The Cato Institute

New Cato Institute Report Grades Governors on Fiscal Restraint

Policymakers in every state should adopt the fiscal approaches of this year’s top-scoring governors…

Today, the Cato Institute released its biennial Fiscal Policy Report Card on America’s Governors, produced by Chris Edwards, director of tax policy studies and editor of www.DownsizingGovernment.org. The report uses statistical data to grade the governors on their taxing and spending records from a limited-government perspective.

Five governors received the highest grade of “A”: Susana Martinez of New Mexico, Henry McMaster of South Carolina, Doug Burgum of North Dakota, Paul LePage of Maine, andGreg Abbott of Texas.

Eight governors received the lowest grade of “F”: Roy Cooper of North Carolina, John Bel Edwards of Louisiana, Tom Wolf of Pennsylvania, Jim Justice of West Virginia, David Ige of Hawaii, Dennis Daugaard of South Dakota, Kate Brown of Oregon, and Jay Insleeof Washington. 

The report card looks at data since 2016 for each state and awards an objective grade based on spending variables, a revenue variable, and tax rate variables. 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.

Susana Martinez receives the highest score in this year’s report due to her spending restraint, tax cuts, and steadfast opposition to tax increases. New Mexico’s budget has remained roughly flat in recent years, and Martinez has repeatedly vetoed wasteful spending. She has pursued reforms to make New Mexico more competitive, including cutting the corporate tax rate. With revenues from energy production stagnant in recent years, balancing New Mexico’s budget has been a challenge. But Martinez has held firm against tax increases proposed by the legislature, including vetoing $350 million worth of tax increases last year.

Jay Inslee is the worst-scoring governor this year. The report argues that his “appetite for tax and spending increases has been insatiable.” Though he originally campaigned on a promise not to raise taxes, Inslee has pushed many hikes over the years, including increases in business taxes, capital gains taxes, cigarette taxes, sales taxes, and a huge new carbon tax. Inslee has also been spendthrift— the current biennial budget in Washington state is up 17 percent over the prior budget.

In this year’s report, Edwards discusses how the federal Tax Cuts and Jobs Act of 2017 is affecting state fiscal environments. He also examines revenues from marijuana legalization and recent Supreme Court decisions on online sales taxes and public-sector labor unions.

Edwards notes, “The 2017 federal tax act has ushered in a new era of state tax competition. Governors need to lead efforts to deliver better services at lower costs, else risk losing residents to other states. Policymakers in every state should adopt the fiscal approaches of this year’s top-scoring governors.”

Read the report, then join the conversation on Twitter with #GovReportCard…

Ending the War on Drugs Would Be a Budgetary Boon

Ending the War on Drugs could generate up to $106.7 billion in annual budgetary gains for federal, state, and local governments…

In the past several years, the national movement to end drug prohibition has accelerated. Nine states and Washington, DC, have legalized recreational marijuana, with at least three more states (Connecticut, Michigan, and Ohio) likely to vote on legalization by the end of 2018. Dozens of others have decriminalized the substance or permitted it for medicinal use. Moreover, amid the nation’s ongoing opioid crisis, some advocates and politicians are calling to decriminalize drugs more broadly and rethink our approach to drug enforcement.

Drug legalization affects various social outcomes. In the debate over marijuana legalization, academics and the media tend to focus on how legalization affects public health and criminal justice outcomes. But policymakers and scholars should also consider the fiscal effects of drug liberalization.

Legalization can reduce government spending, which saves resources for other uses, and it generates tax revenue that transfers income from drug producers and consumers to public coffers.

Drawing on the most recent available data, drug legalization could generate up to $106.7 billion in annual budgetary gains for federal, state, and local governments. Those gains would come from two primary sources: decreases in drug enforcement spending and increases in tax revenue. State and local governments spend around $29 billion on drug prohibition annually, while the federal government spends an additional $18 billion. Meanwhile, full drug legalization would yield $19 billion in state and local tax revenue and $39 billion in federal tax revenue.

In addition, the budgetary effects of state marijuana legalizations that have already taken place in Colorado, Oregon, and Washington have been positive. So far, legalization in those states has generated more tax revenue than previously forecast but generated essentially no reductions in criminal justice expenditure. 

At both the federal and state levels, government budgets would benefit enormously from drug legalization policies. 

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The Truth about Immigrants and Welfare

Overall, immigrants are less likely to consume welfare benefits and, when they do, they generally consume a lower dollar value of benefits than native-born Americans. The per capita cost of providing welfare to immigrants is substantially less than the per capita cost of providing welfare to native-born Americans.

(source: http://bit.ly/2KS6ePl)

Taxation, Theft, and Government Spending

We should say thanks on Tax Day — not to the federal politicians who impose income taxes on us — but to the entrepreneurs and other high earners who work hard, create jobs, invent new industries, and bear the brunt of out-of-control federal spending….

That’s why “Taxation is theft” is a popular slogan among libertarians: it captures the sentiment that we should hold the state to the same moral standards as non-state actors. Theft is taking other people’s property without their consent, by means of a threat of force. This fact is not altered by what is done with the money after it is taken. Taxation might possibly be a socially beneficial kind of theft — but it is still theft.

The harder you work and more value you add, the more the government wallops you under the income tax. The more benefits you generate for society through the marketplace, the larger the share of your earnings the government confiscates.

Contrary to the populist rhetoric of both the Left and the Right, the vast majority of those taxes will have been paid by the rich. 

The chart shows that the top-earning 1 percent of households paid 39% of all individual income taxes in 2015, while the top 10% paid 71%.

Average federal income taxes paid as a share of income for the top 1% of households in 2015 was 27%, while the average for the other 99% of households was 11%.

This year, the wealthiest 1% of Americans, who earn 16 percent of U.S. income, will pay roughly 43% of federal income taxes this year.

Those shares have risen over time, and the new tax law exacerbates the upward skew in burdens. Part of the problem is that about 80% of households receive income tax refunds. Tax Day has become more like Christmas — with gifts from Uncle Sam — than a day of sober reflection about the costs of government, which are obscured by employer withholding and Tax Day refunds.

Even so, Americans will pay more in taxes this year than they will for food, clothing, and shelter combined — $3.3 trillion in federal taxes and $1.8 trillion in local and state taxes, for a total burden (local, state, and federal) of $5.2 trillion, roughly 30% of GDP. 

Yet, the federal government will still run an $800 billion budget deficit this year.

That’s because it will spend roughly $4.1 trillion this year, while taking in the aforementioned $3.3 trillion. This is not rocket science: If you spend more than you take in, you have a problem.

Progressives will blame low taxes generally, and the recent GOP tax reform in particular. But the Congressional Budget Office says that tax revenues as a percent of GDP will decline by just 0.7% this year. Spending, on the other hand, will increase by 3% of GDP, more than four times as much.

In his 1992 Republican National Convention speech, President George H. W. Bush proposed letting taxpayers commit up to 10 percent of their payment to reducing the national debt. The proposal never went anywhere, but it points to a good idea: Taxpayers should be able to designate how their tax dollars are spent. Already, we allow for this in very limited ways. For example, check-off at the top of the 1040 form invites every taxpayer to direct $3 of their federal tax to the Presidential Election Campaign Fund (only 6% of taxpayers do).

Why not take this one step further? Why shouldn’t taxpayers make direct decisions about how much money they want to spend on various government programs, like paying off the national debt, the war in Iraq or the National Endowment for the Arts? This would force the federal government to focus time and resources on projects citizens actually want, not just efforts that appeal to special interests.

In the aftermath of Tax Day, millions of Americans are having to tighten their belts and realizing that they now have less money than they had before the government took its bite. Wouldn’t it be nice, though, if Congress did a little more belt-tightening, and the American people had to do a little less?

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Farm Subsidies are Bad for Everyone — Including Farmers

The federal government spends more than $20 billion a year on subsidies for farm businesses, and about 39% of the nation’s 2.1 million farms receive direct subsidies…

Throughout the past 200 years, agriculture has benefitted from federal support in the form of farm programs and subsidies. These programs have been expanded and modified over the decades, but the central planning philosophy behind them has not changed. U.S. farm policies are outdated, causing economic harm and imposing unnecessary costs on taxpayers today.

The largest of the major subsidy programs, crop insurance from the USDA’s Risk Management Agency, has cost an average of $8 billion a year over the past five years. Most farmers actually make money on this so-called insurance, with the Congressional Budget Office (CBO) finding that farmers received $65 billion more in claims than they paid in premiums since 2000. In addition, farmers can enroll in crop insurance and the Agriculture Risk Coverage (ARC) or Price Loss Coverage (PLC) programs simultaneously. This allows farmers to essential “double dip” in subsidy programs.

The bulk of these subsidies are actually doled out to the wealthiest farms, with the three largest programs transferring 60% of their subsidies to the largest 10% of farms.

Farm subsidies also create harmful market distortions and incorrect incentives — including overproduction, distorted land use, distorted choice of crops, and inadequate cost control. Like many other programs involving subsidy transfers, farm programs are subject to government waste and recipient fraud. U.S. trade relations also suffer due to subsidized farming, as it undermines foreign producers and distorts global trade patterns. The CBO reviewed studies examining the repeal of U.S. and foreign farm subsidies and found that both the U.S. and the global economy would benefit from subsidy reform.

Farm programs survive not because they make practical sense, but because Washington’s agenda is controlled by special-interests. 

The durability of farm programs over the decades encapsulates just about everything that’s wrong with Washington. The programs make no economic or environmental sense. Subsidies induce farmers to overproduce, which pushes down prices and creates political demands for more subsidies. And subsidies hinder farmers from innovating, cutting costs, diversifying their land use, and taking other actions needed to prosper in the competitive global economy. They subsidize higher-income households, including billionaires. They run directly counter to the American ethos of independence and rugged individualism.

President Trump proposed cuts to farm programs in the 2019 federal budget, but the longer-term goal should be to fully repeal all farm subsidies.

Agricultural subsidies impose a costly burden on federal taxpayers, harm the economy and the environment, and distort the decisions made by farm businesses.

A number of major farm programs expire at the end of September 2018, which provides Congress a chance to rethink its costly farm policies. 

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Welfare for Wealthy Athletes? The Economics of Olympic Spending

Fewer and fewer cities believe that throwing an extravagant 17-day party for international athletes and media will promote their economies — and they’re right!

Cost overruns have been a ubiquitous feature of the Summer and Winter Olympic Games — since 1980, the Summer Olympics have experienced an average cost overrun of 252%. 

The Lake Placid Games in 1980 required more than $200 million in bailout funding from the State of New York and the federal government. The Atlanta Games in 1996 received more than $800 million in government money and had cost overruns of 147%. The 2012 Games in London had a nearly threefold overrun, with a final cost in excess of $18 billion. The Sochi Winter Olympics in 2014 is thought to have cost between $50 billion and $65 billion and required massive subsidies from the Russian government.

And the costs don’t end when the games are over. Beijing is struggling with the ongoing cost of maintaining its Olympic stadium. Athens and Rio de Janeiro are letting many of their Olympic venues crumble into ruins.

Of course, it is possible to have a cost overrun and still have a positive cash flow. But Olympic reports of positive cash flows should be taken with grains of salt.

Consider the Winter Games in Sochi in 2014, which reported a positive cash flow despite a final cost in the range of $51–67 billion. The positive balance came from a massive financial transfer from the Russian treasury to the books of the Sochi organizing committee.

Other Games have also reported a positive cash flow. This usually results from the official report only considering the operating budget of the Games, not the larger budgets for venues or infrastructure. 

One striking exception to the pattern was the Los Angeles Games in 1984. The previous three Summer Games were financial or political debacles. Mexico City 1968 was plagued by political repression, militant protest, and air pollution. Munich 1972 was haunted by the terrorist operation at the Israeli compound of the Olympic Village. Montreal 1976 suffered from incompetence and corruption, resulting in a final cost that rose to more than nine times the original estimate. 

When the bidding took place in 1978 for the 1984 Olympics, the IOC received only one bid, and Los Angeles recognized and took advantage of its position. The IOC had to choose between accepting the city’s terms or having no host. Those terms included that the city would not financially backstop the Games and that it would use old venues left over from when it hosted the 1932 Olympics, as well as using dormitories at UCLA and USC to house the athletes.

The International Olympic Committee recently announced that Los Angeles will host the 2028 Summer Games. The city is once again vowing to reuse existing structures for the Olympic Parks and to use campus dorms for the Olympic Village. 

Will Los Angeles be the latest victim of massive Olympic debt — or will we see a repeat of 1984?

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Secret Service Is Going Broke. Now What?

Secret Service is way over budget because of President Trump’s frequent vacations….

Every time the president hops on Air Force One for a weekend getaway at one of his resorts, that involves a major shift of manpower by the Secret Service, along with major outlays for travel, lodging, and other costs. 

Now there’s talk of making the budget even bigger to accommodate all of Trump’s trips, but some sensible reforms that could limit the agency’s burden on taxpayers.

If Congress does permanently expand the Secret Service’s travel budget, it should protect taxpayers by limiting the number of other administration staffers that go on junkets. 

However, ideally, Congress should put an annual limit on expenditures for unofficial White House travel. After that, the President would still have a Secret Service detail, but would have to pick up the incremental expenses, either personally or (more likely) by having their political party or campaign committee cover the cost. 

And, there should also be similar restrictions for the presidential family, especially with regard to overseas business trips. Congress could stipulate this when it writes its annual allocation of funds for the White House and the Department of Homeland Security, which runs the Secret Service.

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President Trump’s First Budget Isn’t Perfect, But It Is Promising

President Trump’s budget proposal isn’t perfect, but it’s a start….

President Trump released his proposed FY 2018 budget — which includes spending and revenue projections for the 2018 to 2027 period— earlier this week. 

Trump’s proposal would reduce the growth in federal spending by $3.6 trillion over ten years, resulting in a balanced budget by 2027. While this projection relies on unrealistic levels of economic growth and cuts that are never going to happen, it still makes Donald Trump the only president to even aspire to balancing the budget since Bill Clinton in 2001.

In many ways, Trump’s plan shows that, like presidents before him, he has discovered he can’t actually balance the budget simply by eliminating “waste, fraud, and abuse.” The only way to truly reduce federal spending is to reduce federal spending. And that means cutting programs that are popular, supported by powerful special interests, or both. 

The plan would increase spending on defense, infrastructure, paid leave, and a few other items, but would reduce overall spending substantially compared to the baseline. 

Trump’s budget challenges the Washington notion that, once enacted, every program — no matter how unnecessary, ill conceived, or unsuccessful — is forever sacrosanct. 

Trump would eliminate such sacred cows as the Corporation for Public Broadcasting, the National Endowment for the Arts, and the Legal Services Corporation. He would significantly slash funding for the Departments of Commerce and Energy. And he would shift education funds to charter schools and school-choice efforts.

Conservative and libertarian fears about Donald Trump’s misinformed infrastructure rhetoric should be somewhat allayed: where once it was talked about as the third priority behind healthcare and taxes, President Trump’s opening message did not feel infrastructure important enough to list in the “eight pillars of reform.” 

Trump would also cut agricultural subsidies near and dear to the hearts of red-state congressmen, and corporate-welfare programs such as the Overseas Private Investment Corporation (OPIC).

Much of the early criticism of Trump’s proposal has been focused on its cuts to what is euphemistically called the “social safety net.” In particular, Trump would reduce Medicaid spending by roughly $610 billion over ten years (on top of some $800 billion in cuts that were part of the Obamacare-replacement bill that recently passed the House) and $193 billion in reductions to the food-stamp program.

It is important to understand that the Medicaid cuts are reductions from the projected baseline, not from current spending levels. That means that, even if Trump’s budget were to become law, Medicaid would still spend more in ten years than it does today —and spending on this huge health program has soared from $118 billion in 2000 to $389 billion this year.

Many members of Congress are denouncing or dismissing the proposed cuts, but they are in denial of the large reforms that will need to be made eventually because of the nonstop growth in the big entitlement programs. Social Security retirement and Medicare should be cut as well, but the Trump budget provides Congress with many good ideas to start paring back the bloated federal welfare state.

President Obama left office having roughly doubled the gross federal debt from about $10 trillion to $20 trillion. We don’t know yet whether Trump will be any more fiscally responsible than Obama. But he does get credit for giving his budget team room to explore major downsizing options across the vast $4.1 trillion federal government. 

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5 Bad Arguments for Public Infrastructure Spending

Good infrastructure, especially highways, bridges, and airports, can certainly improve economic mobility and lower costs by reducing travel time between locations. This, however, says nothing about the kinds of institutions most likely to produce good infrastructure or who should fund it….

With healthcare reform stalling, President Trump’s administration seems ready to shift focus onto infrastructure. Here’s a handy guide to some of the bad economic reasoning you will likely hear as the debate about infrastructure spending heats up.

1. Past benefits don’t mean future benefits. Highway construction can substantially boost productivity for industries associated with road use, but those benefits are largely one-offs. Too many new highways were built between 1983 and 2003, and marginal extensions to the highway system are unlikely to increase social welfare because the cost savings from reduced travel times are relatively small. We should judge new projects on their own merits, not against old examples or countries in different circumstances.
2. Don’t ignore opportunity costs. As legislation for infrastructure is pushed, we will hear plenty about the costs of delays to the economy. These costs are undoubtedly very real, but so are the costs of building new infrastructure, and that money can’t then be spent on other things that we might have preferred to spend them on. 
3. But what about that one bridge…? Individual catastrophic events can lead to concern about the physical conditions of infrastructure. You often hear that 58,791 bridges are structurally deficient, which sounds kinda scary, but, according to the Federal Highways Agency, “structurally deficient does not mean that it is likely to collapse or that it is unsafe.” The proportion of bridges labeled structurally deficient has also fallen from 24.1% in 1990 to 9.6% in 2015.”
4. Cheap debt doesn’t make everything a bargain. If there are structural reasons why demand for transportation use is falling, then any investment would yield far fewer economic benefits. Infrastructure decisions should be judged by robust estimates of costs and expected benefits, not just how cheap it is to borrow.
5. How stimulus actually works… Two well-known arguments for infrastructure investment are 1) that government investment spending can be used to “stimulate” the economy and put people back to work., and 2) that smart, efficient investments can help enhance long-term productivity growth. These two ambitions often conflict. Attempts to stimulate quickly and get people back to work will likely result in sloppy project selection and the hiring of more labor than would be most efficient. And, infrastructure funds will likely go preferentially to the well-connected.

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Is President Trump Following Through on Campaign Promises to Fight the Federal Debt?

President Trump’s first budget — released today — insists on $54 billion in reductions to non-defense programs. That’s a good start… 

The White House released President Donald Trump’s  first budget earlier today. In the opening message, the president says, “Our Budget Blueprint insists on $54 billion in reductions to non-defense programs. We are going to do more with less, and make the government lean and accountable to the people.”

While it would be better for America if the government were to do less with a lot less, many of the proposed cuts have been recommended by DownsizingGovernment.org, a project of the Cato Institute.

The successful spending reforms of other countries may not yet be on the President’s radar, but the new budget follows on the heels of another promising initiative — an executive order signed by President Trump earlier this week that requires budget director Mick Mulvaney to complete a plan recommending specific spending cuts based on input from federal agencies and outside scholars

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.

Donald Trump railed against rising government debt on the campaign trail. At this early date, it looks like he’s following through on his promises. 

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