Editor's Note: This story has been updated with information from Sen. Kelly Hancock about his meeting with Warren Buffett.
A couple of years ago, famed billionaire Warren Buffett got into the auto dealer business without realizing a protectionist state law could stop him from selling cars in Texas.
On Tuesday, the Texas Senate used emergency powers to introduce what was quickly dubbed the “Buffett Bill,” Senate Bill 2279, granting the Oracle of Omaha a special exemption. On Wednesday the author set the bill for a public hearing in a Senate committee. And on Thursday it shot out of the panel like a lightning bolt toward the Senate floor.
In Capitol parlance, what Buffett is getting is known as a “carve-out,” a special deal for one company. In the case of Buffett’s Berkshire Hathaway Automotive, it was an exemption from the supposedly hallowed rule that vehicle manufacturers can’t be vehicle dealers. Berkshire Hathaway also owns an RV manufacturer, Forest River Inc., in Indiana.
If the Legislature fixes Buffett’s problem, it won’t be the first time lawmakers have come to the aid of powerful interests. What makes the Buffett carve-out extraordinary is the speed with which it passed through the often clunky legislative process, the powerful auto dealer alliance supporting it and the stark contrast with other attempts — including by electric car maker Tesla Motors — to open up the state’s heavily-regulated auto market.
The special treatment for Buffett’s bill also lays bare the tensions between the statewide political establishment — led by Abbott and Patrick — and the drain-the-swamp grassroots that have helped put them in their current jobs.
“I do have a problem with a gazillionaire blowing into Texas and meeting with our officials and suddenly a bill gets fast-tracked,” said East Texas Tea Party activist JoAnn Fleming, one of the early and most enthusiastic backers of establishment-busting U.S. Sen. Ted Cruz. “Republicans all run on being free-market people except where there’s an asterisk, and then there’s a bunch of exceptions.’’
Economic protectionism is a touchy subject in the offices of the governor and lieutenant governor, neither of which answered questions about the Buffett Bill or the auto dealers’ firm grip on the Texas Legislature. Patrick’s office did confirm he met with Buffett.
The online Quorum Report first reported the meetings with both Republican leaders, which other Capitol sources have since confirmed. House Speaker Joe Straus, R-San Antonio, met with Jeff Rachor, the Berkshire Hathaway Automotive CEO, but there was no fast-tracked bill heading through the House this week.
The bill's author, Sen. Kelly Hancock, R-North Richland Hills, told The Texas Tribune Thursday that he didn’t meet with Buffett.
"I didn't have a meeting with him," Hancock said. A day later, Hancock contacted the Tribune to correct the record, saying he "briefly met with him when he came in town."
But Hancock had little to say about why he sponsored the company’s carve-out legislation, which was approved 6-0 Thursday in the Business and Commerce committee he chairs.
“It happens just about every session, something moves fast,” said Hancock. “I think we’re just having a typical meeting in Business and Commerce.”
One thing that wasn’t moving fast: carve-out legislation for another company in a similar situation — Cummins Inc. — a diesel engine manufacturer that also owns nine dealerships in Texas.
With similar arguments, the company came looking for relief on the same day that Buffett’s Berkshire Hathaway Automotive testified that it badly needed a fix.
“An engine does not have wheels,” said Cummins executive Jenny Bush, arguing that the law never intended to lump engine makers in with auto makers.
As for the Buffett Bill, Rachor, the Berkshire Hathaway Automotive CEO, compared RVs to apples and cars to oranges.
“The dealer franchise laws are written so broadly that they prohibit an apple manufacturer from owning an orange dealership,” he said, theorizing that this was an “unintended consequence” of the state’s institutional protectionism.
It worked for Buffett, but not for Cummins. Hancock decided that the diesel engine maker will have to wait until next week at the earliest for further action. It’s likely doomed anyway because the head of the Texas Auto Dealers Association, one of the most powerful and well-organized interests groups in the state, came out against it.
At least Cummins got a public hearing. A bill being pushed by Tesla Motors — arch enemy of an auto dealer network that has pumped millions into the campaign coffers of Abbott and others — is heading into oblivion faster than the company’s sleek Model X.
The Tesla bill hasn’t even gotten a public hearing, and nobody in the know at the Capitol is predicting the bill will go anywhere even if it does. That leaves Texas increasingly isolated from other big economies that have embraced the direct-to-consumer sales model Tesla has pioneered around the world — including in approximately 30 U.S. states.
“Neither in socialist France nor Communist China is this an issue,” said Diarmuid O’Connell, vice president of business development for Tesla. “It is only in these four states in the U.S. that it is unambiguously the case that we cannot sell.” The other three are Michigan, Connecticut and West Virginia, he said.
O’Connell argues that laws requiring Texans to buy vehicles from a franchised auto dealer were written for a world that no longer exists by lawmakers who could not have imagined “the technological advances and economic conveniences consumers have access to” today.
But Tesla represents a direct threat to auto dealers because the bill would allow any manufacturer — not just the electric carmaker — to bypass car dealers altogether and sell directly to consumers. And a threat to auto dealers is a threat to the establishment.
In recent years, auto dealer interests, led in large part by one of Abbott’s largest donors — Houston billionaire Dan Friedkin of Gulf States Toyota — have poured money into the campaigns of the state’s top elected officials as part of a well-financed fight against Tesla, according to a 2015 study by Texans for Public Justice, a liberal watchdog group that tracks money and influence. Auto dealer interests have given nearly $11 million to state politicians between 2013 and 2016, with Abbott and Patrick, respectively, at the top of the heap, according to preliminary TPJ figures.
As it turns out, Friedkin, whom Abbott appointed to the board of the Texas Parks and Wildlife Department, has his own carve-out of sorts. His company is the exclusive distributor of Toyotas in Texas and four other states — while also having ownership interests in dealerships.
Friedkin's business empire might have run afoul of state laws designed to stop both manufacturers and distributors from becoming dealers themselves. But Carroll Smith, chairman of the Texas Auto Dealers Association, said Friedkin was cut out of the law because he had pre-existing dealerships when the bills were passed more than a decade ago. It's known as the "Friedkin exemption."
“That’s not a carve-out. Gulf States Toyota is a distributorship, but the common owner of that (also) owned two dealerships in Houston prior to the change of law,” Smith said, referring to Friedkin's businesses. “So it really was a grandfather situation. A changed law would have put him out of business.”
Being put out of the auto dealership business is what likely will happen to both Berkshire Hathaway Automotive and Cummins — the latter already the subject of a state regulatory complaint by the Texas auto dealers — if the Legislature doesn't rescue them. While state leaders love to tout Texas as a beacon of free-market capitalism, under the state's protectionist regulations, Berkshire Hathaway Automotive likely would have to unload either the RV maker or its Irving-based dealership company. The company, which owns 35 dealerships statewide, is worth $10 billion and employs 4,200 people in Texas, Rachor said.
That leaves Abbott with two bad choices: preside over a potential regulatory shutdown of a famed out-of-state billionaire’s dealerships, or tinker with a law that home-state billionaires support with open wallets.
The compromise, according to lobbyists working the deal, is a narrowly tailored bill that will only impact Berkshire Hathaway Automotive.
O’Connell, the Tesla representative, said the fast-tracked Buffett bill flies in the face of the “two immutable truths” that auto industry lobbyists promised O'Connell he would discover in the hallways of the Texas Capitol.
“One is that manufacturers cannot be dealers, and [the other is] that we don’t do carve-outs in the franchise practices act, or more generally, here in this Legislature,” O’Connell said. “And this seems to fail both of those tests.”
Disclosure: Gulf States Toyota and Tesla Motors Inc. and the Texas Automotive Dealers Association have been financial supporters of The Texas Tribune. A complete list of Tribune donors and sponsors is available here.