Canada, which passed the Canadian parliament overwhelmingly by a margin of 245 yes votes to just one no vote. US states, such as Kentucky, have also been inspired by the reforms in British Columbia.

Importantly, the reforms did not come at the expense of public health or the environment. British Columbia was able to achieve these reforms in part because government employees counted the number of regulatory requirements in place and committed to tracking this statistic across time. A tracking system is now made easier because previously unattainable data, such as those captured as part of the Mercatus State RegData project, are now available to assess the level of regulation in a state across time.

Finally, a cap on regulation levels forces more careful consideration of both new and existing regulations. When a new regulation is determined to be important enough to put in place, this triggers the reconsideration of old regulations in order to identify rules for modification or repeal. A cap system leaves decisions about the fine details of policymaking to the regulatory agencies that tend to possess the relevant expertise, while the legislature plays a supervisory role in determining whether the cap should rise, fall, or stay the same over time. 

In 2016 West Virginia instituted a sunset review process for state regulations. Regulatory sunset provisions are automatic expiration dates built into regulations. In West Virginia, new rules will expire five years after being promulgated, unless reauthorized. One hopes that by applying expiration dates to rules, this will force careful consideration in the future about whether rules are necessary, effective, or otherwise need to be modified or repealed.

While this is a good step, the 2016 law has a few limitations. First, expiration dates do not apply to rules enacted before April 1, 2016, unless those rules are modified in the future, meaning old rules won’t receive the same level of scrutiny as new rules. This may even discourage agencies from updating old rules, because making changes will create more work for regulators in the future. Second, the law exempted Department of Environmental Protection regulations. This is rather strange since the Division of Water and Waste Management and the Division of Air Quality sections of the Code of State Rules contain a combined 9,087 restrictions. Given that environmental rules comprise such a large and important part of West Virginia’s regulatory system, shouldn’t these rules be carefully reviewed periodically? 

A cap on regulation levels may bolster the effectiveness of the sunset review process. The cap approach also encourages review of old regulations on the books, because for each new regulation added, one old rule must be identified to repeal. But the absolute nature of this requirement makes it a stronger reform than most sunset laws. A hard cap would apply across all rules, including old regulations and environmental rules. It is also more binding than the sunset provision, which includes no target to maintain the current level of regulation and thus is unlikely to prevent regulatory accumulation. The sunset provision combined with a hard cap would force regulators to carefully consider which rules are necessary and which ones are not, which in turn would lead them to be better stewards of scarce taxpayer resources. 

Conclusion

The state of West Virginia has more than 125,000 regulatory restrictions on its books. It has more regulation than some other nearby states like Maryland and North Carolina, and its online code is confusing because it contains so many inactive rules. A cap on regulation levels could help prevent unwanted regulatory accumulation while also granting regulators the flexibility to address new and evolving problems. The successful experience of British Columbia since 2001 offers a roadmap for how to implement such a reform, which would build on the reforms West Virginia enacted in 2016. Other US states, like Kentucky, are already following British Columbia’s example. West Virginia should also make a commitment to tracking the level of state regulation across time, and data from the Mercatus Center State RegData project are available to help in this endeavor.

If West Virginia can consistently increase its economic growth rate by even tenths of a percentage point annually, this will have profound implications for the opportunities available to state residents, both in the near term as well as far into the future.

Thank you again for your time and this opportunity to testify today. I look forward to your questions.