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February 29, 2016 5:30PM

A Penalty’s Not a Tax Even if the IRS Enforces It

New IRS reporting requirements force U.S. banks to disclose interest-earning accounts of non-resident aliens to the government. (Apparently this is tax-authority mutual back-scratching: foreign nations are expected to reciprocally report this type of information about U.S. citizens with accounts abroad.) Under this regulation, refusing to disclose non-resident alien accounts results in a fine.

The Florida and Texas Bankers Associations are trying to challenge this regulation, but are being frustrated by interpretative jiggery-pokery that prevents their serious legal arguments from even being heard. While the federal district court allowed this lawsuit to proceed, the U.S. Court of Appeals for the D.C. Circuit reversed course and held that the associations couldn’t challenge the regulation because, under the Anti-Injunction Act (AIA), one can’t challenge a tax until the government has attempted to enforce the allegedly improper law and collect the attendant tax. The D.C. Circuit—seemingly imitating Chief Justice Roberts’s reasoning in NFIB v. Sebelius—held that the penalty triggered by failing to follow the new reporting requirements was a tax, thus subjecting the lawsuit to the AIA.

Cato has banded together with the National Federation of Independent Business to file an amicus brief in support of Supreme Court review. The AIA’s statutory language should be interpreted as the Supreme Court has interpreted the Tax Injunction Act (TIA)—confusing, but not the same law—because they contain almost exactly the same language. Under the TIA, one cannot challenge a regulation that deals with either the “assessment” or “collection” of taxes. Similarly, the AIA only prohibits challenges that have the “purpose” to “restrain” “assessment” or “collection” of a tax. Since the fine at issue is a penalty for regulatory non-compliance, not a tax as properly understood, the AIA shouldn’t bar judicial challenges.

Moreover, with the way in which the D.C. Circuit read the “penaltax,” it created an issue under the Administrative Procedure Act (APA). The APA contains a “strong presumption” of judicial review prior to enforcement of substantive regulations like the one at issue here. Congress intended that all agencies’ substantive regulations would be subject to such review under the APA—not that the IRS would have no accountability before federal courts. People have a right to be sure of a regulation’s meaning before engaging in costly compliance efforts—and that’s exactly what pre-enforcement judicial review provides.

Finally, the APA contains stringent procedural requirements for how regulations are to be promulgated. For example, there must be an adequate explanation of the rule, notice and an opportunity for comment, and publication of proposed rules in the Federal Register. The Treasury Department and IRS frequently ignore these requirements—recall the various Obamacare delays, waivers, rewrites, and suspensions—and these agencies must be reigned in.

The Supreme Court should take up Florida Bankers Association v. U.S. Department of Treasury and reverse the lower court’s dangerous precedent. You shouldn’t need to wait until the government attempts to enforce a penalty against you before being able to challenge it.

February 29, 2016 2:39PM

Seattle’s Minimum‐​Wage Law Is Unconstitutional (Not Just Bad Economics)

By Ilya Shapiro and Jayme Weber

Seattle’s $15 minimum-wage law has received plenty of attention from those on both sides of the issue. What has received less attention is the way in which this ordinance distinguishes between businesses—and discriminates against interstate commerce.

The ordinance separates employers into two categories, those with 500 or more employees (Schedule One) and those with fewer (Schedule Two), and mandates that the first category implement wage increases more quickly than the second. But the law creates a special rule for Seattle franchises, placing them into the first category if the total number of employees in the franchise network is 500 or more.

A group of franchise owners, led by the International Franchise Association, challenged the ordinance, to no success in the lower courts. Cato is now supporting their petition to the Supreme Court. Seattle insists that this categorization is neutral as between in-state and interstate commerce, because a franchise network could be entirely within Washington. The reality is that all Seattle franchises that are in Schedule One have either an out-of-state franchisor or are associated with out-of-state franchises of the same brand. The law thus discriminates against interstate commerce in precisely the way the Commerce Clause was intended to prevent.

When the delegates met in Philadelphia in 1787 to revise the Articles of Confederation, one of their main concerns was the protectionism the states exhibited under the Articles. As James Madison said at the time, “Most of our political evils may be traced to our commercial ones.” The Constitutional Convention debated many things between May and September 1787, but there seems to have been general agreement that the new Constitution would give Congress power to regulate—“make regular”—interstate commerce.

Although today’s federal government has far exceeded the positive Commerce Clause power the Framers intended to give it—in terms of federal programs and regulations—the principle that states and local governments may not enact laws that discriminate against interstate commerce dates back to Chief Justice Marshall’s opinion in Gibbons v. Ogden (1824), and indeed all the way to the animating purpose of the Convention. That principle—known as the negative or Dormant Commerce Clause—applies both when Congress has passed legislation in the area and when it hasn’t. See Case of the State Freight Tax (1873).

One scholar has remarked that, under the Articles, the states were “marvelously ingenious” at designing protectionist measures. Seattle’s franchise categorization is just one such measure, which discriminates against interstate commerce in a subtler way than most of the protectionism that courts have considered.

While arguing that its law is constitutional, Seattle points to the fact that the burden of the law will fall on in-state actors (the Seattle franchises). Where the burden falls, however, is irrelevant to whether a law discriminates against interstate commerce. Just last term, in Comptroller of the Treasury of Maryland v. Wynne, the Supreme Court held that Maryland’s income tax scheme violated the Commerce Clause by taxing residents on income they earned out-of-state—even though, by definition, the burden of the income tax law fell on Maryland residents. Seattle’s franchise categorization also violates the Dormant Commerce Clause’s extraterritoriality principle because it makes the wage burden placed on Seattle franchisees dependent on the hiring decisions of independent (and most likely unknown) franchises in other states.

The Supreme Court should take up International Franchise Association v. City of Seattle and consider not the economic wisdom of minimum-wage requirements generally but the effect of this particular law on interstate commerce.

February 29, 2016 8:59AM

Not‐​So‐​Rapid Transit

Washington, DC opened its long-delayed streetcar for business on Saturday. Actually, it's a stretch to say it is open "for business," as the city hasn't figured out how to collect fares for it, so they won't be charging any.

Exuberant but arithmetically challenged city officials bragged that the streetcar would traverse its 2.2-mile route at an average speed of 12 to 15 miles per hour, taking a half hour to get from one end to the other (which is 4.4 miles per hour). If there were no traffic and it didn't have to stop for passengers or run in to any automobiles along the way, they admitted, it would still take 22 minutes (which is 6 miles per hour).

"After more than $200 million and a decade of delays and missteps," observed the Washington Post, "it took the streetcar 26 minutes to make its way end-to-end on the two-mile line. It took 27 minutes to walk the same route on Saturday, 19 minutes on the bus, 10 minutes to bike and just seven minutes in a Uber." After all the costs are counted, the Uber trip probably cost less.

The streetcar opening caught the attention of the Economist, which called it "pointless" because it follows a route that is already served by a bus that is faster, can get around parked cars that are slightly sticking into the right of way, and actually goes somewhere beyond the already gentrifying H Street neighborhood. Despite the problems and criticisms, DC officials were already talking about extending the line another 5 miles. 

Washington isn't the only city caught up in the streetcar fad. Following Portland's example, Atlanta, CharlotteCincinnati, Kansas City, and several other cities have opened or are building streetcar lines. Most of these lines are about two miles long, are no faster than walking, and cost $50 million or more per mile while buying the same number of buses would cost a couple million, at most.

Portland wants to build 140 miles of streetcar lines. At the average cost of its most recent line, this would require as much money as it would take to repave every street in the city--streets that are falling apart because the city doesn't have enough money to maintain them. According to the latest census, seven times as many downtown Portland employees bicycle to work as take the streetcar, but another survey found that two out of three Portland cyclists "have experienced a bike crash on tracks." 

New York's Mayor de Blasio wants to spend $2.5 billion on a 16-mile streetcar between Brooklyn and Queens. Apparently that city is so flush with cash that it doesn't have anything better to spend its money on than a slow transit line that won't even stop near a subway station.

These cities argue that streetcars stimulate economic development. Yet a recent study sponsored by the Federal Transit Administration found that not only was there no evidence of such stimuli, none of the cities that had built streetcars were systematically measuring such impacts. Instead, most were busy subsidizing or coercing (through prescriptive zoning) new development along the streetcar routes.

In fact, there is no reason to think that a slow, congestion-causing, bicycle-accident-inducing rail line would promote new development. Streetcars were technologically perfected in the 1880s, so for Washington to subsidize the construction of a streetcar line today is roughly equal to New York City subsidizing the opening and operation of a factory in Manhattan that would make non-QWERTY typewriters, or Los Angeles subsidizing the manufacture of zoopraxiscopes. Rather than build five more miles of obsolete line, the best thing Washington can do is shut down its new line and fill the gaps between the rails with tar.

February 29, 2016 8:54AM

A Final Goodbye to Ohio’s Ministry of Truth

For the last 20 years, Ohio has had its own kind of “Ministry of Truth,” otherwise known as the Ohio Elections Commission (OEC). Anyone who claimed that someone -- typically a political opponent -- was lying to advance or defeat a politician could file a complaint such that a panel of bureaucrats would determine the “truth.”

What will go down as the abuse of the "political statement law" was in 2010 when Rep. Steven Driehaus complained that a pro-life advocacy group accused him of supporting “taxpayer-funded abortions” by voting for the Affordable Care Act. The OEC determined that there was probable cause that the statement was false. The ruling was widely publicized in the media less than a month before the election. Then discovery started on the formal prosecution, requiring disclosure of all of the targeted group's communications with allied organizations, political parties, and members of Congress.

Imagine just the time and money required to respond to this kind of complaint in the last month before an election -- not to mention the PR fallout -- such that the damage is done regardless of the result of the legal process. Accordingly, Susan B. Anthony List brought a lawsuit challenging the Ohio law (a version of which existed in about a dozen states). But after the election, Driehaus withdrew his complaint, the prosecution was shuttered, and so the OEC claimed that no harm was ultimately done and so the lawsuit had to be dismissed as moot. 

The Cato Institute filed an amicus brief before the Supreme Court mocking the absurdity of the law, joined by America's leading political satirist P.J. O'Rourke (also an H.L. Mencken Research Fellow at Cato). Using humor to illustrate absurdity, we showed the silliness (and danger) of allowing potential criminal penalties for "false" statements like “Read my lips: no new taxes!” or “If you like your healthcare plan, you can keep it.” The brief generated a great response, so much so that it was reprinted in Politico and the Pennsylvania Journal of Constitutional Law, and The Green Bag gave it one of its "Exemplary Legal Writing" honors for 2014. Ultimately, the Supreme Court unanimously held that the statute could indeed be challenged.



On remand, the federal district court quickly enjoined the Ohio statute as violating the First Amendment. Then last week, the U.S. Court of Appeals for the Sixth Circuit affirmed that ruling, effectively killing the "False statement" law. The court described many good reasons for its decision, including the timing and resource-draining issues noted above. However, even if these problems were solved, the government still should not be in the business of evaluating core political speech prior to an election. The result was a victory for the freedom of speech.

While Donald Trump may wish to eviscerate the First Amendment, the state of Ohio (and effectively any state government) can no longer threaten their political candidates and advocates into silence.

February 27, 2016 9:11PM

Donald Trump’s Opinions — and Track Record — On Libel Law

Presidential candidate Donald Trump, speaking Friday: “We’re going to open up those libel laws. So when The New York Times writes a hit piece which is a total disgrace or when The Washington Post, which is there for other reasons, writes a hit piece, we can sue them and win money instead of having no chance of winning because they’re totally protected.” Trump also said of Amazon, whose Jeff Bezos owns the Washington Post, a newspaper that just ran an editorial seeking to rally opposition to Trump: “If I become president, oh do they have problems. They’re going to have such problems.”

The President has no direct power to change libel law, which consists of state law constrained by constitutional law as laid out by the Supreme Court in New York Times v. Sullivan. A President could appoint Justices intent on overturning the press protections of Sullivan or promote a constitutional amendment to overturn it. Assuming one or the other eventually was made to happen, further changes in libel law would probably require action at the state level, short of some novel attempt to create a federal cause of action for defamation.

But although Trump is unlikely to obtain the exact set of changes he outlines, the outburst is psychologically revealing. Donald Trump has been filing and threatening lawsuits to shut up critics and adversaries over the whole course of his career. He dragged reporter Tim O’Brien through years of litigation over a relatively favorable Trump biography that assigned a lower valuation to his net worth than he thought it should have. He sued the Chicago Tribune’s architecture critic over a piece arguing that a planned Trump skyscraper in lower Manhattan would be “one of the silliest things” that could be built in the city. He used the threat of litigation to get an investment firm to fire an analyst who correctly predicted that the Taj Mahal casino would not be a financial success. He sued comedian Bill Maher over a joke.

I have been writing about the evils of litigation for something like 30 years, and following the litigious exploits of Donald Trump for very nearly that long. I think it very plausible to expect that if he were elected President, he would bring to the White House the same spirit of litigiousness he has so often shown as a public figure.

[cross-posted from Overlawyered]

 

 

February 26, 2016 4:46PM

Closing America’s Security Deficit

The RAND Corporation has published the second report in its “Strategic Rethink” series, this one entitled “America’s Security Deficit: Addressing the Imbalance between Strategy and Resources in a Turbulent World.” It is a noble undertaking, conducted by well-respected scholars and analysts. But I’m not particularly optimistic that conditions are ripe for the strategic rethink that they seek, and that the country desperately needs.

The strategy-resources gap should be corrected by adopting a new strategy, one that pares down the United States’ permanent overseas presence, and compels other countries to take on more responsibilities for their own defense (as Japan shows signs of doing). Instead, U.S. policymakers seem willing to undertake merely incremental changes at the margins, retaining U.S. primacy, and trying to cover the strategy-resources gap with wishful thinking and unrealistic assumptions.

RAND’s summary of the report explains “currently projected levels of defense spending are insufficient to meet the demands of an ambitious national security strategy.” And its Key Finding reads as follows:

Limitations on defense spending in the context of emerging threats are creating a "security deficit."

  • Fielding military capabilities sufficient, in conjunction with those of our allies and partners, to deal with the disparate challenges faced by the United States will require substantial and sustained investments in a wide range of programs and initiatives well beyond what would be feasible under the terms of the Budget Control Act.

Advocates for higher military spending have been saying this since the BCA was first passed. Those who also claim to care about the nation’s persistent fiscal imbalance typically note that the Pentagon’s budget is not the primary driver of the nation’s debt, and they would focus, first, on so-called mandatory spending (Social Security, Medicare, and Medicaid) which accounts for a far higher share of total federal expenditures, in order to find the additional money needed to close the security gap.

They are correct on the first point, the need to reform entitlements, but not on the need for more military spending.



We should be clear about what that entitlement solution would look like, and why it hasn’t yet occurred. As a practical matter, it entails telling people to accept cuts in benefits that they have been told (falsely) are theirs by right. Millions of American retirees actually believe that the money that they receive every month under Social Security, or the health care funded by Medicare, is actually their money, the money that they paid into the system during their working years.

Of course, it isn’t “their” money. The benefits for current retirees are paid by taxes on current workers.

But, leaving that aside, under the necessary overhaul, entitlement benefits will be cut, but not enough to cover the difference. Thus, higher payroll taxes, too. Bitter pills all around.

Unsurprisingly, very few American politicians have actually proposed such measures, and the few who have done so have mostly focused on reducing payments to future beneficiaries, not to those already in the system, or nearing retirement. As my colleague Dan Mitchell points out, in a moment of uncharacteristic optimism, such half-measures would be better than doing nothing at all, but it will take a major political shift before any such proposal ever becomes law.

Remember where the current anxiety over supposedly inadequate spending levels for the military all started: the Super Committee, and the hoped-for Grand Bargain of tax and entitlement reform. Then there was the failure to reach any agreement, and the BCA-imposed caps on discretionary spending (divided evenly between defense and non-defense).

But Congress has managed to work around the caps through special legislation in nearly every fiscal year since they first passed the budget-capping law in 2011. Which suggests that they weren’t all that serious about controlling costs in the first place.

So, we are back to where we started: a mismatch between our strategic ends, and the resources available to execute that strategy. And this represents a particularly difficult challenge for people like Marco Rubio and Ted Cruz who have called for huge increases in the military’s budget. Where will they find the money?

There are alternatives for solving America’s security deficit, besides simply spending more. We could adjust our strategy to our fiscal reality, and stop pretending that our money problems will magically sort themselves out.

The Obama administration hasn’t considered those alternatives, however, in part because choosing among competing strategic priorities is difficult, but mostly because Congress’s repeated evasions of the BCA have convinced the administration that actually aligning our strategy with our resources isn’t really necessary. Only serious spending discipline, enforced by a Congress committed to resolving our long-term fiscal imbalance, will prompt the strategic rethink that is long overdue. 

February 26, 2016 12:26PM

Green Energy Cronyism Strikes Out Again at the WTO

Yesterday, a dispute settlement panel at the World Trade Organization released an official report finding that local content requirements in India’s solar power scheme violate global trade rules.  The ruling condemns a particular protectionist policy that dilutes the effectiveness of solar subsidies by diverting them to inefficient domestic manufacturers.  The case is one more example of how global trade rules help to prevent green energy initiatives from becoming expensive crony boondoggles.

Although the report was just released, we’ve known what the outcome would be since last September.  At the time, I wrote about how India’s local content requirement harms its own green energy initiative:

The ruling ought to be celebrated by advocates of solar power.  The local content requirement acts as a drag on the program by making solar power plants more expensive to build.  Allowing solar energy producers to purchase panels on the global market not only reduces prices for those producers, it also furthers the development of efficient supply chains for solar panel production.

Predictably, however, some green groups are not happy with the decision.  According to the Sierra Club, “the WTO has officially asserted that antiquated trade rules trump climate imperatives.”  They’re fully committed to the idea that—contrary to the lessons of history and economics—full-fledged green industrial policy will lead to a future of “100 percent clean energy.”  They believe filling the economy with “green jobs” is politically and economically necessary to achieve their environmental goals.

But this policy approach is self-defeating, and I’ve pointed out its shortcomings on this blog before:

The inconvenient truth is that green industrial policy isn’t going to lead to a future of renewable energy, but it does benefit cronies and politicians.  Bureaucrats who don’t make decisions based on market realities still respond to incentives, making them susceptible to capture by special interests at public expense (see Solyndra).  Even if bureaucrats are enlightened saints, the centralization of decision-making benefits large firms at the expense of entrepreneurs and other innovative competitors.  Over time, the relationship between commercial success and political acumen leads businesses to invest more in lobbying and leads to a culture of rent-seeking and privilege

But the Sierra Club does rightly note that the U.S. government is being somewhat hypocritical in going after India’s solar subsidies at the WTO.

Bringing this case is a perverse move for the United States.  Nearly half of U.S. states have renewable energy programs that, like India's solar program, include "buy-local" rules that create local, green jobs.

And the United States doesn’t just include protectionist local content requirements in its subsidies.  Like India and Europe, the U.S. government also imposes import tariffs in the form of antidumping and anti-subsidy duties on solar panels and wind turbines.  Simon Lester and I have argued that these sorts of tariffs should also be prohibited.

Taxing the same products you subsidize is inherently counterproductive.  The same is true when you condition subsidies on the use of domestic products.  Unless, of course, you are a domestic manufacturer that gets all the money and faces no competition. 

The “Bootleggers and Baptists” dynamic of green energy cronyism is a powerful driver of public policy.  International trade rules and dispute settlement can help to counteract that.