Sunday, December 13, 2009

Deficits, Taxes, Culver and the Highway Lobby

December 13, 2009, 8:25 a.m.

Support the Troopers: A Rational Approach to Taxation
(brought to you by*)

Governor Chet Culver, looking down the well into a near-billion-dollar 2010 deficit, wants to take $46 million from Iowa's $1.144 billion Road Use Tax Fund to keep the State's Highway Patrol on the roads. Thomas Beaumont and William Petroski, "Culver takes on road industry," Des Moines Register, December 12, 2009.

Few if any industries have more power over states' legislatures than their highway lobbies. Iowa's no exception. They are an important sub-set of the industries that, together, have created America's global-warming-auto-dependent transportation system -- leaving us without the passenger rail networks other nations have. Think about it: the oil companies and their station owner-operators; the automobile manufacturers, unions, and dealers; the cement, steel, heavy equipment, and highway contractor companies; all the independent auto repair businesses; the auto scrap steel firms -- it goes on and on. We've paved some 61,000 square miles of America for roads and parking lots. That's an area that, if it were a state, would make it the 24th largest state in the country. It's roughly half the 76 million acres of soybeans, or 85 million acres of corn, farmers predicted they'd plant this year. "USDA Expects Corn, Soybean Acres on Par with Last Year," Newsroom USDA National Agricultural Statistics Service, March 31, 2009.

As the Register reports, "'This will be a bloodbath if it goes forward. This will absolutely be one of the most controversial issues of the session,' said Scott Newhard, vice president of the Associated General Contractors of Iowa." On the other hand, "The State Police Officers Council, a bargaining unit for troopers, 'is very much in favor' of Culver's plan to divert road fund money for the State Patrol, said Sue Brown, the council's executive director."

So there you have the level of analysis of this proposal at the moment: "bloodbath" vs. "support the troopers."

Can we do better? I think so. But rather than take sides in this battle of the titans, here's an effort to bring some rational, neutral principles to the analysis.

1. "What do you mean?'and 'How do you know?'" For starters, to have a rational and civil discussion we need to agree to use a more precise language and support it with data. Railing against "taxes" or "government" isn't very productive.

2. Taxes as currency. Taxes are just another way we buy stuff. We may use cash, checks or credit cards to buy clothes at the mall. We may use loans from a credit union, or auto dealer, to get a car. We may have deductions from our paycheck for a retirement fund or health insurance. We use taxes to buy our kids' K-12 education, the roads and sidewalks they travel to get there, our police and fire protection.

3. No system's perfect. You may buy a toy for your kid at the mall that breaks shortly after you get it home. The auto dealer may sell you a lemon, and then refuse to do anything about it. Your health insurance company may refuse to pay for a procedure that you think is covered by the policy you have been faithfully paying for. And we've just seen what Wall Street banks can do to our entire economy. Is there ever "waste, fraud and abuse" in government programs? Of course. (See, e.g., "State of Iowa Agency Reports on Tax Credits," December 14, 2009 (a pdf file); Clark Kauffman, "Audit: State Jobs Office Failed to Track Money," Des Moines Register, December 12, 2009.) But that's more a human condition than something endemic to government enterprise.

4. Think programs, not taxes. "Cost," standing alone is almost meaningless. It needs to be related to "benefit;" that's why there's such a thing as "benefit-cost" analysis. It's the same in for-profit businesses and government programs; the question is not "what are we paying?" it is "what are we getting for what we are paying?" It's not "how much did we invest?" it is "what is our return on this investment?" We can and do argue about values and ideology, and the validity of the formulas and data we use to arrive at those representations of costs and benefits. But at least those arguments about the utility of government programs are much more productive than arguing about "taxes" qua taxes.

5. Consequences, fairness and alternative taxes. There are many ways of raising money through taxation. Among the more familiar are income taxes, property taxes, sales taxes (and the related "value added" or VAT taxes), "sin taxes" (e.g., cigarette and alcohol taxes), capital gains, estate taxes, and "user fees" (e.g., entrance fees for public parks, swimming pools or museums; as distinguished from the "free" use of K-12 schools, for which there may also be fees).

Even if there is agreement about the benefit-cost utility of a given government program there can still be disagreement about the most appropriate and fair type of tax, and way of assessing and collecting enough taxes to pay for it (e.g., the poor may pay a disproportionately higher percentage of their income in sales and FICA taxes than the rich; property taxes may drive the elderly on fixed Social Security or other income from homes being taxed on assessed values ten times or more what they originally paid for their house).

The principle of "progressive" income tax rates has been with us since 1862, "History of the Income Tax in the United States," Information Please -- that is the notion that it's only fair the rich should pay at a higher rate than the poor (Sweden's marginal rate in 1979 was 87%) as well as paying that rate on a larger pot of income. Given that the wealthy have been notoriously more generous with their campaign contributions than the poor, legislators have tended to reduce the difference between the rates paid by each of those groups of constituents. "Between 1983 and 2003 the average (top) corporate tax rate of advanced OECD countries fell from around 50 to around 32 percent, the average top personal rate from around 66 to 48 percent." Steffen Ganghof, "Progressive Income Taxation in Advanced OECD Countries. Revisiting the Structural Dependence of the State on Capital," Paper presented at the annual meeting of the American Political Science Association, Chicago, August 23, 2004. The U.S. top marginal rate of 35% is, of course, well below the OECD average. And see Alan Reynolds, "Marginal Tax Rates," The Concise Encyclopedia of Economics (with a table of 47 countries' marginal tax rates that places the U.S. in the bottom half). Many Fortune 500 corporations pay nothing at all. Robert McIntyre and T.D. Coo Nguyen, "Freeloaders: Declining Corporate Tax Payments in the Bush Years," Multinational Monitor, vol. 25, no. 11 (November 2004).

(Speaking of progressive taxation, Sherman Johnson has emailed me his suggestion for applying the principle to fines. He's got a point: "Fixed fines are outrageously regressive and unfair. A typical ticket for a moving violation might be $150. Parking in a handicapped space is $250. That represents less than one hour of work for an attorney or accountant -- about one minute for a CEO making $20M per year. Not much of a deterrent. For someone working a minimum wage (or close to minimum wage) job -- say $8 per hour -- that $150 ticket is about half of a weekly paycheck. That's before taxes. After taxes, that $150 is the majority of their take-home pay for the week.")

6. "Tax breaks" as subsidies. Some critics question the validity of ever transferring taxpayers' money to the bottom line of for-profit corporations, regardless of the purpose. They'd prefer to let the "free market" work its will with entrepreneurs. (For one reason why, see "State of Iowa Agency Reports on Tax Credits," December 14, 2009 (a pdf file); Lee Rood, "Other Tax Credits Raised Red Flags," Des Moines Register, December 13, 2009; Lee Rood, "IDED Moves to Recover Funding from 4 Firms," Des Moines Register, December 13, 2009.) Advocates cite the benefit in job creation, and increased revenues for the state, from such programs. Regardless of the merits of such arguments, the fact remains that the only difference between an out-and-out subsidy and a "tax break" is transparency; which is why some critics say, if you're going to give my tax money to for-profit enterprises at least appropriate it, do it above the table where we can see the money and see who's getting it. Don't hide it in the tax code. Whether you give me $100, or tell me I don't have to pay $100 I thought I would, it's $100 in my pocket that wouldn't otherwise have been there.

7. Tying pay to benefit. A part of the rationale for "public" K-12 schools, paid for by everyone in the community, is that everyone benefits from living in a community where everyone else has at least a K-12 education: less crime, a more skilled workforce, more interesting conversations with neighbors, and better quality elected officials. (A similar rationale could be, but has not been successfully, used for "universal, single-payer" health care.) But there are also the "user fees," mentioned above, in which all, or most, of the cost of a public program is paid for by those who are its primary beneficiaries. For example, student tuition at the Regents' universities could be thought of as a partial "user fee," representing perhaps something on the order of one-half the actual cost per student of providing this "public university" education (as distinguished from the virtual free ride for those whose children attend K-12 public schools). It is not always clear which public programs should be paid for by users, and which by the general taxpaying public (because, presumably, there is a general public benefit, as with public K-12 schools) -- and if users should pay what proportion of the cost they should pay.

8. Highway funds and the Highway Patrol. Which brings us to the Governor's proposed use of highway funds for Highway Patrol payroll. The Register's sidebar indicates the sources of the highway fund include "Fuel taxes, motor vehicle registration fees, fees for new registration (formerly the use tax), underground tank fees, title fees, trailer fees, special plate fees, driver's license fees, Underground Storage Tank Fund, motorcycle education, other vehicle taxes and fees, other miscellaneous and interest." It is, in short, an almost perfect example of a "user-fee" based funding system for a government program, that is, road building and maintenance. If you don't own a road worthy vehicle you don't pay registration fees or gasoline taxes. If you do, you do -- and the more you drive, the more gasoline you buy, and the more gas taxes you pay. All drivers benefit from the roads, all contribute to their need for repair, and all pay their proportionate share (assuming the big trucks and heavy equipment, which cause more damage, are paying more than just the gas tax).

That being the case, it is not irrational to argue that the Highway Patrol, the job of which is, as the name suggests, to patrol the highways, should be paid for by the same users who are paying for the highways themselves.

[December 14 modification. Since writing this, "factsgetintheway" posted the following comment on the Register's online version of its story:
"The Iowa State Patrol is the state's law enforcement agency, and their functions extend way beyond traffic/motor vehicle enforcement. The Iowa Constitution clearly did not intend for functions outside of highways to be supported by the RUTF. At a minimum, those activities should be supported by the General Fund. Some of those duties & special ISP units include: assistance during prison riots & labor disputes; emergency assistance and law enforcement during disasters; an airwing used to fly emergency blood and tissue match relays, search for lost persons and other victims; Amber Alert program; canine unit for narcotics detection and criminal apprehension; Chaplains Program; executive protection for the governor and first family, Lt. Gov.; State Capitol security; safety education; and special enforcement team for intercepting illegal drugs.

"Many of these new duties have come about since 1975 when their name was changed from Iowa Highway Patrol to Iowa State Patrol.

12/13/2009 4:22:25 PM"
Assuming all of the content of this comment is true (and I have no reason to believe it's not), while it would not affect the analytical model I've laid out, it certainly would affect the result. I would agree that "at a minimum," as the commenter suggests, to the extent that the other-than-highway-related functions of the ISP can be separated out, there is not a "user fee" rationale for having them paid for out of the Highway Fund. There may, of course, be some other rationale for doing so, just not a "user fee" basis.]

That is not to say there are no contrary arguments, that anyone gives a darn about rational analysis, or that the ultimate decision will not be dictated by campaign contributions and raw political power at its worst.

But for what it is worth, this is at least a way to bring a little more rational analysis, and a little less emotion, to the resolution of a very tough budget debate.

For the recent blog entries you may be looking for, go to "There Is No War in Afghanistan," December 4, 2009, and go to the bottom of that blog entry.
* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source, even if I have to embed it myself. -- Nicholas Johnson
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1 comment:

Dena Gray-Fisher said...
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