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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 Massachusetts

Year

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Rank

44

46

47

46

46

46

46

47

48

48

48

FRASE score

0.80

0.78

0.79

0.80

0.81

0.79

0.78

0.76

0.75

0.76

0.77

FRASE score (constant basis)

0.88

0.88

0.90

0.93

0.97

0.98

1.01

1.01

1.02

1.06

1.09

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 Massachusetts

For 2013, Massachusetts ranked 48th for impact of federal regulation, with a score of 0.77 on the FRASE index. By design, the FRASE index for the United States overall in any year will equal 1, so a score of 0.77 indicates that the impact of federal regulation on Massachusetts industries was 23 percent lower than the impact on the nation overall.

Figure 1: Top Industries for Massachusetts, 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 Massachusetts 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 Massachusetts, the constant-basis FRASE index has grown by 42 percent from 1997 to 2013. For historical ranks and scores, see table 1.

Figure 2: Number of Restrictions for the Top 5 Industries

The key drivers in the FRASE score and rank for Massachusetts 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.

Figure 3: Top Regulators for Professional, Scientific, and Technical Services, Number of Industry-Relevant Regulatory Restrictions

Two of Massachusetts’s top five industries, real estate and hospitals (including nursing and residential care facilities), are regulated near the industry median. Two additional industries—wholesale trade and retail trade—are more highly regulated, but these industries matter less to Massachusetts’s private sector than they do to the nation as a whole. These factors keep the impact of federal regulation on Massachusetts relatively low compared to the impact of federal regulation on the nation overall.

In terms of regulatory restrictions, the standout industry for Massachusetts is professional, scientific, and technical services. This industry is subject to a large number of restrictions—more than 50,000—but it is also one of the most broadly defined in the industry classification system. It includes legal services, accounting services, tax preparation, architecture, engineering, geophysical surveying, and even interior and graphic design. The expansiveness of this industry explains its high number of restrictions, but it also makes precise measurement of the impact of federal regulations more difficult for Massachusetts than it is for other industries in other states.

Which agencies, exactly, regulate this expansive industry? The top five regulators of the professional, scientific, and technical services industry are shown in figure 3.

The top regulator, relevant to all subcategories within the industry but particularly relevant to lawyers, accountants, and tax preparers, is the Internal Revenue Service. Responsible for more than 18,000 industry-specific restrictions, the Internal Revenue Service accounts for approximately one-third of the industry total. Other regulations come from the Federal Acquisition Regulation system, the Office of the Secretary of Defense, the Federal Energy Regulatory Commission, and the Environmental Protection Agency.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, Massachusetts 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.3

hospitals_and_nursing_and_residential_care_facilities professional_scientific_and_technical_services 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. The Federal Acquisition Regulation system is not actually a regulatory agency, but rather a set of rules defining the federal government’s procurement process. For this project, whether rules have a common purpose matters more than if they emanate from a single agency. Therefore, we chose to treat the Federal Acquisition Regulation system as a single entity for our analysis of the impact of federal regulations on a particular state.

  3. 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).