Report says state could regain small businesses by easing regulation

Connecticut could reverse most of its small business losses from the decade just prior to the last recession by easing the burdens that make it one of the most regulated states in the nation, according to the University of Connecticut’s new latest quarterly economic journal released today.

The fall issue of The Connecticut Economy, released during a mid-morning briefing at the Connecticut Education Association offices at Capitol Place, also found the Nutmeg State has fallen behind nearly all others in growing small companies.

“For good or ill, all states regulate economic activity within their borders, but Connecticut places more constraints than average on its businesses,” wrote economist Steven P. Lanza, executive editor of the quarterly journal and author of “Economic Regulation of Business: Market Safeguard or Development Straightjacket?”

Businesses with fewer than 500 workers account for nearly 98 percent of Connecticut’s employers and half of its private-sector jobs, Lanza wrote, citing U.S. Commerce Department data. The vast majority, about 88 percent of these roughly 75,000 small businesses, have fewer than 20 employees.

And Connecticut has a particularly high concentration relative to U.S. in manufacturing and management firms. Small manufacturers are 28 percent more numerous in here than elsewhere nationally. Administration and management firms, “which employ armies of office administrators, accountants, auditors and financial managers, are nearly 20 percent more common here, the report states.

“But Connecticut has lagged behind other states in cultivating these job-rich enterprises,” Lanza wrote. “Connecticut’s small businesses are clearly concentrated in some of the most lucrative sectors of the economy, but why have they struggled so to grow their numbers?”

Between 1996 and 2006 Connecticut lost 1,700 or 2.2 percent of its small employer firms, the third-biggest drop after West Virginia at 6.2 percent and Ohio at 2.9 percent.  The average state saw a 10 percent increase in the decade leading up to the last recession.

Like most of New England, Connecticut has “fairly exacting labor standards” that include a “relatively high” minimum wage–at $8.25 per hour, it’s $1 above the national minimum–a strong workers’ compensation program, and prevailing wage statutes that tie public-sector construction and other wages to levels that match or exceed those paid to unionized employees in the private sector, the report states.

Connecticut also requires special licensing for more occupations than any other state, including massage therapists and television and radio technicians. It also has “fairly rigorous land use standards marked by a significant state (versus local) role in land use planning (and) numerous endangered species statutes.”

Developing a methodology patterned after a 2006 analysis published at George Mason University and analyzing dozens of laws and policies covering labor, health, licensing and utilities, the UConn journal ranked Connecticut 43rd in regulation, with 1 being the least restrictive.

It did better than most of its neighbors, however, including Massachusetts (44th), Rhode Island (48th), New York (49th), and New Jersey (50th). The least regulated states on the UConn ranking system were dominated by southern and midwestern states and led by Alabama, Mississippi and North Dakota.

But Lanza warned that while excessive regulation is problematic, too little governmental intervention should not be Connecticut’s goal either

While a modest level of regulation can expand markets by protecting consumers and businesses from fraud and anti-competitive practices such as price-fixing, “In the extreme, government regulations can yield a bewildering knot of red tape that can stymie even the most enterprising of business people or afford a privileged status to a politically connected few,” Lanza added.

The report does not recommend specific regulatory fixes to aid Connecticut’s position, though it projected that the state could restore 1 or 2 percentage points to its small business growth rate by moving closer to the middle of the pack of state regulatory burdens. This would effectively reverse the losses experienced prior to the last recession.

Lanza did add boosting small business loans is an effective tool to help small companies deal with a heavy regulatory burden. About six out of 10 Connecticut small businesses receive such funding, which ranks this state about average nationally. Boosting that ratio to seven out of 10 also could restore a percentage point to Connecticut’s business growth rate, Lanza estimated.

Two key state lawmakers said Connecticut also could improve its small business climate by working harder to change the culture of state and local governments’ regulatory agencies.

“I hear examples from constituents all the time: It is very difficult in Connecticut to do the simplest of things,” said Sen. Tony Guglielmo of Stafford, a veteran of the Finance, Revenue and Bonding Committee and ranking GOP senator on the Labor Committee. “Part of the problem is just plain attitude. Some people in government don’t feel they are doing their job unless they put businesspeople through a full-court press.”

Both Guglielmo and Sen. Gary D. LeBeau, D-East Hartford, said the legislature should review the state’s extensive business licensing network to ensure licenses are required to promote standards of quality and safety — and don’t serve simply as revenue-raising devices for the state’s coffers.

LeBeau, who is co-chairman of the legislature’s Commerce Committee, also argued for a culture change. “The fact is we have a reputation as a particularly difficult state to do business in,” he said. “It’s all about attitude.”

Peter Gioia, chief economist for the Connecticut Business and Industry Association, echoed that concern. “They feel that these regulations are arbitrarily enforced,” he said.