High Gasoline Prices—A Perennial Problem or a 2005 Anomaly?
As March Madness draws toward a close and the best basketball teams for 2005 emerge, attention is being focused to a greater extent on America’s favorite pastime. I’m not referring to baseball, the game that traditionally is given that moniker. Instead, I’m talking about another love affair of the American public—the automobile and the road trip. Interest in baseball will undoubtedly increase during the summer months, but statistical data on games and players face the possibility of being eclipsed by reports related to high fuel costs. Let’s just hope we don’t end up needing A-Rod’s paycheck just to fill our tanks.
The US, European, and Japanese economies are healthy again, and China is exhibiting its economic prowess. As a result, world oil demand is increasing at the fastest pace in some 16 years. Mix with these facts various weather-related problems, the weakening of the US dollar, trader speculation, and continuing tensions in the Middle East, and you get rising gasoline prices.
Gasoline prices are normally slightly more every spring and summer when demand soars thanks to the greater number of motorists on the open road. These seasonal fluctuations in the cost of powering our cars and trucks have come to be expected and are passively tolerated, with hopes that the end of the summer driving season will lead to a drop in prices. In short, higher fuel prices this time of the year have seemingly become a way of life, just something to deal with as a part of our normal existence.
However, this year’s spike goes far beyond the usual. Average gasoline prices in the Lone Star State have seen a 35.8 cents per gallon hike over the last year. Nearly 83% of that increase, or 29.6 cents, has occurred during the past three months. The average price in Texas is now over $2.00. Even so, our lives are intricately related to personal mobility, much of which is associated with automobiles and motor fuel, and demand for gasoline over the past month was about two percent above the same period last year when costs were substantially lower.
News out of the Middle East indicates falling prices are growing less likely. For the first time in the 45-year history of OPEC, several of the cartel’s ministers are claiming that they have lost control of oil prices. Our nation uses about 20 million barrels of oil a day. Even if we completely drained the country’s strategic petroleum reserves and refused to import any oil, in less than two months we would have to begin relying on foreign sources again.
Domestically, it’s true that improved technology is allowing us to pump more oil from existing wells; rigs are also now dotting the landscapes in many new areas in Texas and elsewhere. Renewable energy is also on the rise. Drilling in Alaska, which recently received Senate approval, will undoubtedly enhance our self-reliance, but it has been estimated that it could take up to 10 years to reach maximum production from the Alaska National Wildlife Refuge (ANWR). During that decade, demand growth could easily offset the rising output.
Still, US refineries are being stretched to meet continually expanding demands. Increasing capacity within the industry will not solve the problem completely as refining is a complicated and long drawn-out process. The differences in crude properties and the flexibility of refineries affect the amount of gasoline, as well as the blend, that can be processed.
Demand for oil is squeezing the ability to supply the amounts required. Even when the summer driving season slows down, the need for motor fuels and heating oils is not expected to decline greatly.
The roller-coaster gasoline price ride we are on today is certainly not enjoyable, though most of us will simply endure because we are not willing to change our habits by joining carpools or using public transportation. Long-term high prices, however, will impact our behavior and, with it, our economic potential.
posted @ 08:57 AM CST [link]
Friday, March 18, 2005
Sausages
There is an old axiom that I have seen attributed to several prominent personages over the years. It says that “Laws are like sausages; it’s best if you don’t see them being made.” That little truism was brought home to me in a couple of ways over the past week or so. First, in doing some research, I ran across a description of how sausage is made for the school lunch program. It’s not pretty. Second, I was involved in the process of how House Bill 3, the revenue-neutral piece of property tax reduction legislation that is part of school finance reform, was narrowly approved by the Texas House of Representatives. It wasn’t pretty, either.
There has been a chorus of criticism of this bill, full of sound and fury and accusations of massive new “job killing” taxes. All of this brouhaha is misplaced. What critics are losing site of is the fact that no new revenue is being raised! It is a tax swap, not a tax increase. School property taxes would go down by $0.50 per $100 valuation and the franchise tax, a very unstable and unfair levy that penalizes capital investment, would be eliminated entirely. The revenue had to be replaced with something, and the House opted for a low-rate, broad-based payroll tax, a modestly broader and higher sales tax, and a few other odds and ends that make the numbers work. This approach is far from perfect, but it would definitely move us in a better direction in terms of modernizing and improving our tax system in Texas. It would also stimulate investment, which is the key to long-term employment growth.
More important than the specifics, however, is the process. It is a constitutional requirement that tax bills in Texas originate in the House. It is a large and diverse body with a strong philosophical bent toward limited government (which is generally a good thing). By its very nature and composition, it has difficulty passing a tax bill. If it fails to do so (as in last year’s Special Session on school finance), the whole game is over, and the courts end up deciding how to fund public education. The end result is that any bill is going to be the product of much debate, compromise, and gnashing of teeth. The job of the House at this point was to present a reasonable plan and keep all of us in the game. The members worked very hard, and they did well. The critical thing that happened was that a “real” bill was passed which can now move the sausage-making over to the Senate. The job of the House at this point was to present a reasonable plan and keep all of us in the game. The members worked very hard, and they did well. The leadership by House Speaker Tom Craddick, Ways and Means Committee Chairman Jim Keffer, and others should be commended in this regard. They succeeded where others failed.
Now, attention will focus on the Texas Senate, a smaller and more deliberative body. There will be other ideas floated, new approaches considered, and the emergence of a bill that may bear little resemblance to House Bill 3. There will then be a Conference Committee to hammer out the final measure, and the Governor, because of veto power, will be brought in as well. We can hope that the Senate takes the House version and improves on it and then final negotiations make it even better. This mechanism has worked before on many occasions.
Ideally, what all of us would like from government is great schools, uncongested roads, public safety, excellent water and sewer systems—and no taxes at all! That’s not going to happen. The issues are limited to how can we provide government services in the most efficient manner possible and pay for them in a fair and equitable manner with minimal disruption to private sector initiatives. By definition, a bill that reforms taxes and maintains the same level of revenue will result in some people paying more and others paying less. Those who will pay less can be counted on to celebrate in silence; those who will pay more will scream to the heavens. Therein lies the fundamental dilemma in measures of this nature and the emergence of another political truism—“The only good tax is an old tax!”
In Texas, we can do better than that. We have a unique opportunity to reduce property taxes and simultaneously make our state more competitive for new investment and business activity. To get there, however, we need to lay off the sausage-makers and let them do their jobs.
posted @ 07:57 AM CST [link]
Friday, March 11, 2005
Capping Prosperity
Property tax relief has become a major goal among many Texas legislators and other public officials, business and community leaders, and citizens across the state. The reasons for support may vary, but one point of agreement is that local governments are heavily dependant on property tax receipts for their ongoing operations. More than 80% of all tax receipts to local governments stem from property taxation. For school districts, the proportion is even higher. There are some viable options being discussed, most of which involve broad-based, low-rate levies to reduce dependence on property taxes. Other ideas, however, could be extremely detrimental to our well-being.
Among the most troubling concepts floating around the halls of the big granite edifice involve various forms of restrictive caps on appraisals or property tax receipts that would apply to all local governments (cities, counties, schools, and special districts). Appraisal caps are limitations on the amounts property values can rise each year for the purposes of property tax levies. Currently, Texas has a 10% cap on residential homesteads in place, meaning that the tax appraisal value of such a home cannot rise by more than 10% regardless of market values. One proposed measure would reduce the cap to 3% and apply it to all real property. Another seeks to limit revenue growth to 3%.
Although appraisal caps may have the appearance on the surface of valid methods for reducing the property tax burden, in reality, they involve many undesirable characteristics. Evidence from areas with severe restraints in place demonstrates that they lead to fiscal problems, arbitrary inequities, and detriments to economic progress. In fact, California has created a fiscal crisis of enormous magnitude in the wake of its infamous Proposition 13, and, in Massachusetts, those areas most impacted by caps have actually seen property values decline in moderation.
By restricting the capacity of local governments to provide services, appraisal caps, revenue limits, and expenditure limits (another variation on the theme that is also discussed at times) lead to a reduction in the quality of life and economic performance of the state. If infrastructure investments are delayed, for example, productivity suffers. If school districts are unable to raise funds to meet their needs, educational quality declines. In addition, local governments are forced to operate in a less efficient manner if they are compelled to deal with perpetual fiscal crises.
The end result is a deviation from the optimal growth pattern for local areas and, hence, the economy as a whole. Some of the major channels through which these effects are manifested include the following.
Texas cities and counties vary markedly in their characteristics, their needs, and their capacity to generate tax revenue under various structures. Another problem is that property values are particularly prone to cycles, both in the general economy and in the real estate market. When revenue or appraised values drop, the new, lower level becomes the base from which future expansion is calculated. A tax structure that resets the base at the trough of every cycle will inevitably fail to adequately provide for local needs over an extended time horizon.
Appraisal caps and revenue limitations bear no relation to the legitimate demand for costs of public services provided by local governments. Revenue limitations do not account for demographic shifts, industrial development, and other factors that legitimately impact the demand for public services. In particular, they constrain the capacity of high-growth regions to meet public service and expanded infrastructure needs.
A limit on the flexibility of local governments to change tax rates in response to needs specific to their areas will clearly inhibit their capacity to respond to the requirements and priorities of their residents. Empirical studies indicate that property values are depressed by appraisal caps and revenue/expenditure limitations because the quality of local services declines.
Appraisal caps and revenue and expenditure limitations also adversely impact bond ratings, thus limiting the ability to meet vital infrastructure needs and raising the cost structure of local governments. Bond ratings agencies analyze outstanding debt and the capacity to raise additional funds in assigning ratings. To the extent that local governments fail to measure up as well along these parameters, bond ratings will be affected, thus restricting the ability to use such debt vehicles and increasing their costs.
Limitations on appraisals distort market outcomes and create systematic inequities among taxpayers. The timing of the purchase of a real estate asset can be the driving factor in the total tax bill rather than the underlying value of the property. They also tend to be regressive, with those in disadvantaged neighborhoods where market values are growing more slowly subsidizing those who are more fortunate.
Appraisal caps discourage real estate market activity and new home purchases. Caps on assessed values also introduce a disincentive to buy and sell property if a sale/purchase results in a significantly higher tax appraisal. They also penalize business startups; in an appreciating market, valuation change limitations benefit existing property owners at the expense of new buyers.
All of this is bad news for the economy. My firm recently studied the issue and found that a 3% appraisal cap would cause a reduction output in the state each year of between $2.1 billion and $2.4 billion. In terms of jobs, between 32,175 and 38,037 positions could be expected to be lost due to the shrinking quality of local services and infrastructure and the resulting effects on productivity. The effects of a 3% revenue cap are over twice that high. Moreover, the losses reflect only the declines in private sector productivity as a result of inadequate public services. The economic development consequences are even more severe.
There is no doubt that the current Texas tax structure, particularly the high degree of local government reliance on property taxes, is in need of reform. It is not keeping pace with the demand for funds and it is dampening economic performance. However, it is crucial that any changes implemented represent real improvement, rather than illusory gains at the cost of future well-being.
While property tax rate reductions and corresponding shifts to a more equitable and efficient funding mechanism for public schools and local governments will notably improve the fiscal structure of the state, such initiatives must be accomplished without introducing further, and particularly more serious, problems. There are proposals surfacing which represent notable mechanisms for improving the tax system in the state. These efforts should not be accompanied, however, by the introduction of the additional and compounding problems associated with severely reducing local government resources and flexibility.
In summary, artificial limits on the ability of local governments to provide for the legitimate and expanding requirements of their citizens are contrary to basic economic principles of optimality, can generate substantial inequities, and needlessly reduce the capacity of local governments to function effectively and efficiently. Our future prosperity can ill afford the consequences.
posted @ 07:56 AM CST [link]
Friday, March 4, 2005
And Then There Were Three—A Perspective on Electric Competition
It’s been just over three years since Senate Bill 7 (SB7) introduced competition into the Texas retail market for electricity. Let’s take a look at what’s happened since January 1, 2002, the effective date of SB7.
Some 85 retail electric providers have been certified, and 55 are currently supplying service. New providers continue to enter the market and offer customers various cost savings plans plus a variety of options.
The performance of the Electric Reliability Council of Texas (ERCOT) wholesale market has improved. As a result, customer complaints related to electric services have declined notably.
SB7 mandated 6% savings for residential and small commercial customers of incumbent providers. Competition has yielded significantly better results.
About 1.5 million requests to switch providers have been processed over the past three years. Approximately 18% of residential customers and a quarter of commercial and industrial customers are now receiving service from non-affiliated providers.
More than 50% of the megawatt-hours sold to small commercial customers and almost 70% of the megawatt-hours sold to large commercial and industrial customers have been through non-affiliated retail electric providers.
In addition to the savings to customers, the opening of the retail market to competition has also led to a substantial increase in facility construction.
Renewable energy capacity grew during the past year, and investment in electricity generation is continuing as new plants are added to the total capacity. These plants are replacing older, less efficient facilities. Utilities are also increasing efforts to reduce emissions.
Nearly 554,000 Texans have enrolled in the low-income assistance program. Accountability for the program has been strengthened.
The level of competition in the retail segment has grown by virtually every measure and has resulted in significant gains in business activity across the state. With the emergence of competitive market forces, customers have gained more freedom to engage in negotiation with power providers.
In some cases, customers have banded together through aggregation programs to save more than they could individually. As a result, these cost savings free up dollars for other purposes, such as saving, investing, and spending, thereby benefiting the Texas economy.
Public sector entities such as cities, counties, and school districts are saving millions of dollars as a result of deregulation. As more municipalities, school districts, and other public sector organizations switch to lower cost providers or join purchasing groups, these effects will increase markedly.
It’s true that prices for electricity have risen, but the uptick stems from dramatic increases in the cost of natural gas rather than any failure in the competitive marketplace. In fact, prices in non-competitive areas exceed those of the independent retail electric providers. Reliable and cost competitive electricity is a significant economic development advantage. Along with the savings experienced by residential customers, commercial and industrial customers are enabled to compete more effectively in national and global marketplaces.
The positive outcomes after three years of deregulation offer compelling evidence of the effectiveness and efficiency of the Texas market. The economy of Texas is far better off because of SB7 as tens of thousands of jobs have been created through the additional business activity sparked by cost savings resulting from deregulation. In fact, my recent analysis reveals economic gains of $5.3 billion in annual total expenditures, $2.6 billion in gross state product, $1.4 billion in yearly personal income, and about 30,000 permanent jobs.
It is evident that the opening of the retail market to competition was a well-conceived and highly effective public policy decision. It is clearly proving to be an avenue of significant value to all Texans.
posted @ 08:43 AM CST [link]