Ruled out

NEW YORK-It took one year and 45 days to build the Empire State Building back in 1931, when Rudy's Bar and Grill was just a speakeasy in a Manhattan neighborhood called Hell's Kitchen. But it's 2009 now and things have changed. In 10 months, Rudy's hasn't been able to build a fire exit and two bathrooms to the satisfaction of government regulators.

Last December, 10 police officers, two fire marshals, two health inspectors, two State Liquor Authority employees, and two building inspectors swooped down on the same night and closed the bar's backyard. The plumber who installed the heaters in the backyard tent hadn't filed the job, they said.

"They said, 'The heaters are illegal,'" recalls Danny DePamphilis, the manager. "I said, 'They are not!'" They told him to close his yard.

DePamphilis decided to do things right-build a fire exit and another bathroom and bring the backyard up to code before it came alive with customers in the summer. He spent five months getting the city to approve plans and permits. Then in April, another inspector showed up: "He says, 'I'm from the building department. Stop this job.'"

A confusing letter came and an audit followed, finding 27 objections to the plans the city had just approved. Now DePamphilis leads me past the mahogany bar and duct-tape-upholstered booths, out a back door marked "Do Not Enter!" "Caution!" and "Closed!," to the rubble-filled backyard where people would usually be pouring from the bar into the summer air. People have held weddings in Rudy's backyard, but now bar stools stand on end in the corner. Aluminum siding slumps next to a sink and cement bags fill a tunnel-the future fire exit-that is just beams strung with naked wiring.

Work stopped in April. Thanks to the holdup, Rudy's business is down around 30 percent.

I am not an isolated incident," DePamphilis said. He's not. As small businesses limp through a recession, regulatory compliance costs hit $1.172 trillion in 2008-8 percent of the GDP. The 2008 Federal Register grew a record 10 percent in 2008 and the burden on small businesses is getting heavier. Of the 4,000 regulations now in the works, 753 would affect small business.

In fact, Congress just passed one of the biggest food inspection bills in recent history, giving the FDA more power to yank products off the shelves and increase inspections. Now everyone who processes food, from truckers to wholesalers, has to document the food as it goes down the processing chain, so in case the feds have to recall a batch of peanut butter they'll know where the batch went wrong. Bruce Phillips, senior fellow of regulatory studies at the National Federation of Independent Business, said it's likely to increase fines, local inspections, and the paperwork burden for small firms.

With 80,000 pages of regulations to sift through, small business owners have to pick and choose which regulations they'll follow, Phillips said: "They literally cannot comply with everything. They would just go nuts. Their time would be too taken up just by paperwork." In Rudy's case, one agency approved the plan while the audit from another found flaws. Whose advice to follow?

For large businesses, the regulatory cost is $5,282 per employee, but for small businesses the regulatory cost is $7,647 per employee. That cost often stays the same no matter how much money comes in. Rudy's business may have gone down by a third, but its compliance costs haven't.

Costs may rise even higher as state and city budget deficits burgeon. The National Conference of State Legislatures reports that the cumulative state budget gap is now $47.4 billion. Cities and states are trying to close crushing deficits without raising income taxes. According to a Pew Research Center report, most cities are raising money by raising fees.

Philadelphia, for example, is raising $4.8 million by increasing fees and fines. Florida approved $1 billion in fee increases. Some states are doubling or tripling car registration fees and tacking fees onto cable or utility bills. "These all add to the stress on a small business owner," said Phillips. In New York, the multiagency task force fines bars and nightclubs $5,000 to $100,000 for violations, and DePamphilis believes it has crossed the line from deterrent to revenue raising. Right now, Rudy's fine stands at around $40,000.

Tax hikes target businesses, too. Thirteen states have raised corporate taxes and the general sales tax. Kentucky just raised the tax on alcohol from 11 percent to 20 percent to close a $456 million budget hole. Philadelphia is proposing a temporary 1 percent sales tax increase and suspending wage and business privilege tax cuts to save $230 million. Even if the taxes aren't exorbitant, the cost of figuring them out and filing them adds to the budget chunk that small businesses devote to the government. Phillips calls it "death by a thousand pin pricks."

If profits are down, unemployment goes up. But DePamphilis balks at the thought of laying off people who have worked for him for years. One day as he was worrying he would have to cut his employees' hours, one came up to him and said, "I really gotta thank you. . . . I was able to send my little boy to summer camp.'" DePamphilis' voice cracks: "And I know the little guy, you know?" A regular who goes by "Jersey Mike" at Rudy's says he's known the bartenders for over a decade.

The regulars may save Rudy's. For six years now a politics group, Drinking Liberally, has met at Rudy's once a week to talk politics, eat Rudy's free hot dogs, and sip pitchers of Rudy's Red. Now that Rudy's regulars are all trapped inside with the music blaring, they have fewer speakers and guests than they did before.

Participant Justin Krebs suggested they circulate a petition to city officials asking them to cut the red tape. In just a few days, they had a thousand signatures, not just from New York but from across the country and overseas. One woman who signed said she met her husband at Rudy's. Another customer wrote a jeremiad asking what New York would be like without Rudy's and other independent businesses that have died. "I almost started crying. I couldn't believe it," DePamphilis said. "These were heartfelt endorsements of Rudy's Bar and what people were saying was moving to me." They have sent the petitions to the city and Danny said he believes that Mayor Mike Bloomberg's office is doing all it can to cut the red tape.

DePamphilis was talking with another restaurant owner friend about the city, regulations, a business owners' meeting with the mayor, and what DePamphilis would say if he got the mayor's ear. His friend asked him to tell the mayor that regulations were taking all the joy out of running a business.

People don't run a business for the money, DePamphilis said, but for the joy that regulations now wither. You run a business because "you like it. It's your business. You're not becoming a millionaire but you're feeding your family. You're the boss. You like it. You actually like it."

DePamphilis walks through the backyard door marked "Closed" back into the brimming bar, and his voice is thick with frustration: "They destroyed my business."