Topic: Tax and Budget Policy

A Contemporary Economist’s Account of the “Crowning Folly of Tariff of 1930”

“[T]here came another folly of government intervention in 1930 transcending all the rest in significance. In a world staggering under a load of international debt which could be carried only if countries under pressure could produce goods and export them to their creditors, we, the great creditor nation of the world, with tariffs already far too high, raised our tariffs again. The Hawley-Smoot Tariff Act of June 1930 was the crowning folly of the who period from 1920 to 1933….

Protectionism ran wild all over the world.  Markets were cut off.  Trade lines were narrowed.  Unemployment in the export industries all over the world grew with great rapidity, and the prices of export commodities, notably farm commodities in the United States, dropped with ominous rapidity….

The dangers of this measure were so well understood in financial circles that, up to the very last, the New York financial district retained hope the President Hoover would veto the tariff bill.  But late on Sunday, June 15, it was announced that he would sign the bill. This was headline news Monday morning. The stock market broke twelve points in the New York Time averages that day and the industrials broke nearly twenty points. The market, not the President, was right.”

– Dr. Benjamin M. Anderson [chief economist at Chase National Bank 1920-39], Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946 (Indianapolis, Liberty Press, 1979, pp. 229-230)

Highways and Gas Tax Diversions

The federal government imposes a gasoline tax of 18.4 cents per gallon. Lobby groups are pressing for an increase and President Trump has suggested that he may support one. But a federal gas tax increase makes no sense.

State governments own America’s highways, and they are free to raise their own gas taxes whenever they want. Indeed, 19 states have raised their gas taxes just since 2015, showing that the states are entirely capable of raising funds for their own transportation needs. State gas taxes average 34 cents per gallon.

Also consider that gas taxes used to be a more pure user charge for highways, but these days gas tax money is diverted to inefficient nonhighway uses such as transit. Politicians say, “We need a gas tax increase to fix our crumbling highways,” and then they spend the money on other things. It is a bait-and-switch.

Federal fuel taxes and vehicle fees raise about $41 billion per year. About 20 percent of those funds (about $8 billion) are diverted to transit and other nonhighway uses.

With state fuel taxes the diversion is even larger, as shown in this Federal Highway Administration table. In 2016, state governments raised $44 billion from fuel taxes, and they diverted 24 percent—14 percent to transit and 10 percent to other activities. Texas, for example, diverts 25 percent of its fuel taxes to education spending.

The states also raised $38 billion from vehicle fees. They diverted 34 percent of those funds—13 percent to transit and 21 percent to other activities.

In total, states raised $82 billion from fuel taxes and vehicle fees. They spent $59 billion (72 percent) on highways and $23 billion (28 percent) on other activities. If the highways in your state have congestion and potholes, it may because your government is taking money raised from highway users and diverting it to other activities.  

The chart below shows the shares of state fuel taxes and vehicle fees diverted to nonhighway uses. South Carolina, for example, diverts 31 percent.

Last year, South Carolina’s governor Henry McMaster vetoed a gas tax increase. He objected to his state’s diversion: “Over one-fourth of your gas-tax dollars are not used for road repairs … They’re siphoned off for government agency overhead and programs that have nothing to do with roads.”

As a rough user charge, gas taxes are a good way to fund highways, and our highways do need more investment. But motorists should be skeptical of gas tax increases until policymakers stop diverting funds to inefficient transit systems with declining riderships.

Many transportation experts say that the rise of electric vehicles will be the end of the road for gas taxes, and they are eager to impose new vehicle miles traveled (VMT) charges to fund highways. However, governments are diverting more than $30 billion in fuel tax revenues and vehicle charges a year to nonhighway uses. If that diversion was ended, these revenues could continue to be America’s highway funding source for years to come.

 

More on highways and the gas tax:

https://www.downsizinggovernment.org/transportation/federal-highway-policies

https://www.downsizinggovernment.org/infrastructure-investment

https://www.downsizinggovernment.org/chamber-commerce-misguided-gas-tax

https://www.cato.org/blog/federal-gas-tax-increase-misguided

https://www.cato.org/blog/federal-gas-tax-lahood-makes-no-sense

Government Crowd Out in Transportation

The existence of government infrastructure deters or “crowds out” private investment. Many airports, bridges, and urban transit systems in the United States used to be private, but during the mid-20th century entrepreneurs were squeezed out by governments.

The provision of federal aid or subsidies to government-owned airports, bridges, and transit facilities was a key factor in pushing out private enterprise. That is one reason why I favor repealing federal aid for transportation.

AIRPORTS

In the early years of commercial aviation, private airports served many American cities. For example, the main airports in Los Angeles, Miami, Philadelphia, and Washington D.C. were for-profit business ventures in the 1930s.

The airports were generally successful and innovative, but they lost ground over time due to unfair government competition:

  • City governments were often eager to set up their own airports, even if private airports already served an area.
  • Cities issued tax-exempt bonds to finance their airports, giving them a financial edge over private airports.
  • Private airports pay taxes. Government airports do not, giving them another financial edge.
  • The U.S. military and the Post Office promoted government airports over private ones.
  • Federal New Deal programs provided aid to government airports, not private ones.
  • Congress provided aid to government airports for national defense purposes during World War II.
  • The federal Surplus Property Act after the war transferred excess military bases to the states for government airport use.
  • The federal Airport Act of 1946 began regular federal aid to government airports, not private ones.
  • The new Federal Aviation Administration in 1958 “prohibited private airports from offering commercial service.”

So governments banished entrepreneurs from a major part of America’s aviation industry. In the early 1930s, about half of the nation’s more than 1,100 airports were private, but by the 1960s, private commercial airports had mainly disappeared. Very sad, as I discuss here.

However, there is good news about airports. A privatized commercial airport industry is booming abroad, particularly in Europe. U.S. policymakers should let entrepreneurs take another crack at our airport industry.

BRIDGES

Bob Poole discusses government crowd out of private bridges in his new book Rethinking America’s Highways. In the 1920s, four main bridges built in the San Francisco area were private toll facilities. In the 1930s, the Golden Gate Bridge and Oakland Bay Bridge were built as government toll facilities.

Poole picks up the story:

All six of these bridges suffered declines in traffic and revenue due to the Depression, but the Bay Bridge and the Golden Gate opened closer to its end and were therefore less affected. Their financing costs were also lower, with the Bay Bridge getting low-cost financing from the New Deal’s Reconstruction Finance Corporation, and the Golden Gate being able to issue tax-exempt toll revenue bonds, rather than the taxable bonds issued by the toll bridge companies.

In addition, the California legislature voted in 1933 to relieve the Bay Bridge of having to cover operating and maintenance costs out of toll revenues, allocating state highway fund (gas tax) monies to cover those costs. The four private toll bridges all went into receivership by 1940. Unlike the Ambassador Bridge (in Michigan), they were unable to work out refinancing plans and were eventually acquired by the state, with the Dumbarton and San Mateo transfers not taking place until the early 1950s; their shares traded on the Pacific Coast Exchange until then.

A similar fate befell many of the other 200-odd private toll bridges during the Depression. The Reconstruction Finance Corporation provided low-cost loans to public-sector toll bridges, but not to investor-owned ones. Relatively new government toll agencies offered buyouts to struggling bridge owners during those years. The New York State Bridge Commission bought four private toll bridges over the Hudson River; the Delaware River Joint Toll Bridge Commission acquired at least six private toll bridges; and the city of Dallas bought the toll bridge on the Trinity River in order to eliminate tolls.

By 1940, the Public Roads Administration (the former Bureau of Public Roads, now part of the Federal Works Agency) reported that the number of US toll bridges had declined to 241, of which 142 were still investor-owned. But nearly all the bridges had been bought out by toll agencies or state and local governments by the mid-1950s.

URBAN TRANSIT

The early history of urban transit in America is one of private-sector funding and innovation, as Randal O’Toole discusses in this study. Hundreds of cities had private streetcar and bus companies moving people in downtowns and the growing suburbs in the early 20th century.

As the century progressed, however, the rise of automobiles undermined the demand for transit. At the same time, transit firms had difficulty cutting costs because their workforces were dominated by labor unions and governments resisted allowing them to cut services on unprofitable routes.

The nail in the coffin for private transit was the Urban Mass Transportation Act of 1964, which provided federal aid to government-owned bus and rail systems. The act encouraged state and local governments to take over private systems, and a century of private transit investment came to a close.

This Transportation Research Board study discusses the decline of private transit:

As the declining fortunes of America’s cities gained national recognition during the 1960s, Congress passed legislation that for the first time gave the federal government a prominent role in the provision of urban transit. The Urban Mass Transportation Act of 1964 (later redesignated the Federal Transit Act) provided loans and grants for transit capital acquisition, construction, and planning activities.

… Notably, only public entities could apply for the federal grants. Given the availability of federal aid, many cities, states, and counties purchased or otherwise took over their local rail and bus systems. Thus by the 1970s, a largely new model of transit provision—public ownership—had become increasingly prevalent in the United States. Many jurisdictions consolidated the operations of smaller private and public systems under the auspices of regional transit authorities. A few states, such as Connecticut, Rhode Island, and New Jersey, formed statewide transit agencies.

… In 1940, only 20 transit systems in the country were publicly owned, and they accounted for just 2 percent of ridership. By 1960, although the vast majority of all systems were still in private ownership, properties in public ownership accounted for nearly half of all transit ridership, mainly because the country’s very largest systems were publicly owned. By 1980, more than 500 systems were publicly owned, accounting for 95 percent of ridership nationally.

In sum, the bad news is that when the government advances, the private sector retreats. But the good news we have seen around the world in recent decades is that when the government gets out of the way, the private sector steps in to provide better services at lower costs.

Further reading:

https://www.downsizinggovernment.org/transportation

https://www.downsizinggovernment.org/infrastructure-investment

https://www.downsizinggovernment.org/privatization

Americans Are Migrating to Low-Tax States

Cato released my study today on “Tax Reform and Interstate Migration.”

The 2017 federal tax law increased the tax pain of living in a high-tax state for millions of people. Will the law induce those folks to flee to lower-tax states?

To find clues, the study looks at recent IRS data and reviews academic studies on interstate migration.

For each state, the study calculated the ratio of domestic in-migration to out-migration for 2016. States losing population have ratios of less than 1.0. States gaining population have ratios of more than 1.0. New York’s ratio is 0.65, meaning for every 100 residents that left, only 65 moved in. Florida’s ratio is 1.45, meaning that 145 households moved in for every 100 that left.

Figure 1 maps the ratios. People are generally moving out of the Northeast and Midwest to the South and West, but they are also leaving California, on net.

People move between states for many reasons, including climate, housing costs, and job opportunities. But when you look at the detailed patterns of movement, it is clear that taxes also play a role.

I divided the country into the 25 highest-tax and 25 lowest-tax states by a measure of household taxes. In 2016, almost 600,000 people moved, on net, from the former to the latter.

People are moving into low-tax New Hampshire and out of Massachusetts. Into low-tax South Dakota and out of its neighbors. Into low-tax Tennessee and out of Kentucky. And into low-tax Florida from New York, Connecticut, New Jersey, and just about every other high-tax state.

On the West Coast, California is a high-tax state, while Oregon and Washington fall just on the side of the lower-tax states.

Of the 25 highest-tax states, 24 of them had net out-migration in 2016.

Of the 25 lowest-tax states, 17 had net in-migration.  

 

https://object.cato.org/sites/cato.org/files/pubs/pdf/tbb-84-revised.pdf

Results from the 2018 Libertarianism vs. Conservatism Post-Debate Survey

As part of a yearly summer tradition, the Heritage Foundation and Cato Institute co-host a debate in which interns at both think tanks debate whether conservatism or libertarianism is a better ideology. Following this year’s debate, the Cato Institute conducted a post-debate survey of attendees to ask who they thought won the debate and what they believe about a variety of public policy and philosophical issues. The post-debate survey offers a unique opportunity to examine how young leaders in the conservative and libertarian movements approach deep philosophical questions that may be inaccessible to a general audience.

2018 Intern Debate Survey

Despite agreement on domestic economic issues and free trade, the survey finds striking differences between conservative and libertarian  attitudes about Donald Trump, immigration, transgender pronouns, government’s response to opioid addiction, police, defense spending and national security, domestic surveillance, and religion. The survey also went further than just asking about policy and used Jordan Peterson’s 12 principles for a 21st century conservatism to examine the underlying philosophical differences between libertarian and conservative millennials. 

Opportunity Zones Fuel Corruption

The federal government dispenses unequal treatment to Americans through subsidies, regulations, and narrow tax breaks. The unequal treatment generates lobbying and corruption as the government-determined winners dig in to defend their lucre and the losers agitate for a share.

Washington is a universe of thousands of separate special-interest galaxies, each with spiraling masses of lobbyists orbiting politicians and bureaucrats whose power is a gravitational force. Scientists say that the universe is mainly filled with dark energy, and the same is true of the nation’s capital.

The Tax Cuts and Jobs Act of 2017 created a new special-interest galaxy called “Opportunity Zones.” O Zones are tax structures that infuse governors and U.S. Treasury officials with the power to divide every state in the nation into winner and loser areas. Projects in the winner areas receive capital gains tax breaks, while projects in the loser areas get the shaft.

O Zones are already generating dark energy, as a recent Washington Post story illustrates:

The Treasury Department last week reversed itself after lobbying by Nevada Republicans and agreed to let a previously ineligible county reap huge benefits from the new tax law.

The effort was led by Nevada’s governor, Brian Sandoval (R), and Sen. Dean Heller (R-Nev.), who separately spoke with Treasury Secretary Steven Mnuchin and pushed for Storey County to win designation as an “Opportunity Zone,” which was established in the law to help distressed areas attract money.

Working behind the scenes to help the effort was a Storey County brothel owner and real estate investor, Lance Gilman, who told local officials that the designation could lead to a surge of investments within the next few years. Gilman is also a major GOP donor and made a $5,000 campaign contribution to Heller in the midst of the process, the biggest contribution he had ever given to a candidate for federal office.

Treasury officials had initially deemed that Storey County’s income levels were too high to qualify, based on the metrics they had used to judge every other nomination for the special tax status. But after weeks of prodding from Nevada officials, Treasury relented and gave the designation to Storey County using new data.

The successful campaign to win this lucrative designation illustrates how political pressure can redirect billions of dollars in federal benefits, which are supposed to be distributed in a non-arbitrary manner.

It shows how the new tax law, meant to simplify the tax code when it passed in December, is creating opportunities for gamesmanship — in this case by public officials and business executives seeking to exploit the Trump administration’s discretion in interpreting the law.

…several other Nevada business owners are furious at the designation. To push Storey County for the Opportunity Zone designation, Sandoval had to withdraw the April 20 nomination of Dayton, Nev., an economically depressed neighboring community that lacks Storey County’s huge industrial center.

This has led to accusations of unfairness, and several executives said they haven’t gotten the straight story about why their nomination was pulled without their knowledge.

Unequal treatment generates bad feelings and divisions, negative forces in the universe. The dark energy of O Zone corruption was entirely predictable, and there will probably be lots more of it.

Corruption has similarly swirled around the federal LIHTC tax break, which empowers officials to make winner and loser decisions in local communities, as Vanessa Brown Calder and I discuss here and here.

Vanessa and I have further thoughts on O Zones here, here, and here.

The Politics and Economics of the Capital Gain Tax

The Treasury Department is said to be studying the idea of providing some sort of inflation-protection (indexing) for the taxation of capital gains.  Rep. Devin Nunes (R-CA) has introduced a bill  (H.R. 6444) to do just that.   Predictably, Washington Post writer Matt O’Brien instantly dismissed the idea as “Trump’s new plan to cut taxes for the rich.” 

O’Brien relies on a two-page memo from John Ricco which yanks mysterious estimates out of a black box – the closed-economy Penn-Wharton Budget Model.   The “microsimulation model” predicts that the Top 1 Percent’s share of federal income taxes paid could fall from 28.6% to 28.4% as result of taxing only real capital gains.  “That’s real money,” exclaims O’Brien.

No model can estimate how much revenue might be lost by indexing (if any) because that depends on such unknowable things as future asset values, future tax laws and future inflation.   Yet Mr. Rico magically “projects” future realizations to “estimate that such a policy would reduce individual tax revenues by $102 billion during the next decade [sic] from 2018-2027.”   Does that imaginary $102 billion still look like “real money” when spread over Rico’s extended 20-year “decade?”   It would be a microscopic fraction of CBO’s projected individual income taxes of $21.1 trillion over that period. 

One problem with the notion that indexing capital gains could only benefit the top 5 percent (over $225,251 in 2016) is that it wrongly assumes the capital gains tax only applies to stock market gains. Another Washington Post article said, “Researchers have estimated that the top 5 percent of households in terms of income hold about two-thirds of all stock and mutual fund investments, putting wealthier Americans in the position of benefiting much more than others from any changes to capital gains rules.”  But the capital gains most likely to be seriously exaggerated by decades of inflation are not gains from selling financial assets, but from selling real assets.  After many years of even moderate inflation, an unindexed tax may be imposed on purely illusory “gains” from the sale of real property that actually involve a loss of real purchasing power.  A 2016 report from the Congressional Budget Office and Joint Committee on Taxation, “The Distribution of Asset Holdings and Capital Gains” reports that Americans held $7.5 trillion in stocks and mutual funds in 2010, but $12.2 trillion in private businesses and $8.5 trillion in nonresidential real estate.  

A related problem with conventional distribution tables is that they add realized capital gains to income in the year in which a farm, building or business is sold, which makes it true by definition that unusually large one-time gains are received by those with “high incomes” (including those gains).

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