Tuesday, July 21, 2015

Maryland's Small Business Regulatory Climate Ranks Poorly

Over the past two weeks I published two separate blogs that addressed different facets of Maryland’s economic health. Here I want to address another one.
In Maryland Needs to Improve Its Fiscal Health, published on July 9, I referenced a recently released study from George Mason University’s Mercatus Center titled, “Ranking the States by Fiscal Condition.” The study concluded that Maryland presently ranks 37th among the 50 states with respect to its overall “fiscal health,” based on an assessment of five separate measures of its fiscal solvency. I recognized that Governor Larry Hogan has begun to take some positive steps to improve Maryland’s structural budget deficit, and I urged the legislators to cooperate in a sustained effort to restrain state spending.
In Maryland Needs to Improve Its Regulatory Climate, published on July 11, I commended Governor Hogan’s formation of a new Regulatory Reform Commission, tasked with examining regulations to determine which ones are making it unnecessarily burdensome to do business in Maryland. The establishment of the commission is a welcome step for the focus it brings to the need for regulatory reform.

Now, Wayne H. Winegarden, Ph.D., Senior Fellow in Business & Economics with the Pacific Research Institute, has just released the 50-State Small Business Regulation Index. In a lengthy, detailed report, Dr. Winegarden compares all 50 states based on an assessment of fourteen different factors that impact a state’s regulatory environment on small businesses. Thus, the Index creates a common platform to compare each state’s regulatory burdens on small businesses. Each one of the fourteen regulatory components included in the Index may impact the economic performance of small businesses.
With a No. 1 ranking as the least burdensome and No. 50 as the most burdensome, Maryland ranks poorly, overall, as No. 39. The report shows the ranking for each state for each of the fourteen different components, with some states ranking high with respect to some measures and low with regard to others. For example, Maryland ranks close to the top (No. 10) with regard to having a relatively favorable unemployment insurance rate but at rock bottom (No. 50, shared by others) with regard to the following measures: right-to-work state; alcohol control state; telecommunications regulations; and regulatory flexibility. [Hopefully, Governor Hogan’s newly formed Regulatory Reform Commission can improve Maryland’s performance regarding regulatory flexibility and telecommunications regulations.]
Below are the fourteen specific components that comprise the 50-State Small Business Regulation Index, along with a brief explanation for each ranking factor:
Workers Compensation Insurance
The Index uses the workers compensation costs, adjusted for industry composition, calculated by the Oregon Department of Consumer and Business Services in 2014 to rank the 50 states with respect to the burdens imposed by each state’s workers compensation program.
Unemployment Insurance

The Index uses the estimated employer contribution rates as a percent of total wages calculated by the U.S. Department of Labor for the calendar year 2014 as a proxy for the burdens imposed by each state’s unemployment insurance program on small businesses.
Short-term Disability Insurance Requirements
The Index differentiates the five states that require small businesses to purchase short-term disability insurance from the 45 states that do not burden small businesses with these mandates.
Minimum Wage Laws
The Index uses the prevailing state-wide minimum wage levels to rank the states based on their prevailing minimum wage as of February 24, 2015.
Expanded Family Medical Leave Act
As a proxy for the higher cost burdens on small businesses in the states that expand the FMLA, the Index categorizes the expanded FMLA benefits into one of ten key family leave categories as documented by the National Conference of State Legislatures and the national partnership for women and families.
Right-to-Work Laws
The Index differentiates the 25 states that have right-to-work laws from the 25 states without right-to-work laws.
Occupational Licensing Laws
The Index incorporates three proxies for the stringency and breadth of state occupational licensing requirements: (1) the number of job categories that require a license; (2) the share of workforce that is licensed; and, (3) the share of workforce that is certified.
Land Use Regulations
The Index uses the Wharton Residential Land Use Regulation Index (WRLURI), which is based on a nationwide survey of local land use control environments, to measure the stringency of the land use regulations across the states.
Energy Regulations
The 50-State Index of Energy Regulations serves as a proxy for the impact from each state’s energy regulations on small businesses’ cost structure.
Tort Liability Costs
Due to different state litigation environments, litigation costs vary across the states. To capture the variation in the litigation environment, the Index ranks the 50 states based on a tort liability survey conducted for the Institute for Legal Reform by Harris Interactive Inc.
Regulatory Flexibility
To assess the extent of relief from each state’s regulatory flexibility program, the Index ranks the states based on two criteria: whether the state implements a regulatory flexibility program, and if it does, the size of the small businesses that qualify for regulatory flexibility.
Telecommunication Regulations
To incorporate these regulations into the Index, changes to each state’s telecommunication regulations were evaluated based on each state’s: oversight of services; oversight of pricing; the existence (or elimination) of quality standards; the existence (or elimination) of filing pricing reviews; and, carrier of last resort requirements (a carrier required to provide service to any customer in a service area that requests it at prevailing rates).
Start-up and Filing Costs
To capture these regulatory burdens across the states, the Index relies on a comparative summary of the favorability of state laws.
Alcohol Control States
The Index differentiates the 18 states that are alcohol control states from the 32 states that are not alcohol control states.
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Of course, not everyone will agree with the significance, or the weight given, to each of the index components. But most will agree that, on the whole, Dr. Winegarden’s comprehensive study, published by the Pacific Research Institute, provides a good assessment of a state’s overall regulatory climate for small businesses relative to other states.
And most will agree – or should – that with its ranking (No. 39) near the bottom of the states, Maryland has much room for improvement. In order to attract and keep small businesses, Governor Hogan and the Maryland General Assembly should focus on improving Maryland’s regulatory climate.