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  • 1. Perceptions and Regulations: How Minnesota Business Owners See the Impact of State and Local Regulations on their Firms How do state and local regulations affect Minnesota businesses? The answer to this question would be long and complicated. However, asking how Minnesota business owners perceive the impact of state and lo- cal regulations on their businesses and on the state’s business environment in general can be just as informative, perhaps even more. The idea is often asserted that Minnesota’s regulatory climate has a significant impact on Minnesota’s business environment, positive or nega- tive, and hence the state’s competitiveness in attracting and keeping busi- nesses. While it is the state and local officials who make the regulations, it is the business owners who make the decision whether to stay or go, and those decisions are based on the owners’ attitudes toward and perceptions of regulations. The empirical study forming the basis for this brief examines the percep- tions Minnesota business owners hold regarding the impacts state and local government regulations have on Minnesota businesses. The study does not address the impact of federal regulations or address the comparative ques- tion of whether Minnesota’s business climate is “better” or “worse” than neighboring states’. It does, however, provide a clearer picture of Minnesota by ANTHONY J. FILIPOVITCH, PH.D & ALEXANDER CAHILL Urban & Regional Studies Institute, Minnesota State University Mankato This research was supported by a grant from the Center for Rural Policy Development. The authors wish to acknowledge the assistance of the project advisory committee and the board and staff of the Center in the preparation of this report, particularly Marnie Werner, Tom Riley, Mike Nolan, Pat Henderson, Lisa Hughes, Connie Ireland, and Kurt Thompson. While their advice was invaluable, the opinions and conclusions expressed in this report are those of the authors, and not those of the Center for Rural Policy Development or Minnesota State University, Mankato. A PDF of this report can bedownloaded from the Center’s web site at The Center for Rural Policy and Development, based in St. Peter, Minn., is a private, not-for-profit © 2013 Center for Rural Policy policy research organization dedicated to benefiting Minnesota by providing its policy makers with and Development an unbiased evaluation of issues from a rural perspective.
  • 2. Table V: “Most important challenges facing your company.”Challenges Rank 1 Rank 2 Rank 3 Rank 4 Rank 5 Rank 6 Rank 7 Rank 8Increased Competition 40 28 27 20 20 18 14 7Inadequate Infrastructure 5 7 15 12 19 39 29 24Regulation 61 27 33 16 12 13 12 2Labor Costs 16 31 40 29 28 14 3 5Insurance/Other Costs 38 53 32 21 16 10 7 0Workforce Issues 15 23 16 26 27 20 19 13Access to Capital 35 17 12 15 15 18 40 11Other 11 6 15 10 6 5 5 72business owners’ attitudes toward were government regulation; the issue is less with the regula-regulations, their perceptions business costs other than labor; tions themselves than with theof the degree of impact on their increased competition; and labor difficulty of compliance. It is as ifbusinesses, and their view of the costs. the survey respondents were say-regulators who enforce them. The comparisons among busi- ing that the rules are inflexible, An online survey based nesses in the Twin Cities metro incomprehensible, ineffective,on one developed for the Irish area (Metro), regional popula- and inconsistent, but we complyequivalent of the Department of tion centers (non-Metro), and with them. Given the stress in theCommerce was distributed to a rural businesses (rural) revealed literature on the negative impactrandom sample of 10,000 busi- that, for major issues and im- of regulations on small business-ness corporations in Minnesota. pacts, there were few differences es, it is interesting that it was theThe initial response rate was 199 based on location in the state. larger firms that were more likelyrespondents, or 2%. A second While regulation was given as the to report perceiving compliancewave of survey responses was greatest challenge everywhere in as burdensome. Respondentsgenerated by inviting participa- the state, competition came in a also reported that the regulationstion from subscribers to e-news- close second in both the Metro that have the most significantletters from Small Business De- and non-Metro cities. Labor and impact on one’s own businessvelopment Centers and Enterprise other costs were a close second do not have a particularly heavyMinnesota, bringing in additional in rural areas. The pattern of re- compliance burden. Instead, they118 responses. A supplemental sponses indicates that businesses perceive the most burdensomesurvey, targeted specifically to in the non-Metro cities are much regulations as those that have anthe Metro/non-Metro/rural dif- more concerned about regula- effect on business in general.ferences, was sent by e-mail to a tions than those in the Twin Citiessample of 1,500 businesses (500 metro area or in rural areas. Busi- Discussion & Implicationsfrom each location) listed by area nesses in rural areas, particularly, This study set out to explorechambers of commerce. This were less concerned about state three questions regarding busi-survey returned 112 responses and local regulations than the ness owners’ attitudes toward(36 from Metro, 38 from Greater cost of doing business. regulation—the impact of regu-Minnesota cities, 38 from rural The top priority for regula- latory compliance on business;counties). tory change was in the area of the relative impact of regulatory The survey found that the top income and corporate taxation. compliance on a business in rela-four challenges for businesses Except for taxes, it appears that tion to its competitors; and the2 Center for Rural Pollicy & Development
  • 3. Table VII: Impact of regulation on business. Areas of Regulation Major Impact Moderate Impact Little Impact No Impact State/Local Health and Safety Regs 25.25 31.19 25.74 17.82 State/Local Environmental Regs 23.65 29.06 26.11 21.18 State/Local Land Use Regulations 22.66 20.20 28.08 29.06 Reporting MN Income/Corporate Tax 20.10 39.22 30.39 10.29 State/Local Business Licensing 19.70 31.53 36.45 12.32 Other State Employment Law 15.27 42.86 31.53 10.35 State/Local Corporate Regulations 14.22 32.35 40.69 12.75 Reporting Industry Specific Taxes 10.15 22.84 34.01 33.00 Return of Statistical Data 4.50 21.50 41.50 32.50Table VIII: Regulations that have most significant impact on your business. Most Significant Percent Number Reporting MN Income/Corporate Tax 33.33% 65 State/Local Business Licensing 13.85% 27 State/Local Land Use Regulations 12.82% 25 State/Local Health and Safety Regs 11.80% 23 State/Local Environmental Regs 11.28% 22 Other State Employment Law 12.82% 15 State/Local Corporate Regs 5.13% 10 Reporting Industry Specific Taxes 3.08% 6 Return of Statistical Data 1.03% 2differential impact of regulatory 3. Increased competition. corporate income taxes; whencompliance on various categories 4. Labor costs. they were asked about the impactof businesses, including rural on business in general, they werebusinesses. The findings also indicated most concerned about safety, en- that it was difficult for respon- vironmental, and land use regula-Impact of Regulatory Compliance dents to separate the impacts tions. In fact, the top five rank-on Business of state and local agencies and ings show an inverse correlation Overall, respondents ranked regulations from those of federal between whether the question isregulations as the greatest chal- agencies and regulations. posed about business in generallenge (Table V). (Table numbering Examining the issue more or one’s own business. The issueshas been preserved from the full closely, questions about the most important to a businessreport.) The survey found that the impact of regulations on busi- owner’s own business were leasttop four challenges for businesses ness in general vs. the impact on important to business in general,were: their own businesses exposes a and vice versa. This suggests that discrepancy (Tables VII, VIII and at least part of the concern being 1. Government regulations. IX). When considering the impact expressed is a matter of percep- 2. Business costs other than on their own businesses, respon- tion rather than direct experience. labor. dents were most concerned aboutPerceptions and Regulations: Impact of State and Local Regulations 3
  • 4. Table IX: Reasons for stating regulations have significant impact on your business. Statement Strongly Agree Agree Neither Disagree Strongly Disagree The regulations are flexible <.01% 10% 25% 39% 26% The regulations are easy to understand 2% 17% 19% 39% 23% The regulations achieve their objectives <.01% 14% 31% 37% 18% The regulations are consistent <.01% 13% 33% 39% 15% The regulations are appropriately enforced 3% 20% 34% 27% 16% Despite the number, it is still possible to 2% 37% 36% 15% 10% comply The top priority for regulatory compliance was perceived as the the increasing complexity of exist-change was in the area of income most burdensome; in non-Metro ing regulations.and corporate taxation. Unlike cities, it was compliance with Some pointed to duplicationthe other issues, the problem environmental regulations; in the of authority, such as the Depart-here seems to be with regulations Metro area, it was employment ment of Agriculture and EPA,themselves rather than how they regulations (Table XLIII). state and federal employmentare enforced. The open-ended There is some tension among regulations, the MPCA and theresponses referred to the sheer the types of firms between consis- DNR, the Minnesota Depart-number of taxes, to the role of tency of enforcement and flex- ment of Revenue and Minnesotasome businesses in collecting tax- ibility in enforcement. For some, Unemployment, and multiplees from customers for the state, the issue is that the regulators inspectors at the same worksite,and to the amount that was taken are too inflexible; for others, it each with his or her own man-in taxes (especially compared to is that they are inconsistent (one dates that could stop construc-neighboring states). person’s “inconsistency” could be tion. Except for taxes, it appears another’s “flexibility”). Some of Although respondents re-that the issue is less with the the open-ended responses stated ported that compliance is more atregulations themselves than with that there were too many regula- issue than the nature of the regu-the difficulty of compliance. tions from too many sources to lation, compliance is reported asThis finding coincides with the keep them all straight. Others a burden less frequently than thefindings of the state Legislative took the position that the regula- overall “impact” of regulations.Coordinating Commission study tors were not there to help the Also, given the stress in the lit-(Dhakal, 2011). It appears that businesses, but to punish them, erature on the negative impact ofsurvey respondents consider the and that they came with demands regulations on small businesses,rules inflexible, incomprehensi- but no answers or authority to it is interesting that it was theble, ineffective, and inconsistent, make final decisions about how larger firms that were more likelybut they comply with them any- one was to comply with those to report perceiving complianceway. While taxes were perceived demands. as burdensome. Respondentsas having the greatest impact, the One finding of particular reported that the regulations thatburden of complying with tax interest, though, was when have the most significant impactregulations was not considered to respondents reported that their on one’s own business do notbe as heavy as other regulations. cost of compliance is increasing have a particularly heavy com-In rural areas, health and safety because of new regulations and pliance burden. Instead, they4 Center for Rural Pollicy & Development
  • 5. Table XLIII: Level of burden by location (% reporting burden to be heavy). Other Em- Environ- Income/ Land Use Business Health & ployment mental Corporate Statistical Corp Tax Regs Licensing Safety Law Regs Regs Data ReportingMetro 0% 3% 17% 17% 20% 9% 9% 3% 6%Non-Metro 8% 16% 14% 11% 11% 27% 8% 15% 11%Rural 6% 11% 6% 20% 14% 17% 6% 14% 11%perceive the most burdensome perceived regulations as neutral), compact enough for more intenseregulations as those that have an on the open-ended questions enforcement than in rural areas,effect on business in general. many asked for tighter oversight while enforcement in the Metro of banks and real-estate lend- area is focused more on a num-Relative impact of regulatory ers, limitations on bank fees and ber of complex cases. Or perhapscompliance on a business in rela- Internet commerce, limitation businesses in non-Metro citiestion to its competitors on utility rate increases, limita- expect a more “personal” style The dominant response tions on lobbying, and increased of enforcement like rural areas,concerning regulations and their support for renewable energy. rather than a more bureaucraticeffect on competition was that Although these comments were style common in very large met-regulations had no significant offered by only a few respondents ropolitan areas. It also suggestseffect on the business environ- and are not necessarily represen- that future research look into thement in general. When asked tative of the group, they do sug- conditions that generate differentabout the competitive impact gest areas in which regulations business expectations in differenton their business specifically, on might be perceived as having a areas in regard to regulation andbalance respondents reported particularly noticeable effect on what regulatory agencies mightthat regulations had little effect relative competitiveness. learn from those expectations.on the intensity of competition, The Metro/non-Metro/ruralalthough regulations did limit the Differential impact of regulatory comparisons revealed that, forentry of new competitors into the compliance on various categories major issues and impacts, theremarket. In terms of competition of business were few differences based onwith firms outside Minnesota, The pattern of responses location. State and local regu-perceptions were about evenly indicates that businesses in the lations were perceived as thesplit on whether Minnesota has non-Metro cities are much more greatest challenge regardless ofmore regulations or about the concerned about regulations location in the state, althoughsame amount. than those in the Metro area or in businesses in non-Metro cities And yet, while the respon- rural areas. This finding suggests responded more strongly (Tabledents clearly expressed a de- that further research is needed to XXXVIII). Within the category ofsire for fewer and less intrusive explore whether the difference is regulations, however, regionalregulations, and while few of due to differences in enforcement differences begin to emerge.them reported perceived benefits or differences in expectations. Businesses in all three areasfrom regulation (at best, they Perhaps non-Metro cities are were most concerned withPerceptions and Regulations: Impact of State and Local Regulations 5
  • 6. Table XXXVIII: Top-Ranked Challenge by Location (%) Competition Infrastructure Regulation Labor Cost Other Cost Workforce Capital Other Metro 19% 3% 22% 11% 19% 8% 17% 0% Non-Metro 32% 3% 34% 8% 5% 11% 5% 3% Rural 13% 0% 26% 18% 21% 8% 3% 11%Table XL: Major Impact of Regulations on Business by Location (%) Income/ Land Use Business Health & Other Environ- Corporate Statistical Reporting Corp Tax Regs Licensing Safety Employment mental Regs Data Law Regs Metro 32% 10% 16% 3% 23% 6% 10% 0% 0% Non-Metro 33% 14% 14% 6% 0% 17% 14% 0% 3% Rural 26% 9% 12% 15% 15% 9% 3% 6% 6%income/corporate taxes (Table ing field, but not so much as to them with other agencies. This isXL). Burden of compliance also stifle innovation and entrepre- great for businesses, where timevaried (Table XLIII). Businesses in neurship. Finding this balance is money.the non-Metro cities were most will require effort at the local as • Go beyond “customer ser-concerned about complying with well as the state level—local gov- vice” training for regulators.environmental regulations, while ernment regulations like land use Business owners reported thatbusinesses in rural areas reported controls and business licensing their biggest issue with regula-the greatest burden from health were mentioned as much as state tors was that the process was tooand safety regulations. Businesses regulations like pollution control inflexible. However, nearly halfin the Metro area reported their and sales tax reporting. of business owners also reportedgreatest burden from employment that regulators did not sufficientlylaw. Potential next steps understand the practices in the • Coordinate and streamline respondents’ businesses, that theRecommendations the tangle of regulations already regulators’ decisions were not The findings from this survey in place. predictable, that the process forappear to confirm the findings First of all, we would recommend appeals was not clear, and it wasfrom the report to the Minnesota that policy makers, whether at the not clear who was responsible forLegislative Coordinating Com- state or local level, consider the making decisions.mission cited at the beginning of impact any new regulation will While some agencies may bethis report (Dhakal, 2011): The have in combination with already practicing customer service train-primary issue expressed by busi- existing regulations. One of the ing for their regulators, the issuesness owners is in complying with most telling findings in this study stated above go beyond learningregulations, rather than the num- was that business owners say the standard customer service prac-ber or character of the regulations cost of compliance is increasing tices and need to be addressedthemselves. because of the increasing number through agency policy. Agencies The trick, therefore, is to find and complexity of regulations. could consider examining thesea balance between having and Some state agencies are already issues of inconsistency that areenforcing enough regulation to working to streamline their regu- causing frustration for businesskeep everyone on an even play- latory processes and coordinate owners and take steps to address6 Center for Rural Pollicy & Development
  • 7. them if necessary, ensuring thatany new policies that result arecommunicated down to thosewho work directly with the pub-lic. • Education for “customers”on the various regulations—in-cluding processes—and thebenefits they provide. Educationalso falls to the business owner.Plain-English explanations of theregulations, available throughprinted materials, web sites, andregulators, could lower the frus-tration level for the people whoare expected to comply. Comparing Minnesota’sregulations with those of otherstates may be less important thandoing a better job with what wehave. As Dhakal (2011) pointedout, businesses do not necessar-ily choose the states with fewerregulations. They choose thestates with the best opportunitiesand figure out how to deal withthe regulations.This full report can be found online and Regulations: Impact of State and Local Regulations 7
  • 8. Find us Twitter @ruralpolicymn Center for Rural Pollicy & Development