Topic: Tax and Budget Policy

Governors Fiscal Report

Most state governments are in an expansionary phase, as revenues are growing at a steady clip. Some governors are using the growing revenues to expand spending programs, while others are pursuing tax cuts and tax reforms.

That is the backdrop to this year’s 13th biennial fiscal report card on the governors, which Cato released today. It uses statistical data to grade the governors on their taxing and spending records since 2014—governors who have cut taxes and spending the most receive the highest grades, while those who have increased taxes and spending the most receive the lowest grades.

Five governors were awarded an “A”: Paul LePage of Maine, Pat McCrory of North Carolina, Rick Scott of Florida, Doug Ducey of Arizona, and Mike Pence of Indiana.

Ten governors were awarded an “F”: Robert Bentley of Alabama, Peter Shumlin of Vermont, Jerry Brown of California, David Ige of Hawaii, Dan Malloy of Connecticut, Dennis Daugaard of South Dakota, Brian Sandoval of Nevada, Kate Brown of Oregon, Jay Inslee of Washington, and Tom Wolf of Pennsylvania.

The report describes the record of each governor and discusses the outlook for state budgets. Medicaid costs are rising, and federal aid for this huge health program will likely be reduced in coming years. At the same time, many states have high levels of unfunded liabilities in their pension and retiree health plans.

Those factors will create pressure for states to raise taxes. Yet global economic competition demands that states improve their investment climates by cutting tax rates, particularly on businesses, entrepreneurs, and skilled workers.

News reports about the states often focus on policymaker efforts to balance their budgets. Balanced budgets are important, but policymakers should also be running their governments in a lean and frugal manner, reforming tax codes to spur growth, and generally expanding fiscal freedom for state residents.

Cato’s new report helps to sort out the governors who are moving in that direction from those who are not. An oped describing the main results is here.

Notwithstanding a New Rhetorical Strategy from Statists, Higher Taxes and Bigger Government Is Not a Recipe for Growth and Development

I must be perversely masochistic because I have the strange habit of reading reports issued by international bureaucracies such as the International Monetary Fund, World Bank, United Nations, and Organization for Economic Cooperation and Development.

But one tiny silver lining to this dark cloud is that it’s given me an opportunity to notice how these groups have settled on a common strategy of urging higher taxes for the ostensible purpose of promoting growth and development.

Seriously, this is their argument, though they always rely on euphemisms when asserting that politicians should get more money to spend.

  • The OECD, for instance, has written that “Increased domestic resource mobilisation is widely accepted as crucial for countries to successfully meet the challenges of development and achieve higher living standards for their people.”
  • The Paris-based bureaucrats of the OECD also asserted that “now is the time to consider reforms that generate long-term, stable resources for governments to finance development.”
  • The IMF is banging on this drum as well, with news reports quoting the organization’s top bureaucrat stating that “…economies need to strengthen their fiscal frameworks…by boosting…sources of revenues.” while also reporting that “The IMF chief said taxation allows governments to mobilize their revenues.”
  • And the UN, which has “…called for a tax on billionaires to help raise more than $400 billion a year” routinely categorizes such money grabs as “financing for development.”

As you can see, these bureaucracies are singing from the same hymnal, but it’s a new version.

Infrastructure Spending and the Charleston Seaport

George Will’s oped the other day argued that Congress should hurry up and fund an expansion in the Charleston, South Carolina, seaport. But his piece revealed why the federal government should reduce its intervention in the nation’s infrastructure, not increase it, as Clinton and Trump are proposing.

The Charleston seaport has become crucial to South Carolina’s economy. Will notes that “1 of every 11 South Carolina jobs — and $53 billion in economic output are directly or indirectly related to Charleston’s port.”

There is a problem, however. The Charleston seaport:

needs further dredging in order to handle more of the biggest ships, which is where Congress enters the picture: Unless it authorizes the project and appropriates the federal portion of the $509 million cost to augment South Carolina’s already committed $300 million, the project will be delayed a year. The deepening project is only 14 percent of the $2.2 billion South Carolina is investing in its port facilities and related access.

The biggest ships pay more than $1 million to transit the [Panama] canal; if they miss their transit time, their fee is doubled. Until the port is deepened, too few can be handled here simultaneously, and they can enter and leave the port only at high tide.

Work “Nonprofit”? Get Free Grad School!

The Cato Institute is a 501(c)(3)—a nonprofit organization. Of course, as an employee I get paid more than my job costs me—I make what you might call “profit”—but because of the tax designation of my employer, I could be getting big forgiveness on any federal student loans I might have. Indeed, a new, quick-read report from the Brookings Institution shows that someone could potentially get all of their graduate schooling covered for free through the federal Public Service Loan Forgiveness (PSLF) program which, by the way, is expected to cost the American taxpayer a lot more than originally anticipated.

The general way PSLF operates is if you work for government, a 501(c)3 organization, or some other qualifying entity like a public interest law firm, you can get the remainder of your federal student loans forgiven after 10 years of regular payments. Sound great? Well don’t order yet! Those payments are also controlled, capped at 10 percent of income above 150 percent of the poverty line. So a single person would pay nothing on income below $17,820, and 10 percent on income above that. And it doesn’t matter if you get paid more than your job-description doppelganger in a for-profit venture—as long as you work for a “nonprofit” you qualify for PSLF.

The Brookings report describes how someone could essentially get a graduate degree for free through PSLF as long as he had substantial—but not huge—undergraduate debt and worked in a relatively low-paid field. Of course, many people will want to earn more than low pay, but PSLF furnishes strong incentives to stick with a low-paying job for awhile, or more likely, take on much bigger debt and all the nice-to-have college stuff that goes with big college revenue.

Go ahead, future Jack McCoy, take that dip in the lazy river!

Of course, this is not free to taxpayers, many of whom have not gone to college, or may work in struggling for-profit businesses, or may even have thought the right thing to do was to get an inexpensive—and frill free—education. But according to the report, their PSLF bill is rising as enrollment in the program is much higher than anticipated, and nearly one-third of enrollees have debt exceeding $100,000. The report doesn’t give estimated total costs because those are very hard to predict, but estimates of what would be saved with controls such as capping forgivable amounts have risen by more than 2000 percent just from 2014 to 2016! The figures are in the billions of dollars.

There is a strong argument, of course, that there is nothing more noble about working for government, or a nonprofit hospital, or even a think tank, than owning a neighborhood shoe store, or being an accountant at Apple, or risking all you have on a new, entrepreneurial venture, all of which seek to offer things of value to other people. Heck, it is the production of goods and services for profit that gives us the “excess” wealth that enables us to pay for government and all its programs. But few employees, regardless for whom they work, are losing money on their jobs, and many—see, for instance, federal workers—make big profits from their nonprofit jobs not just financially, but also with lots of vacation time, or job security, or simply doing something fun every day.

We’re all working for profit. Why should we be treated—especially given big costs and unintended consequences—differently just because of our employers’ tax designation?

Hillary’s Housing Policy Prescription

Yesterday, Hillary announced her latest policy prescription to increase low-cost housing: don’t hold your breath, it’s anything but original. The basic prescription is simply to double down on tax subsidies for housing developers. 

To that end, Hillary proposes enlarging the Low Income Housing Tax Credit (LIHTC) program and shifting the tax burden from housing developers and financial institutions back to taxpayers.

Here are a few reasons she should reconsider:

  1. The Low Income Housing Tax Credit program (hereafter “the subsidy”) crowds out market-provided low-cost housing. That means taxpayers are paying for low-cost housing that would otherwise be provided by the market for free.
  2. The IRS has proven entirely inept in its role as administrator of the subsidy. This is not a controversial point (the Government Accountability Office agrees).
  3. The subsidy has a highly fragmented, complex system of delivery, which means it is inefficient, and by extension, expensive.
  4. As a consequence, the subsidy doesn’t even stack up well against comparable housing subsidies: research describes the subsidy as 19-44% more expensive than comparable housing subsidies.
  5. To make matters worse, the subsidy is often not viable as a stand-alone. Forty percent or more of housing units receiving this subsidy end up utilizing other subsidies, while they’re at it.
  6. The subsidy is a tax expenditure and as such does not appear as an outlay on the federal budget. This means that Congress never has to confront any of the problems noted to this point.

Still unconvinced? Here are a few more reasons why expansions of the Low Income Housing Tax Credit program should be opposed.

Review of Side Effects and Complications: The Economic Consequences of Health-Care Reform

In the latest issue of Cato Journal, I review Casey Mulligan’s book, Side Effects and Complications: The Economic Consequences of Health-Care Reform.

Some ACA supporters claim that, aside from a reduction in the number of uninsured, there is no evidence the ACA is having the effects Mulligan predicts. The responsible ones note that it is difficult to isolate the ACA’s effects, given that it was enacted at the nadir of the Great Recession, that anticipation and implementation of its provisions coincided with the recovery, and that administrative and congressional action have delayed implementation of many of its taxes on labor (the employer mandate, the Cadillac tax). There is ample evidence that, at least beneath the aggregate figures, employers and workers are responding to the ACA’s implicit taxes on labor…

Side Effects and Complications brings transparency to a law whose authors designed it to be opaque.

Have a look (pp. 734-739).

The Unsung Economic Success Story of New Zealand

When writing a few days ago about the newly updated numbers from Economic Freedom of the World, I mentioned in passing that New Zealand deserves praise “for big reforms in the right direction.”

And when I say big reforms, this isn’t exaggeration or puffery.

Back in 1975, New Zealand’s score from EFW was only 5.60. To put that in perspective, Greece’s score today is 6.93 and France is at 7.30. In other words, New Zealand was a statist basket cast 40 years ago, with a degree of economic liberty akin to where Ethiopia is today and below the scores we now see in economically unfree nations such as Ukraine and Pakistan.

But then policy began to move in the right direction; between 1985 and 1995 especially, the country became a Mecca for market-oriented reforms. The net result is that New Zealand’s score dramatically improved and it is now comfortably ensconced in the top-5 for economic freedom, usually trailing only Hong Kong and Singapore.

To appreciate what’s happened in New Zealand, let’s look at excerpts from a 2004 speech by Maurice McTigue, who served in the New Zealand parliament and held several ministerial positions.

He starts with a description of the dire situation that existed prior to the big wave of reform.