On January 30, President Trump issued an Executive Order entitled "Reducing Regulation and Controlling Regulatory Costs," which if properly implemented may herald the most significant changes in the federal regulatory process since 1981, when President Reagan instituted formal White House Regulatory Review of rules issued by Executive departments and agencies.

At this stage, analysis of the likely practical effects of this Presidential initiative is difficult, because the Order contains little more than a broad outlines of three new principles covered agencies are to follow: (1) a "two-for-one" rule requiring elimination of two existing regulations for each new rule issued; (2) a Regulatory Cap, imposed on an agency-by-agency basis, on the costs that may be imposed in rules issued during Fiscal Year 2017, which may constitute a de facto moratorium on issuance of many major rules; and (3) in the most potentially significant step, creating a Regulatory Budget on an agency-by-agency basis, that would allow centralized White House control on the incremental costs that a rulemaking agency may impose on the private sector.

The authority to devise implementation criteria and to make important substantive decisions to carry out these three principles is delegated to the Director of OMB, acting in consultation with the White House staff. If the Order is developed and implemented carefully, it could represent the first steps in a significant modification of the federal regulatory process to focus on its total costs to the economy, to complement the current emphasis on the net benefits of individual rules after subtracting their costs.

Scope of the Executive Order

While not spelled out explicitly in the Order, the Administration has clarified in response to press questions that like the Reagan Executive Order, the new Executive Order applies only to Executive departments and agencies that are subject to Presidential direction. The Order does not apply to independent regulatory agencies (e.g., the SEC, FCC, and FTC).

There is no statutory authority that authorizes the President to introduce such changes into the regulatory review process. The Order thus constitutes an instruction, politically enforceable only, from the President to his agency heads as to the policy priorities they are to follow in promulgating rules. Compliance with the Order will be enforced by the White House staff, including through decisions under the existing OMB regulatory review process whether agency heads may proceed with individual rules submitted for review.

Eliminating Two Existing Regulations for Each New Regulation

Section 1 of the Order establishes that the purpose of the Order is to manage the costs incurred by the private sector to comply with federal regulations. To that end, Section 2(a) requires that "whenever an executive department or agency publicly proposes for notice and comment or otherwise promulgates a new regulation, it shall identify at least two existing regulations to be repealed."

This provision of the Order has received the most media attention because of its catchy "two-for-one" political slogan. However, it will play a relatively subordinate role in the new regulatory process, due to implementation problems and the inevitable delays from conducting the necessary notice-and-comment rulemakings to repeal rules and the risk of litigation challenges to their elimination.

The core implementation problem with the two-for-one approach is that not all regulations are created equal. Unless carefully managed, an agency could eliminate two minor or procedural regulations for every major regulation it issues, and still be in compliance with this requirement. To be effective, the two-for-one requirement needs to be linked to an overall cap on the costs of an agency's regulations, as it is in the Trump Order.

Implementing a Regulatory Cap for Fiscal Year 2017

Section 2(b) of the Order requires that the total incremental costs imposed by new regulations finalized by an agency during Fiscal Year 2017, which ends September 30, "shall be no greater than zero" unless otherwise required by law or approved by the OMB Director. This Regulatory Cap may require agencies to offset the costs of new regulations issued at any time during this fiscal year by repealing existing regulations. The Order recognizes that agencies seeking to eliminate current rules must comply with the Administrative Procedure Act. Such deregulatory rulemakings may experience substantial delays, due to the requirement for public notice and comment, and are subject to litigation risk.

The agencies may experience substantial difficulties in complying with the Regulatory Cap if they wish to issue rules in this fiscal year that would impose substantial costs on the private sector. In particular, the lack of Cap Space might preclude issuance of new rules by agencies that promulgated major regulations during the Transition to the Trump Administration. To issue new rules, these agencies will either have to show that the rule is required by law or obtain approval from the OMB Director, after consultation with the White House staff.

Only time will tell the extent to which the Regulatory Cap will function as a de facto moratorium on the issuance of new regulations by certain federal agencies over the next eight months.

Establishing an Annual Regulatory Budgeting Process

The central feature of the Order is its creation of a regulatory budgeting process starting in Fiscal Year 2018. This policy initiative, which seeks to impose a direct limit on the costs of federal regulation on the private sector, has been discussed by academics for many years but has never before had a full field trial. On its face, the Order suggests a sea change in the federal regulation process because the Regulatory Budget focuses only on the costs of agency rules, while ignoring the corresponding benefits they provide society. If this is the intended effect, this process will be subject to incessant challenges on the policy level.

The critical provision of the Order, Section 3(d), provides:

During the Presidential budget process, the Director [of OMB] shall identify to agencies a total amount of incremental costs that will be allowed for each agency in issuing new regulations and repealing regulations for the next fiscal year. No regulations exceeding the agency's total incremental cost allowance will be permitted in that fiscal year, unless required by law or approved in writing by the Director. The total incremental cost allowance may allow an increase or require a reduction in total regulatory cost.

In essence, the Order establishes a Regulatory Budget process that will be run by the Director of OMB in parallel with OMB's review of agency budget requests for appropriated funds. As with the appropriations process, OMB will determine in close consultation with the White House Staff the appropriate level of the agency's total incremental cost allowance and pass that "mark" back to the agency for implementation. The combination of OMB control of agency financial budgets on the front end and agency regulatory budgets on the back end will give the White House an unprecedented degree of control over agency regulatory activities.

No statute authorizes the Executive Branch to create a Regulatory Budget or to impose overall limits on the regulatory costs that an agency may impose through its rules. The focus of regulatory reform efforts to date has been on whether the benefits of an individual rule exceed its costs. The Order marks a new departure by creating a second, complementary mechanism to establish an upper bound on total regulatory costs on an agency-by-agency basis. Importantly, the Order may allow OMB to allocate an agency a negative regulatory cost budget, which would require the agency to achieve a negative net cost impact during a fiscal year.

To implement the Regulatory Budget process, the Order requires that all regulations an agency wishes to issue must be included in the most recent Unified Regulatory Agenda. This requirement will compel agencies to identify regulations they propose to promulgate or eliminate, plus their associated costs, well in advance, since the Unified Regulatory Agenda lists regulatory activities expected to take place over the following 12 months. An agency's failure to include a rule in the Agenda will prevent it from issuing the regulation during that year, unless it is approved by the Director of OMB. Similarly, a regulation that would result in an agency exceeding its annual regulatory cost allowance may be issued only if required by law or approved by the Director.

Implications for Retrospective Review

For several years, some regulatory experts have called for agencies to engage in retrospective review of regulations. Federal agencies subject to the White House Regulatory Review process typically have conducted ex ante analyses of the projected costs and benefits of rules they propose to issue, but have not gone back after the fact to conduct an ex post review of the actual costs of their rules. In a "retrospective review," agencies are required to analyze existing regulations for effectiveness and revise or eliminate rules or aspects of rules that proved more costly than expected. Indeed, President Obama issued an Executive Order in 2011 that encouraged agencies to engage in retrospective reviews, but this directive generated relatively few results.

The Trump Order does not formally require that agencies engage in retrospective review. But creation of a Regulatory Budget is likely to create incentives for agencies to build into their new rules data collection and analytical techniques that they could use after-the-fact in a retrospective review to determine if a rule has been implemented at lower cost than originally projected; or to identify rules that have cost more than expected, and thus may be candidates for possible revision or repeal. Agencies may conclude that the value of generating Cap Space under the Regulatory Budget by reducing regulatory costs makes it in their institutional self-interest to place greater emphasis on retrospective reviews in their rulemaking processes.

Conclusion

The new Order lacks many details about how its requirements will be implemented. The actual process by which the new Administration will seek to limit regulatory costs is very much a work in progress. The Order does, however, direct the Director of OMB to provide guidance to the agencies on the implementation of its provisions. This guidance will specifically address, among other issues, the standardization of the measurement and estimation of regulatory cost; the definition of new or offsetting regulations; and what constitute emergencies and other circumstances that might justify individual waivers of the requirements of the Order.

We will continue to monitor this issue as the White House releases more details about the implementation of the Order and as the OMB Director issues implementing guidance. Please contact the authors if we can provide you with additional information about the new Order.