Topic: Tax and Budget Policy

Cutting Business Property Taxes to Improve Competitiveness

Tax Foundation has released a study comparing country tax codes. The “International Tax Competitiveness Index” by Kyle Pomerleau and Andrew Lundeen found that “the United States has the 32nd most competitive tax system out of the 34 OECD member countries.” In other words, the United States is a bad place to invest from a tax perspective.

Factors behind America’s poor score include “the highest corporate tax rate in the developed world” and the fact that we are “one of the six remaining countries in the OECD with a worldwide system of taxation.”

Another cause of our poor score is our high property taxes. Many U.S. jurisdictions impose property taxes not just on land and buildings, but also on business machinery and equipment. These taxes are a strong deterrent to capital investment, and they should be repealed. U.S. state and local governments collect a huge $242 billion a year in business property taxes, according to E&Y.

In an upcoming Fiscal Report Card on America’s Governors, Nicole Kaeding and I mention efforts to cut property taxes on business equipment, including reforms in Indiana and Michigan. I suspect one reason for Detroit’s economic demise has been its very high property tax burden.

Using Tax Foundation data, the chart shows property taxes as a percent of gross domestic product for the 34 OECD countries.

Ryan Ellis highlights some more of the Tax Foundation results here.

The Disappointing Continuing Resolution

The House of Representatives is set to vote on a continuing resolution (CR) tomorrow to fund the federal government until December 11, 2014. A CR is stop-gap measure often used when the parties and chambers cannot agree on a full-year budget.

The CR package, as presented in draft form, is disappointing. It fails to institute much-needed fiscal reforms.

  • Spending Levels: The CR keeps the level of discretionary spending constant at $1.012 trillion. Not growing the size of government is a positive step for Congress, but there are plenty of ways to cut and reform spending. As I noted recently, the sooner Congress reforms spending the better.
  • Export-Import Bank: The CR extends the Export-Import Bank’s charter until June 30, 2015. Ex-Im subsidizes exports for American companies, but at a large cost to other American firms.
  • Internet Tax Moratorium: In 1998, Congress passed a law making it illegal for federal, state, or local governments to impose taxes on internet access, such as bandwidth or email taxes. This moratorium expires on November 1, 2014. The CR extends the moratorium until December 11, 2014, but it does not permanently extend it as  previously-passed House legislation would have. This sets up an important tax fight after the congressional elections.
  • Overseas Contingency Operations: The supplemental war budget, known as the Overseas Contingency Operations (OCO) budget, provides funding for military activities in Iraq and Afghanistan. OCO funding is supposed to decrease as those activities wind-down. But this CR increases OCO above planned levels. It includes $26 billion, at an annual rate, more than the Obama Administration’s request earlier in the year. One problem with OCO funding is that it is not subject to the same federal budgetary rules and disciplines as other types of spending, which allows Congress to treat it like a slush fund.

In sum, this CR allows members to again punt on any sort of meaningful entitlement reforms or spending cuts to reduce our half trillion dollar deficit.

More Headaches in Obamacare Open Enrollment

Open enrollment for Obamacare’s second year begins in two months. Recent reports suggest that this year’s enrollment period will not be a smooth process.

According to Ricardo Alonso-Zaldivar of the Associated Press, individuals face many hurdles in signing up for or renewing coverage:

  • For the roughly 8 million people who signed up this year, the administration has set up automatic renewal. But consumers who go that route may regret it. They risk sticker shock by missing out on lower-premium options. And they could get stuck with an outdated and possibly incorrect government subsidy. Automatic renewal should be a last resort, consumer advocates say.
  • An additional 5 million people or so will be signing up for the first time on HealthCare.gov and state exchange websites. But the Nov. 15-Feb. 15 open enrollment season will be half as long the 2013-2014 sign-up period, and it overlaps with the holiday season.
  • Of those enrolled this year, the overwhelming majority received tax credits to help pay their premiums. Because those subsidies are tied to income, those 6.7 million consumers will have to file new forms with their 2014 tax returns to prove they got the right amount. Too much subsidy and their tax refunds will be reduced. Too little, and the government owes them.
  • Tens of millions of people who remained uninsured this year face tax penalties for the first time, unless they can secure an exemption.

These won’t be the only issues. In July, the Government Accountability Office told Congress that the HealthCare.gov website is still not complete. The back-end system that links the website to insurers and distributes the subsidies is not operational. Additionally, thousands, possibly millions, of insurance policies will be cancelled over the next several months for not including all of Obamacare’s mandates which will increase the confusion for individuals.

The Obama administration says that this year’s open enrollment period will be better than the last, but the complexity and short enrollment period will still create lots of headaches for consumers. Shockingly, overhauling a large swath of the United States economy is not easy work.

Scottish Independence: Not That Big a Deal in Today’s World

Yesterday, my colleague Doug Bandow blogged about Scottish independence, concluding with the following: “Whatever the Scots choose on September 18, Americans should wish them well.” I just wanted to add a quick point here, drawing on something law professor Eric Posner said on this issue: “the benefits of a large country—mainly, security and a large internal market—are of diminishing significance in a world of free trade and relative peace.”

To me, this is a very important consideration. If Scottish independence meant an increased chance of war or high tariffs designed to separate the Scottish market from the rest of the world, it would be worrying. But those seem unlikely. In terms of war and peace, there have been no Mel Gibson sightings that I’m aware of. On trade, there may be some bureaucratic challenges, but it seems clear the goal is for Scotland to join the EU and be part of its large, single market. As for trade with the rest of the world, Scotland will take on the EU’s trade policy–which is not perfect of course–but has followed the trend toward liberalization that the rest of the world has pursued over the past few decades. In all likelihood, Scotland will continue to search for export markets for its whisky and allow the free flow of imports.

If Scottish independence meant it would become like North Korea, I’d be concerned. But it doesn’t seem like that’s the path it is on. With the exception of a few regions, we live in a highly integrated, peaceful world. Scottish independence would not change that.

The Naked Truth about TSA Spending

Governments tend to spend money on low-value activities because they do not have market signals or customer feedback to guide them. In this report, I examined the problem with respect to the Transportation Security Administration. As one example, TSA’s SPOT program for finding terrorists spends more than $200 million a year with few if any benefits.

Further confirmation of TSA’s misallocation problem comes from a new academic study looking at the full-body “nudie” scanners installed in U.S. airports at great expense between 2009 and 2013. A team of university researchers bought a Rapiscan Secure 1000 backscatter X-ray machine and began testing it on various types of weapons and explosives. It turns out that a terrorist could fool the machines pretty easily:

We find that the system provides weak protection against adaptive adversaries: It is possible to conceal knives, guns, and explosives from detection by exploiting properties of the device’s backscatter X-ray technology.

If you walked though the machines with a big block of C-4 plastic explosive in your hands, it would be detected. The problem, of course, is that terrorists are smarter than that:

We show that an adaptive adversary, with the ability to refine his techniques based on experiment, can confidently smuggle contraband past the scanner by carefully arranging it on his body, obscuring it with other materials, or properly shaping it. Using these techniques, we are able to hide firearms, knives, plastic explosive simulants, and detonators in our tests. These attacks are surprisingly robust, and they suggest a failure on the part of the Secure 1000’s designers and the TSA to adequately anticipate adaptive attackers.

The Rapiscan machines were pulled from U.S. airports due to concerns about civil liberties and the possible health effects of emitted radiation. But as one of the study authors observed to Bloomberg: “What does this say about how these scanners were tested and acquired in the first place? … It says there’s something wrong with the government’s process … [the process] is secret and not independent. Those are problems.” It’s also a problem that the government has a monopoly on aviation security, and that TSA is not accountable to anyone for its level of efficiency or performance. Well, it’s accountable to Congress I suppose, but that doesn’t really amount to much these days.

The good news is that airport security screening does not have to be a government monopoly. We should move to private contracting with federal oversight, which is the approach taken by Canada and numerous European countries. For more, see my report and check out the writings of Bob Poole at Reason.

Arkansas’ Budget-Busting Medicaid Expansion

Back in February, I highlighted the fight to reauthorize Medicaid expansion under ObamaCare in Arkansas. The states’ plan not only expanded Medicaid; it did so in a more expensive way.  Supporters claimed that the concerns were hogwash. Costs would be the same or lower because Department of Health and Human Services (HHS) required “budget neutrality” for the expansion. A new report from the Government Accountability Office (GAO) confirms that AR’s expansion is a budget-buster.

Medicaid provides insurance to low-income individuals, focused on pregnant women, children, and the disabled. ObamaCare sought to expand this program adding millions of able-bodied, childless adults to the program. States that agreed to dramatically expand the entitlement program would receive a large sum of federal funding. The federal government agreed to fund 100 percent of expenditures through 2016, slowly decreasing to 90 percent in 2020 and after. Even with the large financial enticement, states, rightly, resisted. The program is expensive to operate. States also have little control over the program. The quality of insurance is poor. A 2013 study found “no significant improvements” in health outcomes for individuals joining the program.

Arkansas decided to try something different. Under the plan passed by Democrat Governor Mike Beebe and the Republican legislature, more than 200,000 individuals would join the state’s Medicaid rolls. These individuals would not join the traditional program, but instead would receive money from the state and federal government to purchase insurance on the state’s newly-created health insurance exchange. This plan was preferable, according to advocates, because it would eliminate the known health disparities between traditional Medicaid and private insurance. Better yet, the AR Department of Human Services said that the so-called private option would save the state $670 million over the next ten years and would save the federal government $600 million. Choice and competition would power the market and result in lower prices.

Supporters argued that if the state was going to dramatically expand an entitlement program; it should do it in a fiscally-conservative way saving money in the process.

However, subsidizing Medicaid expansion through private insurance is not fiscally conservative. It turns out that private insurance costs $3,000–or 50 percent more–per enrollee than traditional Medicaid coverage according to the Congressional Budget Office (CBO). Spending $3,000 per person more adds up to a huge added cost for taxpayers. This would be compounded by the Arkansas’ decision–due to federal strings–to eliminate any out-of-pocket expenses for enrollees; no co-pays, no deductibles, no cost-sharing.

Supporters of Arkansas’ expansion claimed it didn’t matter because HHS’s approval required that the plan be “budget neutral.” In other words, the federal government would not spend more than if the state pursued traditional expansion. If the state exceeded the budget cap, the state would be responsible for the additional expenses. The state would be forced to tweak the program later if costs rose.

The plan passed and costs quickly grew. The first month was overbudget. As of June, the program was $10 million overbudget.

GAO now says that HHS did not guarantee budget neutrality in the Arkansas plan suggesting that even more taxpayer money is at risk. “HHS did not ensure budget neutrality. HHS approved a spending limit that included hypothetical costs despite questionable state assumptions and limited supporting documentation…HHS officially told us they accepted the state’s projections of the increased cost of expanding Medicaid in the absence of a demonstration without requesting data to support the state’s assumptions.”

HHS just accepted what Arkansas said, and did not question the state’s assumptions. The promised federal backstop does not seem to exist. GAO estimates that the “$4.0 billion spending limit approved by HHS was about $778 million [over three years] more than what it would have been.”  That’s a 20 percent increase in costs for federal taxpayers.

Making matters worse, GAO says that AR has the authority to “adjust the approved spending limits if costs…prove higher than expected.” This sort of upward flexibility never used to be granted, but HHS recently granted it to 11 other states. AR has already acknowledged that it might need a higher spending limit.

This is not the first time that GAO has highlighted HHS’ inability to properly enforce budget neutrality. HHS’ refusal to properly set spending caps is costing federal taxpayers millions, or billions, more than it should. GAO confirms that Medicaid expansion in Arkansas is busting the budget.