Topic: Tax and Budget Policy

Today in Cato’s Growth Forum

Cato’s special online forum on reviving growth continues today with the following new essays:

1. Morris Kleiner makes the case against occupational licensing.

2. Tim Kane calls for more immigration.

3. Alan Viard advocates moving to a progressive consumption tax.

4. Donald Marron argues for a carbon-corporate tax swap.

New in Cato’s Online Growth Forum

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

1. Ramesh Ponnuru offers three ideas – on taxes, patents, and money.

2. William Gale argues for getting our fiscal house in order.

3. Jeff Miron proposes cuts in health insurance subsidies.

4. Adam Thierer calls for a culture of permissionless innovation.

Fraud in the Defense Department

The wars in Iraq and Afghanistan cost more than $1 trillion with billions going to Department of Defense (DoD) contractors. All of that spending has led to a large uptick in waste and fraud.

As much as $60 billion has been wasted on U.S. operations in those two countries, according to analysis from the Commission on Wartime Contracting in Iraq and Afghanistan. The Justice Department has brought more than 235 criminal cases since 2005.

The Associated Press highlights some examples:

In the past few months alone, four retired and one active-duty Army National Guard officials were charged in a complex bribery and kickback scheme involving the awarding of contracts for marketing and promotional material, and a trucking company driver pleaded guilty to bribing military base employees in Georgia to obtain freight shipments — often weapons which required satellite tracking — to transport to the West Coast.

More recently, a former contractor for the Navy’s Military Sealift Command, which provides transportation for the service, was sentenced to prison along with a businessman in a bribery case in which cash, a wine refrigerator and other gifts traded hands in exchange for favorable treatment on telecommunications work. Also, three men, including two retired Marine Corps officers, were charged with cheating on a bid proposal for maintenance work involving a helicopter squadron that serves the White House.

The story continues on with the long list of abuses:

Defense contractor Leonard Francis was arrested in San Diego last year on charges that he offered luxury travel, prostitutes and other bribes to Navy officers in exchange for confidential information, including ship routes. Prosecutors say he used that information to overbill the Navy for port services in Asia in one of the biggest Navy bribery schemes in years. Ethan Posner, a lawyer for Francis, declined comment.

Yet many others involve more mundane cases of contracting or procurement fraud. Consider the trucking company contractor in Afghanistan who bribed an Army serviceman to falsify records to show fuel shipments that were never delivered, or the former Army contractor who demanded bribes before issuing orders for bottled water at a military camp in Kuwait.

According to the story, the Defense Department acknowledges the issue and is working to improve the situation. But if this report is any indication, DoD has a long way to go.

Drugs for the Deceased

Medicare fraud is rampant. The Government Accountability Office (GAO) estimates fraud compromises 8 percent of total expenditures, or $44 billion annually. Outside estimates are as high as $120 billion. A recent report from the Department of Health and Human Services Inspector General highlights just one of the many examples of waste, fraud, and abuse within the system: Medicare paying for drug coverage of deceased beneficiaries.

Medicare Part D provides prescription drug coverage to 39 million seniors costing taxpayers $59 billion annually, net of premiums paid by seniors. In 2013 Medicare paid for 1.2 billion prescriptions.

The Inspector General’s report details the fraud: “In 2012, Medicare paid for 348 HIV [human immunodeficiency virus] drugs for 158 deceased beneficiaries. The total cost for these drugs was $292,381.” The report studied HIV drugs as they are targets for abuse since they are so expensive.

These drug claims were not isolated instances. The IG found “each of the 158 beneficiaries had between 1 and 6 drugs dispensed after the date of death; most beneficiaries had at least 2.” Medicare spent $7,160 for three prescriptions for one patient’s drugs in Florida. They were approved on two separate occasions after his death. Medicare approved three prescriptions for a patient in Michigan costing $5,616.

Approvals occur because of a delay in receiving information about a beneficiaries death. This results in a period where the recipient is dead, but Medicare’s system still consider the patient to be alive.

This is not the first time that the Inspector General has criticized Medicare’s handling of deceased beneficiaries. In 2011 the Inspector General found that Medicare Part C and D paid $21 million for claims by deceased beneficiaries.

The Inspector General acknowledged that the total amount of fraud was miniscule compared to total Medicare spending. HIV drugs represent just one-quarter of one percent of Part D prescriptions. But the approval process is the same for all Part D drugs meaning other drugs are also vulnerable to improper payments for deceased individuals. The report says “A change in CMS’s practice would affect all Part D drugs, not just HIV drugs. Considering the enormous number of Part D drugs, a change in practice could result in significant cost savings for the program and for taxpayers.” An estimate of cost savings is not included, but it would likely be in the millions.

Medicare does plan to fix the system for dead beneficiaries, but with billions  wasted on Medicare every year, stopping the tide of improper payments seems unlikely without major structural reform of the program.

Government Shutdown Theater: Republicans Should Not Surrender to Obama’s Blackmail

Notwithstanding the landslide rejection of Obama and his policies in the mid-term election, I don’t think this will produce big changes in policy over the next two years.

Simply stated, supporters of limited government do not have the votes to override presidential vetoes, so there’s no plausible strategy for achieving meaningful tax reform or genuine entitlement reform.

But that doesn’t mean that there won’t be important fiscal policy battles. I’m especially worried about whether we can hold on to the modest fiscal restraint (and sequester enforcement) we achieved as part of the 2011 debt limit fight.

Highway Bill: The Unmentionable Option

In an article about federal highway legislation yesterday, the Washington Post illustrated the art of advocacy journalism cloaked as news reporting. The article explored different options for raising federal taxes $100 billion to fund state highways. It quotes three transportation lobbyists and included scare lines about the supposed consequences of not raising taxes (“… hundreds of thousands of construction jobs put at risk…”).

The article does not mention that spending cuts are an option for the upcoming highway bill. Everyone agrees that there is a large gap in the Highway Trust Fund (HTF), but gaps can be closed either by tax hikes or spending cuts. Yet the “transportation advocates” the Post talked to agreed, “until there is consensus on finding more money, transportation may be doomed to limp along in perpetual crisis.”

Nonsense. As I testified here, federal spending cuts would balance the HTF and solve the crisis, while spurring greater efficiency and innovation in U.S. transportation as the states played a larger role. The Post did not bother to explore that option, despite support from conservatives in Congress, prominent think tanks, and independent transportation experts.

In the election, Congress swung decidedly in a small-government direction, but the Post’s reporting did not reflect that reality, and instead presented only the lobbyist point of view. The Post’s silence on the spending-cut option is all the more striking because the newspaper admits that it would be very difficult to raise transportation taxes due to political and public opposition.

It will be interesting to see how Congress closes the HTF gap before the May expiration of the current highway bill. I hope that we have a robust debate on all the options and that the Washington Post changes course and presents its readers with a more balanced perspective.

Ivanpah: Time to End the Subsidies

Ivanpah in California is the world’s largest solar project. The project is owned by Google and NRG Energy, and is heavily subsidized by taxpayers. Ivanpah originally received a $1.6 billion loan from the Department of Energy (DOE) in 2011. Now the company is asking for another government subsidy to pay off its original loan.

Ivanpah’s loan guarantee came from the Section 1705 program created by the 2009 stimulus law. Section 1705 provided up to $18 billion in loan guarantees to “certain renewable energy systems, electric power transmission systems and leading-edge biofuels.” The program was temporary, with loans available until the end of fiscal year 2011. Unlike previous energy loan guarantee programs, Congress even provided subsidies to borrowers to pay the fees on loans.. As a consequence, firms were able to get a federal loan guarantee without any direct expenditure, providing a large incentive for firms to take advantage. By the end of the Section 1705 program in September 2011, DOE approved 27 projects totaling $14.5 billion.

Business failures among these loan recipients were common, the most famous being Solyndra. Solyndra, a solar-panel manufacturer, received a $535 million loan guarantee before filing bankruptcy. An analysis by the Reason Foundation found that 10 of the 27 recipients under Section 1705 experienced some sort of financial trouble.

The survival of Ivanpah is still up in the air. The project came online in December 2013. From January to August 2014, the project generated just one quarter of its predicted amount of electricity.

In February, the company asked DOE for permission to delay payments on its loan. According to the Wall Street Journal, DOE gave Ivanpah a one-year extension on the $132 million first payment. A second subcomponent—the loan is divided among three subcomponents—delayed a June payment of $159 million to December.

Now, Ivanpah is asking for $539 million in cash from the federal government. This time, Ivanpah is targeting a Department of Treasury tax credit program that reimburses renewable energy projects for up to 30 percent of project costs.