FACT CHECK: Have Federal Compliance Costs Increased ‘Nearly Sevenfold’ Over The Last 20 Years?

David Sivak | Fact Check Editor

Republican Sen. Mike Lee claimed Tuesday that the cost to comply with federal regulations has increased “nearly sevenfold” in the last 20 years.

“Twenty years ago, when I first started studying this problem, I was shocked to learn that this backdoor, invisible, highly regressive form of tax – that is the cost of compliance with federal regulations – stood at $300 billion a year,” said Lee in Senate remarks.

“Today that number stands at about $2 trillion a year. In 20 years, we have seen the cost of complying with federal regulations multiply nearly sevenfold,” Lee claimed.

Verdict: False

Lee fails to adjust for inflation and cites two cost estimates that use very different methodologies, assumptions and data sources.

Fact Check:

Lee argues that regulatory costs, meaning the amount firms and the economy lose to environmental, tax and other federal rules, have risen from $300 billion to $2 trillion a year in two decades. The sheer volume of regulations has increased over the years, so it’s reasonable to assume that costs have increased as well.

But there are several reasons to doubt the magnitude of Lee’s claim. For starters, not all economists agree that regulatory costs were $300 billion a couple decades ago.

Lee’s office could not point The Daily Caller News Foundation to a study that substantiates the $300 billion figure, but the senator may have been thinking of a 1997 report by the Office of Management and Budget that estimated costs of $279 billion a year.

Yet the same report acknowledges that other economists have calculated much higher estimates. “Our cost estimates are substantially less than other numbers that are often cited and have gained a certain credibility in the debate,” notes the report.

As a result, Lee’s $279 billion figure may understate the regulatory costs of 20 years ago. For example, the economist Thomas Hopkins estimated annual costs of $708 billion in 1997. The Heritage Foundation, a conservative think tank, even estimated yearly costs as high as $1.7 trillion in 1992.

Lee goes on to claim that $279 billion in regulatory costs have ballooned to $2 trillion in recent years. The $2 trillion figure comes from a 2014 study produced for the National Association of Manufacturers, a group that opposes current levels of regulation.

But the Congressional Research Service (CRS) warns against considering any one study authoritative. “Estimating the total cost of regulations is inherently difficult,” said a recent CRS report. “Current estimates of the cost of regulation should be viewed with a great deal of caution.”

The $2 trillion figure should also be treated with skepticism because the CRS, the Government Accountability Office and prominent economists have questioned the methods and data quality of the economists who produced it. Critics believe such estimates overstate the costs of regulatory compliance.

By choosing a low estimate of $279 billion from the 1990s and a high estimate of $2 trillion today, Lee may exaggerate how costs have increased over time. The studies use fundamentally different assumptions, methods and data sources, so it’s incredibly difficult to make any direct comparison.

Lee also fails to account for two decades of inflation. The $279 billion figure (calculated in 1996 dollars) translates to $413 billion in 2014 dollars. So even if we take Lee’s figures at face value, inflation reduces a “nearly sevenfold” increase to a roughly fivefold increase in regulatory costs. We rate his claim as false.

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David Sivak

Fact Check Editor
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