On Friday, U.S. Reps. Henry Waxman (D-Calif.) and Bart Stupak (D-Mich.) sent a letter to AT&T and several other companies requesting that they verify that the health care bill’s passage will indeed cost the corporations additional expenses. This came after AT&T, which employs 9,000 people in the St. Louis area, said it would record a $1 billion non-cash charge during the first quarter of 2010 because of the tax changes associated with the bill. Under the new law, companies will continue to receive a tax-free subsidy of 28 percent on programs to provide their employees with prescription drug benefits, but they will no longer be able receive the double benefit of deducting the value of the subsidy on their taxes. AT&T said that they will evaluate possible changes to the active and retiree health care benefits offered by the company.

So, let’s recap: The United States Congress passed a bill that makes tax changes. Those tax changes will by design affect corporations’ balance sheets and generate more revenue for the government. When corporations inform the public of these effects, members of Congress request verification of the accuracy of these effects, merely because they contradict what the legislators expected and said would happen.

In the letter, the congressmen state that the bill is “designed to expand coverage and bring down costs,” which makes AT&T’s claims “troubling.” The key word here is “designed.” The legislation may indeed have been designed with the intention of reducing costs, but that doesn’t mean it will actually have that effect when implemented. The letter also cites reports from the Congressional Budget Office and the Business Roundtable projecting that premiums could decrease during the next six to 10 years as a result of the reforms. The report by the Business Roundtable says that “if enacted properly, the right legislative reforms could potentially reduce [premiums] by more than $3,000 per employee” (emphasis added). So, this depends on the right reforms being enacted in the proper way (which we know almost never happens), and then premiums could potentially be reduced. The congressmen neglect to mention in their letter that this report also has a section titled “Risks Could Jeopardize Cost Reductions,” which points out that revenue raisers such as a “high-cost” tax could make health insurance costs worse for affected plans and employees.

The worst thing about this is that the government is asking a private company to explain its accounting, something they have no authority to demand. Beyond filing their taxes accurately, AT&T has no obligation to the government to explain itself, only an obligation to its shareholders. The shareholders are perfectly capable of “verifying” the company’s financial information on their own. The congressmen’s request that AT&T justify the increase in expenses reflects the apparent unwillingness of many legislators to acknowledge the unintended consequences of their legislation.

A decade ago, education expert Dr. Jay P. Greene published a study for the Mackinac Center for Public Policy in Michigan about the direct costs of developmental (or remedial) education for colleges and industry. His conservative estimate then was that developmental education cost Michigan an astounding $601 million each year, and cost the entire United States $16.6 billion.

His figure does not take into account intangibles like lost productivity, college classes that must be taught at a lower level of comprehension, loss of human capital and some mechanization costs that are necessary to circumvent the lack of skill within the workforce (like installing cash registers that automatically dispense change).

The numbers tell a troubling story about the state of public education. The Department of Elementary and Secondary Education in Missouri alone had an allocation of $5.4 billion in 2010; some school districts spend as much as $22,000 per student. Clearly, not all of this money translates into higher educational outcomes. (See below for a map of school district spending per student created by Audrey Spalding.)

Achieving the Dream, a research group focused on improving community college students’ educations, reported that 60 percent of community college students took a developmental course, but that the number of students in need of these courses was undoubtedly higher. Community colleges tend to absorb the majority of remedial class costs, because they often serve as a bridge from high school to a four-year institution.

Community colleges in Missouri received $148,377,417 in appropriations for 2010. How much of this is devoted to remedial education? Michigan colleges devoted an estimate of between 6 to 33 percent of their budgets on remedial courses; if Missouri colleges are at all similar to that, this entails a substantial amount of money being devoted to teaching skills like reading, algebra, and trigonometry that should have been learned in high school.

In February of this year, the agenda for the Coordinating Board of Higher Education created a new Developmental Education Data and Policy Task Force (DEDPT) to quantify this problem in Missouri. Its stated purpose:

Too many freshmen (both traditional and nontraditional) are not adequately prepared for collegiate work.  As a result, substantial numbers of entering students are forced to take remedial coursework to address shortcomings in their preparation and to achieve mastery of the knowledge and skills needed to be successful college students. [...]

The DEDPT was established to work with MDHE staff to understand better the variation in definitions used by different institutions and sectors and to make recommendations for uniform data definitions about developmental students and coursework. This work will better position Missouri to implement strategies to reduce the need for remediation and shorten time-to-degree.

The task force will bring clarity to the true scope of the inadequate preparation being imparted by the public schools in Missouri. This is a good first step, but beyond just mapping the problems, immediate steps can be taken to address these concerns and improve education before the college level. For example, a Show-Me Institute study showed that charter schools have been shown to increase competition and improve educational outcomes. At any rate, Missouri and states across the country are spending far too much money on education for such a large group of students to graduate without acquiring basic skills.

(Jay Greene spoke last month in Kansas City at a Show-Me Institute event about education reform. The audio of his speech is now available on the Show-Me Institute website.)

The Patient Protection and Affordable Care Act was signed into law by President Barack Obama last week, but that won’t stop opponents from continuing to try to shoot it down, or at least shoot holes in it. If you have ever tried to read the provisions of the bill, you know that it is excessively lengthy and wordy, requiring patience and a certain level of commitment to read through in its entirety. Bill sponsors claim the legislation will ensure health care coverage for the 32 million Americans currently living without it, and provide more affordable access to health care. The most central provision, however, is that Americans will be required to purchase health insurance policies.

The signing of the bill has not ended the debate. In fact, it may only be the beginning. House Republicans have already begun fighting the bill, and some have suggested that the Supreme Court may overturn the bill because it violates constitutional provisions. Dave Roland, a Show-Me Institute policy analyst, has written about the potential legal pitfalls that may be faced by the requirement to purchase health insurance.

More information about the final provisions of the bill will undoubtedly become available to the public in the coming days, so that we may better grasp what exactly the bill entails. However, it may well be shot down before it is scheduled to take effect in 2014. We have three years to really understand the changes this legislation will bring.

As Harvard economics professor Jeffrey Miron pointed out at his Obamanomics lecture last week, such intense conflict could be a good thing for the American people. This butting of heads can lead to gridlock, which can help prevent either side from getting everything it wants. Taking into consideration all of the debate and conflict initiated by the bill so far, it may look completely different by the time 2014 rolls around.

Today, the Tax Foundation released its annual Tax Freedom Day Special Report. According to the foundation’s calculations, Missouri’s “Tax Freedom Day” in 2010 falls on April 4. This is the day on which taxpayers will have earned enough money to pay their tax obligations at the federal, state, and local levels for 2010.

Source: Tax Foundation”

Above is a table of Missouri and its border states taken from the report. It indicates that residents of Missouri enjoy a lower tax burden than residents of Illinois, Kansas, and Nebraska. Residents of Missouri have the same tax burden as residents of Iowa, but they have a greater tax burden than residents of Arkansas, Kentucky, and Tennessee.

Last week, the Missouri Supreme Court ruled on the case Klotz v. Shapiro, which challenged the 2005 tort reform legislation and its $350,000 cap on non-economic damages. The court unanimously declared that state caps on non-economic damages cannot be applied retroactively, but did not declare the caps themselves unconstitutional. This is a big victory for both doctors and patients in Missouri, which is one of several states in which caps on non-economic damages have been challenged in the courts. Just the day before this decision came from the Missouri Supreme Court, the Georgia Supreme Court unanimously overturned the pain and suffering caps that were implemented in 2005. Earlier this year, the Illinois Supreme Court also struck down a law that provided for such caps. We are lucky that Missouri did not follow suit.

In 2004, the Congressional Budget Office conducted a review of nine studies that looked at the effects of tort reform. The review notes that studying tort reform is difficult because of the many types of reform and the issue of controlling for differences between states, but it does present some evidence in favor of imposing caps on non-economic damages. Of the three studies that examined this specific type of reform, two found that premiums declined significantly for at least some insurance lines (the other one found no significant effect). These three studies also found that insurers’ profitability increased after the imposition of caps. Contrary to what some politicians may have you believe, this is a good thing. Health insurance profit margins are typically about 6 percent, give or take a few points, which is very low compared to other forms of insurance. Increased profitability for health insurance companies allows for more firms to survive and compete for business, which will drive down costs and make insurance more affordable.

Opponents of caps on non-economic damages would probably point to this same CBO study, which also points out that malpractice costs account for less than 2 percent of health care spending. But this does not take into account the amount of defensive medicine that is practiced by physicians on a daily basis. According to this Gallup poll of 462 randomly selected U.S. physicians, one in four health care dollars is spent on defensive medicine. The study defined defensive medicine as “the practice of diagnostic or therapeutic measures conducted primarily not to ensure the health of the patient, but as a safeguard against possible malpractice liability. This may include tests, prescriptions, hospitalizations and referrals that may not be medically necessary, but are viewed as providing protection from a potential lawsuit.”

As demonstrated by this survey, this is a very real phenomenon. For example, a young female who complains of frequent headaches might get a brain MRI to rule out a tumor, even though she is young and has minimal risk factors. The only way to legally and definitively say that there is no tumor is by using an MRI, even though clinical suspicion is low and does not warrant the scan. So in a case like this (a real example provided to me by a medical student), legal implication trumps clinical judgment, and the unnecessary tests that result then drive up the cost of health care. Caps on non-economic damages mean that doctors can reduce the amount of defensive medicine they practice, because they know they’re not subject to the arbitrary determinations of juries about how much a plaintiff may deserve in compensation. They can instead focus on using their clinical training to make the proper diagnoses and do their jobs as doctors.

Another tangible benefit of imposing caps on non-economic damages is the increased physician supply that occurs as a result. A study published in 2005 looked at the impact of caps on non-economic damages from 1985 to 2000, and concluded that caps increased the per-capita supply of physicians by 2.2 percent relative to states without caps (another study put this number at 2.4 percent; these studies were summarized by the American Medical Association in this report). Missourians will therefore have greater access to care as a result of the court’s decision in this case.

Unfortunately, because the court did not specifically invalidate the plaintiff’s other complaints about the 2005 tort reform bill’s supposed unconstitutionality, the door is open for more challenges in the future. Let us hope that any such challenges are rejected.

Prime Buzz over at the KC Star has a story from the AP about a proposal to eliminate the party symbols from our ballots in Missouri. When I first read the headline, I thought the idea was to remove the words “Republican” or “Democrat” or “Libertarian” from the ballot and expect people to remember who was affiliated with which party. After a full reading, though, it appears that the proposal only entails taking away the pictures of the elephant or donkey that commonly symbolize the major parties. (Question: What is the symbol of the Libertarian Party? I don’t know, but it should be a cat with a lasso around it.)

Removing the party symbols would hardly be a disaster, but I still don’t support it. Simply put, such symbols are an easy and simple way to provide people with voting cues, and this helps people cast a more informed vote. In this instance, the symbols may only be a very minor cue that only provide additional information to a few people, but it is still a cue — and one with negligible costs, at that. For a more detailed analysis of why party labels improve voter information, check out the op-ed I wrote last year about Franklin County’s charter proposal to move toward nonpartisan elections. The overall proposal for Franklin County was fine, but the idea to move to nonpartisan elections was bad enough to rescind my support for the entire proposal.

Thanks to that reliable elephant Combest for the link.

Last month, the CARD (Credit Card Accountability, Responsibility and Disclosure) Act went into effect, after having been signed into law on May 22 last year. One of the fastest-growing problems for Americans is the ever-increasing size of their debt. This comes from many sources — e.g., school loans, mortgages, and credit cards — and this legislation was written in an attempt to curb one significant source.

Credit card contracts have become increasingly complicated and ridden with hidden fees in recent years, as financial institutions have up until now had the freedom to impose such fees and rate hikes without notice or advance consent by the consumer. According to a White House press release issued in May 2009, “Every year, Americans pay around $15 billion in penalty fees.” Legislators hoped their bill would foster transparency, accountability, and responsibility on the part of banks, credit unions, and other financial institutions.

These are some of the CARD Act’s provisions, as summarized by the White House press release:

• Bans Retroactive Rate Increases: Bans rate increases on existing balances due to “any time, any reason” or “universal default” and severely restricts retroactive rate increases due to late payment.
• First Year Protection: Contract terms must be clearly spelled out and stable for the entirety of the first year. Firms may continue to offer promotional rates with new accounts or during the life of an account, but these rates must be clearly disclosed and last at least 6 months.
• Ends Late Fee Traps: Institutions will have to give card holders a reasonable time to pay the monthly bill – at least 21 calendar days from time of mailing. The act also ends late fee traps such as weekend deadlines, due dates that change each month, and deadlines that fall in the middle of the day.
• Enforces Fair Interest Calculation: Credit card companies will be required to apply excess payments to the highest interest balance first, as consumers expect them to do. The act also ends the confusing and unfair practice by which issuers use the balance in a previous month to calculate interest charges on the current month, so called “double-cycle” billing.
• Requires Opt-In to Over-Limit Fees: Consumers will find it easier to avoid over-limit fees because institutions will have to obtain a consumer’s permission to process transactions that would place the account over the limit.
• Limits Fees on Gift and Stored Value Cards: The act enhances disclosure on fees for gift and stored value cards and restricts inactivity fees unless the card has been inactive for at least 12 months.
• Plain Sight /Plain Language Disclosures: Credit card contract terms will be disclosed in language that consumers can see and understand so they can avoid unnecessary costs and manage their finances.
• Real Information about the Financial Consequences of Decisions: Issuers will be required to show the consequences to consumers of their credit decisions.

Increasing levels of consumer debt are certainly worrisome, but new legislation setting mandates for credit card companies and financial institutions will almost certainly cause problems, and could even make the status quo situation worse. As mentioned in an article on MSN Money, there is currently no cap on how high interest rates could go. And, as expected, card companies are already devising methods of circumventing the provisions of the new legislation. They are developing new products that aren’t specifically banned but that still impose the type of fees and interest rates that this legislation was intended to combat.

Reason editor Nick Gillespie pointed out in a recent article that this type of legislation stunts the development of financial instruments that could be otherwise used by responsible credit card holders, and so is not the best way to ensure that consumers obtain access to reliable credit. Gillespie points out, “No financial crisis is created by access to credit per se; it’s created by real and presumed government bailouts of bad decisions made by folks with access to credit.” As a result, this new government legislation may help to exacerbate the negative aspects of the economic climate.

There has also been discussion of the creation of a Consumer Financial Protection Agency that would attempt to ensure that consumers of credit cards and other financial instruments are protected from practices that the agency deems to be unfair. However, this idea also deserves scrutiny, because it would impose more costly rules and regulations, stunting growth and innovation. As Anthony Randazzo argued in another Reason article, it would most likely create conflicts between federal and state governments, among other problems.

The Federal Reserve is cracking down on an analogous issue: overdraft fees. As a part-time bank teller, I see this issue arise more often than you might expect. It is a baffling and complex issue for many account holders. In the near future, financial institutions will be required to offer customers the ability to make decisions about overdraft services and fees. What most account holders don’t realize is that they have an overdraft matrix — an amount that they are allowed to overdraw their account — based on complex factors. At the time of a transaction that will pull funds from an account, customers are not presented with the knowledge that they are about to overdraw their available funds. The purchase or ATM withdrawal simply goes through successfully, and later later entails a hefty fee. If customers are not aware that this has happened, and make a few more purchases with that account on the same day, the same sizable fee will recur — for as many times as they charge an individual transaction and overdraw the account. This can quickly add up to a significant sum of money. It is true that account holders have the responsibility to know how much money is available in their accounts and keep track of whether they will overdraw, but the new rules will require that consumers be presented with the choice either to overdraw their account and pay the associated fee — a service provided by their financial institution — or to have the transaction declined. These rules are expected to take effect in July. This ability to choose between voluntarily paying an overdraft fee and abstaining from a particular transaction will be a positive development for many.

The impulse to help consumers during the financial crisis is admirable, but the Credit Card Act and a proposed Consumer Financial Protection Agency will also have hidden costs — downfalls that may not be worth the expected benefits. Some consumers of credit cards, loans, bank accounts, and other financial instruments are suffering from an economic phenomenon called “information asymmetry,” whereby relevant information is known to some but not all parties involved in market transactions. While such asymmetry applies to some degree in every market, the gap of knowledge between the producers and consumers of financial instruments has grown significantly. I suggest, however, that instead of formulating costly rules and regulations regarding fees, interest rates, and certain types of financial instruments, more attention be paid to allowing consumers to make these choices for themselves. In order for consumers to make better decisions, however, resources must be applied toward educating consumers about these instruments, and bringing greater transparency to financial institutions’ operations. When consumers feel confident that they fully understand the financial instruments they use, it may also help to stave off the urge that regulators often have to indulge their paternal instincts and attempt to protect us to the point of stifling us.

In his quest to balance the budget, Gov. Jay Nixon has proposed cutting tax credits drastically:

[Nixon's economic development director David] Kerr said that rather than just putting caps on tax credit programs, the administration wanted to “reform the whole thing from scratch.” Under the plan, the state would set a “global cap” of $314 million in tax credits that could be authorized next year. The number is pegged to 70 percent of the credits claimed last year.

Certain tax credit programs, like the Homestead Preservation Credit for the elderly, would be exempt from cuts and caps, but most of the others would be subject to the cuts. Tax credits are something that Show-Me Institute scholars have written about frequently in past articles and blog entries. Lower tax rates across the board are preferable to targeted tax credits, which can be used to help special interests. The governor’s drastic plan is a good step in the right direction toward decreasing dependency on these credits.

(To be fair, there are a few tax credits I personally think should be kept, namely the charitable contribution tax credit. It is not targeted at any one business, but can be used by individuals to benefit the causes they deem worthy of donation.)

In discussing the governor’s plan, Show-Me Institute staff writer Audrey Spalding made an interesting point: The fact that the governor plans to cut only half of the tax credit programs seems to imply that there is still some value in the 61 tax credit programs currently in place. She suggested that tax credits should be subjected to an appropriations process, an idea proposed in the General Assembly by Sen. Jason Crowell. This would force the real question of whether each program and tax credit is useful in and of itself in comparison to other possible avenues for government spending.

Up until now, the amount that the state spent on tax credits was not bound in any way. But every tax credit awarded is money that cannot be spent elsewhere. At any point in time — but especially during a budget crisis — these tax credits need to be subjected to great scrutiny, so that the cost-benefit analysis is able to weed out the least deserving programs. I applaud the governor’s efforts to reduce tax credits, but I hope that the process goes even further, and officials reexamine the value of each tax credit.

Tomorrow (Tuesday), I’ll be a special guest for the Legal Roundtable segment on Don Marsh’s “St. Louis On The Air” radio show. The show will run from 11:00 a.m. to 12:00 noon on 90.7 KWMU — with live streaming over the Internet available here.

Our primary topic will be the constitutional issue swirling around the new federal health care reform law and Missouri’s Health Care Freedom Act, which would prohibit punishment for individual citizens who decline to purchase a product they may not want.

The Riverfront Times blog points out that a judge in the local U.S. District Court has determined that St. Louis city may choose which messages it permits citizens to express. In a case that we’ve previously discussed here, Jim Roos sued the city when officials demanded that he remove a mural on one of his buildings calling for an end to eminent domain abuse. Roos pointed out that the city’s laws would have permitted the mural if only he had chosen to communicate a different idea (such as displaying a flag, some other approved symbol, or “Go, Cardinals!”), and that the First Amendment does not allow government to make content-based distinctions in deciding when and where citizens can express themselves — especially when that expression is related to issues of political importance.

The court ruled today that the government does, in fact, get to choose which messages citizens can communicate. In the words of Michael Bindas, one of the attorneys from the Institute for Justice representing Roos in his lawsuit, “The court’s decision gets it precisely backwards.” Fortunately, IJ and Roos intend to keep fighting, and the Eighth Circuit Court of Appeals will have the chance to correct the lower court’s mistake.

Having a huge state budget deficit does have positive consequences, albeit few. One particular example is that the Missouri state government is making an effort to curb excessive spending.

The prison system in Missouri is one area of the state budget that would benefit from some fiscal restraint, as John Payne has noted before. According to an op-ed in the Saint Louis Post-Dispatch, the Missouri legislature has proposed to reduce the number of nonviolent first offenders sent to state prisons, and it is projected to realize significant savings as a result. From the editorial:

If 1,200 offenders were put into judicially supervised drug treatment programs and 800 received “enhanced probation,” costs would go down to $7.1 million.

Those savings would increase steadily and reach $26.6 million a year if a prison were to close. Aggressively pursued, the financial goal could be reached within a year.

Additionally and parenthetically, the article also points out that the practice of incarcerating nonviolent felons has some negative unintended consequences that perpetuate the state’s fiscal troubles:

Recidivism and re-incarceration rates have risen, guaranteeing that “this cycle will continue to worsen at a faster and faster pace, eating tens of millions of dollars in the process,” [Missouri Chief Justice William Ray] Price said.

Missouri would be wise to consider the competing needs of other programs for this money, such as education and incarceration of felons that committed violent crimes. Alyssa Curran articulated this point in a previous post on this blog:

Regardless of how one feels about the morality of such activities, it’s hard to justify expending so many resources on their prosecution when the core functions of the judicial system — protecting life, liberty, and property from actual direct, measurable harm — is suffering from a lack of resources.

The Kansas City Star’s website has a piece today by two Saint Louis University professors arguing against the repeal of the earnings taxes in St. Louis and Kansas City. The bulk of their commentary is intended to be a criticism of this 2006 study by Show-Me Institute executive vice president and University of Missouri–Columbia economics professor Joseph Haslag, but the SLU professors, Lisa Gladson and Jack Strauss, have crafted an argument that doesn’t really address Haslag’s findings. In fact, they seem to have missed the point entirely.

In the Show-Me Institute study, “How an Earnings Tax Harms Cities Like Saint Louis and Kansas City,” Haslag shares his findings that there is a measurable negative impact for cities with an earnings tax. The opening of the paper itself provides an ideal summary: “About one in four large cities in the United States has an earnings tax. I attempt to quantify the relationship between the earnings tax rate and the growth rate of cities relative to their metropolitan statistical areas (MSA). I find that cities with an earnings tax tend to have a significantly lower ratio of city income to MSA income than those without them.”

Haslag goes on to argue that the earnings tax distorts the growth of the MSA, encouraging people to locate in outlying areas rather than in the city center — discouraging investment in the city and reducing per-capita income.

The counter offered by Gladson and Strauss is responding to a different point — one not made in the Show-Me Institute study. They claim that Haslag’s study “offers a simple negative correlation between cities with earnings taxes and real per capita income growth.” This is emphatically not the point being made in the study. Growth implies a comparison over time, whereas the Show-Me Institute policy study to which they refer used side-by-side comparisons of population proportions and where they happened to be located within the MSA. Haslag does not make any arguments about the level of growth, but rather about where the people are located. It may be that the MSAs grow faster or slower because of the presence or absence of an earnings tax, but Haslag’s study drew no connection between growth and the presence of an earnings tax. Haslag may or may not be surprised to learn that Gladson and Strauss “found no relationship between earnings taxes and a city’s income growth, and no evidence that earnings taxes are a reason for a city’s slow growth,” because this is not what he looked at in his study.

Haslag found, with careful, externally reviewed analysis, that the presence of an earnings tax negatively impacts the income of the cities that implement them when residents can easily shift to a nearby area without such a tax. Perhaps after a more careful reading of the piece, Gladson and Strauss will find some salient point on which they can disagree with this study, but for now their offering is an argument without an opponent.