Topic: Tax and Budget Policy

Good Reporting on Federal Subsidies to State and Local Government

Reporters who cover state and local government should heed the example of the Topeka-Capital Journal’s Andy Marso. It’s my opinion that reporters often insufficiently examine how state and local politicians spend federal tax dollars. Heck, I’m even surprised when a reporter mentions that the money originated from Uncle Sam to begin with. 

Marso recently looked at the use of federal Community Development Block Grant money by Osage City in Kansas (see this Cato essay for more on the CDBG program). In particular, $750k from federal taxpayers that was wasted on a now defunct modular home builder: 

Osage City Mayor Quintin Robert says John Samples and his modular housing company Kan Build Inc. was about as safe an investment as a company could be in 2006. 

Samples owned Kan Build when the city council and Kansas Department of Commerce approved funneling $750,000 in federal money to the company through the Community Development Block Grant program. The business had nearly closed one year earlier, but Samples stepped in, leading a group of investors in buying the manufacturing facility. 

Samples was a successful businessman who had bought and rehabilitated the company once before. Despite the turmoil, Robert, who was on the city council at the time, said betting on Samples seemed like a good play. 

“I think the decision was based on, ‘Hey, this guy bought this plant when it closed, got multiple grants, was one of the only people to pay them back and had an award, an entrepreneur of year award,’ ” Robert said in a recent phone interview. “He got a lot of accolades, because it is a big deal in a small community. A couple hundred jobs are a big deal.” 

Then the housing market crashed, and by February 2011 the plant closed and the 108 jobs it had when it got the grant money disappeared.

Mayor Robert’s simple-minded comments on the deal demonstrate the folly of allowing politicians to play economic planner with other people’s money. It’s even worse when a politician uses money that he or she didn’t have to first collect from his or her voters/taxpayers, which is a fundamental problem with federal subsidies to state and local government. Under that arrangement, local citizens have little incentive to pay attention to how their elected officials are spending money.   

As Marso notes, the Osage City City Council’s spent all of three minutes on the decision to give Kan Build the money. If that wasn’t bad enough, it turns out that Mayor Robert “worked for Kan Build in various capacities in the early 1980s, early 1990s and from 1999 until it closed.” The Office of the Inspector General for the Department of Housing and Urban Development might want to look into that. 

Anyhow, great work by Marso. There are a lot of similar stories out there waiting to be told.  

Another Misguided Plan to Burden America with a Value-Added Tax

It’s no secret that I dislike the value-added tax.

But this isn’t because of its design. The VAT, after all, would be (presumably) a single-rate, consumption-based system, just like the flat tax and national sales tax. And that’s a much less destructive way of raising revenue compared to America’s corrupt and punitive internal revenue code.

But not all roads lead to Rome. Proponents of the flat tax and sales tax want to replace the income tax. That would be a very positive step.

Advocates of the VAT, by contrast, want to keep the income tax and give politicians another big source of revenue. That’s a catastrophically bad idea.

To understand what I mean, let’s look at a Bloomberg column by Al Hunt. He starts with a look at the political appetite for reform.

There is broad consensus that the U.S. tax system is inefficient, inequitable and hopelessly complex. …a 1986-style tax reform – broadening the base and lowering the rates – isn’t politically achievable today. …the conservative dream of starving government by slashing taxes and the liberal idea of paying for new initiatives by closing loopholes for the rich are nonstarters.

I agree with everything in those excerpts.

So does this mean Al Hunt and I are on the same wavelength?

Not exactly. I think we have to wait until 2017 to have any hope of tax reform (even then, only if we’re very lucky), whereas Hunt thinks the current logjam can be broken by adopting a VAT and modifying the income tax. More specifically, he’s talking about a proposal from a Columbia University Law Professor that would impose a 12.9 percent VAT while simultaneously creating a much bigger family allowance (sometimes referred to as the zero-bracket amount) so that millions of additional Americans no longer have to pay income tax.

Be Thankful for “Diminished Productivity” in Washington

Let’s do a simple thought experiment and answer the following question: Do you think that additional laws from Washington will give you more freedom and more prosperity?

I don’t know how you will answer, but I strongly suspect most Americans will say “no.” Indeed, they’ll probably augment their “no” answers with a few words that wouldn’t be appropriate to repeat in polite company.

That’s because taxpayers instinctively understand that more activity in Washington usually translates into bigger and more expensive government. And big government isn’t so fun for those who pay the bills and incur the costs.

So what’s the purpose of our thought experiment? Well, new numbers have been released showing that the current Congress is going to set a modern-era record for imposing the fewest new laws.

But while most of us think this is probably good news, Washington insiders are whining and complaining about “diminished productivity” in Congress. The Washington Post is very disappointed that lawmakers aren’t enacting more taxes, more spending, and more regulation.

…this Congress — which is set to adjourn for the year later this month — has enacted 52 public laws. By comparison, …90 laws were encated during the first year of the 113th Congress and 137 were put in place during the first year of the 111th Congress.

Just in case you don’t have a beltway mindset, another Washington Post report also tells you that fewer laws is a bad thing.

…whatever gets done in December will still be part of a year with record-low congressional accomplishment. …According to congressional records, there have been fewer than 60 public laws enacted in the first 11 months of this year, so below the previous low in legislative output that officials have already declared this first session of the 113th Congress the least productive ever.

Let’s actually look at some evidence. The first session of the current Congress may have been the “least productive” in history when it comes to imposing new laws, but what’s the actual result?

Government Planning in Indiana with Federal Funds

According to popular myth, Democrats favor government planning of the economy and Republicans favor free markets. Today’s example of why this is baloney comes from the Republican governor of Indiana, Mike Pence. Before I get to the story, readers should know up front that I was a state budget official (2006-2008) in the prior administration of Gov. Mitch Daniels (R). 

Yesterday, the Indiana Department of Energy Development announced that it will be “crafting a new energy plan for the state of Indiana.” Well, praise the Lord – the state’s energy planners are going to work with “stakeholders” to make sure Hoosiers won’t be forced to turn to whale oil lamps. No, seriously, Indiana is in trouble. According to the announcement, that’s because the state’s current plan apparently just hasn’t panned out: 

Indiana’s current energy plan, the Homegrown Energy Plan, was written in 2006. Since that time, Indiana’s cost of electricity for industrial customers has increased, causing Indiana to slip from 5th lowest in the country to 27th lowest. 

Oops. 

Okay, a new vision is clearly needed. Enter former radio host Gov. Mike Pence: 

“Here in Indiana, we make things, and we grow things,” said Governor Mike Pence. “These activities require enormous amounts of energy. In order to maintain our historic advantage for low cost of energy, we need a new, updated energy plan.” 

Whoa – that’s deep. Think about what Pence is saying: Hoosiers make things…Hoosiers grow things. Only a cold-hearted cynic doesn’t feel a tingle after contemplating such profound insights. 

As the saying goes, great leaders surround themselves with great people. Heading up the state’s development of a new energy plan is my former colleague, Tristan Vance. According to a press release announcing Vance’s reappointment, he has extensive experience working in state government. There’s no mention of Vance having real world experience in the energy sector that he’s now in charge of planning, but he did monitor the agency as a state budget official prior to heading it. 

Eh, close enough. 

Snark aside, there’s a deeper policy concern here that affects taxpayers in all states. Much of the Indiana Department of Energy Development’s funding comes from the federal government (about 70 percent if my reading of state budget numbers is correct). That means, dear federal taxpayers, you’ll be subsidizing the bulk of whatever “plan” the Pence administration comes up with.   

Now as I noted in an Indianapolis Star op-ed back in June, Indiana’s dependence on federal funds isn’t unique. Indeed, the other 49 states are similarly dependent on handouts from Uncle Sam. But state taxpayers should understand that federal funds are not a “free” lunch: 

The appeal of federal funds to governors is obvious: They get to spend additional money without having to raise taxes on their voters to pay for it. A problem with this arrangement is that it creates a fiscal illusion — state taxpayers perceive the cost of government to be cheaper than it really is. In effect, the federal money and a large part of the annual budget appears to be “free.”

But Hoosiers should be mindful that every dollar Washington sends to Indianapolis is a dollar taken from taxpayers in Indiana and the other states. (The return is actually less than a dollar since the federal bureaucracy takes its cut). The situation is no different when the federal dollars go instead to, say, Sacramento. In addition, economists have found that federal subsidies to the states lead to higher state taxes and spending in the long-run because the federal “seed money” creates a demand for more government.

One could argue that so long as Hoosiers have to send money to Washington, Indiana might as well get a share of the loot. That’s an understandable sentiment, but the blatantly self-serving manner in which the Pence administration goes about distributing the bounty should give Hoosiers pause.

Indeed, the self-serving manner in which the nation’s governors go about playing with federal funds should give all taxpayers pause. 

Congress Should Stand Firm on Spending Caps

Rumors abound that budget negotiators are nearing a possible deal to reverse spending cuts required under the 2011 Budget Control Act (BCA).

Senate Republican Leader Mitch McConnell is hoping his colleagues will stand firm and reject any deal. He told reporters last week that it would be “a bad idea to revisit a law that’s actually working and reducing spending.” But he is competing with military spending advocates such as Reps. Buck McKeon and Mac Thornberry. They claim that the dangers confronting the United States today are graver than ever, that the costs to address these threats are rising and cannot be contained, and removing the defense spending caps is necessary to ensure the United States remains safe and secure.

They are wrong on all counts.

First, some context on spending: The Pentagon’s base budget, excluding the costs of the ongoing war in Afghanistan, remains 26 percent higher than in 2000, in inflation-adjusted dollars. Under the spending caps established by BCA, Pentagon spending would average around $528 billion per year from 2013 to 2021, over 18 percent higher than during a typical year in the Cold War.

This is curious considering the threats facing the United States were far greater then. The threats today are declining, not rising. In fact, all forms of violence, from cataclysmic great power wars, to civil wars and ethnic conflicts, have declined to historic lows.

To be sure, some insurance against potential threats is wise, in the unlikely event that current favorable trends are reversed, but we can maintain our safety while spending less because technological advances allow today’s military to address possible threats with fewer people and fewer platforms. U.S. naval vessels have far more striking power than the early 20th century dreadnaughts, just as precision-guided munitions have rendered today’s aircraft at least 10 times more capable of striking targets as their dumb-bomb-dropping precursors. To be sure, these new platforms are much more expensive, but the military services and their suppliers are more cost-conscious today than a decade ago, as when the Air Force recently killed a plan to outfit the next-generation bomber with a $300,000 kitchenette. Such excesses might be resurrected if BCA opponents succeed in changing the law.

The reforms extend well beyond procurement. In 2011, then-Chairman of the Joint Chiefs of Staff Mike Mullen admitted that the military hadn’t been forced “to make the hard choices” because they had all the money they requested, plus a little more. Today, the spending caps are forcing the services to prioritize.

For example, austerity has focused attention on the military’s antiquated compensation system. Today’s soldiers, sailors, airmen and Marines are better compensated than those who served during World War II or the Cold War. And they should be. A modern military must compete to attract and retain the best and the brightest, and that costs money.

The current trajectory of personnel costs is unsustainable, however. Pay and benefits are already eating into other Pentagon spending accounts, including procurement, operations and maintenance, and training. The net effect may impair military readiness. Now, even outspoken military spending advocates, such as Reps. Duncan Hunter and Adam Kinzinger, both veterans of the post-9/11 military, have endorsed changes, including expecting working-age retirees to pick up more of their health care costs.

There is, in fact, broad, bipartisan support for proposals that touch what were once thought of as the third-rails of Pentagon politics. In addition to compensation reform for active-duty military personnel, a letter signed by scholars from the American Enterprise Institute, the Center for American Progress, and the Brookings Institution, among others, also calls for shrinking the Pentagon’s sprawling civilian workforce and reducing overhead, including eliminating excess base capacity.

The most important piece of the military spending puzzle remains the United States’ hyperactive foreign policy. Even if we were to implement the sensible reforms made politically realistic by spending caps, we would still spend more than we need to keep Americans safe. That is because today’s military is mainly geared toward defending others. By discouraging our allies from doing more to defend themselves and their interests, U.S. policymakers have ensured that U.S. troops bear disproportionate burdens, and U.S. taxpayers pay disproportionate costs. If we are going to spend less on the military in the next ten years than we have over the last ten, we must ask our smaller, cheaper military to do less. And we must expect others to do more.

The Budget Control Act, for all its flaws, has managed to deliver something once thought impossible: actual spending cuts. Our military remains second to none, despite those cuts, and might be stronger in the future because of them. A deal to cancel or reverse those cuts threatens to derail sensible reform proposals that could deliver far larger savings to taxpayers in the future.

Sen. McConnell is right: Congress should stand firm.

TSA Wastes $1 Billion on SPOT

A new GAO report recommends that Congress end the SPOT program, which attempts to catch terrorists by suspicious behaviors they may exhibit at airport checkpoints. The Transportation Security Administration currently spends more than $200 million a year on the Screening of Passengers by Observation Techniques program, even though there has been criticism from the start that there is no solid science behind it.

Here are observations about SPOT from my new Cato study on the TSA to be released next Tuesday:

The SPOT program illustrates the problems with top-down federal control over aviation security. The TSA ‘deployed SPOT nationwide before first determining whether there was a scientifically valid basis’ for it, notes the GAO. Nor did the TSA perform a cost-benefit analysis of SPOT before it was deployed. That is the way that the federal government often works—it rolls out an expensive ‘solution’ for the entire nation without adequate research, and it resists efforts to cut programs even if the benefits do not materialize.

The new Cato study focuses on a decade of TSA shortcomings and the advantages of privatizing airport security screening. In sharp contrast to the American approach of a federal monopoly over aviation security, the great majority of European countries and Canada use competitive contracting for airport screening.

If you are in D.C. today, please drop by our Capitol Hill noon forum on the TSA.

The Black Budget, a Sense of Magnitudes

On October 28th, I wrote a blog post, “The NSA’s Rent Is Too Damn High,” in which I looked at the $52.6 billion price tag for America’s spook infrastructure – the so-called “black budget.” When allocated across every American taxpayer, this staggering sum comes out to $574 per taxpayer, per year.

But, there are other edifying ways of gaining perspective on such a whopping amount of money. Doing so is important. Indeed, according to John Maynard Keynes’ biographer, Lord Skidelsky, Keynes believed that a good economist must always have “a sense of magnitudes.”

We can get a sense of magnitudes by looking at this year’s black budget as a portion of the major sources of the federal government’s revenues. The table below tells that tale:

Source of Federal Revenue 2012 Amount $ Billion Black Budget $ Billion Black Budget as % of Revenue Source
Individual Income Taxes $1,132.21 $52.60 4.6%
Corporate Income Taxes $242.29 $52.60 21.7%
Social Insurance Taxes $845.31 $52.60 6.2%
Excise Taxes $79.06 $52.60 66.5%
Estate and Gift Taxes $13.97 $52.60 376.4%
Customs Duties $30.31 $52.60 173.6%
Miscellaneous Receipts $107.01 $52.60 49.2%
Deficit (Borrowing) $1,086.96 $52.60 4.8%
     Source: Congressional Budget Office