Thousands of federal regulations raise the prices of goods and services that Americans buy. Just six of these regulations raise prices enough to cost the average American household $1,005 per year. Consumers pay hidden taxes when they buy a new or used car, fill their gas tank, and pay for their groceries.
According to most estimates, income growth for middle-class families has been low over the past decade or two. According to the Congressional Budget Office (CBO), average real after-tax income for households with children grew by $1,521 per year from 2000 to 2008. Since 2008, income growth has been even lower due to the recession and slow recovery. Removing the six hidden taxes outlined in this Issue Brief would be equivalent to an extra eight months of income growth for a typical middle-class household. Put another way, the average household would benefit about as much from repeal of these six regulations as it would benefit if real gross domestic product (GDP) growth were to accelerate from 2 percent to 3 percent for a year.
The following are six ways that Congress can raise real middle-class incomes by saving consumers money.
1. Repeal Fuel Economy Regulation: Save $448 per Year. Corporate Average Fuel Economy (CAFE) standards add $3,800 to the cost of an average new car, and the cost is rising every year. For the average household, this works out to $448 per year. For a family with several drivers, however, the savings from repeal would be significantly larger. As a percentage of income, the potential savings are greatest for low-income families who rely on car transportation to get to work.
These costs already take into account gasoline savings from greater fuel economy, refuting the argument that greater regulation will save consumers money at the pump.
A recent Heritage Foundation Backgrounder showed that three teams of economists and engineers accurately predicted how much the cost of new cars would rise after Congress and the Obama Administration implemented the costly new CAFE standards between 2007 and 2016, but Congress or the next President can halt the costly annual increase in CAFE standards and help to prevent further damage to middle-class incomes. Full repeal of these uneconomical fuel economy standards requires action by Congress—and the sooner the better, since income wasted on inefficiently engineered vehicles will never be recovered.
2. Repeal the Ethanol Mandate: Save $255 per Year. The Renewable Fuel Standard (RFS) requires that refiners include corn-based ethanol in the gasoline that consumers and businesses use to run vehicles. Regrettably, corn is not very good at being gasoline, so the regulation adds to the price of fuel. The RFS requirement has also shifted a significant share of American farmland away from growing food, raising the price of foodstuffs by 1 percent or 2 percent.
Two studies have found that the RFS raises the price of gas by about 19 cents per gallon. Over the course of a year, the extra gas and food costs add up to $255 for an average household. Repealing the mandate would save American households money and would save lives in poor countries where the increased price of grain has pushed the world’s poorest to the very edge of their budgets.
3. Reform Corporate Taxes: Save $230 per Year. Corporate taxes are a double tax: For every $3 collected in revenue, corporations spend another dollar on compliance costs. The extra dollar is paid for out of a mix of higher prices, lower wages, and lower profits. Corporate tax rates are high, and the corporate tax code includes reams of complicated provisions. Simplifying the code would make it easier for corporations to comply with the law; lowering the rate would shrink the reward for finding or creating a way to get special treatment.
Corporate tax reform would simplify the code and lower the tax rate without changing total revenue. If such a reform cut compliance costs in half, and if half of the benefits were realized as lower prices, prices would fall and save consumers $230 a year. Workers and investors would also benefit, especially in future years as new investments raised labor productivity and thus increased wages.
4. Restore Free Trade in Sugar: Save $29 per Year. Crony capitalism is at work in the sugar industry, where trade restrictions allow U.S. sugar growers to charge higher prices, thereby hurting American consumers and the rest of the food industry. Sugar is a small enough part of American budgets that the savings are relatively small: $29 per year for the typical household, or $3.6 billion for consumers nationally.
The Sugar Program, however, is emblematic of the special treatment that many well-heeled industries have secured from Congress. Lobbyists have figured out that if you can take a dollar from everyone in America, you can become very rich, and most people will not notice.
5. Restore Competition in Milk Markets: Save $29 per Year. Repealing crony-capitalist Milk Marketing Orders in the dairy industry would save American consumers 50 cents on every gallon of milk. For families with children, the savings would work out to much more than the $29 per year average.
Where the Sugar Program prevents free trade between countries, Milk Marketing Orders prevent free trade between regions of the country and allow dairy producers to form cartels, which are illegal in virtually every other industry. Consumers lose in this arrangement, as do dairy farmers in disfavored parts of the country.
6. Repeal One Environmental Rule: Save $14 per Year. Congress and the Environmental Protection Agency (EPA) are supposed to take costs into account when passing and implementing new regulations, but some of those costs are hard to predict. In one case, a 1990 regulation made it significantly more expensive to build new cement factories. As a result, the existing factories became effective monopolists and raised prices significantly. The higher prices, which the EPA did not predict, increase the cost of building infrastructure, workplaces, and homes and are ultimately passed on to consumers.
A Coast-to-Coast Agenda for Regulatory Reform
Congress and the President can save the average household $1,005 a year just by implementing these six reforms, but they should not stop there. Many more regulations impose small hidden taxes on American consumers, and the costs imposed by those regulations add up quickly.
Moreover, local and state governments are not off the hook. Local governments, especially in coastal cities and suburbs, can save renters and homeowners thousands of dollars a year by repealing land-use restrictions and eliminating bureaucratic delays in the permitting process. State governments can save the average family $1,033 a year by removing occupational licensure requirements that have no proven public safety benefit.
As in Washington, so in town halls and state capitals around the country: Crony capitalism leads to benefits for the well-connected at the expense of the rest of the nation.
Finding the Will to Act
When the Heritage Foundation Backgrounder introducing these reforms was published in November 2015, oil exports from the U.S. were still severely restricted, hurting jobs and investment in energy, increasing fuel price volatility, and costing the average household $227 per year in higher gasoline prices.
In December, Congress and President Obama lifted the ban. Now “American crude [oil] is flowing to virtually every corner of the market and reshaping the world’s energy map,” proving wrong those who claimed that the ban had little economic impact. Exports have helped to soften the blow of falling oil prices to American producers while benefiting American consumers: a timely win for everyone.
The unexpected repeal of the export restriction shows that an entrenched regulation can be removed quickly and easily when the political will is found. The Wall Street Journal said that repeal of the oil export ban was “considered unthinkable even a few months ago.”
Congress should not let regulatory inertia stop it from considering the six money-saving reforms outlined above. Responsive, representative government means putting American citizens first and telling every industry and interest group to pursue wealth in the marketplace, not through the regulatory code.
—Salim Furth, PhD, is Research Fellow in Macroeconomics in the Center for Data Analysis, of the Institute for Economic Freedom and Opportunity, at The Heritage Foundation.