I’ve done a lot of travelling this summer with my family. Besides now knowing that spending seventeen hours in a car with my wife and two kids is a bit too long for us to all spend in a car together in one shot, I saw state lines galore especially as my daughter really loved to see the “Welcome to XXXX” signs so we looked for them so that her parents could seem someone omniscience for another couple of minutes of her life. Unless we were in the high plains where no one lived, the state line was clustered with stores engaged in regulatory and taxation arbitarage. In New Hampshire, the fireworks store was twelve feet away from the Massachusetts border. In Ohio, the liquor store was a good projectile vomit distance from the Kentucky bridges. In New Jersey, the gas station was the first thing seen when we left New York. In Wisconsin, they offered corn and cheese.
With the exception of the Wisconsin cheese, all of these stores were engaged in very minor/low level regulator arbitage. They counted on taking advantage of their home state’s looser regulations (fireworks in New Hampshire) or lower taxes (gas in New Jersey) to export goods and services to residents of the neighboring state. The home states would occassionally park a police cruiser at the state line to observe the parking lot and pull cars once they crossed state lines to confiscate fireworks but it was a low level trade with a fairly narrow reach as most people won’t drive thirty miles to avoid an extra four cents a gallon in gas taxes (time and gas is too valuable).
However we have a very good example of national regulatory arbitrage in the credit card industry. South Dakota has minimal regulations and they can set the default credit card policies for the entire country. The proposal to allow insurance to be sold across state lines without state approval falls under the credit card example rather than the cheap(ish) New Jersey gas example.
The Incidental Economist sums it up in a very non-IE style post:
Very bad. Go read Margot Sanger-Katz for the evidence-based details. For all the reasons she explains, and others, I never understood the appeal of this idea. It only makes sense if you don’t know what you’re talking about.
There is a way to make it make some sense while knowing what you are talking about. States could engage in reciprocity agreements among other states whose regulatory climate is similar to their own. Massachusetts could engage in an interstate compact with Rhode Island and Connecticutt without giving up too much actual autonomy or authority while Texas and Oklahoma could decide that each other’s lack of regulation is close enough to the home state lack of regulation and require only a single filing instead of two stacks of paper. The interstate compact route could make sense so there is no race to the bottom, but that is not what is being proposed.