Today the House Technology & Economic Development Committee heard a report from the state auditor’s office assessing implementation of the state’s Regulatory Fairness Act (RFA).

The performance audit examined how well state agencies have complied with the RFA since its was passed in 1982.  The audit’s findings were concerning, to say the least.

The RFA requires agencies to determine how their proposed regulations would impact the state’s businesses, and in particular, small businesses.  Washington is widely considered to be one of the most heavily regulated states in the nation, with small businesses bearing the brunt of the regulatory burden.  The Small Business Administration reports that small businesses with fewer than 20 employees spend 36% more per employee than do larger firms in order to comply with just federal regulations.

Under the RFA, if an agency’s proposed regulation would impose “less than minor” compliance costs on businesses, the agency may proceed with adoption of the rule.  The RFA defines “less than minor” as costs that are less than 1% of annual payroll or .3% of annual revenue in the regulated industry. 

If the regulation would have “more than minor” compliance costs on a business, the agency is required to prepare a Small Business Economic Impact Statement (SBEIS).  If the SBEIS reveals the rule would impose higher costs on a small business than a larger business, the agency must then revise the regulation to mitigate those costs. 

The RFA allows a number of exemptions to the requirement.  If an agency determines a proposed regulation is exempt, the agency is relieved of complying with the steps described above.  Declaring a rule exempt from the RFA means the agency has the green light to implement the regulation with no consideration of its costs or impact on businesses.

Based on the auditor’s findings, this exemption is too often an easy way out of complying with the requirements of the RFA. 

After reviewing the 331 regulations proposed by 16 of the most prolific rule-making agencies (there are a total of 26 regulatory agencies) in 2014 and 2015, the audit found state agencies claimed an exemption from the RFA for 127 of them.  Of these, half were clear and allowable exemptions.  The other half were based on exemptions that either were not allowable under law, do not even exist, or the agency simply didn’t bother to provide an explanation or justification for the exemption. 

For the 204 proposed regulations that were not exempt, only 25 were determined by the agency to have a “more than minor” cost that would trigger the SBEIS requirement.  Only 7 of those 25 included all the information in the SBEIS required by law.   

Of the 179 regulations deemed “less than minor” by the agency, only half provided sufficient support for that determination.  Interestingly, the auditor’s office revealed that upon requesting the proper supporting documentation, some agencies changed their classification of the regulation to exempt.

Representative Norma Smith, who has long championed regulatory reforms to improve the state’s small business climate, expressed outrage over the audit findings and this week introduced HB 1120 to address agencies’ compliance shortcomings.

Given one of the audit recommendations was to “hold agencies accountable for ensuring all proposed rules meet the requirements of the law,” lawmakers from both sides of the aisle should support Rep. Smith’s efforts to ensure agencies account for the cost of the regulations they create.

Of course, as one business owner and newspaper columnist points out, the cost of complying with one regulation is the tip of the iceberg in a state that imposes hundreds of complex and costly new regulations every year.