Topic: Tax and Budget Policy

Three Lessons from the Tax Defeat in Kansas

Leftists don’t have many reasons to be cheerful.

Global economic developments keep demonstrating (over and over again) that big government and high taxes are not a recipe for prosperity. That can’t be very encouraging for them.

They also can’t be very happy about the Obama presidency. Yes, he was one of them, and he was able to impose a lot of his agenda in his first two years. But that experiment with bigger government produced very dismal results. And it also was a political disaster for the left since Republicans won landslide elections in 2010 and 2014 (you could also argue that Trump’s election in 2016 was a repudiation of Obama and the left, though I think it was more a rejection of the status quo).

But there is one piece of good news for my statist friends. The tax cuts in Kansas have been partially repealed. The New York Times is overjoyed by this development.

The Republican Legislature and much of Kansas has finally turned on Gov. Sam Brownback in his disastrous five-year experiment to prove the Republicans’ “trickle down” fantasy can work in real life — that huge tax cuts magically result in economic growth and more, not less, revenue. …state lawmakers who once abetted the Brownback budgeting folly passed a two-year, $1.2 billion tax increase this week to begin repairing the damage. …It will take years for Kansas to recover.

And you won’t be surprised to learn that Paul Krugman also is pleased.

Devolving Highway Funding

The Trump administration’s recent proposal on infrastructure stressed federalism. It said that the “federal government now acts as a complicated, costly middleman between the collection of revenue and the expenditure of those funds by states and localities. Put simply, the administration will be exploring whether this arrangement still makes sense, or whether transferring additional [infrastructure] responsibilities to the states is appropriate.”

Indeed, the federal-middleman arrangement does not make sense. With regard to highways, federal funds go not just to the 47,000-mile interstate highway system (IHS), but also to the vast 3.9 million mile “federal-aid highway system.” But there are few advantages in federal funding over state funding for most the nation’s highways, which are owned by the states and mainly serve state-local needs.

As such, there have been many proposals to devolve at least the non-IHS activities to the states. In such “turnback” proposals, the federal government would cut its highway spending and its gas tax, and allow states to fill the void.

The turnback idea has been around awhile. A major 1987 study by the Advisory Commission on Intergovernmental Relations (ACIR) proposed devolving highway funding except for IHS funding to the states. The ACIR was led by a bipartisan mix of federal, state, and local elected officials, and was known for its top-notch staff experts.

Thirty years later, the ACIR report contains sound advice for today’s policymakers. Here are some excerpts:

The Commission concludes that a devolution of non-Interstate highway responsibilities and revenue sources to the states is a worthwhile goal and an appropriate step toward restoring a better balance of authority and accountability in the federal system (page 2).

It is the sense of the Commission that the Congress should move toward the goal of repealing all highway and bridge programs that are financed from the federal Highway Trust Fund, except for: (1) the Interstate highway system, (2) the portion of the bridge program that serves the Interstate system, (3) the emergency relief highway program, and (4) the federal lands highway program. The Commission urges that the Congress simultaneously relinquish an adequate share of the federal excise tax on gasoline—about 7 cents of the federal tax on motor fuel plus an additional 1 cent for a grant based on lane mileage—to finance the above programs (page 2). [Note: the federal gas tax at the time was just 9.1 cents per gallon].

With state and local governments freed from federal requirements, some of which are unsuitable and expensive, turnbacks offer the possibility of more flexible, more efficient, and more responsive financing of those roads that are of predominantly state or local concern. Investment in highways could be matched more closely to travel demand and to the benefits received by the communities served by those roads (page 3).

Highway turnbacks potentially can add both certainty and flexibility—as well as efficiency and accountability—to the financing of the nation’s transportation infrastructure as well as to the design and operation of both new and modernized roads (page 4).

In time, federal requirements and sanctions have accumulated, which have limited state and local governments’ flexibility in road construction and operation, have restricted these governments’ ability to address specific transportation needs, and have probably increased the cost and time needed for road improvements … The design standards required for receiving federal road grants may often be higher than those actually employed for roads built with state or local funds alone. The result can be that some federally subsidized highways are “gold-plated,” that is, built more lavishly than would be the case if state and local governments made the tradeoffs involved in highway plans and financed their choices by taxes levied on their own constituents (page 11).

[Federal highway regulations] may intrude the most broadly upon the choices of state-local governments and citizens. Examples include the rule that federally aided projects be preceded by an environmental analysis and the Davis-Bacon requirement to pay union wage rates, or the equivalent. The Federal Highway Administration has estimated that the Davis-Bacon requirement added between $293 and $586 million to road costs in FY 1986 (page 12).

The federal restriction on state and local road choices occurs not solely because federal standards are high, but because they tend to be inflexible, inappropriate to circumstances that vary from place to place, and more responsive to national interest groups than to the users of specific highways (page 13).

There is “fiscal equivalence” when the same political community—the same jurisdiction—finances a governmental program, is responsible for its operation, and receives the benefits of that program … The tie between taxing and spending promotes efficiency and careful choices, whether spending levels are high or low. Because various areas’ highway needs and preferences are so different, a nationally uniform program cannot tailor taxing and spending to each other, as state and local programs can (page 22).

With the Interstate system used for long-distance travel, most of the benefits of other federally aided roads are contained within state boundaries. These non-Interstate, federally aided roads should be considered for turnback. Absent federal funding, there is reason to believe that state-local responsibility for the devolved highways would not impair nationwide mobility or interstate commerce. Devolution would move toward “fiscal equivalence.” The same jurisdiction that finances a set of roads will benefit from them. Thus highway spending and highway services would be more closely linked than is presently the case. Efficiency would be enhanced as would political, fiscal, and program accountability (page 48).

The diverse goals and constituencies served by the federal highway program has led to a complex operation and has engendered controversy over the program’s procedures and allocation formulas … Devolution … would sharpen goals and priorities (page 48).

The ACIR report (“Devolving Selected Federal-Aid Highway Programs and Revenue Bases: A Critical Appraisal”) is here.

Towards a Private Flood Insurance Market

The federal-government-managed National Flood Insurance Program (NFIP) is $25 billion in debt, stokes moral hazard, and entails a regressive wealth transfer that favors coastal areas. The NFIP is set to expire at the end of September, offering policymakers an important chance to rethink the program. The House Financial Services Committee is considering the Flood Insurance Market Parity and Modernization Act Wednesday, the current version of the bill takes important steps in moving the U.S. towards a private flood insurance market. Private insurance would improve upon the NFIP by ending transfers from the general taxpayers to the wealthy and the coasts and by limiting moral hazard.

Private insurance functions as a market-driven regulator of risk. Private insurers devise premium payments to accurately reflect risk, forcing economic agents to internalize the risk they choose to assume. For instance auto insurance premiums depend both on a driver’s performance as well as other factors that correlate with risk, such as age or area of the country.

The enactment of the NFIP in 1968 reflected a belief that a centrally planned insurance program could better fulfill the regulatory function of insurance than the private market. Government-managed insurance could, it was held at the time, “limit future flood damages without hampering future economic development” and “prompt an adjustment in land use to reduce individual and public losses from floods,” reported a Housing and Urban Development study integral to the program’s design.

However, the NFIP’s fifty-year record shows why the reasoning behind the creation of the program was misguided. The NFIP is beset by many design flaws, especially in terms of how premiums are priced. About 20% of all NFIP policies are explicitly subsidized and receive a 60-65% discount off the NFIP’s typical rate. These subsidies are in no way a subsidy to poor homeowners but instead relate to the age of a property. They turn out to be wildly regressive.

Even the 80% of the NFIP’s so-called “full risk” properties are not priced accurately. For instance, despite their name the full risk rates do not include a loading charge to cover losses in especially bad years, so even these insurance policies are money-losers in the long run.

Disability Fraud

The federal government runs more than 2,300 subsidy programs, and they are all susceptible to fraud and other types of improper payments. The EITC program, for example, throws about $18 billion down the drain each year in such payments.

Perhaps the program that generates the most outrageous rip-offs is the $150 billion Social Security Disability (SSDI) program. From the Washington Post today:

Eric Conn, the fugitive attorney who pleaded guilty to orchestrating a scheme to defraud the federal government of $600 million, remains at large since he cut off his court-ordered GPS monitoring bracelet on June 2…Conn in March entered guilty pleas to defrauding the Social Security Administration via bribes he paid to a doctor and a judge to process and approve his clients’ disability claims. 

From 2006 to 2016, Conn processed 1,700 client applications for Social Security benefits with a potential of $550 million in lifetime benefits. Since the revelation of the allegations, the Social Security Administration has contacted many of Conn’s former clients with claims they owe as much as $100,000 for disability payments going back 10 years unless they can prove they have been disabled the entire time…

Conn’s fraud scheme was fueled by television advertisements that included a 3-D television ad from 2010 and one from 2009 in which Conn hired YouTube star “Obama Girl” and Bluegrass music legend Ralph Stanley to sing a version of “Man of Constant Sorrows” with new lyrics that refer to Conn as a “superhero without a cape” and to brag that Conn had “learned Spanish off of a tape.” In a rap video, Conn billed himself as Hispanic-friendly: “Even if you’re Latino, no need to worry cuz this gringo speaks the lingo.”

One greedy lawyer, a corrupt doctor and judge, some jingoism, and our government gets ransacked for $600 million. That’s not very comforting to taxpayers, is it?

In his study of SSDI for DownsizingGovernment.org, Tad Dehaven said, “SSDI is a classic example of a well-intentioned effort to provide modest support to truly needy people that has exploded into a massive entitlement that is driving up the federal deficit.” 

DeHaven proposed these SSDI reforms: 

  • Cut the program’s average benefit levels.
  • Impose stricter eligibility standards to discourage claims from people who should be working.
  • Create a longer delay for the initial receipt of benefits to discourage frivolous applications.
  • Reduce the large number of appeals for people initially denied benefits.
  • Ensure greater quality control and consistency of decisions by officials and judges.
  • Create a “taxpayer advocate” in the administrative law process to challenge dubious claims made by applicants and their lawyers.
  • Apply continuous disability reviews of people receiving benefits in a more vigorous manner.

His study is here

No NYT, the Public Doesn’t Need to ‘Pay and Pay’ for Private Infrastructure

The Trump administration’s proposal to repair and expand America’s roads, bridges, ports and airports includes the expanded use of public-private partnerships (P3s). Under P3s, state and local governments award franchises to private companies that agree to pay for and manage the infrastructure in exchange for the companies receiving toll payments from future users. A number of P3 projects currently operate in the United States, and they are common in other developed nations.

Despite the growing embrace of these projects by policymakers around the world, the Trump proposal is being met with skepticism. For example, the New York Times dropped this article last week ahead of Trump administration efforts to promote the proposal. According to the article, “experts agree” that “there is little hard evidence” that such projects produce long-term benefits to the public as compared to traditional government-provided infrastructure. (That “agreement” came as news to many transportation experts.)

At heart, the article charges that P3 programs are “win/no lose” proposals for the private firms: if the projects prove popular, the firms profit—sometimes handsomely, to the detriment of consumers. But if the new infrastructure doesn’t get many toll-paying users, the financial losses from the projects fall on taxpayers.

To illustrate this, the NYT cites California State Route 91, one of the first P3s in the United States. Initially intended to reduce congestion, the project awarded a private company the right to build and operate a special four-lane toll road in the middle of the highway. The road was “congestion priced,” meaning the tolls fluctuated in order to limit use just enough to guarantee the free flow of traffic.

The original lease on the road included a noncompete clause that limited the state’s ability to add additional lanes to the non-P3 part of SR-91 or to build parallel infrastructure. This resulted in heavy congestion on the old lanes, pushing motorists onto the toll lanes and producing a financial windfall for the toll company. That ultimately prompted Orange County to buy out the toll company for $207 million in 2003.

However, the SR-91 problem is not inherent to P3s. It arose as a result of the conditions under which the franchise was arranged. Traditionally, P3s have been awarded through negotiations between private companies and transportation authorities, leading to high initial private investments and uncertainty about demand for the road. That risk, in turn, encourages toll road companies to want protections like the noncompete clause.

What Do the Subsidy Recipients Think about Cutting Subsidies?

Ever since President Trump and budget director Mick Mulvaney released a proposed federal budget that includes cuts in some programs, the Washington Post has been full of articles and letters about current and former officials and program beneficiaries who don’t want their budgets cut. Not exactly breaking news, you’d think. And not exactly a balanced discussion of pros and cons, costs and benefits. Consider just today’s examples:

[O]ver 100,000 former Fulbright scholars, among them several members of Congress, are being asked to lobby for not only full funding but also a small increase.

As a former Federal Aviation Administration senior executive with more than 30 years of experience in air traffic control, I believe it is a very big mistake to privatize such an important government function. 

On Thursday, all seven former Senate-confirmed heads of the Energy Department’s renewables office — including three former Republican administration officials – told Congress and the Trump administration that the deep budget cut proposed for that office would cripple its ability to function.

This is nothing new. Every time a president proposes to cut anything in the $4 trillion federal budget — up from $1.8 trillion in Bill Clinton’s last budget — reporters race to find “victims.” And of course no one wants to lose his or her job or subsidy, so there are plenty of people ready to defend the value of each and every government check. As I wrote at the Britannica Blog in 2011, when one very small program was being vigorously defended:

Every government program is “well worth the money” to its beneficiaries. And the beneficiaries are typically the ones who lobby to create, expand, and protect it. When a program is threatened with cuts, newspapers go out and ask the people “who will be most affected” by the possible cut. They interview farmers about whether farm programs should be cut, library patrons about library cutbacks, train riders about rail subsidy cuts. And guess what: all the beneficiaries oppose cuts to the programs that benefit them. You could write those stories without going out in the August heat to do the actual interviews.

Economists call this the problem of concentrated benefits and diffuse costs. The benefits of any government program — Medicare, teachers’ pensions, a new highway, a tariff — are concentrated on a relatively small number of people. But the costs are diffused over millions of consumers or taxpayers. So the beneficiaries, who stand to gain a great deal from a new program or lose a great deal from the elimination of a program, have a strong incentive to monitor the news, write their legislator, make political contributions, attend town halls, and otherwise work to protect the program. But each taxpayer, who pays little for each program, has much less incentive to get involved in the political process or even to vote.

A $4 trillion annual budget is about $12,500 for every man, woman, and child in the United States. If the budget could be cut by, say, $1 trillion — taking it back to the 2008 level — how much good could that money do in the hands of families and businesses? How many jobs could be created? How many families could afford a new car, a better school, a down payment on a home? Reporters should ask those questions when they ask subsidy recipients, How do you feel about losing your subsidy?

Federal Gas Tax: LaHood Makes No Sense

Former U.S. transportation secretary Ray LaHood lobbied for a federal gas tax increase in a Washington Post letter the other day. The letter captures the illogic and misrepresentation that influences the highway funding debate.

Hugh Hewitt was right on target in his May 31 op-ed, “Trump should raise this tax,” about boosting the federal gas tax to address our nation’s crumbling roads and bridges. The federal gas tax of 18.4 cents a gallon has not been increased in 24 years. Imagine living today on the same salary you made in 1993. That’s the dire situation facing our infrastructure: We’re supporting our roads and bridges using outdated budgets that fail to meet the demands of 2017.

On this important issue, Congress must look to the 22 states that have raised their gas taxes since 2013. States leading the way are “red” states such as Wyoming, Georgia and Idaho and “blue” states such as California, Maryland and Vermont. The list also includes New Jersey, with a Republican governor and Democratic-controlled legislature. Infrastructure is a bipartisan issue. It’s time our federal government takes the action for which Republicans and Democrats have been tirelessly advocating.

Over the years, gridlock and finger-pointing have prevented real action on addressing our infrastructure challenges. All the while, traffic congestion has worsened, potholes have multiplied, and our roads and bridges have further deteriorated.

Here are some problems with LaHood’s position:

First Problem. As former transportation chief, LaHood must know that his own department publishes data showing that the condition of the nation’s bridges has steadily improved for two decades, while the condition of highways has been stable in recent years and improved in some cases since the 1990s. (Highway data summarized here and here. Bridge data here). Why does he say “… bridges have further deteriorated” when he surely knows that is not correct?

Second Problem. The 18.4 cent-per-gallon federal gas tax has not been raised since 1993, and its real value has eroded since then. However, the gas tax rate was more than quadrupled between 1983 and 1993 from 4 cents to 18.4 cents. The 1983 rate would be 9.8 cents in today’s dollars, so the real gas tax rate has risen substantially since then. Even if “potholes have multiplied,” the blame would go to the increasing diversion of plentiful gas tax funds to non-highway uses such as urban rail.

Third Problem. The final issue is the internal inconsistency of LaHood’s position. His first paragraph complains that federal gas taxes are not high enough. But his second paragraph says that 22 states have raised their own gas taxes in just the past four years, which logically negates the need for a federal gas tax increase. The states that have the highest demands for new highway funds are apparently already taking action. Great, problem solved.

In my new Cato study on infrastructure, I note that 98 percent of U.S. streets and highways are owned by state and local governments. The states are entirely capable of funding such infrastructure they own without federal aid. States can tax, borrow, collect user charges, and attract private investment to fund their highways, bridges, airports, and seaports.

Are there any advantages to raising federal gas taxes over raising state gas taxes? How is federal funding of state-owned infrastructure superior to state funding? LaHood and other advocates don’t tell us. Instead, they wave their arms, prattle about crumbling roads and multiplying potholes, and always demand more centralized spending and control.

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