Proposed Price Controls Continue To Be Met With Statehouse Rejection

Progressive Democrats like Senator Bernie Sanders (I-Vt.) and Representative Alexandria Ocasio-Cortez (D-N.Y.) champion a host of price controls, both existing and proposed. Though it’s still not the case for most Republicans, a few GOP lawmakers in Washington have been warming up to price controls recently.

In February of this year, for example, Senator Bernie Sanders coauthored legislation with Senator Josh Hawley (R-Mo.) to cap credit card interest rates at 10%. Representative Ocasio-Cortez and Representative Anna Paulina Luna (R-Fla.) introduced the House version of that bill.

Republican flirtation with price controls, however, is not catching on in state capitals. In fact, in recent weeks statehouse Republicans have continued to reject proposals seeking greater government interference in commerce and state meddling in private transactions, particularly when it comes to the application of credit card interchange fees. Interchange fees cover the cost of privacy protection and rewards points. Interchange fees are assessed as a percentage of credit or debit card transaction that is transferred to the customer’s bank or credit union.

Legislation that would empower state governments to dictate fee structures for electronic payment transactions (e.g., debit cards, credit cards, and prepaid cards) is a form of price control that has been introduced in more than 30 states over the past two decades. Critics of these bills contend their enactment would result in distortionary government-mandated price controls on consumer purchases. Such proposals are designed to prevent payment processors from assessing interchange fees on the full transaction, typically mandating that payment processors exclude sales tax before assessing interchange fees. While such legislation is now pending in Oklahoma, Kansas, Tennessee, Arizona, and Texas, all of those proposals are on track to be defeated.

Proponents of these bills contend assessment of interchange fees with sales tax included is unfair. Yet allegations of unfairness don’t change the fact that the sales tax is part of the transaction being facilitated by the payment processor and comes with associated costs. While legislation to restrict the application of interchange fees has been introduced in most states, only Illinois lawmakers have enacted such a bill. The senior U.S. Senator from that state, Dick Durbin (D-Illinois), is the author of the Credit Card Competition Act, which seeks to impose federal restrictions on interchange fees.

A price control proposal that has, thus far, only been enacted in Democrat-dominated Illinois, is now up for consideration this week in one of the redder states, Texas. In addition to filing legislation mandating that payment processors deduct sales tax prior to assessing interchange fees (HB 4124/SB 2026), Texas lawmakers have also introduced related legislation (HB 4061/SB 2056) mandating disclosure of fee agreements between retailers and payment processors. The Texas Senate Business and Commerce Committee held an April 3 hearing on that legislation, which is seen by critics as a step toward the imposition of new price controls.

“Analyses of similar federal proposals, such as the Credit Card Competition Act, consistently find that consumers will not benefit from future savings under mandates like those imposed by HB 4124/SB 2026 and HB 4061/SB 2056,” noted a joint letter sent to Texas lawmakers this week by a coalition of conservative organizations. “A report from the Government Accountability Office,” for instance, concluded that “65% of non-interest checking accounts offered by covered banks would have been free” had similar regulations that already apply to debit cards never been imposed.

In that joint letter, conservative groups warned Texas lawmakers that a court decision on the interchange fee restrictions enacted in Illinois means that state regulation of interchange fees must be extremely narrow in application in order to avoid violating the U.S. Constitution. The joint letter from free market organizations explains how “a federal court partially granted an injunction to banks in an Illinois case which held that the state prohibition on interchange fees enacted there only applies to Illinois-chartered financial institutions, but not other banks.”

“While state-chartered institutions received no injunctive relief, larger banks managed to successfully argue against state regulation of all interchange fees,” the coalition letter added. What this means is that state lawmakers who decide to impose an Illinois-style prohibition or restriction on interchange fees, as HB 4124/SB 2026 seeks to do in Texas, will only affect local banks chartered within their borders while leaving larger, out-of-state financial institutions with a government-created advantage.

Maryland Attorney General Anthony Brown (D) recently pointed to that Illinois decision in a letter warning Maryland legislators about the consequences associated with state regulation of interchange fees. Brown wrote to the sponsor of House Bill 29, an interchange fee bill pending in Annapolis, explaining that the proposed restriction on interchange fees applies to any bank involved in card payments and that “principles of federal preemption could limit the bill’s application such that it would not (and could not) apply to federally chartered banks and other federal financial institutions.” Brown’s letter went on to add that “there is a real risk, in my view, that a court would find the provisions of House Bill 29 to be preempted by federal law.”

Senator Durbin’s effort to impose federal price controls on credit card interchange fees has thus far failed to gain traction on Capitol Hill. Meanwhile, as state lawmakers continue to reject legislation seeking to restrict interchange fees, Senator Durbin’s own state, in remaining the only one to thus far impose state-level restrictions on interchange fees, is now seen by many as more of a cautionary tale than a model to emulate.