Encourage Entrepreneurship and Innovation in Key Iowa Industries

As tax and regulatory reforms spur our state’s economy forward, policymakers must ensure regulations do not unnecessarily prevent innovation, new ideas, and new jobs from being created in Iowa.

In addition to leading pro-growth tax reform, Governor Kim Reynolds recently issued an executive order initiating a review process to eliminate excessive and unnecessary state regulations. An innovative policy taking hold in several other states could build upon these reforms to make Iowa even more friendly for entrepreneurship and business growth: establishing a regulatory sandbox within one or more of Iowa’s growing economic sectors.

The concept behind regulatory sandboxes is to allow localized industries to develop inventive ideas free from burdensome regulations in “a market space where current industry standards do not apply or are still being created.” With additional flexibility, businesses and entrepreneurs can work with regulators to “strike the right balance between facilitating innovation and mitigating potential risks” to enhance job creation and increase economic growth.

Several Iowan industries could benefit from regulatory sandboxes. For instance, Iowa Economic Development Agency reports that Iowa is home to 7,000 finance and insurance companies, employing an estimated 95,000 people and making the state a national leader in those sectors. Since 2015, Iowa has advanced technology within the insurance industry with the Global Insurance Accelerator (GIA), which helps insurance companies around the world innovate and expand. The state has become a national hub for accelerating the development of insurance technology.

Iowa is also a leader in agriculture and biosciences. Over the last several years, Iowa has experienced growth in bioscience research. Perhaps the largest opportunity for Iowa, however, is in its largest industry, manufacturing, which accounts for 18.2 percent of state gross domestic product (GDP). Crucially, the manufacturing sector connects with many industries, from agriculture and food production to the wide variety of products produced across the state.

Despite these successes, regulations are similar to high tax rates in stifling both economic growth and creativity. Indeed, excessive regulations are a form of taxation, as businesses and consumers ultimately must pay their financial costs.

To be sure, regulations have a purpose, especially protecting the health and safety of the public. Regulatory sandboxes can ensure these goals remain the top priority through proper oversight without overreach. James Czerniawski, who serves as Tech and Innovation Policy Analyst for the Libertas Institute, outlines five key principles that should be applied to any regulatory sandbox program, presented as follows in a Utah-focused policy brief:

  1. Transparency & The Buyer Beware Doctrine: Companies that are going to partake in the sandbox need to be perfectly clear about the product they are offering consumers. If a company is being disingenuous about what they are trying to do, it dissolves trust in the system.
  2. Accountability: When a company causes harm… it is important that there are steps that can be taken to rectify the harm. If there is no accountability to the system, then the institution will be weak.
  3. Institutional Soundness: A challenge facing sandboxes is that the regulatory institutions managing the sandboxes have to be supported. They need to be well funded, and they need to be in a position to optimize the lessons learned from previous cohorts to be able to adapt for future cohorts.
  4. Exposure Control: Risk should be mitigated by limiting the number of [people] exposed to the companies involved in a sandbox. In the event harm is caused, it is preferred to be with a smaller, controlled population in order for the incident to be resolved in a quick and timely manner.
  5. Federal Interaction: Some sandbox companies may be involved or want to be involved with programs offered on a federal level. Legislators worry about pre-emption potentially interfering with their responsibility to protect their citizens, so working with the respective federal agencies is important to find common ground.

Czerniawski further argues that policymakers “should clearly define the objectives and the challenges that need to be addressed” within the regulatory sandbox.

Rod Bordelon of the Texas Public Policy Foundation reports on several states that have implemented regulatory sandboxes for various industries, including Arizona, South Dakota, Utah, and West Virginia. Currently, fourteen states have created some form of regulatory sandbox. Utah has the most extensive regulatory sandbox, applying to financial technology, insurance, legal services, and universal applications. Utah’s sandbox is administered by the governor’s Office of Economic Opportunity and the Office of Regulatory Relief.

Arizona’s policy covers financial technology, with the state’s attorney general providing oversight. West Virginia’s regulatory sandbox also deals with financial technology but is administered by the state’s Department of Financial Institutions.

One of Iowa’s neighbors, South Dakota, is already a strong economic competitor due to their lack of an income tax and now they have implemented a regulatory sandbox directed toward the insurance industry. Administered by the state Department of Labor and Regulation, South Dakota’s sandbox specifically:

  • Allows companies to offer their products or services in a controlled environment for up to two years
  • Requires companies to remain transparent to consumers so they are informed of the exploratory services
  • Provides controls for entry and exit from the sandbox so consumers aren’t left high and dry

Recently, the Nebraska legislature passed a regulatory sandbox that will also focus on innovations within their insurance industry. The sandbox will be regulated within the Nebraska Department of Insurance and will provide the opportunity to encourage new innovation for new and existing companies.

Regulations are complex and one objective of a regulatory sandbox is to help regulators determine what regulations are burdensome and need to be repealed. “State regulators lack the perfect information necessary to perfectly tailor regulations to fit every company,” argues Logan Kolas, an economic policy analyst with The Buckeye Institute. A regulatory sandbox seeks to resolve this problem by creating a safe and transparent avenue for businesses and entrepreneurs to innovate without being restricted by regulations. Moreover, “regulatory sandboxes provide valuable information to help regulators learn which rules are necessary, and which may be redundant, ambiguous, or overly burdensome.”

Kolas offers important advice for legislators as they consider fostering innovation through a regulatory sandbox, saying it “should be instructive and tell policymakers how to make rules more effective and efficient.” Such a policy would complement Governor Reynolds’ recent efforts to eliminate burdensome regulations and point a direction forward for a stronger economy.

Numerous industries could benefit from a regulatory sandbox in Iowa. As tax and regulatory reforms spur our state’s economy forward, policymakers must ensure regulations do not unnecessarily prevent innovation, new ideas, and new jobs from being created in Iowa.

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