Has Governor Bush Monkeyed Around With Business?

Overwhelmingly CEOs say they’ll support you for president, but that’s curious, George.

June 1999By Comments

On the northeastern fringe of Austin the subdivisions and office parks peter out and the prairie takes over, a pastoral scene that goes on for miles until it is broken by a trapezoid facade of green glass and a mammoth longitudinal complex that goes back and back and back, evolving from offices to factory as it recedes into the distance. This is the U.S. headquarters for Samsung Semiconductor, one of the prize catches for Texas in the high-stakes competition for corporate expansion and relocation, and it is here, Brenda Arnett says, because of George W. Bush. “We were competing with Georgia and Oregon,” recalls Arnett, the former head of the Texas Department of Commerce (now called the Texas Department of Economic Development), “and he met with Samsung’s top executives. He didn’t promise them anything. He talked about how much he loved Texas and why this was a good place for business, and that really impressed them. He’s a seller.”

As Arnett related how the governor had sold the Korean high-tech company on coming to Texas, I realized that his message was much like what he had told me when I had asked him about his record on business issues. “It starts with philosophy,” he had said. “I understand that the role of government is to create an environment in which entrepreneurship flourishes. Our business environment sends a clear signal that entrepreneurship is welcome here, that Texas is a good place to take a risk.” Bush should know. Not only did he start his career as the head of his own oil company in Midland and move on to become the managing general partner of the Texas Rangers baseball team, but in deciding to pursue the presidency he has now embarked upon the biggest political risk of all. Apparently the Samsung executives are not the only business leaders who have been impressed. A recent profile of Bush in Fortune cited a poll of CEOs in which a whopping 86 percent favored him for president. This near sweep is all the more remarkable because one of his chief competitors for the Republican nomination, Steve Forbes, was a CEO himself.

As with other polls showing Bush astonishingly far in front of his rivals, Republican and Democratic, the question that comes to mind is, Why? Indeed, Bush himself asked it a year ago, when early polls for the 2000 presidential race showed him rocketing to the top before he’d displayed any overt interest in running for the White House. Is the support for him explained by his familiar name and the royalist impulse of conservatives to favor the promotion of whoever has the best claim as heir apparent? Or are his supporters aware of his philosophy and actions? How much do CEOs know about Bush’s business record? It is quite an intriguing record, and one that reveals the kind of politician Bush is. In 1995 he made good on a campaign promise to bring tort reform to Texas—but he also declined to veto a 1997 bill, the first of its kind in the nation, exposing HMOs to malpractice suits. He believes that science should prevail over politics in environmental decisions—but his appointees to the Texas Natural Resource Conservation Commission last fall made a highly controversial decision to shut down the Sierra Blanca low-level radioactive-waste facility in the West Texas desert after eighteen years of work and $50 million had been spent. He believes in helping business create jobs, as he did by wooing Samsung—but the rate-cutting and pro-deregulation policies of his appointees to the Public Utility Commission have so weakened Texas electric utilities that one, Central and South West, has been bought by an out-of-state company and others fear that they will suffer the same fate.

What these battles have in common are high visibility, considerable controversy, and friends of the governor’s on both sides. Their outcomes suggest two indisputable facts. The first is that George W. Bush is not the kind of politician who falls on his sword over philosophical fine points. The second is that, even in Texas, it is not as easy to be pro-business as it used to be.

The importance of a healthy business environment has been a continuing theme in Texas politics ever since the petrochemical and defense industries began the industrialization of the state’s economy in the thirties and forties. In the ensuing decades Texas governors spoke reverently of nurturing a “good bidness climate,” which meant low taxes, friendly regulation, hostility to unions, and protectionist policies for Texas companies, like intrastate trucking firms. Texas was a one-party state in those years, and the Capitol was ruled by conservative Democrats who were loyal to business and warred constantly with populists, labor, minorities, and others in the party’s liberal wing. In the sixties Governor John Connally foresaw the growth of the Sunbelt and convinced business that if Texas was to attract Northern companies seeking to relocate, the state had to spend more money on basic services, from education to parks.

And so it came to pass. The seventies were boom times in Texas, but prosperity brought about the fall of the old political order. The Northerners who immigrated to Texas with their companies were mainly Republicans who cared nothing for the state’s byzantine political traditions. The conservative wing of the Democratic party withered; its adherents drifted toward the GOP, and the remaining Democrats moved left. Meanwhile, the diversification of the state’s economy made it impossible for business to continue to speak with a single voice. The oil bust of the eighties was fatal to business’s political clout. Politically active independent oilmen, real estate developers, and lenders were wiped out, and in many cases ownership passed to out-of-state interests indifferent to Texas politics. The phrase “good bidness climate” disappeared into history, plaintiff’s lawyers dominated the Capitol and the courts, and Democratic governors Mark White and Ann Richards were elected after campaigning against utilities and insurance companies, respectively. The nineties have brought to Texas, as elsewhere, a politics that revolves more around personality and social issues than the concerns of business, with the single exception of tort reform. From the top-down politics of the fifties and sixties, with the business establishment at the apex of the pyramid, we have moved to the bottom-up politics of the end of the century, where power is in the grass roots. No governor, Republican or Democrat, can ignore that fundamental shift, and George W. Bush certainly hasn’t. It is no coincidence that the unpopular industries attacked by White and Richards—utilities and insurance—have been losers during the Bush years.

A Texas governor affects business in three ways: through his philosophy and policy priorities, through his appointees to regulatory agencies, and through his involvement in legislation. Bush’s philosophy and priorities are unmistakably pro-business, but what business wants has changed since the days of low taxes and union busting. His top priority, improving the public schools, has now become a major concern of business as well, especially large employers such as the high-tech and telecommunications industries. “The educated child is more likely to become an employee,” Bush told me. In an earlier conversation last summer he argued that the number one problem facing the state was convincing young Texans, particularly minorities, that a good job will await them if they stay in school and master basic skills. “The high-tech industry is going to create 140,000 jobs in Texas over the next few years,” he said then. “We’ve got to convince these kids that they have a future. It’s a marketing problem.” The governor’s campaign to eliminate the social promotion of students who cannot read at grade level is strongly backed by the Texas Association of Business and Chambers of Commerce. “We are the consumers of the public school system,” says its president, Bill Hammond.

Bush’s philosophy regarding business, which will carry over to his presidential campaign, is to increase its opportunities and reduce its burdens. The former involves supporting what he describes as “free and fair trade,” a nifty linkage of two principles that are inherently contradictory: the carrot of open markets and the stick of retaliatory action. He has always been a big fan of NAFTA, the North American Free Trade Agreement, and is quick to summon up statistics in its support, such as the $36 billion in commerce that flows from Texas to Mexico. He has devoted considerable political attention to the border, appointing former Cameron County judge Tony Garza as his first Secretary of State (Garza has since won election to the Railroad Commission) and this year naming the first UT System regent from El Paso. Bush believes that Republicans must make inroads into the traditionally Democratic border counties if the GOP is to remain the state’s dominant party; in the 1998 governor’s race he lavished attention on El Paso County and was rewarded with 50.01 percent of the vote there. But what the border really wants is the kind of attention that can be measured in dollars, particularly for new highways to ease the logjam of NAFTA traffic. The Bush-appointed Transportation Commission has drawn criticism from the border for not providing enough help.

A reduction of the burdens on business was the impetus for the tort reform package of 1995, which he campaigned for and pushed through the Legislature. It was his foremost legislative achievement for business, with curbs on punitive-damages awards and forum shopping for judges favorable to plaintiffs. (Without the governor’s active support, additional tort reform bills, most of them far more controversial than the original, languished during the 1997 session. This year Bush has advocated limiting liability for Y2K glitches, a proposal questioned by high-tech companies that don’t think they have problems and see no reason to let competitors that might be at risk off the hook.) A burden Bush wants to eliminate for small businesses is the franchise tax. His current plan to exempt the first $100,000 in gross receipts would save 231,000 taxpayers from the expensive and time-consuming process of filling out forms that, in the end, yield the state just $100 million in revenue. The exemption is expected to become law.

Legislation gets the headlines, but the day-to-day operation of the state agencies headed by gubernatorial appointees is far more critical to many industries. A staggering number of agencies have an impact on the business community. Texas regulates barbers, funeral homes, pest-control companies, doctors, gaming, and a host of other concerns. The public hears about it only if something goes wrong. Something apparently has gone wrong with the Funeral Services Commission, whose former executive director has sued the commission along with Houston-based Service Corporation International (SCI) and its chairman, Robert Waltrip, saying she was fired by Bush-appointed commissioners after Waltrip complained to the governor’s office about an investigation of SCI. (“She asked to leave, and we granted it,” commission chairman Dick McNeil insists. “We didn’t fire her.”) Other agencies act as facilitators for companies that want to do business in the state—for example, the Texas Film Commission and the Department of Economic Development. (The latter, a big player during the bust, has declined in importance in the Bush years and now is little more than a clearinghouse of information.) By far the most important agencies for big business, however, are the Texas Natural Resource Conservation Commission, whose province is the environment; the Department of Insurance; and the Public Utility Commission, which regulates electric utilities and local-service telephone companies.

The three-member commission that oversees TNRCC (called Ten-Rack for short) is friendlier to business than it was during the early Richards years, when it was known in the business world as Trainwreck. Then, as now, many of the battles were over the speed with which TNRCC approved industrial activities that might affect air and water quality. During the Richards years, business complained that the permit process dragged on and on in contested hearings; in the Bush years it’s the environmentalists who grumble that the process is too streamlined. Bush appointee Barry McBee, who chaired TNRCC until he left to become Lieutenant Governor Rick Perry’s chief of staff, steered the agency according to a recent law that allows industry to police itself. “I don’t believe in ‘command and control’ environmental regulation,” Bush told me. I asked him if he thought that the voluntary system of compliance was working. “I didn’t say ‘voluntary,’” Bush said. “I said ‘not command and control.’ We set high standards and expect people to meet them. If they don’t and they get caught, they know they’ll get hit with a stiff penalty.” Except for the decision on the Sierra Blanca nuclear-waste site, TNRCC has operated outside the limelight, a sure indication that its decisions have not been too controversial.

So you’d expect insurance companies and utilities to be regulated according to the “not command and control” approach too, right? Wrong. Those industries are too despised by the public and too likely to get a governor in political trouble to get favored treatment—and they haven’t. Bush’s first-term insurance commissioner, former state legislator Elton Bomer, hammered the industry twice. The first time was in 1995, after Bush had unwisely vetoed the Patient Protection Act (a.k.a. the Doctor Protection Act), which limited the power of HMOs to run roughshod over doctors. Subsequently Bush directed Bomer to develop rules covering the same issues—and Bomer mollified the medical community by imposing more restrictions on HMOs than the legislation had. Last year, when Bush’s opponent, Garry Mauro, tried to make an issue of automobile insurance rates, Bomer ordered a rate reduction and later requested a second one.

The state’s electric utilities, which are locked in a battle over the restructuring of their industry, have fared even worse. New competitors want to generate and sell their own electricity (or buy it from the utility and resell it), and customers want the cheapest rates possible. Which is the pro-business side? All of them, even the customers, who include petrochemical plants, high-tech laboratories, and retailers. The fight illustrates clearly why business no longer can maintain a united front in politics: In a diversified economy the biggest business issues pit industry against industry. The Public Utility Commission (PUC), chaired by Bush appointee Pat Wood III, a former attorney for the Federal Energy Regulatory Commission, has weighed in heavily against the utility companies, beginning with a decision on Central Power and Light’s 1995 request for a $70.8 million rate increase. Instead, in 1997 commissioners ordered a $32.3 million immediate rate cut, future rate reductions, and a lower return on equity—and made some choice side comments that did not escape notice on Wall Street. The stock of CPL’s parent, Central and South West, nose-dived, and the company is now in the process of being acquired by American Electric Power, based in Columbus, Ohio. The inevitable consequence of the merger is that Texas will lose jobs, including high-paying executive positions. After CPL’s experience, all of the Texas-based electric companies regulated by the PUC now will do almost anything to avoid a rate hearing. Regulatory Research Associates, based in New Jersey, evaluates the regulatory climates of 48 states from the perspective of investors. Texas is 1 of 6 states rated as below average, and only 2, Louisiana and New Hampshire, are regarded as worse.

In the area of telephone deregulation, Southwestern Bell is unhappy with the commission too. Its CEO, Edward E. Whitacre, Jr., has complained to Bush about the PUC. When I asked the governor about the conversation, he responded that it was “private.” Okay, what about the general controversy surrounding the PUC? “We need to be in a competitive environment,” he said. “It’s good for the consumer. That doesn’t mean that the PUC is anti-business. Quite the contrary, competition is good for business.” I asked him about the initial plan for electric restructuring that was making its way through the Legislature at midsession, which required utilities to clear the way for competition by giving up 40 percent of their generating capacity and reducing their market share of statewide generation to no more than 20 per- cent. Bush wouldn’t be pinned down to a number, but he said, “Do I think that the plan should have some sort of spin-off? Yes, I do.” Can the Texas companies survive? “Maybe they will,” he said. “Maybe they won’t.”

Other than tort reform and an expression of support for electric deregulation, Bush has not emphasized business issues in his legislative agenda. Of all the proposals that he has backed in his three sessions, none was more far reaching in its potential effect on business than his 1997 plan to reduce Texas’ reliance on the property tax to fund public education. It was a well-motivated, farsighted, and ultimately ill-fated attempt to solve the problems of school finance that have plagued the state for the past thirty years. The flaw in the system is that local property taxes raise a great deal of money in property-rich school districts (those with oil fields and valuable real estate) but very little money in property-poor districts. Bush wanted to replace local property taxes with state tax dollars, thereby eliminating some of the inequities of the property tax.

Where would those state tax dollars have come from? A personal income tax was out of the question. Bush proposed raising the state sales tax, already one of the highest in the nation, by half a cent (to 6.75 cents per dollar) and also embraced a business activity tax, with the industrial sector of the economy that pays large property taxes (oil and gas, petrochemicals, utilities) arguing for it and the service sector that pays little property tax (doctors, lawyers, accountants, architects, consultants) aligned against it. The industrial sector had the better arguments, but the service sector had the most people—that is, voters—and made the most noise. Bush’s plan evolved into a face-saving increase in the homestead exemption for school property taxes amounting to $1 billion but worth little if anything to individual taxpayers. School districts wiped out the cut for many taxpayers by raising tax rates or reaping the fruits of higher property values. The ironic result was that, since homeowners had an increased exemption, they didn’t have to pay their full share of the higher taxes, and property-owning businesses—the very folks the Bush plan had been designed to help—ended up bearing that burden.

So how does the scoreboard finally read? Has George W. Bush been good for business? Measured by the standards applied to presidents—it’s the economy, stupid—he has done well indeed. Even with oil and agriculture hurting, the Texas economy is thriving. Like all incumbents, he gets the credit for the good things that have happened on his watch. He gets credit too for tort reform, which never would have been so far-reaching had Richards been governor. But in just about every other case, you have to ask, “Good for which business?” Remember the 86 percent of CEOs who favored Bush for president? Some of the remaining 14 percent were probably Texans.

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