Old Dominion GOPers Fall Off the Tax Wagon…Again.

Virginia Republicans have lost seats in the state legislature and lost the governor’s mansion in part because of their propensity to raise taxes. Unfortunately, they do not seem to understand the link between their profligate behavior and their political misfortunes. The Wall Street Journal explains that they now want to raise taxes when the state has a giant budget surplus:

Virginia was once a solidly conservative Republican state, but in recent years it has tilted Democratic. A big reason for the shift is the GOP’s recent love affair with higher taxes. In the 1990s Republican Governors George Allen and Jim Gilmore won sweeping victories running as tax cutters. Then in 2004 Richmond Republicans enacted the largest tax increase in the commonwealth’s history – a $1 billion hike in sales and tobacco taxes. Now they are flirting with another tax hike even though the state has a Blue Ridge Mountain-high $900 million budget surplus. …The Republican plan would spend $1 billion more for roads and cost-inefficient transit programs and pay for it through borrowing, raising taxes and fees on cars and trucks, and giving local governments authority to raise their assessments. …Only 10 years ago the Virginia GOP was riding high after Jim Gilmore was elected Governor on a wildly popular message: “End the Car Tax.” Now the Virginia Republicans want to raise car taxes. Have they learned nothing from the party’s implosion in Washington?

Why the States — Not Congress — Should Keep the President’s “Promise”

In his State of the Union address, the president will propose that “persistently underperforming” public schools, as defined by the No Child Left Behind act, be required offer their students ”promise scholarships” that could be used to transfer to private schools or to out-of-district public schools, or be applied to after-school tutoring.

Promoting educational choice is an excellent idea, but attempting to do it from the Oval Office is not. Even if the U.S. Constitution did not leave power over education in the hands of the states and the people (which in fact it does), a national school choice program would still be undesirable.

When states are left to create their own education policies, it is easy to see how their decisions affect students and communities. We can compare what happens in states that adopt a given policy to what happens in states that don’t. That’s how California’s disastrous side-lining of phonics instruction in the late 1980s was caught and reversed.

But when you create programs at the federal level, any unintended effects occur all across the country at the same time, eliminating the ability to make comparisons across states.

Countries that have adopted school choice programs at the national level (e.g., Chile, the Netherlands, Sweden, etc.) have either imposed extensive regulations on participating private schools right from the start, or have added them gradually over time. Some kinds of school choice policies are likely to generate less of this regulatory encroachment than others, so it would behoove the president to encourage states to develop their own policies rather than impose one from Washington.

When the president floated a similar proposal last year I responded in more detail, and that comment can be found here.

The United States Owes Hillary Clinton a Debt

Hillary Clinton’s announcement of her presidential bid has evoked several news stories predicting the demise of the presidential public financing system.

In Buckley v. Valeo, the U.S. Supreme Court decided that spending limits violated the First Amendment. The same decision, however, said that the government could impose spending limits in exchange for public financing of a campaign. The presidential system enacted just after Watergate provided public funding for primary campaigns (on a matching basis) and for the general election. The law established equal spending limits and prohibited private fundraising for the general presidential election for the major party candidates.

McCain-Feingold is also part of this story. That 2002 law liberalized contribution limits a bit which made it easier for strong candidates like Hillary Clinton to raise more money privately than she would receive from the public funding scheme. Of course, she could accept public funding and forego the larger sums she might raise privately. However, her competitors for the nomination – say, Barack Obama or John Edwards – might also be able to raise more money privately, and they would do so to gain an edge in the primaries over Sen.Clinton. The same might well be true of the Republican candidate in the general election. If Sen. Clinton took the public funding and its spending limits, she would be outspent by the GOP nominee. Given all these considerations, Sen. Clinton has decided to forego public funding. Any serious candidate for the presidency in 2008 is likely to make the same decision.

Too much political analysis, you might say. After all, didn’t Congress create the public financing system to prevent corruption of candidates or “level the playing field” for outsiders?  The members of Congress who created public funding ascribed such noble and moral ends to their effort. But the actual purposes of the system were rather less noble and more partisan.

From 1960 to 1974 – the year public funding was created – the Democratic presidential candidates fell increasingly behind their Republican opponents in fundraising. Remember, the public funding scheme required equal spending by both major party candidates in the general election. The law was, in short, a good solution to the emerging Democratic presidential fundraising gap. In The Fallacy of Campaign Finance Reform, I looked at how this equalization affected the two parties after 1974, assuming the trend in fundraising from 1960 continued to 1992. The public funding law cut projected Republican fundraising (and campaign spending) by 60 percent while imposing no limit on expected Democratic donations or expenditures.

From the start, the presidential public funding system was a raw partisan ploy obscured by a moralistic rhetoric. It worked in the sense that some analysts believe the equalization of funding gave the presidency to Jimmy Carter in 1976. But the system has failed otherwise. It has not increased entry into the party primaries compared to the system it replaced. Public funding has forced taxpayers to support candidates they would not support if they had a choice. For that reason, the system has lost 75 percent of its supporters over the years. Now only about 7 percent of taxpayers check off support for the presidential fund. In 1978, 28 percent did so.

That lack of public support means Congress is unlikely to save the system. In any case, Democratic presidential candidates have drawn even with their GOP counterparts in fundraising. The real, partisan reason for the system no longer exists. Soon the system itself will be the first choice of those who finish last. Surely Congress could find a better use for a few hundred million dollars.

Taxing the Future

Today’s New York Times reports that Illinois is seriously considering selling off its state lottery and converting the future cash flow into a current lump sum plus a smaller cash flow over the next 75 years.  Gambling, of course is not an economic development strategy.  Excess profits exist only because the state restricts entry.  Like the mercantile regimes of old, the state is raising cash by selling off its monopoly.

Given the numbers in the Times, I conducted some present value calculations.  The sale is projected to result in a cash flow of $200 million per year for 75 years to the state (current profits are $430 billion).  The remaining cash flow goes to the winning bidder.  The reported estimated bid for this franchise is approximately $1 billion.  That suggests a return on investment of 20% per year compounded over 75 years.  Seems rather steep to me.  A 5% return would result in a much higher bid of $3.9 billion.

If the $1 billion is an accurate reflection of what an auction would yield, then the market is telling us that there is large risk to investing in a business whose only asset is state restrictions on entry.  This is particularly true because of the possibility not only of actual physical entry in Illinois, which is less likely, but entry through the internet.

Gambling markets are not the only markets whose source of profits is state enforced entry restriction.  Some years ago Richard Sansing and I studied the difference between the lease prices and sale values of taxi medallions in New York City (Journal of Policy Analysis and Management volume 13 issue 3 (1994) pp. 565-570).  We found that the market acted as if there was a 5% chance of deregulation in any year (i.e. the market was pricing the asset as if its cash flow would be zero in year 21).

Why are states selling assets for their cash flows?  Spending a billion dollars now rather than $630 million every year (the current profits of the lottery) allows today’s politicians to appear generous.  But my suspicion is that they are taxing the only thing left to tax i.e. people in the future.  My colleague Jagadeesh Gokhale’s work in entitlement reform argues that Social Security and Medicare are policies that redistribute from all future generations to current and past generations.  Politicians do this because the future is the last unorganized group in society.  I think some of the same politics are behind the Illinois lottery financial proposal.  But ironically the inability of the political system to credibly commit to future policies reduces the value of the sale to the current era because the market includes political risk in its valuation.         

Trade Showdown Looks Inevitable

Yesterday I argued that Congress’s unflinching devotion to the antidumping law poses a real threat to the world trading system.  As the WTO dispute settlement mechanism renders more decisions against U.S. antidumping actions and procedures, Congress will grow more inclined to question the efficacy and legitimacy of the WTO in public.  And that is a slippery slope.

I wrote:

To Congress, trade remedy laws are not the problem.  Dumping and subsidization are.  And the latest Appellate Body decision against zeroing makes it that much harder to combat “unfair” trade.

Accordingly, Congress is highly unlikely to go quietly into the night after the WTO’s latest indictment of zeroing. Thus, confrontation–perhaps intractable confrontation–between the United States and the WTO dispute settlement system may be in the cards later this year.

Well, judging from this news release and letter, written by the two highest ranking legislators on trade issues, “later this year” is here.  Stay tuned.

Bush Health Care Proposal Mirrors Cato Scholars’ Proposal

I’ve returned from my first pre-State of the Union briefing of the day by the Bush administration.  (I’ve got another at 4:30).  What I heard about the president’s health care proposal has me even more heartened.

In part, that’s because the president’s proposal mirrors the proposal for “large HSAs” that I introduced here and here, and that Mike Tanner and I explain in Healthy Competition: What’s Holding Back Health Care and How to Free It.

Tonight, the president will propose setting a very high limit on existing distortionary tax breaks for health insurance.  The Large HSAs proposal would do the same.  He also will propose extending the revamped tax break to all individuals, ending the tax code’s discrimination against those who don’t have access to employer-sponsored insurance.  Ditto Large HSAs.

However, the president’s proposal does not incorporate an important third element of the Large HSAs idea: giving workers ownership of the part of their compensation that purchases their health benefits. 

Here’s why that’s important.  If your employer currently spends $10,000 on your health benefits, that part of your compensation is untaxed.  The president’s proposal would let you keep that tax break if you choose to purchase coverage someplace else.  But it does nothing to make sure that you get to keep the $10,000 that your employer spends on your health benefits.  That money is not a gift – it is part of your compensation.  But if you choose to leave your employer’s health plan, the employer is under no obligation to give you the money that he otherwise would spend on your health benefits.  In fact, your employer would face strong incentives not to “cash you out.”  Being free to choose where to purchase your health insurance means less if you have to take a pay cut to excerise that freedom.

Large HSAs would give workers ownership of that part of their compensation.  The proposal would convert the current tax break for employer-sponsored coverage into a tax break only on HSA contributions.  The contribution limits on HSAs would be raised, so that most workers could put all of their health benefits dollars into the account.  They could then use those funds to purchase coverage tax free from their employer, or any other source.  Importantly, with Large HSAs, the worker would control that $10,000 from day one.

Even though the president’s proposal doesn’t give workers ownership over that portion of their compensation, it is still a step in the right direction.