Foundation: Taxpayers fared well in 2009 legislative session

Key wins are adoption of conservative budget and defeat of higher taxes

Taxpayers fared well this legislative session, according to the post-session assessment of the Texas Public Policy Foundation.

“The Legislature adopted a relatively conservative budget, needed eminent domain reform, and improved public school accountability, while cutting taxes for small businesses,” said Justin Keener, the Foundation’s vice president of policy and communications. “To taxpayers’ relief, they defeated the expansion of government-run health insurance and several tax increases. Texas remains poised for a bounce back from the global recession thanks to lawmakers’ actions to maintain our state’s competitive edge of low taxes and a reasonable regulatory environment.”

Keener praised the Legislature’s action to reduce the bite of the gross margins tax on small businesses. “While we would have preferred a rate reduction for all businesses, increasing the exemption to $1 million for the next two years and to $600,000 permanently will be a great benefit to the small and startup enterprises that are the backbone of the modern Texas economy,” he said.

While there was not much forward movement on taxpayer protections such as improving the state’s expenditure limit and building upon Texas’ position as a leader in financial transparency, taxpayers dodged several bullets in the forms of billions of dollars in proposed new taxes and fees. The Foundation cited the failure of local-option transportation taxes and the unemployment stimulus legislation as the two biggest bullets that taxpayers dodged.

“During difficult times, Texas families expect their governments to scrutinize their budgets and set priorities in the same way that they have to,” Keener said. “This is not the time to ask citizens to raise taxes and fees, especially when other alternatives are available. The House showed true statesmanship in vetting the tax plans and rejecting them.”

The Foundation also cited the defeat of legislation that would have expanded unemployment eligibility, thereby accepting federal stimulus dollars in return for a likely permanent business tax increase.

“Our research has shown that one-time federal unemployment funds often come with conditions that permanently increase employer taxes,” said Talmadge Heflin, Director of the Foundation’s Center for Fiscal Policy. “Gov. Perry was right to reject these funds, and thankfully the Legislature ran out of time before it could overrule him.”

Heflin praised the Legislature for adopting a budget that stayed within population growth plus inflation, and for not tapping the Economic Stabilization Fund. “The state should have almost $9 billion set aside next session to pay for any emergency situations or tax relief initiatives,” he said.

According to the Foundation’s Bill Peacock, director of the Center for Economic Freedom, eminent domain reform moved forward for the first time since 2005 with passage of HJR 14.

“If adopted by Texas voters, this constitutional amendment will stop local governments from using blight designations to condemn blocks of perfectly good homes and businesses for economic development projects,” Peacock said. “While work still remains to fully address the ramifications from the Kelo Supreme Court decision, private property owners came out ahead this session.”

Texas public school students and taxpayers saw improvements. “The Legislature made considerable strides in education by preserving and expanding Texas’ teacher merit pay program, as well as providing for a meaningful accountability program to better prepare children for work or college,” according to Foundation education policy analyst Brooke Terry.

Despite these advances, Terry said many public school children will suffer due to the Legislature’s inability to lift the arbitrary cap on charter schools.

“More than 17,000 Texas children are on a waiting list to enter a charter school and we are very disappointed that the Legislature failed to lift the cap,” Terry said. “Texas charter schools have demonstrated amazing results by inventing new models to educate students and prepare them for success in college and the workplace.”

Charter schools are public schools supported by legislators in both parties. However, legislation to raise the arbitrary cap on charter schools and to help effective open-enrollment charter schools expand was vehemently opposed by the teacher unions.

"Major bills fail every session leaving work unfinished, yet industrious Texans still go about their business. This session will be no different," Keener said of the sunset legislation for the Texas Department of Insurance and the Texas Department of Transportation. "The governor and the Legislature have several options before them and we encourage them to take a measured approach when evaluating them."

Justin Keener is Vice President of Policy and Communications for the Texas Public Policy Foundation.

The Honorable Talmadge Heflin is Director of the Center for Fiscal Policy at the Texas Public Policy Foundation. Heflin served 11 terms in the Texas House of Representatives and chaired the House Appropriations Committee in 2003, leading the Texas Legislature’s successful efforts to close a $10 billion budget deficit without a tax increase.

Bill Peacock is Director of the Center for Economic Freedom at the Texas Public Policy Foundation.

Brooke Terry is an education policy analyst at the Texas Public Policy Foundation.

The Texas Public Policy Foundation is a non-profit, free-market research institute based in Austin. More information can be found on the Foundation’s website, www.TexasPolicy.com.

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TPPF COMMENTARY: "Going to Texas"

There’s a Reason People Want to "Rush" Here

by Bill Peacock

Dear Mr. Limbaugh:

I noted your evident frustration this week with the high tax policies of New York that subject you to a punitive income tax rate anytime you step foot in the state to perform your show. I was delighted that you expressed an interest in making Texas the home of your alternate studio whenever hurricanes chase you out of Florida.

If you come to Texas to do business, you wouldn’t be alone. Texas has ranked in the top five states for the last five years when it comes to attracting new and expanded facilities, according to Site Selection magazine.

In fact, our success has come at the expense of your soon-to-be-former workplace. Last year, Texas surpassed New York as home to the most Fortune 500 companies. Texas now boasts 58 Fortune 500 headquarters, ahead of New York's 55 and California's 52.

Why is Texas forging ahead of the competition? Well, you hit the nail on the head when you mentioned that Texas doesn't have a state income tax. The people of Texas still have the same spirit of independence that attracted folks from all over the U.S. to fight at the Alamo so long ago. We don't believe that the government is the solution to all the world's problems and we'd just as soon leave people’s money in their own pockets where it will be the most productive.

A recent Texas Public Policy Foundation study showed how this attitude has made Texas a better place than California to do business. California's overall tax burden is $118.33 per $1,000 of personal income. Texas' is $99.49. California government spends $9,448.26 per capita. Texas spends $6,652.11.

And the kicker: California's personal income tax progressivity is $33.58. Texas'? Try zero.

I suspect the results would be similar in a head-to-head competition with New York. And the way things are going in Florida these days, it may not be long before you start thinking about moving your studio to Texas on a permanent basis.

It is true that Florida doesn’t have an income tax. But that may not last long. Florida's ill-considered decision to get into the homeowners' insurance business has the state facing bankruptcy if a major hurricane makes landfall there this summer. With a potential liability of $32 billion, Florida will have to turn to either its citizens or the federal government to make up the shortfall. I am fairly certain, Mr. Limbaugh, you will be on the short list of those solicited to contribute.

Businesses are noticing this too. Florida bounces in and out of Site Selection's top 10 ranking and is only 11th on the Fortune 500 list.

So if you come to Texas, where should you live? While Texas is a great place, we do have our flaws like everywhere else. So let me provide you with some local knowledge that may help in your decision about where to relocate.

I'd avoid downtown El Paso at all costs. That city is prepared to use eminent domain to reshape parts of the area into a livable, workable urban utopia. Never mind the forced dislocation of the thousands of people who already live and work there.

The Metroplex is a great area, but may be getting much more expensive pretty soon. Local business and government "leaders" are proposing hundreds of millions of dollars in new taxes to fund rail and other transportation projects. This is the same group, of course, that agreed to limit transportation options in the area through restrictions on air travel through Love Field.

Houston might be a good choice for you. Though its moniker of "free market city" may be something of an anachronism, it still doesn't have zoning, so you could build your new home and studio together in the location of your choice.

Wherever you wind up, Rush, we'd welcome your entrepreneurial spirit to Texas. Let’s hope that you join with another famous Texas transplant and freedom fighter, Davy Crockett, in saying, "You can all go to hell; I am going to Texas."

Bill Peacock is the Director for the Center for Economic Freedom with the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.

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The Japanese experience with fiscal stimulus

The last couple of days I’ve been examining the muddled thinking that is driving the debate over how to get us out of our current economic funk. The solution de jure seems to be more government intervention in the economy, such as the economic stimulus package being worked on by President-elect Barack Obama.

Dr. Arthur Laffer, the author of our Thinking Economically series, recently sent me an email commending a December 16th Wall Street Journal editorial (subscription required) on the efforts to create a stimulus package as “the single best editorial I’ve ever read.” The editorial outlines stimulus package after stimulus package passed by the Japanese Kokkai, or Diet, as their parliament is called in English. Here is a brief excerpt:

“In 1992, Japanese Prime Minister Kiichi Miyazawa faced falling property prices and a stock market that had sunk 60% in three years. Mr. Miyazawa’s Liberal Democratic Party won re-election promising that Japan would spend its way to becoming a "lifestyle superpower." The country embarked on a great Keynesian experiment.”

Here is a listing of what Japan did over the decade: August 1992: 10.7 trillion yen ($85 billion); April 1993: 13.2 trillion yen ($117 billion); September 1993: 6.2 trillion yen ($59 billion); February 1994: 15.3 trillion yen; September 1995: 14.2 trillion yen ($137 billion); April 1998: 16.7 trillion yen ($128 billion); November 1998: 23.9 trillion yen ($195 billion); November 1999: 18 trillion yen.

What did Japan get for all this? Well, mainly a lot of government debt. Japan’s debt-to-GDP ratio started out this period at about 63%. By the time all this spending was through, it had reached 128.3%. It finally peaked in 2006 at 180%. Compare this to the U.S. level that has hovered between 35% and 40% for most of this decade.

What Japan didn’t get was an improved economy. Its economy grew anemically during the 1990s; all of the “stimulus” and negative interest rates didn’t help a bit. As the WSJ said, “Only in this decade, with a monetary reflation and Prime Minister Junichiro Koizumi’s decision to privatize state assets and force banks to acknowledge their bad debts, did the economy recover.”

We face the same situation today in the U.S., and may also have to deal with this in Texas if our economy starts to falter because of the drop in oil prices. Our only hope for a turnaround is turning to the market – rather than the government – to lead us back to prosperity. Our paper, The Economy, part of our Influential Issues series, offers some thoughts and ideas about how to do this in Texas.

- Bill Peacock

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Texas PolicyCast: 2008 in review

This week, we are pleased to bring you a roundtable discussion featuring the policy team at the Texas Public Policy Foundation looking back at 2008 and previewing the 81st Texas Legislature.

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Financial crisis: Failure of markets or of government?

It seems as if everyone is heading to Washington, D.C. these days looking for a bailout – investment banks, mortgage banks, automakers and autoworkers, insurance companies, universities, and even the state of California.

Yet at least some people are questioning the wisdom of providing bailouts to every Tom, Dick, and corporate CEO that shows up. As Congressman Jeb Hensarling put it, "People believe we are now engaged in whack-a-mole at the bailout carnival."

People are looking to the wrong place for the solutions to this problem because they are looking at the wrong place as the source of this problem. Yes, there are a lot of companies out there that have caused their own problems, but this isn't a market failure. Instead, this is a failure built on the foundation of government monetary and regulatory policy.

Robert Murphy and Mark Thornton show that a large part of the problem today can be traced to easy money flowing from the Federal Reserve. Other reasons are the federal housing policies that pushed lenders to make these risky loans, labor policies that have the Big Three in trouble, and market regulations that have hamstrung the ability of the markets to handle this mess.

Today's financial situation is a failure of government, not markets. More on this tomorrow.

- Bill Peacock

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Texas consumers to pay steep price for rush to wind energy

Foundation report looks at costs, challenges of harnessing wind for electricity

AUSTIN – Texas’ efforts to make it the nation’s leading wind energy state have come at a cost – at least $60 billion between now and 2025 – that will be borne by consumers and taxpayers, according to a report released today by the Texas Public Policy Foundation.

“The combined cost of subsidies, tax breaks, market disruptions, and increased production and ancillary costs associated with wind energy in Texas could top out at more than $4 billion per year, and total at least $60 billion through 2025,” according to Bill Peacock, Director of the Foundation’s Center for Economic Freedom.

The report, “Texas Wind Energy: Past, Present, and Future,” examines the growth of wind energy in Texas over the last decade. While many policymakers and business leaders foresee wind as a major contributor to America’s electricity supply, the report identifies several practical obstacles that stand in the way of achieving that vision.

“Wind power is, and will continue to be, part of Texas’ energy supply,” said Drew Thornley, the report’s author. “However, Texas’ policymakers must thoroughly examine both the benefits and limitations of wind energy, particularly the issues of reliability, transmission, and cost.”

The Public Utility Commission’s recent approval of a $5 billion plan to connect proposed West Texas wind farms to Texas’ metropolitan centers is just the beginning of the costs to Texas’ electric ratepayers. “These costs do not include escalating labor and material costs or financing costs during construction,” Thornley said. “Thus, the installed costs, which will be used to establish future transmission rates, should be considerably higher. The total cost of transmission construction should increase electricity prices by about $17.1 billion through 2025.”

Texas wind energy will be subsidized to the tune of $28.3 billion through 2025. Besides transmission costs, the subsidies include Texas’ program for mandating production of wind energy through the renewable portfolio standard and renewable energy credits ($1.4 billion) and the federal production tax credit ($9 billion). Texas consumers and taxpayers should expect to bear more than $20 billion of this directly, with the rest paid by U.S. taxpayers. The remainder of the $60 billion cost of Texas wind energy comes from increased generation and system management costs, economic costs from disruptions of service due to unreliability, and from additional tax breaks.

In addition to the cost, Thornley identified the three major challenges to the expansion of Texas wind energy as the intermittent nature of wind, the inability to store electricity on a large scale, and the limitations on electric transmission infrastructure.

“The greatest impediment to wind’s large-scale contribution to our energy supply is its intermittent nature,” Thornley said. “The wind must blow in order for wind turbines to produce power. In Texas, however, wind blows the least during the summer months when we need power the most.” He added that the Electric Reliability Council of Texas relies on a mere 8.7 percent of wind power’s installed capacity during peak summer hours.

Thornley debunked the notion that wind could replace natural gas as a fuel source for electricity. “Because there is presently no adequate wind-power storage system, wind-generating units must be backed up by units that generate electricity from traditional fuels,” Thornley said. “In Texas’ case, that has most often meant natural gas.”

“Wind power is not an energy-supply panacea,” Thornley said, “but rather a supplement with the potential to play a beneficial role in Texas’ energy mix for years to come.”

The Texas Public Policy Foundation is a non-profit, free-market research institute based in Austin, Texas. The report, “Texas Wind Energy: Past, Present, and Future” is available online at http://www.TexasPolicy.com.

Bill Peacock is Director of the Center for Economic Freedom at the Texas Public Policy Foundation.

Drew Thornley is a natural resources and economic freedom policy analyst at the Texas Public Policy Foundation.

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Kelo Day

Today is the third anniversary of the U.S. Supreme Court’s egregious Kelo vs. New London decision, in which a 5-4 majority expanded the ability of governments to use the power of eminent domain to include "economic development." The ruling dealt a tremendous blow to individual property rights and has drawn sharp rebuke from across the philosophical spectrum.

Over the last three years, the Texas Public Policy Foundation has extensively researched the question of how the state can preserve individual property rights in a post-Kelo world. Last month, Bill Peacock and Drew Thornley testified before a House committee on eminent domain and condemnation compensation, respectively. And last fall, Bill Peacock gave a presentation on how eminent domain harms those in need of affordable housing.

Texas has made some progress to protecting Texas landowners from eminent domain abuse, but much more needs to be done.

- David Guenthner

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COMMENTARY: Telecom Taxes on the Decline; City Franchise Fees Should be Next

Prior to 2007, Texas ranked third in the nation in telecom taxes. One national study estimated that Texans paid about 29 percent in taxes and fees on their local phone service – a rate twice the national average.

Since then, the Legislature has eliminated the $210 million a year Telecommunications Infrastructure Fund fee, while the Texas Public Utility Commission recently cut the Universal Service Fund fee by $144 million a year.

These two cuts, when fully phased in over four years, will cut the tax rate by about 2.25 percent, saving the average consumer $1.12 per month. But our telecom taxes will remain well above the national average, let alone the state average for other goods and services.

Consumers who buy electronics or yard equipment pay a combined state/local sales tax rate of 8.25 percent. For cars, it’s 6.25 percent. Only mixed beverages (14 percent) and cigarettes (35.6 percent) are in the range of telecom taxes. So using a telephone still qualifies for “sin tax” treatment.

With Texas telecom taxes still too high, where is the next place to cut?

City franchise fees.

Local telephone tax rates total about 11.32 percent on the average bill. The three largest local taxes are the franchise fee, the 911 tax, and the local sales tax. Of these, the franchise fee is by far the largest. In fact, local franchise fees can even top the state sales tax as the largest single tax on consumers’ tax bills, going as high as 6.35 percent.

Franchise fees are payment for the use of the public right of way, though most of the revenue generated from franchise fees is not used to manage or maintain the right of way. Instead, the majority of revenue generated by franchise fees goes straight into a city’s general revenue fund. And this is true not just for fees paid by telephone and cable companies, but for fees paid by all companies that use the right of way.

The numbers are impressive. Dallas will collect about $31 million from telephone franchise fees. But they also collect fees from cable, electric and gas companies, so the city’s total franchise fee revenue should reach about $125 million this year. Houston will do even better, collecting $48 million in telephone fees, $99 million in electric fees and $37 million in gas and other fees, for a whopping total of $184 million.

And all of these costs are being passed on to consumers.

Cutting the telephone and cable franchise fees in half would reduce most consumers’ bills by another 3 percent or so, lowering Texas telecom taxes by more than $500 million a year. Similar cuts to electric, gas and other fees would yield even greater savings for consumers. This would still leave more than enough revenue for management and maintenance of the public right of way.

Cities want us to believe that franchise fees are not taxes, but rental payments for the use of public property by private companies that must be a “value based fee [to] maximize revenue” on behalf of the public. But a quick look at a telephone or cable bill belies this argument. Consumers, i.e., the public, not businesses, pay the franchise fees—businesses are just tax collectors for the government. In essence, the public is paying franchise fees in order to use the public right of way.

It is the cities—not the citizens—that are profiting from today’s excessive franchise fees, which also harm consumers by keeping new entrants out of the market, undermining efficiency, and reducing competition.

A significant reduction in telecom franchise fees could lead to more video, voice, and data services being delivered to the home—at a lower price, with lower taxes to boot. A reduction in electricity franchise fees might even lead to competition in the transmission or distribution of electricity.

We don’t know exactly what innovations and efficiencies would come from a reduction in franchise fees, but we do know that consumers would benefit to the tune of hundreds of millions of dollars a year. That should be the only information we need to keep consumer tax cuts moving forward.

Bill Peacock is the Director for the Center for Economic Freedom with the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.

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TPPF COMMENTARY: Texas Consumers Benefit from Competitive Electricity Market

As summer draws near, it is a sure bet that temperatures in Texas will increase—with electricity prices following right along.

In the past, increases in electricity prices have prompted calls for more regulation of the Texas electricity market. While we might hear those refrains again this summer, a recent review of the market reveals that Texas has benefitted by freeing buyers and sellers of electricity from government interference in their transactions.

In Texas Electric Meter: Measuring the Effects of Electricity Deregulation, the Texas Public Policy Foundation puts numbers to work in a debate that has been dominated by rhetoric.

Our research establishes conclusively that last year’s critics of the Texas electricity market spoke too soon. Using data from the still-regulated 2006 market, they claimed that deregulation wasn’t working.

The same pattern held true across the country. For instance, deregulation was widely blamed for causing California’s power crisis several years ago. However, the California electricity market, in fact, was never deregulated. A poorly designed set of wholesale regulations combined with retail price controls led to that market’s collapse when natural gas prices skyrocketed.

Back in Texas, the only things that have skyrocketed since full deregulation took effect in January 2007 are consumer choice and competition.

In September 2006, the average Texas consumer in an area open to electric competition had access to about 17 retail electric providers offering about 36 different rate plans. Today, those same consumers can choose from 28 providers (on average) and nearly 100 rate plans.

Consumers can lock in today’s rate for the long term or let it float month-to-month. They can pick providers and rate plans based on their fuel sources. They can even choose electric providers that will give them a commission for each household they recruit to the company.

This explosion in consumer choice is rooted in the highly competitive nature of the retail electricity market.

Since competition began, the five former monopoly electric providers have lost between 53 and 78 percent of their market share. The percentage of residential customers who chose competitive rate plans more than doubled during 2006 and2007 as the state completed the transition into full deregulation.

As of December, 72 percent of residential consumers had chosen a competitive rate plan, and 80 percent had made an observable choice of providers. And, of course, the remaining 20 percent of the market can choose (or not choose) a new plan at any time.

Competition in the wholesale market has led to the construction of more than $20 billion in new generation facilities in Texas since wholesale deregulation began in the 1990s. An additional $25 billion is currently under construction or planned.

As much as anything, the reliability resulting from these massive investments testifies to the success of deregulation. Texans have been spared the repeated rolling blackouts that have afflicted California and New York.

Deregulation produced these gains in competition and reliability while providing more efficient and (often) better prices.

Prior to deregulation, Texas had the 14th highest average electricity rates in the country; as of December, we had slightly improved to 15th. The average competitive offer in January was only 2.9 percent higher than the inflation-adjusted regulated rates of 2001, but consumers could select rate plans almost 18 percent below the former regulated rate.

Yes, prices climbed higher in 2005 and 2006, but this was clearly influenced by the vestiges of regulation and higher natural gas prices. Once the Price-to-Beat expired and deregulation was fully implemented last year, the average price in Texas declined by more than five percent even while U.S prices were on the rise.

The temperature will increase in the coming months and it looks like natural gas prices might do the same. This is a formula for higher electricity prices, especially in states—like Texas—that depend heavily on natural gas for its electricity generation.

However, the higher prices won’t be just in Texas, or due to deregulation. The facts clearly show that Texans benefited from deregulation in 2007 and will continue to do so in the future.

Bill Peacock is the Director for the Center for Economic Freedom with the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.

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TPPF releases "Texas Electric Meter"

On January 1, 2007, Texas completed its transition to retail electric competition. Critics of deregulation were vocal during the last legislative session, declaring it to be a failure and barely falling short in their efforts to re-regulate the Texas electric market. But with a full year of competition under our belt, how is competition working out? This week, the Foundation debuted its new project, the Texas Electric Meter, a statistical report that will monitor the health and vitality of the Texas competitive electric market. Bill Peacock, Director of the Foundation's Center for Economic Freedom, compiled the report, and he shares his findings on this week's edition of Texas PolicyCast.

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Dark days ahead?

Here is the latest post on "Speaking Freely," the news commentary feature at www.TexasPolicy.com. (For those you who are more blog-savvy, we have added an RSS feed to that.)

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Reuters reports that “a drop in wind generation late on Tuesday, coupled with colder weather, triggered an electric emergency that caused the Texas grid operator to cut service to some large customers.” ERCOT, which operates the state’s power grid, moved directly to a stage 2 emergency.

Over the course of three hours, the megawatts of electricity coming from West Texas wind farms dropped from 1700 to 300. Other power suppliers fell short of their scheduled production.

Texas is now the nation’s leading generator of electricity from wind power, and the amount of wind generation is increasing. Consider what a problem this would be the next time if it were to happen on a hot summer evening when electricity use hits its peak. The more wind energy on the power grid, the more unreliability becomes a problem.

The cost of building those lines so far away from where the electricity is needed will almost certainly be borne by Texas consumers, while the wind energy investors, landowners, and West Texas taxing entities reap the financial benefits.

Wind energy has its place in the generation mix, but there is a problem with the state mandating the use of an unreliable resource and forcing consumers to subsidize it.

- Bill Peacock

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First Listen: Texas PolicyCast for 12/13/07

The latest edition of Texas PolicyCast is now available for preview on the TPPF website (www.TexasPolicy.com).

Last month, many Texas cable customers accustomed to seeing their Dallas Cowboys play couldn't see the game against the Green Bay Packers due to an ongoing dispute between the National Football League and several major cable providers over carriage of the NFL Network. As the two sides remain deadlocked at the negotiating table, they have pressed their cases through vigorous and expensive public relations campaigns.

And with this week's Houston Texans game and next week's Dallas game also affected by this dispute, the Texas Legislature is getting involved. On Monday, the House Regulated Industries Committee held a public hearing on this issue. Bill Peacock, Director of the Foundation's Center for Economic Freedom, testified at the hearing, and you can find both his testimony and his latest commentary on the Foundation's website.

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TPPF COMMENTARY: Football Follies 2007

The dispute between the National Football League and major cable providers over the NFL Network shows no sign of abating. Both sides continue to wage expensive public relations campaigns on why the other is to blame for Texas football fans' inability to see games featuring their favorite teams, including Thursday's Houston/Denver game and next Saturday's Dallas/Carolina contest.

Unfortunately, a growing number of politicians are seeking government intervention in the dispute. This afternoon, the House Regulated Industries Committee will conduct a hearing "regarding the availability of NFL games on cable networks."

In this week's commentary, Bill Peacock, Director of the Foundation's Center for Economic Freedom, shows how the marketplace provided a solution for last month's Dallas/Green Bay game and why government should stay out of this business negotiation.

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Football Follies 2007

Consumers Can Pick Their Own Winners

By Bill Peacock

The “Football Follies” series of films contains classic highlights of players bumbling, stumbling, and fumbling their way across the gridiron. While highly entertaining – such as ex-Minnesota Viking Jim Marshall’s fumble recovery and ensuing 65 yard run to the wrong end zone – they also provide excellent examples of how not to play football.

Recent government forays into consumer regulation provide similar examples of how not to intervene in markets.

Take, for example, the public relations war surrounding the NFL Network. Last week’s game between the Dallas Cowboys and Green Bay Packers featured two 10-1 teams, with the winner becoming the frontrunner to reach the Super Bowl. But many fans used to seeing such contests couldn’t watch it.

Last year, the National Football League opted to move some of its games off of broadcast TV and onto its NFL Network, available only on cable and satellite services.

From the network’s inception, the NFL has prodded cable providers to include it on their basic tier of channels, as the two main satellite companies have done. But the major cable providers objected to the hefty price the NFL is seeking. They’ll carry it, they say, but only on the sports tier, which entails an additional expense and thus reaches far fewer viewers.

This has all the elements of a classic battle between marketplace titans – including the unfortunate attempt by one party to get government intervention on its side.

Such behavior is known as rent seeking, where businesses attempt to gain through government what they can’t win through market competition.

The NFL, probably the most muscular of all sports leagues, is no stranger to competition. But rather than battle it out on the field, the league has turned to the Federal Communications Commission and the Texas Legislature in order to force the cable industry’s hand.

This is not surprising, since the FCC has made it its business recently to involve itself in such matters. It is currently considering prohibiting providers from “tying” programming and instead forcing them to offer channels a la carte, and just last week began the process of regulating the market share of cable companies.

The FCC, though, has no monopoly on overreach. Earlier this year, the Texas Legislature came dangerously close to re-regulating Texas’ world-class electricity market – failing to do so only because of a technicality. Government regulators routinely interfere with insurance market transactions. And a Texas legislative committee held hearings earlier this week on the NFL Network dispute.

Regulators simply cannot deal with such issues better than the marketplace, where billions of consumers negotiate with millions of suppliers every day to reach optimal solutions.

The response of consumers to the NFL Network problem shows the superiority of market-based solutions.

Many fans watched the game with other friends who had satellite service. One such satellite customer in East Austin opened up his yard to all comers with a big-screen TV and free food. Others actually switched their television service to a different provider that carried the NFL Network.

Probably the most common response by fans was to watch the game in sports bars, which reported huge crowds and revenues that night.

Let’s not forget this is all about money. Sellers want to maximize revenues, consumers want to minimize costs.

Rather than taking money from one pocket and putting it into another, regulators ought to remember that fans are quite capable of taking care of themselves when it comes to figuring out the best way to watch a football game, or to buy electricity or insurance. It is folly to think otherwise.

Bill Peacock is the Director for the Center for Economic Freedom with the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.

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TPPF COMMENTARY: Facts Show Electric Deregulation a Clear Success

The Texas electricity market has come under intense scrutiny during the last couple of years, as legislators and the media look at a single statistic -- average price per kilowatt/hour -- and judge the state's steps toward electric competition to be a failure. But Bill Peacock, Director of the Foundation's Center for Economic Freedom, argues in this week's commentary that important context is being ignored and that a refusal to acknowledge the market's successes could deprive Texas consumers of the benefits from electric choice.

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Facts Show Electric Deregulation a Clear Success

So Why Don’t More People Recognize This?

By Bill Peacock

Galileo, the 17^th Century Italian astronomer whom Albert Einstein called the father of modern science, was willing to change his views based on observation. For this, he was forced to spend the last years of his life under house arrest by those who refused to believe the sun was at the center of the solar system.

Today, there are far too few people willing to follow Galileo when it comes to observing the Texas electric market. Though the facts clearly point to the success of deregulation in this market, the geocentric crowd remains convinced that consumer choice is a bad idea.

Why is this?

In some cases, it could be that people are misinformed. For instance, a recent article in the Houston Chronicle incorrectly identified markets such as Austin, San Antonio, and the Pedernales Cooperative as being regulated. In fact, markets served by cooperative and municipal electric companies have for years been the most deregulated in the state. If anything, the lower rates charged in these areas are proof positive of the long-term benefits of deregulation.

Another reason could be misperception. One legislator recently repeated the oft-made claim that while deregulation has worked well in the industrial and commercial markets, it has not done a good job in the residential market.

Again, observations tell a different story. Back in 2000, before deregulation, residential consumers paid 23.77 percent and 88.18 percent more for electricity, respectively, than commercial and industrial customers. Today, the ratio between residential and commercial customers is almost identical, while the gap between residential and industrial customers has narrowed to 62.47 percent.

The complexity of the regulatory system could also limit the ability of some to make accurate observations. The claim is often made that only deregulation exposes customers to the full impact of increases in natural gas prices. However, regulated systems always pass on fuel costs (and savings) to consumers—they just do so inefficiently.

Electricity prices in the efficient Texas market increased faster than in regulated markets when natural gas prices rose. In the last year, however, Texas prices have dropped 5.37 percent while the national average has increased 0.82 percent. Our comparatively inefficient neighbors in Oklahoma and Louisiana have seen prices increase by about five percent. As Texans enjoy the cost savings of deregulation, consumers in regulated markets will be paying for past higher natural gas prices in the years to come.

Finally, as with Galileo’s persecutors, old belief systems just die hard for some. How else can we explain the persistent but false perception that Texans are significantly worse off than the rest of the country?

It is true that the average price in Texas—12.51 cents per kWh—is about 13 percent higher than the national average. But the gap is closing as we recover from the price shocks associated with natural gas. And our prices are far better than in states like Connecticut, Massachusetts, California, and New York, where average rates run from 15 to 18.33 cents per kWh.

Furthermore, the re-regulators entirely ignore the benefits of a reliable supply of electricity. Deregulation brought a construction boom in electric generation plants to Texas, resulting in unsurpassed reliability. Yes, reliability comes at a cost, but one that Texas consumers have voluntarily paid to avoid California- and New York-style blackouts.

The facts are there for all to see. Let’s hope that more people start paying attention to them so that Texas consumers do not lose the nation’s most consumer-friendly electric market and get placed back under the lock and key of regulation.

Bill Peacock is Director for the Center for Economic Freedom with the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. He may be reached at bpeacock@texaspolicy.com.

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TPPF Policy Primer: Energy and the Environment-Economic Growth in the Face of the Challenges of Clean Air and Global Warming

Despite dramatic improvements in air quality in Texas over the last 30 years, ever-tightening “clean air” regulations continue to impose heavy costs on the Texas economy. On the horizon, potential regulation of CO2 could have a much greater impact on Texas’ economic growth, manufacturing, and energy production, despite the mounting body of evidence challenging the effectiveness of such regulations. This event will examine the environmental successes in Texas, the upcoming regulatory challenges we are facing, and what can be done to avoid imposing heavier regulatory costs on Texas businesses and consumers.

November 14th, 2007

Location:
Houston City Club
One City Club Drive
Houston TX 77046

11:00 to 12:30 - Panel Discussion

Myron Ebell, Competitive Enterprise Institute
Joel Schwartz, American Enterprise Institute (invited)
Bill Peacock, Texas Public Policy Foundation

12:30 - Luncheon

Remarks: Brooke Rollins, Texas Public Policy Foundation
Keynote Address: Rep. Dennis Bonnen, Chairman of the House Environmental Regulation Committe

Price: $15.00 per person (complimentary for current donors)

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TPPF expert to speak at Heritage Foundation

AUSTIN – Bill Peacock, Director of the Texas Public Policy Foundation’s Center for Economic Freedom, will speak at the Heritage Foundation on Thursday, October 18^th.

The Heritage Foundation and Competitive Enterprise Institute will convene experts and political leaders from around the country to discuss America’s fast changing property insurance environment. Particularly in the hurricane zone that stretches from Texas to South Carolina, homeowners have paid ever-higher homeowners’ insurance rates as government-backed insurance entities have grown ever larger.

This conference will focus on ways that the United States can retain a vibrant, private insurance industry that provides rationally priced insurance for everyone without placing an enormous burden on taxpayers. Mr. Peacock will share his research and assessment of the Texas property insurance market, especially related to windstorm coverage.

The conference will take place on Thursday, October 18^th between noon and 3 p.m. CDT. Mr. Peacock will present on the first panel, which is expected to begin around 12:40 p.m. The event will be webcast on the Heritage Foundation’s website, http://www.heritage.org/press/events/index.cfm.

WHAT: “Making Property Insurance More Affordable for Everyone: What Private Companies, State, Local and Federal Governments Should Do”

WHEN: Thursday, October 18, 2007
12:00 – 3:00 p.m. (CDT)

WHERE: The Heritage Foundation – Van Andel Center
214 Massachusetts Avenue, NE
Washington, DC

The Texas Public Policy Foundation is a non-profit, free-market research institute based in Austin.

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TPPF COMMENTARY: Consumer Sovereignty

Government has a hard time letting go of certain decisions. Over the last several years, regulators and policymakers have shown support for allowing consumers to exercise more choice regarding the products they purchase -- at least until they don't like the choice those consumers make. In this week's commentary, Bill Peacock, Director of the Foundation's Center for Economic Freedom, looks at recent events in the Texas insurance and electricity markets and articulates why government needs to trust consumers and leave well enough alone.

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Consumer Sovereignty

Time to Bring Consumer Regulation into the 21^st Century

By Bill Peacock

“Many people want the government to protect the consumer,” said the late economist Milton Friedman. “A much more urgent problem is to protect the consumer from the government.”

Friedman’s words particularly ring true regarding the Texas insurance industry.

Since World War II, regulation of insurance has been justified in the name of ensuring “affordable” prices. Experience, however, shows that regulation has led to wild swings in prices and availability.

States like Illinois and South Carolina have proven that a modernized regulatory approach focusing on fairness (ensuring that the cost to a policyholder reflects his level of risk) and solvency (ensuring that companies have the financial resources to pay claims) in lines such as auto and homeowners’ insurance creates a more stable and healthier industry. Since their reforms, both states have seen more companies enter the market, stable rates, and smaller residual markets.

A study that compared Illinois’ auto insurance market to other comparable states found Illinois to have more predictable “rate levels, lower consumer prices, the highest number of insurance carriers in the nation, and a low number of uninsured drivers.”

Texas insurance regulators, however, operate as though none of this has taken place.

This summer, the Texas Department of Insurance rejected or threatened to reject three rate filings by two different insurers. And this week, they are preparing to “crack down” on affiliated business arrangements—where one company owns or controls another and is in a position to refer business to the controlled business—in title insurance, ignoring the obvious efficiencies gained by such arrangements.

This approach to regulation turns on the notion that without government oversight, insurance companies will take advantage of consumers. They make this assumption based on the fact that a few insurers tend to serve the majority of the homeowners’ market, and thus can exercise “market power” over consumers.

If competition was working in the homeowners’ market, critics contend, more people would have left the larger providers and chosen providers that offered lower prices. They claim the existence of consumers sticking with higher prices is proof that consumer choice is not readily available; thus consumers need protection from the larger companies who are profiting at their expense. Of course, no standard is ever offered for how much business the large firms should lose before competition is considered optimal.

This was the same rationale that drove the debate on electric re-regulation during the last legislative session. Market opponents said the market share of TXU in conjunction with higher prices was proof of their anti-competitive behavior.

But it has only been recently that the attempts of a company to take market share from its competitors have been deemed anti-competitive. In more lucid times, companies increasing their market share were seen as being aggressive, and consumers who stuck with such companies were given credit for being sophisticated buyers.

Research examining online “consumer stickiness” shows consumers sticking with one provider in the presence of lower prices elsewhere can be an indicator of a healthy, highly-competitive marketplace. While the Internet allows consumers to search and frequently switch to alternative providers, “branding, awareness, and trust” make consumers willing to pay higher prices to retailers that they have previously dealt with.

Consumers reign supreme in the marketplace. Nobody forces consumers to buy electricity, insurance, or cell phones from a particular provider—unless it’s the government restricting availability via regulation, as it has done with telephone and electric service in recent times.

Every time consumers buy insurance or pay their electric bill, they signal that they have made an affirmative choice that satisfies their individual preferences. If the price and product is good enough for consumers, it ought to be good enough for the government as well.

Bill Peacock is Director for the Center for Economic Freedom with the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. He may be reached at bpeacock@texaspolicy.com.

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Texas consumers will benefit from modernizing insurance market

FOR IMMEDIATE RELEASE

August 28, 2007

Texas consumers will benefit from modernizing insurance market

Paper recommends shift of TDI focus from rate regulation to fairness and solvency

AUSTIN – The focus of the Texas Department of Insurance (TDI) and other Texas policymakers on rate regulation has been misguided and damaging to Texas consumers, according to a new paper released today by the Texas Public Policy Foundation.

“The marketplace for both homeowners’ and windstorm insurance is not being allowed to meet the needs of Texas homeowners or investors,” said Bill Peacock, Director of the Foundation’s Center for Economic Freedom. “Without meaningful reforms and a new focus at TDI, it will be Texas taxpayers and consumers who will foot the bill for these harmful policies.”

The paper, “Modernizing the Texas Insurance Marketplace,” recommends four actions that would improve the competitiveness of Texas’ insurance market:

* Implement a regulatory emphasis on fairness and solvency at TDI: Because TDI’s regulatory focus has remained on subjective notions of “affordability,” the market-oriented “file-and-use” system has turned into a de facto prior approval system that will cause long-term harm to the homeowners’ market. TDI should allow rates to be observed in the marketplace in order to more accurately assess fairness, and redirect its regulatory resources to ensure that insurers have enough reserves to cover potential claims.

* Completely deregulate homeowners’ insurance rates in Texas: Illinois has completely deregulated insurance rates and focused its insurance department on insurance solvency and market conduct. As a result, Illinois has a “healthy, stable, and thriving marketplace that benefits consumers.”

* Allow Texans to purchase insurance from companies licensed in other states: Legislation to allow interstate commerce in health insurance was filed last year in the U.S. Congress. Adopting a similar principle here in Texas would present some logistical challenges, but ultimately would increase competition and shift regulatory costs away from Texas taxpayers.

* Adopt the concept of an optional federal charter: This proposal would allow insurers to opt for either federal or state regulation, as is currently done in the banking industry. Federally licensed insurance carriers could sell a product in any state, while a state licensed carrier could sell in those states in which it is licensed. A recent study on the optional federal charter conservatively estimated that it would reduce costs for life insurers by more than $5.7 billion per year.

“Insurance regulations are wasteful, produce higher industry costs, delay innovation, reduce competition, slow the introduction of new products to the market, and build operational inefficiencies into the insurance carriers,” Peacock said. “Texans will be better off without the regulations and those side effects.”

The Texas Public Policy Foundation is a non-profit, free-market research institute based in Austin. The paper can be downloaded through this link or via the Foundation’s website, www.TexasPolicy.com.

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