Topic: Tax and Budget Policy

Mississippi Copies Misguided Energy Subsidies

The federal government has a long history of “green energy” failures. Many states have also foolishly subsidized green energy, including Mississippi.

KiOR biofuels launched several years ago with much fanfare. The company was supposed to turn wood chips into liquid hydrocarbons for use as fuel and promised to revolutionize the energy industry. Its chief investor, Vinod Khosla, described KiOR’s refinery as “an amazing facility.”

The company benefited from a federal biofuel requirement that mandated refiners use 16 billion gallons of biofuels annually by 2022. It then sought out state subsidies. The company decided to locate in Mississippi after the state offered a $75 million, no-interest loan. In exchange, the company promised to create 1,000 jobs by December 2015.

Yet the company had financial problems that were apparent from the start. Operating costs  ran $5 to $10 a gallon. The Washington Post reports that court papers estimated KiOR’s revenue at just $2.25 million but losses of $629.3 million.  

Production issues also plagued the facility. The system that fed wood chips into the plant frequently malfunctioned. The process converted less than 40 percent of its inputs into gasoline or diesel, leading to higher costs.

The problems were too much for the company to overcome. It filed bankruptcy in November and  still owes Mississippi $69.5 million.

This loan is just one of the many types of energy subsidies that Mississippi provides to green energy companies. The state exempts some green energy manufacturers from taxes. It has provided grants and loans to multiple companies.

Tax Money Down the Drain

There are many types of federal government waste. Perhaps the most glaring is spending on projects that simply do not work. The money is spent, but taxpayers receive no benefit.

From the Washington Post:

Social Security officials have acknowledged that the agency spent nearly $300 million on a computer project that doesn’t work. The agency, however, is trying to revive it. The program is supposed to help workers process and manage claims for disability benefits.

Six years ago, the agency embarked on an aggressive plan to replace outdated computer systems overwhelmed by a growing flood of disability claims. But the project has been racked by delays and mismanagement, according to an internal report the agency commissioned.

As a wild guess, let’s say that skilled computer techs cost $150,000 a year in wages and benefits. Apparently then, about 333 of them have been paid for six years, yet have made little or no progress on this mishandled Social Security project.

Here’s a much larger taxpayer black hole, also reported in the Washington Post this week:

One of the first casualties was the Crusader artillery program, which was canceled after the Pentagon spent more than $2 billion on it. Then there was the Comanche helicopter debacle, which got the ax after $8 billion. More than twice that amount had been sunk into the Army’s Future Combat System, but that program got killed, too.

In all, between 2001 and 2011 the Defense Department spent $46 billion on at least a dozen programs—including a new version of the president’s helicopter—that never became operational, according to an analysis by the Center for Strategic and Budgetary Assessments.

Any organization will go down some wrong paths when it comes to advanced technologies, but $46 billion is a remarkable amount to have sunk into dead-end projects. Let’s say that engineers, machinists, managers, and other workers at defense firms earn an average of $200,000 a year. The $46 billion lost would be like having a small city of 23,000 such high-skill people beavering away for a decade on projects that all end up in the trash bin. I’m not an expert on procurement, but I do know that is a lot of human talent for the government to waste.

Two Very Depressing Charts for President Obama, Two Very Encouraging Charts for America’s Taxpayers

Let’s look at some fiscal data that must be very depressing for President Obama and other advocates of big government.

Which means, of course, that this information must be very good news for American taxpayers!

Here’s a chart looking at annual federal spending since 2000. You’ll notice that spending skyrocketed from 2000-2009 (a time when libertarians were justifiably glum), but look at how the growth of government came to a screeching halt after 2009.

Here are some specific numbers culled from the OMB data and CBO data. In fiscal year 2009, the federal government spent about $3.52 trillion. In fiscal year 2014 (which ended on September 30), the federal government spent about $3.50 trillion.

In other words, there’s been no growth in nominal government spending over the past five years. It hasn’t received nearly as much attention as it deserves, but there’s been a spending freeze in Washington.

Now let’s look at what happens when government is put on a diet.

Who Will Watch the Watchdogs?

Inspectors General (IGs) serve an important purpose within the federal bureaucracy. They are supposed to be independent, internal watchdogs that guard against fraud, corruption, waste, and other failures. But based on the recent actions of some Inspectors General, their independence is being questioned.

Congress created the system of Inspectors General in 1978 with support from both parties and President Carter. The 72 IGs monitor agency activities and report on agency malfeasance.  Many IGs are appointed by the president to shield them from agency interference.

In theory, IGs are supposed to crack down on waste, but IGs are often too soft on their agencies. Complaints have increased over the last several years. The Washington Examiner discusses the issue:

In the past two years, IGs at a half-dozen Cabinet-level agencies have been accused of retaliating against whistleblowers or softening their findings to protect top department executives or the White House.

Damning information about high-level misconduct has been scrubbed from recent IG reports at the Departments of State, Defense, Homeland Security, Interior and a slew of independent agencies, according to congressional reports and outside watchdog groups.

The Commerce IG has been rebuked for retaliating against his own people by the U.S. Office of Special Counsel and two congressional committees.

At the Department of Veterans Affairs, the acting inspector general is under fire for downplaying whistleblower claims and absolving the agency of blame for patient deaths in a high-profile report, even though the report confirmed that the VA used phony scheduling practices that led to delays in care.

Whistleblowers who have turned to Congress or the media routinely say inspectors general failed to investigate their charges of wrongdoing and then idly watched as their bosses subjected them to brutal retaliation for exposing agency secrets.

Even investigators within IG offices have faced retaliation for reporting internal wrongdoing or attempts to withhold embarrassing findings, according to congressional reports.

IGs are supposed to be guardians of the public interest, but sometimes they are the opposite. Congress has even had to use its subpoena power to force IGs to release documents and reports in some cases.

IGs serve an essential function ensuring that taxpayer funds are spent wisely, but many IGs are falling short on their oversight responsibilities. If they refuse, who will watch the watchdogs? As James Madison wrote in Federalist 51, “”In framing a government which is to be administered by men over men…, you must first enable the government to control the governed; and in the next place oblige it to control itself.”

New Essays in Cato Growth Forum

Here are today’s new essays in the Cato Institute’s online forum on reviving growth:

1. Edward Glaeser targets land use restrictions – and five other barriers to growth.

2. Susan Dudley wants to reform the regulatory process.

3. James Pethokoukis takes aim at the crony capitalist alliance.

4. Andrew Kelly calls for better integration of school and work.

5. Bowman Cutter looks for a path to the “good economy.”

Improve Government: Repeal Aid to States

James L. Buckley’s new book, Saving Congress from Itself, examines federal aid-to-state programs. The federal government spends more than $600 billion a year on 1,100 such programs for education, welfare, and many other state and local activities.

The whole system is a damaging mess, and Buckley proposes in his book that Congress “eliminate all federal grants-in-aid to state and local governments.” That action would “have a profound effect on how we govern ourselves.” A profoundly positive effect, that is, which is a bold claim, but I’ve come to the same conclusion in my writings on the aid system (here, here, and here).   

Buckley’s analysis is grounded in his distinguished career as a U.S. senator from New York, a judge on the U.S. Court of Appeals for the D.C. Circuit, and a high-level Reagan administration official. He argues that repealing aid-to-state programs would free the federal government to focus on truly national matters, put the government on sounder financial footing, and improve the ability of states to increase the quality and efficiency of their own programs.

Buckley’s book is a fairly quick read at 95 pages, but he hits the key legal and practical problems with aid to the states. Buckley believes, as I do, that the aid system is a hidden, or at least underexamined, factor steadily corroding the quality of American governance, particularly since the aid expansion of the 1960s. He notes, for example: “Congress’s current dysfunction is rooted in its assumption, over the years, of more responsibilities than it can handle. As a result, its members now live a treadmill existence that no longer allows them time to study, learn, and think things through. Instead, they substitute political reflex for thought.”

Federal aid is not the free lunch that state governments think it is. Nonetheless, a free lunch is available to you this Monday: please join James Buckley, Roger Pilon, and me at a Capitol Hill forum on December 1 to discuss the book. Details are here.

Latest Essays in Cato’s Growth Forum

Today we add the following essays to Cato’s online growth forum:

1. Enrico Moretti wants to increase the R&D tax credit.

2. Daniel Ikenson calls for more foreign investment.

3. Scott Sumner argues for better monetary policy based on nominal GDP targeting.

4. Don Peck worries about growing dysfunction in the middle class.

5. William Galston offers a potpourri of proposals for faster, more inclusive growth.

6. David Audretsch highlights the central importance of entrepreneurship.

The remaining essays will posted next week.