Sal Nuzzo: Is support for free market principles wavering?

Close up of credit cards over grey background

Strange things are afoot in a corner of the public policy world.

Organizations like ours, which are committed to advancing the principles that made this country the greatest prosperity engine in the history of humanity — free markets, limited government, and economic liberty — are witnessing a limited but worrying trend among some conservative policymakers: support for big government intervention in the arrangements between retailers and banks that allow consumers to use electronic transactions — credit and debit cards.

So fundamental is the concept of non-intervention to free-market believers that it has come as a bit of a shock to see some of our traditional allies, at both the federal and state levels, throw their weight behind proposals interfering in the “interchange” system — which ensures that the costs of issuing the credit and debit cards (a vital element of the 21st-century economy) are fairly allocated between retailers and banks.

This battle has a history. The largest retailers have long sought to use their collective might (as they have every right to do) to compel the government to impose price caps, or otherwise intervene, to minimize the costs to them of accepting electronic transactions. This has been the subject of contention between banks and retailers for years, and federal government intervention in the form of the so-called Durbin Amendment to the Dodd-Frank Act has already capped prices on debit card interchange, with disastrous consequences.

The Durbin Amendment was famously heralded by supporters as a law that would reduce retail prices for consumers. In fact, it had no effect on prices at checkout at all; retailers used the enormous windfall to pad their profits instead. It did force issuing banks to raise banking costs for consumers, however, resulting, by one calculation, in the effective transfer of between $1 billion and $3 billion annually from poor households to big retailers and their shareholders. Given this example, it is unsurprising that efforts to expand this to credit cards have failed.

So, large retailers have changed tactics. The “Credit Card Competition Act,” currently under consideration in Congress, skins the cat in a different way. It would give the government a broad mandate to interfere in credit card processing in ways that benefit the bottom lines of some of the same corporations that benefited from the Durbin Amendment. Again, it would do this at the expense of credit unions, banks, and ultimately consumers. Despite this obvious case of government picking winners and losers from within the market, it has, for some unfathomable reason, garnered bipartisan support, including from some unlikely policymakers previously considered to be in the free-market camp.

In our home state of Florida, this battle is being waged in a different, even more insidious form. In this case, retailers, having again failed to get traction on a pure price cap bill, were earlier this year behind a bill that sought to artificially prohibit interchange on the sales tax element of a transaction. This bill failed but is expected again next year.

If such a law passes it would mean that Florida banks and credit unions would be expected to collect sales tax on retailers’ electronic payments for free, or, viewed in another way, pay the retailers’ costs for the collection of the sales tax on electronic payments. Banks and credit unions would be the biggest losers, but smaller merchants are likely to be negatively affected too, through problematic implementation costs that large retailers can easily afford. Eventually — no surprise here — we can expect Florida consumers and their families will have to pick up the tab.

The ostensible conservative justification for supporting this effort appears to revolve around the concept that paying interchange on the sales tax element of a transaction is “a tax on a tax.” We do not accept that characterization, but, for the sake of argument, let’s work with it. If conservative support is driven by a desire to alleviate an unfair burden on certain Florida businesses (large retailers), where is the logic in simply moving the responsibility for that cost onto another segment of Florida business (the credit unions and banks)? Florida businesses are still on the hook; Florida businesses still suffer under the exact same burden. We have simply rearranged the deck chairs on the tax ship.

It’s tough to call out our allies on their support for bills like these. The fact remains, however, that government interference in the free market, especially in the form of price caps, has always been anathema to conservatives. We believe that the market exists to set its own prices, primarily through competition between businesses. Interfering with this, no matter how well-meaning, always carries unintended consequences which usually manifest in raiding the pockets of the public. We believe that conservative policymakers have a clear-cut duty to support principles that prevent this.

We must not waver on this. 

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Sal Nuzzo is the senior vice president of The James Madison Institute.