Topic: Tax and Budget Policy

Scott Walker Defends Corporate Welfare for NBA

On ABC News’ This Week yesterday, Gov. Scott Walker defended his proposal to spend $250 million of taxpayers’ money to build a new arena for the Milwaukee Bucks:

“Our return on investment is three to one…” Walker said. “It’s a good deal.”

The Bucks franchise, valued at $600 million, is owned by a group of billionaire financiers in New York. But no matter what it’s worth, Walker’s statement is at wide variance with the findings of independent economists.

Economic projections for subsidized stadiums are always vastly overstated. As Dennis Coates and Brad Humphreys wrote in a 2004 Cato study criticizing the proposed D.C. stadium subsidy, “The wonder is that anyone finds such figures credible.”

And indeed the Washington Examiner reported in 2008:

Attendance at Nationals Park has fallen more than a quarter short of a consultant’s projections for the stadium’s inaugural year, cutting into the revenue needed to pay the ballpark bonds and spurring a D.C. Council member to demand the city’s money back.

Several Cato studies over the years have looked at the absurd economic claims of stadium advocates. In “Sports Pork: The Costly Relationship between Major League Sports and Government,“ Raymond Keating finds:

The lone beneficiaries of sports subsidies are team owners and players. The existence of what economists call the “substitution effect” (in terms of the stadium game, leisure dollars will be spent one way or another whether a stadium exists or not), the dubiousness of the Keynesian multiplier, the offsetting impact of a negative multiplier, the inefficiency of government, and the negatives of higher taxes all argue against government sports subsidies. Indeed, the results of studies on changes in the economy resulting from the presence of stadiums, arenas, and sports teams show no positive economic impact from professional sports — or a possible negative effect.

In Regulation magazine, (.pdf) Dennis Coates and Brad Humphreys found that the economic literature on stadium subsidies comes to consistent conclusions:

The evidence suggests that attracting a professional sports franchise to a city and building that franchise a new stadium or arena will have no effect on the growth rate of real per capita income and may reduce the level of real per capita income in that city.

And in “Caught Stealing: Debunking the Economic Case for D.C. Baseball,” Coates and Humphreys looked specifically at the economics of the new baseball stadium in Washington, D.C., and found similar results:

Our conclusion, and that of nearly all academic economists studying this issue, is that professional sports generally have little, if any, positive effect on a city’s economy. The net economic impact of professional sports in Washington, D.C., and the 36 other cities that hosted professional sports teams over nearly 30 years, was a reduction in real per capita income over the entire metropolitan area.

Stadiums, arenas, convention centers, arts centers, the story is the same. In 2011 the Washington Post reported that the financial projections for a government-funded arts center, Artisphere, in Arlington, Virginia, didn’t seem to have panned out.

A 2014 report by Don Bauder in the San Diego Reader is worth quoting at length:

Would you take advice from a gaggle of consultants whose forecasts in the past two decades have been off by 50 percent?

Of course you wouldn’t. But all around the U.S., politicians, civic planners, and particularly business executives have been following the advice of self-professed experts who invariably tell clients to build a convention center or expand an existing one.

A remarkable new book, Convention Center Follies: Politics, Power, and Public Investment in American Cities, published by the University of Pennsylvania Press, tells the amazing story of how one American city after another builds into a massive glut of convention-center space, even though the industry itself warns its centers that the resultant price-slashing will worsen current woes.

The author is Heywood Sanders, the nation’s ranking expert on convention centers, who warned of the billowing glut in a seminal study for the Brookings Institution back in 2005. In this new, heavily footnoted, 514-page book, Sanders, a professor of public administration at the University of Texas/San Antonio, exhaustively examines consultants’ forecasts in more than 50 cities….

The worst news: “These expansions will keep happening,” as long as “you have a mayor who says it is free,” says Sanders.

Or a governor:

“We would lose $419 million over the next 20 years if we did nothing, if we said, go on, move somewhere else, which the NBA said they would do,” Walker continued. “In this case, we don’t raise any taxes. There are no new taxes, only existing taxes. And we get a three to one return.”

The project will be funded by existing taxes on hotel rooms and rental cars, though the Wisconsin Center Board has the authority to raise the rate, he said.

“In this case, we take the tax, the revenues on hotels and rental cars that are currently paid for the convention center and allow those to continue to be paid for a new arena,” Walker said. “It’s not a new tax.”

This wasn’t the worst thing Scott Walker said to Jonathan Karl on ABC. He also said he wouldn’t rule out re-invading Iraq. But any presidential candidate who believes that taxpayer-subsidized stadiums are “a good deal” shouldn’t be anywhere near the federal Treasury.

An earlier version of this post relied on an erroneous quotation by ABC News in the first and last paragraphs. The post has been corrected to reflect the video with Walker’s actual language.

Honest Leftist Admits Desire for Spite-Driven Tax Policy

Every so often, I’ll assert that some statists are so consumed by envy and spite that they favor high tax rates on the “rich” even if the net effect (because of diminished economic output) is less revenue for government.

In other words, they deliberately and openly want to be on the right side (which is definitely the wrong side) of the Laffer Curve.

Just in case you think I’m exaggerating in order to make my opponents look foolish, check out this poll of left-wing voters who strongly favored soak-the-rich tax hikes even if there was no extra tax collected.

But now I have an even better example.

Writing for Vox, Matthew Yglesias openly argues that we should be on the downward-sloping portion of the Laffer Curve. Just in case you think I’m exaggerating, “the case for confiscatory taxation” is part of the title for his article.

Here’s some of what he wrote.

Maybe at least some taxes should be really high. Maybe even really really high. So high as to useless for revenue-raising purposes — but powerful for achieving other ends. We already accept this principle for tobacco taxes. If all we wanted to do was raise revenue, we might want to slightly cut cigarette taxes. …But we don’t do that because we care about public health. We tax tobacco not to make money but to discourage smoking.

The tobacco tax analogy is very appropriate.

Indeed, one of my favorite arguments is to point out that we have high taxes on cigarettes precisely because politicians want to discourage smoking.

As a good libertarian, I then point out that government shouldn’t be trying to control our private lives, but my bigger point is that the economic arguments about taxes and smoking are the same as those involving taxes on work, saving, investment.

Needless to say, I want people to understand that high tax rates are a penalty, and it’s particularly foolish to impose penalties on productive behavior.

But not according to Matt. He specifically argues for ultra-high tax rates as a “deterrence” to high levels of income.

If we take seriously the idea that endlessly growing inequality can have a cancerous effect on our democracy, we should consider it for top incomes as well. …apply the same principle of taxation-as-deterrence to very high levels of income. …Imagine a world in which we…imposed a 90 percent marginal tax rate on salaries above $10 million. This seems unlikely to raise substantial amounts of revenue.

I suppose we should give him credit for admitting that high tax rates won’t generate revenue. Which means he’s more honest than some of his fellow statists who want us to believe confiscatory tax rates will produce more money.

But honesty isn’t the same as wisdom.

Rick Perry’s Fiscal Record

Rick Perry, former governor of Texas, will announce his second White House run tomorrow. Perry served as Texas governor from December 2000, following the election of George W. Bush, until January of this year. During his long tenure, Perry showed reasonable fiscal restraint. Perry did not shrink the size of Texas’ government, but he limited its growth both in terms of spending and tax revenue.

Perry appeared in six editions of Cato’s Fiscal Policy Report Card. His first appearance was in 2004. His scores show consistent management of Texas’ budget as governor. He received a “B” in five of his six reports, with a “C” in 2012. Below are his scores in each report card.

2004: B

2006: B

2008: B

2010: B

2012: C

2014: B

Perry’s track record is certainly consistent given the tendency of some governors to slip while in office. For instance, George Pataki’s score fell from an “A” to a “D” between his first and last reports.  Mike Huckabee went from a “B” to an “F.”

From fiscal year 2002 to fiscal year 2015, general fund spending in Texas increased 63 percent. This growth outpaced the growth in average state spending, which grew by 50 percent.

But when these figures are adjusted for population growth, Governor Perry’s record appears much better. Texas’ population grew almost 2.5 times faster than the United States’ population during this time period. In this situation, comparing per capita general fund spending growth is more instructive.

Chafee’s Fiscal Record in Rhode Island

Lincoln Chafee, former U.S. Senator and Governor of Rhode Island, will announce his presidential run this week.  Chafee’s fiscal record as governor was moderately liberal, but much more centrist than Maryland’s Martin O’Malley.

Chafee served as governor of Rhode Island from January 2011 to January 2015, first as an Independent and then as a Democrat. (He was a Republican during his time in the U.S. Senate.) During his tenure, he received a “D” and a “B” on Cato’s Fiscal Policy Report Card on America’s Governors.

State spending grew substantially while Chafee was governor. From fiscal year 2011 to fiscal year 2012, Rhode Island general fund spending grew 5.2 percent and it grew another 5.1 percent from FY2012 to FY2013, according to data from the National Association of State Budget Officers (NASBO). NASBO data shows a 17 percent during Chafee’s entire tenure. This is almost three times population growth plus inflation for the state during his tenure.

After Another Failure, Time to Privatize TSA

The Transportation Security Administration (TSA) has another failure on its hands. In recent tests, undercover investigators smuggled mock explosives and banned weapons through U.S. airport checkpoints 96 percent of the time. According to ABC, “In one case, agents failed to detect a fake explosive taped to an agent’s back, even after performing a pat down that was prompted after the agent set off the magnetometer alarm.”

The unionized TSA has a history of inept management. Reports in 2012 by various House committees found that TSA operations are “costly, counterintuitive, and poorly executed,” and the agency “suffers from bureaucratic morass and mismanagement.” Former TSA chief Kip Hawley argued in an op-ed that the agency is “hopelessly bureaucratic.” And in 2014, former acting TSA chief Kenneth Kaspirin said that TSA has “a toxic culture” with “terrible” morale.

TSA has a penchant for wasting money on useless activities, leaving it less to spend on things that benefit travelers, such as more screening stations. A GAO report, for example, found that TSA continues to spend $200 million a year on a program to spot terrorists by their suspicious behaviors — yet the program does not work.

The State of Washington Should Learn a Very Important Lesson from Connecticut about the Dangers of an Income Tax

Every so often, I get asked why I’m so rigidly opposed to tax hikes in general and so vociferously against the imposition of new taxes in particular.

In part, my hostility is an ideological reflex. When pressed, though, I’ll confess that there are situations - in theory - where more taxes might be acceptable.

But there’s a giant gap between theory and reality. In the real world, I can’t think of a single instance in which higher taxes led to a fiscally responsible outcome.

That’s true on the national level. And it’s also true at the state level.

Speaking of which, the Wall Street Journal is - to put it mildly - not very happy at the tax-aholic behavior of Connecticut politicians. Here’s some of what was in a recent editorial.

The Census Bureau says Connecticut was one of six states that lost population in fiscal 2013-2014, and a Gallup poll in the second half of 2013 found that about half of Nutmeg Staters would migrate if they could. Now the Democrats who run the state want to drive the other half out too. That’s the best way to explain the frenzy by Governor Dannel Malloy and the legislature to raise taxes again… Mr. Malloy promised last year during his re-election campaign that he wouldn’t raise taxes, but that’s what he also said in 2010. In 2011 he signed a $2.6 billion tax hike promising that it would eliminate a budget deficit. Having won re-election he’s now back seeking another $650 million in tax hikes. But that’s not enough for the legislature, which has floated $1.5 billion in tax increases. Add a state-wide municipal sales tax that some lawmakers want, and the total could hit $2.1 billion over two years.

In other words, higher taxes in recent years have been used to fund more spending.

And now the politicians are hoping to play the same trick another time.

The Folly of Centralized Spending

I’ve argued that the centralization of government spending in Washington over the past century has severely undermined good governance. Citizens get worse outcomes when funding and decisionmaking for education, infrastructure, and other things are made by the central government rather than state and local governments and the private sector. The problem is the same in the European Union, as a new article in Bloomberg on the funding of Polish airports illustrates:

Local authorities are spending some 205 million zloty ($58 million), including more than $44 million in EU subsidies, to build runways and a new terminal that could accommodate more than 1 million passengers a year. The Olsztyn Mazury Airport is scheduled to open next January, but traffic and revenue forecasts developed by the project’s backers are “very far from reality,” says Jacek Krawczyk, a former chairman of LOT Polish airlines who advises the EU on aviation policy through its European Economic and Social Committee.

Szymany adds to a burgeoning supply of costly new airports across Poland. Since 2007, the EU has spent more than €600 million ($666 million) to build or renovate a dozen Polish airports.

… Mostly, though, Poland’s new airports have been a financial bust. A report in December by the European Court of Auditors found that EU-subsidized airport projects in Poland, as well as others in Estonia, Greece, Italy, and Spain, had “produced poor value for money.” Traffic at most airports fell far short of projections, and there was little evidence of broader economic benefits, such as job creation, the report found.  

With respect to U.S. infrastructure, there is ongoing pressure to increase federal investment, despite decades of experience on the inefficiency of it. Politicians and lobby groups constantly complain that America does not spend enough on infrastructure. But they rarely discuss how to ensure efficiency in spending, or cite any advantages of federal spending over state, local, and private spending.

I’ve discussed the many downsides to federal aid for infrastructure and other local activities here and here. But I was alerted to an additional argument against aid from this Regulation article by William Fischel and this book by James Bennett. Federal aid encourages local governments to expropriate private property, often for dubious purposes.

The article and book discuss the expropriation of Detroit homes for the benefit of General Motors in the 1980s. The “Poletown” project would not have happened without $200 million in federal and state loans and grants to the city. So Fischel makes the point that (abusive) government uses of eminent domain—such as the Kelo case in New London, Connecticut—are encouraged by the flow of federal and state funds to cities. That is, money for “economic development” and the like.

State and local governments would make better decisions if they were responsible for their own funding of programs and projects. The annual flow of more than $600 billion in federal aid to state and local governments should be phased out over time and eliminated.