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Cato Daily Dispatch for August 14, 2003

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More Governors Head for the Exits
SEC Issues More Rules to Prevent Future Enrons
Former Ambassador: Saudis May Reconsider U.S. Relationship

More Governors Head for the Exits

"When Montana Gov. Judy Martz announced Wednesday that she wouldn't seek re-election, she joined a growing list of governors who have chosen to leave statehouses across the country," reports USA Today. "She became the third governor this week to announce plans to leave office. West Virginia Gov. Bob Wise said Tuesday that he won't seek another term, and Utah Gov. Mike Leavitt was picked by President Bush Monday to head the Environmental Protection Agency.

"Although credited during the booming economy of the 1990s for innovative leadership, many governors now face criticism for tough budget choices and voters turned off by their missteps in office."

In "States Face Fiscal Crunch after 1990s Spending Surge," Cato Director of Fiscal Policy Chris Edwards, Cato Senior Fellow and Club for Growth President Stephen Moore, and Phil Kerpen of the Club for Growth, say that the governors' "mistake was to allow rapid tax revenue growth during the 1990s to fuel an unsustainable expansion in spending."

"Between fiscal years 1990 and 2001, state tax revenue grew 86 percent--more than the 55 percent of inflation plus population growth," they write. "If states had limited spending growth to that benchmark, budgets would have been $93 billion smaller by FY01--representing savings roughly twice the size of today's state budget gaps. If revenue growth higher than the benchmark had been given back to taxpayers in permanent tax cuts and annual rebates, rebates could have been temporarily suspended during FY02 and FY03 to provide a cushion with which to balance state budgets."

The Cato Institute gave Gov. Martz a 'B' grade in "Fiscal Policy Report Card on America's Governors: 2002". Wise and Leavitt however did not fare as well: They both got 'D's.

SEC Issues More Rules to Prevent Future Enrons

"To guard against conflicts of interest, corporate directors must approve each tax and consulting project proposed by outside auditors before they are hired for the additional work, according to Securities and Exchange Commission guidelines issued yesterday," as reported in The Washington Post. "The SEC released a question-and-answer sheet for auditors and board members after receiving complaints that big accounting firms were flouting new rules designed to ensure independent reviews of financial statements.

"The accounting industry's reputation has been tarnished in recent years by scandals at Enron Corp. and WorldCom Inc., and accountants are undergoing unprecedented scrutiny from investors and regulators."

According to a Cato Institute Policy Analysis released today, the United States's flawed corporate tax code is behind these recent scandals. In "Replacing the Scandal-Plagued Corporate Income Tax with a Cash-Flow Tax," Cato Director of Fiscal Policy Chris Edwards argues that with a simpler corporate tax process, there would be fewer incentives for executives to create complex transactions to avoid taxation.

"In many cases, unethical behavior and poor oversight of corporate management are to blame," writes Edwards. "But a deeper look reveals that the flawed structure of the corporate income tax has been a key driver of corporate waste and inefficiency. The tax code distorts financial and investment decisions and spurs executives to hunt for tax shelters."

The solution, he says, is to move from a corporate income tax to a cash-flow business tax. "Today's combination of corporate management problems and rising global competitive pressures makes this an excellent time to fundamentally rethink U.S. business taxation," Edwards concludes.

Former Ambassador: Saudis May Reconsider U.S. Relationship

"A former U.S. ambassador to Saudi Arabia is warning that a pending lawsuit against top Saudi government and business figures filed by victims of the Sept. 11, 2001, attacks could jeopardize relations between the two nations and strengthen the hand of anti-American forces in the kingdom's ruling circles," according to The Washington Post.

"If the plaintiffs prevailed, 'it would aid and abet those within the Kingdom, including not a few in the ruling Al-Saud (royal family), who argue that their country should now end its longstanding cooperation with the United States,' former ambassador Chas. W. Freeman Jr. contended in an affidavit."

Cato Senior Fellow Doug Bandow says that it's the United States that should rethink its relationship with the Saudis. In "Befriending Saudi Princes: A High Price for a Dubious Alliance," he writes: "The United States must not retreat from the world. But it should stop intervening militarily and supporting illegitimate and unpopular regimes where its vital interests are not involved, as in Saudi Arabia."

Bandow makes several more recommendations regarding U.S. policy towards Saudi Arabia in a chapter on the subject in the Cato Handbook for Congress. Among other suggestions, he argues that the U.S. government needs to "withdraw U.S. military forces from Saudi Arabia and recognize that the feared Saudi 'oil weapon' is a myth.

Wyatt Dubois, editor, wdubois@cato.org