Who Bears the Cost of Overregulation?

Business may be the direct recipient, but the ultimate costs are passed on.

JP-Line-Drawing“Worse than Illinois” was the recent Wall Street Journal editorial headline that commented on the announcement that GE, which had moved from New York to Fairfield, Connecticut in 1974, was ditching the Nutmeg state for Boston—yes, Boston, as in the home of “taxachusetts.”

To be worse than Illinois in terms of business environment is to be in the eighth circle of business-unfriendly hell.

In our annual survey of CEO sentiment about the Best and Worst States to do business, business leaders ranked Connecticut 45th in 2015. It had dropped from 44 the previous year. Tellingly, the Nutmeg state’s ranking on just its tax and regulatory environment was lower than Illinois (#48) and New York (#49), but still above that of California at 50th overall.

“Companies are mindful that in a new era of digital transformation they need to be near areas that attract talented people who are imbued with new technical skills.”

Chief Executive, which is based in Greenwich, Connecticut, takes no pleasure in this development. But we’ve noticed over the years that our home state has been on a spending and regulatory binge. In addition, Connecticut was one of six states that lost population in fiscal 2013-2014, according to the U.S. Census and, as the Journal editorial noted, a Gallup poll in the second half of 2013 found “that about half of Nutmeg Staters would migrate if they could. Now the Democrats who run the state want to drive the other half out too.”

Not long ago, I was interviewed by NPR about why our annual survey consistently ranked California the least friendly state for business for 11 straight years. The economist they had scheduled opposite me in the radio interview insisted that California was getting a bad rap not only from us but numerous other state rankings, such as the American Legislative Executive Council (ALEC) and the Tax Foundation. Californians, who called into the live program, ranted about Texas presuming to steal businesses away. Former governor Rick Perry came in for some heavy vitriol. “Who would want to live in Texas anyway?” said one clearly agitated caller.

I responded by saying that trashing Texas does not make California more desirable to job creators. If the GE decision proves anything it shows two truths: Companies are mindful that in a new era of digital transformation they need to be near areas that attract talented people who are imbued with new technical skills; and that business sees heavy regulation and an inhospitable business climate as additional taxes.

In a past Republican debate, former presidential contender Ben Carson made a point of saying that regulation, both federal and state, was burdening the private sector unnecessarily—a point also made by Oklahoma attorney general Scott Pruitt. These costs are not insignificant.

As the Competitive Enterprise Institute documents in its recent annual report “Ten Thousand Commandments,” the so-called hidden tax imposed by the regulatory state has reached $1.88 trillion. Quoting from the report, Peter Roff, a U.S. News & World Report contributing editor and longtime observer of the Washington scene, noted that, “If U.S. federal
regulation was a country, it would be the world’s 10th largest economy, ranking behind Russia and ahead of India.”

The real problem is that business doesn’t actually pay the full burden. These costs are borne by consumers who pay inflated prices for the products and services they buy and by workers whose
wages have been held down in part as a result of the regulatory burden. This issue inevitably leads to lower levels of growth and prosperity—about which our policy-makers going forward should
think long and hard.


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