Resources for a Potential Ruling Today in Halbig v. Sebelius

The D.C. Circuit is due to rule any day now, quite possibly today, on Halbig v. Sebelius. For those who haven’t been watching the vigil I keep over at DarwinsFool.comNewsweek calls Halbigthe case that could topple ObamaCare.”

First a little background. The Patient Protection and Affordable Care Act offers refundable “premium-assistance tax credits” to qualified taxpayers who purchase health insurance “through an Exchange established by the State.” The PPACA contains no language authorizing tax credits through the 34 Exchanges established by the federal government in states that declined to establish one themselves, nor does it authorize the Internal Revenue Service to treat those federally established Exchanges as if they had been “established by the State.” Offering benefits only in compliant states was proposed by numerous Republicans and Democrats in 2009, for obvious reasons: Congress cannot force states to implement federal programs, but it can create incentives for states to act, such as by offering health-insurance subsidies to residents of compliant states.

Halbig is one of four cases challenging the IRS’s decision to rewrite the statute and offer tax credits in the 34 states with federal Exchanges. The plaintiffs are individuals and employers who are injured by the IRS’s overreach because, due to the PPACA’s many inter-locking pieces, issuing those illegal tax credits subjects them to illegal penalties.

Since a ruling may come today (or some Tuesday or Friday hence, as is the D.C. Circuit’s habit), here are some materials for those who want to hit the ground running.

Update: The D.C. Circuit has handed down rulings for today, and Halbig is not among them. Click here to check on the court’s most recent rulings.

IRS IT: $2.4 Billion But Not World-Class

Perhaps the most suspicious thing about the disappearance of Lois Lerner’s emails is that the IRS is not a small business operation that cannot afford high-quality computer, email, and backup systems. It is a huge modern bureaucracy that has computer technology at the core of its operations. The IRS IT budget in 2014 is a massive $2.4 billion (page 149 here).

Here is what the administration’s most recent IRS budget says (page 150) about its IT strategy:

IT is a key enabler for efficient and effective tax administration … To ensure the public trust, the IRS also is making significant investments to secure infrastructure, data, and applications. With continued investment in new technologies and the modernization of existing IT systems, the IRS is improving service to taxpayers, achieving productivity gains, and distinguishing itself as a model of tax administration around the world. The IRS also has established world-class practices and tools to manage and implement its portfolio of IT investments more efficiently.

There is no doubt that the IRS has distinguished itself recently, but not as a model of world-class practices.

Obamacare FYI: Page 147 shows that IRS IT costs for the ACA will be $345 million in 2014. Page 32 shows that IRS IT costs for the ACA over 2010-2018 will be $1.9 billion.

Obama Administration Should Keep U.S. Out Of Iraq’s Revived Killfest

The uber-hawks and neocons who led America into the disastrous invasion of Iraq are campaigning for a repeat.  If only the U.S. will go to war along the Euphrates a second time, they promise, everything will turn out well.

As I point out on Forbes online:  “Americans should ignore these Sirens of Death.  Attempting to forcibly transform Iraq never was Washington’s responsibility.  Having botched the job once, U.S. policymakers should not try again.” 

Should Taxi Medallion Owners Be Compensated?

The Sunday Washington Post published a very interesting long article on the effects of Uber and other similar ride-sharing services on the value of the medallions required for operation of conventional taxis in Chicago and other cities.

The medallions have value because the supply of rights to operate taxis, restricted by city regulation, is low relative to demand. The Post article presents data on the number of taxis per 100,000 residents. Washington D. C. licenses cabs, but does not restrict the number of cabs operating through a medallion requirement, and has almost 900 taxis per 100,000 residents. In contrast, Chicago and New York, which have medallion restrictions, only have approximately 230 to 250 taxis per 100,000 residents.[1] The supply restrictions in Chicago and New York lead to excess profits, which reveal themselves in the bids for medallions in the secondary market. The present value of the profits from owning the “rights to cruise for passengers” relative to the profits of other investments is the market value of the medallions, which until recently ranged from $500,000 to a million dollars depending on the city and the severity of the medallion restrictions.

Uber, which supplies luxury town-car service, and especially UberX, which supplies service similar to cabs, in effect, have increased the supply of taxis to eliminate some, if not all, of the difference between the number of vehicles per capita in Washington D.C. and those cities with medallion supply restrictions. This increased supply reduces the market value of the medallions. The article asks whether reductions in the value of the medallions are a “taking” by the government that deserves compensation like any normal taking of “property” by government action.

I (along with Richard Sansing, a Professor at Dartmouth Business School) wrote an article in the Journal of Policy Analysis and Management (volume 13, issue 3, Summer 1994 pp. 565- 570) that analyzed the question of whether governments should compensate those citizens who lose wealth because public policies change. (Here is a version published in Regulation in Winter 1997)

We analyzed data on lease versus purchase of tax medallions in New York City. If there were no risk, the purchase price of a medallion would reflect the present value of leasing in perpetuity. Unlike other assets the medallion’s only value is the entry restrictions created by government. At the time we conducted our analysis the present value of leasing in perpetuity at 5 percent interest was $240,000 whereas the sale price of medallions was only $100,000. That is the purchase price of a medallion at that time amortized the cash flows over a period of 20 years as if they would go to zero in year 21. Unlike other investments the only reason that cash flows might go to zero was the possibility of deregulation or reduction in enforcement of the entry restrictions. If policy change created any reduction in cash flows in years one through 19 investors made less than normal profits. Investors made “excess” profits if any reduction in cash flow occurred after year 20. Thus the medallion market was like a fairly priced lottery ticket that took into account the possibility of deregulation, even though at the time we did this calculation no change in taxi regulation had ever taken place since it was instituted in the late 1930s. We concluded that no compensation was required to preserve equity or fairness because the price for medallions reflected the risk investors faced from policy change.

We then analyzed the efficiency consequences of a no-compensation regime. The lack of compensation for policy change increases the riskiness (variance) of returns on assets even though it does not change the average return. Investors handle risk by diversification: owning assets whose returns do not all increase or decrease at the same time. As long as the risk of policy change in taxi medallions does not occur at the same time as the risk to assets in all other markets, the risk of taxi medallion policy change can be managed through asset diversification. Thus in the case of taxi medallion deregulation due to changes such as the advent of Uber and Lyft, compensation is not required for efficiency either.


[1] Chicago has 6904 medallions according to the Post article and 2,718,782 population in 2013 for 254 cabs per 100k people. NYC has 13,605 medallions http://en.wikipedia.org/wiki/Taxicabs_of_New_York_City  In December 2011, Governor Cuomo signed law allowing 18,000 new outer borough medallions. 6, 000 of the outer borough medallions have been issued. Thus New York City has 19,605 medallions and 8,405,837 people in 2013 according to the census, which equals 233 cabs per 100k people.

Several States Expand Educational Choice

On Friday, Gov. Rick Scott signed legislation that expands eligibility for the Florida’s longstanding scholarship tax credit (STC) program and creates a new education savings account for students with special needs. Earlier this year, Oklahoma expanded its STC program and Arizona expanded both its STC and education savings account programs. Kansas Gov. Sam Brownback signed legislation creating a new STC program, though unfortunately it is limited only to low-income students assigned to government schools that are designated as “failing” by the state’s board of education. Students in “non-failing” schools that are nevertheless failing to meet their needs are not eligible to receive scholarships.

The changes to Florida’s scholarship program were mostly positive. Florida eliminated the requirement that students first spend a year at a government school before being eligible to receive a scholarship. Also, starting in 2016-17, the income eligibility cap for first-time recipients will increase to include middle-income families (from 185 percent of the federal poverty line to 260 percent), with priority given to lower-income students. Students from middle-income families will receive smaller scholarships. Students in foster homes will be eligible regardless of their foster family’s income.

Unfortunately, the law adds new rules regulating the operation of scholarship organizations. Florida already has the most regulated scholarship program in the nation, which explains why the state has only one scholarship organization while other states have dozens or even (in the case of Pennsylvania) hundreds.

Back in March, the bill’s prospects seemed dim. The Florida Speaker of the House and Senate President battled over whether to mandate that private schools administer the state test (i.e. – Common Core) as a condition of receiving scholarship students. As a result, the bill’s sponsor withdrew the legislation. That poison pill would have severely restricted school autonomy and parental choice. Fortunately, the resurrected bill that the governor signed into law did not mandate state tests. Participating schools must still administer nationally norm-referenced tests.

Florida’s new education savings account for students with special needs is based on Arizona’s highly popular program, but with a twist: nonprofit scholarship organizations will administer the program rather than the state, though the accounts will still use public funds.

Parents will be able to use the funds to pay for a variety of educational services, including private school tuition, tutoring, online education, curriculum, therapy, post-secondary educational institutions in Florida, and other defined educational services. … The maximum amount for the Personal Learning Scholarship Account shall be equivalent to 90 percent of the state and local funds reflected in the state funding formula that would have gone to the student had he or she attended public school.  

Students qualify if they reside in Florida and are eligible to enroll in kindergarten through 12th grade who have an Individualized Education Plan or have been diagnosed with one of the following: autism, Down syndrome, Intellectual disability, Prader-Willi syndrome, Spina-bifida, Williams syndrome, and kindergartners who are considered high-risk. 

Unfortunately, New York legislators ended the session without passing an educational choice bill, despite majority support in both chambers of the legislature and a promise by Gov. Andrew Cuomo to Timothy Cardinal Dolan that he would support STC legislation. Given the legislative support, the New York Post faulted Gov. Cuomo for the failure to pass the legislation:

The human tragedy, of course, is who will pay the price for Cuomo’s alliance with the Working Families Party & Co.: i.e., the children of actual working families, who have no avenues of escape from rotten public schools where they aren’t learning.

Refusal to Set Military Priorities Creates Strategic Bankruptcy

The U.S. government is financially bankrupt and can ill afford to police the world.  Unfortunately, U.S. policymakers refuse to reconsider even the most antiquated security promise.  The result is strategic bankruptcy as well.

In the aftermath of World War II the U.S. effectively took over the defense of much of Asia and Europe, fought or supported combatants in several Third World proxy wars, engaged in nation-building, and otherwise routinely intervened around the globe.

Despite a changed world, the U.S. continues to defend now wealthy Asian and European client states.  American military personnel continue to die fighting in Third World conflicts, only in different nations.  Washington continues to attempt to micromanage the globe.

Why Piketty Was Mistaken for Endorsing the Zucman & Saez Slide Show

I will have more to say about this fairly soon, but this might serve as a preview.

Thomas Piketty is now advising innocent readers of his book to (1) not demand a refund or dump the book used on Amazon, and (2) ignore his own flawed estimates of top 1% U.S. wealth shares and instead utilize a PowerPoint by Gabriel Zucman and Emmanuel Saez.  Zucman and Saez use capital income reported on individual tax returns (dividends, interest, rent and capital gains) to infer ownership of capital assets, and not just greater realization of gains or portfolio shifts from tax-exempt bonds to dividend-paying stock.

That might be semi-plausible if businesses and professionals were not free to report income on either corporate or individual tax forms, and if tax rates never changed. But this methodology can’t possibly work after the huge tax rate reductions of 1986 (for partnerships & SubS corps), 1997 (capital gains) and 2003 (dividends and capital gains).  The reason it can’t work was fairly well explained by Piketty, Saez and Stantcheva in the original unsanitized version of a paper they published this February (which I have cited beforebut also critiqued):

There is a clear negative overall correlation between the [reported] top 1% income share and the top marginal tax rate: …  [T]he top 1% income share has increased significantly since 1980 after the top tax rate  has been greatly lowered… . [T]he top 1% income share more than doubled from around 8% in the late 1970s to around 18% in last five years, while the net-of-tax (retention) rate increased from 30% (when the top marginal tax rate was 70%) to 65% (when the top tax rate is 35%).”