The Case for Reforming the United States Postal Service

posted by Robert Shapiro on April 20, 2018 - 12:00am

Recently, President Donald Trump issued an Executive Order creating a new task force to evaluate how the United States Postal Service (USPS) operates and funds itself. The order followed two weeks of presidential tweets about the Amazon-USPS relationship. Trump has raised serious concerns that may need to be addressed, but he seems to blame the wrong party. The heart of his grievance lies in the complex connections between the USPS’s monopoly operation and its competitive business, through which the Postal Service uses billions of dollars in subsidized monopoly resources and higher postal rate to lower the fees it charges Amazon and others for its competitive package and express mail deliveries.

This week, I submitted a Declaration to the Postal Regulatory Commission (PRC) presenting the results of my new study evaluating the subsidies the USPS receives to provide universal first-class and bulk mail deliveries, and how much of those subsidies are used by the USPS to support its business division that competes with FedEx, UPS, and others. Amazon uses the USPS to deliver packages, especially over the “last mile” from a local depository to its customers’ homes and offices, because those “cross subsidies” lower the rates the USPS charges Amazon and others. The source of the problem that spurred Trump’s tweets lies with the USPS, not with Amazon.

In the interests of full disclosure, let me note that the research into these subsidies and cross-subsidies was supported by UPS. Let me also note that my analysis along with my research are mine alone – as are my findings that Americans pay higher postal rates and higher taxes so the USPS can claim a larger share of the competitive market in private delivery services.

The USPS’s subsidies range from its monopolies over first-class mail and the right to use customers’ mailboxes and mailrooms in office and apartment buildings, to its exemptions from federal, state and local taxes and fees, and the privilege to borrow directly from the U.S. Treasury. Some subsidy is clearly justified, since Congress imposes costly obligations on the USPS, including universal mail delivery, residential deliveries six days day a week, discounted rates for non-profit organizations, and more. But the subsidies far exceed the costs of those obligations. The PRC, which regulates the USPS, has calculated that the USPS’s obligations raised its costs by $4.4 billion in FY 2016 and valued its subsidies at $6.75 billion. The data actually show that the USPS’s special rights and subsidies were worth $12.9 billion in 2016. The major forms of subsidy and special savings include:

  • $3.05 billion in exempt state and local property and real estate taxes
  • $1.4 billion exemption from income taxes on profits through competitive products
  • $4.45 billion for use of the USPS subsidized workforce, sorting facilities, and vehicles
  • $3.9 billion for exclusive use of the customer’s mailboxes

For example, the PRC has said that the USPS’s legal exemption from state and local property and real estate taxes saved $315 million in 2006 or $428 million in 2016 after adjusting for inflation. But that estimate valued the USPS’s post offices and other real estate at the cost it paid when it purchased or built them. The USPS’s Inspector General looked at the market value of all that real estate in 2012 and reported that it came to $85 billion, or $112.9 billion in 2016 after adjusting for inflation in commercial property prices. Using that real market valuation and the average nationwide commercial property tax rate, this exemption saved the USPS $3.05 billion in 2016, or more than seven times the PRC’s figure.

Another subsidy, one ignored by the PRC, involves the income taxes the USPS allegedly pays on profits earned by its competitive division. The USPS pays those taxes, but not to the IRS. Instead, the taxes are deposited in a special Postal Service Fund (PSF) at the U.S. Treasury, from which the USPS can withdraw any payments to meet its expenses. In January 2017, the USPS deposited $1.4 billion in the PSF for taxes on its competitive division’s 2016 profits, and promptly withdrew the same funds, pocketing another $1.4 billion subsidy.

Few would object if the USPS simply used its considerable subsidies to keep postal rates low. But that’s not the case. Over just the last five years, the PRC has approved USPS requests to raise postal rates in 2013, 2015, 2016, 2017 and again this year. The truth is, the PRC had little alternative. Under growing pressure from email and other Internet services, the USPS’s volume of first-class and bulk mail has been steadily shrinking. The USPS’s hopes for the future, therefore, focus on its competitive express mail and package delivery business.

The USPS’s dilemma is that its’ entire operation is not very productive and thus not very competitive, at least not without help. The Bureau of Labor Statistics reports that the USPS’s productivity grew at an average rate of 0.5 percent per-year from 1987 to 2015, compared to 2.4 percent per-year for its private competitors. Economically, that’s not very surprising. In its monopoly operations, the USPS feels no competitive pressures to invest in new technologies and innovative operations, since there is no competition. The same privileged position allows the USPS to maintain most of its far-flung workforce of 644,000 employees (the country’s second largest after Wal-Mart). Given those facts and choices, its competitive operations could never compete successfully with FedEx, UPS and others — but for the USPS’s ability to forge ways to leverage some of its subsidies into its competition over package and express mail deliveries.

To keep its prices competitive with its private rivals, the USPS provided cross-subsidies totaling an estimated $9.24 billion in 2016. First and foremost, the USPS uses its subsidized workers, vehicles, equipment and facilities to deliver packages and express mail. The USPS’s competitive division is supposed to reimburse the monopoly division for its use of those “institutional” resources. An accountant or economist would base such reimbursements on metrics such as the competitive division’s share of USPS revenues or, alternatively, its share of USPS costs that can be specifically attributed to the competitive business. In 2016, those shares, respectively, were 26.7 percent and 30.7 percent, for a midpoint of 28.7 percent. Instead, the PRC, while formally leaving the minimum contribution at 5.5 percent for 10 years, directed the USPS’s competitive business to pay 16.5 percent of those institutional costs. The difference between that 16.5 percent contribution and an economically-based payment of 28.7 percent constitutes a $4.45 billion cross-subsidy.

Another major cross-subsidy comes from the USPS’s exclusive right to leave first-class and bulk mail in a customer’s mailbox or the central mailrooms of office and residential buildings. Part of this subsidy becomes a cross-subsidy when the USPS extends this privilege to its package and express mail deliveries, while its private competitors have to leave their deliveries at a customer’s door. I estimate that this cross-subsidy was worth $3.9 billion in 2016. Similarly, the USPS’s exemptions from state and local property and other taxes, its ability to use its own income tax payments, and its interest rate subsidy on $15 billion in loans from the Treasury saved the USPS another $4.4 billion in 2016. But again, those subsidies also benefitted its competitive business. Based on the competitive division’s average 28.7 percent share of USPS revenues and attributable costs, $1.26 billion of that $4.4 billion went to support its competitive division as a cross-subsidy.

Ultimately, U.S. consumers and taxpayers fund this shell game through higher postal rates and higher taxes to support the direct subsidies. However, the cross subsidies also distort prices and returns in the private delivery market by diverting demand to the USPS’s less productive competitive services. In so doing, those cross-subsidies discourage new investments and innovations by both established and new companies. The rapid growth of e-commerce deliveries demands such investments and innovation, suggesting that the cross-subsidies could have unforeseen, adverse effects on the development of this major part of our Internet-based economy.

A decade ago, a President’s Commission on the Postal Service and the Federal Trade Commission both proposed a sensible solution. Congress should reorganize the USPS so its monopoly operations and competitive business become separate entities that do not share facilities, equipment, works, vehicles or financial assets. If President Trump’s new task force comes to the same conclusion, Congress can provide the appropriations needed to maintain universal mail delivery at rates that no longer increase every year and let the USPS’s private package and express mail delivery business fend for itself.

Posted on April 17, 2018April 18, 2018Author Categories Donald Trump, Economic Strategy, Economy, Jobs, United States Postal Service, USPS