Topic: Regulatory Studies

Appeals Court Approves Net Neutrality Rules

The United States Court of Appeals for the District of Columbia upheld on Tuesday June 14, 2016 so called “net neutrality” rules issues by the Federal Communications Commission in February 2015.  Two previous attempts by the FCC to regulate the internet under different sections of the Telecommunications Act were overturned by the same court in 2010 and 2014 reflecting the traditional policy distinction between heavily regulated traditional telephone landline service and so-called information services involving computers that were not regulated.

The rule issued by the FCC in 2015 reclassified internet services as falling under the same legal regime as traditional telephone service.  Yesterday’s Appeal Court decision accepts that reclassification and the legal authority that goes with it.

Regulation has published four articles in the last two years year criticizing traditional public utility regulation of the internet.  Christopher Yoo from the University of Pennsylvania argues that traditional telephone regulation envisions a monopoly service and government oversight ostensibly intended to limit prices and expand service provision. But the expansion of wireless high-speed Internet has allowed multiple competitive providers to provide service to a large majority of American consumers while restraining capital costs.  “What Hath the FCC Wrought”, by former FCC chief economist Gerald Faulhaber, argues that service quality will suffer to the extent that internet access providers can’t charge more for streams that impose greater costs on the system. Kansas State professor Dennis Weisman argues that internet regulation will likely protect competitors from competition rather than serve consumer interests just like the old telephone regulatory scheme. And Larry Downes from the Georgetown Center for Business and Public Policy argues that the movement to re-regulate telecom is propelled by some firms’ quest for rents under new regulation, and by Federal Communications Commission attempt to regain political power and the benefits that come with it. 

Much Higher Tax Rates in 2013 Left Top 1% Taxes About the Same

Top Tax Rate and Taxes Paid

A timely new blog post from the Tax Foundation points out that, “taxes on the rich are much higher than they’ve been in recent years. Between 2008 and 2012, the top 1 percent of households paid an average tax rate of 28.8 percent. However, in 2013, this figure spiked to 34.0 percent, as a result of tax increases in the “fiscal cliff” deal and the Affordable Care Act”.

“Readers should check out the new CBO report,” the authors suggest, “and reflect for themselves about whether or not high-income Americans are now paying their fair share of taxes.”

The trouble is that the tax rate alone can’t tell us how much the Top 1% paid in taxes: To know how much taxes were paid by the Top 1% requires knowing how much income they reported to the IRS.  The reason this matters is that there is ample evidence that the “elasticity of taxable income” is very high among top taxpayers, which simply means they find ways to report less income if marginal tax rates go up.  This doesn’t require lawyers or loopholes: Avoid capital gains tax by not selling assets and/or shifting into exempt assets (housing up to $500k); avoid the dividend tax by holding tax-exempt bonds; defer personal tax on business income by retaining earnings within a C-corporation; avoid punitive tax rates on second earners by becoming a one-earner household; retire early, etc.

Looking at the same thing from a different angle, the graph shows that average taxes actually paid by the Top 1% grew rapidly after the tax rate on capital gains was cut from 28 percent to 20 percent in 1997. Taxes paid by the Top 1% grew even more rapidly after 2003 when the tax rate on capital gains and dividends was further reduced to 15 percent and the top tax on salaries and unincorporated businesses was cut from 39.6 percent to 35 percent.  If you want the rich to pay more taxes, cut their tax rates.  

As it turns out, 2013 showed that we can’t just assume higher tax rates mean docile taxpayers will simply write bigger checks to the U.S. Treasury. On the contrary, when the average tax rate on the Top 1% increased by 18.4 percent in 2013, the amount of income reported by the Top 1% fell by 15.4 percent – from $1,856,000 in 2012 to $1,571,600. The net effect was almost a wash, in terms of taxes actually paid. According to the CBO, average federal taxes paid by the Top 1% were $530,128 in 2013 –virtually unchanged from $529,056 in 2012. 

Presidential candidates Bernie Sanders and Hillary Clinton propose even more increases in top tax rates on income and capital gains (to 54.2 percent with Sanders, 43.6 percent with Clinton), ostensibly to finance their lavish government spending plans.  But even a relatively small dose of this same poison failed to raise significant revenue from the Top 1% in 2013, partly because of the drag on the overall economy from reduced incomes and incentives. 

Respecting Property Rights Means Paying Just Compensation for Takings

There’s no such thing as a free lunch. Or as the Fifth Amendment puts it, “nor shall private property be taken for public use, without just compensation.” Despite the clarity with which the Takings Clause proclaims that government must respect property rights, state and local governments have long been contriving ways to obtain private property without paying the constitutionally required just compensation.

In 2012, San Juan County, Washington—the islands in the Salish Sea between Seattle and Victoria—enacted a rule that conditions shoreline owners’ proposed land uses on dedicating a portion of their property as on-site conservation areas. This isn’t a new tactic. In Nollan v. California Coastal Commission (1987), for example, the Supreme Court rejected the government’s conditioning of a building permit on the landowners’ granting a public easement across their property to access a beach. The Court acknowledged that conditioning a benefit on the property owners’ giving up their Fifth Amendment right to just compensation is “an out-and-out plan of extortion.” The Court elaborated seven years later in Dolan v. City of Tigard (1994), ruling that courts must apply a high level of scrutiny to conditions attached to land-use permits to prevent government “gimmickry.”

Government Exceeds Its Powers in Enforcing the Endangered Species Act

“It is not rational, never mind ‘appropriate,’ to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits,” the Supreme Court held last year in Michigan v. EPA.It seems that the U.S. Fish and Wildlife Service (USFWS) did not get the message, with its willy-nilly imposition of significant economic costs when designating “critical habitat” for endangered species.

A California builders’ association is now asking the Court to establish that judicial review is available for individuals and businesses affected by these agency actions that purport to enforce the Endangered Species Act (ESA). The ESA specifically requires federal agencies to take economic impacts into consideration, but the USFWS routinely ignores the costs of designating land as a critical habitat. The San Francisco-based U.S Court of Appeals for the Ninth Circuit held that the designation of critical habitat is an action fully committed to agency discretion, and that it may ignore any cost implications at its leisure, but this would seem to contradict Michigan v. EPA and other precedent.

The USFWS employs a cost-benefit accounting method called “baseline analysis,” which separates the impacts that would occur absent designation (baseline impacts) from the impacts attributable to designation (incremental impacts). It then only considers the incremental impacts, despite enormous disparities between baseline and incremental costs—one order of magnitude or two—and fanciful estimates that the economic impact of critical habitat designation is often $0.

Cato, joined by the Reason Foundation and National Federation of Independent Business, filed an amicus brief urging the Supreme Court to take up this important question of whether courts can even review the government’s Enron-style of cost-benefit analysis. Independent research by Reason’s Brian Seasholes found that in examining 159 of the 793 species that have critical habitat designation, there are at least $10.7 billion in economic impacts, hundreds of jobs lost per species designated, and regulatory burdens affecting 60,169,546 acres of land (11,261,054 privately owned) spanning 37 states and two territories.

Supreme Court Should Protect Workers Against Government-Union Collusion

Imagine that you run a daycare business out of your home. Some of your clients are poor families whom your state has decided to help with daycare. The state program allows such families to choose any daycare they want and then reimburses the provider up to a certain amount. Now the state has declared that because of this program, you—and even people who provide at-home daycare for family members’ children—will be considered a state employee for the sole purpose of giving a union exclusive representation rights.

You don’t get state medical or dental insurance. You don’t get state retirement benefits. You don’t get paid vacation on national holidays. The only thing you get is a union you didn’t choose and you refuse to join that is now representing your “interests” before the state, which isn’t even your employer. Does this sound far-fetched? Yet it’s what’s happened to Kathleen D’Agostino and seven other women in Massachusetts who are asking the Supreme Court to take their case after the lower courts dismissed their lawsuit.

Feds Lose Another Unanimous Supreme Court Case

Earlier this year, I documented the Obama administration’s abysmal results before the Supreme Court (the two Obamacare cases excepted). Not only is its overall winning percentage much worse than any other modern presidency, but its spate of unanimous losses is truly record-breaking.

And that record has only grown in the last few months. This week the government suffered its fifth unanimous loss of the year – matching its dubious achievement in 2013 with 25 cases still left to be decided – in a property-rights case in which Cato filed an amicus briefU.S. Army Corps of Engineers v. Hawkes Co.

Hawkes has a somewhat technical background but the case boiled down to this question: Can a landowner – in this case a peat-mining company (nothing to do with scotch, unfortunately) – challenge a government determination that its land is subject to federal regulation? Not whether the land is properly a wetland under the Clean Water Act, but whether the owner can go to court to argue the point in the first place!

Thankfully, all eight justices ruled that yes, this agency action is subject to judicial review under the Administrative Procedure Act. If you’re an eagle-eyed reader and think this reminds you of another case from a few years ago, you’re right! In 2012, the Court – also unanimously – ruled essentially the same way in a case called Sackett v. EPA. Yes, that case involved a different government agency and different legal technicalities, but the upshot is the same: if the government does something that hurts your use and enjoyment of your land, you get to go to court to challenge that action.

You’d think this would be a simple proposition, and yet the government insists on fighting it all the way to highest court in the land – and garnering nary a vote. Congratulations to our friends at the Pacific Legal Foundation, who litigated Hawkes and who have now won eight straight cases at the Supreme Court!

Finally, one interesting footnote to Hawkes: The Court took up this case after the U.S. Court of Appeals for the Eighth Circuit had ruled against the government and thus split from an opposite ruling by the Fifth Circuit in an essentially identical case called Kent Recycling Services v. U.S. Army Corps of Engineers. That Hawkes ruling happened but two weeks after the Court had denied review in Kent Recycling. Accordingly, the keen PLF lawyers who also brought Kent Recycling filed an immediate petition for rehearing, which the justices held pending the resolution of Hawkes. That petition will now be Granted, the lower-court ruling Vacated, and the case Remanded – what lawyers call “GVR’d” – for reconsideration (and reversal) in light of Hawkes.

As far as I know, it’s been decades since a cert. denial was not only reconsidered, but turned into a summary reversal on the merits. And it was here at Cato’s Constitution Day conference where John Elwood made what I believe was the first public call for just that outcome (see final panel). 

Big Bureaucracies Beget Bad Behavior

One of the problems with big government is that it stimulates the worst sort of behavior from people and attracts legions of cheaters on the inside and outside.

On the outside, the more than 2,300 federal subsidy programs are under constant assault by dishonest individuals, businesses, and criminal gangs. The improper payment rates for the earned income tax credit and school breakfast programs, for example, are more than 20 percent. Medicare and Medicaid are ripped off by tens of billions of dollars a year. It’s a sad reality that when the government dangles free money, millions of people will falsify application forms to try and get some of it.