Budget & Tax, Economy, Good Government

Deregulation could spur state growth, lawmakers told

August 26, 2019

Ray Carter

For Oklahoma lawmakers seeking to boost economic growth and job creation in Oklahoma, one expert says a key step is to pare down regulation.

“There is considerable evidence, academic evidence, that regulations slow economic growth,” James Broughel, senior research fellow at the Mercatus Center at George Mason University, told members of the House Business and Commerce Committee during a recent interim study.

He said other officials at the Mercatus Center have estimated that federal regulation has slowed the national growth rate by just under 1 percentage point per year. Had regulations held constant at 1980 levels, researchers estimate the U.S. economy would have been 25 percent larger by 2012. The impact of additional regulations during those years translated into the loss of $4 trillion in growth by 2012.

From 2008 to 2018, the most recent data available, Broughel found that Oklahoma’s gross domestic product (GDP) growth rate averaged just 1.8 percent, which was lower than the national rate of 2.1 percent. And that 2.1 percent annual growth rate for the nation was lower than historic norms. Barack Obama was famously the first president in modern times to never preside in a year in which GDP growth hit at least 3 percent annually.

“Small improvements in growth rates have an enormous effect over time,” Broughel said. “So even if you could increase that growth rate by a percentage point, that would have huge effects on the opportunities for our children and grandchildren in particular.”

If a state’s GDP grows at just 1 percent annually, it will take 70 years for the state economy to double in size, Broughel said. But at 2 percent, the doubling occurs in 35 years, while at an average of 3 percent or 4 percent annually the state’s economy will double in size every 24 and 18 years, respectively.

“Growth rates of 3 percent or 4 percent per year are not unrealistic,” Broughel said. “They are possible. They are being achieved in some U.S. states right now. So the question is, ‘Is regulatory reform a good option to boost growth?’”

Broughel argued that deregulation is a proven way to boost economic growth, citing the example of the Canadian province of British Columbia. From 1981 to 2001, British Columbia’s GDP grew at a significantly slower rate than most Canadian provinces and that nation as a whole.

But since 2001, British Columbia’s growth in real GDP per capita has been above the national average, and the gap between the province and the nation as a whole has increased over time.

Those years of growth have coincided with reforms that reduced regulatory requirements by roughly 50 percent in British Columbia.

“It’s striking that a significant regulatory reduction took place that cut their code in half. This coincided with a turnaround in economic growth,” Broughel said. “There was no major problem that arose related to public health or the environment, no controversies.”

Even as regulations were slashed, he noted British Columbia maintained high rankings in measures of health and the environment.

“It’s known as one of the most pristine and healthy places in the world, in fact,” Broughel said.

Some U.S. states have also pursued major regulatory restarts. In Idaho, most major regulations have a sunset date and must be renewed by state lawmakers and the governor. When infighting caused Idaho lawmakers to fail to renew regulations before they adjourned this year’s legislative session, the state’s regulations were poised to fall off the books. The governor then had to re-file, over a two-month period, every regulation he did not want to see expire .

It turned out the governor found much of Idaho’s regulatory code was not worth re-filing. Idaho has now repealed 20 percent of its regulatory chapters, Broughel said, and another 20 percent have been modified. As a result, about 19,000 regulatory restrictions have been eliminated in the state.

By the end of the year, Broughel said, Idaho officials expect to “simplify or repeal 55 to 60 percent” of the state’s rules.

“I should also mention Idaho is, I think, the third-least regulated state, according to our metrics,” Broughel said.

The state of Rhode Island, which is controlled by Democrats, has also provided an example of a state that is aggressively cutting regulation. In 2016, lawmakers in that state passed a 2018 expiration date “for its entire regulatory code,” Broughel said.

Lawmakers did that to force all state regulators to re-file all rules online to increase transparency. But a side-effect of that process is that it led to jettisoning many regulations.

“They eliminated about 31 percent of their regulations doing this,” Broughel said. “Now, were there riots in the streets? No. No one even noticed.”

Broughel’s research has found that Oklahoma’s administrative code is 9.3 million words in length, which would take 13 weeks to read, and contains 145,296 restrictions. That’s above the national average of roughly 131,000.

In the same meeting, officials with the Oklahoma Department of Commerce told lawmakers that the state has a workforce shortage and that reducing the personal income-tax burden of workers has been a successful way to lure out-of-state workers to Oklahoma.

“When we meet a company and we lose deals because we just don’t have enough people, that’s pretty frustrating,” said Charles Kimbrough, the director of business recruitment at the Oklahoma Department of Commerce. “And it’s not just enough people; it’s enough of the right people.”

He said the state’s aerospace engineering tax credit has helped Oklahoma attract workforce and grow that industry in Oklahoma. A key part of that program is it reduces personal income tax payments.

“To my knowledge, there are no other states that say to an individual that I will credit your personal income tax just by relocating or coming to work here,” Kimbrough said.

Such tax breaks are usually offered only at the corporate, not individual, level, he noted.

In the first five years of the tax break’s existence, the number of aerospace engineering claims in Oklahoma increased from 363 to 1,531. Employment tax revenue in the aerospace industry increased from $3.6 million to $14.9 million in five years. Growth in Oklahoma aerospace engineering employment has increased 16.7 percent during the life of the tax program, Kimbrough said. And the number of engineering degrees conferred by Oklahoma colleges increased over 57 percent over a 10-year period.

Kimbrough summed up the tax break’s effect simply: “It worked.”

Rep. Brian Hill, the Mustang Republican who requested the study, said he hopes lawmakers will use the information provided to remove government intrusions that are impeding job creation.

“The goal of this economic development study is to identify road blocks to business growth and job creation in Oklahoma,” Hill said. “As I have spoken to constituents and business owners like myself throughout the state, I’ve continually been made aware of difficulties that they are facing in growing their companies, and thus job creation, and also difficulties for businesses moving into our state.”