Topic: Regulatory Studies

Uncle Sam’s Vestigial Feudalism

In the feudal era, rulers funded their households by taking a share of the crops farmers in their territory produced. The lords called this tribute and the peasants would’ve called it extortion.

We like to think that we’ve come quite a ways since then. After all, taxes are now paid withmoney—or even a digital abstraction of money—and forms, not cartloads of grain. We can even feel good (well, sanguine) about paying taxes, because we know that we’re funding the government of our own choosing—a democratically elected leadership restrained by the Constitution—not just feeding the avarice of a local warlord.

Except if you’re a raisin farmer in California, a state responsible for 40% of the world’s and 99% of America’s raisins. If you’re a California serf raisin farmer, you’re required by federal law to hand over up to 47% of each year’s crop to the U.S. government so the government can control the supply and price of raisins under a New Deal-era regulatory scheme.

The Fifth Amendment says that “private property [shall not] be taken for public use, without just compensation,” however, so it’s hard to see how it would be constitutional for the government to take nearly half a farmer’s harvest without any payment—let alone “just compensation.” (To be clear, if you grow grapes for use in wine or juice, you’re fine. It’s only if you dry out those grapes that you have to watch your property rights evaporate.)

Yet the U.S. Court of Appeals for the Ninth Circuit has done just that, repeatedly. In 2012, the en banc court held that nobody could challenge this taking in federal court. The Supreme Court unanimously disagreed. (For more background and to read Cato’s merits brief in that case go here.)

Failing to take the hint, the Ninth Circuit has now held that the Fifth Amendment’s protection against state expropriation simply doesn’t apply to personal property (as opposed to real estate). To put it bluntly, that’s an arbitrary, unprecedented, and ahistorical distinction, so raisin farmers are once again forced to ask the Supreme Court to correct lower court’s failure to protect their rights.

Joined by the five other organizations, Cato has filed a brief urging the Court to take this case, thus insuring that the farmers’ constitutional rights aren’t left to wither on the vine. We argue that the Ninth Circuit’s distinction between real and personal property has no basis in the text and history of the Constitution, Supreme Court precedent, or a reasonable understanding of the English language.

The Fifth Amendment embodies the notion that property rights are central to a free people and a just government. It could not be more clear that property can’t be taken without “due process,” and that when it is taken, the government must pay “just compensation.” These guarantees reflect the many values inherent in private property, such as individual achievement, privacy, and autonomy from government intrusion.

By devaluing property rights of all sorts, the Ninth Circuit weakens the values of autonomy and reliance that undergird the Takings Clause and conflicts with the very foundations of our constitutional order.

Raisin farming ain’t easy; five pounds of grapes yield only one pound of raisins. Raisin farmers shouldn’t have to hand over half of that pound to the federal government.

The Supreme Court will decide whether to take Horne v. U.S. Dept. of Agriculture later this fall.

Cato legal associate Gabriel Latner co-authored this blogpost.

Airbnb Legalization Law Passed By San Francisco Supervisors

Yesterday, San Francisco’s board of supervisors voted 7-4 to legalize and regulate the online rental marketplace Airbnb.

The legislation, which is expected be be implemented in February, was welcomed by Airbnb. Nick Papas, one of Airbnb’s communications staffers, wrote on the Airbnb public policy blog that the vote was “a great victory for San Franciscans who want to share their home and the city they love.”

Airbnb might be praising the legislation, but it contains a number of restrictions on Airbnb hosts. Under the new legislation non-hosted entire-home rentals are limited to 90 days a year, and it will be up to hosts, not Airbnb, to provide the documentation to prove that they are not in violation of this regulation. Airbnb hosts will have to pay a $50 fee to be part of a public registry, pay a hotel tax (which Airbnb will reportedly remit), register with the city planning department, and not charge more than they are paying their landlord. Hosts must also have liability insurance or offer their listing through a platform that provides coverage.

The legislation will also prohibit buildings that have had Ellis Act evictions from being used for short-term Airbnb rentals, as TechCrunch’s Kim-Mai Cutler explains:

What’s the Ellis Act? Well, San Francisco city and California state rental laws have some strange overlaps. The city has incredibly strong rent control laws, that cover 172,000 of the city’s 376,000 housing units. As long as the tenant handles their basic obligations like paying rent on time, they can’t really be evicted and there’s a culture of lifetime tenancy in the city that’s fairly unique. But the state of California passed a law in the mid-1980s that allows landlords to “go out of business” and take their rental units off the market. The concern in red hot San Francisco housing market is that this law is abused and landlords will take their units off the market to convert them into tenancies-in-common or permanent Airbnb rentals. This change is supposed to clamp down on that.

The board of supervisors rejected an amendment put forward by member David Campos, which would have required Airbnb to pay an estimated $25 million in back taxes. Airbnb announced in September that it would begin collecting 14 percent occupancy tax in San Francisco from the beginning of this month.

Although the new legislation contains some restrictive provisions it is understandable that Airbnb is accepting these new regulations. Airbnb, which was valued at around $10 billion earlier this year, wants to grow, and accepting regulations like those passed by the San Francisco board of supervisors allows for Airbnb to operate legally in San Francisco while refuting accusations that it evades taxes and operates in a grey market.  

Cato Maintains Opposition to IRS Lawlessness in Obamacare-Subsidies Case

To encourage the purchase of health insurance, the Affordable Care Act added a number of deductions, exemptions, and penalties to the federal tax code. As might be expected from a 2,700-page law, these new tax laws have the potential to interact in unforeseen and counterintuitive ways.

As first discovered by Michael Cannon and Jonathan Adler, one of these new tax provisions, when combined with state decision-making and IRS rule-making, has given Obamacare yet another legal problem. The legislation’s Section 1311 provides a generous tax credit for anyone who buys insurance from an insurance exchange “established by the State”—as an incentive for states to create the exchanges—but only 16 states have opted to do so. In the other states, the federal government established its own exchanges, as another section of the ACA specifies. But where § 1311 only explicitly authorized a tax credit for people who buy insurance from a state exchange, the IRS issued a rule interpreting § 1311 as also applying to purchases from federal exchanges.

This creative interpretation most obviously hurts employers, who are fined for every employee who receives such a tax credit/subsidy to buy an exchange plan when their employer fails to comply with the mandate to provide health insurance. But it also hurts some individuals, such as David Klemencic, a lead plaintiff in one of the lawsuits challenging the IRS’s tax-credit rule. Klemencic lives in a state, West Virginia, that never established an exchange, and for various reasons he doesn’t want to buy any of the insurance options available to him. Because buying insurance would cost him more than 8% of his income, he should be immune from Obamacare’s tax on the decision not to buy insurance.  After the IRS expanded § 1311 to subsidize people in states with federal exchanges, however, Klemencic could’ve bought health insurance for an amount low enough to again subject him to the tax for not buying insurance. Klemencic and his fellow plaintiffs argue that they face these costs only because the IRS exceeded the scope of its powers by extending a tax credit not authorized by Congress.

The district court rejected that argument, ruling that, under the highly deferential test courts apply to actions by administrative agencies, the IRS only had to show that its interpretation of § 1311 was reasonable—which the court was satisfied it had. On appeal, a panel of the U.S. Court of Appeals for the D.C. Circuit held that the plain language of the ACA precluded the federal government from subsidizing the premiums of insurance policies obtained through federally established exchanges. Later that same day, the Fourth Circuit in King v. Burwell took the opposite position on the same question—from which ruling there is now a cert petition pending in the Supreme Court.

This circuit split did not last long, however, as the D.C. Circuit decided to vacate the panel opinion and rehear Halbig en banc (meaning all the court’s judges, not just a three-judge panel). Federal appellate rules say that such review “is not favored” and the D.C. Circuit has a particularly high bar, on average taking only one case per year en banc. Judge Harry Edwards, who dissented in the Halbig panel ruling, has taken great pains to reduce the number of en banc hearings. Even before he served as the D.C. Circuit’s chief judge, Edwards wrote in Bartlett v. Bowen (1987) that “the institutional cost of rehearing cases en banc is extraordinary” and that it “substantially delays the case being reheard, often with no clear principle emanating from the en banc court.” Nevertheless, the court took this step, vindicating President Obama’s strategy of packing the underworked D.C. Circuit after the Senate eliminated the filibuster for judicial nominees.

Cato and the Pacific Research Institute have filed a brief continuing our support for the plaintiffs on their appeal. While it is manifestly the province of the judiciary to say “what the law is,” where the law’s text leaves no question as to its meaning—as is the case here with the phrase “established by the State”—it’s neither right nor proper for a court to replace the laws passed by Congress with those of its own invention, or the invention of civil servants.

If Congress wants to extend the tax credit beyond the terms of the ACA, it can do so by passing new legislation. The only reason for executive-branch officials not to go back to Congress for clarification, and instead legislate by fiat, is to bypass the democratic process, thereby undermining constitutional separation of powers.

This case ultimately isn’t about money, the wisdom of individual health care decision-making, or even political opposition to Obamacare. It’s about who gets to create the laws we live by: the democratically elected members of Congress, or the bureaucrats charged with no more than executing the laws that Congress passes and the president signs.

The en banc D.C. Circuit will hear argument in Halbig v. Burwell on December 17.

Little Evidence Supports the FDA’s Proposed Food Label Rules

In the upcoming issue of Regulation magazine, Robert Scharff, associate professor in the Department of Consumer Sciences at the Ohio State University, and Sherzod Abdukadirov, research fellow in the Regulatory Studies Program at the Mercatus Center at George Mason University, argue that the FDA’s two proposed rules on food nutrition labeling are supported by little evidence and should be scrapped.

The food labeling rule would, as Scharff and Abdukadirov explain, result in a number of changes “involving both formatting and content changes to labels, increases in recordkeeping, and new analytic requirements.” The second rule, the serving size rule, would affect packages that contain a small number of servings. 

The FDA claims that implementing both of these rules will help Americans make healthier food choices. However, as Scharff and Abdukadirov point out, the FDA does not cite any work that supports the underlying assumption that consumers will change their short-sighted behavior if changes are made to food labels. In fact, an FDA-commissioned study found that increasing the font size for calorie information on food labels had no effect on consumer behavior. In addition, the FDA has provided little evidence that inserting a separate line on labels for “added sugars” will result in health benefits.

Aside from the lack of evidence cited by the FDA, Scharff and Abdukadirov explain that the study on the effects of regulations written to comply with the Nutrition Labeling and Education Act of 1990, which is used by the FDA to make the benefits calculations of its proposed rules, is flawed. Not only is the study unpublished and yet to be peer reviewed, its sample is limited to women aged between 19 and 50 years old, which artificially inflates the effects of nutrition labels on behavior because women are more likely to view nutrition panels than men.    

If the two proposed rules are implemented they will add billions of dollars in costs for consumers. Such an expensive change in regulations should have to be justified with good empirical data. Scharff and Abdukadirov show that the FDA’s proposed rules are justified mostly by good intentions, not data.  

Pruitt v. Burwell: A Victory for the Rule of Law

From Darwin’s Fool:

The U.S. District Court for the Eastern District of Oklahoma handed the Obama administration another – and a much harsher — defeat in one of four lawsuits challenging the IRS’s attempt to implement ObamaCare’s major taxing and spending provisions where the law does not authorize them. The Patient Protection and Affordable Care Act provides that its subsidies for private health insurance, its employer mandate, and to a large extent its individual mandate only take effect within a state if the state establishes a health insurance “Exchange.” Two-thirds (36) of the states declined to establish Exchanges, which should have freed more than 50 million Americans from those taxes. Instead, the Obama administration decided to implement those taxes and expenditures in those 36 states anyway. Today’s ruling was in Pruitt v. Burwell, a case brought by Oklahoma attorney general Scott Pruitt.

These cases saw two appellate-court rulings on the same day, July 22. In Halbig v. Burwella three-judge panel of the U.S. Court of Appeals for the D.C. Circuit ordered the administration to stop. (The full D.C. Circuit has agreed to review the case en banc on December 17, a move that automatically vacates the panel ruling.) In King v. Burwell, the Fourth Circuit implausibly gave the IRS the thumbs-up. (The plaintiffs have appealed that ruling to the Supreme Court.) A fourth case, Indiana v. IRS, brought by Indiana attorney general Greg Zoeller, goes to oral arguments in federal district court on October 9.

Today, federal judge Ronald A. White issued a ruling in Pruitt that sided with Halbig against King, and eviscerated the arguments made by the (more senior) judges who sided with the government in those cases…

Read the rest.

Amtrak Shouldn’t Get to Write Its Own Ticket

Article One, Section One of the Constitution vests “all legislative powers” in Congress. The sovereign power to make laws comes from the people, so their representatives—Congress—should make those laws.

It sounds simple enough, but once the federal government started ballooning in size and regulating everything under the sun, that simple understanding had to go. There was too much governing for Congress to handle on its own, so the courts adjusted, allowing a proliferation of government agencies to exercise lawmaking power, within certain guidelines.&

We’ve now apparently gotten to the point, however, that there’s so much governing to do that it’s too much for the government to handle on its own. In a case now before the Supreme Court, Amtrak—the for-profit, quasi-public entity that the federal government has deemed private for these purposes—has been given a part to play in making laws to regulate its competitors in the rail transportation industry.

New York Airbnb Law Hurting B&Bs

The campaign against Airbnb in New York City has claimed some surprising collateral damage – actual B&Bs. According to Mary White of BnB Finder, half of all the B&Bs in the city have closed down since legislation in 2011 aimed at limiting Airbnb abuses came into effect. The statewide law prohibits building owners renting rooms in residential buildings and apartments for less than 30 days.

The law may have been aimed at preventing apartment buildings from being turned into illegal hotels, but it has resulted in fines being issued to B&B owners. The owner of one of New York City’s B&Bs launched an advocacy group in 2011 that lobbies for changes in legislation but does not list its members. Given the legislation affecting B&Bs it is understandable that BnB owners would be hesitant to increase their exposure. A Crain’s New York Business article on the decline of B&Bs in New York City quotes the owner of a Brooklyn inn, who limits the amount of attention her business receives online in order to avoid city investigators:

Most people don’t even know B&Bs exist in the city. Now many innkeepers are keeping a lower profile, hoping not to attract the city’s attention.

The owner of a European-style inn in Brooklyn, who did not want to be identified, said she limits her online exposure by not listing her property with travel sites like Expedia. The reason is twofold: She wants to speak personally with her guests before they arrive to ensure “that the people who stay with us won’t steal anything from us,” and to keep out of the crosshairs of city investigators.

Airbnb has made enough on an impact in New York City for hotel industry representatives, local officials, and activists to launch Share Better, a coalition group which claims the popular site is contributing to New York City’s affordable housing crisis and allowing tenants to violate lease agreements. Earlier this month, I wrote about Share Better’s claims and discussed the regulatory gray area Airbnb operates in with MSNBC’s Eric Ortega and The New Republic’s Noam Scheiber.

As Share Better continues to make its arguments against Airbnb, regulators and lawmakers should not forget the recent decline in New York City B&Bs, the hard hit unintended victims of anti-competitive rental restrictions.