The Low Income Housing Tax Credit (LIHTC) is a federal program that subsidizes the construction of housing for poor tenants. The $8 billion program suffers numerous failures, as discussed in this study. One problem is that the program’s subsidies may flow more to developers and financial institutions than to the needy population that is supposed to benefit.
National Public Radio investigated the LIHTC for a show aired yesterday. The joint investigation with PBS found that the program has “little federal oversight” and is producing “fewer units than it did 20 years ago, even though it's costing taxpayers 66 percent more.” The investigation discovered that “little public accounting of the costs exists, even among government officials and regulators charged with monitoring the program.”
Here’s how the program works:
Every year, the IRS distributes a pool of tax credits to state and local housing agencies. Those agencies pass them on to developers. The developers then sell the credits to banks and investors for cash. Often, to find investors, developers will use middlemen called syndicators. The banks and investors get to take tax deductions, while the developers now have cash to build the apartments.
With lots of groups on the federal gravy train—state and local housing bureaucracies, developers, banks, syndicators, and investors—the LIHTC program has fortified itself politically. Developers apparently take a 15 percent cut on the total value of housing projects, while syndicators earned more than $300 million in fees last year.
Some share of LIHTC subsidies disappear in corruption and fraud. NPR profiles a Miami-area criminal enterprise led by Biscayne Housing and Carlisle Development Group, which is “one of the country's top affordable housing developers.” The companies stole $34 million from 14 LIHTC projects. Biscayne’s former head Michael Cox admits, "It was a construction kickback scheme . . . The scam was to submit grossly inflated construction numbers to the state in order to get more money than the project required and then have an agreement with the contractor to get it back during construction."
NPR interviewed Assistant U.S. Attorney Michael Sherwin, who has spent five years investigating the LIHTC program in Florida. "This program has been described as a subterranean ATM, and only the developers know the PIN," he says.
The IRS runs the program at the federal level, but its oversight is “minimal” says the GAO. The IRS relies on local housing agencies to prevent corruption, but those agencies don’t put much effort into program integrity. "It's really a program of trust," Sherwin noted to NPR.
The man who ran Florida’s housing agency at the time of the Biscayne/Carlisle crime spree, Steve Auger, defended the LIHTC and assured NPR such scams would not happen again. He said, "It's probably the most efficient tax housing program that has ever existed.”
So far, this blog has had a serious focus. But now it’s time for the comic relief:
After the interview with NPR and Frontline in late 2016, Auger was forced to resign from the agency after an audit revealed he spent more than $50,000 on a steak and lobster dinner for affordable housing lenders and gave his own staff almost half a million dollars in bonuses.
I guess Auger was lying about the efficiency thing, but he was also wrong about scams not happening again:
A few months later, Sherwin charged a Miami-based shell company called DAXC LLC belonging to the owners of Pinnacle Housing Group, another one of the largest developers in the country, with the theft of $4 million from four tax credit developments. In an agreement with prosecutors, a DAXC representative acknowledged that the company "inflated costs" for its own "personal benefit."
Is LIHTC corruption confined to Florida? The Assistant U.S. Attorney doesn’t think so:
Sherwin says he is not done investigating the LIHTC program. He says he is turning his investigation to more developers with projects in other states and also to the banks, lenders and syndicators. "I know that this fraud doesn't just reside in South Florida," he says. "There's too much money involved, and based upon other information that we've looked at, this fraud exists in other jurisdictions."
The vast majority of housing agencies have never been audited. There have been only seven audits of the 58 state and local housing agencies that the IRS relies on to watch the program since it began in 1986. And when you trace the tax credits of LIHTC properties upward to syndicators and investors, the profit structure becomes even more obscure.
Congress is considering tax reform this year to cut rates and eliminate loopholes. The LIHTC is a corporate loophole that should be chopped. Tax reform means less steak and lobsters for the insiders and more income and opportunity for average families.
Kudos to NPR and PBS for their investigation. Further discussion of the LIHTC here, here, and here. Discussion of reforms to reduce housing costs here.
President Trump’s Office of Management and Budget (OMB) has released a “Comprehensive Plan for Reforming the Federal Government and Reducing the Federal Civilian Workforce.” The 14-page memo from OMB director Mick Mulvaney creates a process for executive branch leaders to produce a detailed plan to cut the government. The final plan will be included in the fiscal year 2019 budget a year from now.
The core of the process is that the president is requiring federal agencies to prepare Agency Reform Plans by this September, with draft plans due June 30. Agencies must come up with downsizing “proposals in four categories: eliminate activities, restructure or merge, improve organizational efficiency and effectiveness, and workforce management.” Agencies “should focus on fundamental scoping questions (i.e. analyzing whether activities should or should not be performed by the agency).”
Some of the factors that agencies should consider when doing their “fundamental scoping” are whether activities are nonessential, whether they violate federalism, and whether they would flunk a cost-benefit test. Agencies should propose eliminating activities that do not pass muster on these and other criteria.
Director Mulvaney is trying to get federal bureaucracies to reconsider all of their activities in a bottom-up manner. The downsizing process he has launched will include actions that the president and agencies can take administratively, and reforms that will need legislation passed by Congress.
Aside from pushing agencies to identify savings, the OMB will work over the next year to propose and implement crosscutting reforms that affect all agencies. One theme in the memo is the need to cut the federal civilian workforce. The memo encourages agencies to implement near-term cuts and to develop plans to reduce workforces over the next four years. The memo is right that “technology may have changed or eliminated the need for some positions.”
The memo provides a good framework for pursuing federal downsizing. Some agencies will probably drag their heels and try to include just minor-league reforms in their plans. But the OMB will be overseeing the development of the plans, and will hound agencies to think big. It will also be important for the administration to fill top positions in agencies with leaders who have a zeal for cutting.
Support from congressional Republicans is also needed. The reform effort will be undermined if members simply whine and grumble when the administration suggests trims to their favored programs. When Trump’s “skinny budget” was released in March, the response of Senate Majority Leader Mitch McConnell was to announce that he would not allow cuts to an obscure $120 million pork barrel program that favors his state. But if the party leader selfishly rejects such a tiny cut, how does he expect any other member to accept cuts to any of the programs they favor?
If the Trump-Mulvaney budget reform effort is to be successful, we are going to need congressional leaders to act as actual leaders. And that means putting the broad public interest in spending control ahead of narrow parochial interests.
Mick Mulvaney’s press briefing on the new plan is here.
For comments on previous OMB reform actions, see here, here, here, and here.
President Donald Trump signed an executive order to create a “Comprehensive Plan for Reorganizing the Executive Branch.” The order requires his budget director, Mick Mulvaney, to complete a plan recommending specific spending cuts based on input from federal agencies and outside scholars.
This is a promising initiative. It will be up to Congress to enact the administration’s plan into law, but Mulvaney is a serious reformer who will likely use this opportunity to push for substantial terminations.
The executive order does not just ask for modest efficiency gains, but for major cuts:
The proposed plan shall include, as appropriate, recommendations to eliminate unnecessary agencies, components of agencies, and agency programs, and to merge functions.
The plan contemplates a revival of federalism:
In developing the proposed plan … the Director shall consider … whether some or all of the functions of an agency, a component, or a program are appropriate for the Federal Government or would be better left to State or local governments or to the private sector through free enterprise.
As it turns out, the federal budget includes 1,100 aid-to-state programs costing almost $700 billion a year that “would be better left to state and local governments.” As for free enterprise, we could start by weaning farmers off welfare and allowing them to earn a living in the marketplace like the rest of us do.
The executive order asks Mulvaney to consider, “whether the costs of continuing to operate an agency, a component, or a program are justified by the public benefits it provides.” This is a call for Mulvaney to initiate detailed cost-benefit analyses of spending programs. Federal law currently requires cost-benefit analyses of regulations, but there is no similar accountability for spending programs.
Consider, for example, that Congress spends $8 billion a year on farm insurance subsidies. Taxpayers are supposed to take it on faith that this is a good use of their money. Sorry, but that is just not good enough anymore in an era of $600 billion budget deficits.
So, as a first step, Mulvaney should identify a few dozen major programs that outside experts have pointed to as dubious (such as farm insurance subsidies) and subject them to a rigorous cost-benefit analysis. Such analyses would include the deadweight losses imposed by each program’s needed tax funding, as well as other sorts of damage to society.
Prior presidents have “reorganized” the government in harmful and expansive ways. George W. Bush compounded bureaucracy, wasted money, and reduced efficiency by creating a Homeland Security superstructure on top of 22 existing federal agencies.
The language of Trump’s executive order suggests that he will move in the opposite direction, and Mulvaney is the right man to lead this effort.
To understand the failings of federal bureaucracies, see here.
For a menu of high-priority cuts, see here.
There are numerous causes of federal government expansion, including special-interest pressures and the ability to borrow-and-spend endlessly.
Another cause was highlighted in a recent story about a Bush-Obama education program: politicians are excessively optimistic and hopelessly naïve about their ability to solve society’s problems top-down from Washington.
Neal McCluskey mentioned the failure of the School Improvement Grant program the other day, but I wanted to highlight the Washington Post summary because this is such a classic failure:
One of the Obama administration’s signature efforts in education, which pumped billions of federal dollars into overhauling the nation’s worst schools, failed to produce meaningful results, according to a federal analysis.
Test scores, graduation rates and college enrollment were no different in schools that received money through the School Improvement Grants program — the largest federal investment ever targeted to failing schools — than in schools that did not.
The Education Department published the findings on the website of its research division on Wednesday hours before President Obama’s political appointees walked out the door.
The School Improvement Grants program has been around since the administration of President George W. Bush, but it received an enormous boost under Obama. The administration funneled $7 billion into the program between 2010 and 2015 — far exceeding the $4 billion it spent on Race to the Top grants.
The school turnaround effort, he told The Washington Post days before he left office in 2016, was arguably the administration’s “biggest bet.”
He and other administration officials sought to highlight individual schools that made dramatic improvements after receiving the money. But the new study released this week shows that, as a large-scale effort, School Improvement Grants failed.
It is excessively optimistic and hopelessly naïve to think that a new federal spending effort would turn around the nation’s schools after that approach has not worked for five decades. But the Post reveals how deep the blind optimism was in this case:
Some education experts say that the administration closed its eyes to mounting evidence about the program’s problems in its own interim evaluations, which were released in the years after the first big infusion of cash.
The latest interim evaluation, released in 2015, found mixed results, with students at one-third of the schools showing no improvement or even sliding backward.
Even then, Duncan remained optimistic about the School Improvement Grants, which he said had — along with the Race to the Top grants — unleashed innovation across the country.
Presidential candidate Donald Trump says that he will balance the federal budget while also cutting taxes. Given that the gap between federal spending and revenues is more than $500 billion and rising, he is going to need lots of spending cuts to make that happen.
In his big speech last night Trump said:
We are going to ask every department head in government to provide a list of wasteful spending projects that we can eliminate in my first 100 days. The politicians have talked about this for years, but I'm going to do it.
That’s great. Here are 10 “wasteful spending projects” (with annual costs) that Trump should put in his 100-day elimination plan:
Farm subsidies, which enrich wealthy landowners and harm the environment, $29 billion.
- Energy subsidies, which have been one boondoggle after another for decades, $5 billion.
- The war on drugs, which wastes police resources and generates violence, $15 billion.
- Federal aid for K-12 schools, which generates huge bureaucracy and stifles innovation, $25 billion.
- Excess pay for federal workers, especially gold-plated retirement benefits, which should be cut 10 percent to save $33 billion.
- Housing subsidies, which distort markets and damage cities, $37 billion.
- Community development and rural subsidies, which is corporate welfare used for buying votes, $18 billion.
- Urban transit and passenger rail funding, which is properly a local and private responsibility, $15 billion.
- Obamacare exchange subsidies and Medicaid expansion, which should be repealed along with the overall law, $200 billion a year by 2023.
- TSA airport screening, which Trump said last night is “a total disaster,” and which should be devolved to local and private control, $5 billion.
In November 2008, President Obama promised to “go through our federal budget – page by page, line by line – eliminating those programs we don’t need.” He did not follow through, and neither do most politicians on such promises, as Trump noted.
Would Trump be any different? I have no idea. But I do know that the next president—whether Trump, Clinton, or Johnson—will face huge budget pressures as deficits soar and the economy possibly descends into another recession.
Federal spending cuts would help avert a fiscal crisis and boost growth by reducing economic distortions. We’ve got plenty of reform ideas at www.cato.org and DownsizingGovernment.org, and the Heritage Foundation has an impressive new study on budget reforms as well. So think tank experts know how to balance the budget—the real question is whether the next president will want to make it happen.
In the federal government, employees are paid to faithfully execute the laws, but they often pursue self-serving goals counter to those of the general public. Unionized federal workers actively oppose legislators who support reforms. Agency leaders try to maximize their budgets by exaggerating problems in society. They leak biased information to the media to ward off budget cuts. They put forward the most sensitive spending cuts in response to proposed reductions, which is the “Washington Monument” strategy.
Federal officials signal to the public that they are solving problems without actually solving them. Security agencies, for example, use “security theater” techniques that are visible to the public but do not make us safer.
Officials often trumpet the supposedly great jobs they are doing, but hide agency failures from the public. And officials stonewall congressional requests for information that may shed a bad light on them.
I describe these and other bureaucratic failures in this new essay at Downsizing Government.
The Washington Post reports on other ways that bureaucrats serve themselves and not the public. In one story the other day, the paper reported:
An assistant director of the Secret Service urged that unflattering information the agency had in its files about a congressman critical of the service should be made public, according to a government watchdog report released Wednesday.
That effort to smear Rep. Jason Chaffetz is disgraceful, but it is topped by another one in the Post the same day:
Senior executives at the Department of Veterans Affairs manipulated the hiring system to coerce two managers to accept job transfers against their will — then stepped into the vacant positions themselves, keeping their pay while reducing their responsibilities.
The executives also gamed VA’s moving-expense system for a total of $400,000 in what a new report by the agency’s watchdog described as questionable reimbursements, with taxpayers paying $300,000 for one of them to relocate 140 miles, from Washington to Philadelphia, Pa.
Rubens and Graves kept their salaries of $181,497 and $173,949, respectively, even though the new positions they took as directors of the Philadelphia and St. Paul, Minn. regional offices had way less responsibility, overseeing a fraction of the employees at lower pay levels. Rubens had been deputy undersecretary for field operations.
By and large, the federal government is not full of people that help us. They tax us, regulate us, defend their bureaucracies, and some of them try to actively fleece us. So in structuring the government, a basic assumption should be that it will not be populated by “public servants,” but by people who are in it for themselves. That is one reason why all of us should want to keep the government’s power strictly limited.
For more of the workings of the bureaucracy, see “Bureaucratic Failure in the Federal Government.”
Conservative and libertarian scholars are clashing over the findings and political implications of the new Heritage Foundation immigration study. The study spans 92 pages and is jam-packed full of statistics and detailed calculations.
I’ll leave the immigration policy to my colleagues who are experts in that area. To me, the study provides a very useful exploration into how massive the American welfare state has become. Here are some highlights:
- “There are over 80 of these [means-tested] programs which, at a cost of nearly $900 billion per year, provide cash, food, housing, medical, and other services to roughly 100 million low-income Americans.”
- “The governmental system is highly redistributive … For example, in 2010, in the whole U.S. population, households with college-educated heads, on average, received $24,839 in government benefits while paying $54,089 in taxes ... [and] households headed by persons without a high school degree, on average, received $46,582 in government benefits while paying only $11,469 in taxes.”
- “Few lawmakers really understand the current size of government and the scope of redistribution. The fact that the average household gets $31,600 in government benefits each year is a shock.”
Total federal, state, and local government spending in 2010 was $5.4 trillion, or $44,932 per U.S. household. The figure of $31,600 in “benefits” is total spending less spending on public goods, interest, and government pensions.
A useful feature of the Heritage study is a breakdown of the $5.4 trillion in spending into six categories constructed by the authors. “Direct benefits” includes mainly Social Security and Medicare. “Pure public goods” includes programs such as defense and scientific research. “Population-based services” includes programs aimed at whole communities, such as police and highways. (Some of these also seem to be public goods). “Means-tested benefits” includes programs such as food stamps. Education includes both K-12 and college subsidies. “Interest and pensions” is the current costs of past spending, which includes servicing the debt and paying for government pensions. The chart shows spending in 2010.
This spending breakdown is useful for thinking about the proper size of government. From a libertarian standpoint, governments ought to be spending only on public goods and population-based services, as a first cut. That would be $1.94 trillion, or just 36 percent of the current total of $5.4 trillion. As a percent of GDP in 2010, that would be spending of 14 percent, rather than current spending of 38 percent.
But some of the population-based services mentioned by the authors could be privatized, and spending on some of the public goods could be cut. So a good libertarian target might be less than 36 percent of current spending, or less than 14 percent of GDP.
The Heritage study is sparking a debate about what type of immigration reform the nation should have. But hopefully, it will also spur more discussion about the massive size of the American welfare state. Immigration is partly, or mainly, such a contentious issue because we have such a huge welfare state.
The study includes projections about how many trillions of dollars of government benefits will flow to immigrants and their children in the decades ahead. But conservatives and libertarians agree that we ought to cut trillions of dollars in benefits to immigrants and nonimmigrants alike.
So is there some common ground here? Can we work toward an immigration reform that cuts government dependency in general and downsizes the welfare state?