It’s been a while since we’ve checked in with Reason’s Nanny of the Month series, which is too bad, because … it gets results. Not the results we’d like, perhaps, but at least it got noticed this month. When Ted Balaker zeroed in on regulations that will crush home businesses making soap and other personal care products, Senator Dianne Feinstein’s office registered their objection:
The Personal Care Products Safety Act requires businesses with more than $500,000 in sales to register any kind of ingredient changes with the FDA, plus pay a $250 annual registration fee for the right to sell their wares. The problem for home businesses like those shown in the video is that ingredient mixes change constantly, not for safety reasons but for issues like availability and product improvement. Larger firms, such as those endorsing the PCPSA, have plenty of resources to deal with the regulatory red tape, but home businesses achieving $500,000 in sales have very little left over from income — the profit margin from those businesses.
We’ll get back to that in a moment. Balaker got this response from Feinstein’s deputy press secretary:
I saw your video on my boss’ Personal Care Products Safety Act—it completely ignores the bill’s small business protections and does not fairly represent what it would do.
* Companies selling less than $100,000 per year do not have to do anything—they do not have to register with FDA.
* Companies selling less than $500,000 per year do not have to pay ANY fee.
* The fee will be no more than $250 for small businesses selling between $500,000 and $2.5 million per year.
Additional information is available here.
If you have any additional questions, I’m happy to answer them.
A half-million in sales sounds like a lot, but as anyone who ever operated a P&L for any business knows, that’s not the same thing as income. Businesses have to spend money producing their product too, and even the healthiest of businesses will spend 85% or more of their sales to achieve them. What’s left over is the profit, or in the case of small business owners, their income. In this instance, income would be much more modest than this bill presumes:
Walsh pointed to the difference between sales and income and illustrated the issue with a woman she met at a Maryland farmers market. Although the Maryland woman’s annual sales of homemade personal care products exceeded $500,000, her income stood at $62,000. The woman’s husband and two teenage daughters both work for the business, and the business is the family’s only source of income. A fee of $250 may not sound like much to some people, but Walsh contends that it’s a different story when you’re a family of four living on a modest income in an expensive region and paying tuition for your daughters.
That’s a profit margin of about 12%, assuming that the sales weren’t much over $500,000. That sounds good until one realizes that the business is probably not paying salaries, being an entirely family-run business. The $250 takes a bite out of that income, but probably not nearly as much as the labor-intensive reporting requirements that the FDA will now require:
Walsh notes that whenever an entrepreneur changes ingredients—adds a little more honey or makes soap with almond oil instead of coconut oil—the bill would require her to log onto the FDA website to fill out a product ingredient statement.
Walsh says the FDA website is often very slow, but even if you caught it on a good day and spent only, say, 10 minutes completing the statement, the cumulative effect could be crushing for small entrepreneurs who might have to fill out hundreds of statements per week.
“Look at the time,” says Walsh. “Ten minutes times 100. You’re now at 1,000 minutes. One person is going to spend one or two days per week just doing product ingredient statements? How is that going to impact that family making $62,000?”
Larger corporations have big advantages in economy of scale to deal with these issues. First, their formulations will rarely change thanks to their ability to acquire raw materials and thusly control their manufacturing processes over a very long period of time. But even to the extent they do change, these corporations can absorb those costs much easier by utilizing their larger staffs to take on the compliance tasks without diverting resources away from production itself. Like most of these kinds of regulations, the impact — if not the purpose — is to burden the smaller players so that the larger players don’t have to compete against them.
That’s not exactly a nanny-state issue; it’s more about crony capitalism. But to the extent that nanny-state policies advance that cause, those larger concerns will have no problem backing a nanny state to get what they want. It’s the first rule of Crony Club.
Update: In the second paragraph, I wrote $100,000 instead of $500,000. I’ve corrected it above.