RALEIGH – Under the general category of “A Little Knowledge is a Dangerous Thing,” there should be a file folder labeled “Their Fair Share.”
Many public-policy problems stem from a misunderstanding of the commonsensical notion, opposed in the abstract by few, that people ought to “pay their fair share” of the cost of the goods and services provided to them, including government services. Unfortunately, too many North Carolinians get misled because they consider only what is readily apparent to them, not what lies underneath.
Consider the example of the Coastal Plan. My friend Jay Price just wrote about this state insurance arrangement in the News & Observer. It offers property and casualty insurance to residents along the North Carolina coast. Some very smart people believe that the Coastal Plan has built up woefully inadequate assets to cover potential losses from a catastrophic hurricane or tropical storm. There is talk of reforming the plan to raise consumer rates and assessments to insurers.
Before judging the wisdom of such reforms, though, it’s important to ask a basic question: Why does the Coastal Plan exist? Insurance is a competitive market, priced according to risk. People who live in along rivers or coasts are choosing a higher level of flood risk than those who live elsewhere, a risk that, all other things being equal, shows up in the higher price of homeowners insurance.
Essentially, then, the state’s Coastal Plan offers these homeowners lower rates than they could otherwise obtain, financed by forcing insurers – and thus insurance policyholders – in other parts of the state to subsidize coastal insurance. Sure, if we are going to maintain the Coastal Plan as an instrument of public policy, then by all means there should be adequate reserves and higher prices to coastal residents. But why maintain it in the first place? The plan presents potential coastal homeowners with artificially low prices, inducing demand for more housing in the path of storms. And it appears to be grossly unfair to North Carolinians in the piedmont and mountains.
Some politicians and residents along the coast beg to differ. They argue that people from the piedmont and mountains do derive benefit, as tourists and state taxpayers, from the existence of a healthy market for homes and businesses along the coast. So the Coastal Plan, plus other government subsidies (such as post-storm bailouts), do constitute ways to make all North Carolinians “pay their fair share” of the insurance risk, according to this argument.
Here is where the seen obscures the unseen. When coastal residents and businesses pay higher insurance premiums, that’s easy to see. But when tourists pay these higher insurance premiums, too, in the form of higher rents and prices for the goods and services they buy during a visit, that’s not so easy to see. It’s not itemized on the bill. Get another step or two removed from the coast – say, when a restaurant patron buys shrimp harvested by coastal residents – and the effects of market-priced insurance become even harder to discern. That doesn’t mean the effects aren’t present.
Similar misunderstandings plague debates about tax policy. Many North Carolinians believe that only homeowners shoulder the burden of property taxes. In reality, renters finance most of the cost of their landlord’s taxes, and consumers shoulder a significant percentage (it varies according to how sensitive they are to competing prices) of the cost of property taxes levied on industrial and commercial property. When you shop at your grocery store, part of what you spend pays for the property taxes on the store, taxes on the construction and maintenance of the facility, and the cost of providing you a parking space.
The use of taxes and fees to link the costs and benefits of public policies has its limits, of course. For some government functions, such as public safety, it makes little sense to talk about taxpayers shouldering “their fair share” because we typically view them as entitlements. You are entitled to police protection simply as a resident of the jurisdiction, by right. You don’t charge crime victims for the cost of emergency response. On the other hand, few oppose the notion that residents ought to pay fees for service when, for example, tapping into a city water system or registering a new corporation with the state.
When considering such issues and forming an opinion about them, you’ll find good advice in another familiar saying: Look before you leap.
Hood is president of the John Locke Foundation.