This commentary was originally featured in The Dallas Morning News on June 20, 2017
Last month, the Texas Legislature passed a law that will force taxpayers to pay up to 20 percent more for some public projects. In Washington, D.C., a tax is being considered that could increase what Texans pay for insurance. Why would the government do this?
The short answer is influence by special interests and a poor understanding of the benefits of free trade. Unless we successfully combat these factors in both Austin and Washington, Texans and the Texas economy will suffer.
As the nation's top exporting state, Texas benefits greatly from international trade. Research by the Texas Public Policy Foundation shows that all Texans — not just exporters — benefited as the North American Free Trade Agreement helped diversify the Texas economy, allowing it to better survive economic disruptions like reductions in oil prices and major events like the Great Recession.
Despite these benefits, 125 members of the Texas Legislature (with only 40 opposed) supported the passage of Senate Bill 1289, which restricts free trade by requiring "that any iron or steel product produced through a manufacturing process and used in [a government] project be produced in the United States." Though there are a few exemptions in the bill, most government projects will be required to use higher-priced American steel and iron unless the products "increase the total cost of the project by more than 20 percent."
What return on investment will Texas taxpayers receive for the up-to-20-percent more they will spend on these public works projects? Not much. The main beneficiaries will be the primary and fabricated metals industries. But most of this benefit will be exported to other states, where 91 percent of the activity of those industries takes place. This trade restriction is forcing Texans to pay higher prices to benefit primarily out-of-state special interests.
The same misunderstanding of free trade is at the center of the debate over the border adjustment tax in Washington, D.C. As proposed last year, the BAT would eliminate taxes on foreign income but also remove the ability of U.S. firms to write off the costs of goods and services sourced from abroad. In other words, exporters could export virtually tax-free, while importers would be taxed.
Of course, it is not just the importers that would be taxed, but also the consumers who purchase products from them, who would pay these taxes in the form of higher prices.
Our research, conducted in partnership with R Street, shows the economic harm to Texas that would come from a BAT imposed on reinsurance.
Texas is a huge insurance market, with more than $51 billion of premiums written in 2016. Consumers depend on insurance to manage a number of risks to their homes, automobiles and other properties.
Most consumers are unaware of the reinsurance market, which functions as insurance for insurance companies. Texas insurance companies manage their risk by spreading it out around the world. The diversification of these portfolios that cover hurricanes in Texas, snowstorms in the French Alps and tsunamis in Japan allow companies to offer lower premiums to consumers.
However, if the BAT under consideration were to include reinsurance, Texas insurers would be cut off from the global market and unable to fully spread their risk.
Our research finds that "the real effects of applying a BAT to insurance and reinsurance would be to make it harder and costlier for property owners to buy home insurance, for employers to buy workers' compensation, for factories and industrial plants to insure their machinery and for contractors to get the terrorism insurance they need to erect new buildings."
The bottom line would be "$3.39 billion in higher property-casualty insurance premiums over the next decade" in Texas.
Free markets and free trade within those markets benefit everyone. They ensure profits are justly earned based on value creation rather than access to political power or by imposing unjust costs on others. Congress and the Texas Legislature should remember these lessons and respectively reject the border adjustment tax and reverse course on trade restrictions. If they do, Texans and the Texas economy will benefit greatly.