Topic: Tax and Budget Policy

The Great Society Meets the Taxpayer

President Lyndon Johnson’s legacy was the so-called Great Society (read: entitlement programs). As these programs have matured, along with the U.S. population, the proportion of the people dependent on the State has soared. Indeed, spending on entitlement programs gobbles up bigger and bigger chunks of the federal budget.

As the population grows older, entitlements will grow. Worryingly, the ratio of people receiving government benefits to those paying taxes will continue to climb, too. As the accompanying chart shows, those who receive government goodies already number the same as those who pay taxes (the ratio is one). With the steady progression of the ratio, it will be very hard to put the genie of the Great Society back in the bottle. Can you just imagine how difficult it will be to cut entitlement programs when those who are dependent on the government outnumber taxpayers by two to one?

Overpaid Federal Employees

With the election only weeks away, pundits are visualizing how a Republican-controlled Senate would impact future policy decisions.  Today’s Washington Post highlights the supposed plight of federal workers under a Republican Congress.

The piece discusses House Budget Chairman Paul Ryan’s budget proposal:

Under the Ryan budget, the contribution of most federal employees toward their retirement plan would increase by 5.5 percentage points with no increase in benefits — effectively a pay cut. Ryan emphasizes a “defined-contribution system” that centers on employee payments to their retirement program instead of the current system, which includes pensions from the U.S. government. He estimated his plan would save the government $125 billion over 10 years.

That $125 billion in savings, however, would come from the pockets of federal employees.

The piece continues in a similar vein discussing Republican-supported legislation that would make it easier for federal employees to be disciplined, fired, and restricted in their conference expenditures–all  reasonable proposals. It cites federal employee union officials on the difficulties these policies would place on federal workers.

Failing to Track Highway Spending

The problems with federal highway spending are well documented. The program distorts project incentives and distributes money inefficiently. A new report from the Government Accountability Office (GAO) adds to the list of problems, detailing improper fund management within the Federal Highway Administration (FHWA).

In 2014 the highway trust fund collected $39 billion in fuel tax revenues, but spent $53 billion, creating a $14 billion deficit. This was not an isolated event. Since 2008 Congress has provided  $50 billion of general federal revenues to prop up the highway trust fund. The Congressional Budget Office estimates that the highway trust fund will require another $157 billion of general revenues by 2024.

Funds from the highway trust fund are spent by several agencies, with the bulk allocated by FHWA. In fiscal year 2013, FHWA spent $41 billion, or 80 percent, of all highway funds. Of that, $39 billion was sent to states; the majority going to road and bridge construction and improvement.

But GAO found that FHWA is poorly tracking how this money is being spent. According to GAO,  “FHWA tracks and reports aggregate obligations for its “major projects” (projects with a total cost of $500 million or more), it does not collect and report aggregate obligations for other projects, which represented nearly 88 percent of all fiscal year 2013 spending.” GAO’s analysis states that $36 billion in federal highway funding is not being properly tracked by FHWA.

Tracking this information would allow FHWA to provide greater oversight on projects, and to provide Congress and the public greater detail about spending projects and priorities. The agency could track cost growth on projects and perhaps stop cost overruns, which are common on transportation projects.

FWHA already has the technology to make these improvements. GAO notes that FHWA’s computer system already has the capability to track this data, but the agency does not feel inclined to use this capability.

Congress’ current short-term patch to the highway trust fund expires in May. FHWA’s adoption of GAO’s recommendations would allow both Congress and the agency to better control spending and lower the imbalance between spending and revenues.

Department of Homeland Security: Who Needs It?

The Secret Service is scandal prone. It spends excessively on foreign presidential trips, and it has agents who get in trouble with prostitutes and liquor bottles. The recent White House fence-jumping incident was a stunning failure. Despite the Service spending $1.9 billion a year, a guy with a knife jumped the fence, sprinted across the lawn, pushed open the front door, galloped through the Entrance Hall, danced across the East Room, and almost had time to sit down for a cup of tea in the Green Room.

In the wake of the incident, the head of the Secret Service resigned. But the Service is an agency within the Department of Homeland Security (DHS), and the head of DHS, Jeh Johnson, did not resign. Indeed, he said very little about it, presumably to evade responsibility. So what is the purpose of having the DHS bureaucratic superstructure on top of agencies such as the Secret Service? If DHS does not correct problems at agencies when they fester for years, and if DHS leaders do not take responsibility for agency failures, why do we need it?

A new survey of 40,000 DHS employees reported in the Washington Post finds that the department has severe management problems:

The government’s 2014 Federal Employee Viewpoint Survey portrays a Department of Homeland Security still facing debilitating morale problems that have plagued it for years but worsened during the Obama administration — and which have grown more serious since Johnson took over in December.

While the survey shows that the vast majority of DHS employees are hard-working and dedicated to their mission to protect the homeland, many say the department discourages innovation, treats employees in an arbitrary fashion and fails to recruit skilled personnel.

At the DHS Science and Technology Directorate, for example, only 21 percent of employees in this year’s survey held positive views of their leadership’s ability to “generate high levels of motivation and commitment in the workforce,’’ according to results for that division.

Since its inception, the department has been plagued by poor morale and a work environment widely seen as dysfunctional, which has contributed to an exodus of top-level officials in recent years, many of whom have been lured by private security companies.

Only 41.6 percent of DHS employees said they were satisfied with the department, down from 44.4 percent a year earlier.

In 2013, only 29.9 percent of employees department-wide had a positive view of their leaders’ ability to “generate high levels of motivation and commitment in the workforce.’’ That number plunged to 24.9 percent this year.

That’s all pretty pathetic. But this is the most stunning result from the survey: “Asked if their leaders ‘maintain high standards of honesty and integrity,’ just 39.1 percent of employees responded positively.”

The 2002 creation of DHS was a mistake. Congress should revisit its handiwork, and begin unbundling the department and closing it down. Some DHS agencies, such as the Secret Service, should be stand-alone organizations that report directly to the president. Some DHS agencies should be moved to existing departments. And some DHS agencies, including TSA, ought to be abolished.

Governor Brownback’s Tax Cuts

Kansas Gov. Sam Brownback (R) has become a punching bag for liberal pundits. They particularly dislike his tax reforms, which they say are causing a state budget disaster. Nicole Kaeding and I awarded Brownback an “A” on our “Fiscal Report Card.” So let’s take a look at how liberal and libertarian views on Governor Brownback differ.

John Judis at the New Republic writes, “the heart of his program consisted of drastic tax cuts for the wealthy…”

Brownback did sign into law large tax cuts, but that is a good thing. Legislation in 2012 replaced income tax rates of 3.5, 6.25, and 6.45 percent with lower rates of 3.0 and 4.9 percent, while substantially increasing the standard deduction. Those cuts provided savings for taxpayers at all income levels, not just the wealthy. 

Judis continues, “Brownback’s tax cuts had produced a staggering loss in revenue—$687 million, or nearly 11 percent.” Tax Foundation shows the revenue effects of 2012 and 2013 tax legislation here. Judis gets the numbers about right, but I don’t think that magnitude of revenue change is “staggering.” In 2011, Gov. Dan Malloy (D) increased overall Connecticut taxes about 15 percent. That same year, Gov. Pat Quinn (D) increased overall Illinois taxes about 25 percent—now that is “staggering.” (Details on both increases here).

The important thing with tax cuts is that politicians need to match them with spending cuts so they are sustainable. Brownback has been frugal on spending, but it is true that Kansas needs further budget reforms so that future spending growth matches projected revenues. However, that restraint will be beneficial, as it will encourage policymakers to trim low-value programs in the budget.

Paul Krugman slammed Brownback’s tax cuts, saying, “the state’s budget has plunged deep into deficit, provoking a Moody’s downgrade of its debt.”

One problem with that assessment is that state budgets don’t really “plunge deep into deficit” like the federal budget does. Nearly all states must legally balance their general funds. They often cheat a bit with accounting maneuvers, but they generally get it done.

Centers for Disease Control Spending

In an editorial today, the Wall Street Journal discusses Democratic complaints linking Ebola with supposedly falling spending on the Centers for Disease Control (CDC). Let’s take a look at the data with the Downsizing Government chart tool. Click open Health and Human Services, then click on CDC. Hold your mouse over the line to see the data.

Between 2000 and 2014, CDC outlays almost doubled in 2014 constant dollars, from $3.5 billion to $6.8 billion. Outlays have dipped the last few years, but that’s after a Bush-Obama spending boom. CDC outlays have quadrupled in constant dollars since the late 1980s.

The chart below shows CDC spending since 1970 in constant, or inflation-adjusted, dollars. The data is sourced from the Office of Management and Budget public database, available here.

Medicaid’s Fiscal Pressure

State budgets face numerous long-term pressures, including overpromised and underfunded pensions. Another challenge is Medicaid, the health insurance program for low-income individuals, which is growing rapidly in cost and enrollment.

Medicaid is the single largest component of state budgets representing 25 percent of total state expenditures. Since 2003, state spending on Medicaid has increased 75 percent, growing faster than the federal budget. State spending decreased in 2010, but not because of any reforms. The federal stimulus bill temporarily increased the federal government’s share of Medicaid spending, so expenditures were simply shifted to the federal budget. But the stimulus has now expired so state spending is rising once again.

The below chart shows the growth in state Medicaid spending over the last ten years:

The higher levels of Medicaid spending are crowding out spending in other state budget areas, such as transportation and education, while also creating pressure to increase taxes.

In the newest edition of the “Fiscal Policy Report Card on America’s Governors: 2014,” Chris Edwards and I discuss how the president’s health care law is poised to make this situation even worse for state budgets:

Medicaid has grown rapidly for years, and the Affordable Care Act of 2010 (ACA) expanded it even more. Individual states can decide whether or not to implement the ACA’s expanded Medicaid coverage, but Congress created strong incentives to do so. The federal government is paying 100 percent of the costs of expansion through 2016, and then a declining share after that, reaching 90 percent by 2020. The Congressional Budget Office (CBO) estimates that Medicaid expansion under the ACA will cost the federal government $792 billion and state governments $46 billion over the next 10 years.

Even with the federal government paying most of the initial costs, the ACA will put a large strain on state budgets down the road. State policymakers are concerned that Congress will reduce the federal cost share in coming years because federal deficits will create pressure to cut spending. Without reforms, CBO estimates that federal Medicaid spending will almost double from $299 billion in 2014 to $576 billion by 2024. The growth is projected to be so rapid that even President Obama has suggested that Congress decrease the federal cost share.

The expansion of Medicaid under the ACA is bad policy for numerous reasons, and many governors are refusing to go along. Currently, at least 21 states have decided not to go along with the expansion. Those states may lose “free” federal money in the short-run, but leaders in those states may be saving their states from huge fiscal burdens later on.

Refusing to expand Medicaid under the ACA is a good first-step in controlling the growth in state and federal expenditures. But it is not enough. State and federal leaders should pass major structural reforms to Medicaid to halt the growth in this large entitlement program.