Counting the Cost of Small Business Regulation in Texas

When Texas agencies propose new administrative rules or amendments to existing rules, they are required by law to consider any adverse economic effect the rules may have on small businesses in the state. The McNair Center for Entrepreneurship and Economic Growth sought to determine the effectiveness of this law, which we reference as the small business adverse-effect law, through a case study of the Texas Alcoholic Beverage Commission (TABC).

We focused our case study on the TABC rules for their applicability to the small business sector. For example, drinking places and restaurants that serve alcohol are among the businesses subject to TABC rules, and according to the Texas Comptroller of Public Accounts, 87% of drinking places and restaurants[1] in Texas are small businesses.[2] (See Table 1.) Other small businesses engaged in the manufacture, distribution or sale of alcoholic beverages in Texas are also subject to rules of the TABC. If the small business adverse-effect law is working in practice, we reasoned, the results ought to be apparent in the proposed rules of the TABC, particularly those that affect drinking places and restaurants serving alcohol.

Table 1 — Prevalence of Small Businesses Among Drinking Places and Restaurants in Texas[3][4]

 

We first compiled and analyzed every rule proposed by the TABC that was published in the Texas Register from January 1, 2008, to June 3, 2022, excluding the repeal of rules.[5] Our research revealed that the TABC published findings of adverse economic effect for only 5% of the notices of proposed rule it published from January 1, 2008, to June 3, 2022.[6] We also found that the TABC considered only cash outlays — such as permit fees and, sometimes, fines — to be adverse economic effects. None of the agency’s notices of proposed rule considered the cost of labor required to comply with its rules, including a number of rules requiring permit applications, specific signage and record-keeping.

The findings of our case study suggest that the Texas law requiring state agencies to assess the economic burden of rules affecting small businesses may not be effective in practice. Further research is needed to determine whether the patterns of compliance demonstrated in the rulemaking of the TABC are also present in the rulemaking of other state agencies. Based on our findings, we propose the adoption of an empirical method for assessing the economic burden of regulations in Texas, which would facilitate compliance by state agencies, encourage stakeholder participation, yield better information about the regulatory burden and enable public debate about the costs and benefits of state regulations.

What the Law Requires of State Agencies

Section 2006.002 of the Texas Government Code contains the substance of the small business adverse-effect law. It requires all state agencies to determine whether a proposed rule may have an adverse economic effect on small businesses and, if so, to publish its analysis in the Texas Register with the notice of proposed rule.[7] The small business adverse-effect law was first adopted by the Texas Legislature in 1987 and was codified at Section 2006.002 in 1993.[8] 

The Legislature has modified the methodology of the adverse-effect law since its adoption in 1987. Initially, agencies were required to analyze the compliance cost for small businesses and compare it to the compliance cost for large businesses in terms of employees, hours of labor or sales.[9] In 2007, the Legislature amended Section 2006.002 to change the methodology to its current form, which requires:

• An economic impact statement that estimates the number of small businesses ... subject to the proposed rule, projects the economic impact of the rule on small businesses ... and describes alternative methods of achieving the purpose of the proposed rule; and
• A regulatory flexibility analysis that includes the agency's consideration of alternative methods of achieving the purpose of the proposed rule.[10]

(We use the term “adverse-effect analysis” to reference the economic impact statement and the regulatory flexibility analysis as a package.) The proponents of the 2007 legislation intended this change in methodology to implement the principles of small business regulatory flexibility reflected in the federal Regulatory Flexibility Act and “to improve the regulatory climate for small businesses in Texas.”[11]

The 2007 legislation also lowered the threshold for requiring publication of an adverse-effect analysis. The original language of Section 2006.002 required state agencies to prepare and publish an analysis when considering the adoption of a rule that “would” have an adverse economic effect on small businesses.[12] With the 2007 amendment, the Legislature changed the auxiliary verb “would” to “may,” with the apparent intent of decreasing the requisite likelihood of an adverse economic effect and increasing the number of rules requiring an adverse-effect analysis.[13] In Texas Shrimp Association v. Texas Parks and Wildlife Dept., the Austin court of appeals interpreted the phrase “may adversely effect in a material way” to require only “the possibility or potential of an adverse effect.”[14]

The Office of the Attorney General of Texas (OAG) publishes a handbook to assist agencies in determining a proposed rule’s potential adverse economic effect on small businesses.[15] The OAG’s guidance is inconsistent in its use of “would” or “may” as the threshold for an adverse-effect analysis. Though the current, correct “may” is used throughout the guidelines, the “Outline of Required Steps” section advises an agency to ask “would the proposed rule have an adverse economic effect on small businesses?”[16] That is not the correct question, since “would” was rejected by the Legislature in 2007 in favor of “may.”[17] The guidance also states that if an agency determines a proposed rule will not have an adverse economic effect on small businesses, it should include a finding to that effect in the proposed notice.[18]

The key statutory term “adverse economic effect” has remained unchanged since the adoption of the adverse-effect law in 1987, and is not defined by the statute.[19] Since the term is undefined, the Code Construction Act requires that its words be construed according to the rules of grammar and common usage.[20] Texas courts likewise have not interpreted “adverse economic effect” under Section 2006.002, and the Fort Worth court of appeals has said that the word “adverse” is “so common that no definition [is] required [for juries] to render a verdict.”[21] A footnote in the OAG’s guidance includes the Merriam-Webster’s Dictionary definition of “adverse” as “acting against or in a contrary direction,” “opposed to one’s interests,” and “causing harm.”[22] The OAG’s guidance also states that “[a]dverse economic effects can include mandatory costs incurred by a small business for compliance with a proposed rule and may include a loss of business opportunities as the result of the regulation.”[23]

The Legislature has not limited the adverse-effect analysis to proposed rules with a certain level of adverse effect, such as the “material” qualification in the Shrimp Association case. In that case, the court interpreted a similar statute, Section 2001.0225 of the Government Code, which requires an agency to perform a regulatory impact analysis when a major environmental rule "may adversely affect [the economy] in a material way.” [24] The Legislature did not similarly qualify adverse economic effect in Section 2006.002 with “material” or another word that signifies size or scale. In Unified Loans v. Pettijohn, the Austin court of appeals rejected a state agency’s argument that Section 2006.002 requires an adverse-effect analysis only when a proposed rule has a disproportionate effect on small businesses. The court held that Section 2006.002 simply, expressly and unambiguously requires an adverse-effect analysis before an agency may adopt “a rule that would have an adverse economic effect on small businesses” and noted: “We may not remodel the statute to incorporate a requirement of proportionality--a condition not obviously suggested by the statutory text.” [25]

The Austin court of appeals has also held that a state agency’s statement in the notice of a proposed rule that “[t]here will be no effect on small businesses” and its failure to state the grounds for this conclusion did not substantially comply with Section 2006.002. The court stated that an objective of statutes such as Section 2006.002 is to give notice to interested persons so that they might comment meaningfully. Accordingly, the court held that an agency’s conclusion that “there will be no effect on small businesses” was an “opaque generality” that did not invite meaningful comment and therefore did not substantially comply with the requirements of the statute.[26]

Case Study Methodology

We conducted a quantitative and qualitative analysis of the TABC’s compliance with the current form of Section 2006.002 for all rules in effect on September 1, 2022. For our purposes, Section 2006.002 was amended to its current form on January 1, 2008, when the current criteria for an adverse-effect analysis were added to the statute.[27] Accordingly, the population for our case study comprised all notices of proposed rule published in the Texas Register on or after January 1, 2008, for TABC rules that remained in effect on September 1, 2022.

To gather the population of notices for our case study, we began by identifying the TABC rules in effect on September 1, 2022. The TABC’s rules are published in Title 16, Part 3, of the Texas Administrative Code (TAC), which is maintained by the Office of the Texas Secretary of State.[28] There were 213 TABC rules in effect on September 1, 2022.[29]

For each of these rules, we worked backward through the citation history in the TAC to the notice of proposed rule for each rule adoption or amendment. First, we followed the citation in the TAC to the notice of rule adoption in the Texas Register.[30] Second, from the notice of rule adoption, we followed the citation in the preamble to the notice of proposed rule previously published in the Texas Register. If a small business adverse-effect analysis is required, it must be published in the notice of proposed rule.[31]

We excerpted from each of the notices of proposed rule all text in the preamble relating to small businesses. Next, we excluded all excerpts from notices of proposed rule published before January 1, 2008. Sometimes a single notice of proposed rule included the adoption or amendment of more than one rule.[32] In those instances, the notice of proposed rule and its excerpt were included in the population only one time. Our final population included 92 notices of proposed rule and 92 excerpts relating to the effect of the proposed rule on small businesses.

For our quantitative analysis, we first created a list of criteria reflecting the requirements of Section 2006.002(c)-(d), as interpreted by the OAG and the courts. Specifically, we evaluated the rulemaking notices of the TABC according to the following criteria and recorded our findings.

1. Presence in the notice of (a) a finding of adverse economic effect or (b) a finding of no adverse economic effect on small businesses.[33] We treated words and phrases such as “effect,” “fiscal or regulatory impact,” “fiscal implications” or “regulatory burden” as synonyms for “adverse economic effect,” as the context indicated those statements were published in the notices in response to Section 2006.002.
2. Presence in the notice of an adverse-effect analysis that substantially complied with Section 2006.002(c) as amended in 2007. We considered this criterion to be satisfied if the notice stated at least two of the three elements required by Section 2006.002(c):
   1. The number of small businesses subject to the proposed rule;[34] 
   2. A projection of the economic impact of the rule on small businesses;[35] and
   3. A description/consideration of alternative methods of achieving the purpose of the proposed rule.[36]
3. Presence in the notice of a statement of grounds for a finding of no adverse economic effect on small businesses, as required by the Austin court of appeals in Unified Loans.[37]
4. Presence in the notice of qualifying terms for adverse economic effect not present in the statute, such as “material” or “negligible,” a practice proscribed by the Austin court of appeals in Unified Loans.[38] 

We scored each of the 92 excerpts in the population according to each of the above criteria, assigning a “1” if the information in a criterion was present and a “0” if the information was not present. For our quantitative analysis, we did not evaluate the accuracy of any statements contained in the notices in the case study. We assumed all statements to be accurate on their face and evaluated the statements only for the presence or absence of the textual elements outlined in the criteria.

For our qualitative analysis, we observed and recorded patterns in the notices that reflect TABC practice under Section 2006.002.

Quantitative Findings

Of the 92 notices of proposed rule in the case study, the TABC published a finding of adverse economic effect on small businesses (Criterion 1(a)) in five notices (5% of notices).[39] The agency published a finding of no adverse economic effect on small businesses (Criterion 1(b)) in 86 notices (94% of notices). In one notice, the agency wrote that the “effect” on small businesses was “indeterminable.” (See Figure 1.)

Figure 1 — Finding of Adverse Economic Effect in TABC Rulemaking

 

Of the five notices containing a finding of adverse economic effect, none of the notices contained an adverse-effect analysis that substantially complied with the requirements of Section 2006.002(c) (Criterion 2). Note that in our analysis, we did not apply a strict reading of Section 2006.002(c). Instead, we considered a notice to substantially comply with Section 2006.002(c) if it contained at least two of the three elements required by Section 2006.002(c). Nonetheless, none of the notices in this category met even our lenient substantial-compliance standard. None of the five notices contained an estimate of the number of small businesses subject to the proposed rule (Criterion 2(a)); only two contained a projection of the economic impact of the rule (Criterion 2(b)); and none described or considered alternative methods of achieving the purpose of the proposed rule (Criterion 2(c)).

Interestingly, one notice contained both a finding of no adverse economic effect and an adverse-effect analysis that substantially complied with Section 2006.002(c).[40] 

Of the 86 notices that contained a finding of no adverse economic effect, only 13 notices contained a statement of grounds for the finding of no adverse economic effect.

Of the 92 notices in our case study, 24 notices (25%) included a qualifying word in describing the adverse effect of the proposed rule on small businesses (Criterion 4), such as “no material fiscal implications.” Specifically, 19 notices used “material,” one used “significant” and five used “additional” to qualify the regulatory burden or adverse economic effect on small businesses. All 24 notices that contained a qualifying word also contained a finding of no adverse effect.

Qualitative Observations

In addition to evaluating the notices in the case study according to our quantitative criteria, we observed patterns in the notices that offer insight as to how the TABC applied Section 2006.002 and why the agency found so little adverse economic effect for small businesses in its rulemaking.

1. The notices primarily considered only required payments of cash to the TABC to be adverse economic effects, and did not consider other costs presented by the proposed rules — such as other cash outlays, compliance labor or loss of business opportunity.[41] Of the five notices in the case study containing a finding of adverse economic effect, four notices proposed rules that required the payment of license, permit fees or penalties to the TABC.[42] One notice found an adverse economic effect for violators of a rule that did not require a cash payment, but the notice gave no information about the form of the adverse economic effect.[43]
2. None of the 92 notices in the case study contained text regarding the labor required to comply with a rule, even though 81 of the 213 TABC rules in effect on September 1, 2022, directly required labor of a licensee, permittee or applicant. Compliance labor in these 81 rules took the form of submitting applications, reports or notices to the TABC (46 rules); paying a tax or fee (18 rules); acquiring a bond or insurance (six rules); posting signs (three rules); affixing stamps or labels to products (four rules); or creating or maintaining records (38 rules). Forty notices in the case study (43%) adopted or amended those rules, but none of the 40 notices discussed the adverse economic effect of compliance labor.
3. None of the 92 notices in the case study considered the adverse economic effect of labor indirectly required by proposed rules that would regulate the internal operations of a business. For example, Rule 41.53 concerns the internal operations of a private club operating under a pool system.[44] A private club must deploy labor to ensure that its internal operations comply with Rule 41.53 and to carry out procedures that it would not carry out absent the rule’s requirement. Similarly, under Rule 45.8, an applicant that is denied a product registration by the TABC is entitled to a hearing on the denial before the State Office of Administrative Hearings (SOAH).[45] An applicant must deploy labor to present its case in a SOAH hearing. These two rules offer examples of compliance labor requirements that were not captured by the TABC in any of the notices in the case study.
4. Most of the notices (95%) did not state the economic effect of a rule in dollars. Of the 92 notices in the case study, only five notices stated a dollar value at all. Two of those notices stated an increased cash outlay,[46] one notice stated a decreased cash outlay,[47] and one notice stated an optional cash outlay for an optional certification.[48] Only two notices stated economic effect as a total dollar amount for all businesses subject to the rule, while the other three notices stated dollar amounts only on a per-transaction basis.[49]
5. When a notice proposed a rule requiring payment of a fee, the TABC found an adverse economic effect only if the fee was new or increased. Among the rules in effect on September 1, 2022, 10 rules required the payment of a license, permit, registration, application, administrative, certificate or annual fee to the TABC by businesses. Seventeen notices in the study related to these 10 rules, and of those 17 notices:
   • Only three notices contained a finding of adverse economic effect, and in each case, a surcharge was added or increased;[50]
   • Three notices reduced fees;[51]
   • Nine notices proposed a rule requiring the payment of a fee to the TABC but did not contain a finding of adverse economic effect, presumably because the fee existed in the same amount in a previous iteration of the proposed rule;[52] and
   • Two notices proposed a rule creating a new fee but, inexplicably, did not contain a finding of adverse economic effect.[53]
6. When the agency proposed rules in response to legislative changes to the Alcoholic Beverage Code, the notices did not consider the associated costs to be an adverse economic effect requiring an adverse-effect analysis. Six notices found no adverse economic effect from costs “required by” or “attributable to” legislation.[54]
7. Eighty-three notices in the case study (90%) used the phrase “fiscal impact,” “fiscal implications” or “fiscal or regulatory impact” in their findings rather than the phrase “economic effect” used in Section 2006.002. Only seven notices (7.4%) used the phrase “economic effect” or “economic impact.”[55] One notice used a phrase in both categories,[56] and three notices used none of the phrases.[57]
8. Four notices indicated an economic benefit for small businesses. These proposed rules would eliminate certain required permits and associated fees, “reduce the regulatory burden,” “benefit” small businesses or “decrease” fees.[58]
9. Five notices contained a finding of adverse economic effect or no adverse economic effect for the first five years of the proposed rule.[59]
10. The notices were inconsistent in their treatment of penalties and late fees as adverse economic effects. A 2008 notice that proposed the adoption of a new schedule of sanctions in Rule 34.2 contained a finding of adverse economic effect for small businesses that “violate a provision of the Code or commission rules.”[60] Stating the same grounds in the inverse, a 2019 notice that revised the schedule of sanctions in Rule 34.2 contained a finding of no adverse economic effect “because the proposed amendments will not affect businesses that comply with the law.”[61] A 2021 notice that added a $100 late fee in Rule 33.2(d) contained a finding of no adverse economic effect on the basis that “increases in fees amount to a few dollars a day or less, which most businesses of any size will be able to absorb.”[62]

Implications of the Findings

The findings of our case study suggest that the Texas law intended to acknowledge and reduce the economic cost of state agency rules for small businesses is not effective in practice. From 2008 to mid-2022, the TABC found an adverse economic effect in only five of its 92 rulemaking notices, covering only four of the agency’s 213 rules. Only two conclusions are possible. Either the vast majority of the TABC’s rules present no costs for small businesses, or the TABC’s rulemaking notices have not captured those costs. Our study indicates the latter. If an agency does not acknowledge the adverse economic effect of a proposed rule, then it is not required by Section 2006.002 to quantify the effect or to attempt to reduce it. We identified several practices in the TABC notices that overlooked costs imposed on small businesses and thereby enabled the agency to avoid the additional analysis required by Section 2006.002.

The most significant finding in our study is that the TABC’s rulemaking notices did not consider the cost of compliance labor required by its rules. We found that 22% of the TABC’s current rules require regulated businesses to prepare and submit information to the TABC in the form of applications, reports or notices (“paperwork hours”). Other rules require regulated businesses to post signs, maintain records or conduct other internal operations in a certain manner (“compliance hours”). The paperwork hours and compliance hours required by TABC rules pose costs to small businesses in the form of wages paid to employees or fees paid to outside professionals, yet the TABC’s rulemaking did not capture these costs as adverse economic effects.

The notices show that the TABC narrowly focused its analysis of adverse economic effects on required cash payments such as permit fees and penalties. Of the five notices in which the TABC published a finding of adverse economic effect, four notices concerned rules that required the payment of fees or penalties to the TABC. Additionally, in the vast majority (90%) of the notices in the case study, the TABC’s finding regarding adverse economic effect used the word “fiscal” instead of “economic” to describe the rule’s effect. This choice of words suggests that the TABC’s analysis was in fact focused on financial transactions, especially transactions between the agency and regulated businesses, and not on the broader economic effects contemplated by Section 2006.002.[63]

The notices in the case study yielded little useable data about the cost of TABC regulations for small businesses. Only five of the 92 notices in the case study contained a dollar value. Two of those notices stated a total dollar value for all businesses subject to the rule; three other notices stated dollar-value costs on a per-transaction basis but gave no information about the number of transactions or regulated businesses affected. In fact, none of the five notices stated the number of small businesses subject to the proposed rule, even though that information is required by Section 2006.002(c)(1). Without stating regulatory costs in numerical terms, such as dollar values, paperwork hours and the number of regulated businesses, the notices offer no means to quantify the regulatory burden on small businesses.

Section 2006.002 is not a vehicle for counting the total cost to small businesses of all rules, or even one rule, of an agency. While Section 2006.002 may capture the new, incremental cost of a rulemaking action, it will not capture the total cost of an individual rule. Each individual rule of a state agency is the product of a series of rulemaking actions — the initial adoption of the rule and any number of subsequent amendments. Sometimes rules are reorganized, renumbered and readopted as new rules but without substantive change from their previous form. Sometimes a rule that imposes a cost on small businesses is amended or readopted without change to those costs (“embedded costs”). If the original adoption of a rule predates Section 2006.002, or if the original adoption postdates Section 2006.002 but costs are overlooked, the costs of the rule become embedded and will not be captured in subsequent rulemaking actions.

As interpreted by the TABC, Section 2006.002 requires a finding of adverse economic effect only for a rulemaking that introduces new costs, but not for a rulemaking that amends or readopts rules with embedded costs. For example, the TABC found an adverse economic effect in three notices that proposed to add or increase a surcharge, but the agency did not find an adverse economic effect in nine notices that amended or reorganized rules with embedded costs. The OAG’s guidance may suggest that the TABC’s approach is incorrect, but the guidance is unclear on embedded costs not previously acknowledged.[64] The TABC’s approach to Section 2006.002 highlights an important shortcoming of the statute. If the statute only requires the reporting of the new, incremental costs for each rulemaking transaction and does not incorporate embedded costs, the information generated by Section 2006.002 will be very limited. Even if an agency complies perfectly with Section 2006.002 and captures every new cost associated with a rule, the design of Section 2006.002 will never yield the total cost of one rule, much less the total cost of all rules.

The notices in the case study also raise several questions about the interpretation and application of Section 2006.002 by a state agency:

1. Does “adverse economic effect” under Section 2006.002 refer to an effect of any size, or only to an effect of a certain magnitude?[65] In 24% of the notices in the case study, the TABC qualified its finding of no adverse economic effect with words like “material,” “significant” and “additional,” which implies an awareness by the TABC of small adverse economic effects in the proposed rules. In one of those notices, the TABC found no adverse economic effect on the grounds that “increases in fees amount to a few dollars a day or less, which most businesses of any size will be able to absorb.”[66]
2. If a proposed rule includes a cost required or imposed by legislation, are those costs adverse economic effects of the rule for the purposes of Section 2006.002? In six notices, the TABC found no adverse economic effect on small businesses from costs “required by” or “attributable to” legislation.[67]
3. What time period should an agency consider when deciding the presence or absence of an adverse economic effect? Section 2006.002 does not specify a time frame for adverse economic effect. In five notices, the TABC’s finding regarding adverse economic effect was limited to the first five years of the proposed rule.[68]
4. Can penalties or sanctions give rise to an adverse economic effect for the purposes of Section 2006.002? In other words, is the Legislature concerned about an adverse economic effect for small businesses that do not comply with a rule or statute? The TABC was inconsistent on this question with respect to the schedule of sanctions in its Rule 34.2. In a 2008 notice, it found an adverse economic effect for small business that violate a rule or statute,[69] but in a 2019 notice, it found no adverse economic effect since the sanctions did not apply to businesses in compliance with the law.[70]
5. If a proposed rule confers an economic benefit for small businesses, is Section 2006.002 truly unconcerned? In four notices, the TABC reported a reduction of costs, or an economic benefit, from a proposed rule, even though Section 2006.002 does not contemplate the publication of cost reductions.[71]

The low number of adverse economic effect findings in the TABC’s notices, and the agency practices that contributed to that outcome, thwart the operation of Section 2006.002 and the Legislature’s intent in enacting it. The Legislature’s purpose in enacting the current version of Section 2006.002 in 2007 was to reduce, when possible, the regulatory burden on small businesses by asking state agencies to quantify the burden and consider cost reduction strategies.[72] As Section 2006.002 is designed, however, an economic impact statement and a regulatory flexibility analysis are required only if the agency first finds that a proposed rule will have an adverse economic effect on small businesses. If the agency finds a proposed rule will not have an adverse economic effect on small businesses, it is not required to quantify the effect or consider possible reductions, and the agency can argue that it has satisfied the requirements of Section 2006.002.[73] Hence, Section 2006.002 creates a strong incentive for agencies to overlook the costs of proposed rules, such as paperwork and compliance hours, embedded costs, costs that can be attributed to legislation, costs only imposed on violators, small costs and cash outlays to anyone other than the agency.

Policy Proposal

Based on the findings in our case study of TABC rulemaking, Section 2006.002 should be remodeled if the statute is to achieve its laudable objectives. The goals of Section 2006.002 are the publication of regulatory costs by state agencies, the potential reduction of those costs for small businesses and the meaningful participation of stakeholders in that process. To achieve those goals, the statute should require the publication of information that state agencies are capable of assessing and then ensure that agencies have an incentive, and not a disincentive, to publish the information.

By asking state agencies to determine the “adverse economic effect” of their rulemaking, the current Section 2006.002 is asking agencies to quantify any negative effect of a proposed rule on the production, distribution or consumption of goods and services.[74] “Adverse economic effect” encompasses anything and everything, as the OAG has noted.[75] Identifying and quantifying all negative economic effects of a proposed rule would require an economic model, like that used by the Legislative Budget Board in preparing a dynamic fiscal impact statement for legislation that increases or decreases a state tax or fee.[76] Most state agencies do not have the resources to conduct that level of analysis, as the TABC’s rulemaking demonstrates.[77] Instead of asking state agencies to do the near-impossible, Section 2006.002 should focus on costs that can be quantified or estimated by state agencies and stakeholders, specifically:

1. Paperwork hours, meaning the average quantity of labor of one regulated entity to prepare and submit to the agency any forms, applications, reports or other information required by the rule;
2. Compliance hours, meaning the average quantity of labor of one regulated entity to conduct its internal operations in compliance with the rule;
3. Fees, meaning the dollar amount of cash payments by one regulated entity to the agency required by the rule; and
4. Cash outlays, meaning the average dollar amount of expenditures by one regulated entity to someone other than the agency.

For each category, the statute should also require an agency to publish the number of regulated entities subject to the rule, multiply the number of regulated entities by average hours or dollars, and publish the total cost of the rule to the economy in the form of paperwork hours, compliance hours, fees and cash outlays.[78]

A statement of a rule’s cost in empirical terms would offer stakeholders an opportunity for meaningful comment, which is one objective of Section 2006.002.[79] For example, if the TABC were to publish a finding in a notice of proposed rule that a “File and Use Notification” for a temporary event under Rule 33.76 would require one paperwork hour, a caterer might comment that the application actually would require two paperwork hours.[80] In response to the comment, the TABC might consider whether the application process could be streamlined. If state agencies are not required to state the cost of their rules in empirical terms such as hours or dollars, the intended feedback loop is stymied and stakeholders cannot effectively participate in the assessment or management of the regulatory burden. 

An estimate of the total regulatory burden of a proposed rule in empirical terms — the rule’s total price tag — would also facilitate analysis of and debate about that burden. The government and the public could ask and answer questions like: What percentage of an industry’s contribution to gross state product is consumed by the regulatory burden? Would productivity be higher if the burden were lower? What are the public benefits of the regulation? Are the benefits justified by the cost? How does the regulatory burden in Texas compare to other states? Does it make Texas more or less attractive in the competition for business location? Section 2006.002, as applied by the TABC, does not yield enough information to facilitate this analysis or debate.

Since the rules of the secretary of state’s office allow a single notice of proposed rule to include groups of rules, the TABC published a single finding regarding adverse economic effect for multiple rules in a notice.[81] Moreover, the TABC found an adverse economic effect only for new costs and not for embedded costs. These practices make it impossible to put a price tag on any individual rule. The TABC also demonstrated an inclination to publish notice of cost reductions, which Section 2006.002 does not contemplate. If the objective of Section 2006.002 is to assess the cost of state regulations in order to manage those costs for the public good, then the statute should require state agencies to deliver the information necessary to put a price tag on each of its rules and, by extension, all of its rules. To this end, Section 2006.002 should require a notice of proposed rule to state:

• The dollar and labor costs for each rule in the notice, if the notice includes more than one rule;
• The total dollar and labor costs for each rule, including both new costs and embedded costs; and
• The net change in dollar and labor costs from any prior iteration of the rule, which could be a net increase, a net decrease or no net change.

Section 2006.002 should also be amended to provide guidance to state agencies in areas on which the statute is currently silent. The TABC’s rulemaking demonstrated uncertainty about whether small costs matter, what time period should be considered in an analysis, whether costs required or imposed by a statute constitute costs of a rule, and whether costs that arise after noncompliance (penalties and late fees) count. To clarify these gray areas and capture all regulatory costs, a revised statute should require a state agency to:

• Account for labor hours and dollar costs even if, in the agency’s judgment, the costs are not material or substantial;
• Estimate and publish costs for the first year the proposed rule will be in effect;
• Account for costs required by or attributable to legislation; and
• Account for fines, late fees and penalties.

Finally, Section 2006.002 should be amended to eliminate the incentive for state agencies to downplay the cost of their rules. Instead of requiring an agency to quantify the costs of a proposed rule only if, in the agency’s judgment, the rule imposes costs on small businesses, the statute should require the agency to publish hour and dollar costs for all proposed rules. Then, if an agency fails to substantially comply with the requirement to publish hour and dollar costs for a proposed rule, the rule would be voidable under Section 2001.035(a) of the Government Code.[82] The current incentive to publish a finding of no adverse economic effect in order to avoid further procedural obligations under Section 2006.002 would be replaced with a new incentive to publish hour and dollar costs in order to preclude the voidability of the proposed rule under Section 2001.035(a). Having published the hour and dollar costs of the proposed rule for the average business, the agency then should be required to consider whether those costs can be reduced for small businesses in a regulatory flexibility analysis under Section 2006.002(c)(2).[83] 

Together, these amendments can facilitate a more accurate assessment of, and potentially lessen, the economic burden of regulation on small businesses in Texas.

Endnotes

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[1] A drinking place or restaurant that serves alcohol holds a wine and malt beverage retailer’s permit or mixed beverage permit issued by the TABC. A restaurant that serves alcohol also holds a food and beverage certificate issued by the TABC. See Tex. Alco. Bev. Code § 25.01 et seq., § 28.01 et seq.; 16 Tex. Admin. Code § 33.5, 33.23(b).

[2] The small business adverse-effect law defines a small business as an independently owned and operated, for-profit legal entity or sole proprietorship with fewer than 100 employees or less than $6 million in annual gross receipts. Tex. Gov’t Code § 2006.001(2); Texas Comptroller of Public Accounts, HB 3430 Reporting Requirements -- Determining Potential Effects on Small Businesses, last visited Oct. 26, 2022, https://fmx.cpa.texas.gov/fmx/legis/ecoeffect/; Executive Office of the President, Office of Management and Budget North American Industrial Classification System, United States, 2022, last visited Oct. 26, 2022, https://www.census.gov/naics/.

[3] The NAICS codes included in the table comprise drinking places or restaurants that may serve alcoholic beverages as defined by the North American Industrial Classification System. Office of the President, Office of Management and Budget, NAICS, United States, 2022, last visited Aug. 11, 2022, https://www.census.gov/naics/.

[4] The comptroller’s office incorrectly states the first four digits of the NAICS code for Full-Service Restaurants as 7221. The correct NAICS code for Full-Service Restaurants is 722511 and the correct first four digits are 7225. NAICS, 561.

[5] The Texas Register is a weekly publication of the Office of the Texas Secretary of State. It is the official record of state agency rulemaking and review actions, governor’s appointments, attorney general opinions, requests for proposals and other miscellaneous documents. See The University of North Texas Libraries, The Portal to Texas History, Texas Register.

[6] Notices in which the TABC proposed the repeal of a rule were not included in the case study, and references to groups of rules or notices throughout this paper do not include repeals.

[7] Tex. Gov’t Code § 2006.002(c)-(d); The requirements of Section 2006.002 apply to rules having an adverse economic effect on small businesses, micro-businesses or rural communities. Our research focused on small businesses, which includes micro-businesses, as the terms are defined in Section 2006.001 of the Government Code.  

[8] Act of May 20, 1987, 70th Leg., R.S., ch. 375, § 6, 1987 Tex. Gen. Laws 1875, 1876; Act of May 17, 1993, 73rd Leg., R.S., ch. 268, § 1, 1993 Tex. Gen. Laws 583, 761 (codified at Tex. Gov’t Code § 2006.001 et seq.).

[9] Act of May 20, 1987, 70th Leg., R.S., ch. 375, § 6, 1987 Tex. Gen. Laws 1875, 1876.

[10] Act of May 28, 2007, 80th Leg., R.S., ch. 1270, § 3, sec. 2006.002(c), 2007 Tex. Gen. Laws 4249, 4250 (codified at Tex. Gov’t Code § 2006.002(c)).

[11] See House Research Organization, Bill Analysis, Tex. S.B. 700, 80th Leg., R.S. (2007), last visited Oct. 26, 2022, https://hro.house.texas.gov/pdf/ba80r/sb0700.pdf#navpanes=0. S.B. 700 did not become law, but the changes to Section 2006.002 contained in S.B. 700 were amended onto H.B. 3430, which did become law. S.J. of Tex., 80th Leg., R.S., 3368, Floor Amendment No. 3, last visited Oct. 26, 2022, https://journals.senate.texas.gov/sjrnl/80r/pdf/80RSJ05-23-F.PDF#page=278.

[12] Act of May 20, 1987.

[13] Act of May 28, 2007; “May” and “would” are auxiliary verbs that, in Section 2006.002, express epistemic modality or “the speaker’s assessment of reality or likelihood of reality.” Wikipedia, s.v. “auxiliary verb,” last visited Oct. 26, 2022, https://en.wikipedia.org/wiki/Auxiliary_verb; Tex. Gov’t Code § 311.011(a) (“Words and phrases shall be read in context and construed according to the rules of grammar and common usage.”). See also Estrada v. State, 313 S.W.3d 274, 281 n.5 (Tex. Crim. App. 2010) (“‘will’ and ‘would’ are ‘helping verbs called modal auxiliaries or modals’ with ... ‘would’ used in a main clause to express, among other things, ‘a hypothetical meaning or a sense of probability’”).

[14] Tex. Shrimp Ass'n v. Tex. Parks & Wildlife Dep't, No. 03-04-00788-CV, 2005 Tex. App. LEXIS 5906, at *14 (Tex. App.—Austin July 27, 2005) (mem. op.).

[15] Office of the Attorney General of Texas, Government Code Chapter 2006 Small Businesses and Rural Communities Impact Guidelines, last visited Oct. 26, 2022, https://www.texasattorneygeneral.gov/sites/default/files/files/divisions/general-oag/RuralCommunitiesImpactGuidelines2017.pdf.

[16] Office of the Attorney General of Texas, Small Businesses and Rural Impact Guidelines, 2.

[17] Act of May 28, 2007.

[18] Office of the Attorney General of Texas, Small Businesses and Rural Impact Guidelines, 4.

[19] See generally Tex. Gov't Code § 2001.001, 2001.003.

[20] Tex. Gov’t Code § 311.011(a).

[21] See Unified Loans, Inc. v. Pettijohn, 955 S.W.2d 649 (Tex. App.—Austin 1997, no pet.), and Town of Flower Mound v. Teague, 111 S.W.3d 742, 760 (Tex. App.—Fort Worth 2003).

[22] Office of the Attorney General of Texas, Small Businesses and Rural Impact Guidelines, 4n1, citing Merriam-Webster Dictionary, “adverse,” last visited Oct. 26, https://www.merriam-webster.com/dictionary/adverse.

[23] Office of the Attorney General of Texas, Small Businesses and Rural Impact Guidelines, 5.

[24] Tex. Shrimp Ass’n, quoting the Legislature’s definition of a “major environmental rule” as one that “may adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs… .” in Tex. Gov’t Code § 2001.0225(g)(3) (emphasis added).

[25] Unified Loans, 955 S.W.2d, 653-654; note that Unified Loans was decided in 1997, before the 2007 change of “would” to “may” in Section 2006.002.

[26] Unified Loans, 955 S.W.2d, 653-654.

[27] “Rural communities” were added to the small business adverse-effect law in 2017, but their addition did not otherwise change the form of the law. Act of May 19, 2017, 85th Leg., R.S., ch. 898, § 2-3, sec. 2006.001-.002, 2017 Tex. Gen. Laws 3685 (codified at Tex. Gov’t Code § 2006.001-.002).

[28] Office of the Texas Secretary of State, Texas Administrative Code, Title 16, Part 3, last visited Oct. 26, 2022, https://texreg.sos.state.tx.us/public/readtac$ext.ViewTAC?tac_view=3&ti=16&pt=3.

[29] 16 Tex. Admin. Code § 31.1-50.33; each § (section) of the TAC is an individual rule. See 1 Tex. Admin. Code § 91.32.

[30] The Texas Register archive is maintained by the University of North Texas Libraries. See University of North Texas Libraries, Texas Register, last visited Oct. 26, 2022, https://texashistory.unt.edu/explore/collections/TR/.

[31] Tex. Gov’t Code § 2001.024(a)(8), 2006.002(d).

[32] A single notice of proposed rule may include more than one rule. 1 Tex. Admin. Code § 91.35(a).

[33] Tex. Gov’t Code § 2006.002(d); Office of the Attorney General of Texas, Small Businesses and Rural Impact Guidelines, 4 (“If a proposed rule will not have an adverse economic effect on small businesses or rural communities, an agency should include a finding to that effect in the notice of the proposed rule.”).

[34] Tex. Gov’t Code § 2006.002(c)(1).

[35] Tex. Gov’t Code § 2006.002(c)(1).

[36] Tex. Gov’t Code § 2006.002(c)(1)-(2). Section 2006.002(c)(1) requires an agency to “describe” alternative methods of achieving the purpose of a proposed rule, and Section 2006.002(c)(2) requires an agency to “consider” the same information. We considered (c)(1) and (c)(2) to be a single requirement that was satisfied by either a description or a consideration.

[37] Unified Loans, 955 S.W.2d, 653-654.

[38] Unified Loans, 955 S.W.2d, 653-654.

[39] 38 Tex. Reg. 5161 (2013) (amending § 33.23); 36 Tex. Reg. 3692, 3693 (2011) (amending § 33.23); 33 Tex. Reg. 5454, 5455 (2008) (amending § 33.23); 33 Tex. Reg. 4444 (2008) (amending § 34.1 et seq.); 34 Tex. Reg. 6967 (2009) (amending § 45.131).

[40] 46 Tex. Reg. 3996, 3998 (2021) (amending § 33.2 et seq.).

[41] Office of the Attorney General of Texas, Small Businesses and Rural Impact Guidelines, 5 (“Adverse economic effects can include mandatory costs incurred by a small business for compliance with a proposed rule and may include a loss of business opportunities as the result of the regulation.”).

[42] 38 Tex. Reg. 5161 (2013) (amending § 33.23); 36 Tex. Reg. 3692, 3693 (2011) (amending § 33.23); 33 Tex. Reg. 5454, 5455 (2008) (amending § 33.23); 33 Tex. Reg. 4444 (2008) (amending § 34.1 et seq.).

[43] 34 Tex. Reg. 6967 (2009) (amending § 45.131).

[44] 16 Tex. Admin. Code § 41.53, last visited Oct. 26, 2022, https://texreg.sos.state.tx.us/public/readtac$ext.TacPage?sl=R&app=9&p_dir=&p_rloc=&p_tloc=&p_ploc=&pg=1&p_tac=&ti=16&pt=3&ch=41&rl=53.

[45] 16 Tex. Admin. Code § 45.8, last visited Oct. 26, 2022, https://texreg.sos.state.tx.us/public/readtac$ext.TacPage?sl=R&app=9&p_dir=&p_rloc=&p_tloc=&p_ploc=&pg=1&p_tac=&ti=16&pt=3&ch=45&rl=8.

[46] 33 Tex. Reg. 5454, 5455 (2008) (amending § 33.23); 33 Tex. Reg. 4444 (2008) (amending § 34.1 et seq.).

[47] 45 Tex. Reg. 5580, 5583 (2020) (amending § 45.1 et seq.)

[48] 45 Tex. Reg. 982, 983 (2020) (amending § 50.32).

[49] 36 Tex. Reg. 3692, 3693 (2011) (amending § 33.23); 33 Tex. Reg. 4444 (2008) (amending § 34.1 et seq.).

[50] 33 Tex. Reg. 5454, 5455 (2008) (amending § 33.23); 36 Tex. Reg. 3692, 3693 (2011) (amending § 33.23); 38 Tex. Reg. 5161 (2013) (amending § 33.23).

[51] 46 Tex. Reg. 3996, 3998 (2021) (amending § 33.2 et seq.); 43 Tex. Reg. 6733 (2018) (amending § 33.23); 33 Tex. Reg. 9040 (2008) (amending § 33.23).

[52] 47 Tex. Reg. 622, 623 (2022) (amending § 39.1 et seq.); 46 Tex. Reg. 6634, 6636 (amending § 41.1 et seq.); 47 Tex. Reg. 1801 (2022) (amending § 41.17 et seq.); 45 Tex. Reg. 5580, 5583 (2020) (amending § 45.1 et seq.); 35 Tex. Reg. 3739 (2010) (amending § 50.1 et seq.); 43 Tex. Reg. 676 (2018) (amending § 50.9); 43 Tex. Reg. 687 (2018) (amending § 50.22); 43 Tex. Reg. 688 (2018) (amending §50.25).

[53] 43 Tex. Reg. 670, 671 (2018) (amending § 33.23); 44 Tex. Reg. 5837 (2019) (amending § 33.29).

[54] 46 Tex. Reg. 3996, 3998 (2021) (amending § 33.2 et seq.); 46 Tex. Reg. 6634, 6636 (amending § 41.1 et seq.); 46 Tex. Reg. 4006, 4007 (2021) (amending §45.1 et seq.); 38 Tex. Reg. 5166 (2013) (amending § 45.105); 38 Tex. Reg. 5167 (2013) (amending § 45.120); 38 Tex. Reg. 5170 (2013) (amending § 45.131).

[55] 38 Tex. Reg. 5161 (2013) (amending § 33.23); 36 Tex. Reg. 3692, 3693 (2011) (amending § 33.23); 44 Tex. Reg. 5837 (2019) (amending § 33.29); 44 Tex. Reg. 3997 (2019) (amending § 34.2); 36 Tex. Reg. 3695 (2011) (amending § 35.32); 46 Tex. Reg. 6634, 6636 (amending § 41.1 et seq.); 36 Tex. Reg. 3696, 3697 (2011) (amending § 45.117).

[56] 46 Tex. Reg. 6634, 6636 (amending § 41.1 et seq.).

[57] 44 Tex. Reg. 7593 (2019) (amending § 31.6); 43 Tex. Reg. 670, 671 (2018) (amending § 33.23); 45 Tex. Reg. 982, 983 (2020) (amending § 50.32).

[58] 46 Tex. Reg. 3996, 3998 (2021) (amending § 33.2 et seq.); 43 Tex. Reg. 6733 (2018) (amending § 33.23); 43 Tex. Reg. 670, 671 (2018) (amending § 33.23); 45 Tex. Reg. 5580, 5583 (2020) (amending § 45.1 et seq.).

[59] 34 Tex. Reg. 3132 (2009) (amending § 31.1); 33 Tex. Reg. 9040 (2008) (amending § 33.23); 33 Tex. Reg. 5454, 5455 (2008) (amending § 33.23); 34 Tex. Reg. 783 (2009) (amending § 34.1); 34 Tex. Reg. 6967 (2009) (amending § 45.131).

[60] 33 Tex. Reg. 4444 (2008) (amending § 34.1 et seq.).

[61] 44 Tex. Reg. 3997 (2019) (amending § 34.2).

[62] 46 Tex. Reg. 3996, 3998 (2021) (amending § 33.2 et seq.).

[63] “Fiscal” means relating to “taxation, public revenues, or public debt” or, secondarily, “financial matters,” while “economic” means relating to the “production, distribution, and consumption of goods and services.” Merriam-Webster Dictionary, “fiscal” and “economic,” last visited Aug. 29, 2022, https://www.merriam-webster.com/.

[64] See Office of the Attorney General of Texas, Small Businesses and Rural Impact Guidelines, 6 (“An agency should individually analyze the impacts of each proposed rule or rule amendment. While an agency may be able to take advantage of the data and analysis compiled as part of an Economic Impact Statement for a prior rulemaking, the agency should confirm that the data are appropriate for each proposed rule.”).

[65] Unified Loans, 955 S.W.2d at 654 (“We may not remodel the statute to incorporate a requirement of proportionality--a condition not obviously suggested by the statutory text.”).

[66] 46 Tex. Reg. 3996, 3998 (2021) (amending § 33.2 et seq.).

[67] 46 Tex. Reg. 3996, 3998 (2021) (amending § 33.2 et seq.); 46 Tex. Reg. 6634, 6636 (amending § 41.1 et seq.); 46 Tex. Reg. 4006, 4007 (2021) (amending §45.1 et seq.); 38 Tex. Reg. 5166 (2013) (amending § 45.105); 38 Tex. Reg. 5167 (2013) (amending § 45.120); 38 Tex. Reg. 5170 (2013) (amending § 45.131).

[68] 34 Tex. Reg. 3132 (2009) (amending § 31.1); 33 Tex. Reg. 9040 (2008) (amending § 33.23); 33 Tex. Reg. 5454, 5455 (2008) (amending § 33.23); 34 Tex. Reg. 783 (2009) (amending § 34.1); 34 Tex. Reg. 6967 (2009) (amending § 45.131).

[69] 33 Tex. Reg. 4444 (2008) (amending § 34.1 et seq.).

[70] 44 Tex. Reg. 3997 (2019) (amending § 34.2).

[71] 46 Tex. Reg. 3996, 3998 (2021) (amending § 33.2 et seq.); 43 Tex. Reg. 6733 (2018) (amending § 33.23); 43 Tex. Reg. 670, 671 (2018) (amending § 33.23); 45 Tex. Reg. 5580, 5583 (2020) (amending § 45.1 et seq.).

[72] House Research Organization, Bill Analysis, Tex. S.B. 700, 80th Leg., R.S. (2007).

[73] The agency’s argument would be wrong, however, since the Third Court of Appeals held in Unified Loans that an agency is required to give a reasoned justification for a finding of no adverse economic effect. 955 S.W.2d, 653-654. Nonetheless, a finding of no adverse economic effect nominally satisfies Section 2006.002 and shifts the burden to stakeholders to challenge the agency’s rulemaking in court under Section 2001.038 of the Texas Government Code.

[74] Merriam-Webster Dictionary, “economic.”

[75] Office of the Attorney General of Texas, Small Businesses and Rural Impact Guidelines.

[76] See Tex. Gov’t Code § 314.005.

[77] Ironically, the rulemaking of the one agency that does have those resources, the Comptroller of Public Accounts, is exempt from the requirements of Section 2006.002. Tex. Gov’t Code § 2006.002(e) (“This section does not apply to a rule adopted under Title 2, Tax Code.”).

[78] Some hour and labor requirements will be constant across regulated entities, and others will vary according to the size of the entity. Where costs vary, the statute should instruct agencies to publish an average hour or dollar cost.

[79] Unified Loans, 955 S.W.2d at 652 (“Statutes of this kind have two objectives. The first is to obtain as early as possible in the rulemaking proceeding an objective assessment of the agency’s proposed action by forcing it to consider seriously, in detail and in orchestration, the various factors named in the statute--in this instance the effect of the rule on small businesses ... The second objective is to afford adequate notice--to place the agency’s assessment before interested persons in advance in order that ... interested persons might comment intelligently on the proposed rules...”).

[80] See 16 Tex. Admin. Code §33.76; see also Texas Alcoholic Beverage Commission, File and Use Notification, last visited Oct. 26, 2022, https://www.tabc.texas.gov/static/sites/default/files/2021-07/form-l-fun.pdf.

[81] Recall that each § (section) of the TAC is an individual rule.

[82] Tex. Gov’t Code § 2001.035(a); see also Unified Loans, 955 S.W.2d, 650-651.

[83] See also Tex. Gov’t Code § 2006.002(c-1) (“The analysis under Subsection (c) shall consider, if consistent with the health, safety and environmental and economic welfare of the state, using regulatory methods that will accomplish the objective of the applicable rules while minimizing adverse impacts on small businesses...”)

 

 

This research was funded in part by a grant from the Institute for Humane Studies at George Mason University.

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.

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