James Allen Walker for WORLD

Ruled out

Business | In a down economy, burgeoning government regulations can cause 'death by a thousand pin pricks' for small businesses

Issue: "The ABCs of C Street," Aug. 29, 2009

NEW YORK-It took one year and 45 days to build the Empire State Building back in 1931, when Rudy's Bar and Grill was just a speakeasy in a Manhattan neighborhood called Hell's Kitchen. But it's 2009 now and things have changed. In 10 months, Rudy's hasn't been able to build a fire exit and two bathrooms to the satisfaction of government regulators.

Last December, 10 police officers, two fire marshals, two health inspectors, two State Liquor Authority employees, and two building inspectors swooped down on the same night and closed the bar's backyard. The plumber who installed the heaters in the backyard tent hadn't filed the job, they said.

"They said, 'The heaters are illegal,'" recalls Danny DePamphilis, the manager. "I said, 'They are not!'" They told him to close his yard.

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DePamphilis decided to do things right-build a fire exit and another bathroom and bring the backyard up to code before it came alive with customers in the summer. He spent five months getting the city to approve plans and permits. Then in April, another inspector showed up: "He says, 'I'm from the building department. Stop this job.'"

A confusing letter came and an audit followed, finding 27 objections to the plans the city had just approved. Now DePamphilis leads me past the mahogany bar and duct-tape-upholstered booths, out a back door marked "Do Not Enter!" "Caution!" and "Closed!," to the rubble-filled backyard where people would usually be pouring from the bar into the summer air. People have held weddings in Rudy's backyard, but now bar stools stand on end in the corner. Aluminum siding slumps next to a sink and cement bags fill a tunnel-the future fire exit-that is just beams strung with naked wiring.

Work stopped in April. Thanks to the holdup, Rudy's business is down around 30 percent.

I am not an isolated incident," DePamphilis said. He's not. As small businesses limp through a recession, regulatory compliance costs hit $1.172 trillion in 2008-8 percent of the GDP. The 2008 Federal Register grew a record 10 percent in 2008 and the burden on small businesses is getting heavier. Of the 4,000 regulations now in the works, 753 would affect small business.

In fact, Congress just passed one of the biggest food inspection bills in recent history, giving the FDA more power to yank products off the shelves and increase inspections. Now everyone who processes food, from truckers to wholesalers, has to document the food as it goes down the processing chain, so in case the feds have to recall a batch of peanut butter they'll know where the batch went wrong. Bruce Phillips, senior fellow of regulatory studies at the National Federation of Independent Business, said it's likely to increase fines, local inspections, and the paperwork burden for small firms.

With 80,000 pages of regulations to sift through, small business owners have to pick and choose which regulations they'll follow, Phillips said: "They literally cannot comply with everything. They would just go nuts. Their time would be too taken up just by paperwork." In Rudy's case, one agency approved the plan while the audit from another found flaws. Whose advice to follow?

For large businesses, the regulatory cost is $5,282 per employee, but for small businesses the regulatory cost is $7,647 per employee. That cost often stays the same no matter how much money comes in. Rudy's business may have gone down by a third, but its compliance costs haven't.

Costs may rise even higher as state and city budget deficits burgeon. The National Conference of State Legislatures reports that the cumulative state budget gap is now $47.4 billion. Cities and states are trying to close crushing deficits without raising income taxes. According to a Pew Research Center report, most cities are raising money by raising fees.

Philadelphia, for example, is raising $4.8 million by increasing fees and fines. Florida approved $1 billion in fee increases. Some states are doubling or tripling car registration fees and tacking fees onto cable or utility bills. "These all add to the stress on a small business owner," said Phillips. In New York, the multiagency task force fines bars and nightclubs $5,000 to $100,000 for violations, and DePamphilis believes it has crossed the line from deterrent to revenue raising. Right now, Rudy's fine stands at around $40,000.

Tax hikes target businesses, too. Thirteen states have raised corporate taxes and the general sales tax. Kentucky just raised the tax on alcohol from 11 percent to 20 percent to close a $456 million budget hole. Philadelphia is proposing a temporary 1 percent sales tax increase and suspending wage and business privilege tax cuts to save $230 million. Even if the taxes aren't exorbitant, the cost of figuring them out and filing them adds to the budget chunk that small businesses devote to the government. Phillips calls it "death by a thousand pin pricks."


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