We Got it Right the First Time
Competition is a very good thing for consumers and the economy. As firms strive to gain market share, the result is innovation, lower prices, increased efficiency, and myriad other improvements. Introducing competition has led to enormous benefits for consumers in the areas of airlines, trucking, and natural gas.
The Texas market for retail electric power opened to competition as of January 1, 2002, and by any standard, the move to competition has been a resounding success. In fact, the pace has far exceeded that in other industries, such as telecommunications, over the same timeframe.
The state economy has clearly benefited, with competition presently linked to the creation of more than 28,900 jobs in the state. There is also compelling evidence that competition is flourishing.
New providers continue to enter the market, offering customers cost savings and a variety of options. As of October 2004, residential customers had between seven and 12 provider choices. Moreover, surveys indicate that virtually every customer is aware of the fact that they have a choice and most can even name one or more competing firms.
More than 1.5 million requests to switch providers have been processed, and 18% of residential customers receive service from non-affiliated providers. Savings have been realized and continue to grow, with competitors offering significant savings of 15 to 20% from the mandated Price to Beat rates.
Commercial and industrial customers have switched in large numbers, with over 50% of the megawatt-hours sold to small commercial customers and almost 70% of the megawatt-hours sold to large commercial and industrial customers consisting of service through non-affiliated retail electric providers. The availability of less costly power has improved the competitive position of Texas businesses and aided in economic development.
In short, Texas is widely recognized as the healthiest and most successful market for retail electricity in the US and, in fact, one of the best in the world. Competition has led to cost savings, more innovation among providers, greater choice for customers, and additional capacity to ensure sufficient power in the future.
Even with these extremely positive outcomes, however, proposals have surfaced which threaten to derail progress in the marketplace.
One of these involves municipal opt-out aggregation. Texas law already allows for opt-in aggregation, which means that political subdivisions such as cities or counties can negotiate and purchase energy on behalf of their citizens if the citizens request to be included in such groups.
By contrast, opt-out aggregation essentially forces citizens to buy power from the company of the municipality’s choosing unless you, the customer, specifically ask to be excluded.
In effect, this opt-out approach represents a reduction in consumer choice, the very essence of competition. It also discourages retail providers from aggressively pursuing businesses in these areas, thus slowing the progress of the past three years and limiting opportunities for lower prices and innovations.
These actions also introduce uncertainty into the marketplace --affecting investment levels and the return on investment and adversely affecting the entire process of providing power to Texas consumers and businesses.
In particular, municipal opt-out aggregation can lead to sudden and substantial loss of customers to existing retail providers. Recent empirical analysis by my firm reveals that such restrictions risk substantial losses to the economy that far outweigh any measured short-term gains.
In short, significantly changing the rules at this stage creates arbitrary losses for some, arbitrary gains for others, and greater instability for all -- all at a greater cost to consumers.
Moreover, municipal opt-out initiatives stand to reverse the very promising directions of the industry—toward greater choice and lower prices.
The Texas system is working remarkably well by any measurement. But, ill-conceived notions -- such as implementing municipal opt-out aggregation -- could slow or stop progress to the detriment of all Texans.
The Texas Legislature got electric competition right the first time around; now is the time to stay the course.
posted @ 08:02 AM CST [link]
Friday, April 22, 2005
Red Letter Day
Last week marked the passing of one of many Americans’ least favorite days—April 15th. Whether you wrote a check or expect a refund, dealing with federal income taxes is no picnic. While the need for government services and, thus, tax revenue to Uncle Sam is beyond question, the taxes should be carefully crafted to minimize the damage to the economy. Surveys indicate that many Americans feel the amount of tax they pay is reasonable, but virtually all find fault with the complexity of the process.
The roots of the income tax go all the way back to the Civil War, when President Lincoln and Congress created the tax to pay war expenses. That law was repealed 10 years later, but incomes were a source of funds for government coffers too tempting for politicians to resist, and the income tax was later revived. Since the original enactment, the tax code has become complicated by layers upon layers of revisions and additional regulations. Most of these quirks came about with the very best of intentions, but in the aggregate, they lead to a system that even Internal Revenue Service hotlines often can’t sort out.
Requesting delays or just waiting until the April 15th midnight deadline may have a variety of causes, but many people complain about the complexity of the forms and indeed, the entire system. There seem to be new wrinkles in the tax code every year, and just keeping up with them is a major job. Millions of people are not sure how to calculate what they owe; others need more time to compile their information or squeeze in some of the new deductions allowed by the law—from sales taxes to Tsunami relief contributions, as well as myriad others.
Attempts have been made over the past several years to make it easier for people to file their taxes. Included are new software programs that check your math and prompt you on possible deductions, as well as e-file, direct deposit, and e-payment programs. And, of course, nowadays it seems there is an abundance of tax-savvy accountants ready to assist. Proposals for other, more sweeping overhauls surface periodically (such as replacing the income tax with a levy on consumption or value added), but have yet to gain sufficient support to stand much of a chance of becoming law. Some of these proposals have clear advantages for the economy, and we can hope they will eventually be seriously considered. In the meantime, we’re stuck with making the best of it.
E-filing has proven particularly helpful. Last year, some 42.5 million Americans filed electronically (either by phone or Internet), up 75% over a year prior. About 4.6 million of those were Texans, which is almost 30% of all state residents. This year, the electronic systems continued to gain popularity, with e-filed returns up some 8% as April 15th approached. Internet-based resources maintained by the IRS provide key forms and a wealth of information on how to file them. But no matter how great the tools are, they must function for the same highly confusing process.
The total gross collection from Texas last year was $152.69 billion, which represented 7.56% of the US aggregate. The IRS returned over $22.03 billion of that amount to the citizens of our state. Recently released data compiled from 2002 returns shed light on how this burden is divvied up. The income tax is designed to be progressive, meaning that those with greater incomes pay a larger proportion.
Specifically, the top 25% of taxpayers (those with adjusted gross incomes in excess of $56,401) paid 84% of all taxes, while earning only 64% of income. The bottom 50% (with adjusted gross incomes of less than $28,654) earned about 14% of income and paid a little more than 3% of tax.
Millions of American families were dropped from the tax rolls entirely thanks to recent tax cuts. For many, withholding throughout the year was sufficient to lead to a tax refund. For others, April 15th (which also happens to be my mom’s birthday) was a red letter day indeed.
posted @ 08:01 AM CST [link]
Friday, April 15, 2005
Pain and Gain
Various alternatives have been proposed which seek to provide much-needed restructuring of the Texas tax system and otherwise provide additional funds for education and other budgetary priorities. I have extensively analyzed a wide variety of key proposals with regard to their equity, efficiency, and growth potential. One set of proposals, expanding the legal gaming options available in the state, represents an alternative that both stimulates business activity and provides substantial revenue. The hearing process on these measures has begun, but they face a difficult and uphill battle to get the two-thirds votes needed to end up on the November ballot. In my opinion, based on years of studying the issue around the country, we should get the chance to decide.
Casinos and related activity could be expected to bring billions into state coffers. Even if Texas is only half as successful as relatively comparable states with casinos (adjusted for demographics) in attracting spending from persons from other locales, the economic stimulus is huge (almost 187,000 new jobs plus billions in business activity during the construction phase). In all probability, the true impact would be substantially higher.
Another proposed enhancement of gaming options is to allow video lottery terminals, an extension of the existing Texas Lottery, to operate at the licensed racing locations within the state. Adding VLTs at racetracks would also lead to significant economic stimulus. Once fully operational (around mid-2006), this expanded amusement offering would generate net contributions of some 26,073 jobs.
The chief arguments against implementing gaming deal with the costs to society of problem gambling, increased crime, and related drawbacks. While the issue of the social costs associated with gaming is certainly legitimate and worthy of full and serious discussion, it should be properly focused. The evidence I’ve seen suggests that the incidence of problem gaming and adverse social consequences are not materially or systematically different in states that permit casino gambling from those that do not. Texans, for example, presently have opportunities in the form of the lottery, eight liners, racing, Internet gaming, and casinos in nearby states (to name only the most obvious categories). Citizens of the Lone Star State spend billions of dollars each year in these types of activities, much of it in Louisiana, Oklahoma, New Mexico, and other states. Moreover, the profiles of those who participate in casino gaming indicate they tend to exhibit educational and income levels above national averages. Thus, this type of activity is not regressive in its incidence like many alternative forms of gaming and other elements of the Texas revenue structure.
Similarly, crime rates in areas with casinos do not rise any more than tends to be the case with any form of increased tourism, and regulatory oversight can eliminate any other concerns. Simply stated, there is evidence that Texas is already bearing the social costs associated with gaming while not enjoying the far more significant positive stimulus. In fact, Texans are paying hundreds of millions in taxes to other states and supporting thousands of jobs elsewhere.
From the standpoint of consumer welfare, casino gaming is clearly warranted. National surveys overwhelmingly indicate that casino gaming is desired by a substantial majority of the population. Moreover, a local option process of the type proposed allows voters to make the ultimate decision and, thus, permits interested parties on all sides to have a full and fair hearing and specific community concerns to be adequately addressed at the area level. I have been involved in numerous projects in which voters have been allowed to decide about the location of sports and entertainment venues. Some of these initiatives have passed, others have not. Without exception, however, there has been vigorous debate on community priorities.
Virtually all options available to significantly raise fiscal revenues for public education, property tax relief, or other worthy public purposes implicitly involve a net extraction from the private sector. Every major current or potential revenue base—be it property, sales, income, payrolls, business activity, or gross receipts—removes funds from consumers or businesses in order to provide for public needs. Gaming is unique in that it permits “voluntary” payments by those who desire to purchase a particular form of recreation. It actually stimulates private-sector spending and, by decreasing the percentage of public revenues that must be extracted through involuntary taxes, enhances the business climate and competitiveness of the state. Additionally, as an ongoing source of State revenues, gaming offers excellent stability and growth properties. As an example, during the recent downturn when the state and local tax bases in Texas suffered substantial contraction, casino gaming in the US, and the tax revenues derived there from, demonstrated consistent growth.
Responsible gaming clearly merits careful consideration in the ongoing efforts to promote statewide economic development, job creation, greater prosperity, new governmental revenues, and more competitive tourism in Texas.
posted @ 07:59 AM CST [link]
Friday, April 8, 2005
Texas-Mexico Ties
The inter-related nature of the economies of Texas and Mexico is beyond question. Trade represents a crucial source of business activity for virtually all regions of the US, particularly Texas. Strong cultural and familial ties link Mexico with the border region and beyond. The flow of goods and people is vital to the ongoing economic health of families, corporations, cities, regions, and states.
Thousands of Mexicans cross the border every day to shop in retail outlets in the US. Other Mexicans cross the border (and legally stay) to work, and many affluent Mexican families send their children to US schools. Mexican citizens are also a substantial element of the housing market in several border communities. In fact, empirical evidence indicates that many US border cities are actually more dependent on economic conditions in Mexico than in the US.
Key facets of these linkages are the maquiladora plants, which are important to both the Texas and Mexico economies. Maquiladoras came into existence along the border in the mid-1960s. Originally, the plants were permitted to import parts, equipment, and other supplies free of tariffs as long as their output was exported back to the US. In this way, the relatively low-wage Mexican labor force could be utilized for activities such as final assembly and other labor-intensive work. While NAFTA changed these dynamics to some degree by eliminating most of the tariff considerations, the differences in the US and Mexican workforces and business climates continue to offer benefits to plants located proximate to the border.
According to a report by the El Paso Branch of the Federal Reserve Bank of Dallas, in 2001, there were 3,735 maquiladora plants employing almost 1.3 million people. However, the facilities were hit hard by economic downturns in the US and Mexico, as demand for their products fell. Between 2001 and 2003, employment levels dropped by more than 18% and an estimated 280,000 jobs were lost. More recently, employment has rebounded for these plants, and in the past year, almost 45% of the lost jobs were recouped; nearly 74,400 jobs (7.1%) were added along the Mexican side of the border and approximately 21,000 were added on the Texas side.
The effect of these operations is apparent on the Mexican side, with nearly 78% of maquiladora employment originating from the northern, neighboring states. From the perspective of Mexico, these jobs represent high-paying manufacturing positions, and the border cities on the Mexican side are some of the most dynamic in the country. Even though the Texas side of the border experienced rapid growth in population, income, and employment through the 1990s, the area remains plagued by high unemployment and low income levels relative to the rest of the state. Maquiladora operations and the resulting stimulus to supplier networks and other vendors in Texas have led to an increase in opportunities for workers and companies alike.
Maquiladoras have been crucial in the reorientation of the Mexican economy toward growth through export production. Over the past two decades, the share of international trade in Mexico’s gross domestic product has grown substantially. Cities located across the border from each other (such as El Paso-Juarez, Laredo-Nuevo Laredo, Brownsville-Matamoros, and McAllen-Reynosa) have developed symbiotic working relationships in which factors of productivity in one city, such as employment and industry, are mutually beneficial to the other. Maquiladoras are a natural and important outgrowth of these connections.
While maquiladora operations are obviously vital to the Mexican economy, they are also critical to firms on the US side. The movement of goods and people across the US-Mexico border is crucial to the economic wellbeing of both nations. Products from Mexico are utilized in plants all over the US, and exports to Mexico originate from virtually every state in the nation. However, Texas is clearly more closely linked to Mexico than any other area. The recent upswing in maquiladora employment is evidence of the continued viability of such operations. While they are dependant on business cycles in the US and Mexico, maquiladoras offer substantial benefits to communities on both sides of the border and are an important element of the global competitive dynamics between the US, Asia, and emerging countries.
posted @ 07:57 AM CST [link]
Friday, April 1, 2005
Meeting the Neighbors
Last week, President Bush sat down with Mexican President Vicente Fox and Canadian Prime Minister Paul Martin in Central Texas. In formal meetings at Baylor University and later at Bush’s ranch in Crawford, the leaders discussed issues confronting North America. Although there are disagreements on some topics, the relationships among the countries remain strong. It is virtually impossible to overstate the crucial nature of these ties to our northern and southern neighbors, and it is heartening to see these three men meeting face to face and pledging a new “security and prosperity partnership.”
First, about security. The 9/11/01 terrorist attacks served as a catalyst for a renewed focus on homeland security. Clearly, few vulnerabilities are more pronounced than the thousands of miles of borders we share with Canada and Mexico. The US-VISIT initiative incorporates many new security measures, but is by no means perfect. Ongoing cooperation is essential to try to solve problems related to border crossings. In addition, shared intelligence and an attitude of securing North America from external threats may well make more sense than focusing on the US alone. At the same time, we must be careful not to let programs aimed at safety ripple economic cooperation and interaction. A study that I completed a few months ago revealed substantial reasons for concern about limiting economic progress by unduly constraining border crossings.
Speaking of prosperity, the economic ties between the US and Canada and Mexico run deep. For Texas, the Mexican relationship is particularly crucial, given proximity and the cultural and familial ties that span the border. Maquiladoras continue to serve as important sources of economic growth, but that’s a topic for another day.
Texas is now the leading exporting state, with some $117.2 billion in exports in 2004, up 18.6% over 2003. In 2004, the Lone Star State accounted for 14.3% of the US total. Mexico is far and away the state’s most important trading partner and Canada is a strong second. Together, these two nations absorb half of Texas exports. Since the implementation of NAFTA, trade volumes with Canada and Mexico have essentially doubled since 1994 when NAFTA’s provisions began to take effect.
Texas exports to Mexico in 2004 totaled more than $45.7 billion (of a US total of $110.8 billion in exports to our southern neighbor). Key export goods include computer and electronic products, chemicals, and nonelectrical machinery. Six of the top 10 land ports between the US and Mexico are in Texas, including the largest by a wide margin—Laredo, with $78.8 billion in trade in 2003.
Texas’ exports to Canada are also substantial. In 2004, the total value of goods shipped to that nation was $12.4 billion. Key product categories were computers, unshaped plastics, and organic chemicals. Other important Texas export markets include South Korea, China, Taiwan, Singapore, and Japan.
Differences in the regulatory climate and business practices in the three countries constrain growth in all to some degree. Financial regulatory standards, for example, complicate matters for international operations. While the North American Free Trade Agreement (NAFTA—which, by the way, recently passed its 10-year anniversary) solved many problems and has contributed to substantial growth, there is still work to be done. Standardizing visa requirements and inspection rules would help. Eliminating certain remaining tariffs would also be a plus.
Problems remain, and these need resolution before they become major stumbling blocks. Canada takes issue with the US stance on importing that country’s beef and certain lumber products. Mexico is frustrated by US immigration laws, attempts by US citizens to patrol borders, and a wall that is going up south of San Diego. Even so, all three countries recognize the interdependent natures of their prosperity and security. It is in the interest of every American to support these relationships. Let’s hope the time spent here in Texas helped strengthen the bonds.
posted @ 08:14 AM CST [link]