SBA Office of Advocacy Continues to Carry ‘Water’ for Big Business

by James Goodwin

October 02, 2014

Apparently undeterred by all the bad press it has received lately, the Small Business Administration’s (SBA) Office of Advocacy has cast its controversy-attracting lightning rod ever higher in the air by issuing a feeble comment letter attacking the Environmental Protection Agency’s (EPA) pending rulemaking to define the scope of the Clean Water Act (“Waters of the US rule”).  The letter is just the latest evidence that the SBA Office of Advocacy has no interest in working to advance the unique interests of real small businesses—in accordance with its clear legal mandate—but instead is entirely focused on seeking to block those rules that are opposed by large business interests and their conservative allies.  

In its recent scathing report, the Government Accountability Office (GAO) raised several disturbing questions about whether and to what extent the SBA Office of Advocacy is actually fulfilling its statutory mission of serving as a “voice for small businesses within the federal government.”  Of immediate relevance here, one of the key issues identified in the report was that the SBA Office of Advocacy was never able to provide any evidence of small business input it received to inform its decision intervene in rules or the substance of its comments letter.  In other words, the SBA Office of Advocacy could never prove that its interventions were every actually prompted by small business concerns.  As described below, the SBA Office of Advocacy’s comment letter on the EPA’s Waters of the US rule only adds to these questions—and its provides additional impetus for needed reforms and increased congressional oversight to ensure that the agency is not wasting taxpayer money and helping large businesses to the direct detriment of the small firms they are supposed to be helping.

The SBA Office of Advocacy’s comment letter on the Waters of the US rule argues that the EPA failed to carry out (1) the necessary analytical requirements under the Regulatory Flexibility Act and (2) a Small Business Advocacy Review (SBAR) panel as required by the Small Business Regulatory Enforcement Fairness Act (SBREFA).  In particular, the letter argues that the EPA failed to support its claim that the rule would not have significant impacts on a large number of small businesses.  Accordingly, the SBA Office of Advocacy concludes that the EPA should withdraw its proposed Waters of the US rule and start over after completing those requirements—a process that would delay the final rulemaking by several years without producing any real improvement in the quality of the rule.

The actual substance of the SBA Advocacy’s letter is troubling—particularly its legal analysis of the critical threshold question of whether the EPA’s Waters of the US rule has any “direct” impacts on small businesses.  The federal courts in a series of decisions have held that the regulatory flexibility analysis and SBAR panel requirements mandated by the Regulatory Flexibility Act and SBREFA do not apply to rules that have only an indirect effect on small businesses.  The EPA correctly explained that this was the case with its Waters of the US rule.  The rule merely defines a key legal term—namely, which water bodies in the United States fall within the protections of the Clean Water Act. By itself, this rule is not self-executing—that is, until some form of additional agency action is taken it has no practical, real-world effect—and it does not independently impose any regulatory requirements on any business entities, including small ones.  In this way, the rule is no different from the one at issue in American Trucking Associations v. EPA where the Court of Appeals for the D.C. Circuit held that the Regulatory Flexibility Act and SBREFA requirements did not apply to the EPA’s ozone National Ambient Air Quality Standard (NAAQS).  There, the Court found that a NAAQS, much like the Waters of the US rule, merely defines a key legal term—that is, the level at which ambient ozone pollution poses a threat to human health.  As such, the Court concluded the ozone NAAQS at issue was not self-executing and did not impose any direct regulatory requirements.

In its letter, though, the SBA Office of Advocacy ignores the actual legal significance of the Waters of the US rule and simply states in conclusory fashion that the rule itself imposes regulatory requirements.  But, it is the various permitting programs under the Clean Water Act—which are governed by a different set of regulations—that impose the regulatory requirements that have impacts on affected business entities.  In this way, the situation is entirely analogous to the one at issue in the American Trucking case, a decision that the SBA Office of Advocacy does not dispute.  In the case of the ozone NAAQS, state implementation plans (or, if necessary, federal implementation plans) impose the regulatory requirements necessary for achieving reductions in pollution levels for meeting the ozone NAAQS.  Critically, the implementation of these intervening regulatory steps—the Clean Water Act’s permitting programs in the case of the Waters of the US rule and the Clean Air Act’s state implementation plans in the case of the Ozone NAAQS—can be adjusted to alter or even mitigate the impacts on affected small businesses.  As such, the implementation of these intervening regulatory steps creates a degree of separation that necessarily renders the rules’ effects on small businesses to be indirect.

The fact that the Waters of the US rule has only indirect effect on small businesses settles the question of whether or not the EPA should have undertaken the costly and time-consuming requirements imposed by the Regulatory Flexibility Act and SBREFA.  It is therefore unnecessary to even get into the technical and complex issue of whether EPA applied the correct baseline in determining the magnitude of those indirect effects of small businesses.

Given the obviously shaky legal foundation of the comment letter, it’s only fair to ask what prompted the SBA Office of Advocacy to wade into this rulemaking in the first place.  Their comment letter cites only one small business by name, the Lazy JF Cattle Co, that had expressed concerns about the Waters of the US rule—and significantly, the SBA Office of Advocacy didn’t even speak directly to that business.  Instead, the letter cites testimony by the owner of the business at a congressional hearing that was held specifically for the purposes of attacking against the rule.  That business owner was testifying on behalf a large trade group—the National Cattleman’s Beef Association—so it’s not even clear whether the views he expressed fairly represent the genuine unique views of real small businesses in that industry or whether they were in service of the large firms that no doubt dominate the trade group’s policy agenda.

Elsewhere, the letter refers to a smattering of unidentified small businesses.  The GAO report found that while the SBA Office of Advocacy often made these kinds of vague references in its past comments, the was never able to provide any evidentiary documentation to support them.

Even if the SBA Office of Advocacy did fairly convey the input of genuine small businesses in its letters, it is not clear why it decided to promote these particular views on the EPA’s Waters of the US rule.  After all, it has been well publicized that small businesses in another industry—craft beer brewing—have come out strongly in favor of the Waters of the US rule.  Did the SBA Office of Advocacy make any effort to reach out to these and other similarly situated businesses when crafting its comment letter?  If so, does the Office of Advocacy have a principled reason for discounting their views?  It seems like a truly neutral representative of small businesses, which the Office of Advocacy purports to be, would have expressed both sets of views in its comment letter to the EPA.

In short, the SBA Office of Advocacy is unable to point to any reliable small business concerns to support its decision to draft this comment letter, nor can it substantiate that the views expressed in the letter fairly represent those of real small businesses.  Rather, we are left with the unmistakable impression that this letter was prompted by the big business interests and antiregulatory ideologues that the SBA Office of Advocacy has long allied itself with.

More broadly, the SBA Office of Advocacy’s opposition to the EPA’s Waters of the US rule raises an important issue that has been ignored for too long.  The fact of the matter is that the “small business community” is not monolithic.  Just about every rule that the EPA or any other agency issues will have small business opponents and small business supporters.  Indeed, many of the EPA’s rules—including those that the SBA Office of Advocacy has fervently fought against, such as the agency’s rules to address climate change—will generate enormous benefits for many small businesses, many of which are unique to these firms.  How does the SBA Office of Advocacy decide whether and how to weigh in on these rules?  Does it even have a principled basis for reaching these decisions?  Crucially, it doesn’t adequately explain its process for coming to its conclusions.

If the SBA Office of Advocacy really wants to carry out its mission in the neutral fashion defined by its legal authority, it should be prepared to present all small businesses’ views of a rule—pro and con—or not weigh in at all.  At the moment, though, when one looks at the SBA Office of Advocacy’s record, it is hard not to notice that the agency is always attacking those rules that happen to be opposed by large business interests—even in cases where a strong rule would advance the interests of many legitimate small businesses.  (See, for example, here, here, and here.)  It is this record that has created the growing impression that the SBA Office of Advocacy is not working on behalf of real small businesses—but rather is working on behalf of large business interests and antiregulatory ideologues in general.  And it is this growing negative impression that will ultimately undermine the SBA Office of Advocacy’s ability to participate meaningfully in the governmental decision-making, as the agency will be rightly perceived by other stakeholders as biased and untrustworthy.

With more comment letters like this one, the SBA Office of Advocacy risks becoming so tainted that it would no longer be able to advance the legitimate interests of real small businesses, even if it wanted to.  The biggest loser in this scenario, of course, would be the real small businesses that no longer have a powerful voice speaking on their behalf and the majority of taxpayers who are funding an Office that doesn’t adequately represent them.

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Also from James Goodwin

James Goodwin, J.D., M.P.P., is a Senior Policy Analyst with the Center for Progressive Reform. He joined CPR in May of 2008.

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