Menu
Tax Notes logo

Americans for Tax Reform Report Puts Cost of Government Day at August 12

AUG. 12, 2009

Americans for Tax Reform Report Puts Cost of Government Day at August 12

DATED AUG. 12, 2009
DOCUMENT ATTRIBUTES
  • Authors
    Ciesielska, Monika
  • Institutional Authors
    Americans for Tax Reform
    Center for Fiscal Accountability
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2009-18276
  • Tax Analysts Electronic Citation
    2009 TNT 154-31

 

COST OF GOVERNMENT DAY® 2009 REPORT

 

 

                           TABLE OF CONTENTS

 

 

 About the Author

 

 

 The Thomas Jefferson Fellowship

 

 

 A Message from Grover Norquist and CFA Executive Director Sandra

 

 Fabry

 

 

 Overview of Results

 

 

 Cost of Government Day Components

 

 

 State by State Breakdown

 

 

 The Government Spending Burden

 

 

      Federal Spending

 

 

      Special Focus: Spending and the Federal Budget Deficit

 

 

      The Obama Economic "Stimulus"

 

 

      State and Local Spending

 

 

 State Tax Increases

 

 

 Government Employees

 

 

 The Regulatory Burden

 

 

 Interstate Migration

 

 

 Closing Statement

 

 

 Case Studies

 

 

      The Troubled Asset Relief Program (TARP)

 

 

      The American Recovery and Reinvestment Act (ARRA)

 

 

      Cap-and-Trade

 

 

      Tax-Deferral and Foreign Tax Credit

 

 

      The Value-Added Tax (VAT)

 

 

      The Davis-Bacon Act

 

 

 From The States -- Guest Case Studies

 

 

      California: The Golden State's Self-Inflicted Crisis

 

 

      New Jersey: "The Perfect Bad Example"

 

 

 Methodology

 

 

ABOUT THE AUTHOR

This report was authored by 2009 Thomas Jefferson Fellow Monika Ciesielska.

Monika holds an M.A. degree in International Relations from the Warsaw School of Economics (Szkola Glówna Handlowa) in Poland. She attended the Warsaw School of Economics between 2003 and 2008, where she acquired an extensive education in econometrics, international economics, foreign policy, management, public and social policies, and history.

In 2004 she coauthored a study "GDP Growth Convergence in the EU Accession Countries", which she later presented at the "III International Meeting on Economic Cycles" in Pontevedra, Spain.

As a part of her program, in spring 2007 she studied at Queen's School of Business at Queen's University in Kingston, Canada.

After graduation in October 2008, she worked at Americans for Tax Reform as an associate for the Tax Policy Director, and in March 2009 she was awarded the Thomas Jefferson Fellowship.

THE THOMAS JEFFERSON FELLOWSHIP

The Cost of Government Day Report is published in the context of the Thomas Jefferson Fellowship, a program run by the Center for Fiscal Accountability (CFA).

CFA offers this fellowship to a graduate student with a background in the field of economics interested in the areas of federal and state fiscal and regulatory policy.

The fellowship is named after one of the most influential thinkers in American history, and one of the leading proponents of accountable government -- Thomas Jefferson, Founding Father and third president of the United States of America.

Acknowledging that the American people and their economy can best thrive and prosper when the role of government is limited and subject to the scrutiny of taxpayers, the Center for Fiscal Accountability seeks to shed light on government expenditures, and to promote the Jeffersonian ideals of fiscal accountability, fiscal restraint and free-market principles.

The aim of the fellowship is to offer a graduate student the opportunity to work independently in the area of federal and state fiscal and regulatory policy and in collaboration with prominent experts and institutions in the field. The primary task during the fellow's time is to craft CFA's hallmark study, the "Cost of Government Day® Report."

Potential candidates should contact the program director at cfa@atr.org.

 

A MESSAGE FROM GROVER NORQUIST

 

AND CFA EXECUTIVE DIRECTOR SANDRA FABRY

 

 

Happy Cost of Government Day 2009!?

This year, Cost of Government Day (COGD) the day of the calendar year on which the average American worker has earned enough gross income to pay off his or her share of the spending and regulatory burdens imposed by government on the federal, state, and local levels falls on August 12, which is almost a full month later than in 2008.

In last year's report, we cautioned that the looming entitlement crisis and efforts to drastically increase regulations were threatening to move Cost of Government Day later into the year. However, no one could have foreseen the magnitude of the federal spending spree which was to begin in the second half of 2008, and has not abated since.

This massive government spending spree -- a Keynesian (and utterly flawed) response to the financial market crisis and subsequent economic downturn -- is the main culprit for this year's late Cost of Government Day.

As a result, taxpayers have to work 224 days out of the year just to meet the cost imposed by all levels of government.

As in previous years, this year's report seeks to shed light on the burden government imposes on taxpayers. A new feature of the report is a series of case studies taking a closer look at some of the more recent spending initiatives and other proposals that are currently threatening taxpayers. For a broader perspective, for the first time, we have included several narratives authored by lawmakers and think tank representatives analyzing the cost of government at the state level.

The recent federal spending spree paints a bleak picture for taxpayers. It started with the passage of the financial market bailout and continued with the "stimulus," the $410 billion earmark-stuffed "omnibus," the $3.55 trillion budget, and more bailouts leading to current threats of a national energy tax and a government takeover of health care.

There are however, some rays of light, and they come in the form of viable alternative reform proposals, such as Congressman Paul Ryan's (R-Wis.) Roadmap for Reform and Sen. Jim DeMint's (R-S.C.) "Health Care Freedom Act." These types of free-market approaches are supported by a growing movement pushing for increased transparency and accountability around the country, including the "Tea Party" movement that is bringing together hundreds of thousands of concerned taxpayers protesting the direction this country has taken in the last year.

If Americans want an earlier Cost of Government Day, it will be an uphill battle, but it is not too late yet.

Onward,

 

 

Grover Norquist

 

President

 

Americans for Tax Reform

 

Foundation

 

 

Sandra Fabry

 

Executive Director

 

Center for Fiscal Accountability

 

OVERVIEW OF RESULTS

 

 

Definition

Cost of Government Day (COGD) is the date of the calendar year on which the average American worker has earned enough gross income to pay off his or her share of the spending and regulatory burden imposed by government at the federal, state and local levels.

Cost of Government Day 2009

Cost of Government Day for 2009 is August 12. On average, working people must toil 224 days out of the year just to meet all costs imposed by government. In other words, the cost of government consumes 61.34 percent of national income.

Cost of Government Day: Trends

Cost of Government falls 26 days -- almost a full month -- later in 2009 than last year's revised date of July 16. In 2009, the average American will have to work an additional 43 days out of the year to pay off his or her share of the cost of government compared to 2000, when COGD was June 29.

In fact, between 1977 and 2008, COGD has never fallen later than July 20th. This year even marks a sharp leap of 23 days from the previous record date, in 1982, when it fell on July 20th.

The driving factor for this development is that all components of the cost of government -- federal spending, state and local spending, and regulations -- are now increasing faster than national income, which shrunk as a result of the financial crisis in 2008. The Emergency Economic Stabilization Act (EESA) that created the Troubled Asset Relief Program (TARP) and the American Recovery and Reinvestment Act of 2009(ARRA), passed under the guise of economic "stimulus," have enormously expanded federal spending. In conjunction with the FY 2010 Budget proposed by President Obama and passed by Congress, these spending bills set taxpayers up for a year when federal spending has reached a record 28.5 percent of GDP.

 

Cost of Government 1977-2009

 

 

 

 

COST OF GOVERNMENT DAY COMPONENTS

 

 

Federal Spending

The average American worker will have to labor 111 days just to pay for federal spending, which is now consuming 30.36 percent of national income. This is a considerable leap compared to last year, when the average American worker had to labor 90 days to pay for federal spending. This demonstrates that federal spending grew significantly while national income decreased, and at a much faster rate than anticipated as a result of the financial crisis of 2008. The main reasons behind the steep increase in federal spending were government bailouts and the so-called "stimulus" plan.

State and Local Spending

Due to the economic downturn, most of the state and local governments were forced to limit their spending sprees. However, the average American worker must still labor 49 days in 2009 just to pay for state and local government expenditures. That compares to 42.5 days in 1999, 44 days in 2004, and 47 in 2008. This means that in the last ten years alone, state and local spending has grown by almost 14 percent in relation to national income.

Regulatory Costs

The average American worker must labor 65 days in 2009 just to cover the costs of government regulations. This compares to 61.1 days in 2008, reflecting rapid growth in regulatory costs. This year, regulation is estimated to consume 17.7 percent of national-income which, compared to 16.1 percent in 1999, is a drastic increase.

 

2009 Cost of Government Day Components

 

 

 

 

ACRONYMS

AIFP -- Automotive Industry Financing Program

 

ARRA -- American Recovery and Reinvestment Act

 

BLS -- Bureau of Labor Statistics

 

CBO -- Congressional Budget Office

 

COGD -- Cost of Government Day

 

COP -- Congressional Oversight Panel

 

CPP -- Capital Purchase Program

 

DHS -- Department of Homeland Security

 

DOL -- Department of Labor

 

DOT -- Department of Transportation

 

EESA -- Emergency Economic Stabilization Act

 

EPA -- Environmental Protection Agency

 

EU -- European Union

 

FEI -- Financial Executives International

 

FinSOB -- Financial Stability Oversight Board

 

GAO -- Government Accountability Office

 

HHS -- Health & Human Services

 

IRS -- Internal Revenue Service

 

MSA -- Metropolitan Statistical Areas

 

NASBO -- National Association of State Budget Officers

 

OECD -- Organisation for Economic Co-operation & Development

 

OIRA -- Office of Information and Regulatory Policy

 

OSHA -- Occupational Safety and Health Administration

 

PCAOB -- Public Company Accounting Oversight Board

 

SIGTARP -- Special Inspector General for TARP

 

SOX -- Sarbanes-Oxley Act

 

TALF -- Term Asset-Backed Securities Loan Facility

 

TARP -- Troubled Asset Relief Program

 

VAT -- Value-Added Tax

 

WHD -- Work and Hour Division

 

STATE BY STATE BREAKDOWN

 

 

The calculation of Cost of Government Day (COGD) for each state is based on the varying government burdens suffered in each state. Certainly, federal tax and spending burdens are a large contributing factor. These federal burdens vary because relatively higher burdens are borne by states with relatively higher incomes. Of course, state and local tax and spending burdens vary by state as well.

As in previous years, the latest Cost of Government Day is in Connecticut, with the average worker toiling all the way until September 7 to pay off all the costs of government at each level. The dubious honor of second place is held by New Jersey, with COGD now falling on September 6. New York is right behind on August 31, followed by California and Maryland.

                            Rank in     Rank in     # of Days Worked     COGD

 

 State                       2008         2009      for Cost of Govt.    2009

 

 

 Alaska                         1            1             192          11-Jul

 

 Louisiana                     13            2             199          18-Jul

 

 Mississippi                    2            3             199          18-Jul

 

 South Dakota                  10            4             201          20-Jul

 

 North Dakota                  12            5             205          24-Jul

 

 West Virginia                  4            6             205          24-Jul

 

 Alabama                        5            7             207          26-Jul

 

 New Mexico                     9            8             207          26-Jul

 

 Kentucky                       6            9             209          28-Jul

 

 Montana                        3           10             209          28-Jul

 

 Arkansas                      21           11             210          29-Jul

 

 Iowa                          17           12             210          29-Jul

 

 Oklahoma                       8           13             210          29-Jul

 

 South Carolina                18           14             210          29-Jul

 

 Tennessee                      7           15             212          31-Jul

 

 Wyoming                       30           16             212          31-Jul

 

 Maine                         29           17             213          1-Aug

 

 Missouri                      15           18             213          1-Aug

 

 Texas                         11           19             213          1-Aug

 

 Indiana                       22           20             216          4-Aug

 

 Kansas                        25           21             216          4-Aug

 

 Nebraska                      26           22             216          4-Aug

 

 Nevada                        40           23             216          4-Aug

 

 Florida                       42           24             218          6-Aug

 

 North Carolina                24           25             218          6-Aug

 

 Oregon                        19           26             218          6-Aug

 

 Arizona                       31           27             219          7-Aug

 

 Michigan                      20           28             219          7-Aug

 

 New Hampshire                 16           29             219          7-Aug

 

 Delaware                      14           30             221          9-Aug

 

 Ohio                          23           31             221          9-Aug

 

 Colorado                      36           32             223          11-Aug

 

 Georgia                       28           33             223          11-Aug

 

 Idaho                         32           34             223          11-Aug

 

 Vermont                       27           35             223          11-Aug

 

 National Average              --           --             224          12-Aug

 

 District of Columbia          --           --             224          12-Aug

 

 Hawaii                        41           36             224          12-Aug

 

 Illinois                      35           37             224          12-Aug

 

 Utah                          34           38             224          12-Aug

 

 Wisconsin                     37           39             224          12-Aug

 

 Pennsylvania                  33           40             226          14-Aug

 

 Rhode Island                  38           41             226          14-Aug

 

 Minnesota                     43           42             227          15-Aug

 

 Massachusetts                 45           43             229          17-Aug

 

 Virginia                      39           44             229          17-Aug

 

 Washington                    46           45             229          17-Aug

 

 Maryland                      44           46             233          21-Aug

 

 California                    47           47             235          23-Aug

 

 New York                      48           48             243          31-Aug

 

 New Jersey                    49           49             249           6-Sep

 

 Connecticut                   50           50             250           7-Sep

 

THE GOVERNMENT SPENDING BURDEN

 

 

Federal Spending

Federal spending continues to be the single largest component of the total cost of government and the main driving force leading to the substantial-increase in the cost of government over the last nine years. In 2009, this trend was additionally augmented by the spending provisions in the Emergency Economic Stabilization Act (EESA) of 2008 and the American Recovery and Reinvestment Act (ARRA) of 2009. The average American will have to work 111 days just to pay for the cost of federal spending, which will consume 30.36 percent of national-income this year. This is a jump of over 31 days compared to 1999 and almost 21 days compared to 2008. This increase was caused by the rapid growth in federal spending relative to the growth of national income. Federal spending relative to the economy has increased by 39 percent since 1999.

By contrast, despite the buildup of national defense that resulted in the collapse of the Soviet Union, President Reagan still led a reduction in federal spending from 1982 to 1989 of close to 10 percent relative to the economy. Former Speaker of the House Newt Gingrich spearheaded spending reforms that led to a reduction in federal spending relative to the economy of 12.4 percent from 1994 to 2000.

Between 2000 and 2008, we saw a sharp increase in the federal spending burden, but this wast just a warm up for the 2009 splurge. In October 2008, President Bush, along with Congress, approved the EESA of 2008, authorizing the $700 billion Troubled Assets Relief Program (TARP) which is discussed in detail in the "Case Studies" section of this report. This, however, was just the beginning of the great "spendathon."

Only days into his presidency, President Obama signed into law an expansion of the State Children's Health Insurance Program (SCHIP) funded through a 61.66 cent tax increase on every pack of cigarettes. This constituted President Obama's first broken election promise, as he had vowed not to raise taxes on anyone making less than $250,000 and data shows that the average smoker's median income is about $36,000.1

Soon afterwards, on February 17, 2009, President Obama signed into law the $787 billion American Recovery and Reinvestment Act (ARRA)that is discussed in more detail in the"Economic Stimulus" section as well as in the "Case Studies" part of this report.

In spite of promises to go through the budget line by line and to reform the earmark process, on March 11, President Obama signed the Omnibus Appropriations Act of 2009 -- a $410 billion piece of legislation containing over 9,000 earmarks funding a multitude of dubious spending projects for which there was no debate, as well as other disconcerting provisions.

President Obama's $3.69 trillion FY 2010 budget, the misnomered "A New Era of Responsibility," confirmed critics' fears. According to a report by the Congressional Budget Office (CBO), it would have increased total spending by $2.7 trillion over ten years over the current baseline, including interest.2 This would amount to an increase of $9,000 for every American. Furthermore, federal spending under the President's budget would increase from 23.6 percent of GDP in 2011 to 24.5 percent in 2019, significantly above the past 40 year average of 20.7 percent. In 2009 alone it would total 28.5 percent of GDP and reach 25.5 percent in 2010.

On April 29, exactly 100 days after President's Obama inauguration, the U.S. Congress passed the FY 2010 budget resolution. The final version outlines $3.55 trillion in spending and closely follows the President's major proposals.

The President's spending cut proposals of $100 million, and the cuts announced as part of the budget of $17 billion, amount to less than one-half of one percent of the $3.55 trillion budget. His proposed cuts, although presented with much media fanfare, are even smaller than the ones contained in President Bush's FY 2009 proposal, and they pale in comparison to the overall spending spree.

Sadly, this is not the end. Looking at the speed at which the 111th Congress alongside the new President is spending taxpayers' money now, we can expect a gigantic expansion of the federal government spending burden going forward.

 

Days Worked for Federal Spending

 

 

 

 

Special Focus: Spending and the Federal Budget Deficit

The often-discussed federal deficit has itself been called a "completely uninteresting number," which is the difference between two meaningful and important numbers -- the total level of federal spending and the total level of federal taxes.

The size of government is not determined by the deficit but by the level of spending and taxes. The deficit is also not a major driver of economic performance. Taxes, and the total burden of government spending, are truly the major factors affecting the economy, as they determine the incentives for saving, investment, business, entrepreneurship, and work.

History shows that there is no correlation between the size of the deficit and GDP growth. Between 1979 and 1982 U.S. experienced low GDP growth. During the same period, the deficit, expressed as a percentage of GDP, was very small. In the 19962000 period, the deficit was significantly larger, but economic growth was also low. On the other hand, the period between 1983 and 1989 was marked by a large deficit, and high GDP growth. Since 2005, the deficit has been getting bigger, while economic growth has slowed down considerably.

Nevertheless, it is noteworthy that the federal deficit in 2009 will more than triple in size as compared to 2008, jumping from $459 billion to almost $1.7 trillion. This means that the deficit will balloon from 3.2 percent in 2008 to 13.1 percent in 2009, relative to GDP.

The trend towards a bigger deficit started in early 2008 when President Bush and Congress joined in passing a first so-called economic "stimulus" package. The package was touted as providing tax rebates or cuts, but in fact it just involved one-time cash grants that were meant to "stimulate" consumer spending demand. However, as many had expected, it failed to deliver the desired results. Most of the recipients merely used the checks from the government to pay down debt or to put them towards savings.3The package had no long-term effects on economic growth and the deficit ballooned to $459 billion in 2008. The main contributing factor to the drastic increase in the size of the deficit was the financial crisis that emerged in September 2008 that consequently led to the economic crisis. As a result, in 2008 and 2009, federal revenues slumped and federal expenditures sky-rocketed, particularly in wake of the subsequent passage of the financial market bailout and the "stimulus" package.

 

Federal Spending and Budget Deficit

 

FY 1999-2019

 

 

 

 

The Obama Economic "Stimulus"

On February 17, 2009, President Obama signed into law the $787 billion American Recovery and Reinvestment Act (ARRA), a massive government spending and debt package rushed through Congress under the guise of "economic stimulus." In spite of promises of unprecedented transparency and accountability both from President Obama and Congressional leadership, and on the heels of a House resolution allowing at least a 48 hour review period before any vote on the package could occur, the bill was passed through Congress with little review or debate.

After each chamber had passed their respective versions and a conference committee had met behind closed doors, congressional leaders scheduled the vote on the conference report before the language was even available for the next day, February 13, 2009. The final legislative language was not presented to the public until late in the night on February 12, giving U.S. taxpayers and lawmakers less than 16 hours to read the 1,071 pages of the bill. The conference report passed by a vote of 246 to 183, with no Republicans voting in favor, seven Democrats voting against it and one voting present. The Senate approved the "stimulus" with 60 to 38 votes.

According to Congressional Research Service calculations, the spending parts of the total cost of the ARRA($787 billion)account for 63.7% of the bill ($501.6 billion), and tax provisions account for 36.3% ($285.6 billion).4

The "stimulus" appropriations break down as follows:

  • $90 billion for "State Fiscal Relief;"

  • $71.3 billion for the Department of Labor, Health and Human Services and Education (including $16.6 billion for Student Financial Assistance, $13 billion for Education for the Disadvantaged, $12.2 billion for Special Education and $9.7 billion for National Institutes of Health);

  • $61.1 billion for Transportation, Urban Development and Housing (including $27.5 billion for Highway Construction);

  • $57.3 billion for Assistance for Unemployed Workers and Struggling Families (including 39.2 billion for Unemployment Compensation);

  • $53.6 billion for the State Fiscal Stabilization Fund;

  • $50.8 billion for Energy and Water (including $16.8 billion for Energy Efficiency and Renewable Energy);

  • $26.4 billion for Agriculture, Rural Development and Food and Drug Administration(including $20 billion for the Supplemental Nutrition Assistance Program);

  • $25.1 billion for Health Insurance Assistance;

  • $20.8 billion for Health Information Technology;

  • $15.8 billion on Commerce, Justice and Science (including $4.7 billion on the Broadband Technology Opportunities Program);

  • $10.6 billion on Interior and Environment (including Clean Water and Drinking Water State Revolving Funds);

  • $7.9 billion on Defense and Homeland Security;

  • $6.7 billion on Financial Services and General Government (including $5.4 billion on the Federal Buildings Fund);

  • $4.3 billion on Military Construction and Veteran Affairs.5

 

The Act claims, among others, the following tax cuts:
  • "Making Work Pay" ($116.2 billion), which is a combination of tax credits and spending;

  • Temporary reduction of the earnings threshold for the refundable portion of the child tax credit ($14.8 billion);

  • "American Opportunity Tax Credit" ($10.3 billion), which provides partially refundable tax credits to pay for college expenses (modification of the existing Hope Credit);

  • First-time homebuyer credit ($6.6 billion);

  • Business tax provisions ($6.2 billion);

  • Energy tax provisions ($20 billion, including the long-term extension and modification of renewable energy production tax credits $13.1 billion);

  • Alteration of the size and mix of tax exempt bond provisions ($25 billion).6

 

However, the actual size of the tax cut portion of the Act is overstated. In fact, the tax cuts only amount to $214.6 billion (27.3 percent -- without factoring in the long term cost of the spending portion of the package). A significant portion of what the Obama Administration and other proponents of the package claim as"tax relief,"including the part of "Making Work Pay" provisions, are in fact welfare spending run through the tax code. Under the plan, even those with $0 income tax liability are receiving a check from the government. Refundable tax credits are tax cuts for some, but free money for many recipients, and in effect, they cannot be called tax cuts for nontaxpaying recipients.

A critique of the American Recovery and Reinvestment Act and an analysis of its impact on this year's Cost of Government Day can be found in the "Case Studies" section of this report.

State and Local Spending

In 2009, the average American will work 49 days to pay for state and local spending. That is up from 42.5 days in 1999 and 44 days in 2004. Consequently, in the last five years alone, state and local spending has grown by 10 percent relative to national income.

Unfortunately, this trend toward higher state spending will likely increase in future years. While the trillion dollar spending and debt package passed by Congress under the guise of economic "stimulus" was used by many states to help cover their 2009 budget "shortfalls," this federal money comes with many strings attached that prevent offsetting savings at the state level. In five to ten years, state budget baselines will have risen significantly, but the money from Washington, D.C. that contributed to this excessive spending growth will no longer be there to support it. Once the one-time injection of federal "stimulus" dollars dries up, taxpayers in the states will be on the hook to pay for the expansion of state spending programs upon which acceptance of the "stimulus" was contingent. Furthermore, higher spending on programs that came with matching federal funds will mean that when states look to reduce their bloated budget baselines in future years, revenue will come up twice as short.

It is clear that states are not living within their means. One of the best examples of this conundrum is California, the state with the largest excess spending above its revenues. Since 1991, spending in the Golden State has grown at an unsustainable rate of 300 percent. As a result, entering 2009, the state faced a budget gap of more than $40 billion.

Now, more than ever, states would be well advised to enact constitutional tax and expenditure limitation measures. Had California tied spending to population growth and inflation since 1991, the state would now have a surplus of $15 billion as opposed to facing the prospect of bankruptcy. While the magnitude of the problem is particularly clear in California, the state is not alone in this regard. Heading into 2009, a total of 46 states had committed to spending more than they could take in.

Making government expenditures subject to public scrutiny gives states another tool to get a handle on the overspending problem.

Shortly after the passage of the Federal Funding Accountability and Transparency Act of 2006, which resulted in the creation of www.USASpending.gov, the Center for Fiscal Accountability began working with policymakers and activists around the country to pass legislation and promote executive orders that emulate, and ideally go beyond, the federal legislation.

Since the beginning of 2007, more than twenty laws mandating the creation of searchable online database websites for government expenditures have been passed around the country, and several governors have taken executive steps to the same effect. As of June 2009, twenty of these websites mandated by legislative or executive action have already gone live, and provide taxpayers with an opportunity to track their tax dollars at a mouseclick. In addition, several state constitutional officers have also taken steps to increase accountability through transparency.

By posting state checkbooks online in a searchable format, citizens and elected officials are able to root out fraud, waste, and abuse. Governors and state administrators can also utilize transparency to identify potential savings and opportunities to streamline government.

 

Days Worked for State and Local Spending

 

 

 

 

STATE TAX INCREASES

 

 

In recent years most states increased taxes to continue their spending extravaganzas during the economic downturn. This report compiles a list of state tax increases by state from FY 2003 to FY 2009. The list is based on data from the National Association of State Budget Officers (NASBO), with two adjustments. First, we compounded the tax increases to reflect hikes adopted since FY 2003 which have to be paid in successive years. Second, we adjusted each state's tax increase by population to produce a better comparison across states.

The index shows that, as in past years, New Jersey continues to be the leader among all states in terms of tax increases. Since FY 2003 the Garden State government increased taxes on each resident by $2,446 for a total net tax increase of over $21 billion. Residents of Connecticut, Massachusetts, Nevada, Rhode Island, New York, Delaware, Ohio, Indiana and Tennessee also suffered per capita increases of over $1,000 in the same period.

During the same period only seven states reduced their taxes. This group is led by Florida and South Carolina both of which reduced taxes by over $150 per capita.

North Dakota leads the states in terms of net tax cuts per capita in 2009. The North Dakota legislature reduced taxes by $104.5 per capita for a total of $67 million in the FY 2009 budget. Overall, for the FY 2003-FY 2009 period North Dakota cut taxes by a net $23 million. However, North Dakota is only one of a few states to cut taxes both over the FY 2003 -- FY 2009 period and in 2009.

For FY 2009 net tax increases across the U.S. totaled $1.5 billion and state lawmakers' penchant for tax hikes has shown no sign of abating this year. This year New York has already passed over $6 billion in new taxes, including a new, higher top income tax bracket that is promised to collect nearly $4 billion per year. Despite having a roughly $15 billion spending excess, in a glaring sign of fiscal irresponsibility, the taxhike-laden budget increased spending by nearly $11 billion -- 9 percent over last year.

Counterparts on the West Coast were not to be outdone by Empire State lawmakers. This year California lawmakers passed a $16 billion tax increase, representing the largest tax hike in state history. As a result, Golden State taxpayers are paying more in income tax, sales tax, and the hated car tax.

States have increasingly sought to raise taxes that target narrow segments of the population in an effort to triangulate opposition to onerous tax hikes. Governors and state lawmakers have learned that tax increases are political losers that lead to a loss of business, jobs, residents, and economic growth. However, as there is clearly not an appetite to cut spending, broadbased tax hikes have largely been replaced with targeted tax increases on groups singling out a segment of the population. Particularly popular are tax increases on products or services that are perceived as "sinful" or "unhealthy." Supposedly, increased taxes on such products or services, while used to fund increases in spending, have the goal of discouraging their use. In resorting to such"sin tax"increases, government is placing itself in the contradictory positions of discouraging certain behavior, while at the same time relying on its continuance to finance overzealous spending. These targeted tax hikes become "placeholders" for the next tax increase that will likely be required once revenues from the initial hike dry up. These include tobacco, telecommunications, gaming, snack foods, car rentals, soft drinks, alcohol, and fuel.

In line with this trend in 2009, 30 states seriously considered or passed cigarette tax increases, and nearly 40 states proposed higher levies on alcohol beverages. While refraining from broadbased income tax increases during better fiscal times, some states are now resorting to income tax increases or across-the-board sales tax increases in light of mounting budgetary pressures. Consequently, in 2009, over a dozen states have enacted or proposed higher income taxes, including Hawaii, Wisconsin, New Jersey, Oregon, California, and North Carolina. However, these income tax increases still continue the "divide and conquer" politics of targeted tax hikes, as in most cases they mainly single out families and businesses making $125,000 or more.

                  Cumulative State Tax Increases FY 2003-2009

 

 

                                                       Per Capita

 

                                    FY 2003-2009     (FY 2003-2009)

 

                                          $                 $          Rank

 

 

 UNITED STATES (Excluding DC)     136,402,390,000         449.48         --

 

 

 New Jersey                        21,243,000,000       2,446.60         50

 

 Connecticut                        6,328,400,000       1,807.47         49

 

 Massachusetts                      9,964,100,000       1,533.42         48

 

 Nevada                             3,850,200,000       1,480.75         47

 

 Rhode Island                       1,353,300,000       1,287.89         46

 

 New York                          23,651,100,000       1,213.48         45

 

 Delaware                           1,046,000,000       1,198.04         44

 

 Ohio                              13,208,200,000       1,149.95         43

 

 Indiana                            7,159,100,000       1,122.68         42

 

 Tennessee                          6,946,600,000       1,117.74         41

 

 Vermont                              571,900,000         920.53         40

 

 Oregon                             2,938,700,000         775.37         39

 

 Michigan                           7,329,500,000         732.70         38

 

 Illinois                           8,488,000,000         657.90         37

 

 Minnesota                          3,066,500,000         587.41         36

 

 Kansas                             1,634,800,000         583.41         35

 

 Wyoming                              294,600,000         553.06         34

 

 Virginia                           3,049,800,000         392.56         33

 

 Maryland                           2,099,890,000         372.74         32

 

 Maine                                469,500,000         356.64         31

 

 New Mexico                           557,600,000         281.00         30

 

 Oklahoma                             972,700,000         267.05         29

 

 Washington                         1,710,900,000         261.24         28

 

 Idaho                                388,800,000         255.15         27

 

 Alaska                               156,000,000         227.31         26

 

 New Hampshire                        289,000,000         219.64         25

 

 Alabama                              847,500,000         181.79         24

 

 North Carolina                     1,674,700,000         181.59         23

 

 Kentucky                             657,600,000         154.03         22

 

 Colorado                             736,600,000         149.13         21

 

 Utah                                 396,400,000         144.86         20

 

 California                         5,321,600,000         144.78         19

 

 South Dakota                         104,400,000         129.82         18

 

 Nebraska                             195,300,000         109.51         17

 

 Arkansas                             283,500,000          99.29         16

 

 Pennsylvania                       1,038,300,000          83.41         15

 

 Texas                              1,592,300,000          65.45         14

 

 Missouri                             318,100,000          53.81         13

 

 Montana                               50,600,000          52.30         12

 

 Georgia                              449,300,000          46.39         11

 

 North Dakota                          23,300,000          36.32         10

 

 Wisconsin                            139,200,000          24.73          9

 

 Mississippi                           20,000,000           6.81          8

 

 Iowa                                 -46,600,000         -15.52          7

 

 Arizona                             -538,700,000         -82.87          6

 

 West Virginia                       -162,400,000         -89.50          5

 

 Louisiana                           -430,200,000         -97.53          4

 

 Hawaii                              -130,000,000        -100.92          3

 

 South Carolina                      -709,600,000        -158.40          2

 

 Florida                           -4,197,000,000        -228.99          1

 

GOVERNMENT EMPLOYEES

 

 

President Obama's FY 2010 budget projects that "the Federal boomer" bureaucrats, and to expand the federal workforce under Government will hire several hundred thousand new civilian the guise of building a "high-performing government." employees during the next four years"7 to replace retiring "baby

                     Federal Government Employees

 

 

 Legislative Branch                               30,429

 

 Congress:                                        17,946

 

     U.S. Senate                                   7,235

 

     House of Representatives                     10,711

 

 All Others                                       12,483

 

 

 Judicial Branch                                  33,803

 

 U.S. Supreme Court                                  532

 

 U.S. Courts                                      33,271

 

 

 Executive Branch                              2,706,147

 

 Executive Office of the President                 1,752

 

 Executive Departments                         1,786,093

 

 Independent Agencies                            918,302

 

 

 Total                                         2,770,379

 

 

 Federal Military Personnel                    1,436,642

 

 

 Grand Total                                   4,207,021

 

 

 Source: U.S. Office of Personnel Management, Employments and

 

 Trends -- July 2008.

 

 

According to the budget blueprint, and excluding the U.S. Postal 2009 and 2010, resulting in the biggest executive branch workforce Service, federal civilian employment will grow by 141,400 between since 1994.8

The most significant expansions include:

                             Current        Planned      Planned    Percentage

 

 Department                 Employment     Employment    Increase    Increase

 

 

 Department of Commerce       52,500        141,400       86,900      169.33%

 

 Department of Defense       689,000        708,000       19,000        2.76%

 

 Department of Veteran

 

   Affairs                   269,400        279,200        9,800        3.64%

 

 Department of Homeland

 

   Security                  169,100        176,100        7,000        4.14%

 

 Social Security

 

   Administration             65,100         68,300        3,200        4.92%

 

 Department of Justice       116,400        119,400        3,000        2.58%

 

 Department of Health &

 

   Human Services             62,600         65,000        2,400        3.83%

 

 Department of Interior       68,000         70,100        2,100        3.09%

 

 

Overall, six agenciesI will expand their workforce by more than 5 percent (with the Department of Commerce increasing by almost 170 percent), bringing the federal civilian government employment growth rate to 6.86 percent.

In contrast, only two agencies are slated to reduce their personnel: the Department of Agriculture and the Small Business Administration -- both by 800 workers.

In light of the impending increase in the federal workforce, the Americans for Tax Reform Foundation calculated how much it will cost taxpayers to hire each of these employees over a forty-year working career.II

The cost ranges between $2.02 million for the cheapest employee (GS1), and $11.3 million for the most expensive employee (GS15). An employee in the middle of the federal pay scale(GS8) will cost $4.27 million.

In the assumption the middle (GS8) cost of $4.27 million per employee is the representative one.

President Obama plans to replace or hire 250,000 federal employees, forcing a burden on taxpayers to the tune of over $1 trillion. This is during the same forty-year period where taxpayers will be on the hook to pay for the unfunded obligations of Social Security, Medicare, and Medicaid(not to mention the national debt).

It can be reasonably assumed that the expansion of the government workforce will not be limited to the federal government. As the Administration's policies will likely trickle down to the state and local levels, and indeed the "stimulus" bill imposes expansion at the state level, it is safe to assume a growth in the workforce at these levels of government as well.

                       State and Local Employees

 

 

                            State         Local          Total

 

 

 Alabama                   110,400       220,400       330,800

 

 Alaska                     25,000        41,000        66,000

 

 Arizona                    89,900       289,400       379,300

 

 Arkansas                   72,900       120,300       193,200

 

 California                491,300     1,779,700     2,271,000

 

 Colorado                   87,800       244,100       331,900

 

 Connecticut                70,200       162,700       232,900

 

 Delaware                   30,900        25,400        56,300

 

 District of Columbia            0        37,500        37,500

 

 Florida                   213,900       784,600       998,500

 

 Georgia                   163,300       431,900       595,200

 

 Hawaii                     74,300        18,500        92,800

 

 Idaho                      29,900        76,200       106,100

 

 Illinois                  150,400       617,400       767,800

 

 Indiana                   116,000       285,900       401,900

 

 Iowa                       66,800       167,800       234,600

 

 Kansas                     53,400       181,700       235,100

 

 Kentucky                   98,600       185,300       283,900

 

 Louisiana                 116,000       215,800       331,800

 

 Maine                      28,000        61,600        89,600

 

 Maryland                  109,200       251,000       360,200

 

 Massachusetts             117,300       271,000       388,300

 

 Michigan                  171,100       423,400       594,500

 

 Minnesota                  98,800       286,000       384,800

 

 Mississippi                61,000       160,700       221,700

 

 Missouri                  107,300       283,200       390,500

 

 Montana                    25,400        49,000        74,400

 

 Nebraska                   39,100       108,700       147,800

 

 Nevada                     37,200       107,200       144,400

 

 New Hampshire              25,000        62,000        87,000

 

 New Jersey                152,400       439,000       591,400

 

 New Mexico                 59,700       107,200       166,900

 

 New York                  261,300     1,124,400     1,385,700

 

 North Carolina            200,200       442,000       642,200

 

 North  Dakota              23,200        43,300        66,500

 

 Ohio                      166,000       553,100       719,100

 

 Oklahoma                   84,100       196,000       280,100

 

 Oregon                     76,500       192,800       269,300

 

 Pennsylvania              159,600       485,800       645,400

 

 Rhode Island               16,400        37,100        53,500

 

 South Carolina            100,200       213,900       314,100

 

 South  Dakota              17,800        47,000        64,800

 

 Tennessee                  97,600       279,300       376,900

 

 Texas                     368,700     1,217,400     1,586,100

 

 Utah                       64,500       112,300       176,800

 

 Vermont                    18,000        29,900        47,900

 

 Virginia                  154,500       380,000       534,500

 

 Washington                152,500       322,900       475,400

 

 West Virginia              46,400        77,400       123,800

 

 Wisconsin                 103,600       287,200       390,800

 

 Wyoming                    16,000        46,000        62,000

 

 

 Source: U.S. Office of Personnel Management, Employments and

 

 Trends -- July 2008.

 

Grand Total (Federal, State and Local) 24,010,021

 

 

THE REGULATORY BURDEN

 

 

The average American will have to work 65 days in 2009 to pay for the cost of government regulation, which is estimated to consume 17.7 percent of national income. This is up from 61.1 days and 16.7 percent in 2008.

 

Days Worked for Total Regulatory Burden

 

 

 

 

Our conservative estimate of total regulatory costs takes into account only the cost of complying with regulations. This calculation includes the cost of material resources and labor needed to carry out compliance. For example, if a regulation requires new pollution control equipment for power plants, compliance costs include the costs of manufacturing, installing, operating and maintaining the equipment.

Not counted are the negative economic effects of regulatory requirements. These hidden costs stifle the growth of the economy because they introduce inefficiencies and distortions and reduce the economic reward left over for productive activity. Regulations may prevent new firms from entering the market or stop existing ones from expanding. They may even force some existing firms out of business altogether. The end result is a reduction in overall output, fewer jobs, lower wages and suppressed economic growth.

These economic costs may be as large as the direct compliance costs of regulation. Economists at Washington University in St. Louis, leaders in the study of regulation, estimated these costs to be over $1.5 trillion per year.9

The estimate also does not account for the budget of the federal regulatory agencies, which expanded significantly from $48 billion in FY 2008 to over $51 billion in FY 2009. Between 1990 and 2009, regulatory agencies' budgets increased by 129.6 percent in inflation-adjusted dollars, so it is no trivial matter and needs to be observed carefully in the future.

 

Regulators' Budget

 

Millions of Dollars

 

 

 

 

Source: V. de Rugy, M.Warren, "The Incredible Growth of the Regulators' Budget," Mercatus Center at George Mason University

There are a number of myths concerning the George W. Bush Administration and regulatory policy. One of these is the assertion that his Administration curbed regulatory activities. During his presidential campaign, President Obama claimed that the financial crisis was caused by deregulation.10His assertion missed the mark in two respects: first of all, no financial deregulation occurred during the Bush Administration. In fact, President Bush signed the Sarbanes-Oxley Act (see following page) increasing the regulatory regime in this area. Secondly, there was a significant bipartisan effort to deregulate the financial markets before Bush Administration took office.

On the contrary, one of the real reasons behind the housing market crisis that led to the financial meltdown of 2007 and 2008 was the 1990s relaxed lending standards contained in the Community Reinvestment Act (CRA) of 1977, the purpose of which was to increase home ownership of minorities and people with low income. The other contributing factors behind the mortgage panic of 2008 were government-sponsored enterprises(GSEs), easy money from the Federal Reserve, and mark-to-market accounting rules.

Since the 1960s, there has been a steady increase in regulatory agencies' spending and staffing, and the George W. Bush years were no different. However, from 2001 onward, this increase was largely due to Homeland Security spending. For other agencies, the growth of regulatory spending in real terms was about flat.

The first and probably the only substantial deregulatory initiative during President Bush's years in the White House was the signing of a resolution of disapproval of the "Ergonomics in the Workplace" final regulation issued by the Occupational Safety and Health Administration (OSHA) in 2000. In March 2001 Congress passed the resolution and President Bush signed it, saying "There needs to be a balance between and an understanding of the costs and benefits associated with federal regulations. (. . .) In this instance, though, in exchange for uncertain benefits, the ergonomics rule would have cost both large and small employers billions of dollars and presented employers with overwhelming compliance challenges."11

On the whole, however, and in contrast to President Reagan who was an aggressive deregulator, President Bush, who called himself a "compassionate conservative," believed in introducing supposedly "smarter" regulations.

However, most of President Bush's regulatory actions were not undertaken in an effort to fulfill campaign promises but rather the response to crises: September 11, the 2001 and 2002 corporate and accounting scandals, sharp run-up in energy prices, and the financial meltdown of 2007 and 2008. His response was highly regulatory, unfortunately resulting in higher compliance costs for all Americans.

It is a fact, however, that the federal government has imposed over $30 billion in new regulatory costs on U.S. taxpayers since 2001. Based on the most current data from the Office of Information and Regulatory Policy (OIRA), the most costly of those were the regulations introduced by the Environmental Protection Agency (EPA), Department of Transportation (DOT) and Department of Homeland Security(DHS).

Specifically, among many regulations, OIRA distinguishes some that had the highest annual cost:

  • "Clean Air Act Fine Particle Implementation" -- $7.3 billion (EPA);

  • "Review of the National Ambient Air Quality Standards for Particulate Matter" -- $2.8 billion (EPA);

  • "Tire Pressure Monitoring Systems" -- $2.3 billion (DOT);

  • "Required Advance Electronic Presentation of Cargo Information"-$2.1 billion(DHS);

  • "Clean Air Interstate Rule Formerly Titled: Interstate Air Quality Rule" -- $1.9 billion (EPA);

  • "Chemical Facility Anti-Terrorism Standards" -- $1.5 billion (DHS).

 

These estimates do not, however, reflect the real compliance costs of the regulations as agencies themselves provide OIRA with the estimates of both costs and benefits of introduced rules, and as such their findings are biased.

 

_____________________________________________________________________

 

 

THE SARBANES -- OXLEY ACT

 

 

The "Sarbanes-Oxley (SOX) Act" is a United States federal law enacted in July 2002 in response to major corporate and accounting scandals that led to the collapse of a number of high-profile firms after late 2001. The stated purpose of the Act was to enhance corporate governance and restore public confidence by introducing changes in corporate management's reporting responsibilities and the scope and character of auditors' responsibilities. However, while doing little to prevent corporate and accounting wrongdoing, Sarbanes-Oxley has become an extremely costly burden, especially on smaller businesses.

Section 404 of the SOX Act is the major factor in increased costs borne by companies. While dealing strictly with financial statement issues, it mandates that all publicly-traded companies must establish burdensome internal controls and procedures for financial reporting.

According to a Financial Executives International (FEI) survey, in 2007 the total average cost of compliance with Section 404 of the Act was $1.7 million per company.12 This included internal and external expenses and the auditor attestation fees.

Another comprehensive study on the issue conducted by Foley & Lardner LLP13 found an even higher compliance burden. According to Foley & Lardner, in FY 2006, the estimated total cost of being a public company with revenues under $1 billion stood at $2.8 million. The cost of being public for a firm with revenues of $1 billion and over in FY 2006 totaled $12.5 million.

Furthermore, the SOX Act also created the Public Company Accounting Oversight Board (PCAOB) with the purpose of overseeing the auditors of public companies. PCAOB has been granted the authority to set accounting standards, impose its own set of taxes that it levies on all public companies, and open investigations of accounting firms big and small. It also has the power to fine an accountant up to $100,000 or an accounting firm up to $2 million for a single unintentional violation. As the structure and method of the appointments of the PCAOB board members is questionable, in February 2006, the Free Enterprise Fund and Beckstead and Watts, LLP filed a lawsuit in federal court challenging the constitutionality of the PCAOB. The case was lost in lower court decisions, and the Competitive Enterprise Institute and the Free Enterprise Fund brought the appeal to the Supreme Court. In May 2009 the Supreme Court announced it would hear their case challenging the constitutionality of the PCAOB.

_____________________________________________________________________

 

 

Numbers of Pages in the Federal Register

 

 

 

 

Source: National Archives and Records Administration, Office of the Federal Register.

 

INTERSTATE MIGRATION

 

 

Several studies, including the American Legislative Exchange Council's "Rich States, Poor States," have documented the surge of taxpayers moving from high tax to low tax states over the past years. In fact, these studies show that taxes are the single largest factor in interstate migration, compared to factors such as weather, employment, family relocation, etc.

Our analysis, in comparison to the previous studies, takes a different direction. Using data from Internal Revenue Service (IRS), we calculated not only the number of taxpayers migrating, but also the personal income that moves along with those migrants. Our findings confirm previous studies that taxpayers are leaving states with higher taxes, and also show that they are migrating from states with higher unfunded pension and healthcare liabilities.

States that fail to realize the significant role the level of taxation plays in influencing migration between the states and continue to increase taxes are losing residents while the states on the opposite side of the spectrum are gaining residents. There are nine states with no income tax -- Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. In 2007 alone these states gained a net total of over 235,000 new residents from the other 41 states. Migrants brought with them $11.8 billion of net adjusted income according to IRS data.

In contrast, the ten states with the highest tax burden, California, Connecticut, Hawaii, Idaho, Maine, Maryland, New Jersey, New York, Rhode Island and Wisconsin, respectively lost around 441,000 residents and $12.8 billion of net-adjusted income in 2007 alone.

From 1997 through 2007, the ten states with the highest tax burden lost over 3 million residents to the other states. These residents took with them a staggering $82 billion in income.

 

Total Residents Lost in Highest Tax Burden States

 

 

 

 

Source: Internal Revenue Service, Statistics of Income Tax Stats, "State-to-State Migration Data."

 

Total Income Lost in Highest Tax Burden States

 

Millions of Dollars

 

 

 

 

Source: Internal Revenue Service, Statistics of Income Tax Stats, "State-to-State Migration Data."

During the same period over 2.6 million migrants moved to the states with no income tax, bringing in about $98.5 million in income. Additionally, between 1997 and 2007, the ten states with the lowest tax burden, Alabama, Alaska, Florida, Louisiana, Nevada, New Hampshire, South Dakota, Tennessee, Texas and Wyoming, enjoyed an in-migration of 2.3 million residents from the other states. Due to this influx of residents, these ten lowest-tax states saw a cumulative real income gain of $88.7 billion from 1997 to 2007.

 

Total Residents Gained in Lowest Tax Burden States

 

 

 

 

Source: Internal Revenue Service, Statistics of Income Tax Stats, "State-to-State Migration Data."

 

Total Income Gained in Lowest Tax Burden States

 

Millions of Dollars

 

 

 

 

Source: Internal Revenue Service, Statistics of Income Tax Stats, "State-to-State Migration Data."

At the same time, states with large unfunded liabilities for public employee health care and pension programs are losing population. In particular workers between the ages of 30 and 40 just entering their prime earning years are fleeing future higher taxes that will likely be needed to pay for these unfunded liabilities.

Furthermore, not only do high-tax states experience higher out-migration, they also they have higher unemployment rates, placing their increasing tax burden on an ever-shrinking tax base. Not surprisingly, the top five highest-tax states consistently have about a 0.5 percent higher unemployment rate than the five states with the lowest tax burden.

The migration of residents from high to low-tax states has been the biggest issue facing state governments in over ten years. Without significant fiscal restraint as well as reforms in public employee pension and healthcare retirement programs, states with heavy tax and entitlement burdens will continue to see residents leave for lower-tax states, further draining state treasuries.

 

STATE INCOME MIGRATION CHANGES 2006-2007

 

 

Percentage Change in State Personal Income from

 

Domestic Migration

 

(for a map displaying changes from 1996-2006 please refer to the

 

2007 COGD report, and for 2005-2006 to the 2008 report)

 

 

 

 

Source: Internal Revenue Service

The recent federal spending spree marks a break from a long period of time, beginning in 1945 when World War II was drawing to a close, during which federal spending hovered around 20 percent. This year, taxpayers are confronted with a federal budget that raises spending to over $9,000 for every man, woman and child in America -- forever.

As a percentage of the economy, spending will be sustained at levels not seen in decades, putting America dangerously close to Western European "social democracy" levels of government spending.

Eventually, if spending is not curtailed, there will be pressure from the mainstream media and Democrats to raise taxes to "address the deficit" caused by all this new government spending. Trial balloons for the introduction of a European-style value-added tax (VAT) have already been floated, and a multi-trillion-dollar tax hike is already baked into the cake, as on January 1, 2011 several rates are scheduled to rise:

The tax rate on most small business profits will increase from 37.9 percent to 42.5 percent. Also targeted are the nest-egg taxes on capital gains (15 to 20 percent) and dividends (15 to 39.6 percent). And the death tax, which is set to die after December 31, 2010, will come roaring back at a 55 percent rate on estates valued over $1 million.

Unfortunately, it is not just the current spending spree and looming tax increases that spell trouble for the future. The relative stability in terms of federal spending levels as a percentage of the economy we have seen in the past will be further eroded without fundamental reform of the United States' entitlement programs, the cost of which is estimated to grow exponentially.

Rather than addressing part of the looming entitlement crisis in a responsible manner, the Obama Administration's health care reform plan mirrored in Congressional leaders' bills such as Sen. Kennedy's "Affordable Health Choices Act" essentially constitutes a costly government takeover of the health care system under the guise of providing all Americans access to health insurance. The CBO estimates that leading health care reform proposals like Sen. Ted Kennedy's bill will cost at least $1 trillion over the next 10 years.

A viable alternative to the Administration's plans is Sen. Jim DeMint (R.S.C.) The "Health Care Freedom Act" which would allow every American access to health insurance. According to a study by the Heritage Foundation, the plan would cover 22.4 million currently uninsured Americans within five years. Furthermore it would refrain from raising taxes, and provide tax cuts that are fully-offset with spending restraint.

One of the broader alternatives addressing the entitlement crisis head-on is the the "Roadmap for America's Future" originally introduced by Rep. Paul Ryan (RWis.).

In the area of health care, the "Roadmap" would replace current tax exclusion for employer provided insurance with a refundable tax credit of $2,500 for individuals and $5,000 for families. It would also allow workers to shop for health insurance across state lines. Further, under Rep. Ryan's plan every senior would be given payment of up to $9,500 to purchase health insurance, a portion of which could be saved in a savings account.

In the realm of Social Security, Ryan's plan seeks a shift to "personal accounts," allowing workers to choose to substitute savings and investment accounts for at least part of the current system.

Last but not least, the "Roadmap" would give taxpayers a choice whether to pay taxes under the existing laws, or whether to choose a new simplified tax code with just two rates (10% on first $100,000 for joint filers, $50,000 for individuals, 25% above that). Under the alternate tax regime there would be no deductions or exemptions except for an increased standard personal deduction and exemption of up to $39,000 for a family of four. While the plan would institute a 8.5 percent business consumption tax -- essentially a VAT -- it would do so to replace the corporate income tax entirely. The capital gains and dividends tax would also be eliminated.

At the state level it is clear that states continue to spend too much during upturns in the business cycle leaving taxpayers to foot the bill with additional tax increases during recessions. Reform is urgently needed.

A constitutional limit on state spending to the rate of population plus inflation growth would ensure the tax revenue gains during upturns can be used to offset the revenue losses during recessions. Such limits prevent large entitlement programs from being created during upturns in the business cycle, thus minimizing risk to taxpayers.

Further, large scale reform of state pension and healthcare systems are needed to prevent large tax increases in the future. Eight of the last ten changes to the state pension system have come in the form of moving from defined benefit (DB) to defined contribution (DC) plans.

Under a DB plan, taxpayers are forced to contribute more to the system when the economy is in recession and pension funds also have a higher level of unpredictability. Moving to a DC plan, as the private sector has done, creates better predictability for state taxpayer contributions and will remove the current unfunded liabilities in the system. Similar changes should be made for healthcare through the expansion of Health Savings Accounts (HSAs).

States need to curtail their reliance on volatile revenue sources such as nonwage income including capital gains and dividends. With the runup in the 1990s stock market, states became flush with temporary capital gains revenue and used that to increase spending permanently. When the stock market declined, states lost up to 80 percent of this revenue source but continued spending. This was a major factor driving tax increases. By removing capital gains revenue from the general budget (or eliminating this growth inhibiting tax), states will have greater predictability in budgeting and consequently less appetite for tax increases.

While not a silver bullet, the spending transparency movement sweeping the country is an encouraging effort that can help set the stage for future reforms as it helps sensitize taxpayers to the spending burden government imposes on them, while at the same time eliminating the potential for fraud, waste and abuse.

The fact that this year Cost of Government Day falls on August 12, the latest date this day has ever fallen since 1977, is certainly troublesome for taxpayers. But while the challenges we are facing as a nation are daunting, but they are not insurmountable. The good news is that there is a growing awareness that the current rate of government expansion is unsustainable -- as exemplified in the Tea Party movement, which has brought hundreds of thousands of taxpayers into the street to protest out-of-control spending and the prospect of future tax increases.

However, policymakers must be willing to begin to make tough choices and embrace free-market solutions that can help keep the growth of government in check, and, if applied properly, ultimately reverse it, thus leading to an earlier Cost of Government Day.

 

CASE STUDIES

 

 

This year we expanded the scope of the Cost of Government Day Report to include a number of case studies. The purpose of these case studies is to explore the possible effects the implementation of certain policies has had, or would have, on the 2009 COGD.

THE TROUBLED ASSET RELIEF PROGRAM (TARP)

TARP Overview:

The year 2008 earned itself a dubious distinction, and may well be dubbed the "Year of Government Bailouts." What started with Bear Stearns and then continued with Fannie Mae and Freddie Mac, A.I.G., and the financial markets bailout package passed by Congress at the end of September 2008, has left taxpayers with a massive tab. But beyond that, it has also turned into the launching pad for calls for government to assume even greater control over the financial market, opening the door for regulatory overkill and irreversible damage to our economy.

As critics had feared, the original framework of the Troubled Asset Relief Program which was signed into law in October 2008 by President George W. Bush as a part of the Emergency Economic Stabilization Act (EESA) of 2008 was quickly abandoned, and the scope, size and complexity of the program considerably expanded. Originally, the legislation authorized the Department of Treasury to purchase, manage, sell off or insure up to $700 billion of "toxic" assets, primarily troubled mortgages and mortgage backed securities, for the supposed purpose of restoring liquidity and stability to the financial system. What has followed is an incremental and still ongoing expansion of the reach of the federal government into the free market.

Instead of purchasing "toxic assets" -- the rationale under which the program was sold to Congress and the public -- Treasury opted for injecting TARP money directly into regulated financial institutions through the Capital Purchase Program (CPP).

Shortly thereafter, TARP funds were repurposed to prop up failing unionized Detroit automakers under the Automotive Industry Financing Program (AIFP), and restructure the assistance previously provided to Citigroup and A.I.G. In March the Treasury announced the launch of the Term Asset-Backed Securities Loan Facility (TALF). At the time of writing this report TARP funds have been used in connection with twelve separate programs that total to around $3 trillion.

From the originally authorized $700 billion, $355.4 billion were committed under the Bush Administration and $344.6 billion were left for use and made available by Congress under the Obama Administration.

At the time of writing this report, 628 entities had already received funds from the program. The biggest recipients of TARP are:

  • A.I.G. with $69.8 billion;

  • General Motors -- $68.7 billion;

  • Citigroup $50 billion;

  • Bank of America -- $45 billion;

  • JPMorgan Chase, Wells Fargo -- $25 billion;

  • Chrysler -- $17 billion;

  • Goldman Sachs Group -- $10 billion;

  • Morgan Stanley -- $10 billion;

  • PNC Financial Group -- $7.6 billion.

 

Automakers, not considered at all in the first version of the Program, have so far received almost $85.7 billion of taxpayers' money. Banks have been given $237.3 billion, while specialty lenders received $13.7 billion. The most infamous recipient was probably A.I.G., the first insurance company to receive TARP funds, after it had previously been given $85 billion in September 2008. In May 2009Treasury announced that it was prepared to inject up to $22 billion into six other insurers: Hartford Financial Services Group, Prudential Financial, Principal Financial Group, Lincoln National Corp., Allstate Corp., and Ameriprise Financial. However Allstate Corp, Ameriprise Financial, and Prudential Financial rejected the Treasury offer.

 Program                                               Projected TARP funding

 

                                                                billions

 

 

 Capital Purchase Program (CPP)                                   $218

 

 Term Asset-Backed Securities Loan Facility (TALF)                 $80

 

 Public-Private Invest ment Pro gram (PPIP)                        $75

 

 Systemicaly Significant Failing Institutions (SSFI)               $70

 

 Making Home Affordable (MHA) Program                              $50

 

 Automotive Industry Financing Program (AIFP)                      $25

 

 Unlocking Credit for Small Businesses (UCSB)                      $15

 

 Asset Guarantee Program (AGP)                                     $12.5

 

 Auto Supplier Support Program (ASSP)                               $5

 

 Capital AssistAnce Program (CAP)                                  TBD

 

 New Programs, or Funds Remaining for Existing Programs14         $109.5

 

 

TARP is on its way to failure:

A troubling discovery was made in May of 2009 when records obtained by Judicial Watch indicated that the executives of the so called "Big Nine" -- the first banks to receive TARP funds15 -- were in fact pressured into accepting the funds. In October 2008, then Treasury Secretary Henry Paulson ordered nine banks, which the Treasury described as "healthy" financial institutions, to give ownership interests to the government or else face regulatory action forcing them to do so.

Meanwhile, financial institutions wishing to return their share of TARP funds have met with reluctance on the part of the Treasury Department to accept repayment of funds. When this report went to print only $70.4 billion of the given funds had been returned by only 32 companies.

That, coupled with recent comments made by Treasury Secretary Tim Geithner indicating that even repaid funds could, and likely would, be redisbursed under the TARP program with no end in sightIII causes concern for taxpayers.

Painting doomsday scenarios, then Treasury Secretary Henry Paulson and other proponents of the financial markets bailout package argued that passage was desperately required in order to prevent a massive collapse of the global financial system. However, even though Congress ultimately passed ESSA and the TARP was established, the stock market collapsed evidently shareholders did not put any faith in the government's actions.

Treasury's acquisition of preferred nonvoting shares through the Capital Purchase Program first raised the issue of "nationalization." More recently the Obama Administration began floating the concept of converting these nonvoting shares into common stock with full voting rights, with the potential of increasing the government's reach into the institutions' operations even further. In some instances, Treasury might have the majority of shares, allowing for the government to take full control of the institution. Such a scenario would be damaging to the economy as a whole as it would erode economic freedom and discourage domestic and foreign investment. It would further encourage risk aversion and create "zombie banks, "institutions that have no real economic worth, but operate on funds from the government. Critics have a point when they argue that such a conversion of nonvoting shares to common stock would send the United States on its way to becoming a centrally planned economy. Meanwhile, while four entities were originally created to oversee TARP,IV several months into the program taxpayers have not been given a clear or complete picture of how the funds are being spent, as relevant data is dispersed over various agencies and in various formats, and disclosure of information directly to the public remains limited at best.

Interestingly, and in what appears to be the result of a realization that the American people are increasingly wary of the TARP, officials at Treasury are steering away from using the acronym "TARP" in their communications. Instead they are using the acronym for the underlying legislation EESA, as well as the term "Financial Stability Plan" -- a program that was created in February by Timothy Geithner, in an effort to rebrand the financial-market bailout and make a rhetorical clean break from Henry Paulson and the Bush Administration.

The reasons behind the possible failure of TARP are suitably described by the Cato Institute's Vern McKinley and Gary Gegenheimer: "Beyond the inconsistencies and implementation problems, financial institution bailout policy has been unwieldy, inequitable, extremely costly, disruptive, and lacking in transparency and oversight."16

However, even if TARP were to be discontinued in the near future, as lawmakers are pushing to prevent the further use of repaid TARP funds,V taxpayers have every reason to be concerned about the fallout from the bailout package. Already, members of Congress are floating bills to reregulate the industry, failing to acknowledge that the financial crisis was not triggered by a lack-of regulation.17

In June 2009 President Obama unveiled what he described as a "sweeping overhaul" of the rules governing the financial system. Indeed, it is "sweeping" but misguided at best.

These are the key elements of the plan:

  • it would give the Federal Reserve extensive powers to oversee and regulate large firms, such as insurance companies, that are deemed "too big to fail" -- in short it means that U.S. officials would have the authority to seize and dismantle these companies whenever they please (with the supposed purpose of "saving" the financial market);

  • it would create a new bureaucracy, the Consumer Financial Protection Agency, that would have authority to enact new rules over credit cards, mortgages and other consumer products, which could be a big intrusion of the government into private banking;

  • it would set up another institution, the Financial Services Oversight Council, headed by the Treasury Secretary, which would extend financial regulations well beyond the reasonable level.

 

President Obama's plan is the most extensive revision of the financial regulatory system since the 1930s and will pose a great threat to the free market by threatening private financial institutions.

Effects on COGD:

For our calculations, we are assuming the full expenditure of the $700 billion in TARP funds in 2009.VI Based on this assumption, had Congress not passed the package, COGD would fall on July 25.That means that the COGD would be later in the year by only nine days in comparison to 2008 estimates.

 

What would happen to COGD in 2009 absent TARP

 

 

 

 

THE AMERICAN RECOVERY AND REINVESTMENT ACT (ARRA)

What is ARRA?

The enactment of the American Recovery and Reinvestment Act of 2009, the trillion dollar spending and debt package pushed through Congress by President Barack Obama and Congressional leaders under the guise of "economic stimulus," marked a return to failed policies of the past.

Following the Keynesian rationale that increased government spending will lead to economic growth, Congress passed, and President Obama signed, a $787 billion package largely consisting of spending with some (albeit overstated) tax cuts. The actual taxpayers' cost of the spending component, however, when factoring interest on the debt incurred to finance the package, will be much higher.

The resurrection of Keynesian policies did not come as a surprise, although the magnitude of the stimulus package is unprecedented. During the presidential campaign President Obama had made clear his support for redistributionist policies stating his belief that the economy works best if "we spread the wealth around."18

The "stimulus" package does indeed "spread the wealth around," but this redistributionist package that takes money from one group of people (tax hikes) in order to give it to another one (government spending), fails to acknowledge the fact that government is unable to create wealth in doing so.

Why is the "stimulus" not working?

In the 1930s John Maynard Keynes argued that, during a time of economic slump and lagging private demand, increased government spending was a good way to boost economic growth. His theory asserted that a government induced cash infusion could give short-term "stimulus" to help end a recession or depression. However the theory has one major weakness -- it overlooks the fact that government spending does not occur in a vacuum. Every dollar spent by government has to be taken out of the productive sector of the economy in the form of tax increases or debt, only to be infused into nonproductive areas, and, what's worse, all too often in the form of political favors.

In other words, the theory of Keynesianism fails to acknowledge that government is unable to create wealth: it merely moves it around. As noted economist Henry Hazlitt once said, government spending merely directs "labor and capital into the production of less necessary goods or services at the expense of more necessary goods or services."19

Until the 1970s the Keynesian model was very influential as it provided politicians with the justification for spending more money. The stagnation of 1970s, caused partially by spending increases, and the economic boom of 1980s, triggered by tax cuts and spending restraint, convinced most of the remaining Keynesian economists to abandon the "stimulus" myth. However, the Keynesian rationale still continues to have a following among politicians and the media.

The failed policies under Republican and Democrat presidents Herbert Hoover and Franklin Delano Roosevelt, under whom federal spending rose from 3.4 percent to 10.3 percent of GDP only to see the economy shrink by nearly 10 percent in ten years, underscore the flaws of Keynesianism as a tool to promote economic growth. The experiences of Japan and Argentina in the 1990s serve as further proof that increased government spending is not an adequate tool to address a slumping economy:

 

During what the Japanese now call the "Lost Decade" of the 1990s, the Japanese government increased spending from 32 percent of GDP to 38 percent in nine years. However, rather than seeing increased economic activity and prosperity, percapita income fell from 86 percent of the U.S. level in 1991 to only 74 percent in 2000.

In 1997, Argentina embarked on a similar Keynesian experiment, with similar results. After economic activity began to contract in 1997, the government increased spending from 23 percent to 25 percent. However the average real GDP growth was limited to a meager 0.7 percent.

 

Invoking these failed Keynesian adventures, noted Harvard economist and former Bush Administration adviser Greg Mankiw believes that "it is becoming increasingly clear that the long-term fiscal strategy of the White House is based on large doses of wishful thinking."20

However, it may be more than just wishful thinking. Going back to President Obama's "redistribution of wealth" cynics could argue that perhaps part of the reason the Keynesian model is currently-experiencing a revival is its political expediency as it provides the President with an opportunity to put more money in the hands of political allies.

Despite President Obama's claim that "there is no disagreement that we need action by our government"21 many economists remain highly skeptical that the ARRA will have the desired effects.

These include a number of Nobel Laureates -- Ed Prescott, James Buchanan and Vernon Smith who along with 200 other economists signed the letter opposing the bill stating that it is "a triumph of hope over experience to believe that more government spending will help the U.S. today."22 Even President Obama's own economic advisors including Christina Romer, Jason Furman and Larry Summers, before being appointed to work at the White House, criticized the so-called "stimulus" measures. And the CBO report that analyzes the possible effects of ARRA provides us with a word of caution: "the macroeconomic impacts of any economic stimulus program are very uncertain."23

In 2001, the U.S. Congress provided rebate checks with the stated goal of promoting economic growth, a measure that was also used in 2008. Economists studied the effects of the 2001 and 2008 checks and came to the conclusion that the rebates did not create a significant increase in consumption, mostly because they were believed to be temporary.24

The refundable tax credits, which are part of the 2009 ARRA, will likely have a similarly negligible effect on consumption for two reasons. Firstly, people will likely pay down debts or save the money for a rainy day rather than spend it during unstable times. Secondly, due to the fact that the vast portion of the Act is deficit-ballooning spending, taxpayers are aware that sooner or later it will bring much higher taxes. Thus consumers may respond negatively -- in contradiction to what the creators of the so-called "stimulus" intended.25

Furthermore there is empirical evidence suggesting that in the long run, the growth of the size of government negatively affects economic growth. Research conducted by macroeconomist Robert Barro concluded that "public consumption has a robust negative relationship with growth and investment while public investment spending has an insignificant effect on economic growth."26

Proponents touted the "stimulus" package as a "must pass or else" legislation, painting dooms-day scenarios for the job market should Congress refuse to pass the bill. However, several months into the implementation of the "stimulus," the package has not only not helped create jobs, but the unemployment rate has in fact soared higher than the 8 percent rate economic advisers for the Obama Administration predicted in the absence of the "stimulus" package.

Even the cleverly devised (because impossible to verify or falsify) arbitrary measure of "jobs created or saved" employed by the Obama Administration cannot distract from the fact that at least 1.5 million jobs were lost between February 18, 2009, the day the president signed the package into law and June 2009, when the unemployment rate had risen to 9.5 percent, up from 7.6 percent at the end of January.27

And, in spite of the promised "unprecedented level of transparency," taxpayers were still far from being able to track "stimulus" dollars from the federal government level down to the end recipient when this report went to print.

Meanwhile, critics' fears that "stimulus" dollars would be wasted -- in spite of the President's assertion that the money would be spent "without waste, without inefficiency, without fraud"28 have already been confirmed on numerous occasions.

In June of 2009, Sen. Tom Coburn released a report detailing 100 examples of questionable projects funded through the package, including the following:

  • $1.5 million in "free" stimulus money for a new wastewater treatment plant resulting in higher utility costs for residents of Perkins, Oklahoma;

  • $1 billion for FutureGen in Mattoon, Illinois is the "biggest earmark of all time" for a power plant that may never work;

  • $15 million for "shovel-ready" repairs to little-used bridges in rural Wisconsin are given priority over widely used bridges that are structurally deficient;

  • $800,000 for little-used John Murtha Airport in Johnstown, Pennsylvania airport to repave a backup runway; the 'Airport for Nobody' has already received tens of millions in taxpayers' dollars;

  • $3.4 million for a wildlife "ecopassage" in Florida to keep animals from wandering onto a busy roadway;

  • A Nevada nonprofit gets $2 million weatherization contract after recently being fired for the same type of work;

  • $1.15 million for installation of a new guard rail for the nonexistent Optima Lake in Oklahoma;

  • Nearly $10 million to renovate an abandoned train station that hasn't been used in 30 years;

  • 10,000 dead people get stimulus checks, but the Social Security Administration blames a tough deadline;

  • The Town of Union, New York, is encouraged to spend a $578,000 grant it did not request for a homeless problem it says it does not have.29

 

Estimate of ARRA costs:

Based on the CBO estimates, the ARRA spending during calendar year 2009 alone will amount to $175 billion. During the same time revenues will shrink by $143 billion. Between 2009 and 2018 the one of the reasons why in 2009, the federal spending will amount total net negative impact of the "stimulus" on the deficit is to an overwhelming 28.5 percent of GDP, and the deficit will conservatively estimated to total a staggering $904 billion. That is constitute about 13.1 percent of GDP.

 

Net Impact of ARRA on the Deficit

 

 

 

 

Source: Congressional Budget Office, Joint Committee on Taxation.

Effects on COGD:

Cost of Government Day in 2009 would fall about 10 days earlier, on so-called "stimulus". That means that COGD would fall only 16 August 2, if not for the 2009 expenditures connected with the instead of 26 days later than in 2008.

 

What would happen to COGD in 2009 absent ARRA?

 

 

 

 

CAP-AND-TRADE

What is Cap-and-Trade?

Under the Kyoto Protocol, some countries have implemented a "cap-and-trade" system. Under the system every firm has to obtain permits for each ton of CO2 it releases into the atmosphere. These credits create a limit, or cap, set arbitrarily by the government, based on the amount of gas that the companies are allowed to emit. The firms that would want to increase their emissions would have to trade credits from others who produce less of the carbon dioxide.

In the United States there are currently no laws that would put a cap-and-trade system in effect. Previous efforts to implement such a system in the 110th Congress have not only failed, but were met with harsh criticism.

Why is Cap-and-Trade harmful?

Implementing a cap-and-trade system will have a devastating effect on the economy. Apart from the most obvious concerns including a possible lack of transparency and high susceptibility for fraud and corruption, there is a consensus that it will increase energy costs and eliminate American jobs.

The Institute for Energy Research cites eight main reasons why implementing cap-and-trade in the U.S. is a bad idea.30

  • cap-and-trade is designed to increase the price of energy;

  • the system has failed to reduce carbon dioxide emissions in the European Union;

  • cap-and-trade will disproportionally harm the poor (according to the CBO report, the annual increase in households' cost from a 15 percent cut in carbon dioxide emissions will amount to 3.3 percent of income for the lowest quintile, and 1.7 percent for the highest quintile);31

  • the program might harm energy security by making it more expensive to import oil from Canada than from the Middle East;

  • cap-and-trade for carbon dioxide is not comparable to cap-and-trade for sulfur dioxide -- "regulating millions of different and individual sources of [carbon dioxide] emissions is considerably different from regulating 445 plants;"32

  • a domestic cap-and-trade program can only produce marginal effects on the climate -- increases in global carbon dioxide emissions are driven mostly by developing countries (analyses by the EPA show that if the U.S. were to implement a 60 percent reduction in carbon dioxide emissions by 2050, the global temperature would be reduced only by 0.10.2 degrees Celsius in 2095);33

  • the program will force industries to leave the U.S., as natural gas prices will skyrocket;

  • a cap arbitrarily set at the wrong level will cause great economic harm.

 

Capping carbon dioxide will result in the loss of thousands of U.S.-based manufacturing jobs. They will be moved to countries like India and China, which produce higher levels of carbon dioxide than the U.S., and have decided they will not introduce a similar costly cap-and-trade system.

The Waxman-Markey "Clean Energy Act:"

In recent years there have been several attempts by Congress to pass a cap-and-trade bill, including proposals like McCain Lieberman, Lieberman Warner and Dingell Boucher. Fortunately for the U.S. economy, none of them succeeded.

In March 2009, Representatives Henry Waxman (D Calif.) and Ed Markey (DMass.), in tune with the President's Obama FY 2010 budget, proposed yet another economically harmful energy bill: H.R. 2454 the "American Clean Energy and Security Act of 2009."

Their misguided plan is to reduce, by 2050, the CO 2 emissions rate to 83 percent below the 2005 level. The bill, apart from imposing the cap-and-trade system, would implement a "set of mandates forcing efficiencies independent of any cost-benefit calculations on the part of industry or consumers,"34 including:

  • a "Federal Renewable Electricity Standard" that would require electricity providers to obtain a specific amount of their production from renewable resources (between 6 and 8.5 percent by 2012, between 11 and 17.5 percent by 2016, between 17.5 and 23 percent by 2021, and 25 percent by 2025), the cost of which would be passed on to their customers;

  • an increase of the Corporate Average Fuel Economy (CAFE) standard, that forces automakers to produce smaller and lighter cars, a standard that will raise costs on American drivers (by more than $6.71 billion between 2010 and 2011), diminish consumer choices and increase traffic fatalities;35

  • "Lighting and Appliance Energy Efficiency Programs" would require manufactured homes, appliances, and lighting to be "energy efficient," thus limiting consumer choice and increasing the overall costs.

 

The Heritage Foundation estimated the costs connected with the Waxman Markey proposal. If passed, by 2035 the bill would:
  • reduce aggregate GDP by $9.6 trillion;

  • on average, eliminate over 1.1 million jobs;

  • raise electricity prices by 90 percent;

  • increase gasoline prices by 74 percent;

  • raise residential natural gas prices by 55 percent;

  • increase an average family's annual energy bill by $1,500.36

 

Furthermore, the Heritage Foundation has also calculated that the total cost of the energy tax amounts to $4,600 per family of four in 2035.37

As proposed in the Waxman-Markey bill, cap-and-trade will have a devastating impact on the economy, at a time when American families can least afford it. At best, the policies implemented by the bill would reduce the global temperature by only 0.10.2 degrees Celsius by 2095. The costs of such a scarce effect, however, are enormous -- trillions of dollars in lost income resulting in a weaker economy and over a million of jobs eliminated causing more unemployment.

Effects on COGD:

For a hypothetical calculation of the effects of the passage of the Waxman-Markey bill on COGD we are using the average of expenditures under the bill which would equal the 2014 levels as estimated by the June 5th CBO score for H.R. 2454. Using this metric, and taking into account the present value of a 2014 CBO spending projection, the passage of H.R. 2454 would move COGD three day later into the year, to August 15.

 

What would happen to COGD in 2009 if Cap-and-Trade

 

(Waxman-Markey) were implemented?

 

 

 

 

TAX-DEFERRAL AND FOREIGN TAX CREDIT

Worldwide Taxation vs. Territorial Taxation:

There are two theories of international taxation. Territorial taxation, most commonly used around the world, is based on the notion that only a company's profits generated within national borders are subject to tax, thus avoiding double taxation. The United States, however, is using the worldwide taxation system. Every American company's income generated outside the U.S. is not only subject to a foreign country's taxes but also to the U.S. taxation regime. Although the worldwide approach was once much more popular, about two-thirds of Organisation for Economic Cooperation and Development (OECD) countries (joined recently even by Japan and United Kingdom) now use the territorial system. Right now the United States is the only country subject to both a worldwide system and a corporate tax rate above 30 percent.

However, in most instances the U.S. tax liabilities are not due until the already taxed income is repatriated to the U.S. parent company. This is thanks to the "deferral" process that was created to alleviate the disadvantage at which American firms find themselves when competing with companies from countries that have lower tax rates and are subject only to the territorial taxation system. An American corporation operating abroad can retain earnings overseas or reinvest them abroad without penalty until it sends them back home or pays them as dividends. However this is only a "clumsy attempt to deal with the fact that most countries don't tax their companies' overseas profits."38

To reduce double taxation, the U.S. government allows a tax credit equal to the amount of taxes paid in the foreign country. However "U.S. law already limits the applicability of the foreign tax credit innumerous ways, all of which result in double taxation."39 Moreover, an American company can only claim a tax credit equal to the U.S. rate. If a country has a higher tax rate than the U.S., e.g. 40 percent, the company can only take a foreign tax credit of 35 percent of their foreign income, the percent of which the U.S. taxes corporate profits.

Their complexity and limits notwithstanding, deferral and the foreign tax credit are two very important features that currently prevent the very high U.S. corporate income tax from undermining the international competitiveness of American companies.

The Netherlands, described recently by President Obama as a corporate tax haven,40 has a territorial tax system. The Dutch corporate income tax is 25.5 percent, which is in fact very high in comparison to other European Union states like Ireland (12.5 percent), Poland and Slovakia (both 19 percent) or Hungary (20 percent). The comparison between a Dutch and an American company is telling. Both have manufacturing divisions in Slovakia, with profits for each amounting to $100 million. Slovakia imposes a 19 percent corporate income tax. As outlined before, the U.S. has a 35 percent statutory corporate tax rate.

Even if we take into account the temporarily deferred taxes and the tax credit, the American company ends up paying more in taxes than the Dutch company. In a competitive international market, this is a crucial disadvantage.

                               Dutch Company          American Company

 

 

 Slovak tax                       $19 million           $19 million

 

 

 Additional domestic tax                                $16 million

 

                                      0              (100 * 0.35 -  19)

 

                                                    including tax credit

 

 

 Total tax                        $19 million           $35 million

 

                                                         (16 + 19)

 

 

Obama's International Tax Plan:

President Obama and Treasury Secretary Geithner revealed their international tax reform proposal in early May. If enacted, it would further damage the global competitiveness of American firms that are already at a tax disadvantage compared to other major trading countries.

The plan, among other proposals, includes limiting the ability of American businesses to defer the U.S. tax on their foreign income. It would also reduce the foreign tax credit.41

The stated goal of this proposal is to raise taxes paid on the foreign profits earned abroad in order to reduce the incentive for U.S. companies to invest abroad, which the Obama Administration inexplicably calls "shipping jobs overseas." Since about 95 percent of the world's consumers live outside the United States, it is not surprising that 90 percent of what American companies produce overseas is sold overseas. An American firm would rather produce toys for the Slovak market in the Czech Republic than in the U.S. not only to avoid high taxes, but also to reduce additional expenses like shipping costs. It is natural for companies to take into account every cost and benefit they might encounter when deciding where to place its divisions.

Looking beyond the rhetoric of "saving/creating" jobs in the U.S., it becomes clear that the real underlying objective is to generate more than $200 billion in revenues over the next ten years to pay for the federal government's lavish expenses. However due to the Laffer Curve effects,VII it is unlikely that the Administration's international tax scheme will actually generate that much revenue.

Weakening global competitiveness of American companies:

If the new proposals are enacted, American multinational companies will be left with two alternatives: move the company to another country with a more tax-friendly jurisdiction, or go out of business and consequently fire all its workers.

The President's international tax plan reflects a protectionist worldview, not the realities of the international economy. In a world of increased global economic integration, American companies have to compete against businesses from all around the world. A firm's decision of where to locate its subsidiary is consequently increasingly important as the companies have to compete on many levels, not least of which is their ability to operate efficiently.

In recent years corporate tax rate competition has influenced changes in tax systems around the globe and the differences in tax rates have become very important for attracting foreign investment. That is why during the last two decades most of the OECD countries have dramatically reduced their tax rates (by 38 percent on average).42 By contrast, the U.S. corporate income tax was last reduced in 1986, from 46 percent to 34 percent43 (it was modified again in 1993 when the top rate was increased to 35 percent). Due to its lavish corporate tax rate, the United States is already perceived as a less attractive place to invest. If deferral were limited or eliminated altogether American-based companies would become even less competitive. They would lose market share at the international level and their exports would shrink. Therefore, American workers would be hit twofold; multinational American-based companies might go out of business or move their headquarters to other countries, while foreign businesses might close their subsidiaries in U.S. and stop the influx of capital into the U.S. economy.

The numbers speak for themselves. For every worker employed by a U.S. subsidiary in a foreign country, 2.3 Americans are employed in the U.S.44 Furthermore, a 10 percent increase in foreign investment by private businesses has been linked with a 2.6 percent increase in domestic investment.45

Therefore the most obvious choice for President Obama would be to keep the deferral process, while simplifying its application, or to adopt a territorial system which would help eliminate the tax rates' distortion. Alternatively, the U.S. government could lower its corporate tax rate to match the rate of countries that have a more business-friendly environment. It would make U.S. businesses more competitive internationally, while at the same time improving the wages and living standards of American workers at home.

Costs and Possible Effects on COGD:

As mentioned above, in reforming the international tax system the Obama Administration is hoping to raise $209.9 billion in the next 10 years to pay for its lavish spending. In 2010 alone the Administration plans to raise $2.5 billion.

According to the IRS, the foreign tax credit claimed by active corporations on their returns in 2006 amounted to $78.2 billion. If the U.S. were to abandon the tax credit altogether, which could be the goal of the Administration's long-term plan, using the very conservative 2006 data, it would move the 2009 Cost of most likely the final objective of the government, the 2009 Cost of Government Day to August 14. Government Day would move, by one day, to August 13.

The FY 2010 Budget provides estimates for income tax breaks, including deferral. In FY 2009 it amounts to $36.4 billion. If the deferral process for companies was entirely eliminated, which is Although highly unlikely for political reasons, if both the tax credit and deferral were eliminated at the same time, such a move would result in COGD falling three days later in the year, on August 15.

 

What would happen to COGD in 2009 if the U.S. international

 

taxation system were to be changed?

 

 

 

 

THE VALUE-ADDED TAX (VAT)

What is the VAT?

A value-added tax, or goods and services tax (GST) is a tax levied on a firm's added value, at each stage of production and was first introduced, although in a different form, in France in 1954. On a larger scale it was adopted by the European Communities in 1967. At that time, before introducing the VAT, European countries and the U.S. confiscated about $0.27 out of every dollar of national income. In the beginning European VAT rates averaged around 5 percent, but since then the rates have gone up significantly, averaging 18 percent. Because of the VAT European governments now seize about 41 percent of national income in taxes.

The "value added" of a company is the difference between its sales and purchases of inputs from other companies. In simpler words, the "added value" is the amount a firm contributes to a good or service by applying its factors of production.46

According to the European Commission the VAT, as applied in the European Union countries, is "a general tax that applies to all commercial activities involving the production and distribution of goods and the provision of services, [and it is] a consumption tax because it is borne by the final consumer."47

There are three types of value-added taxes -- a consumption VAT, an income VAT and a gross product VAT. Under the most widely used consumption VAT (adopted by all 29 OECD nations with a VAT), the purchase price is deducted at the time of purchase, which makes it simpler to compute the tax.

Three alternative ways of imposing a VAT exist:

  • credit-invoice method: "typically administered by taxing the total value of sales of all businesses, but allowing businesses to claim a credit for taxes paid on their purchases of raw material, intermediate materials, and capital goods from other businesses;"48

  • subtraction method: the company calculates the value added by subtracting its cost of taxed inputs from its sales, and later multiplies it by the VAT rate to get the tax liability;

  • addition method: a firm calculates its value added by adding all payments for untaxed inputs, and then multiplies the result by the VAT rate.

 

The credit-invoice VAT is also known as a European-style VAT and is the version that has been adopted by 28 out of 29 OECD countries that have a VAT. If the tax were ever to be implemented in the U.S. it would most certainly have that form.

Negative Consequences of the VAT:

There are many disadvantages and adverse effects of implementing a VAT in the U.S. First of all, taxing consumption is regressive, which means that the burden of the tax as a share of income is greater for families with lower-income. The VAT is consequently one of the most regressive tax schemes, as lower-income families spend more on necessities as percentage of their income. This tax would impose a significant new tax burden on the poor.

Adding a tax on consumption would also be costly both in terms of compliance and management, as no federal general consumption tax currently exists in the U.S. New agencies or bureaus within existing agencies would have to be set up, raising the cost of an already expanding government. Companies would have to bear compliance costs of transitioning into the new tax system, as accountants would have to be retrained. Further, firms themselves would serve as tax collectors for the government, which means that every company would have to keep records of every transaction, segregating them according to policymakers' instructions. A 1992 CBO report estimated that "administering the VAT would (. . .) cost the federal government about $750 million to $1.5 billion annually, and complying with it would (. . .) cost U.S. businesses about $4 billion to $7 billion annually."49

Looking at a broader perspective, if implemented in the U.S., the VAT would expand the general cost of government significantly. Evidence from around the world shows that a VAT is likely to add to the aggregate burden. A study conducted by the Tax Policy division of the U.S. Chamber of Commerce in the 1980s found that government spending grew 45 percent faster in nations that had adopted a VAT than in those that had not. What is more, the tax burden grew almost 34 percent faster in VAT countries.50

In a theoretical world where the government acts logically and looks at the long-term effects of its actions, the VAT could replace much more economically damaging corporate and personal income taxes. However, real world evidence from VAT nations shows that when such a tax replacement or reduction was cited as an argument to switch to a VAT, not only were corporate and income taxes not eliminated, but they were in fact raised.

By taking money out of the private sector and transferring it to the government the VAT slows down the economy and destroys jobs. Furthermore, the VAT "drives a larger wedge between pre-tax income and post-tax consumption, therefore reducing incentives to engage in productive behavior."51

What makes a VAT politically appealing for proponents of bigger government is the fact that it is essentially a hidden tax. Unlike state sales taxes in the United States, the VAT is embedded in the price of a good and most people are unaware of the tax or how high it is. This lack of awareness is also the main reason why it is easy for the governments to raise the rates.

The experience of VAT nations, especially in Europe, should teach us that introducing a VAT, equals bigger government and a slower economy, American policymakers should steer clear of the VAT fallacy.

VAT scenarios:

In May 2009 the Washington Post reported that a VAT trial balloon was being floated by Kenneth Baer, spokesperson for Peter Orszag, the President's Budget Director. Democrats and the White House are exploring the feasibility of using a VAT to pay for their government controlled national health insurance scheme. Despite President's Obama campaign promise not to raise taxes on families making less than $250,000, Mr. Baer stated: "While we do not want to rule any credible idea in or out as we discuss the way forward with Congress, the VAT tax, in particular, is popular with academics but highly controversial with policymakers."52

This is not the first time the idea of a value-added tax has been contemplated in the U.S. However all past VAT trial balloons met with strong opposition. Such attempts, to name a few, were made in 1979, 1984, 1985, 1989, and most recently in 1993, when newly elected President Clinton explored ways to pay for a government health care plan. In 2005 President Bush's Advisory Panel on Federal Tax Reform analyzed tax reform options, including a VAT. While not recommending a VAT alternative, it "viewed this option as worthy of further discussion."53

In order to understand fully the effects imposition of a VAT would have, one has to look at the actual numbers. To reflect the impact of a VAT, we calculated the rates at which a VAT would have to be set to implement certain policies.

                              VAT Rates Scenarios

 

 

                                            VAT Base as percentage of GDPVIII

 

 

                                                                       80%

 

 Policies                                        40%         60%     academic

 

                                             EU average   mid-point  average

 

 

 Health care reform (~$300 billion annualy)      5.34%      3.56%     2.67%

 

 Replacement of all federal taxes (2009)        39.02%     26.01%    19.51%

 

 Replacement of payroll tax (2009)              16.02%     10.68%     8.01%

 

 Replacement of corporate income tax (2009)      3.24%      2.16%     1.62%

 

 Replacement of personal income tax (2009)      17.57%     11.71%     8.79%

 

 Fund the unfunded liabilities of Social

 

   Security and Medicare (2009-2085 average)     7.72%      5.15%     3.86%

 

 

 Source: Congressional Budget Office, U.S. Social Security  Administration,

 

 the White House Office of Management and Budget.

 

 

For example, assuming the VAT was implemented to finance the To illustrate how the VAT rate would have to rise through 2085 in Congressional Democrat healthcare reform, the minimum tax rate order to fund the unfunded liabilities of Social Security and (with the highly unlikely 80 percent VAT base) would stand at 2.67 Medicare, we made a conservative projection, based on the data from percent, and the maximum rate (with the most probable European the "2009 OASDI Trustees Report." In these estimates we assumed style 40 percent base) would amount to 5.34 percent. the European Union average VAT base rate of 40 percent.

    Unfunded liabilities  VAT rate            Unfunded liabilities  VAT rate

 

        billions of $                              billions of $

 

 

 2009       11.27          0.20%       2024             491.25        4.25%

 

 2010       10.21          0.18%       2025             559.11        4.63%

 

 2011        4.63          0.08%       2030             945.45        6.25%

 

 2012        1.64          0.03%       2035           1,404.08        7.40%

 

 2013       13.88          0.20%       2040           1,924.47        8.08%

 

 2014       42.15          0.58%       2045           2,528.27        8.45%

 

 2015       53.95          0.70%       2050           3,298.35        8.80%

 

 2016       84.69          1.05%       2055           4,323.98        9.23%

 

 2017      120.31          1.43%       2060           5,715.33        9.75%

 

 2018      163.44          1.85%       2065           7,584.31       10.35%

 

 2019      207.90          2.25%       2070          10,072.22       11.00%

 

 2020      258.49          2.68%       2075          13,320.70       11.65%

 

 2021      310.75          3.08%       2080          17,432.36       12.23%

 

 2022      367.24          3.48%       2085          22,658.48       12.75%

 

 2023      428.28          3.88%

 

 

 Source: U.S. Social Security Administration, "2009 OASDI Trustees

 

 Report".

 

 

Possible Effects on COGD:

Assuming the European-style 40 percent tax base rate, if a value26-Aug added tax were imposed in order to finance healthcare reform, the 25-Aug 2009 COGD would move by nine days, to August 21.

If the government decided to fund the unfunded liabilities of Social 22-Aug Security and Medicare through a VAT, assuming the 40 percent tax 21-Aug base rate and the 20092085 average cost, the 2009 COGD would 20-Aug be thirteen days later and would fall on August 25.

 

What would happen to COGD

 

in 2009 if a VAT were implemented?

 

 

 

 

THE DAVIS-BACON ACT

What is the Davis-Bacon Act?

The Davis-Bacon Act of 1931 is a wage subsidy law enacted during the Great Depression when the federal government was the largest construction contractor in the country. The main purpose of the Act was to prevent the government's purchasing power from driving down wages. Since then all federal government construction contracts, and most contracts for federally assisted construction over $2,000, must include provisions for paying workers onsite no less than the local prevailing wages estimated by the federal government.

Flaws of Prevailing Wage Determinations:

The Wage and Hour Division (WHD) of the Department of Labor (DOL) has been appointed by lawmakers to calculate local wage rates in each county in the United States. The WHD methodology is based on self-reported surveys, which means that only data from employers who volunteered to participate in the surveys were considered. The sample collection of contractors is therefore not random and does not accurately represent construction workers' wages and produces skewed calculations. In consequence, Davis-Bacon rates are often below market wages, which is exactly what the Act was supposed to prevent. On the other hand, in some counties, the prevailing wages are high above the market wages, which in turn means that the government overpays for the federal construction.

In 2004, the Office of Inspector General in the Department of Labor in the Office of Audit conducted a study on the integrity of the Davis-Bacon Act prevailing wage determinations. The report concludes that there is a high frequency of error in the data WHD uses to calculate rates; the self-reporting of the survey WHD conducts could result in biased data; a wide gap in time between surveys because of the time needed to complete and publish survey them resulted in outdated and inaccurate wage determinations.54

The Beacon Hill Institute, in its widely used study on Davis-Bacon "mismeasure of wages," concluded that there are three main consequences of the flawed estimates:55

  • the WHD inflates wages, on average, by 22%;

  • the WHD methods inflate construction costs by 9.91%;

  • the WHD raised public construction costs by $9 billion in 2009.IX

 

Further, the requirements specified in the Davis-Bacon Act make it particularly hard for minority, open-shop contractors to employ and train inexperienced workers as they would have to pay them the same wage as skilled ones. This, in turn, creates a system similar to medieval guilds, a structure that encourages nepotism and creates entry barriers.

Alternatives:

There are viable alternatives to the Davis-Bacon Act in its current form. The first long-term solution would be to repeal it. This would be the most favorable approach in terms of federal budget savings and nondiscriminatory policy.

1. Repeal

In 2001 the Congressional Budget Office (CBO) included this alternative in its "Budget Options":

 

The federal government could reduce outlays for construction by repealing the Davis-Bacon Act. Doing so would save $9.5 billion over 2002-2011 period relative to current appropriations (. . .). In addition, mandatory spending would fall by about $10 million in 2002 and $255 million over the 10year period. (. . .) [It] would probably increase the opportunities for employment that federal projects would offer to less skilled workers."56

 

The Beacon Hill Institute in the aforementioned study also estimated the effects of repealing the Davis-Bacon Act.57 Based on its methodology, we calculated the possible savings in 2009 alone -- $9 billion in wages, and about $300 million in administrative expenses and compliance costs for the industry, which totals over $9.3 billion. Furthermore, the Act's repeal would likely result in the creation of about 31,000 new jobs in the construction industry, most of which could reasonably be expected to go to members of minority groups.58

2. Change of methodology

The other solution advocated by a number of organizations is for WHD to change its statistical technique so that the prevailing wages would reflect the market situation more accurately. The Department of Labor already has a principal fact-finding agency that conducts highly viable and accurate wage estimates -- the Bureau of Labor Statistics (BLS). To calculate wage statistics, BLS uses three surveys: the National Compensation Survey (NCS), the Occupational

 

Possible Savings in Wages by Repealing the Davis-Bacon Act

 

 

 

 

Source: S. Glassman, M. Head, D. Tuerck, P. Bachman, "The Federal Davis-Bacon Act: The Prevailing Mismeasure of Wages," Beacon Hill Institute at Suffolk University.

Employment Survey (OES) and the Current Population Survey provided by the Census Bureau. All three are conducted in a timely manner and are updated frequently. Instead of carrying out its own costly and erroneous survey, WHD could take the raw wage data collected by BLS and use it to estimate prevailing wages.

One obstacle is the difference between the Davis-Bacon Act requirements and the BLS survey method. The Act requires prevailing wages calculations for individual cities and counties; BLS, on the other hand, conducts its surveys on the basis of metropolitan statistical areas (MSA) and non-metropolitan statistical areas. Therefore, in order to use the BLS data and calculate prevailing wages more accurately, Congress would have to amend the Davis-Bacon Act to require random sampling using larger geographical areas rather than civil divisions.

On 1997, the Inspector General of the Department of Labor published a report recommending that WHD consider contracting BLS to calculate prevailing wages. WHD tested this alternative and concluded that BLS surveys were not viable. However, the previously mentioned 2004 Inspector General study concluded that "while obstacles to using BLS survey exist, we do not believe they are insurmountable."59

3. Raising the threshold

The final option would be to raise the threshold for determining which projects are covered by the law. In some editions of its "Budget Options" CBO suggests increasing it from $2,000 to $1 million. Based on its 2001 calculations this would save about $1.3 billion in discretionary outlays over the ten year period from 20022011,60 and based on their most recent 2007 estimates -- $1.5 billion over the ten year 20082017 period.61 CBO mentions that the rationale for raising the threshold is that "it has remained the same for seven decades and (. . .) [changing] it would allow the federal government to spend less on construction. Moreover, this option could increase the opportunity for employment that federal projects might offer less-killed workers."62

Effects on COGD:

The repeal of the Davis-Bacon Act, based on the high estimate, would move the Cost of Government Day in 2009 by almost one-third of a day earlier, changing the number of days from 224.1 to 223.8. Although the difference seems minuscule in comparison to the overall federal largesse, repealing this Act would alleviate one of the many burdens that government places on Americans.

 

Possible Savings by Raising the Threshold for

 

Coverage Under the Davis-Bacon Act

 

 

 

 

Source: Congressional Budget Office. "Budget Options 2007."

 

Possible Savings on Davis-Bacon Act Repealing vs.

 

Raising Threshold

 

 

 

 

Source: Congressional Budget Office, "Budget Options 2001."

 

FROM THE STATES -- GUEST CASE STUDIES

 

 

CALIFORNIA: THE GOLDEN STATE'S SELF-INFLICTED CRISIS

by State Assemblyman Chuck DeVore

Americans for Tax Reform does our nation a great public service by calculating and publicizing the annual Cost of Government Day (COGD) -- the day when the average American stops working to pay the government's bills, and starts earning for his or her own household.

With ever expanding Federal spending and mounting public debt, the American COGD is appallingly late in the year: about August 12th. This is bad enough, but in California, the COGD comes even later, on August 23rd. To put it another way, California's tax, spending and regulatory burden is so great, it demands an extra eleven days of labor for each Californian to pay it off. Only New York, New Jersey, and Connecticut have later COGDs.

Despite the extraordinary demands made upon its taxpayers, California nonetheless manages to rack up multi-billion dollar deficits with depressing frequency, and now finds itself in a fiscal crisis that previews the nation's eventual fate if some responsibility is not imposed upon Washington, D.C. How did things come to this? It's worth looking at three examples of the fiscal irresponsibility that mark California's governance: welfare, carbon cap-and-trade, and state prisons.

WELFARE

California's share of U.S. welfare recipients is disproportionately high: with about 12 percent of the American population, the Golden State shoulders the burden of 32 percent of the nation's welfare cases according to the federal Department of Health and Human Services. The result of this is a disproportionate burden on California taxpayers who fund that welfare, who must pay about three times per capita what the residents of other states pay for their own welfare recipients.

It may be useful here to illustrate the burden that this places upon the individual California taxpayer. According to the California Franchise Tax Board, which administers the collection of state personal income taxes, about 15.8 million Californians filed an income-tax statement in 2008. (This is out of a state population of about 36.7 million.) According to the California Department of Social Services, about 1.2 million Californians were receiving welfare from the Cal-WORKs program in that same year. Were recipients of other welfare programs, including programs for food and/or healthcare, added in, the total would rise significantly. This means that each welfare recipient is supported by about a dozen California taxpayers: a remarkably concentrated ratio that doubtless worsens when one considers that of the 15.8 million Californians who filed an income-tax statement in 2008, not all actually paid taxes.

What we have in California, then, is a narrow base of taxpayers supporting a comparatively broad base of welfare recipients. That the number of those recipients is so high is often blamed on California's problem with illegal immigration. This is a contributing factor, but not the driving cause as California is not the only border state, nor is it the sole destination of illegal immigrants. The primary cause of California's high welfare caseload, and narrow taxpaying base to support it, is overreaching and overspending state government. The "generosity" with other peoples' money that impelled Sacramento lawmakers to give such large sums of working Californians' money to nonworking Californians inevitably results in less of the former and more of the latter. This much is simple economics, and it's a shame that it escapes the architects of our state's governance today. The bottom line: when one of the world's top ten economies has America's largest welfare caseload (seven times the rate of Texas, the next largest state) things have gone terribly wrong.

CARBON CAP-AND-TRADE

This narrow base of taxpayers is not asked to just fund welfare, of course. The number of expensive, big-ticket projects on Sacramento's wish list goes far beyond help to needy families. That help, however misguided, inept, and damaging, at least has the virtue of some moral defensibility. By contrast, AB 32 -- California's cap-and-trade scheme for carbon reduction -- has none. Worse, it will do more than its share to cripple our state's economy, and pile crushing debt upon our taxpaying citizens.

AB 32, soon to be largely copied at the national level by the Waxman-Boxer plan in Congress, seeks to reduce California's global greenhouse gas emissions to 1990 levels by 2020. To achieve this reduction, California needs to trim its emissions by 30 percent. To add perspective, were California to be completely eliminated, only one year's worth of economic growth in China would wipe out any supposed environmental benefit of California's demise.

Common sense dictates that in this era of uncertain energy costs and economic hardship the last thing any state needs is a massive new tax. Yet this is what AB 32 imposes upon Californians. As the San Diego Business Journal editorialized back in July 2008, "[AB 32 implementation] revenues would add from $760 million to $39 billion in de facto taxes per year on California companies that wish to continue operating in this state, depending upon the scope of the cap and trade program and the per ton cost of carbon." We can reasonably guess that the true burden will be closer to the $39 billion mark, given that present energy prices (by no means historically low) are temporarily depressed by the recession in international demand. We can equally reasonably guess that meaningful numbers of California companies will not, in fact, "wish to continue operating in this state." And why would they? Low-tax states like Nevada and Arizona are just a few hours away; and given that California is spared a net outflow of population only through international immigration, it's not a stretch to predict that businesses will also flee -- even more than they already are.

If welfare is an example of California's counterproductive system of tax-based disincentives, then AB 32's carbon cap-and-trade is an example of a forthcoming system that will make Californian welfare seem a paragon of good governance.

PRISONS

The final example of poor fiscal choices in California must be that of our state's prisons. The prisons are a huge recipient of taxpayer funds, topping $9 billion in the last state budget -- nearly 10 percent of all state expenditures. Yet the figures strongly suggest a tremendously wasteful and inefficient system that saddles taxpayers with chronic overpayment for basic services. As the New York Times reported on March 2, 2009, "A [Pew Research] survey of 34 states found that states spent an average of $29,000 a year on prisoners, compared with $1,250 on probationers and $2,750 on parolees." That same survey found that California was comfortably average -- 23rd out of 50 -- in its rate of incarceration. But California's spending is anything but average: whereas the average state spends about $29,000 a year per prisoner, California spends about $46,000 a year per prisoner of which, fully $14,000 is for healthcare alone. This incredibly high number, unjustified by any exceptional realities of California's crime or incarceration rates, is a direct result of a combination of unaccountable bureaucracy, aggressive public-employee unions, cruel and unusual punishment lawsuits from the ACLU and legislators either too afraid to challenge the status quo or who wish to use these high costs as an excuse to release tens of thousands of inmates onto the street. Compounding the high cost of incarceration is the fact that 19,000 of California's 166,000 inmates are illegal immigrant felons costing taxpayers some $960 million, according to the nonpartisan Legislative Analyst's Office. Who pays the price? As always, the taxpayer.

California's COGD is shamefully late, and it's a date that eloquently demands a rethinking of how we run our state. In focusing on welfare, carbon cap-and-trade, and prisons, I do not argue that these are the major causes of our state's fiscal crisis. They are symptoms rather than causes -- and if we want to cure our fiscal ills, we would do well to address what lies beneath them.

NEW JERSEY: "THE PERFECT BAD EXAMPLE"

by New Jersey General Assemblyman Jay Webber

"The Perfect Bad Example." That's how one national newspaper recently described New Jersey and its chronically mismanaged government this decade. Taxpayers in New Jersey must work 249 days out of 2009 just to pay for the cost of government. It is no mystery how New Jersey's Cost of Government Day falls on September 6th, 25 days later than the national date: bad policies and weak leaders.

Since 2002, the average family of four in New Jersey has seen a state tax increase of more than $10,000, a wallop to the wallet by far the worst in the entire nation. The state's citizens have been saddled with a cumulative tax increase of $21.2 billion from FY2003 to FY2009. We have experienced 108 new or increased taxes in just 8 years -- on income, sales, estates, employees, employers, home sales, televisions, phone bills, motor vehicles, tires, and many more items. And that does not even count the state's recordsetting property taxes, which have skyrocketed 54.8 percent since 2002 and amount to $6,500 per household. New Jersey collects more property taxes per capita than any other state.

It is bad enough that New Jersey overburdens the present generation of taxpayers. But our relentless borrowing and refusal to meet current obligations already have placed heavy burdens on future generations. State debt and unfunded liabilities for state pensions and retiree healthcare add much more than $100 billion to the state's toxic mix of high taxes and unchecked spending.

Those crushing costs of government are forcing our families, neighbors, employers, and capital to flee to low-cost states. New Jerseyans are voting with their feet in crisis proportions, seeking escape from oppressive taxes and finding refuge elsewhere. New Jersey has had a net outflow of residents every year for the past 10 years. In the last 6 years alone, a net 300,000 people have left the Garden State with another 100,000 expected to flee in 2009.

The social consequences of our mass outmigration are terrible. Families and neighborhoods are breaking apart as relatives and friends must scatter to find affordable living, jobs, or a reasonably comfortable retirement. With generations of families separating, ready sources of emergency day-care are drying up for New Jersey moms. Too many of our families now track each other via e-mail and phone calls across state lines, rather than sharing instate soccer games and Sunday picnics.

That exodus carries negative economic effects as well. The flight of our citizens has cost our state economy about $10 billion, with heavier losses to come. For the first decade since the 1930s, we will experience negative job growth this decade. The New Jersey experience shows that individuals and employers can and do relocate to states with better tax treatment. Two of the top destinations for fleeing New Jerseyans have been Pennsylvania and Florida, which have low income tax rates.

Despite New Jersey's spectacular failures with its tax-and-spend ways, some argue that additional spending will cure our economic ills. But our collective experience tells us that that is the exact wrong thing to do. When our neighbors left for Florida and Pennsylvania, not a single one said, "We would remain in New Jersey, if only government spent more and taxed us more to pay for it."

A vicious cycle has characterized New Jersey this decade: the more the state spends, the more our citizens are taxed; the more people are taxed, the more they seek refuge in low-tax states; the more who leave, the more that the economy and budgetary revenues decline, and the more pressures are placed on remaining residents and employers to support unsustainable taxand-spend policies.

And the abuse and cruelty continue for our long-suffering citizens. In June, New Jersey's government imposed new tax increases on payroll, income, businesses, insurance premiums, cigarettes, alcohol, and lottery winnings, while simultaneously suspending property tax deductions and rebates -- a whopping $2.8 billion tax increase in the middle of a recession.

Those draconian tax increases will only destroy more jobs and drive more New Jerseyans out of their homes.

The tried-and-failed taxing policies of this decade should give way to policies like those championed by Presidents Kennedy and Reagan, who proved that tax-cutting generates true investment, powers sustained prosperity and economic growth, and increases government revenues at the same time. Our Garden State again should become an affordable place where citizens want to live, not a place they need to leave.

 

METHODOLOGY

 

 

The Cost of Government is determined by adding the figures for government spending (federal, state and local expenditures) and an estimate of the cost of government regulations (both on the federal and state level).

The total cost of government is then divided by an estimated Net National Product to determine the percentage of national income consumed by government. This percentage is applied to the 365.25 weighted calendar year to determine the date of Cost of Government Day.

All figures are based on calendar years and, among others, utilize Congressional Budget Office (CBO) reports and Bureau of Economic Analysis' National Income Product Account (NIPA) data.

State tax increases are derived from the NASBO data, with two adjustments.

The calculation of Cost of Government Day for each state is based on the varying government burdens suffered in each state. Federal spending burdens vary because relatively higher burdens are borne by states with relatively higher incomes. Of course, state and local tax and spending burdens vary by state as well.

A 2005 report for the U.S. Small Business Administration by Lafayette College W. Mark Crain provided the framework for determining the cost of regulations.

The migration data was provided by the Internal Revenue Service Office (IRS).

 

FOOTNOTES

 

 

I Department of Commerce, Department of Labor, Agency for International Development, National Labor Relations Board, and the Peace Corps.

IIOur assumptions:

  • The federal GS schedule is used, which can be found at OPM's website (the national average is the table consulted)

  • The worker is assumed to stay in the same GS grade for a forty-year career. This makes the numbers conservative, since workers often move up in GS grade when promoted. On the other hand, most federal workers don't work for forty years

  • The worker starts at step one of his grade level, and gets a 6 percent raise for the first nine additional years

  • The worker gets a 3 percent COLA raise in years 11 through 40

  • The worker's step-one salary is raised by 20% to account for fringe benefits like the thrift savings plan match, the federal employee retirement system defined benefit pension, the cost of the federal employee health benefits plan, the government's share of FICA tax, and other nonsalary costs of compensation

  • All figures are nominal (inflation is not subtracted out)

 

III The Congress of the U.S., Senate Banking Committee hearing, May 20, 2009: Senator DeMint: 'So your understanding of what we did is that the Treasury now has $700 billion that it can use permanently, rotating in and out of the capital markets as you see fit?' Secretary Geithner: 'Well, I'm not quite sure permanent, but you're right.'

IV Congressional Oversight Panel (COP) established as a legislative branch body to help provide broad oversight of financial markets and regulatory system; Financial Stability Oversight Board (FinSOB) -- its purpose is to review Treasury's exercise of authority, including the appointment of financial agents, assets to be purchased, and the structure of tools used to purchase troubled assets; Special Inspector General for TARP (SIGTARP) -- its responsibilities includes conducting audits and investigations of purchase, management and sale of TARP assets; Government Accountability Office (GAO) every 60 days, the U.S. Comptroller General is required to monitor the performance and report on a variety of areas associated with oversight of TARP.

V On June 8, 2009, Rep. Jeb Hensarling introduced a bill that would set a December 31 deadline for the Treasury Department to use TARP funds.

VI Under the original EESA legislation, the Treasury's authority to enter into agreements to purchase assets under TARP is set to expire on December 31, 2009.

VII The Laffer Curve, named after noted economist Arthur B. Laffer, illustrates that tax rate increases do not necessarily increase tax revenues, as increasing taxes beyond the peak of the curve point will decrease returns.

VIII The VAT base is the portion of GDP that is liable to this taxation, which could be expressed as percentage of GDP. European Union countries VAT base averages around 40 percent. The academic average is the maximum percentage of GDP that can be reasonably taxed (e.g. excluding government expenditures), which amounts to around 80 percent. The hypothetical 60 percent VAT base is used to show a middle ground between those two.

IX Author's projections based on the Beacon Hill Institute methodology.

1 www.atr.org/theyscrewingfirstpelosiobamareida2823

2 The Congress of the United States, Congressional Budget Office, "A Preliminary Analysis of the President's Budget and an Update of CBO's Budget and Economic Outlook," March 2009.

3 Kevin A. Hassett, "Why Fiscal Stimulus Is Unlikely to Work," American Enterprise Institute, March 3, 2009.

4 Congressional Research Service, Library of Congress, "Economic Stimulus: Issues and Policies," February 27, 2009.

5 The Congress of the United States, Congressional Budget Office, "Estimated Macroeconomic Impacts of the American Recovery and Reinvestment Act of 2009," March 2, 2009.

6 The Congress of the United States, Joint Committee on Taxation, "Estimated Budget Effects of the Revenue Provisions Contained in the Conference Agreement for H.R. 1, the 'American Recovery and Reinvestment Tax Act of 2009'," February 12, 2009.

7 Office of Management and Budget, "FY 2010 President's Budget. Analytical Perspectives: Building a High-Performing Government."

8 Ibidem.

9 Thomas Hopkins, "Regulatory Costs in Profile," Center for the Study of American Business, Policy Study No. 132, August 1996.

10 Senator Barack Obama, Mountain Range High School in Westminster, Colorado, September 29, 2008.

11 CNN, "Bush signs repeal of ergonomic rules into law," March 20, 2001.

12 FEI Survey 2008, http://fei.mediaroom.com/index.php?s=43&item=204

13 Foley & Lardner LLP, "The Cost of Being Public in the Era of SarbanesOxley," August 2007.

14 Office of the Special Inspector General for the Troubled Asset Relief Program, "Quarterly Report to Congress," April 11, 2009.

15 Judicial Watch, "Judicial Watch Forces Release of Bank Bailout Documents," May 13, 2009.

16 Vern McKinley, Gary Gegenheimer, "Bright Lines and Bailouts: To Bail or Not To Bail, That Is the Question," Cato Institute, April 20, 2009.

17 Ryan Ellis, "Four Horsemen of the Financial Panic," Americans for Tax Reform, September 29, 2008.

18 Senator Barack Obama, Holland, Ohio, October 12, 2008.

19 Henry Hanzlitt, "What Spending and Deficits Do," The Freeman, Volume 27, Issue 2, February 1977.

20 Greg Mankiw, "Never mind," Greg Mankiw's blog: Random Observations for Students of Economics, May 16, 2009.

21 President Elect Barack Obama, January 9, 2009.

22 Cato Institute, "With All Due Respect . . .," op.cit.

23 The Congress of the United States, Congressional Budget Office, "Estimated Macroeconomic Impacts . . .," op.cit.

24 Ibidem.

25 Ibidem.

26 Ibidem.

27 Bureau of Labor Statistics, "The Employment Situation: June 2009," July 2, 2009.

28 Lesley Clark, "President Obama warns mayors not to 'waste' stimulus money," McClatchy, February 20, 2009.

29 United States Senate, Senator Tom Coburn, "100 Stimulus Projects: A Second Opinion," June 2009.

30 Institute for Energy Research, "Cap and Trade: Eight Reasons why cap and trade harms the economy and reduces jobs."

31 The Congress of the United States, Congressional Budget Office, Testimony of Peter R. Orszag, "Implications of a Cap-and-Trade Program for Carbon Dioxide Emissions," April 24, 2008.

32 Institute for Energy Research, op.cit.

33 Nicolas Loris, Ben Lieberman, "Capping Carbon Emissions Is Bad, No Matter How You Slice the Revenue," The Heritage Foundation, May 14, 2009.

34 William W. Beach, David W. Kreutzer, Karen A. Campbell, Ben Lieberman, "Son of Waxman-Markey: More Politics Makes for a More Costly Bill," The Heritage Foundation, May 18, 2009.

35 Ryan Balis, "CAFE Standards Kill: Congress' Regulatory Solution to Foreign Oil Dependence Comes at a Steep Price," National Policy Analysis, National Centre for Public Policy Research, July 2006.

36 Ibidem.

37 "The High Cost of Cap and Trade: Why the EPA and CBO Are Wrong," The Heritage Foundation, Fact Sheet #34, June 24, 2009.

38 "Obama's Global Tax Raid," The Wall Street Journal, May 7, 2009.

39 J. D. Foster, Curtis S. Dubay, "Obama International Tax Plan Would Weaken Global Competitiveness," The Heritage Foundation, May 5, 2009.

40 Alex Ritson, "European 'tax havens' face Obama action," BBC News, May 6, 2009.

41 U.S. Department of the Treasury, "General Explanations of the Administration's Fiscal Year 2010. Revenue Proposals," May 2009.

42 Robert Carroll, "Bank Secrecy, Tax Havens and International Tax Competition," Tax Foundation, May 2009.

43 Ibidem.

44 Matthew J. Slaughter, "How U.S. Multinational Companies Strengthen the U.S. Economy," Business Roundtable and United States Council Foundation, Spring 2009.

45 Mihir Desai, C. Fritz Foley, James R. Hines Jr., "Domestic Effects of Foreign Activities of Multinationals," American Economic Journal: Economic Policy, Vol. 1, No. 1 (February 2009).

46 Congressional Research Service, Library of Congress, "Value-Added Tax: A New U.S. Revenue Source?," August 22, 2006.

47 European Commission, "Taxation and Customs Union -- How VAT works," retrieved on June 17, 2009.

48 The Congress of the United States, Congressional Budget Office, "Reducing the Deficit: Spending and Revenue Options," February 1993.

49 The Congress of the United States, Congressional Budget Office, "Effects of Adopting a Value-Added Tax," February 1992.

50 Daniel J. Mitchell, "Beware the Value-Added Tax," The Heritage Foundation, May 16, 2005.

51 Ibidem.

52 Lori Montgomery, "Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look," Washington Post, May 27, 2009.

53 The Congress of the United States, Congressional Budget Office, "Reducing the Deficit . . .," op.cit.

54 U.S. Department of Labor, Office of Inspector General, "Concerns Persist with the Integrity of Davis-Bacon Act Prevailing Wage Determinations," March 30, 2004.

55 Sarah Glassman, Michael Head, David G. Tuerck, Paul Bachman, "The Federal Davis-Bacon Act: Prevailing Mismeasure of Wages," Suffolk University, Beacon Hill Institute, February 2008.

56 The Congress of the United States, Congressional Budget Office, "Budget Options," February 2001.

57 Sarah Glassman, op.cit.

58 Institute for Justice, "Removing Barriers for Opportunity: A Constitutional Challenge to the Davis-Bacon Act," Litigation Backgrounder.

59 U.S. Department of Labor, Office of Inspector General, op.cit.

60 The Congress of the United States, Congressional Budget Office, "Budget Options," February 2001.

61 The Congress of the United States, Congressional Budget Office, "Budget Options," February 2007.

62 The Congress of the United States, Congressional Budget Office, "Budget Options," February 2005.

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Authors
    Ciesielska, Monika
  • Institutional Authors
    Americans for Tax Reform
    Center for Fiscal Accountability
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2009-18276
  • Tax Analysts Electronic Citation
    2009 TNT 154-31
Copy RID