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141 IRET Congressional Advisory 1 (2002)

handle is hein.taxfoundation/iretcgadv0138 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. November 13, 2002 Advisory No. 141 DOES FIRST-CLASS MAIL CARRY TOO MUCH OVERHEAD? Executive Summary The Postal Service claims that a large fraction of its costs - about 40% - are overhead costs that are unrelated (not attributable) to specific products. These overhead costs are spread over the Postal Service's various products. First-class mail customers pay a disproportionate share of reported overhead costs. The markup added for overhead to the direct cost of delivering first-class mail was 90.1% in the last rate case decision. That is over twice the 43.9% average markup authorized for the Postal Service's other products and services. Since the mid 1980s, the first-class mail markup has increased relative to the average postal markup. First-class mail accounts for 45.1% of the Postal Service's reported attributable costs but because of its high markup, it is estimated to bring in 52.0% of the government agency's total operating revenues and 62.8% of total operating revenues in excess of attributable costs. Current law directs the Postal Rate Commission (PRC), the independent federal agency that regulates postal rates, to approve rates for products that (1) cover their attributable costs and (2) that apportion overhead costs among products based on multiple factors. The Postal Service and the PRC interpret one of those factors (value of the mail service) as justifying higher markups on products whose demands are relatively insensitive to price - notably first-class mail - because the higher prices will not cause much decline in mail volume. Indeed, the Postal Service has long argued that insensitivity of demand to price should be the primary determinant when apportioning overhead costs. Giving it primacy would push the markup on first-class mail still higher and force first-class mail customers to bear an even greater share of overhead costs. But demand for first-class mail is relatively insensitive to price in large part because the Postal Service has a government-granted monopoly on non-urgent letter delivery. Using the artificially low price sensitivity stemming from the postal monopoly as the basis for a high first-class-mail markup contradicts the supposed purpose of the monopoly, which is to increase the availability of reasonably priced basic mail service. In addition, overhead costs are probably substantially overstated, which means first-class mail customers are subsidizing other postal products, especially low-markup products outside the postal monopoly, where the Postal Service faces strong competition from private-sector companies. In its transformation plan, the Postal Service asks Congress to give it more pricing flexibility, that is, power to alter rates with less regulatory oversight. Granting the Postal Service that power would likely lead to an increase in the already excessive burden on first-class mail customers.

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