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Senate Finance Committee Examines Impact of CHIP Tobacco Tax Hikes
Recently, the Senate Finance Committee convened to discuss an important but often controversial topic: tobacco taxes.
Committee chairman Senator Ron Wyden opened the hearing by accusing the tobacco industry of tax evasion, citing more than $2 billion in tax revenue that supposedly should have been raised since the Child Health Insurance Program Reauthorization Act (CHIPRA) was passed in 2009.
You might recall these measures as going against President Obama’s promise not to raise taxes on anyone making less than $250,000 per year.
CHIPRA provides health insurance for roughly 8 million uninsured children, and it has intended to fund this health insurance by ramping up excise taxes on tobacco products.
While taxes normally just burden and slow markets, the post-CHIPRA taxes are uneven; some products such as cigarettes, light cigars, and “roll-your-own” (RYO) tobacco are taxed at dramatically higher rates than pipe tobacco and large cigars.
Much of the alleged tax evasion Senator Wyden referred to is found in companies changing how they sell tobacco to take advantage of different tax rates. For example, the sale of pipe tobacco was ten times higher very soon after CHIPRA’s passage, and companies began adding grams of tobacco to light cigars in order to make them qualify as heavy cigars.
One of the underlying questions of the hearing was whether these actions qualify as “tax evasion” or “tax avoidance” as Senator Hatch put it. Arbitrary changes in taxation may just incentivize private firms in an unintended manner?
This question became more and more relevant as Senator Wyden pressed John Manfreda, Administrator of the Alcohol and Tobacco Tax and Trade Bureau (TTB), to explain why the TTB hadn’t enforced some of these cases of mislabeling, to which Manfreda responded that it simply isn’t the TTB’s jurisdiction to govern how private companies make their products.
Senator Wyden mentioned several times that tobacco companies were supposedly burdening American taxpayers, which is an odd accusation considering Congress started this process in the first place with ill-advised levy hikes.
Like other so-called “sin taxes,” high taxes on tobacco products hurt low-income Americans the most. But high cigarette taxes have also created a booming black market for smuggling..
Scott Drenkard of the Tax Foundation spoke of the “effective prohibition” on cigarettes in the most tax-heavy states; a situation that leads to smuggling and counterfeiting tobacco products.
Currently 57% of cigarettes in New York City, where a pack of smokes costs $14,are smuggled from different states, and one smuggler was found to be using the proceeds to fund the terrorist group Hezbollah. In addition the international trade of untested, unregulated counterfeit cigarettes is growing, with black markets like China’s producing 400 billion possibly dangerous cigarettes each year.
As the hearing neared its conclusion, and the mass of information surrounding this issue became clearer, proposals were offered up.
Senators Wyden and Hatch pressured the TTB to begin enforcing taxes on these firms alleged to be guilty of evasion, while Dr. David Gootnick of the Government Accountability Office suggested making all taxes of all tobacco products equal. A third answer to the problem seems obvious, yet it was only really mentioned by the Tax Foundation’s Scott Drenkard: Why not follow historical principle and ease government restrictions on tobacco products? Why not simply lower taxes across the board? Tax parity would be the first step so that all products are equal in the eyes of the law.
When the market is restricted, dangerous black markets develop, and unpredictable negative externalities emerge. With the health effects of tobacco products well-known to the general public and warning labels on every pack of cigarettes, American consumers should be allowed to make their own decisions and buy these products free of excessive and confused taxes.
Politicians dealing with these challenges would also do well to learn of the unintended consequences of constantly relying on an “easy target” like cigarette taxes.
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This is a follow-up to the earlier blog post, Corporate Inversion: Fleeing from the Terrifying Tax Code.
The fervor for inversion is not slowing down, especially now that Congress is in recess until September. With two bills left behind, H.R. 4679 in the House and S. 2360 in the Senate, Congress could address the issue during their short September session or in the subsequent lame duck session. While President Barack Obama and Treasury Secretary Jacob Lew condemn businesses as “unpatriotic” for trying to relocate, few policymakers attempt or even suggest specific comprehensive reforms to the tax code, despite admissions that the rate is the real problem. Instead, both bills retroactively change the IRS requirements for inversion to trap businesses in the U.S.
The high corporate tax rate reduces competitiveness for U.S. companies, causing many to analyze the costs and benefits of moving their headquarters abroad. Under the current law, some not-yet-incorporated, fledgling businesses will also decide that the U.S. is not an ideal country in which to open shop. The U.S. corporate income tax rate sits at 35 percent, considerably higher than the European Union average rate of 21.34 percent or the OECD average of 24.11 percent. Operating with at least a 10 percentage point tax advantage leaves foreign competitors with significantly more income for future investments, higher wages, or lower prices, with which U.S. companies struggle to compete.
With their additional expendable revenue, foreign corporations are increasingly viewing U.S. companies as valuable investments. They can buy U.S. competitors to take advantage of American resources and infrastructure, yet maintain their headquarters abroad. As a recent Wall Street Journal article reported, foreign businesses use their additional cash after paying taxes to outbid their U.S. counterparts trying to buy U.S.-based businesses. The article specifically cites a situation in which Emerson, a manufacturing and technology company based in St. Louis, attempted to acquire American Power Conversion (APC) in Rhode Island. Despite an offer of over $5 billion, France-based Schneider Electric outbid Emerson by about $1 billion, turning once-American APC into a French company.
Without true tax code reforms, Congress will continue to see erosion of its tax base. Congress’s misguided attempts to stop inversions could actually expedite the erosion by preventing new companies from incorporating in the U.S. President Obama has threatened unilateral action to stop inversions, but only comprehensive tax reform will rectify the problem that Congress has created with the complicated tax code.2 Comments | Post a Comment | Sign up for NTU Action Alerts
In honor of the economist Milton Friedman’s birthday, NTU Foundation once again opened up the polls to taxpayers across the country to see which fundamental tax system change they support. As many Americans know, Friedman was a supporter of tax reform in favor of broadening the base and increasing bureaucratic efficiency. This poll has become a tradition for Americans as NTU and Foundation continue to research the different revenue collecting proposals in Congress and state capitols. Taxpayers were given several different options to choose from:
What did taxpayers vote for this year? Over 170 people voted in our poll with half voicing their support for the FairTax. The Flat Tax came in second at 39 percent. Demand for a National Transaction Tax, Keeping the Current System, and a VAT fell into the single digits, similar to last year.
Thanks for everyone who voted in our poll this year! We will be doing more of these as Congress continues to propose alternatives and marginal changes to our current tax system.
Have a thought or question on the FairTax or any of the other options? Leave a comment below and our NTUF experts will get back to you!
* Email me if you want to see Rep. Wise's BillTally report from the 102nd Congress. NTUF has back to the 107th Congress online.0 Comments | Post a Comment | Sign up for NTU Action Alerts
Rarely is there a policy or legislation that doesn’t have a cute acronym to help legislators sell it to the public. The Foreign Account Tax Compliance Act is no different. FATCA is the stunted acronym for “fat cat,” a term used frequently by President Obama, when referencing the so-called rich eluding taxes. However, FATCA isn’t just about targeting cartoonish tax-eluding billionaires - it is already causing trouble for many making well-below seven figures.
According to the IRS if you are a US individual holding just over $50,000 in foreign financial assets on the last day of the tax year, you too will be under the scrutiny of FATCA. But it isn’t just US citizens who are facing the consequences.
The vague wording in FATCA is extending its reach beyond US “citizens” to US “persons.” According an article in The Economist, foreign banks and other financial institutions must choose between turning over information on clients who are “US persons” or handing 30 percent of all payments of US source income as well as gross proceeds from the sale of securities that they receive from America to the IRS. “US persons” not only includes citizens but also current and former green card holders and non-Americans with various personal and economic ties to the United States, such as marriage. Of those non-American citizens impacted, it appears that Canadians will be the most directly affected.
Take Ruth Anne Freeborn for example. After the passage of FATCA in 2010, Oklahoma born US citizen Freeborn had to choose “between country and family.” Freeborn has been living in Canada for over 30 years with her Canadian husband who receives an income of $51,000 a year as an electronics technician and is the sole income earner in the family. Despite her family’s modest income, Freeborn was fearful enough of FATCA’s overreach to renounce her US citizenship. Freeborn explained, “My decision was either to protect my Canadian spouse and child from this overreach or I could relinquish my US citizenship.”
It is unlikely Freeborn’s Canadian family will be alone in their decision. Many banks are giving their American associated customers the boot to avoid entanglement with FATCA. It may not be hard for Americans to choose their family’s financial wellbeing over their US citizenship. According to FATCA News “any Canadian holding a dual US-Canadian citizenship is a US person and will be impacted by the FATCA provisions. Individuals who have spent a large amount of time in the US are also considered US persons. Others include estates, trusts, US corporations and partnerships.” Even some Canadian “snowbirds” who travel to America for a small portion of the winter will be subject to FATCA.
This is just a small snapshot of the rifts FATCA could be creating across the world – either causing discomfort for anyone interacting with Americans, or making any U.S. “person” persona non grata abroad. If these experiences become more widespread, it seems more than just “fat cats” are getting a shave.0 Comments | Post a Comment | Sign up for NTU Action Alerts
Congressman Paul Ryan (R-WI), the Chairman of the House Committee on the Budget, recently spoke at the American Enterprise Institute about strengthening the safety net for disadvantaged and unemployed Americans. Specifically, he reflected on the state of public benefits for the poor and how, through his proposal of an Opportunity Grant pilot program, welfare programs could be greatly improved. The transcript and recorded video can be found here.
The Opportunity Grant would streamline existing sources of federal funding into one program. States could then apply for that funding, and would be eligible for federal assistance so long as the anti-poverty initiatives receiving the support adhered to certain guidelines:
Overall, Congressman Ryan’s theme is to allow the federal government to support state programs, not to supplant their efforts. Since the Great Society programs of the 1960s, many local efforts have become dependent on federal funds, thus becoming defacto federal operations. Congressman Ryan’s proposal is an attempt to address that by making federal welfare funding streams more efficient.
Another proposal from Congressman Ryan is to increase the Earned Income Tax Credit for childless workers. This would be accomplished by lowering the minimum eligibility from 25 to 21 and to double the maximum credit to $1,005. To pay for this reform, he would not raise taxes but instead cut funding for less effective government programs, such as subsidies for renewable energy businesses. His goal is to “stop programs that don’t work and support the programs that do”.
Congressman Ryan also addressed the need to expand access to education. By bringing “more competition to the college cartels” through accreditation reform, the cost of schooling could be reduced as more educational institutions are available.
Criminal justice reform was also discussed at the event, particularly as it related to helping non-violent offenders contribute to the economy. Instead of convicting those individuals for maximum sentences, Congressman Ryan proposed counseling and work programs in order to reduce recidivism and prepare them to enter the workforce.
He concluded by proposing to cut regulatory red tape by requiring that future regulations be approved by Congress. If a regulation disproportionately affects low-income families, then the agency would be required to defend it on record for its actions. In a bid to improve collaboration between government and taxpayers, Congressman Ryan invited anyone to comment on his proposals via an email to ExpandingOpportunity@mail.house.gov.
After the Chairman spoke, there was a roundtable discussion which included Ron Haskins, Stuart Butler, and Bob Woodson. Along with the Congressman, each expert emphasized different aspects of aiding Americans in poverty. Bob Woodson noted that the poor in America face different barriers to economic prosperity. “Both people on the left and the right have myths about the poor,” he said, and categorizing people only as victims does not help individuals overcome challenges posed by poverty. The discussion conveyed the need to collaborate and to focus on solutions that are proven to be successful for lifting Americans out of financial difficulty.
The problem is not just academic. According to the 2012 report by the U.S. Census Bureau, 48.5 million Americans live in poverty, 16 million of whom are children. Though the federal government spent over $1 trillion in 2012 on 80 (oftentimes overlapping) welfare programs, poverty continues to be a major economic issue. Legislators have always proposed reforms but many measures attempt to address the symptoms of poverty, rather than the root causes (education, health, and skills being major factors). On paper, much of what Congressman Ryan presented could help the disadvantaged, but they face significant political obstacles within the halls of Congress and the White House. By decreasing the costs of anti-poverty efforts while lowering the numbers of those actually in poverty, taxpayers and those in poverty both win. The question is whether or not Congress will choose to continue spending money on entrenched programs rather than take further risks on new ones.
Thanks to Ian Johnson for drafting this post.0 Comments | Post a Comment | Sign up for NTU Action Alerts
Corporate Inversion: Fleeing from the Terrifying Tax Code
“The American tax code is an anti-competitive mess.” Chairman Ron Wyden (D-OR) of the Senate Finance Committee stated the complicated problem quite simply in his opening remarks for the hearing titled “The U.S. Tax Code: Love It, Leave It or Reform It!” On July 22nd, the committee heard testimony from six witnesses on the recent flood of corporate inversions. Dozens of U.S.-based companies have decided to acquire competitors abroad in order to relocate their headquarters and lower their tax bills. U.S. corporations pay the highest income tax rate among OECD countries at 35 percent. When state taxes are included, U.S.-based businesses bear on average a 39.1 percent tax burden. In comparison, the OECD tax average is 25 percent, putting American businesses at a disadvantage.
The first witness, Robert Stack who is Deputy Assistant Secretary for International Tax Affairs at the Department of the Treasury, made the statement upon which everyone could agree: “there is universal consensus that our rate is too high.” Obviously, the high U.S. corporate tax rate compared to other developed nations is the primary reason for corporate flight, yet disagreement remains on how to solve the problem. Chairman Wyden highlighted the issue facing Congress today, that “tax reform is moving slowly, inversions are moving rapidly.” For that reason he would prefer to enact punitive, retroactive laws to attempt to stop inversions immediately. Two such bills, S. 2360 in the Senate and H.R. 4679 in the House would seek to prevent further inversions in the short term by changing the IRS criteria for being considered inverted, based on the portion of stock the foreign entity holds and the volume of business activities which continue in the U.S. Both bills would be retroactive to May 8, 2014, but S. 2360 would sunset in two years, whereas H.R. 4679 would be permanent.
The Finance Committee’s Ranking Member Sen. Orrin Hatch (R-UT) would rather see immediate, comprehensive correction of the tax system. While Congress generally moves slowly, especially on taxation, the rapid loss of the tax base could be the impetus needed to force an overhaul. Sen. John Thune (R-SD) agreed, not wanting to punish corporations for leaving because “when you make bad rules, you get bad outcomes.” Sen. Rob Portman (R-OH) also felt “this is an opportunity for us to encourage solving the problem rather than dealing with the symptom.” Medical analogies were used to illustrate the issue, describing a short-term fix as a tourniquet which will stem the flow to allow for time to deliberate over changes to the tax code. However, as one witness mentioned, if the tourniquet is left on for too long with no resolution to the underlying problem, the result will be gangrene.
The witnesses floated a number of ideas on how to reform the tax code to discourage inversions. For instance, the U.S. could switch to a territorial tax system, in which the IRS would only tax multinational corporations for the income they generate domestically. One witness, Dr. Leslie Robinson, a business professor at Dartmouth, suggested simply ending deferral and lowering the rate. Either choice could improve upon the system currently in place. All business owners search for cheaper inputs to lower their costs and increase profits, and the U.S. tax burden has been targeted as an input well worth adjusting.
One reason corporate inversion is generating greater attention now is the consequent loss of tax revenue for the government. With mounting debt and yearly deficits, Congress and the White House cannot bear to see taxpaying companies move elsewhere. Treasury Secretary Jacob Lew outlined these concerns in a letter he sent to Sens. Wyden and Hatch and Reps. Dave Camp (R-MI) and Sander Levin (D-MI), who are Chairman and Ranking Member of the House Ways and Means Committee. Secretary Lew stated that, “What we need is a new sense of economic patriotism,” and “We should not be providing supporting for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes.” He implies that the current tax rate constitutes a “fair share,” but corporations considering inversion clearly view it differently. When operating abroad, U.S. multinationals face the same taxes that other corporations pay, but to bring profits home, they must comply with a much higher tax. The federal government has caused this problem through their own mishandling of the tax system, and now it is time for a permanent fix.2 Comments | Post a Comment | Sign up for NTU Action Alerts
High Corporate Taxes: One Explanation for America’s Painful Recovery
Just looking at the numbers, June seemed like an example of strong economic recovery, with the Dow growing, unemployment shrinking, and more jobs entering the economy. However, writing in The New York Sun economist Lawrence Kudlow found some problems brewing in the seemingly positive June jobs report:
But there were some important glitches in this good-news report. For one, worker wages remained soft, rising only 2% over the past 12 months. Total hours worked are 2.1% ahead of a year ago, suggesting that overall income and nominal GDP are growing at a relatively slow 4% rate.
Meanwhile, the U6 unemployment rate, which includes part-time workers who want better full-time jobs or folks who have given up, dropped only slightly to 12.1%. That’s still a historically high rate. And the labor-force participation rate was unchanged at 62.8%, a 30-year low.
One of the problems Kudlow highlights is that unemployment goes down in two ways—either more people are employed, or more people stop looking for work. He notes that while, “2.15 million people gained employment in June, 2.35 million dropped out of the labor force.” In order for the economy to have true increases in employment, businesses need to be able to freely add more positions to their payrolls. The answer to this problem is simple: stop holding the market back, and lower the corporate tax rate. With the highest effective corporate tax rate in the developed world, the U.S. is making itself into a much less desirable home for the kind of lucrative corporations that provide the economic growth that Americans need.
Kudlow cites a dynamic economic model released by the Tax Foundation that demonstrates the market potential currently being restrained by the 35-40% corporate tax. Cutting the tax to 25% would, “over ten years raise real GDP by more than 2 percent, increase private business-capital investment by more than 6%, boost worker wages by 2%, and increase total federal revenues by nearly 1%.”
In June, The Wall Street Journal published an op-ed regarding the fact that numerous corporations are doing exactly as feared and choosing to leave America in favor of kinder tax rates in places like Ireland, and why shouldn’t they? Medical technology firm Medtronic is planning to shift its principal executive offices to Ireland, which boasts a corporate tax of 12.5%, and according to The Wall Street Journal, corporate friendly countries are numerous.
Ireland isn't the only place with a more competitive tax policy. The near-40% U.S. average rate is almost double the 21% average in the European Union, or the 22% in Asia, according to KPMG. As we noted recently, about the only place outside of captive Marxist countries with a higher corporate tax rate than the U.S. is the United Arab Emirates. But its top rate of 55% is generally applied only to foreign oil companies.
By overtaxing, we are intentionally sending jobs, wealth and innovation away from the United States. The corporations that the current tax-and-spend administration seems so eager to hold back are the very entities that can bring vitality to the struggling American economy. Relieving them of excessively high tax burdens relieves the American people and helps put the economy on the road to recovery. The rest of the world knows this, and it’s high time our government caught up.0 Comments | Post a Comment | Sign up for NTU Action Alerts
A recent poll conducted by The Heritage Foundation found that in 2013 alone, a record 3,000 Americans living overseas voluntarily gave up their citizenship or green cards. The percentage increase of expats from 2012 was an overwhelming 221 percent, an increase never seen before in the United States. There has been much speculation as to what caused the concerning increase but the most discussed cause is the passage of the Foreign Account Tax Compliance Act (FATCA).
Passed in 2010, the act took effect on July 1st of this year and it nominally aims to crack down on the use of offshore banks and fight against tax evasion. By forcing foreign banks and other financial institutions to exchange data, the act is incentivizing many Americans to abandon their US citizenship to avoid FATCA’s complexity and overreach.
The previously mentioned Heritage survey revealed that 70 percent of Americans working and living abroad have considered giving up their U.S. citizenship because of FATCA.
Among those who have recently relinquished their US citizenship are some surprising and extremely well known faces.
Perhaps the most famous of the expats is singer Tina Turner. The US embassy in Bern Switzerland confirmed that the famous American singer signed a “Statement of Voluntary Relinquishment of U.S. Citizenship” in October 2013. Ms. Turner has been living in Switzerland since 1995 with her husband Erwin Bach, a German record executive. A Forbes article notes, “While it doubtless wasn’t tax motivated, our tax system doesn’t exactly help.” And “Concerning taxes, it is worth noting that Swiss rates are high.”
What makes FATCA so burdensome is how it inserts the U.S. Government into the financial matters of people who have as little as $10,000 in an account. Combine that with America’s already nonsensical “double taxation” system where citizens living abroad can owe domestic income taxes (even if they did not spend a day in the U.S.), and you have a big reason to cut bait, and almost no reason to retain citizenship any longer.
Social media pioneer, Eduardo Saverin received slightly more criticism from the media for his relinquishment of his US citizenship. The Washington Post explains that the Facebook co-founder renounced his U.S. citizenship to become a resident of Singapore. His spokesman countered, “We are unequivocal in our position that taxes were not a factor in his decision.” However, unlike Ms. Turner’s new home in Switzerland, Singapore’s taxes will favor Mr. Saverin.
Socialite, songwriter and former high-profile Democratic Party fund-raiser, Denise Rich also handed in her U.S. passport. Reuters explained in 2012 Rich renounced her citizenship in for an Austrian Citizenship “and, with it, much of her US tax bill.” But FATCA isn’t just causing the rich and famous to relocate their allegiance to tax-friendlier countries, the act is also having a rather large impact on over 7 million Americans who are living overseas.0 Comments | Post a Comment | Sign up for NTU Action Alerts
Alaska Bypass: Risk Without the Reward for Taxpayers
For the average consumer, a 12 pack of Coke may cost around $12. For some Alaskans, a 12 pack costs $15.15. But for postage stamp buying taxpayers, the cost for a 12 pack to get to an Alaskan consumer is $21. How can this be? The answer: the Alaska Bypass.
The Alaska Bypass is a program delegating responsibility for shipping over 100 million pounds a year in consumer items—mostly groceries—to off-road Alaskan villages to the United States Postal Service. Since it’s origins in 1972, the program has cost taxpayers $2.5 Billion.
Though rural Alaskans are paying around $3 more for a can of Coke than consumers in, say, Boston, many Alaskans believe the Alaska Bypass is the only program keeping isolated villages afloat. Postmaster General Patrick R. Donahoe told the Washington Post on Saturday “If you talk to people in Alaska, they’re very satisfied with this service.”
And why wouldn’t they be? One pallet that cost the Postal Service nearly $3,200, cost Alaska Commercial only about $485 in postage. The Washington Post explained that “not only is this well below commercial rates, it’s even less expensive—about 20 percent less per pound, postal regulators say—than customers anywhere else in the country pay to send a package via parcel post.”
But the Alaska Bypass isn’t just a treat for hungry Alaskans. The program has also been extremely beneficial to retailers as well. Retailers such as Coke are able to mark up their products by 30 percent or more. This is because the subsidy allows the retailers to pay the USPS roughly half of what it would cost to ship the goods commercially.
While this is all fine and dandy for Alaska and many retailers, the United States Postal Service is clearly suffering from the costs. Last year alone, the Alaska Bypass cost the USPS $77.4 Million.
With insufficient revenues, unfunded liabilities of nearly $99.3 Billion and debt to the U.S. Treasury of $15 Billion, the Postal Service may ask taxpayers to deliver relief if they can’t cut down on expenses like the Bypass.0 Comments | Post a Comment | Sign up for NTU Action Alerts
The Senate Finance Committee was expected to markup Sen. Wyden’s (D-OR) Preserving America’s Transit and Highways (PATH) Act today, but the vote was put on hold until after the week-long July 4th recess while the two parties continue to negotiate. The bill attempts to provide a short term funding boost for the long-troubled Highway Trust Fund, which is expected to run out of cash by late July as TheHill.com explains:
The traditional funding source for transportation projects has long been collected from the federal gas tax, which is currently set at 18.4 cents per gallon. Infrastructure expenses have outpaced revenue from the gas tax by about $16 billion annually in recent years, partly due to increases in fuel efficiency and a decline in driving.
The PATH Act purported to provide a $9 billion cash injection to the Trust Fund primarily by eliminating stretch IRAs (essentially raising taxes on investments and nest eggs by $3.5 billion over ten years), increasing taxes on heavy trucks, and a hodge-podge of other tax-loophole gimmicks, such as revoking passports for nonpayment of delinquent taxes. However, a Chairman’s modification to the underlying bill issued only a few hours before the scheduled markup struck the Heavy Vehicle Use Tax hike, which was expected to raise $1.3 billion over ten years, leaving a large gap in revenue and making it even harder for Senators to find agreement on the legislation.
This isn’t the first time the Highway Trust Fund has hit a “roadblock,” so to speak. The fund has been repeatedly bailed out with billions from the General Fund over the past six years. It’s clear another short-term measure is only kicking the can down the road and won’t address the program’s underlying problems. So far, lawmakers on Capitol Hill seem to be focused only on the revenue side of the ledger as one proposal after another has focused on raising taxes or even trying to find savings from the U.S. Postal Service to fund highways, truly a robbing Peter to pay Paul scenario. However there are some commonsense steps lawmakers should take first to restore solvency to the trust fund before turning to taxpayers with hat in hand.
Davis-Bacon is a blatant piece of special-interest, pro-union legislation. It hasn't come cheap for taxpayers. According to research by Suffolk University economists, Davis-Bacon has raised the construction wages on federal projects 22 percent above the market rate.
James Sherk of the Heritage Foundation finds that repealing Davis-Bacon would save taxpayers $11.4 billion in 2010 alone. Simply suspending Davis-Bacon would allow government contractors to hire 160,000 new workers at no additional cost, according to Sherk.
2. Stop raiding the Highway Trust Fund for non-highway projects: The Heritage Foundation’s recent issue brief on the infrastructure funding crisis highlights the way funds are diverted to state and local projects that are outside the intended use of the trust fund:
Transit—including light rail, trolleys, and buses—marks the largest diversion. In 2010 alone, it received 17 percent, or $6 billion, of federal highway user fees, even though it accounted for only about 1 percent of the nation’s surface travel. Despite receiving a portion of federal user fees for decades, transit has failed to reduce traffic congestion or even maintain its share of urban travel. For example, between 1983 and 2010, traffic volumes in the nation’s 51 major metropolitan areas increased by 87 percent, peak travel times in those areas increased by 125 percent, and transit’s share of passenger miles fell by one-fourth.
The transportation alternatives program is another diversion. From FY 2009 to FY 2011, the Federal Highway Administration obligated over $3.1 billion for these activities, which included pedestrian and bicycle paths and facilities, recreation trails, landscaping, environmental mitigation, and transportation museums. The current surface transportation law, Moving Ahead for Progress in the 21st Century (MAP-21), eliminated a handful of previously eligible activities but still required a 2 percent set-aside of total highway funding to fund the remaining ones.
3. Increase privatization and implementation of private-sector innovation: Decreasing the role of big government is the go-to solution for one problem after another, from student loans to health care to energy. Transportation and infrastructure are no different, despite the tendency of some to believe otherwise. The Mercatus Center has a recent working paper that outlines numerous ways increased privatization and adaption of private-sector technologies can address transportation costs and inefficiencies. As the paper explains:
The funding shortfalls result mainly from the lack of basic economic principles to guide the provision of public highway and aviation infrastructure. Prices are not aligned with users’ contributions to congestion and delays, investments are not based on benefit-cost analyses, and regulation inflates operating costs.
Increased privatization would help better align use and cost and would change user behavior based on economic benefits.
Of course, the bottom line is that we shouldn’t be spending money we don’t have. The coming Highway Trust Fund shortfall has been anticipated for a long time and not only have lawmakers waited until the eleventh hour to try to strike a deal, but funds have continued to be dispersed above the rate gas tax revenues have come in. Last-minute deal making rarely bodes well for taxpayers. We should reject tax increases and insist on a long-term solution that addresses our out of control spending problems first.
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