Study says Connecticut among nation's regulatory heavyweights

By Bill DeRosa

In a paper published in the fall 2011 issue of The Connecticut Economy, UConn economist Steven P. Lanza argues that easing the state's regulatory burden could spur small-business growth.

Lanza, the quarterly's executive editor, cites data showing that Connecticut lost 2.2% (1,700) of its small-employer firms between 1996 and 2006: the third-largest percentage drop of any state during that period.

Why such a poor showing? According to Lanza, in addition to factors such as taxation and difficulty obtaining financing, "excessive regulation also plays a role in hamstringing business owners and entrepreneurs who simply don't have the resources of larger firms to cope with these constraints."

Where Connecticut Ranks

To support his point, Lanza refers to the Ruger/Sorens regulatory index: a ranking of states according to their fiscal and regulatory policies: which puts Connecticut in 42nd place, or ninth worst in terms of regulatory burden. He then applies alternative statistical methodology to develop a second index, one that ranks Connecticut slightly worse at 43rd. He attributes the low rankings to several regulatory factors, including Connecticut's:

  • Fairly exacting labor standards
  • Relatively high minimum wage
  • Prevailing wage law
  • Mandatory workers' compensation rules
  • Status as a non-right-to-work state (i.e., Connecticut is one of 28 states with no law to prohibit making the payment of union dues a condition of employment
  • Licensing rules, which require more special licenses for more occupations than any other state
  • Fairly rigorous land-use standards

Too Much of a Good Thing?

So, can overregulation be blamed for Connecticut's lack of small-business growth? Lanza urges caution when it comes to "inferring an exact causal link" but shows that regulation does play a role. His analysis of the relationship between key determinants of small business growth: including regulatory burden: and the change in small businesses between 1996 and 2006 reveals "a statistically significant, quadratic relationship between small-business growth and regulation."

What that means, says Lanza, is that "after controlling for other factors, modest levels of regulation are associated with higher rates of small-business growth, but beyond a certain point, additional constraints can hobble business performance."

Lanza's investigation suggests that an optimal level of regulation would be one that put Connecticut at about the 60th percentile in state regulatory rankings versus its current position in the 86th percentile.

He points out that if Connecticut's regulatory burden had been closer to that imposed by Minnesota, Michigan, Ohio, or North Carolina (all rank at about the 60th percentile), "Connecticut might have had a small-business growth rate one to two percentage points higher than it did over the 1996-2006 period: enough to have stemmed the small-employer losses that actually occurred."

Easing the Burden

CBIA has long advocated for reforming state regulations as a way to promote business investment and job creation in Connecticut. We played a central role in the passage of the landmark 2010 regulatory reform bill and continue to push for further improvements.

In advance of the Oct. 26 special legislative session on jobs, CBIA submitted a series of recommendations for consideration by Gov. Malloy and state lawmakers. They include ideas for easing the regulatory burden on Connecticut's small businesses by streamlining the permitting process and moving state agencies toward an enforcement approach that emphasizes guidance over punishment.

Bill DeRosa is editor of CBIA News. He can be reached at bill.derosa@cbia.com.