Tax Expenditures: The Invisible Hand of the Government and Runaway Prices

Mettler discussed the concept of the Submerged State and how the government designed policies through tax expenditures (tax credit, breaks and subsidies), to avoid the image of an enlarging government whilst providing social benefits to the people. I will discuss some of the motivation for the government to adopt this approach that has achieved the durability politicians sought, but economic unsustainability that impacts Americans as a whole.

Designing Policies to be Invisible

In her book, Mettler shared that many Americans were unaware that they received governmental support through initiatives such as the Home Mortgage Interest Deduction and Student Loan Interest Deduction. On that front, policies through tax expenditures had created the impression of smaller governmental control following the Great Society period. Instead, these policies worked quietly in the background. The lack of awareness also meant little debate on the matters, thus ensuing durability. For example, the Home Mortgage Interest Deduction had been in place since 1965 despite minor tweaks along the way.

Beyond the debate of creating enlarged or smaller governmental control, policies that work through tax expenditures yield efficiency in the Administration. With an already well-established institution of the IRS to administer tax breaks or credits, there is relative ease of implementation with low administration costs. The policy would also reach every Americans as they file for taxes. Contrasting this to direct policies, where specific agencies had to be established to administer the policies, and policy beneficiaries have to engage with the relevant government agencies. Thus, policies through tax expenditures provide equity in access to the benefits at low administration costs to the government. The flipside is that a lack of dedicated institutions to oversee the policy implementation could result in lack of overview of trends and to exercise control mechanisms to mitigate negative effects of the policies. The lack of overview could also bring about an abuse of the policy.

Policies that utilizes tax expenditures and subsidies worked through the market to provide social benefits to citizens. This has indirect and multiplier effects for the market. Taking the Home Mortgage Interest Deduction as an example: the policy encourages citizens to take up loan to purchase their homes. The resultant effect creates valuable jobs in many industry sectors including construction, transportation, banking, advertisement and so on. Designed properly, such policies develops key industries and become self-sustaining.

Given the various reasons, policies through tax expenditures presented a very attractive approach to politicians, and many presidents have used this approach in some form to push their agendas and initiatives.

Over-consumption and Runaway Prices

Entrusting the market to implement and manage public policies is not without risks. After all, the mission objectives of government and market often do differ. Whilst government seeks to shape social behavior, deliver social benefits and to maximize social value as a whole, industries and corporations seek to maximize value for shareholders. Without clear oversight and regulation, policies through tax expenditures encourage consumption, or worse still, overconsumption. This drives up demand unnecessarily. As the market controls supply, price increases. This is evidence in sharp rises in housing prices, college fees and medical costs at rates higher than inflation since inception of the policy. The increasing cost of living worsen the widening income gap, with the poor becoming poorer. Yet, the tax credits and breaks bring ever dwindling tax receipts for the government to channel funds to help these poor. Removal of tax expenditure could bring in $1 trillion each year that could fund social and other programs directed to target groups. Unfortunately, such policies remain submerged from public scrutiny and faces headwind for any policy review. (609 words)

References:

http://www.irs.gov/taxtopics/tc456.html

http://www.irs.gov/publications/p936/ar02.html

http://prospect.org/article/affordable-care-act-and-submerged-state

http://www.realclearpolicy.com/articles/2013/06/03/the_shadow_welfare_state_533.html

http://www.newrepublic.com/book/review/the-submerged-state-suzanne-mettler

http://www.nextnewdeal.net/dredging-submerged-state-how-democrats-lost-their-nerve

http://www.huffingtonpost.com/2013/10/03/health-care-costs-_n_3998425.html

http://www.huffingtonpost.com/2013/01/04/college-textbook-prices-increase_n_2409153.html

A Review of Policy Design in Mitigating Carbon Emissions - Carbon Tax or Trading

In 2009, the House of Representatives narrowly passed the American Clean Energy and Security Act (ACES) (H.R.2454) by a vote of 219-212. The bill proposed a carbon cap-and-trade system and was seen as US’s answer on its commitment towards climate change to the then upcoming Copenhagen Climate Summit. However, the bill failed to pass the Senate. This paper seeks to review how policy design favored cap-and-trade over carbon tax, and suggests reasons for it failing to be passed.

Carbon Tax: A Penalty to All

Economically, a carbon tax is the most direct and efficient approach to curbing carbon emissions. It directly accounts for the social costs associated with greenhouse gas emissions. A published tax rate provides certainty on the tax amount payable. However, it is uncertainty if the pricing mechanism would effectively reduce emissions.

What is clear with a carbon tax is that it presents a clear message of “You use, you pay”, and a perception of “No Way Out”. Consumers will most likely be at the receiving end as businesses passes the additional costs to them. The carbon tax is also seen as a regressive tax that affects the poor in particular especially when applied to goods such as energy and food which are price inelastic. Businesses could also suffer as they lose the competition in the global economy.

Many overseas countries are facing similar problems when imposing a carbon tax. An example was Australia, where former Prime Minister Julia Gillard’s carbon tax cost resulted in her Labor-Greens coalition government being voted out, and the current government plans to reverse the unpopular ruling. These various factors presents a lose-lose-lose situation, which could explain the lean towards a cap-and-trade approach.

Carbon Trading: Market Driven Approach

The market driven cap-and-trade system provides a “Way Out” for businesses and industries, as companies that are energy efficient could sell their allowances to net emitters. This mimics the Acid Rain program to limit SO2 levels. Market forces manage the pricing, whilst the invisible hand of the government controls by setting the emission limit. Such a cap also provides certainty on achieving the original intent – to mitigate greenhouse emission levels. 

A key issue lies with the amount of greenhouse gases to limit. An overly-high limit poses little effect and drives down the carbon costs, which might disincentive industries to adopt greater energy efficiency, as they choose to acquire additional allowances. Such was the case when the EU introduced its emissions trading program, where a higher emissions limit was set. Conversely, an exceptionally-low limit could artificially inflate costs, affecting costing of goods and global competitiveness. The government would not benefit from a cap-and-trade program if the initial allocation of allowances was free, or “grandfathering”, compared to the carbon tax, which would provide tax revenue that could be channeled to other social and environmental initiatives.

An Elites’ Debate

Through my research, it is apparent that elites and organized interests groups dominated the debates. There were questions on the approach to manage emissions, the social costs to impose, and whether climate change is actually happening. In contrast, the public, whilst generally believing in climate change, have not mobilized towards the cause. The cost-benefit simply does not make sense. The cost associated with the legislation would be too high, with no clear benefit especially when greenhouse emission is a global issue. Why should Americans pay a penalty for their carbon emissions when other countries could freely pollute. Without global consensus, any governmental actions on emission levels would at best be a symbolic gesture, much like the ACES act. That could explain why the focus has shifted towards encouraging greater energy efficiency and renewable energy generation. 

(606 words)

References:

http://www.theguardian.com/environment/2013/jan/31/carbon-tax-cap-and-trade

http://www.lse.ac.uk/GranthamInstitute/publications/Policy/briefingNotes/2011/case-carbon-pricing-Bowen.aspx

http://www.stanford.edu/~goulder/Papers/Published%20Papers/Carbon%20Taxes%20vs%20Cap%20and%20Trade%20-%2015%20Aug%20'13.pdf

http://www.ieta.org/index.php%3Foption%3Dcom_content%26view%3Darticle%26id%3D207:why-emissions-trading-is-more-effective-than-a-carbon-tax%26catid%3D54:3-minute-briefing%26Itemid%3D135

http://beta.congress.gov/bill/111th-congress/house-bill/2454?q=%7B%22search%22%3A%5B%22H.R.2454%22%5D%7D

Legislative Process and its Impact on Lawmaking – A Case Study on Moving Ahead for Progress in the 21st Century Act

The Moving Ahead for Progress in the 21st Century Act (MAP-21), which primarily reauthorize funding for surface transportation, was signed into law by President Obama on June 6, 2012 (P.L. 112-141). This paper seeks to review how the legislative process contributed to the eventual passing of the $105-billion bill by both houses of Congress on June 29, with comfortable margins—373 to 52 in the House and 74 to 19 in the Senate.

Motivations for MAP-21

After expiring on September 30, 2009, the surface transportation program had to be temporarily extended 9 times while Congress debated its reauthorization. This caused uncertainty for states and others that rely on federal transportation funding, and affected transportation planning and implementation with an already deteriorating public infrastructure.

A major issue with the reauthorization bill was the cost, with some people questioning the increase in transportation funding at a time of widening federal deficits. Indeed, CBO estimated that enacting the legislation would reduce budget deficits over the 2012-2022 period by $16.3 billion, but the implementation would lead to discretionary spending of $95.9 billion over the 2013-2017 period. Of that amount, the spending on transportation programs would total $94.3 billion, which reflects estimated obligation levels for 2013 and 2014 that are approximately equal to the obligation levels for 2012, adjusted for inflation. The Senate and the House both sought to consolidate the number of programs in the federal-aid highway program to focus priorities and resources on key national goals, whilst maintaining the same funding level.

The Legislation Process for MAP-21

The federal legislation process took place separately in both houses.

Senator Barbara Boxer [D-CA] introduced bill S.1813 to the Senate on November 7, 2011. The bill seemed to follow a rather Orthodox law-making process. It was referred to the Senate Environment and Public Works Committee. The bill was mark-up on November 9, 2011, and after about 3 months, on February 6, 2012, the Committee submitted the report for consideration in the Senate. What followed was a long process where 317 amendments were proposed and debated. The Senate bill was finally passed with amendments on March 14, 2012 with a vote 74 to 22. Of those who voted in favor for the bill, there were 51 Democrats, 21 Republicans and 2 Independents who were caucusing with the Democrats. All those voted against the bill were Republicans.

Representative John Mica [R-Fl] introduced bill H.R.4348 to the House on April 16, 2012. In contrast with the Senate bill, H.R.4348 took a rather Unorthodox law-making process. Speaker John Boehner referred the bill to 5 committees concurrently: (i) Transportation and Infrastructure, (ii) Ways and Means, (iii) Natural Resources, (iv) Science, Space and Technology, and (v) Energy and Commerce. The bill went to the floor with only 3 amendments, and was passed in 3 days, on April 18. As explained by Sinclair, when a number of committees work on a bill, many perspectives and interests are represented in the bill-drafting process. If the committees come to an agreement among themselves, the supportive coalition for the bill becomes formidable. This is reflected in the vote count of 293 in favor to 127 against.

H.R.4348 was submitted to the Senate on April 19. On April 24, the Democrat-majority Senate struck all clauses of the bill after the Enacting Clause and substituted with the language of S.1813. It also insisted on its amendment, requested for a conference to reconcile the differences, and appointed conferees which included the sponsor for S.1813, Senator Boxer. The House agreed to the conference on April 25 and appointed bill sponsor Representative Mica as conferees, along with several members from the 5 committees which the bill was referred to.

The conference between the 2 houses was held on May 8. Between May 17 and June 21, the House debated through several motions to instruct conferees, and passed instructions that related primarily to funding amount and funding limits. On June 28, the conference report H. Rept. 112-557 was filed. The amended bill became an omnibus bill. In addition to reauthorization of the surface transportation program, the bill included several non-transport related programs including:

1. Set interest rate that pension plans use to measure their liabilities, increase pension premium rates for both variable and flat rate premiums paid to the Pension Benefit Guaranty Corporation, and establish a cap on the variable rate premium

2. Secure Rural Schools and Payments In Lieu of Taxes programs

3. Reduce the additional Medicaid payments to Louisiana that it will receive based on prior declarations of federal disasters

4. Reduce mandatory payments to states that have completed certain reclamation projects on land formerly used for mining

5. National Flood Insurance Program

6. Retain an interest rate of 3.4 percent on all new subsidized student loans until June 30, 2013

7. Raise additional revenue by increasing the ability of businesses with excess assets in their pension funds to use them for retiree health and life insurance benefits, and by defining businesses that make roll-your-own machines available for consumer use as tobacco manufacturers

A careful review of the conference report also showed that for the surface transportation reauthorization, the text essentially was a combination of both the House and Senate bills, focusing on the shared priority of accelerating project delivery. There were also new provisions that will maintain substantive environment and public health protections while streamlining the creation and use of documents and environmental reviews, to enhance the efficiency and accountability in the project delivery process.

On June 29, both houses voted and agreed on the report, with very high margin. The House vote consisted of 373 supported and 52 objected. The Senate vote consisted of 74 supported and 19 objected. Only Republicans objected, largely with concerns on the legislation’s financial aspects, including the use of general revenues transferred to the Highway Trust Fund to make up for anticipated shortfalls.

Cooperation for Bipartisanship Agreement

Sinclair suggested that by employing special procedures and practices, a bill is considerably more likely to pass. In the case of the MAP21 act, these included multiple referral, an omnibus bill and post-committee adjustments where both houses reconciled their disagreements. The Democrat-majority Senate and the Republican-majority House had to work together to ensure that most interests are met in order to push the bill forward. The bill presented the philosophy from both parties: efforts to reduce budget deficit while maintaining current spending levels; streamline processes to cut red tape; demand greater federal oversight and accountability with established performance measures.

When the bills are individually passed in each house, the vote came largely from the majority-party. It is only when the conference report brought all considerations together, that the bill received a near unanimous agreement, from both Republicans and Democrats.

Notwithstanding this, the bill could have been passed due to reasons that could go beyond the legislation process. With a divided Congress and an ongoing Presidential election year, there was pressure for both parties to signal to the public that each party was able to get the job done, even if they had to come to a compromise. This was especially so at the onset of the debt limit crisis in the prior year. The legislation process merely set the stage for both parties to put together all of their interests, and the condition increased their willingness to compromise, to agree. Nevertheless, this is still an extraordinary accomplishment.

(1241 words)

References:

http://beta.congress.gov/bill/112th-congress/house-bill/4348?q=%7B%22search%22%3A%5B%22h.r.4348%22%5D%7D

http://beta.congress.gov/bill/112th-congress/senate-bill/1813

http://cbo.gov/publication/43368

https://www.enotrans.org/eno-brief/map-21-incremental-bipartisanship-at-its-finest

http://thehill.com/policy/transportation/235283-highway-bill-conference-report-released

http://www.asce.org/CEMagazine/Article.aspx?id=25769810182#.U2qIxPl6a9w