Well, That’s One Way to Increase Health Care Costs

On Tuesday, Gov. Jay Nixon announced his first priority for the coming legislative session: Requiring prescriptions for medicines that contain pseudoephedrine, a key ingredient used in meth production. If the governor’s recommendation is put into place, Missourians will no longer have relatively easy access to many cold medicines, including Sudafed.

Gosh, it was only a year ago when U.S. senators and representatives were debating provisions of a large-scale, mostly unread health care bill. One of the biggest issues at the time prompting the discussion of health care policy was the concern that U.S. health care costs are rapidly increasing, for both the government and the private sector.

Nixon’s proposal flies in the face of previous and current attempts to decrease health care costs. Requiring residents to see a doctor to obtain a prescription for, say, Sudafed vastly increases the cost for both individuals and health insurers.

For example, if I am sick tomorrow and need nasal decongestant, I will head to the nearest Walgreens and pick up the generic version of Sudafed for about $5. The entire process will take me less than 15 minutes. However, if I am sick in the future and the prescription requirement has been implemented, the additional cost to obtain medicine will include a visit to my doctor. The monetary cost to me could still be relatively low, if I have a low co-pay, but if I am uninsured, have a high co-pay, or a high-deductible health insurance policy, I may have to pay a great deal more. Meanwhile, my health insurance provider will pay whatever cost that I don’t, resulting in — all else being equal — higher health insurance premiums. All for the privilege of seeing a doctor. Because the state says so.

Now, I know that some, including the governor and Attorney General Chris Koster, will argue that these increased costs are worth it if meth-related accidents decrease. But this ignores that a number of other state laws have already been implemented specifically to eliminate meth production (and access to decongestant). The governor, in his press release, enumerates other restrictions already in place:

By law, pseudoephedrine must now be sold behind a pharmacy counter and buyers are limited to purchasing no more than 3.6 grams, or 120 standard tablets in a 24 hour period, and 9 grams, or 300 standard tablets, in a 30-day period. On Sept. 28, a new state rule took effect, giving authority to the Missouri Department of Health and Senior Services (DHSS) to work with law enforcement and pharmacies on a new database that automatically blocks over the limit sales of pseudoephedrine and allows law enforcement agencies to track pseudoephedrine purchases in real time.

So, Missouri government already limits the purchase of pseudoephedrine, restricts where it can be sold, and tracks those who purchase the drug. What else can the state do, short of making nasal decongestant illegal?

In fact, a good example of these policies at work can be found in Oregon, one of two states that have enacted prescription requirements for pseudoephedrine. According to Oregon’s Narcotics Enforcement Association, in late 2004, the state began requiring photo identification from purchasers of medicine containing pseudoephedrine, and the state required that those medicines be sold behind the counter. In 2005, the state tightened these restrictions, requiring the medicines to be sold behind pharmacy counters, and began tracking purchasers of the medicines. Those restrictions led to a dramatic decrease in the annual number of “meth lab incidents.”

In 2004, Oregon reported 448 meth lab incidents. In 2006, the count was down to 63.

But that wasn’t low enough for Oregon. In July 2006, a new rule was set: Medicines containing pseudoephedrine could only be purchased with a prescription. And that odious requirement, which almost certainly has pushed up health care costs in Oregon, appears to have resulted in the elimination of roughly 40 meth incidents per year (Oregon now has about 20 each year).

There are a few things I don’t know, but suspect may be at work. First, how do we know that Oregon’s policies have stamped out dangerous drug-related incidents? It may be that Oregon’s pseudoephedrine restrictions have merely encouraged meth producers to produce different illegal drugs instead. Furthermore, these numbers are for recent years. In the future, meth producers may figure out a way of acquiring pseudoephedrine that will bypass the restrictions.

All the while, more Oregonians have to go to the doctor in order to obtain cold medicine. Is the cost of their time and the resulting increase in health care costs worth it? I don’t think so.

Rapidly increasing health care costs are not a new problem. From our most recent three U.S. presidents:

Former President Bill Clinton:

Small businesses will continue to face skyrocketing premiums and a full third of small businesses now covering their employees say they will be forced to drop their insurance. Large corporations will bear bigger disadvantages in global competition, and health care costs will devour more and more and more of our budget.

Former President George W. Bush:

We share a common goal: making health care more affordable and accessible for all Americans. The best way to achieve that goal is by expanding consumer choice, not government control.

President Barack Obama:

Then there’s the problem of rising cost. We spend one and a half times more per person on health care than any other country, but we aren’t any healthier for it. This is one of the reasons that insurance premiums have gone up three times faster than wages. It’s why so many employers — especially small businesses — are forcing their employees to pay more for insurance, or are dropping their coverage entirely.

Regulations and restrictions like the prescription requirement proposed are certainly part of the health care cost problem. I hope Missouri’s governor will realize that, and withdraw his proposal.

Letting the Federal Bush Tax Cuts Expire May Have Negative Revenue Consequences in Missouri

When I was driving into work yesterday, I heard a story on NPR reporting that the decision of whether to extend the Bush tax cuts or let them expire is a significant topic of discussion in Washington.

In an article on the Missouri Watchdog, Brian Hook links to a new study from Tax Foundation. It concludes that letting the Bush tax cuts expire would negatively affect revenues for states that allow residents to deduct the amount that they pay in federal income taxes — which includes Missouri. This is because if the tax cuts expire, a high-earning individual living in Missouri would pay more in federal taxes. He or she could therefore deduct more from state income taxes, and Missouri would receive less revenue.

I want to highlight my statements in the article regarding the marginal effects of this policy in Missouri, because it’s a concept fit for Show-Me Daily. From the article:

If the tax cuts are allowed to expire, taxpayers in Missouri will experience higher tax rates, said Christine Harbin, an analyst with the Show-Me Institute, a free market think tank. The top marginal effective tax rates on income would increase to 46.69 percent under the Democrat’s plan, or 41.13 percent under the Republican’s plan.

“Because they will experience reductions in their take-home income, it’s likely that fewer individuals and businesses will decide to come to Missouri to conduct business,” Harbin told Missouri Watchdog.

“People tend to think on the margin, and a marginal number of individuals and businesses will elect to go to other states where the cost of doing business is lower. For those individuals and businesses that do remain in Missouri, this reduction in net income will mean that they will have less money to save or spend.”

The tax policy will also likely have negative consequences for the state budget as well, Harbin said.

“A reduction in general revenue collections will mean that the state will have to raise tax rates further, cut expenditures or borrow more to cover the shortfall,” she said, adding changes in tax policy could further discourage individuals and companies from remaining in Missouri or relocating to the state.

It’s additionally notable that the expiration would negatively affect all taxpayers, not just those in the highest marginal income bracket, because the Bush tax cuts reduced marginal income tax rates for all earners. The Bush tax cuts introduced a new 10-percent bracket; previous to this, the lowest rate was 15 percent. If the Bush tax cuts expire, low- and middle-income earners would also experience a tax increase.

I hope that this reduction in state tax revenues doesn’t lead to the unfortunate consequence of eliminating federal deductibility in Missouri. Contributors to Show-Me Daily have discussed the negative consequences of income taxation before.

If the tax cuts were extended, individuals living in Missouri would be better off because they could keep a greater share of their income, and the state government in Missouri wouldn’t experience a consequent reduction of revenue.

Private Water Company in the News

A small, private water company in Southwest Missouri is in the news because one of its pumps failed a few weeks ago. The Joplin Globe has the story (link via Combest). A key pump failed, the company was unable to fix the problem immediately, and for a few days the town — and the fire department — didn’t have a water supply. I did not write this post intending to discuss whether the Public Service Commission (PSC) is correct in its allegations against the company, or whether the company’s defense is true. It’s not that the allegations aren’t serious or important, just that I have no idea who is correct.

Rather, my purpose is to show how the system works with private companies. Private utilities in Missouri are closely regulated by a variety of actors. Water utilities report to the PSC, the Missouri Department of Natural Resources, and local county health departments. (The bulk of the regulations are at the state level — and this does not include the Environmental Protection Agency (EPA), because I believe state agencies enforce EPA guidelines.)

I am not automatically opposed to every aspect of the regulated utility system we use in Missouri. Technological improvements have demonstrated the absurdity of treating telephones and cable television like utilities and/or monopolies, and the legislative environment has properly adapted. I can at least understand the historic purpose behind telephones being regulated as utilities. Treating cable as a utility, though, was always idiotic, and often just a device for corruption. I believe electricity will eventually (in the long run) be deregulated as a utility, too.

As for water and natural gas, infrastructure issues will make it more difficult to move away from monopoly. They may be the best examples of natural monopoly, because the up-front investment costs alone make competition unprofitable. As David Henderson writes:

Economists tend to oppose regulating entry. The reason is as follows: If the industry really is a natural monopoly, then preventing new competitors from entering is unnecessary because no competitor would want to enter anyway. If, on the other hand, the industry is not a natural monopoly, then preventing competition is undesirable. Either way, preventing entry does not make sense.

My paper on privatizing the St. Louis water division dicusses one way to bring competition to the water industry on p. 17. Absent that price competition, I understand the reasons for some types of price regulations.

Back to the original subject. The PSC moved pretty quickly in addressing this potential issue. In fairness, the private company states that it attempted to move quickly, but could not move quickly enough. (The issue here could well be one of utility size, rather than a question of public vs. private.) I hope people don’t read a story like this and think the problem lies with private utilities. The problem in this case has been addressed. Fines may be imposed after the full details emerge. If there was a company failure, the company will be held accountable — the key word here being “if.” Private water, like other private utilities, works just fine under our system in Missouri.

Education Panel Tonight!

I will be part of a panel discussion of education at Washington University in Saint Louis tonight, from 7:30 to 8:30. The event will be held at the Danforth University Center, in Room 276 at the top of the main staircase. Panelists will also include Robbyn Wahby, Mayor Francis Slay’s education adviser, Terry Harris, director of equity and diversity for the Rockwood School District, and Dr. Janet Duckham, an English teacher at Ladue High School.

The event is open to the public, so come out and join the conversation.

Don’t Hate the Players, Hate the Game

The Post-Dispatch has an excellent article that illustrates one reason why government tax incentives for private development almost always fall short. To summarize: Government officials usually fail to make sure that private companies deliver on the promises they make in exchange for taxpayer dollars.

In this case, the city of Saint Louis entered into an agreement with the Cardinals baseball team about eight years ago, when the team decided to build a new stadium. In exchange for tax incentives from the city worth $145 million, the Cardinals agreed to a few obligations, including at least 100,000 free tickets and 486,000 discounted tickets each year. And, if the owners sold the team, the agreement specified that the city would receive a portion of the sales profit.

It appears that city officials did not even attempt to make sure that the team upheld its side of the bargain.

From the article:

The team’s 2002 agreement with the city did not require proof that the team was giving away 100,000 tickets a year, or making 486,000 inexpensive seats available to the public, or giving $100,000 to city recreation programs.

[City officials] said they never asked the Cardinals for documentation, until the Post-Dispatch called recently.

Fortunately, it seems that the team had worked to meet most of its contractual obligations. After the Post-Dispatch inquiry, the team sent the newspaper a spreadsheet showing that it had exceeded the benchmarks.

However, there is some dispute about the profit-sharing clause. In January, as reporter David Hunn recounts, one of the team’s owners sold 13 percent of the team. The Cardinals’ attorney said that the owner did not make a profit on the sale, meaning that no money is owed to the city.

Of course, no city official has bothered to investigate the matter. As Hunn writes, “They trust the Cardinals.”

If city officials aren’t bothering to monitor this agreement, what else aren’t they checking up on? There are certainly many tax incentive deals in both Saint Louis and elsewhere in the state. Governments hand out millions upon millions of targeted tax incentives all the time.

Not only are those handouts bad policy from an economic standpoint, there is the possibility, as in Saint Louis city, that government officials won’t even bother to try to make sure that tax incentive agreements are followed. Not that you needed another one, but this is one more reason we should let free competition, not government favoritism, determine profits.

P.S. — At least Saint Louis isn’t making debt payments on a non-existent stadium.

The Best Job Creation Strategy? Government Non-Intervention

Last week, I attended a Legislative Action Seminar sponsored by the Missouri Chamber of Commerce here in Saint Louis. Sitting on a legislative leadership panel, Senate President Pro Tem Robert Mayer said that tax credit programs in Missouri are not his top priority, and that they should take a back seat to job creation.

This is a message that he has communicated frequently of late. From an article in the Missouri Watchdog:

New state Sen. President Pro Tem Robert Mayer, a Republican from Dexter, said discussion on tax credits “needs to happen.” But when pressed on how soon that discussion would take place in the upcoming session of the Missouri General Assembly, Mayer demurred.

“First, we need to get to work on job creation and see what we can do there,” Mayer said.

Government programs that are intended to induce job creation and economic activity have negative unintended consequences, such as crowding out private investment. This is a concept that Henry Hazlitt discusses in his classic work Economics in One Lesson, a book that I encourage policymakers in Missouri to read. Even though the book was first published more than 60 years ago, at present the lesson it teaches is no less relevant:

When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only where bridges must be built, the government spenders begin to ask themselves where bridges can be built. Can they think of plausible reasons why an additional bridge should connect Easton and Weston? lt soon becomes absolutely essential. Those who doubt the necessity are dismissed as obstructionists and reactionaries. […]

[The bridge] is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. It is true that a particular group of bridgeworkers may receive more employment than otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $1,000,000 the taxpayers will lose $1,000,000. They will have that much taken away from them which they would otherwise have spent on the things they needed most.

Therefore for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been per­mitted to come into existence. They are the jobs destroyed by the $1,000,000 taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, radio technicians, clothing workers, farmers.

Basic economic forces, not government programs, determine job creation. Only by getting out of the market can the government truly further its goals of job creation and productive economic activity.

In his comments, the senator sets up a false choice between job growth and tax credit reform. Job creation will occur when the overall cost of doing business in the state decreases, and this can be partially accomplished by reining in tax credits and widening the tax base. Once employers don’t have to subsidize other companies or prop up entire industries with their tax monies, they will be able to hire more people and grow their businesses.

Benefits of Tax Credits Concentrated in Urban Regions, Costs Diffused Throughout Missouri

Last week, I spoke to Roseann Moring at the Springfield News-Leader about the Tax Credit Review Commission‘s recent recommendations. (Here is a link to her article.) Following our conversation, I used the Show-Me Institute’s Show-Me Living: Tax Credits web tool to look at Springfield’s share of the tax credits issued.

As a percentage of the total amount issued, Springfield is issued a smaller amount of tax credits than other urban areas. Most of the recipient projects are located in Saint Louis and Kansas City, so residents of those areas receive more of the benefits of tax credits. However, Springfield residents still have to shoulder the costs of these programs through their state taxes. It’s a case of concentrated benefits and diffused costs. Most of the benefits are concentrated on the residents of Saint Louis and Kansas City, and the costs are diffused on all Missouri taxpayers.

This difference is partly attributable to the fact that Springfield has a smaller population than Saint Louis and Kansas City, but there may be other factors. (Senate districts in Missouri have an average of about 176,000 people, and the Springfield metropolitan area is divided into two senate districts, whereas Kansas City is divided into four and Saint Louis is divided into eight.)

Trend of Percentage of Tax Credits Issued, by Region

Trend of Tax Credits by Region

The chart below shows the same information in terms of total amount issued. For the year 2010 to date, projects in the Springfield region (Dist. 20 & 30) have only been issued $141,875 in tax credits. For comparison, projects in Saint Louis (Dist. 1, 4, 5, 7, 13, 14, 15, 24) have been issued $4,354,456, and projects in Kansas City have been issued $15,962,032.

Trend of Amount of Tax Credits Issued, by Region

trend of tax credits issued in springfield

The Tax Credit Review Commission will deliver its final report to the governor today.

Selective Tax Rates in Advertising

While driving back to Saint Louis from Wisconsin yesterday, I stopped at the Road Ranger gas station in South Beloit, Ill., which is located about 0.3 miles south of the Wisconsin-Illinois state border.

While I was loitering outside, I noticed the following sign on the front of the building:

This sign is fantastic! It acknowledges and capitalizes on the fact that tax rates affect consumer behavior. As contributors to Show-Me Daily have discussed previously, businesses and individuals tend to vote with their feet. Differences in tax rates across borders encourage individuals to shift their purchases to areas that have lower taxes.

The tax rate on cigarettes in Illinois is $0.98 cents per pack of 20. In Wisconsin, this rate is $2.52 per pack of 20. This means that an individual will pay (2.52-0.98)*10 = $15.40 more in excise taxes on cigarettes in Wisconsin than she would in Illinois. (I’m assuming that state and local sales taxes account for the $0.85 discrepancy between this number and the sign.)

I suspect that at least some number of Wisconsin residents shift their cigarette purchases to Illinois when they can, which results in higher tax revenues and more business activity in Illinois. I also suspect that this Road Ranger has higher cigarette sales than an identical gas station that’s located on the Wisconsin side of the border, as a direct consequence of this difference in tax rates.

In comparison, Missourians enjoy the lowest taxes on cigarettes in the nation, at $0.17 cents per pack. Although there have been frequent calls to increase this rate, the economy in Missouri benefits from the marginal increase in tax revenues as a direct consequence of this policy. Increasing the state tax rate on cigarettes would shift some marginal amount of this activity from Missouri to other locations.

Private Property and the First Thanksgiving

The popular New England origin story of Thanksgiving (there are other claims to the first American Thanksgiving) might not have been possible if the Pilgrims had continued to pursue their original, nearly communist, economic policies. Gov. William Bradford’s decision to allow the citizens of Plymouth to keep the fruits of their labor essentially saved the entire colony, as is explained (along with mocking Bradford’s English) in this short video from Reason TV:

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