Improved Business Regulation Systems Can Benefit State Economies

When state business regulations function well, they help protect workers, companies, and the public, and play an important role in society. But poorly designed regulatory administrative and compliance processes can be difficult, confusing, and time-consuming to navigate, especially for entrepreneurs hoping to launch a new business or product. Such poorly designed compliance processes can impose unnecessary burdens on businesses, cost them scarce time and money, and even delay or prevent the launch of a productive new commercial venture. They also have a cost to society in undermined economic growth and productivity.

Fixing these problems, though, could be a cost-effective way to boost states’ long-term economic potential and also improve agency performance. For example, in 2021, Rhode Island launched an online portal that provides comprehensive guidance on the often-complex approvals needed to open a restaurant, which officials estimate reduced a two-week manual process to a two-hour online session. Such improvements to regulatory processes may even reduce a state’s costs over the long run, helping agencies to achieve their regulatory missions more efficiently.

A summary of research by The Pew Charitable Trusts and our partners can further the conversation about how states can approach regulatory improvement from an economic development perspective while continuing to achieve important goals such as protecting workers, the environment, and public health. Our work in this area also included a policy academy that brought together Pew, the National Governors Association (NGA), and policy leaders from five states—Alaska, Colorado, Delaware, Rhode Island, and Tennessee—to share their experiences and discuss best practices.

Promising state approaches

Although public discussions often focus on whether to increase or decrease the level of regulation, our research found that business leaders are often more interested in reforms that make the process of complying with regulations easier to navigate and that also produce timely and predictable regulatory decisions.

States have taken two broad approaches to achieve these goals. The first is to streamline and modernize regulatory compliance systems. For example, moving processes online helped the Wisconsin Department of Natural Resources address filing errors more quickly, which reduced costly delays. Michigan updated procedures to allow for the simultaneous review of construction plans by multiple bureaus, which saved businesses time and money. Some officials have used innovative approaches to make their agencies more efficient, such as redirecting enforcement resources toward the highest-risk firms and activities. For example, we documented how the Colorado agency tasked with overseeing oil wells prioritized inspections based on risk factors such as a history of spills and the age of the well.  

A second common approach is for states to partner with businesses by proactively offering guidance aimed at increasing compliance and reducing uncertainty. For example, Rhode Island’s Department of Environmental Management engaged in consistent outreach to companies that encouraged them to voluntarily declare and correct noncompliance, which many companies did, thus avoiding penalties. Hawaii built an online tool to reduce uncertainties around prospective renewable energy projects by detailing the specific regulatory approvals that would be needed, the expected timeline, and the most efficient sequence for applications.

Some states have found it beneficial to inventory, review, and revise their regulatory codes to make them easier to understand and comply with, as documented in this NGA paper. A first step is to “catalog” all of the rules and requirements, which can then inform a state’s systematic review focused on regulatory objectives, effectiveness, and compliance costs. The paper argues that the sustained success of such an effort is more likely when states set clear goals, develop quantitative progress metrics, and communicate these clearly to the public and key decision-makers.

Another NGA paper focuses on online “one-stop” portals—single-point-of-entry websites for any interaction a business may have with the state government. The paper examines how four states—Connecticut, Delaware, Rhode Island, and Tennessee—use one-stop portals to improve customer service by providing clearer, step-by-step guidance. One-stops can also help states link previously unconnected systems and information across different regulatory authorities to reduce duplicative work and processing times. Launching a new business can require many time-consuming interactions with a range of state agencies, so one-stops can be particularly beneficial for entrepreneurs and small businesses that lack both regulatory expertise and time. These systems can also benefit agencies by reducing operating costs, increasing business compliance, and generating valuable performance data.

Lessons learned from COVID-19

The onset of the COVID-19 pandemic presented state regulatory officials with unique challenges. They had to quickly implement a range of rule and process changes to protect public health while ensuring that businesses, health care providers, and regulatory authorities could continue operating safely. For example, agencies enabled more transactions to be completed online, expedited approvals for outdoor dining, and provided increased flexibility for telehealth providers. Two papers, one by the NGA and the other by the National Academy of Public Administration (NAPA), document these policy changes and the compliance system improvements that states made both before and during the pandemic that helped them quickly adapt their regulatory systems to the changing circumstances.

One lesson to draw from these experiences is that change is possible within regulatory agencies and that these agencies can act nimbly when it is a priority. If officials and policymakers can draw insights from changes made during the pandemic, these experiences have the potential to shape future improvements.

Second, the urgent and rapidly evolving public health crisis underscored the value of having robust and flexible systems in times of crisis. NAPA found that states that had already invested in updated technologies such as one-stop portals and remote operations were better prepared to implement changes and serve customers, although they still faced many challenges. NAPA recommends that agencies experiment with additional flexibilities that might help them prepare for the next crisis as well as improve day-to-day operations.

Third, regulatory authorities should document the changes they make and collect real-time data to bolster their ability to identify and address chokepoints and evaluate improvements. Officials can also identify and address challenges more quickly by strengthening communication channels with businesses and sharing best practices across states.

How regulatory improvement can support economic development

A report published by the Regulatory Studies Center at George Washington University reviews the available economic research regarding the potential economic impacts that different approaches have in reducing the burden of compliance processes. It found that certain reforms can produce economic benefits by reducing compliance costs, barriers to entry, and delays, leading to increased supply, productivity, dynamism, and innovation, and lower consumer prices.

The report also notes that newer and smaller businesses tend to be the ones most affected by confusing or poorly designed processes because they have less experience and fewer resources to dedicate to regulatory compliance. So a streamlined compliance system could encourage competition from new firms and potentially invigorate innovation and economic growth.

The report concludes that the evidence from the U.S. and other developed countries suggests that streamlining regulatory compliance can yield economic benefits that exceed their implementation costs. It also finds that the U.S. appears to lag behind other developed countries in implementing such reforms. However, the report also cautions that economic impacts can be difficult to accurately estimate, and that more research and data are needed to better understand the impacts within the U.S. and to separate the results of changes to compliance processes from changes to the substance or stringency of regulations.

Conclusion

Pew’s work and that of our research partners has shown that streamlining and improving regulatory compliance processes is achievable and can have positive economic impacts. Moreover, these efforts may reduce costs and increase regulatory agencies’ effectiveness over the long term. Officials throughout the U.S. can learn from states that have already made significant progress, and leading states have the opportunity to further build on their successes. To advance the case for streamlining processes, states should continue to modernize their systems to collect and report key data and metrics and use that information to continually identify potential improvements and evaluate their effects.

Mark Robyn is a senior officer with Pew’s state fiscal health project.