A New Approach to Regulatory Budgeting in Virginia

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New agency aims to implement a more impactful approach to reducing regulatory costs.

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Although regulations can provide important public benefits, overregulation runs the risk of killing innovation and hurting the economy. Even in cases in which all or most regulations seem reasonable in isolation, the cumulative burden can become so crushing that businesses find it difficult to operate.

The problem, of course, is finding a way to roll back regulatory burdens while still preserving necessary public protections. Regulators and even the regulated community have limited incentives to push for eliminating a regulation once it’s in place. Regulators are reluctant to upset their own handiwork, and existing businesses may actually like burdensome regulations if they keep new competitors out of the market.

One approach that multiple governments at the state, federal, and international level have tried is a regulatory budget. The idea is similar to a budget on government spending: agencies can regulate up to a certain amount, but, beyond that level, they need to get rid of old regulations in order to adopt new ones. And although the idea of a regulatory budget has been around for decades, it is only recently that state and national governments have attempted it.

Here are a few examples. President Donald J. Trump issued an executive order requiring federal agencies to get rid of two existing regulations for each new regulation. President Trump also directed agencies to find one dollar in regulatory savings for each new dollar in regulatory costs.

In addition, for a time, the United Kingdom required agencies to find two pounds in regulatory savings for each new pound in costs. The State of Missouri required agencies to eliminate one-third of all regulations they had on the books. And the State of Idaho allowed all regulations to sunset and required agencies to re-adopt any regulations they wanted to keep.

Each of these approaches is unique, and each raises some challenging questions. As a result, regulatory budget architects have confronted several questions. First, should agencies focus on reducing discrete regulations, requirements within the regulations, or monetary costs that regulations impose? Second, should regulations be capped at a set level, or should they be reduced over time? If the latter, should the reduction involve an ongoing swap out—such as

President Trump’s executive order or Oklahoma’s 2-for-1—or a fixed reduction goal—such as Missouri’s one-third reduction? And third, how can regulators ensure that agencies do not exploit possible loopholes by, for example, swapping two trivial regulations for one massive one?

These questions defy easy answers. The Harvard Journal of Law and Public Policy devoted an entire symposium issue to the topic, and the foremost experts in this space all favor somewhat different approaches. But now that more than a dozen governments have tried out some sort of regulatory budget, some clear patterns are starting to emerge. And the new Virginia Office of Regulatory Management (ORM), created by Governor Glenn Youngkin’s Executive Order 19, embodies an innovative approach that builds on and improves existing best practices.

Like most other states that have adopted budgets, Virginia has chosen to focus on regulatory requirements, seeking to reduce the total number of regulatory restrictions by 25 percent by the end of the Youngkin Administration. This approach ensures that agencies cannot achieve the goal by focusing on trivial regulations with relatively few requirements and ignoring major ones.

But ORM has also recognized that there are ways to reduce regulatory burdens other than by simply eliminating discrete requirements. For example, reducing the number of training hours for cosmetologists from 1500 to 1000, as a Virginia agency recently proposed, creates significant time savings for practitioners while still ensuring that they receive the necessary training. Eliminating the requirement entirely would be misguided, but right-sizing it balances the need for training against the risk of needlessly restricting market entry.

The challenge is figuring out how to give “credit” toward the 25 percent reduction target for requirements that are modified but not eliminated. There are any number of ways to reduce regulatory burdens: lower fees, reduce training hours, shorten forms, expand exemptions, or provide greater compliance flexibility, among others. This makes coming up with a common denominator difficult. But all of these actions have the common effect of reducing costs.

In its recently issued guide on the subject, ORM has asked agencies to calculate the cost savings associated with any regulatory reduction that does not involve fully eliminating a requirement. ORM then gives “partial credit” for any such savings. For example, using the cosmetologist training regulation, the agency reduced the regulatory burden by 33 percent (from 1500 to 1000 hours), and the requirement therefore will be counted as “0.67 requirements” rather than “1 requirement” going forward. ORM will also calculate the overall monetary cost savings that agencies have achieved and highlight major successes.

ORM’s approach ensures that agencies get rewarded for the full range of approaches to reducing regulatory burdens. And it solves an incentive problem, ensuring that agencies have a reason both to pick low-hanging fruit—reporting requirements that easily can be eliminated completely, for example—and to spend the time necessary to make sure that high-impact regulations are no more burdensome than necessary to achieve their goals.

Although Virginia agencies are just now beginning to implement the ORM framework, they already have achieved some notable successes and will no doubt continue to log major regulatory reductions as they work toward the 25 percent goal in the next three years. And these efforts will go a long way toward advancing Governor Youngkin’s goal of achieving a best-in-class regulatory system and making Virginia a top destination for new citizens and businesses. The regulatory burden is one of the top concerns business leaders cite when deciding where to locate their businesses, and the Virginia approach will help streamline that burden while still ensuring that necessary protections remain in place.

Furthermore, as the process plays out, it is ORM’s hope that other state governments, as well as the federal government and foreign governments, will take note. ORM benefitted enormously from studying past and current regulatory budget initiatives when formulating its approach, and other governments will undoubtedly find useful lessons in Virginia’s experience.

Reeve T. Bull is the Deputy Director of the Virginia Office of Regulatory Management.