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Introduction

Federal regulation applies in the same way in all 50 states and the District of Columbia. Each state’s economy, however, includes a unique mix of industries, so federal policies that target specific sectors of the economy will affect states in different ways.

Federal regulations can, by design, target some industries more than others. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 directed federal regulatory agencies to create approximately 400 new regulations targeting the financial services sector.1 Because financial services matter in all states, these new regulations will have national effects, but those effects will be felt more acutely in New York than in Virginia, for example, simply because of the relative greater importance of the financial services industry in the former state.

Table 1: Historical FRASE Ranks and Scores for Indiana

Year

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Rank

5

4

5

5

4

4

4

4

4

4

4

FRASE score

1.34

1.37

1.33

1.33

1.38

1.44

1.41

1.45

1.45

1.39

1.38

FRASE score (constant basis)

1.48

1.54

1.52

1.54

1.64

1.80

1.83

1.94

1.98

1.95

1.97

Using the RegData database, we can examine the relative impact of federal regulation on a particular state. RegData creates an industry regulation index by counting the words and phrases in the Code of Federal Regulations that indicate a specific mandated or prohibited activity and then by classifying those regulatory “restrictions” according to which industry or industries they likely target. The 10 most regulated industries in the United States for 2014 are listed in table 2.

By weighting industry restrictions using the importance of an industry to a particular state relative to the industry’s importance to the country overall, we can produce a single index that measures the impact of federal regulation on that state. The federal regulation and state enterprise (FRASE)  index is thus a ratio of the impact of federal regulations on a specific state’s industries to the impact of federal regulations on the nation’s industries in a given year. A value of 1 would indicate that a state’s private sector is affected by federal regulations to precisely the same degree as is the national private sector, whereas a score higher than 1 would indicate a higher impact of federal regulation on a state’s private sector.

Table 2: McLaughlin-Sherouse Top 10 Most Regulated Industries for 2014

NAICS code

Industry name

Industry-relevant restrictions

3241

Petroleum and coal products manufacturing

25.48

2211

Electric power generation, transmission, and distribution

20.96

3361

Motor vehicle manufacturing

16.76

5222

Nondepository credit intermediation

16.58

5221

Depository credit intermediation

16.03

4811

Scheduled air transportation

13.31

1141

Fishing

13.22

5239

Other financial investment activities

12.26

2111

Oil and gas extraction

11.95

3254

Pharmaceutical and medicine manufacturing

11.51

Note: The number of industry-relevant restrictions is divided by 1,000 for ease of reading.

The Impact of Federal Regulations in Indiana

For 2013, Indiana ranked 4th for impact of federal regulation, with a score of 1.38 on the FRASE index. By design, the FRASE index for the United States overall in any year will equal 1, so a score of 1.38 indicates that the impact of federal regulation on Indiana industries was 38 percent higher than the impact on the nation overall.

Figure 1: Top Industries for Indiana, Industry Value Added as a Percentage of the Private Sector

Although the ratio of the impact of federal regulation on the state to its impact on the nation fluctuates some from year to year, more dramatic growth has occurred in the total number of regulatory restrictions affecting Indiana since 1997. One way to measure this impact is to scale the weighted restrictions to the total weighted restrictions for the national economy in 1997. Doing so allows us to calculate the growth of the FRASE index relative to 1997. We call this the constant-basis FRASE index. For historical ranks and scores, see table 1.

Figure 2: Number of Restrictions for the Top 5 Industries

For Indiana, the constant-basis FRASE index has grown by 74 percent from 1997 to 2013. This represents the largest percentage growth of any state during that time. Two major contributors to this growth are the chemical products manufacturing industry and the motor vehicles, bodies and trailers, and parts manufacturing industry. Each of these two industries, the second and third largest industries in Indiana, has experienced a significant increase in the number of industry-relevant restrictions since 1997. In 2013, the chemical products manufacturing industry was subject to nearly 17,000 more restrictions than it was in 1997; the motor vehicles, bodies and trailers, and parts manufacturing industry was subject to over 12,000 more.

Figure 3: Top Regulators for Chemical Products Manufacturing, Number of Industry-Relevant Regulatory Restrictions

These two industries also have a significant impact on the total number of restrictions in Indiana and, consequently, the state’s high ranking among the most regulated states. The key drivers in the FRASE score and rank for Indiana are the particular industries that make up the state’s economy and the degree to which those industries are regulated. The top five industries by contribution to the state’s private sector are compared to those industries’ contributions to the national private sector in figure 1, and the number of restrictions on those industries is shown in figure 2.

As shown in figure 1, the chemical products manufacturing industry and the motor vehicles, bodies and trailers, and parts manufacturing industry constitute approximately 16.3 percent of the private-sector economy. This proportion is almost four times as large as the 4.2 percent of the nation’s private-sector economy that these industries represent. These industries are also subject to a higher number of restrictions than is the median industry. The chemical products manufacturing industry is subject to more than 10 times the number of restrictions as is the median industry, and the motor vehicles, bodies and trailers, and parts manufacturing industry is subject to more than 6 times the number of restrictions.

The five agencies with the most industry-relevant restrictions for the chemical products manufacturing industry are shown in figure 3. The top regulator is the Environmental Protection Agency with 29,293 restrictions, slightly fewer than half of the industry’s 66,789 total restrictions. The Environmental Protection Agency is also the top regulator of the motor vehicles, bodies and trailers, and parts manufacturing industry with 20,615 restrictions, or more than 50 percent of the total number of restrictions relevant to that industry, making the agency a major contributor to Indiana’s high ranking. The agencies with the most industry-relevant restrictions for some of the state’s top industries are shown below.

The landscape of federal regulations can change from year to year, as can the makeup of a state’s economy. As such changes occur, residents of affected states may have to learn new sets of regulations or deal with different regulators. Using the FRASE index, Indiana citizens and policymakers can consider the impact of federal regulation in their state and determine whether that impact is adequately represented in the current debate about regulatory and legislative impact accounting.2

chemical_products_manufacturing motor_vehicles_bodies_and_trailers_and_parts_manufacturing real_estate retail_trade wholesale_trade

Notes

  1. Patrick A. McLaughlin and Robert Greene, “Quantifying and Projecting Dodd-Frank’s Provisions,” in Dodd-Frank: What It Does and Why It’s Flawed, ed. Hester Peirce and James Broughel (Arlington, VA: Mercatus Center at George Mason University, 2012).

  2. For a recent proposal on the topic of legislative impact accounting, see Jason J. Fichtner and Patrick A. McLaughlin, “Legislative Impact Accounting: Rethinking How to Account for Policies’ Economic Costs in the Federal Budget Process” (Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, June 2015).

Source: Patrick A. McLaughlin and Oliver Sherouse, The Impact of Federal Regulation on the 50 States, 2016 ed. (Arlington, VA: Mercatus Center at George Mason University, 2016).