An official state report on the cost of regulations on small businesses in California was released last week, and it sure had some eye-popping numbers. The total cost of regulation was $134,122.48 per small business in California in 2007, the report said, and indirect business taxes not generated or lost were $57,260.15 per small business.

My first reaction: Wow! My second reaction: Wait a minute.

Those numbers – the ones that ended with 48 cents, etc. – stopped me. After all, this is the kind of report based on all manner of broad assumptions and multipliers, so to somberly report figures so exact, so down-to-the-cent picky, implies a precision that simply doesn’t exist and shouldn’t be pretended. It’s an immediate red flag.

And if you read the report, what stands out is that it relies on data that Forbes magazine gathers to make its many lists, the ones that compare cities and states in terms of their business friendliness.

A scholarly report that should guide state policymakers based on Forbes’ rankings? There’s another red flag.

What’s more, the methodology is opaque. The academics who created the report assign numbers and weights to the various Forbes rankings. They make conclusions about how all of that affects California’s economic performance. But it’s hard to tell exactly what’s being compared and which regulations are included.

I called the lead author, Sanjay Varshney, who is a finance professor and dean of the business school at California State University, Sacramento. He pointed out that his task was not simple. No one has ever really done a serious and comprehensive study that quantifies how state regulations impose costs on businesses. His first decision: Skip the temptation to try to assess the bottom-up effects of regulations and focus instead on the top-down. In other words, he looked at the big picture.

Employing Forbes’ data was a follow-on decision because the magazine uses sound economic data and that was in line with his big picture assessment. “I feel pretty good about it,” he said of his methodology.

But how about those overly precise numbers, the ones that go down to the penny? Don’t those invite ridicule? He laughed. They were included so that anyone who wanted to replicate or verify his method could tell if they were on track.

OK. Fair enough. But it’s still difficult to stop wondering about the methodology as you read his eye-popping conclusions. Take this, for example:

“This study finds that the total cost of regulation to the state of California—direct, indirect, and induced—is $492.994 billion, which is almost five times the state’s general fund budget, and almost a third of the state’s gross product. This cost of regulation results in an employment loss of 3.8 million jobs which is a tenth of the state’s population.”

If you’re like me, you think, “Wow. That’s impressive. But wait a minute. Can I really believe this?”

When we received the report at the Business Journal, we decided not to do a story about it. We weren’t sure how the report had measured and weighed its data. It looks like lots of the mainstream media outlets also said “wait a minute,” judging from the scant attention the report got.

That’s unfortunate. The cost of regulation in this state is an issue that needs serious attention. This report may not get it any.

Rob Carpenter, a local entrepreneur, had a good suggestion: Try again. Let’s have a do-over on this report.

“There is no question that the regulatory impact has negatively impacted businesses (it could be more or less than the study states),” he said, “but we need accurate information to make thoughtful, important decisions.”

Charles Crumpley is editor of the Business Journal. He can be reached at [email protected].