Out of the Storm News

• Congress poised to make crop insurance more generous: NPR
• Yahoo warns merchants about Internet sales tax: eCommerce Bytes
• AIG drops lawsuit against New York Fed: New York Times
• More investors interested in taking on hurricane risk: Artemis.bm
• What’s behind the bond market swoon?: Wall Street Journal
• Did anyone really “predict the crisis?”: Noah Smith
• Two big catastrophe modelers join open source data sharing project: PropertyCasualty360
• What is “reform conservatism?”: Ross Douthat

After enduring months of salvos from the banking industry, credit unions are fighting back.

The above video from the Credit Union National Association, one of the industry’s two major trade groups, launches credit unions’ campaign to enlist their 96 million members nationwide to beat back lobbying efforts by the American Bankers Association and the Independent Community Bankers of America that would strip them of their tax-exempt status.

Credit unions have been exempt from the federal income tax ever since it was created in 1916 by the 16th Amendment, on grounds that they are “organized and operated for mutual purposes and without profit.”

This reliance on community bonds and mutual interest has allowed credit unions to serve populations that historically have had difficulty accessing bank credit, whether it be immigrants and other individuals of more modest means (highlighted in CUNA’s video by the striking fact that, though 40 percent of Americans belong to a credit union, they hold only 6 percent of the country’s financial assets) or particular small business niches that banks have tended to eschew (in recent years, credit unions have had notably strong penetration among organic farms and taxi drivers, for instance.)

And for as long as credit unions have enjoyed their exemption, banks have been lamenting it as an “unfair” advantage. The charge does not stand up to scrutiny. An April 2013 report from Yang Liu and Richard Anderson of the Federal Reserve Bank of St. Louis examined whether credit unions’ tax exemption offered them a competitive advantage over banks, and found that the “evidence does not permit any sharp conclusions.”

Over the past two decades, Liu and Anderson found, the number of banks and credit unions have both declined and their total assets have both increased. Moreover, the relative proportion of assets held by credit unions has remained steady, even following federal legislation in 1998 to loosen membership requirements. The economists did find evidence that member business lending by credit unions displaced some bank lending, but also noted that “credit union lending has been steadier through business cycles, including the recent financial crisis.”

Nonetheless, with Congress engaged in a seemingly endless round of budget “crises” – both real and manufactured – and with the leadership of both of Congress’ tax-writing panels publicly committed to working on a major tax reform package, credit unions’ tax exemption is back on the table.

A May 6 report to the House Ways and Means Committee that aggregated comments from the various tax reform working groups included commentary on the credit union exemption from two of those groups, one dealing with financial services and the other with charitable and exempt organizations. Both working groups noted the preponderance of comments appeared to favor maintaining the tax exemption for state and federal credit unions, but the working groups also heard input from a number of interested parties who favor scrapping it.

The biggest of these, of course, is the ABA. The bankers launched their offensive earlier this year, with a billboard campaign in the Washington, D.C. area and print ads like this one that appeared in Politico. The ad reads:

Today credit unions are a $1 trillion industry that pays no income tax. That’s nearly $2 BILLION every year that could help shrink the federal deficit. Now, credit unions want even more perks. Enough is enough. It’s time to end credit unions’ indefensible and outdated special treatment.

The $2 billion figure is the ABA’s own invention, and far overstates what federal officials have found as the purported “cost” of the tax exemption. President Barack Obama’s proposed Fiscal Year 2014 budget estimates the cost of the exemption at $1.44 billion in 2012, which is by far the largest estimate from any independent agency.

In April, the Government Accountability Office released its annual corporate tax expenditures report, which put the exemption at $1.1 billion.  Meanwhile, the Joint Committee on Taxation finds the revenue lost because of the exemption to be just $500 million in both 2012 and 2013.

Of course, in order to tax credit unions, they have to continue to exist. The federal reports all operate from the baseline assumption that taxation would have relatively small impacts on the number of credit unions or their total assets. Part with that baseline assumption, and the analysis is quite different.

Thus a September 2012 report from the National Association of Federal Credit Unions found that eliminating the credit union tax exemption would actually cost the federal government $15 billion in lost tax revenue over the next decade, in addition to costing the U.S. economy $148 billion in lost gross domestic product and 1.5 million in lost jobs.

NAFCU’s analysis is premised on their estimate that credit unions benefit consumers by $10 billion annually. And it’s not just their own members who benefit; bank customers likewise benefit from lower fees, lower interest on loans and higher interest on savings, thanks to the competition that credit unions provide.

CUNA calculates similar (albeit somewhat more modest) effects. According to CUNA’s estimates, credit union members enjoyed $6 billion of benefits in 2012, while the moderating impact of credit union competition benefited bank customers by roughly $2 billion. All told, CUNA says, for every $1 in new credit union taxes, the government wipes out $10 in credit union benefits

Even if one is skeptical of the trade groups’ calculations, there can be no question that taxing credit unions would force most to reconsider the value of continuing to be organized as not-for-profit institutions. It is likely that many would convert to banks, and among those who did not, there are any number of ways for a mutually owned company to reduce “income” simply by increasing member benefits.

For credit unions with more than $1 billion in assets – that is, those who operate most like banks already – conversion would simply make financial sense, and many of these institutions already have at least considered conversion or have conversion plans drawn up as a contingency. Small credit unions are also likely to consider conversion, but for an entirely different purpose. Just like thousands of small banks already do, small credit unions could reorganize under Subchapter S charters, and thus continue to be exempt from federal income taxes.

If any group is likely to remain chartered as not-for-profit credit unions, it is the group of mid-sized institutions that historically have been most committed to serving lower-income consumers. Given the overwhelming research about the difficulties this segment of the population faces in finding appropriate financial services – a recent Pew report estimates 12 million U.S. borrowers spend $7.4 billion on payday loans each year – it truly would be unfortunate to add new burdens on those institutions that offer them the best alternatives.

There is, of course, another way to settle the issue: Scrap the corporate income tax altogether. But that’s an argument for another day.

• Will Texas take on windpool reform in special session?: Texas Public Radio
• Small businesses identify serious problems with Internet sales tax: ATR
• Are recent tornadoes a result of climate change? : PropertyCasualty360
• Financial markets enjoying a wild ride with Fannie Mae and Freddie Mac: Felix Salmon
• Citizens Climate Lobby is making progress in pushing carbon tax issue: New York Times

Last week, a coalition ostensibly made up of four groups (Let Freedom Ring, American Majority, 60 Plus, and Americans for Job Security) released a letter (PDF) urging support of the Marketplace Fairness Act. Beyond coming to a bad conclusion about the bill’s merit, the letter gets so much wrong that my reaction to it was more one of pity than of annoyance or concern that it might be effective. Let me count the ways that they totally blew it with this letter.

First of all, they didn’t write it. Or at least the properties of the document suggest that they weren’t the original authors. The metadata of the letter lists someone named “Travis Burk” as its author (go ahead, look for yourself). Some rudimentary Googling tells me that Travis Burk is a Senior Account Executive at CRC Public Relations. Though Google knows many things, one thing it cannot tell me is who Travis’ client is and why he wrote this letter on behalf of four conservative organizations.

So, what did Travis get wrong when drafting this letter? Lots of things. In fact, most of them are straight out of the “Top 10 bogus arguments for the Marketplace Fairness Act” piece that I wrote recently. I guess he thought I wrote it as a guide, not a warning.

Let’s start with the fact that he references the wrong bill number (oops). The letter urges Members of Congress to support S. 336, but the bill that recently passed the Senate was S. 743. This is because the bill’s sponsors had to drop the same bill text with a new number in order to allow them to employ a procedural trick to skip Finance Committee scrutiny and go directly to the floor without significant debate or discussion. S. 336 is dead and gone, effectively.

Travis also incorrectly characterizes the Supreme Court case around which much of this debate centers. He writes that the decision in Quill v. North Dakota said that “States, without Congressional authority, cannot require online retailers to collect sales taxes at the point of sale, as they often require brick-and-mortar shops to do.” This is false on two levels. First, even after Quill states very clearly do have the authority to require sales tax collection at the point of sale (so long as that point of sale exists within their borders) and doing so would actually be a great idea. Travis just alluded to the fact that brick-and-mortar sales effectively operate on a very simple system called origin-based sourcing, something that we’ve been advocating at R Street for some time: require tax collection based on where the business is located, not based on where the customer lives. That’s how every brick-and-mortar sale is governed today, so let’s extend that to online sales as well.

Second, that’s not at all what Quill said. The Court’s decision said that states could not require sales tax collection and remittance for businesses not physically present within their borders. This reiterated the so-called “physical nexus” standard that underpins virtually all of our tax policies. After the collapse of the Articles of Confederation, we designed a system where state taxing power ended at its borders and Quill basically affirmed that because of the huge complexity that exists in sales tax codes.

Travis continues by stating that current policy “…is a clear case of government picking winners and losers in the economy.” Yeah, no. Current law treats every retailer, regardless of their model, identically. If they’ve got a physical presence in a state, they’ll have to collect and remit its sales tax for sales made to consumers in that state. If they don’t, they don’t. There is no “picking” of winners and losers between business models in a policy that makes no distinction between business models.

Travis goes on to trot out the tired old arguments about federalism, saying, “We may not like the choices every state makes, but that is hardly a justifiable reason for federal usurpation of their authority.” As I pointed out in the “Top 10″ piece, states don’t have “rights,” they exercise powers that are granted to them by the people in order to achieve certain common goals. A power that they don’t have now, and generally haven’t throughout the history of our Constitution, is to extend their tax authority outside their borders. There is no federalism concern in not granting states the ability to dramatically expand their authorities in unprecedented and damaging ways.

He then goes on to specifically call out other conservative organizations that have written in opposition to the bill, including us at the R Street Institute. When discussing a letter we organized (which was signed by basically every conservative group other than the four mentioned here), he writes, “Either they do not understand how the legislation works or they do not know how e-commerce works” after quoting us on the extra hoops the Marketplace Fairness Act envisions forcing online sales to jump through. Let’s just say that, in my humble opinion, I know the legislation a bit better than Travis does if this letter he drafted is any indication.

If my face looks a little redder than normal, you’ll know it’s because I’ve been facepalming all day at this profoundly misguided letter.

• Baucus and Camp say IRS scandal, Apple controversy bolster case for tax reform: The Hill
• Elon Musk, Richard Branson among CEOs endorsing carbon tax: Huffington Post
• Houston attorney announces $135 million settlement with Texas wind pool over Ike claims: Texas Tribune
• Mortgage rates at their highest levels in a year: Reuters
• Exiting Texas insurance commish warns TWIA is a “ticking time bomb”: PropertyCasualty360
• Farm Bill reform is in the eye of the beholder: Cato

The Senate’s Farm Bill deliberations should wrap up next week, with final approval coming after this week’s recess. That makes this a good time to take stock of what we know and don’t know about what the final bill will look like.

With more than 200 amendments submitted, there are many ideas floating around for ways to improve the bill. Not all those amendments will be considered, but looking at the few amendments that already have been voted up or down, we get a sense of just how much reform the Senate is willing to swallow.

One important improvement already made it into the bill in the form of Amendment 953, which means-tests the crop insurance program. Under the amendment, producers with average adjusted gross income of more $750,000 would see their crop insurance subsidies reduced by 15 percent. While this modest reform – which would be implemented pending a study examining its effects on the overall insurance market, represents a step in the right direction – it barely garnered the votes to pass, clearing the floor 59-33.

A more radical reform to the federal sugar program introduced by Sen. Jeanne Shaheen, D-N.H., failed to pass, as did an amendment to prohibit federal premium support to tobacco farmers. The failure of those amendments is telling, as it suggests any major reforms may be destined for defeat.

So what should reform seekers push for during this final thrust, knowing that only incremental change is possible? When it comes to crop insurance, five more amendments should make the cut:

• Amendment 926, introduced by Shaheen and Sen. Pat Toomey, R-Pa., caps crop insurance premium subsidies at $50,000 per farmer. This amendment would save $3.4 billion over the next ten years, while still providing the same level of benefits for 96 percent of all farmers. It’s a no-brainer in this fiscal climate.
• Amendment 936, by Sens. Jeff Flake, R-Ariz., and Mark Begich, D-Ark., requires full transparency for crop insurance, allowing taxpayers to see who is receiving how much in premium subsidies. Numerous other federal programs contain such requirements, and crop insurance should be no different.
• Amendment 1012, from Flake and Sen. Claire McCaskill, D-Mo., eliminates a provision of the bill that would prevent Congress from negotiating any savings for taxpayers as part of the Standard Reinsurance Agreement with insurance companies. A 2010 renegotiation found $6 billion in savings, and there’s no reason to keep future agreements from finding savings when possible.
• Amendment 1013, by Flake, eliminates subsidies for insurance plans that include a Harvest Price Option. This one amendment could save $7.7 billion over ten years, and you can read more on why it’s a good idea here.
• Amendment 1014, again by Flake, is perhaps the hardest sell. It would reduce the taxpayer share of crop insurance premium subsidies from an average of 62% to 37%. It’s worth noting that this was the level of support as recently as 2000, and would still provide incredibly generous support to farmers.

With these and many other good options for progress on the table, it would be shameful for the Senate to pass the bill as-is. But given the Senate’s record so far, even these modest reforms may be too much to hope for.

• Senators will consider cuts to crop insurance when they return: Farm Futures
• Insurance, not electronics, is Sony’s most profitable business: New York Times
• eBay enlists sellers to oppose the Marketplace Fairness Act: eBay
• A carbon tax as the solution to climate change: Forbes
• Franklin Center for Government & Public Integrity calls MFA “wolf in sheep’s clothing”: Oakland Press
• After seven years without a hurricane, Florida insurance rates are still inadequate: Miami Herald
• Oregon carbon tax advocates rally at state Capitol: Statesman-Journal
• CASAA collecting tobacco harm reduction success stories: CASAA
• EIOPA wants more authority to regulate European insurers: Business Insurance
• The climate cooling effects of sulfates may be overstated: Los Angeles Times

As an insurance guy who has been on both sides of the climate change debate (I’ve worked for organizations full of climate change skeptics and now head one that believes it’s an important public policy issue) I’ve heard just about every claim about what “insurers say” about climate change.

Plenty of people who want to minimize the risks (or even existence) of human-caused climate change will say that insurers are trying to line their pockets by fomenting fear of natural disasters. Plenty of environmentalists, on the other hand, will make broad statements about the insurance industry’s deep concern about the issue as a way of demonstrating that at least one big business supports their preferred policy solutions.

As with many other issues, the truth lies between the extremes. A balanced look at the insurance industry’s perspective on climate change reveals a lot of nuance.

On one hand, if one doubts the opinion of an overwhelming majority of scientists, the insurance industry provides another major data point.  Given that accurate and unbiased weather forecasts are key to property insurers’ business, the fact that the industry broadly accepts that climate change is real and likely to be a problem should be taken seriously by anyone who believes in the power of markets to aggregate information. If insurers were not concerned about climate change, that would be a very strong piece of evidence that politicians, the media or scientists have hyped the issue beyond what it deserves.

In fact, every large property insurer incorporates climate change-related projections into its own models. Every large property insurer that I know of considers the likelihood of climate change-linked catastrophes to be a future operational threat. Smaller property insurers do less long-term planning and are less likely to make direct use of climate change projections, but they still feel the impact of those projections in terms of how much reinsurance they can buy and at what price.

On the other hand, the business implications of climate change to insurers are a lot smaller than many environmentalists assume. I’ve attended dozens of insurance industry conferences—even some focused on environmental issues, with environmental groups in heavy attendance—and climate change is fairly low on the list of insurers’ own pressing concerns.

The first thing to understand is that property insurance is just one segment of the overall insurance industry. The property/casualty industry, with $426.2 billion of premiums in 2010, is a fair amount smaller than the life/health insurance industry, which had $581.2 billion. And the property/casualty industry is made up of dozens of lines of business, many of which just simply aren’t terribly concerned with the weather. That includes the largest single line of business – private auto insurance, representing 37.6 percent of property/casualty premiums – as well as other major lines like liability, workers’ compensation, commercial auto and medical malpractice.

With $61.3 billion of premiums, homeowners insurance is the biggest line of business that can expect to see a direct impact from climate change. But it is also one of the least profitable lines of business. Indeed, no company of any size sells only homeowners insurance. While sea level rise and more frequent natural disasters would impact other lines of business – including business insurance, fire, crop insurance, and ocean marine – most insurance contracts are written on an annual basis. Insurers are much more interested in what calamities are likely to befall their policyholders this year, and to price those risks accordingly, than they are in what might happen 20 or 30 years down the line.

In a nutshell, while climate change offers a potential long-term threat to insurers, regulatory hurdles, pricing challenges, investment returns, and ordinary claims are omnipresent and impact earnings every quarter. Over the past decade, insurers fled the Florida market in droves because of poorly designed government regulations and continued subsidies for development in hurricane-prone areas. At the same time, Louisiana and Mississippi – which both pursued more free-market regulatory courses— actually have more companies writing insurance in coastal areas than they did before Hurricane Katrina. No insurer that I know of has ever exited (or entered) a market because of climate change.

Finally, I don’t know of a single insurer that really has a strong corporate-wide position on what public policies would be the most appropriate to deal with climate change. Some, particularly large European companies, have supported various sorts of energy taxes intended to reduce carbon pollution. But ultimately, the industry’s relative silence isn’t that surprising. When it comes to complex issues without an identifiable direct and immediate business impact, few companies of any sector are likely to go too far out on the limb.

The bottom line is pretty simple: the insurance industry’s positions on climate change do help validate that it is real and a problem. But when it comes to a broader set of claims that environmental groups tend to make, the insurance industry as a whole doesn’t really have that much to say.

• Fact checking the Internet sales tax coalition: Heritage
• American Academy of Actuaries endorses raising the retirement age: Academy
• NRDC says insurers are running from climate change risks: PropertyCasualty360
• Rep. Mike Capuano introduces bill to extend terror insurance backstop for 10 years: Wall Street Journal
• Senate votes to means-test crop insurance subsidies: The Hill
• Senate approves Sen. Kay Hagan amendment to crack down on crop insurance fraud: Associated Press
• Sen. Claire McCaskill introduces amendment letting government negotiate discounts with crop insurers: KZIM

In a new blog post, our friend Daren Bakst at the Heritage Foundation argues against returning to the Reagan administration policy of linking federally subsidized crop insurance to conservation compliance measures.

Bakst argues that denying federal crop insurance subsidies to farmers who drain wetlands and cultivate sensitive lands without plans to stop erosion is bad policy. The two policies ought remain disconnected, Bakst says, because “crop insurance is designed to minimize risk to farmers,” while conservation compliance “is designed to protect the environment.” He adds that the policy of conservation compliance “does not respect the fact that farmers, not the federal government, are the best stewards of their land.”

Both of these arguments are deeply flawed.

It’s simply not the case that conservation compliance and crop insurance have different purposes. Both serve to manage risk.  Environmentally sensitive wetlands and prairies are exactly the same areas where farmers are most likely to lose their crops. If purely private companies underwrote crop insurance, they would either demand far higher premiums to insure these areas or they would decline to write coverage at all. Thus, if one wants to scale back the federal subsidies and move in the direction of a private market—a goal R Street and Heritage share—returning to the Reagan administration policy makes sense.

This isn’t a trivial consideration. There are major challenges to privatizing the National Flood Insurance Program in the short term precisely because it has written so much coverage in areas that the private sector simply won’t touch. Failing to link conservation compliance to subsidies could likewise make it impossible to privatize crop insurance, in that farmers will continue to be encouraged to plant in areas the private sector would never insure at prices that farmers could afford.

Furthermore, Bakst implies a “right” to crop insurance subsidies that simply does not exist.  While individual farmers are better stewards of their own land than Washington paper-pushers, this doesn’t mean these same farmers have any inherent right to taxpayer support. Under current conservation compliance programs, farmers who don’t want to follow the rules are free to decline the subsidies. No one will prevent them from disposing of their land as they see fit with their own money. No business is “entitled” to have its activities subsidized, particularly when those activities are both inherently risky and harmful to the environment.

Bakst is right to call for “setting caps on the premium subsidies that farmers can receive and reducing the percentage of premium subsidies currently paid for by taxpayers.” Frankly, we’d rather see these subsidies eliminated altogether. But insofar as crop insurance supports exist, returning to the Reagan-era policy (also known as, “don’t subsidize dumb things”) is a step in the right direction that deserves conservatives’ wholehearted support.

• Carbon tax would raise significant revenues, avert catastrophe: CBO
• Senate rejects reforms to sugar program: The Hill
• Rep. Stephen Fincher, who has collected $3.5M in farm subsidies, wants to cut SNAP: New York Times
• 97.1% of peer-reviews papers over past 20 years find global warming is substantially man-made: Environmental Research Letters
• More economic progress needed before quantitative easing is unwound: Federal Reserve

• Senate Finance Committee Chairman Max Baucus, D-Mont., plans to have a tax reform package ready to move by the August recess: Washington Post
• The Florida Hurricane Catastrophe Fund is selling $2 billion of taxable bonds this year, the state’s largest muni debt offering since 2007: Bloomberg
• Credit union trades are called in by House Ways and Means Committee to discuss the industry’s federal tax exemption: Credit Union Times
• U.S. Rep. Candice Miller, R-Mich., introduces bill to privatize National Flood Insurance Program: Insurance News Net
• U.S. infrastructure isn’t “crumbling”; it’s merely mediocre: Bloomberg View
• Florida state Rep. Bryan Nelson distributes wine from with “scary” vintages: Florida Business Observer
• Attractive catastrophe bond pricing may help bring down North Carolina homeowners’ insurance rates: Triangle Business Journal
• Storm forecasters expect an active hurricane season ahead: PropertyCasualty360

In a truly stunning announcement, last week, the U.S. Food and Drug Administration announced its intention to lift many restrictions on labeling of over-the-counter Nicotine Replacement Therapy drugs; allow multiple NRT products to be used concurrently, and concurrently with cigarettes; and to substitute the current firm limitation of 8 to 12 weeks with a squishier recommendation that, if needed for longer durations, the user should consult his or her physician.

This was in response to citizen petitions from Tobacco Free Kids, the State of New York and multiple other parties alleging the safety of these proposed changes and that such action would enhance the efficacy of NRT products in curbing cigarette smoking. Even though the FDA found the referenced studies weak, inconclusive or technically flawed,it accepted the major recommendations of these citizen petitions on the basis of “30 years of experience” with these products.

If I understand the response correctly, these products are now to be available basically without warnings or restrictions, and, as they have been in the past, with no age restrictions for purchase or prohibitions on TV or other media advertising.

In addition, the FDA approved their being made available at much lower cost in single-day packaging without considering how this might be seen by teens attracted to possible nicotine use.

While I agree in general with the thrust of the citizen petitions and the steps taken by the FDA with regard to the labeling requirements on these products, I wonder if the practical effect is to move these products into the realm of recreational drug use. Certain elements of their action may be worthy of reconsideration.

The other aspect of this is what it implies for manufacturers and vendors of e-cigarettes and other smoke-free, relatively low risk tobacco products. Should they all submit drug applications, or will FDA use this opportunity to rethink the provisions of the tobacco control law that prohibit these manufacturers and vendors from advising current smokers and others about the difference in risk posed by these products, as compared to cigarettes?

I’ve already covered in these pages some of the things the editorial pages of North Carolina’s leading newspapers are getting wrong about S.B. 154, legislation to modernize the state’s system of setting auto insurance rates. But co-sponsor Sen. Jeff Tarte, R-Cornelius, does a better job than I ever could of getting to the heart of the matter.

To refresh your memories, S.B. 154 would allow auto insurers to opt out of setting their rates collectively through the North Carolina Rate Bureau, the last “pure” auto insurance rate bureau system in the country. The change would permit insurers the option to offer a range of products and discounts not currently possible under the one-size-fits-all rate bureau system.

The insurance commissioner would continue to have authority to disallow rates deemed to be excessive, inadequate or discriminatory, but regulators would need to show cause to challenge proposed rate increases of less than 12 percent.

Opponents of the bill have seized on that change to argue that the new system would lead to massive rate increases in what has been undeniably a relatively affordable state for auto insurance (albeit one in which lower-risk are bearing a disproportionate amount of the costs generated by higher-risk drivers.)

In a letter to the Charlotte Observer, Tarte explains a serious flaw in that prediction:

Some people have suggested that the N.C. Rate Bureau is responsible for keeping North Carolina’s car insurance rates low. But consider this, N.C’s commercial auto insurance market does not use a rate bureau to set rates. Are commercial rates significantly higher? No. North Carolina enjoys some of the lowest commercial auto insurance rates in the nation.

Indeed, as Alan Smith and I note in a new primer published by North Carolina’s John Locke Foundation, there are any number of reasons North Carolina has low average auto insurance rates, but the insurance department’s authority to set price controls are not among them. In reality, auto rates are low throughout the Southeast. Rates in North Carolina and other nearby states are lower than the national average for a variety of reasons, including caps on tort damages, reasonably tight enforcement of vehicle safety standards, demographics, and relatively low traffic density.

Tarte also offers a concise summary of why the system needs reform:

More important, hidden fees that are charged to every driver to help cover the cost of insuring risky drivers would be eliminated. Did you know that this fee by state law cannot be mentioned on your insurance bill? It cost North Carolina residents nearly $900 million over a five-year period, and most drivers never knew that they were being charged.

This hidden fee is only necessary because our state has insurance companies lump good drivers together with high risk drivers through the N.C. Reinsurance Facility. This practice leaves all drivers with the responsibility for insuring risky drivers, while the insurance company makes a guaranteed profit for servicing these accounts. Does your business get a guaranteed profit for taking on risky business?

North Carolina consumers deserve better. We deserve a system that lets good drivers take advantage of discounts and does not force us to pay hidden fees to help insure risky drivers.

This is how everyone else in the country does business – not because it is good for insurance companies, but because it is fair to every driver.

When it comes to property insurance reform in Florida, everyone is basically focused on proposals that deal with the Florida Hurricane Catastrophe Fund, Citizens Property Insurance Corp. and the (over) regulation of private insurance carriers in the state.  Some bills dealing with these issues are crawling through the process, but it is still too early to tell whether or not they ultimately will be enacted by a Legislature that has historically viewed them through a very skeptical lens.

However, a property insurance bill that appears to be sailing through the Legislature is one that deals with FIGA, a little-known state insurance mechanism with no apparent problems or need for reforms.

When insurers are on the verge of insolvency, they must either be rehabilitated or liquidated by state government.  When they are liquidated, the Florida Insurance Guaranty Association (FIGA) assumes and pays any outstanding claims belonging such insurers so that consumers who bought an insurance policy in good faith are not left with their claims unpaid.  It’s like the FDIC for insurance companies.

FIGA obtains its funding to pay claims primarily in two ways: through the liquidation of assets of insolvent insurers and by levying assessments on insurance companies.

Like Citizens and the Cat Fund, FIGA can levy assessments onto essentially every property/casualty insurer in the state.  Specifically, FIGA can levy up to a 2%-of-premium assessment for each of the two accounts it has for a maximum of 4% per year.  When the FIGA board determines the need for an assessment, the Office of Insurance Regulation approves it and orders each insurance company to pay the assessment upfront to FIGA within thirty days.

If it is an “emergency” assessment (due to a hurricane), the board at its discretion can spread the assessment over 12 months or collect it upfront, depending on whether it needs the funds quickly. “Regular” (or non-hurricane) assessments must be paid upfront within 30 days. Regardless, insurance companies recover the assessment from their policyholders at renewal or issuance. This is how just about all other states pay for their insurance guarantee funds.

S.B. 324 and H.B. 211 change the manner in which the assessment is levied onto the insurance companies. Instead of an upfront payment, regular assessments would be gradually collected directly from policyholders at renewal or issuance. Emergency assessments would likewise be collected directly from policyholders at renewal or issuance, unless the FIGA board determines it needs the funds immediately and cannot “reasonably” obtain financing.

At first glance, this appears to be a decent proposal that would save insurers from having to tap into their surplus to pay a FIGA assessment. Insurance companies like this for accounting purposes, not to mention the interest they can continue accruing on that money.

However, the proposal appears to bind the FIGA board to the new “pass-through” levy rather than give it more flexibility.  Indeed, in the case of an emergency assessment, FIGA may elect to levy it upfront (per current law), but according to language in the bill, to do so, the board must demonstrate that “financing is not reasonably available” in order to make that decision.

“Reasonably available” is inherently vague.  If “reasonably available” pertains solely to availability without regard to cost, then this bill would in essence always force FIGA to finance regardless of the cost.

Remember when the Charlie Crist Administration paid $224 million to Warren Buffett’s Berkshire Hathaway for a mere pledge to buy $4 billion in Cat Fund bonds back in 2008 when the bond markets were frozen? The moral of this flashback: financing is always available even in hard times—at the right price.

If after a sufficiently bad hurricane season there are multiple insurance company insolvencies and Citizens, the Cat Fund, and neighboring states also impacted by hurricanes simultaneously go cap-in-hand into the bond market, FIGA may very well find itself in a situation where financing may not come cheap.

And what does this mean? The cost of financing—potentially expensive, high-interest financing—would be passed through directly onto policyholders (read: consumers) instead of insurance companies paying their FIGA assessment upfront as current law prescribes, which incurs no finance costs.

Paging Rep. Fasano!

However, a few tweaks can avoid such a scenario.  Two possible changes that preserve the spirit of the current legislation are:

• Removing the requirement that “financing is not reasonably available” and giving the FIGA board the discretion to determine if circumstances merit an upfront assessment payment or a gradual pass-through assessment payment; or
• Allowing the insurance carriers to decide.  They can be given, say, 30 days to decide whether to remit the full assessment amount as current law prescribes or to remit it gradually as a pass-through as the bill prescribes. Those electing the gradual pass-through option would subject their own policyholders to applicable financing costs, if any.

These are commonsense suggestions to fine-tune well-intentioned legislation that, if enacted without changes, may very well have the unintended consequence of raising insurance costs on consumers.

I was in North Carolina last week. North Carolina is, I believe the only state in the union where the Monday after Easter is a state holiday to allow people to celebrate the twin religious ceremonies of the Christian Easter and the state high school basketball championships. 

As a committed basketball state, and since one of the local university teams was selected to play in the national college tournament (that produces, and I am not making this up, the lowest productivity of any regular work day in America) naturally there was some discussion about their trip to Dayton, Ohio to confront Temple, and then perhaps the winner of the Indiana-James Madison game.

One of the players interviewed on television disclosed that James Madison University was unknown to him as a college, but remembered that Madison was a “big name.”  “Somebody who signed the Declaration of Independence or the Emancipation Proclamation or something.”  If the odds were beaten, and North Carolina State faced a giant-killer that dispatched a number one seed, maybe he would look it up.

Upon returning home, I was greeted at the airport by my wife, who tells me that the desperation to do something about the kids who are failing elementary school in our little community has produced a proposal by our school board. To supplement the homework help and additional benefits already offered to these struggling children, we taxpayers are in discussions about also providing them with free summer school.  We will try almost anything to keep them advancing through the system which has the potential to give them a shot at a decent life in the 21st Century.

Summer school doesn’t come with a free breakfast and lunch, however, so it’s no sale so far.  First conversations about the extension of the educational safety net indicate that the parents of these at-risk children might not be willing to send them unless they get free meals.

As a comparison, a couple of Americans who founded and run Project Ethiopia are providing a corrugated roof and a concrete foundation for school buildings for young African children who don’t have one.  The parents, to get this help, pound rocks into gravel for the concrete, build the walls out of local materials and dig a 40-foot well by hand.

There is a lot of debate these days about taxpayer-provided benefits, which seem to beget twin torrents of statistics about need and “fair share” matched against warnings of what further dependency on the government could do to the economy and the American future.  Entitlement debates are mainly about the inexorable arithmetic these days. Perhaps they should increasingly be about a society that doesn’t appreciate its history or a basic human need for dignity satisfied by “earned success,” as Arthur Brooks, president of the American Enterprise Institute often puts it.

Also evident is the replacement of gratitude and determination in response to “a hand up” – the traditional standard for help by a community to its less fortunate members – with a less thankful instinct that views elimination of all inequalities as cultural and increasingly legal imperatives.

In the same way that the pursuit of happiness envisioned by the patriots who founded this nation has morphed into a demand, “charity” has undergone a transformation — first to “welfare,” and now to mandated benefits and transfer payments which reportedly comprise about half of nonmilitary federal spending.

Health and Human Services Secretary Kathleen Sebelius just last week offered her public opinion that the states who are nervous about expanding a troubled and expensive Medicaid benefit to more citizens will be eventually forced to knuckle under to provider pressure and the 100% federal match lasting until the end of the president’s term. The federal carrot sometimes turns quickly into a stick, as it did with serial use of lower speed limits, drunk driving laws and seat-belt use to threaten states’ federal highway money. Moreover, HHS is notorious for not granting permission to states that have developed programs that have been shown to be more effective in maintaining the public health, like our neighbors in Indiana, because they sometimes charge a small co-pay or use a deductible.

What happens if a “grand bargain” or something like that is struck on the federal budget, and the feds fall back on their share of the funding?

Well, several million more Americans have a bone to pick with their member of Congress, for openers.

The best-selling Hunger Games trilogy by Suzanne Collins is all about a self-absorbed and demanding capital district that controls all production, including agriculture and mining, law enforcement and justice, and broadcast communications for all of the other districts in the nation.  I hope the Hunger Games series weren’t meant to be textbooks.

My home state of New Jersey has been the scene of a number of historic events over the years, both famous and infamous: the invention of the incandescent light bulb, the first recorded baseball game, the Hindenberg disaster, the discovery of the Big Bang, the duel between Alexander Hamilton and Aaron Burr.

But earlier this week, the New Jersey state Senate topped them all, with its proclamation of a newly derived fundamental human right: the right to own beachfront property.

Garden State lawmakers would perhaps quibble with that characterization, but it’s difficult to imagine any other justification for S.R. 102, which passed the upper chamber March 18 by unanimous voice vote. The resolution declares the Legislature’s sense that Congress and the White House ought to “take all appropriate legislative and regulatory action necessary to increase subsidies for premiums paid for flood insurance through the National Flood Insurance Program, especially for property owners who have suffered frequent losses.”

Those who don’t follow the ins and outs of the NFIP closely might not immediately apprehend why that sentiment borders on self-parody. The NFIP has been offering overly generous subsidies to residents of flood-prone regions for more than 45 years, and the roughly 1% of policyholders who suffer “repetitive losses” (90% of whom were paying deeply discounted “grandfathered” rates ) have accounted for more than a third of all the program’s claims.

The result of this system, which the N.J. Senate apparently would like to see expanded, has been nothing but environmental catastrophe and financial ruin. To put it frankly, the NFIP is flat-broke, and has been ever since 2005, when hurricanes Katrina, Rita and Wilma forced it borrow more than $19 billion from the U.S. Treasury just to pay its claims. There was little chance the program ever would be able to pay down that debt, and what little progress it did make was quickly erased by Hurricane Ike in 2008 and Tropical Storm Irene in 2011.

But with claims still coming in from last year’s Superstorm Sandy, whatever hope may once have existed of the NFIP returning to fiscal sustainability has long since been swept away. When all is said and done, the Sandy claims are expected to put the program more than $30 billion in the hole, with no hope of ever digging itself back out.

Someday, some future Congress will have to bite the bullet and forgive that debt, which exists essentially as an accounting fiction. In the meantime, a strong bipartisan consensus has emerged in favor of reforming this broken system which, in addition to flushing billions of taxpayer dollars down the drain, has served to encourage development in the most risk-prone and environmentally sensitive regions, contributed to wetlands depletion, threatened endangered species and led to the overdevelopment of barrier islands that serve as natural buffers against hurricanes.

Last year, Congress capped nearly eight years of debate on flood insurance reform by passing the Biggert-Waters Act. It incrementally moves the program toward greater solvency by phasing out premium subsidies for second homes, commercial properties and properties that have seen severe repetitive losses. It raises the cap on annual rate increases from 10% to 20%. It asks the program to begin building a catastrophe reserve fund and permits it to leverage those funds through purchases of private reinsurance.

It’s not a perfect piece of legislation. It doesn’t address the program’s debt, or what the GAO has identified as lax oversight of its Write Your Own program. We’re still a long way from bringing the program to true actuarial soundness, much less to the full privatization that we at the R Street Institute would like to see.

But even the modest steps Biggert-Waters does take clearly trouble some coastal lawmakers. Like, for instance, state Sen. Christopher Connors, R-Forked River, author of the New Jersey resolution. Following the state Senate vote, Connors told The Press of Atlantic City:

“A perspective a lot of people didn’t realize is that the federal government realized they had a failed program for years and what they attempted to do to adjust the program was removing the subsidies so those in higher-risk areas would be paying higher rates,” Connors said Wednesday.

…“Removing subsidies is only ensuring that people who will be living near the water are very rich people. If you raise these costs and shift this burden onto them, you will drive out the middle class dream of living on the water,” Connors said.

One must at least credit Connors for his honesty. He recognizes that the program is failed. He concedes that the goal of reformers is to make those who live in high-risk areas pay more, in accordance with the basic principles of insurance. He’s a bit confused on the demographic distribution – in truth, research by the Institute for Policy Integrity shows that the wealthiest counties in the National Flood Insurance Program filed 3.5 times more claims and received $1 billion more in payments between 1998 and 2008 than the poorest counties – but the basic gist of Connors concern is pretty clear.

His concern is that folks in coastal communities have been having their lifestyles subsidized by the rest of the country for a very long time, and they don’t want to see anything change that.

In the Book of Matthew, Jesus compares those who hear his words and do not act upon them to “a fool, who built his house on the sand.” But who is the bigger fool, the one who builds his house on sand, or the one who chips in to rebuild it, over and over again?

The NFIP is a sucker’s bet, a three-card monte, of the sort that boardwalk hustlers have been peddling down the Jersey Shore for more than  century. In that sense, the state Senate is just taking part in a long and storied Jersey tradition – playing out the long con.

In a Jan. 31 BMJ blog post, Dr. Ruth Malone, editor of Tobacco Control, excoriated the Food and Drug Administration for proposing “facilitated dialogue” with the “tobacco industry.” This assertion was based on her perception that such dialogue would lend the “tobacco industry” legitimacy that they do not deserve. She further denied that the “tobacco industry” should be referred to as “stakeholders,” and denied the possibility that they might have goals in common with the public health community.

While this statement of righteous indignation reflects a view held by many within the tobacco control community, it is both technically incorrect and dysfunctional from a number of perspectives.

In her ruling, U.S. District Court Judge Gladys Kessler, of the D.C. District, found seven major cigarette manufacturers guilty of racketeering. While these companies are the largest and most visible cigarette manufacturers, they do not represent the larger “tobacco industry.” The tobacco industry consists of hundreds of other companies manufacturing and selling a wide range of tobacco and tobacco-related products. Dr. Malone, in her stereotyping the entire industry on the basis of criminal activity by seven firms, showed a profound lack of understanding of the structure and dynamics of the larger tobacco industry.

Even worse, by painting the entire industry as guilty of racketeering, Dr. Malone strengthens the hand of the guilty cigarette companies by effectively silencing the many others within the tobacco industry who are ready and able to work with the public health community in pursuit of public health objectives.

In her post, Dr. Malone references action by tobacco companies as “creating divisions within the tobacco control community.” She seems unable to imagine the possibility that, by gaining a better understanding of the dynamics of the larger tobacco industry, that we, in public health, could exploit similar divisions within the industry in a manner supportive of public health objectives.

It is not the FDA who has given the seven cigarette companies the cloak of social responsibility.  It is the larger tobacco control community, which has offered total and unquestioning support of the FDA Tobacco Control Act that provided this benefit to the racketeering companies. They knew, or should have known, at the time this bill was making its way through Congress, that Altria/Philip Morris helped draft major sections of the bill. In the name of protecting children from nicotine addiction, multiple provisions were written into the bill to protect both cigarette and pharmaceutical companies from competition from far less hazardous and likely less addictive tobacco/nicotine products.

Perhaps the greatest fault of Dr. Malone’s post was her failure to recognize the realpolitik and power dynamics of tobacco-related issues in the United States in this second decade of the 21st Century. For the past half century, the tobacco control community, both in the United States and internationally, yearned for a “tobacco-free society.”

During the 1990s, under the leadership of then-FDA Commissioner Richard Kessler, we attempted to secure federal legislation that would have empowered the FDA to ban at least some tobacco products. That was not to be. We only secured FDA authority to regulate tobacco when Congress and the president were presented with a bill that carried the strong support of the largest cigarette company. With passage of that bill, that question was put to rest. Our society will not be tobacco-free.

That being the case, the FDA is not “unwittingly acting as an agent for the tobacco industry…and undermining a strong tobacco control strategy.” The FDA is realistically taking the action needed to reduce tobacco-attributable illness and death and further our efforts to reduce teen initiation of tobacco/nicotine use.

Dr. Malone is not alone in her failure to recognize the manner in which the advent of the FDA tobacco law changes the American tobacco control landscape. If used wisely by the FDA and others in the tobacco control community, these changes can secure more rapid and more substantial reductions in tobacco-attributable illness and death than previously imagined, and most likely do so while further reducing teen initiation of tobacco products. If used unwisely, this law will do more harm than good, in terms of these public health objectives.

Wise use of the power given to the FDA under the new law will require facilitated dialogue between the public health community and all within the tobacco industries who care to engage in such dialogue. Central to this discussion will be consideration of tobacco harm reduction – the potential means by which relatively low risk, and possibly less addictive tobacco products could be used to displace cigarettes as the dominant means of nicotine delivery in the United States.

Wise use of this power will enable us to take advantage of natural market forces, in addition to strict regulation and frank health education, to pursue our public health objectives. How we collectively manage the skyrocketing popularity of e-cigarettes will be the first real test of our ability, as a tobacco control community, to adapt to a radically changed tobacco policy environment and use these changes to benefit the health of the public.

For four out of the last seven years, the Florida Hurricane Catastrophe Fund has been projected to have a shortfall should a major hurricane impact the state and cause the fund to pay out to its coverage limits.  This is one of those years. Currently, the Cat Fund is projected to experience a shortfall of $1.5 billion year should a sufficiently bad hurricane strike Florida this year.

What does this mean for the average Floridian?

Some background: The Cat Fund sells reinsurance to every property insurer selling coverage in the state of Florida.  Reinsurance is insurance for insurance companies. Florida law requires property insurance companies to purchase a minimum amount of this coverage from the Cat Fund, and the rest they can purchase from the private reinsurance market. The purpose of requiring insurers to purchase some of their reinsurance coverage from the Cat Fund is to keep insurance prices relatively stable for consumers, as the price of private reinsurance can fluctuate from year-to-year.  As such, the Cat Fund is meant to stabilize the Florida insurance market.

However, a potential shortfall of the Cat Fund would be anything but stabilizing. Because every insurer in the state relies on the coverage they purchase from the Cat Fund to pay claims in the event of a storm, if the fund is unable to pay out what it has promised each company after a hurricane, then quite simply, consumers may not get their claims paid in full.  On a larger scale, the consequence would be that many of the state insurance companies would themselves become insolvent (aka: broke) or close enough to it that the Office of Insurance Regulation would have to take some type of action.

Needless to say, mass insurance company insolvencies after a hurricane and the resultant inability of storm-ravaged areas of the state to quickly rebuild would have a catastrophic impact on the state’s economy, not to mention the thousands of families reeling from the aftermath of a hurricane who expected their insurance companies to make good on their promises.

This week, a House committee is scheduled to consider legislation that would gradually decrease the amount of coverage the Cat Fund can sell to a level where it could be reasonably expected to pay.  Currently, the law requires the Cat Fund to sell $17 billion worth of coverage. It has roughly $8.5 billion in reserves and would have to go out into the bond market and sell another $8.5 billion in bonds to pay out the full $17 billion.  However, the Cat Fund’s internal managers and outside firms alike believe that it will only be able to sell roughly $7 billion in bonds, which would leave a $1.5 billion shortfall.

Legislation up for consideration would gradually decrease the fund’s capacity from $17 billion to $14 billion over three years. Similar legislation was filed last year, but was rejected by the Legislature because decreasing the Cat Fund by $3 billion would have required insurance companies to seek that coverage from the private reinsurance market, which is generally more expensive than the state-run Cat Fund.  As such, this would have driven-up insurance rates, albeit by just a little more than 1 percent per year.  Florida’s Insurance Consumer Advocate Robin Westcott also opposed the legislation on these grounds.

This year, however, private reinsurance rates are projected to continue declining (by a projected 7 percent), which would make it an ideal time to consider right-sizing the Cat Fund.  In fact, the aforementioned Ms. Westcott favors this year’s legislation.  After running the numbers with the projected decreases in private reinsurance, her office actuary projected that property insurance rates would either remain the same, but more than likely would decrease if these reforms were enacted by the Legislature.

As such, legislators in the House and Senate insurance committees no longer have last year’s hard choice to make between slightly higher rates and gambling with the state’s economic future. This year, the choice is a lot easier: they can secure the state’s economic future without raising rates; or do nothing and continue peddling false, phantom coverage at great risk to the state.

The choice would be a clear no-brainer… if this wasn’t Tallahassee.

Later this week, the Senate is likely to vote on a “deficit-neutral reserve fund” amendment regarding internet sales taxes, couched in terms of state sales and use tax laws. As is frequently the case with such resolutions, it will contain plain language that is sufficiently generic as to hide its true intention: to corner conservatives into a proxy vote on the “Marketplace Fairness Act,” a flawed bill opposed by most of the conservative movement. If a vaguely-worded resolution draws significant support, then sponsors like Senator Dick Durbin (D-IL) will point to it as proof that his misguided legislation to dramatically expand state tax collection authority should get an immediate vote on the Senate floor. Supporters of limited government should oppose the Marketplace Fairness Act and any “reserve fund” scheme to aid its passage because it is bad policy for conservatives and even worse politics.

First, a brief reminder of why this bill is misguided. It would allow states to tax businesses beyond their borders for sales made online, setting a terrible precedent for other areas of tax policy and subjecting businesses to huge compliance burdens. It also imposes an “unlevel” playing field by allowing brick-and-mortar sales to collect tax based on the business’ location while forcing online sales to collect tax based on their customer’s location (a much more burdensome and complicated standard). Third, it creates real interstate commerce burdens of the kind that Congress should be actively avoiding.

But let’s focus on the politics. This is, after all, the United States Senate we’re talking about. Simply stated, the next Republican Senator to get in electoral trouble for being insufficiently supportive of expanding tax collection on businesses across state borders for internet sales will be the first. It’s true that there’s a lot of noise about this bill; that much is undeniable. Big box retailers have poured tens of millions of dollars into a high-powered lobbying and PR blitz to support the Marketplace Fairness Act because it would advantage them against their competition. But I haven’t heard much from what you could call “regular” folks without a business or lobbying interest in the bill saying, “Yes, please. Let’s give state revenue collectors the authority to target businesses outside their borders and levy their complicated taxes on my internet purchases.” In fact, polling on the matter pretty consistently shows that the public opposes the concept behind the bill, including upwards of 75% of conservatives.

A “no” vote on a “reserve fund” scheme might annoy lobbyists in gleaming penthouse offices on K Street, but so what? Regardless of one’s feelings on the underlying issue, a “no” vote is easier to defend back home because a failed reserve fund amendment does nothing to materially impact the fate of the Marketplace Fairness Act (it can always be brought up later) while a successful resolution helps to manufacture pressure to pass the bill ASAP, before committees can fully vet it and before the eyes of the world are truly set upon it. Any Senator with questions about the bill or who has yet to make up his or her mind on it should vote “no” by default, since there is no deadline that must be met and the bill has not been subjected to enough analysis on the Hill.

Beyond the lobbying game, a Republican Party that sees itself as resurgent on thwarting government intrusion on technology policy (witness conservative engagement on cybersecurity, wireless spectrum, and copyright issues) would look awfully strange simultaneously supporting greater tax collection authority via the internet. Some conservatives have made real inroads into tech-focused communities by being consistent opponents of unwarranted government involvement, something quite at odds with the Marketplace Fairness Act.

A lot of Republican Senators have kept their powder dry on the Marketplace Fairness Act because it’s a complicated issue and there have been much more important battles being fought over the last year or so. This week’s vote seems poised to try to trick them into effectively supporting that bill by instead presenting them a generically-worded deficit-neutral reserve fund. Time will tell whether or not they make the right choice, but rest assured that conservatives will be watching very closely.