Mississippi Center for Public Policy

Wednesday, March 29, 2017

MCPP Reports

HB 1425: Necessary Regulatory Reform

March 15, 2017

HB 1425: Necessary Regulatory Reform
that Will Protect Consumers and Lower Prices

Executive Summary

  • The Supreme Court recently ruled that many occupational licensing boards may be sued for engaging in anti-competitive practices. Approximately two dozen of Mississippi's boards are vulnerable to lawsuit.
  • There are, essentially, three ways to protect our boards from legal action: 1) place them under active state supervision; 2) reduce the boards to having only an advisory role; or 3) reconstitute board membership so as to remove members currently practicing in their respective field.
  • The Court, as well as the Federal Trade Commission and both the previous and current White House administrations, is skeptical that unrestrained occupational licensing serves the public interest.
  • Occupational licensing drives up prices, limits opportunities for workers and, in some cases, originated in prejudicial attitudes aimed at keeping African Americans out of select professions.
  • HB 1425 is narrowly tailored to address the concerns raised by the Supreme Court and will protect state occupational licensing boards from frivolous lawsuits while encouraging licensing boards to respect free market principles.

Full Analysis

"Government has nothing to give anyone except what it first takes from someone else," reads Principle 5 of Governing by Principle. For this reason, the best way for government to foster prosperity is to remove barriers to opportunity rather than directly intervene in the economy. Some of these barriers include a lack of education and job training, high taxes, and heavy regulatory burdens. These barriers kill the dreams of entrepreneurs before they even take flight.

While lawmakers in Mississippi have done an admirable job in recent years of advancing educational opportunity and cutting taxes, the challenge of regulatory reform remains. The basis of government regulation is the responsibility to protect public safety, health and welfare. These are broad categories that easily lend themselves to abuse. So is there a limit to government regulation?

High Court Places Limits on Occupational Licensing Boards

The U.S. Supreme Court has weighed in on this question, determining that regulatory practices that give industry participants an unfair market advantage are impermissible. Explained the Court in its recent N.C. Dental Board v. FTC case:

Federal antitrust law is a central safeguard for the Nation's free market structures. In this regard it is "as important to the preservation of economic freedom and our free-enterprise system as the Bill of Rights is to the protection of our fundamental personal freedoms." The antitrust laws declare a considered and decisive prohibition by the Federal Government of cartels, price fixing, and other combinations or practices that undermine the free market.

On the basis of these principles, the Court held that occupational licensing boards that are controlled by "active market participants" (that is, people who currently practice in the profession or occupation regulated by the board) do not enjoy sovereign immunity (immunity from lawsuits) unless the boards are under the "active supervision" of the state. Cautioned the Court:

Limits on state-action immunity are most essential when the State seeks to delegate its regulatory power to active market participants, for established ethical standards may blend with private anticompetitive motives in a way difficult even for market participants to discern. Dual allegiances are not always apparent to an actor. In consequence, active market participants cannot be allowed to regulate their own markets free from antitrust accountability. ... Parker immunity requires that the anticompetitive conduct of nonsovereign actors, especially those authorized by the State to regulate their own profession, result from procedures that suffice to make it the State's own.

In short, the Court has ended the practice of unaccountable boards being given free reign within their own sphere. If boards are going to be comprised of "active market participants" that directly benefit from the regulations they impose, especially if those regulations keep competitors out, these boards must be made accountable to state government. And while the Court allows for some leeway in how this supervision is carried out, "the State's review mechanisms [must] provide 'realistic assurance' that a nonsovereign actors anticompetitive conduct 'promotes state policy, rather than merely the party's individual interests.'" At a minimum, these mechanisms must meet the following standards:

  • The state's review must be substantive and not merely a procedural rubber stamp;
  • The state "must have the power to veto or modify particular decisions";
  • The state may not itself be "an active market participant";
  • Regulatory actions must be based on a "clearly articulated state policy" that implies state endorsement of the action.

What's Wrong with Occupational Licensing?

The Supreme Court has been relatively tolerant of a variety of regulatory schemes (e.g., Wickard, Chevron, Whitman), which makes the N.C. Dental Board decision all the more significant. While the case may have further implications for other regulatory actions, it most immediately applies only to occupational licensure.

The textbook definition of occupational licensure is that it "is a form of government regulation requiring a license to pursue a particular profession or vocation for compensation". Government licensing generally entails the creation of a licensing board that sets standards for entry into the profession and demands fees to sustain its regulatory activities. Consumers are familiar with licensed professionals, like doctors and lawyers, but do not realize that many other trades require a license or that activities licensed in one state are often not licensed in another.

According to a 2015 White House report on occupational licensing:

  • Estimates suggest that over 1,100 occupations are regulated in at least one State, but fewer than 60 are regulated in all 50 States, showing substantial differences in which occupations States choose to regulate. For example, funeral attendants are licensed in nine States and florists are licensed in only one State.
  • The share of licensed workers varies widely State-by-State, ranging from a low of 12 percent in South Carolina to a high of 33 percent in Iowa. Most of these State differences are due to State policies, not differences in occupation mix across States.
  • States also have very different requirements for obtaining a license. For example, Michigan requires three years of education and training to become a licensed security guard, while most other States require only 11 days or less. South Dakota, Iowa, and Nebraska require 16 months of education to become a licensed cosmetologist, while New York and Massachusetts require less than 8 months.

In a rare case of agreement between the Obama and Trump administrations, acting Federal Trade Commission Chairman Maureen Ohlhausen is creating an Economic Liberty Task Force to address burdensome occupational licensing requirements. Ohlhausen explains:

The public safety and health rationale for regulating many of those occupations ranges from dubious to ridiculous. ...Market dynamics will naturally weed out those who provide a poor service, without danger to the public. For many other occupations, the costs of added regulation limit the number of providers and drive up prices. These costs often dwarf any public health or safety need and may actually harm consumers by limiting their access to beneficial services. Other evidence suggests that such regulations are unnecessary or overly broad.

Mississippi regulates a high number of professions. A review by the Institute for Justice found that Mississippi licenses 55 out of 102 mid-to-low-level professions. We license court clerks (only 3 other states do that); residential drywall installers (8 other states); and landscape workers (9 other states). Somehow, nearly every other state manages to get by without licensing these trades.

Numerous studies have demonstrated that, by and large, occupational licensing has no correlation with public safety, health or welfare. Observes the White House report:

Licensing laws also lead to higher prices for goods and services, with research showing effects on prices of between 3 and 16 percent. Moreover, in a number of other studies, licensing did not increase the quality of goods and services, suggesting that consumers are sometimes paying higher prices without getting improved goods or services. ... Most research does not find that licensing improves quality or public health and safety.

In fact, the licensing of some professions has more ominous roots. According to research by the Cato Institute:

Before the Second World War, black Americans were increasingly successful in becoming plumbers, barbers and electricians. Trade unions convinced states legislatures to pass laws that made it difficult for them to gain licenses. ... By 1941, all of the states of America except Virginia and New York had passed licensing laws obstructing black men who wanted to become plumbers, barbers, and/or electricians. The laws exploited the fact that black people tended to be less well educated and poorer to exclude them from these trades. Simply by being required to pass written exams and pay for courses, they were obstructed. ... The purpose of such licensing laws may have been to discriminate against blacks or to reduce competition or both. Whichever it was, it was certainly against the public interest.

This is not say that all occupational licensing is racist, but the coincidence between licensing and prejudice suggests just how easily so-called attempts to protect the public welfare can go astray. This subjective nature of many licensing policies is what prompted the Supreme Court to force states to realign their licensing practices with objective standards that protect the public welfare while preserving the free market.

HB 1425: A Restrained Approach to Occupational Licensure Reform

Prompted by the N.C. Dental Board decision, the Mississippi legislature is considering a bill that would meet the standard of "active supervision" required by the Supreme Court. The bill would do the following:

  • Create an Occupational Licensing Review Commission comprised of the governor, secretary of state and attorney general;
  • Give this commission the authority to "review the substance" of occupational regulations and approve, disapprove or suggest amendments to these regulations, excluding disciplinary actions;
  • Articulate a state policy regarding occupational licensing that defines the various types of occupational regulation, promotes competition, and uses the "least restrictive regulation to protect consumers.'

HB 1425 takes a restrained approach toward addressing the reforms required by the Supreme Court. The bill does not call for a total overhaul of the state's occupational licensing practices. Such an overhaul, suggests the Federal Trade Commission, would entail limiting board activity to an advisory role or restricting board membership to those with no financial interest in the regulated profession.

HB 1425 also does not apply to all boards, but only those controlled by "active market participants." The bill does not radically expand the governor's authority over licensing boards, but disperses this review power to other statewide officers.

Again, it is worthwhile recalling that the Supreme Court requires "active state supervision" that is substantive and will be evaluated based on "all the circumstances of the case." There is no other way to read this guidance than to presume that the state must provide for something like the active review process mandated by HB 1425. All in all, HB 1425 is aligned with a narrow reading of the N.C. Dental Board case that will protect state occupational licensing boards from frivolous lawsuits while also encouraging licensing boards to respect free market principles.

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