Regulation: Is Government Building Business or Breaking It Down?

Arizona’s business climate gets good marks, but there’s more to be done
by Don Harris

Regulation-0115Government regulations can be a double-edged sword — either they cut off business from a lucrative market or they slice through red tape, enhancing the bottom line. Either way, the purported goal is to protect the public from less-than-honest merchants, but overzealous regulators can take a well-intentioned rule and use it to cause private-sector headaches.

As we explore in more detail throughout this article, one top state official gives the state’s regulatory climate a “B” and has some ideas on how to improve conditions, while a key lawmaker promises to take an in-depth look at existing regulations to determine where job-creating changes can be made.

Business-related organizations generally consider Arizona’s regulatory climate conducive to their interests, with some caveats, and are confident that good times will continue under the leadership of Gov. Doug Ducey, who has pledged to renew the regulation freeze that Gov. Jan Brewer ordered six years ago.

“Arizona’s regulatory climate is very competitive,” says Glenn Hamer, president and CEO of the Arizona Chamber of Commerce and Industry. “Unlike other states around the country, Arizona’s leaders have made a concerted effort to lessen the regulatory burden on job creators. Governor Brewer’s first act upon taking office was to institute a regulatory moratorium. She rightly recognized that job creators face enough challenges without confronting new rules at every turn. We’re encouraged that Gov.-elect Ducey has given every indication that he intends to extend that moratorium.”

The Good and the Bad

Arizona’s regulatory conditions have changed for the better in recent years. The state put systems in place that “encourage businesses to take corrective actions in areas such as workplace safety and environmental mitigation before being forced into legal proceedings,” Hamer says.

He hails the 1980 Groundwater Management Act for its positive regulatory features. “Arizona does a great job in managing its water compared to other Western states, such as California,” Hamer says. “Water use in 2011 was essentially the same as it was in 1957, despite population going up several times over. No other state has a comparable groundwater management strategy that not only protects the state’s economy, but ensures its future economic stability.”

The groundwater law was developed with the assistance of the three major water-using sectors — agriculture, municipal and mining. “It’s been smart water regulation and management that has helped our arid desert region grow a dynamic economy,” Hamer says.

Farrell Quinlan, Arizona state director of the National Federation of Independent Business, agrees on the positive nature of Arizona’s regulations, but says the system is “frustrating in enough areas to justify a continued emphasis on reform and improving the ‘corporate culture’ among some agencies.” He applauds Brewer’s moratorium as refreshing and says it “halted the state’s steady slide into a California-style administrative regime that was making it more difficult for small businesses to succeed.”

But Quinlan says regulations and regulators can hurt small businesses in myriad ways. “In one category are the moronic policies that seem to be written by someone with absolutely zero familiarity with the situation they have promulgated rules for,” he says. “These regulations can be self-contradictory, unintelligible or unfeasible — the classic instances of ‘Catch-22.’ There is another way regulations can hurt small businesses, one that Arizona hasn’t gotten control over yet. It’s when individual enforcement officers, auditors or inspectors bring to their work a deeply held disdain or contempt for the regulated community they’re charged with overseeing. Too many of these bullying regulators think all the small-business owners they encounter are at some level crooks and it’s the regulator’s job to punish them.”

However, Quinlan concedes that small businesses find regulations to be a net positive when rules are properly deployed. “Such regulations can serve to help the business catalyze certain processes so the market can function more efficiently,” he says. “But we also must recognize that too much of a ‘good’ thing can become highly toxic and possibly deadly when overused — be it a dietary supplement or government regulation.”

The overriding problem small businesses have with regulations, Quinlan says, “is when they cease being beneficial to the free market and … [seek] to micromanage things that shouldn’t be dictated by government bureaucrats.”

At the Goldwater Institute, a frequent critic of government overreach and particularly tax breaks for specific businesses, Byron Schlomach has no problem with regulations — or laws — that protect the public against fraudulent practices. “If you’re a businessperson, you can’t be dishonest,” says Schlomach, director of Goldwater’s Center for Economic Prosperity.

Despite having a fairly positive regulatory climate, business in Arizona is hampered by zoning restrictions imposed by cities, Schlomach says. “Zoning restricts development and business activity,” he says. “I don’t think there should be zoning.” He recommends deed restrictions that are more targeted and specific to a particular property. “Let individual property owners determine how their property should be used instead of government or a citizens committee appointed by government.”

Even so, some environmental regulations have made a positive contribution to the health of individuals and to society in general. “But, there certainly are negatives,” Schlomach says. “Look at the federal level — the environmental policy has gone overboard to the point that development has been stifled.”

How Others View Us

Canadian businesses are interested in doing business in the United States, but big government, high taxes and an increasingly restrictive regulatory environment are viewed with hesitancy, according to Glenn Williamson, founder and CEO of the Canada Arizona Business Council. Federal regulations governing mining are particularly troublesome for Arizona, Williamson says. “If a Canadian company wants to come here for mining, nothing is done to make it easy. The U.S. has managed to roadblock and stymie anyone who tries to put mining concerns in Arizona.”

For example, he cites the proposed Rosemont Copper Mine in southern Arizona as “a horrifying experience,” bogged down by federal regulations for seven years. The biggest obstacle involves environmental issues, mostly water concerns and air pollution. “Arizona needs to have a strong backbone in fighting the protectionist environment in Washington,” Williamson says.

Controversial legislation dealing with illegal immigration or a bill that was deemed to target the gay community apparently doesn’t concern international businesses. “Arizona has good local politics,” Williamson says. “Bills that have caused pain and angst — international companies don’t care about that. I have not seen or heard major corporations make a decision on whether they’re going to set up operations in the States based on those things. If there are business opportunities in a region, business decisions outweigh the local color of politics and the trend du jour. 

“Arizona has done a decent job of giving the state a business-friendly environment,” Williamson continues. “Regulations at the state level are not hindering Arizona’s growth. We need to do a better job of selling our product to the world.”

New Leadership: New Regulatory Environment?

Incoming Secretary of State Michele Reagan gives Arizona’s regulatory climate a “B” and she, too, supports a continuation of the Brewer moratorium. “As someone who ran a small, family business, I know firsthand how damaging burdensome regulations can be,” says Reagan. “The state should do everything it can to reduce costs for what I believe is the backbone of Arizona’s economy.”

Reagan, a Scottsdale Republican who served in the Arizona Legislature since 2003, plans to be an outspoken advocate for needed reforms to the state’s workers’ compensation system. “In addition, I will push toward consolidating business-related filings within the Secretary of State’s office to make it easier and more efficient to start a business,” she says.

Regarding workers’ comp bills, Reagan served as chair of the House Commerce Committee for six years and sponsored about 80 percent of those measures. Key ones focused on making applications uniform so it’s easier for small businesses to apply for coverage, and trying to eliminate or curb prescription drug abuse to reduce workers’ comp costs, she says. “The most notable bill, I helped write the enabling language that allowed the State Comp Fund to completely privatize so they could later become CopperPoint Mutual.”

Reagan recalls other legislation to improve the regulatory process. “One of the better bills we passed in the Legislature permitted state agencies to conduct expedited rulemaking if its goal was to streamline existing rules in order to increase the quality and efficiency of state agencies — all while protecting public health, safety and the environment,” Reagan says. “It was a great example of government partnering with the private sector to move the state forward.” That legislation, which removed confusing or outdated provisions, is Arizona Revised Statutes, Chapter 41-1027.

An area that needs improvement involves occupational licensing. “Over the years, Arizona has imposed some of the most stringent rules and regulations that inhibit job growth,” Reagan says. “We certainly want to protect consumers from wrong-doing, but if there are licensure requirements that can be reduced or eliminated, we should seriously consider doing so.”

Newly elected House Speaker David Gowan puts Arizona’s regulatory climate “somewhere in the middle,” despite improvements in recent years. “The Legislature has focused on creating a much more business-friendly climate by cutting red tape and repealing overly burdensome regulations that make it difficult for companies already in the state,” Gowan says. “I am firmly committed to continuing to make it easier for businesses to locate, expand and start up in Arizona.”

Among the improvements, Gowan cites fundamental changes in the administration of Arizona’s transaction privilege tax system. “These changes are still in the process of being implemented, and as they come online they will work to streamline tax collection and eliminate the need for multiple state and local tax licenses, multiple tax returns and multiple tax audits,” he says.

Gowan, a Sierra Vista Republican, plans to target and repeal regulations that harm local businesses and Arizona citizens. At the federal level, Gowan says “changes continue to be proposed that add additional regulatory burden that will cost jobs and make it harder for Arizona business to grow.” For example, the Environmental Protection Agency released two proposals, one addressing carbon and the other dealing with water, which Gowan says “could devastate an already fragile economic recovery.”

Gowan explains that the Clean Power Plan sets target emissions reductions for Arizona that will require nearly all coal-powered generating units in the state to shut down or convert to natural gas. Additional capital investments will be required for those utility operators that remain in business to meet the new targets. That additional cost will be borne by customers, including businesses, Gowan says.

Any utility operators, such as rural cooperatives, that are forced to close as a result of the rule will have to let their current employees go. “If those employees have to move to find work, small businesses lose their customer base,” he says. “Small businesses often operate on thin margins, and any changes in their costs can have a huge impact on their ability to compete and continue to operate.”

The proposed change to the definition of “waters of the United States” under the Clean Water Act dramatically expands the authority of federal agencies to stop development or improvements on virtually any land, which has serious repercussions for private property owners. For instance, Gowan says it could prevent a rancher from adding a stock pond for cattle on his own private property. It could also preclude a business from expanding because it owns land that could be designated as a “wetland” under this new definition, even though it rarely sees water.

“Those examples do not even account for permitting nightmares that are likely to occur, given that the new definition is designed to be applied on a case-by-case basis,” Gowan says. “The uncertainty that is created under that type of structure does not make it easy for businesses to operate, let alone grow. In short, it adds a level of regulatory burdens that will almost certainly increase costs for businesses.”

The most important thing the Legislature could do in 2015 to help businesses in Arizona, Gowan says, would be “to enact a structurally balanced budget that includes economic development policies to strengthen the recovery and get us back on track to historical job and revenue growth.”

He goes on to say that a balanced budget should make “strategic investments in government to aid in future economic growth, review the expenditure side of the budget to make sure taxpayers are getting the greatest return on their investment, and adopt stronger budget reforms that guarantee that one-time revenues are used with one-time expenditures.” Basically, a balanced budget favored by Gowan would give businesses confidence in how government is handling the state’s economy.

Meanwhile, Rep. Warren Petersen, R-Gilbert, says he plans to bring back an anti-regulatory measure that Brewer vetoed in 2013. It would have imposed civil penalties on overzealous government officials who make licensing decisions based on requirements that aren’t authorized by statute or rule. In her veto letter, Brewer said the bill was “punitive and unnecessary” because the law already forbids such licensing decisions, and there is an administrative process to remedy abuses. Petersen disagrees that the legislation was unnecessary and is hoping that, if the bill passes again, Ducey agrees with him. “What’s great about Ducey is, he knows what it’s like to work in the real world and run a business and deal with red tape,” Petersen says. “So when it comes to government accountability, I see him signing anything in that fashion that crosses his desk.”

Impact in Action

Longtime lobbyists have varying views on the impact of regulations. Barry Aarons of The Aarons Company recalls examples involving members of the Construction Trades Coalition, which was formed in 2003 by a group of subcontractor associations. Aarons says the Registrar of Contractors at times acts as “investigator, judge, jury and executioner.” The agency licenses and regulates residential and commercial contractors and investigates and resolves complaints against licensed and unlicensed contractors.

One example involved an investigation of a contractor that turned up no violations, but the agency wanted to suspend its license for one day anyway, Aarons says. Another example was when the agency sought power of attorney over contractors’ tax records, but Aarons says he was able to get legislation passed restricting such access that could have led to “all kinds of witch-hunts.”

Aarons is critical of any regulatory agency that “decides punitive action against practitioners is more of a goal than protecting the public.”

Aarons sees both sides of the regulatory issue. “You probably could make a case that the regulations are too steep,” he says. “But you could also make a case that the Governor’s Office — and I expect it to continue under Ducey — and the Legislature have been responsive to over-regulation and have tried to modify the law so as to enable business to be less pressured by unnecessary or overdone regulations or overly pursued regulatory authority. Any legitimate regulation becomes onerous if the department overseeing it engages their activities in a way to be punitive during the investigation. I see the Legislature doing a really good job of being responsive to industry in areas where they think either the regulation in and of itself or the pursuance of regulatory action by the agency has been over the top.”

During his 30-plus years at the Capitol, Aarons says he has seen a ratcheting up of business-hindering regulations, especially in areas of health, safety and the environment. “I now see them beginning to level out and I see a legislature trying to make things better and less onerous for business,” Aarons says.

Chris Herstam, a former legislator who has held key positions with three Arizona governors and currently is a lobbyist with Lewis Roca Rothgerber, is a bit cautious in his assessment. “Arizona already has a superb business climate,” Herstam says. “We have lowered taxes in Arizona for 23 of the last 25 years. We are extremely competitive with other states.”

But Herstam says the Great Recession resulted in budget reductions at several regulatory agencies. “There is probably less peer regulation of the business community today than several years ago,” he says. “I find it hard to believe that you can improve on the business regulatory climate very much. If you go much farther, then you’ve got to start tipping the scale too much in favor of business and against consumer protection.”

For more, see “Regulation: Q&A with Glenn Hamer and Farrell Quinlan.”

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