Key Areas for Regulatory Reform

ESTIMATING THE TOTAL BENEFITS and costs of federal regulations is no easy task. Regulatory accounting is still an evolving, and as yet imperfect, discipline. Yet, there are some changes that could usefully be made to provide a clearer and more complete picture of the impact of regulation. Among these:

● Report “best estimates” of costs and benefits, in addition to ranges. Many cost-benefit estimates have extremely wide ranges. Based on its own judgment or working with agencies, OIRA should develop “best estimate” calculations of costs and benefits.

● Provide an annual regulatory “scorecard” for each agency. To help policymakers determine which agencies are conducting high-quality reviews of rules, and which are not yet up to par, OMB should publish a scorecard of each agency’s performance.

● Require each agency to produce its own report on its regulatory performance. In addition to OMB analysis of agency efforts, each agency should be asked to submit to OMB – as part of the preparation of this report – a report on its own regulatory efforts.

● Present key information in a more useful format. While OMB’s draft report provides a wealth of information, much of it is unnecessarily difficult to extract. The most important information – including total regulatory costs in the aggregate and by agency and annual incremental costs should be clearly provided in tabular form.

● Provide more contextual information. In addition to the raw numbers, additional efforts to put this information in context would be useful to policymakers.

● Include other measures of regulation. Although the Regulatory Right-to-Know Act only requires OMB to provide information on the costs and benefits of regulation, there are also a number of other statistical measures that provide information on regulatory trends. While each of these is imperfect, they can be useful to filling in the regulatory picture.

● Include discussion of non-economic costs of regulation. Monetary costs are just a proxy for the real human costs of regulation – such as goods and services made unavailable to citizens.

● Provide information on returned regulations. Of particular significance is the increased number of regulations returned to agencies for further work. The reasons for each return are now made publicly available through formal “return letters” drafted by OMB. However, the final outcome of each action is not yet so readily available.

More broadly and more importantly than specific changes in the content of this annual report, OMB should continue to improve the regulatory review process itself. Among the steps that should be considered:

● Require stricter adherence to OMB guidance in the preparation of regulatory analyses. While perfect uniformity of analyses would be difficult to achieve, OMB needs to further raise the analytic floor, requiring agencies to follow its guidelines more strictly.

● Ask independent agencies to prepare analyses. Independent agencies are explicitly exempted from regulatory review and analysis requirements. This is a major gap in the regulatory process.

● Designate regulatory coordinators in each agency. One official at each agency should be designated as a regulatory coordinator. This coordinator would be responsible for ensuring that regulations are cost justified and impose no more burdens than necessary.

The Draft Report also specifically asks for nominations regarding regulations and guidance documents that should be reformed. Below is a description of nine such rules. These recommendations are based on the work of analysts at Heritage and elsewhere in a broad number of fields. The list is by no means exclusive, and is not meant to be a comprehensive litany of all problematic rules. Instead, it includes selected rules in need of review, with an emphasis on issues that have not already been the subject of extensive debate and/or can be practicably achieved. It also avoids areas, such as rules by independent agencies, not currently within OMB’s jurisdiction.

These recommendations include:

1. Individual health insurance rules.

Regulating agency: Department of Health and Human Services

Citation: Program Memorandum issued by the Health Care Financing Administration, November 2000.

Authority: Part A of Title XXVII of The Public Health Service Act and The Health Insurance Portability and Accountability Act of 1996.

Description of problem. The structure of the health insurance market, shaped and driven by existing federal tax policy, is such that it frustrates consumer choice and competition.

The Bush Administration is trying to expand coverage through the use of tax credits for health insurance. Today, however, if a consumer were to use a tax credit for the purchase of an individual policy and wants the employer to contribute to the purchase of this policy, she has a problem. The source of the problem: the former Health Care Financing Administration (HCFA) now called the Centers for Medicare and Medicaid Services (CMS). The HHS bureaucracy issued a memorandum, in the final days of the Clinton Administration, that holds that if an employer makes any financial contribution at all to the purchase of an individual health care plan, that very act by an employer, means that the policy will be deemed a “group plan” for the purposes of federal regulation, and all of the regulatory requirements that go with group plans.

Proposed solution: Revoke the Memorandum. The Secretary of HHS should reverse the Clinton Administration’s policies governing employer participation in the purchase of private health insurance in the individual market.

Estimate of economic impacts: Not aware of any formal estimates.

For more information contact: Bob Moffit, Director of Domestic Policy Studies, The Heritage Foundation.

2. Food identity standards.

Regulating agency: Food and Drug Administration

Citation: 21 C.F.R. secs. 130-169.

Authority: Food, Drug and Cosmetic Act

Description of problem: Recently, the Department of Agriculture proposed elimination of its “pizza identity standards,” regulations that define the characteristics of various types of frozen pizzas. For instance, a “sausage pizza” must have a bread base, contain tomato sauce and cheese and have a sausage topping of not less than 12 percent of cooked sausage or 10 percent of a dry sausage. Meant to protect consumers, the regulation actually hurts them by limiting choice and variation: for instance, white pizzas without tomato sauce cannot be sold in stores. It also restricts the ability to buy healthier food – pizzas without cheese, for instance, are prohibited.

USDA was right to propose elimination of this rule. However, many more such food identity standards – imposed by the FDA – are still on the books. These cover the content of everything from cherry pies and sherbet to canned mushrooms. These standards also limit consumer choice, and may harm consumers in ways similar to the pizza standard.

Proposed solution: FDA should undertake a thorough review of these identity standards, and rescind those not found to be necessary.

Estimate of economic impacts: Not aware of any estimates.

For further information contact: Jennifer Zambone, Mercatus Center.

3. Alcohol labeling rule.

Regulating agency: Bureau of Alcohol, Tobacco and Firearms

Citation: Policy outlined in 1993 Industry Circular Health Claims in the Labeling and Advertising of Alcoholic Beverages.

Authority: Federal Alcohol Administration Act, 26 U.S.C. sec. 291, et. al.

Description of problem: In recent years, a large and growing body of evidence has shown substantial health benefits from the moderate consumption of wine. Yet, the Bureau of Alcohol, Tobacco and Firearms, which has jurisdiction over alcohol advertising and labeling has effectively banned manufacturers from providing this health information to consumers on wine bottles. Since 1999, a rulemaking has been pending to formalize this existing policy.

Proposed solution: ATF should modify its policy to allow truthful information as to the health benefits of wine and other alcoholic beverages to be provided on labels to consumers.

Estimate of economic impacts: Not aware of any estimates of the economic impact of such a change. The health impact, however, would likely be substantial, given evidence that moderate consumption reduces the risk of heart attack by 30-54 percent.

For more information contact: Sam Kazman, General Counsel, Competitive Enterprise Institute.

4. Pediatric rule.

Regulating agency: Food and Drug Administration

Citation: 21 C.F.R. Parts 201, 312, 314, & 601.

Authority: Food, Drug and Cosmetic Act, 21 U.S.C. 321 et. seq.

Description of problem: The FDA’s pediatric rule, published in 1998, established a new policy under which FDA could require drug companies to perform pediatric testing for certain drugs even if pediatric uses were not part of the drug’s labeled indications. The FDA claimed it was acting to protect children, but this additional requirement, by making drugs found safe for adults unavailable, increases the health risks of Americans overall.

Proposed solution: Rescind the rule.

Estimate of economic impacts: The FDA estimated total costs of approximately $80 million per year. More significant, however, is the likely negative health impact of the rule.

For more information contact: Sam Kazman, General Counsel, Competitive Enterprise Institute.

5. Organic food standards.

Regulating agency: Department of Agriculture

Citation: 7 C.F.R. Part 205.

Authority: Organic Foods Production Act

Description of problem: In a rule promulgated in December 2000, USDA imposed a single national standard for organic production. (Under some circumstances, this standard could actually limit the ability to use higher, as well as lower, standards). This standard denies consumers the flexibility to choose between various organic production methods, and its restrictions on labeling by competing certifiers may be unconstitutional. There is considerable evidence that consumers of organic products would benefit from being able to choose from an array of standards, and that the market is capable of providing such choices.

Proposed solution: Replace the standard with more flexible rules.

Estimate of economic impacts: Not aware of assessment of costs of rule as a whole, although Regulatory Impact Assessment includes estimates for various component parts of the regulation.

For more information contact: Greg Conko, Director of Food Safety Policy, Competitive Enterprise Institute.

6. Title IX and single-sex schools.

Regulating agency: Department of Education

Citation: 34 C.F.R. sec. 106.35(b), 34 C.F.R. sec. 106.34.

Authority: Title IX of the Education Amendments of 1972

Description of problem: Title IX of the Education Amendments of 1972 prohibits sex-based discrimination in education programs supported by federal aid. The law states that no person can be excluded from participation in or be denied the benefits of a program or activity on the basis of sex. Current Title IX regulations generally prohibit single-sex classes or activities. Exceptions are made for physical education activities that require bodily contact, sexual education classes, remedial education, and affirmative action.

While regulations do not specifically prohibit same sex schools, they make it difficult for school districts to open and operate single-sex schools. For this reason, only 11 such public schools exist in the country.

Research suggests that single-sex schools and classes benefit girls and low-income and minority boys. Benefits include enhanced achievement, character development, and reduced disciplinary problems. Regulatory flexibility would enable more school districts to open additional single-sex schools and classes. The addition of new schools will give parents more options for their children’s schooling and enable researchers to take a closer look at the benefits of single-sex education.

The No Child Left Behind Act of 2001 allows school districts to use Innovative Programs funds for same-sex classes and schools consistent with applicable laws. It requires the Department of Education to issue guidelines regarding the applicable law on single-sex classes and schools within 120 days of enactment. The Department of Education issued a notice of intent to regulate on May 3, 2002. The Department proposes greater regulatory flexibility and support for single-sex learning environments while continuing to prohibit discrimination in accordance with the spirit of the law.

Proposed solution: Replace existing Title IX regulations with regulations offering greater flexibility to school districts.

Estimate of economic impacts: None available.

For more information contact: Krista Kafer, Senior Policy Analyst, The Heritage Foundation.

7. Title IX and collegiate sports participation.

Regulating agency: Department of Education

Citation: 34 C.F.R. Part 106.

Authority: Title IX of the Education Amendments of 1972

Description of problem: The Title IX statute prohibits sex-based discrimination in education programs supported by federal aid. The law states that no person can be excluded from participation in or be denied the benefits of a program or activity on the basis of sex. The statute impacts participation in collegiate sports. According to current Title IX regulations, a college or university can comply with the law by meeting one of three criteria – by demonstrating that participation is proportionate to enrollment; by demonstrating program expansion to meet the interest and abilities of the “underrepresented” sex; or by showing that the school is fully accommodating the interests of the “underrepresented” sex. Because the Office of Civil Rights has focused compliance efforts on the first criteria, it has forced colleges and universities to impose gender quotas on their sports programs.

Over the past thirty years, female participation in post-secondary education and collegiate sports has risen. Today, over half of all college graduates are women. Title IX enforcement has adversely impacted male participation in sports. Over the past 30 years, more than 170 wrestling programs, 80 men’s tennis teams, 70 men’s gymnastics teams, and 45 men’s track teams have been eliminated. The test of strict proportionality denies men the opportunity to participate in sports if more men than women are interested in playing. The policy is discriminatory and contradicts the spirit of Title IX.

Proposed solution: Eliminate Title IX regulations demanding proportional representation. Review the second and third tests of compliance requiring colleges and universities make efforts to accommodate students’ interests and abilities.

Estimate of economic impacts: None available.

For more information contact: Krista Kafer, Senior Policy Analyst, The Heritage Foundation.

8. Flexible spending accounts.

Regulating agency: Department of Treasury

Citation: Internal Revenue Service interpretations of Prop. Reg. S.1.125 issued on May 7, 1984.

Authority: Unclear.

Description of problem: Under current law, employees can put aside funds for health care expenses “tax free” under Section 125 of the Internal Revenue Code in what is called a flexible spending account (FSA). However, if they do not spend those funds, they lose the money. They cannot carry the money over from year to year tax-free. This is the so-called “use or lose it” rule governing the use of flexible spending accounts. This is bad tax policy and worse health care policy, for it encourages unnecessary year-end spending, and inhibits individuals from spending wisely on medical services and carrying over monies to be used to offset medical expenses in the following year. Current policy affects millions of American workers and their families, union and non-union, enrolled in business and corporate benefits plans.

Current policy is not based clearly on statute, but on an Internal Revenue Service interpretation of the law and proposed rules, pursuant to that interpretation, first issued on May 7, 1984. In 1989, the IRS further clarified its position that a carryover of funds within a FSA was prohibited. This interpretation has long been disputed, and the issue remains one that could be resolved solely by administrative action.

Proposed solution: Reverse the IRS interpretation and allow a rollover of funds in flexible spending accounts.

Estimate of economic impacts: There have been a variety of estimates, depending upon the assumptions and the amount allowed for a year-to-year roll over of funds. According to the Administration’s Budget Blue Book, a $500 per annum roll over of FSAs would amount to a revenue loss of $8.4 billion over 10 years. (See www.treas.gov/taxpolicy/library/bluebk02.pdf)

For more information contact: Bob Moffit, Director of Domestic Policy Studies, The Heritage Foundation.

9. Interest reporting requirements.

Regulating agency: Internal Revenue Service

Citation: 26 C.F.R. Parts 1 and 31 (proposed).

Authority: None cited.

Description of problem: The IRS has proposed to “extend the information reporting requirement for bank deposit interest paid to nonresident alien individuals who are residents of other foreign countries.” The proposed regulation flouts congressional intent. Lawmakers have chosen to exempt foreign bank deposits from taxation and not to require their reporting to the IRS. This makes America a safe haven for foreigners fleeing political and economic repression and has helped attract more than $1 trillion to the U.S. economy.

Proposed solution: The proposed regulation should be withdrawn.

Estimate of economic impacts: The regulation would lead to a significant loss of capital from the U.S. economy. A study commissioned by the Florida Bankers Association estimated that over 50 percent of foreign deposits might flee U.S. banks if the regulation was implemented. These funds provide capital for business expansion, home mortgages, and auto loans.

For more information contact: Dan Mitchell, McKenna Senior Fellow, The Heritage Foundation.


Mr. Gattuso is a Research Fellow at The Heritage Foundation. This article is adapted from comments submitted to the Office of Management and Budget on its Draft Report on Costs and Benefits of Federal Regulations.