Choosing the Gatekeepers:

How Special Interests Control Licensing Board Nominations

• Private industry controls the majority of seats on most occupational licensing boards across the United States. These active market participants can easily outvote any public members on the board, who are essentially powerless to counter insider interests.
• In dozens of states, industry members on public licensing boards are effectively hand-picked by private industry. In fact, state laws require the governor to choose board members only from a list created by the industry’s professional association.
• This study, the first of its kind on this subject, shows that in 96 instances in 23 states for 17 licensed occupations, special-interest associations directly choose the pool of candidates for appointments to the public licensing board. These associations have incentives to keep licensing barriers high in order to reduce competition from new or innovative providers.

​One out of every four workers is not allowed to do their job without an official state-issued license. Licensing boards, using government power, control the marketplace for services in their industries. Researchers have emphasized the large number of licensed occupations and their burdensome requirements.^{1 Department of the Treasury Office of Economic Policy, Council of Economic Advisers, & Department of Labor, “Occupational licensing: A framework for policymakers” (Washington, DC: White House, 2015), 1-77.}

These boards enforce occupational licensing laws and often can create their own rules. They can penalize existing license holders and reject new workers from entering the profession.

The boards are mostly composed of individual license holders in the industry, as required by law. In some instances, seats are reserved for members of the public as a check on the industry insiders. The public seats, however, are usually a small minority. The industry representatives can easily outvote them. In fact, the minority is often so small that the board could have a quorum without any public member being present. Furthermore, these public seats can go years without being filled, being deemed unnecessary for board business.^{2 Rebecca Haw Allensworth, “Foxes at the Henhouse: Occupational Licensing Boards Up Close,” California Law Review 105, no. 6 (2017): 1,567-1,613,}

Members of state licensing boards are usually appointed by the governor or are nominated by the governor and then confirmed by the legislature. State law requires that members meet certain qualifications, such as industry experience or holding an existing license in good standing.

In some states, however, there is a more restrictive and consequential requirement: The governor may only choose board appointments from a list of candidates provided by the professional associations of the industries. Some statutes explicitly name which of these incumbent special interests shall provide the lists or require that the lists contain only three or four names. In some cases, the professional association holds an election open only to existing licensees, and then the governor must rubber-stamp the winners.

Stacking a licensure board with members who tend to share the biases of the trade association creates several problems⁠—and it is unlawful.

It encourages gatekeeping against new workers and discourages entrepreneurship.

Licensing boards often have substantial power to determine the fate of entrepreneurs and workers, and they often abuse it.

• They usually have the power to interpret state licensing law, which may sometimes be ambiguous, and they use their interpretations to restrict new licenses.
• They can reject applicants (often with little deliberation) for lacking “good moral character,” and they often do so with little deliberation, deciding against an applicant who has ever been arrested or served time in jail, even for a misdemeanor.
• They can assess penalties on existing license holders (again with little deliberation or evidence), which could have an intimidating effect.
• They can issue cease-and-desist letters to providers of a related service that the board interprets as being under their authority, even if that purview is unclear in state law.

A lack of checks on these powers increases the likelihood of board decisions that keep out new competitors, burden existing licensees, and thwart innovative business models with unnecessary or overly aggressive enforcement.

It violates a Supreme Court decision.

In a 2015 decision, North Carolina State Board of Dental Examiners v. Federal Trade Commission, the Supreme Court of the United States found that requiring a majority of the board members to be “active market participants” creates a conflict of interest that equates to anticompetitive behavior by the state government and that is actionable in a court of law.

Furthermore, the Court ruled that state governments must carry out robust oversight of board activities and structure. The Court’s majority noted, “[w]hen a State empowers a group of active market participants to decide who can participate in its market, and on what terms, the need for supervision is manifest.”^{3 N.C. State Bd. of Dental Exam’rs v. FTC, 135 S. Ct. 1101 (2015).} Very few states, however, have made changes to board structure or executive oversight to comply with this decision. This failure likely opens the states to litigation in cases on these grounds, and a sovereign antitrust exemption (which lets states have their own monopolies) cannot be used as defense.

It violates established separation of powers principles.

Legislative powers belong to the legislature. It is unfortunate enough that legislatures have outsourced rulemaking to licensing boards, even within the limited extent that states may regulate the right to work. Here legislatures have established regulators who are not democratically accountable. For these regulatory bodies, the industry chooses its own insiders as members. When licensing board members limit the right to work or abuse their authority, they normally cannot be fired, and nobody can vote them out.

Giving the industry so much of a role in selecting members reduces transparency and weakens the ability of both the public and the state government to oversee the board or hold it accountable. Although the public usually can access records regarding the nomination process from public bodies, it has little or no ability to learn why or how a private industry association determined the list of potential board nominees.

This study illustrates the scope of the problem across 50 states for 17 occupations that are governed by a licensing board. Among those occupations, 23 states effectively hand over the power of nominating the private sector board members to a trade association for at least one board.

For people seeking a license in any of these 17 occupations, there are 96 specific instances across all 50 states in which the license would be issued and regulated by a board at least partly hand-picked by special interests.

The states with the largest number of occupations regulated by boards on which private sector members are recommended by a trade association are Louisiana (12 occupations), Alabama (11 occupations), Mississippi (10 occupations), Kentucky (9 occupations), Oklahoma (8 occupations), Maryland (8 occupations), and North Carolina (8 occupations).

Trade associations most frequently direct the selection of private sector board members for the following occupations: podiatrists (10 states), accountants (9 states), psychologists (9 states), dentists (8 states), nurses (8 states), and optometrists (8 states).

The table illustrates these findings.

As a more mobile workforce becomes a permanent feature of the modern economy, state policymakers have a compelling interest to keep their labor markets as open as they can. This pro-growth policy should be coupled with due diligence in the wake of a Supreme Court decision that effectively revokes antitrust protection for state government in any judicial proceedings that challenge a licensing board if it is dominated by active market participants.

A board selection process that explicitly hands control to market participants to limit their own competition should be a ripe and obvious target of reform. The cleanest reform of the selection process would be one that allows governors to consult with a trade association if they wish but would not require the governor to choose any of the recommended nominees. See the model legislation in Appendix A.