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Regulatory: The impact of uncertain government policies

How unfinalized regulation affects businesses’ bottom line

Uncertainty is always a challenge for business. Owners and supervisors best manage their business when they know the key costs of their operations with reasonable certainty. Raw materials, utilities and labor costs, among many other factors, play a major role in decision-making and investment planning.

One challenge clients consistently face is that many of the costs they must plan for are not market-driven, but rather imposed by the government—such as healthcare, taxes and various regulatory schemes. These costs may not be welcome, but if they can be planned for, they can be profitably managed. Today, however, our clients frequently must try to manage around government policies that are not actually final. When a government policy cannot be considered final, the effect on investment and business can be significant.

Several examples of evolving government policies are readily available today.

  • Health care costs: The Supreme Court upheld the Affordable Care Act, but it took several years for this to play out and health care purchasing decisions were held hostage in the interim. Even with the court’s decision, many state governments still have to decide which path they will take on reform, thus continuing the uncertainty.
  • Taxation: Enterprise zones have proven to be effective tools in helping local governments attract new businesses to economically stressed areas with tax benefits that include sales, tax reductions and hiring tax credits. But, due to increasingly empty municipal coffers, continued efforts to eliminate or claw back the tax benefits have created uncertainty regarding the long term viability of the enterprise zone tax benefits. This uncertainty has led to delayed or altered decisions to locate in areas without long-term protection for the tax breaks.
  • Regulation: The scheduled start of California’s groundbreaking climate control regulatory scheme has been shrouded in uncertainty, despite repeated agency attempts to assure stakeholders that it will begin on time in January 2013. Pending litigation, legislative intervention and even foreign policy all lead to questions about the ability of regulators to deliver, which translate into cost impacts on everything from the price of power to the price of shipping.

These three examples represent different ways that government policy is currently creating significant risks for clients, even when the policy decision is supposedly complete. As long as clients may see major shifts in how a policy is implemented, then they cannot plan with confidence and this impacts decisions that are fundamental to whether a business can be successful.

Our clients must take basic financial responses in reply to these uncertainties, such as ever more aggressive reductions in administrative costs, deferring new hiring and major investments and building up reserves to hedge against the risk of the unknown. Each of these is a drain on our clients’ resources, particularly reserves, as these dollars come straight out of the bottom line.

Since governments create the rules and guidelines in which businesses compete, when the rules change, businesses are forced to change as well. Given the direct impact of uncertain government policy on clients, lawyers need to be mindful of potential shifting sands when counseling clients on the rules of the game. The days of consistent government policy seem to be a thing of the past.

 

Contributing Author

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Thomas McMorrow

Tom McMorrow is a Partner at the law firm Manatt, Phelps & Phillips, LLP, in the Sacramento Government practice group and is Chair...

Additional Contributors: Jon Costantino

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