Are Private Tolls More Efficient Than Public Tolls?

On Tuesday, in PhillyDeals: Private toll roads are on their way back, Joseph N. DiStefano, after explaining the history of toll roads, predicts that private toll roads will be returning “to a neighborhood near you.” He may be right, and I have no evidence to prove that private toll roads will not be returning. The question is whether it makes sense to permit this to happen.

Once upon a time, some roads were privately owned, and DiStefano gives as an example the Lancaster Turnpike, which is now the state-owned Lancaster Pike that traverses the western Philadelphia suburbs. Yet even while private individuals were building and then charging for use of this turnpike, travelers also had the option of heading west on Conestoga Road, portions of which still exist, without paying tolls. Those in a hurry and with money used the Lancaster Turnpike, and those unwilling or unable to pay used the less convenient Conestoga Road. During World War One, the Commonwealth of Pennsylvania purchased the Lancaster Turnpike, took over its maintenance, and abolished the tolls. Today, there are two main differences between Lancaster Pike and Conestoga Road in those areas where both exist. Lancaster Pike has four lanes of travel in most places, whereas Conestoga Road has two lanes. And Lancaster Pike wins the “has more traffic lights” contest by a wide margin. Both roads are toll-free, and both get very congested during peak travel times, and are quite busy throughout most other times.

DiStefano reports that Pennsylvania’s governor, seeing his proposal to use tolls on I-80 to fund road and bridge repairs elsewhere in the state and his proposal to use the proceeds of a Turnpike lease for the same purpose having been rejected, is going to be pressured by a campaign for a return to private toll roads. This campaign, DiStefano tells us, is “a well-funded movement, with support in both parties” and is orchestrated “by building contractors, investors and their professional representatives.” These folks have placed the catchy tag of “Public-Private Partnerships” on their idea.

When the state builds a toll road, it borrows money, pays for the construction, charges tolls, and uses the toll proceeds to maintain the road and to pay off the loans. According to DiStefano, the Public-Private Partnership allows private companies to acquire money by borrowing – “from banks, investors, even federal loan programs” – pay for the construction, charge tolls, and use the toll proceeds to maintain the road and pay off the loans. As best as I can tell, there are two differences between public state toll road construction and private toll road construction. First, the private toll road needs to charge a higher toll in order to make a profit. Second, the private toll road is beyond the control of voters, because voters do not have the opportunity to speak at a ballot box with respect to the private companies the way they do with the state.

DiStefano quotes Frank M. Rapoport, who represents big contractors. He says, “Nobody’s against this,” although I’m guessing that by “this” he means turning over to the private sector the construction of additional highways, or even the construction of additional tolled lanes to existing highways. Rapoport cites, as support for his proposition, a Frank Luntz poll that “found commuters would pay more to drive, if it would cut traffic delays.” That survey proves an unsurprising outcome. Those with the means to do so would pay for access to roads with lower traffic density. But it doesn’t tell me that those roads need to be built with money borrowed by the state that is repaid through state-charged tolls or with money borrowed by private industry that is repaid through private tolls that are higher because the private investors seek a profit that is not an object for a state-operated highway system.

Though Rapoport claims, “Nobody’s against this,” I am, at least until someone demonstrates how the numbers play out. Someone needs to explain to me, and to everyone else for that matter, how a privately constructed and operated toll road is less expensive than one built by the state. In other words, if it is possible for a private company to build a road from point A to point B, or to add express lanes to Highway W, then why can’t the state do the same thing at a lower cost because of the absence of a profit motive? Perhaps the answer is that those who stand to gain by reason of privatizing highways lead the charge to protest “expansion of government” in response to state-built toll roads, but are waiting to jump at the chance to do the same thing themselves in order to squeeze out that profit. Those who cannot afford the higher private tolls would be left to fend for themselves. Perhaps that is the plan. Those who can afford to pay ride on the nice roads, and those who cannot afford to pay are stuck with the public roads that cannot be improved because of objections to “expansion of government.”

The explanations that I provided for my opposition to selling or leasing publicly owned toll roads, shared in Selling Off Government Revenue Streams: Good Idea or Bad?, in Are Citizens About to be Railroaded on Toll Highway Sales?, Turnpike Cash Grab Heats Up, five months later in Selling Government Revenue Streams: A Bad Idea That Won't Go Away, and a year later in Turnpike Lease: Bad Policy and Now a Bad Deal , The Pennsylvania Legislature Gets It Right and Killing the Revenue Idea That Won't Die, are not fully applicable when the road in question is a new road. At least with a new road, a public asset isn’t being sold off to the private sector. But it isn’t clear to me that the analysis of the numbers flips when shifting the question from selling or leasing an existing road to building a new one. Why do something as risky as privatizing highways when there are other options, such as the mileage-based user fees I discussed in Tax Meets Technology on the Road.

Indeed it is risky to transfer highway expansion to the private sector. It’s not a new idea, and one need only look at what happened in California when it permitted private industry to build and charge tolls for express lanes on Route 91 to learn how the ultimate bearer of risk is the taxpayer. More recently, the private enterprise building another California private toll road filed for bankruptcy. In the first instance, the financial mess was absorbed by taxpayers when the regional highway agency had to take over the Route 91 express lane operation. In the second instance, it remains unclear whether Caltrans will need to step in. A major factor in the Route 91 failure was the provisions in the agreement that prohibited the state from building additional lanes on the public portion of the highway. A major factor in the second failure was a huge increase in the tolls.

In How Do Toll Road Lessees Make a Profit?, I pointed out how the profit factor enters into the picture when private industry operates toll roads:

Lee Matchett shared what he calls "another twist" to the proposed arrangement. And indeed a twist it is. He noted that as one tries to determine why the lessee would fork over big bucks for the rights to take over what currently is the equivalent of a break-even enterprise, the answer must be found by "think[ing] through the deal from the other side." He asks:

What does the lessee have to gain, and what are the lessee's potential pitfalls?. One obvious potential liability for the operator would occur if there was a decrease in revenue caused by, say, a decrease in the vehicles deciding to use the toll road. What could cause this? Well, perhaps if alternative roads were improved, or if some other form of transportation were made available (mass transit, rail, etc.), maybe drivers would opt not to pay the increased tolls.

He then directed me to Patrick Bedard's column in the February issue of Car and Driver magazine.It's an important read for drivers, taxpayers, citizens, and voters. Not only are lessees extracting promises from state and local governments to refrain from making improvements to highways offering alternative routes to the leased toll road, they are also compelling the governments to make those alternate routes less attractive by reducing speed limits for no sensible reason (other than to steer vehicles onto the lessee's road) and by adding traffic signals and other restrictions that otherwise have no reason to exist.

Lee's point is important. I've consistently warned that the only way for private enterprise, in the business of making profits, to extract profits from a toll road that presently breaks even is to increase profits, cut services and maintenance, or both. So now the nasty twist to the deal is revealed. Revenue can be increased without raising tolls by coercing drivers to use the toll road. To the free market advocates, I direct this question: Is that how a free market works? If so, it's not a free market. Toll road lessees want to use public resources, namely, the legislature and highway department) to crush any opposition (the alternative roads). It's been happening in the corporate world, to no good end, and now invades the public sector through these "privatization" boondoggles.

What I said in Raising Revenue Through Tolls Isn't Simple concerning the imposition of tolls on existing toll-free roads applies to the idea of private construction and ownership of new roads or new highway lanes. I predicted what DiStefano indicates is about to happen:

Unfortunately, the issue [of tolling existing highways] isn't going to be resolved on the basis of economic analysis, the weighing of public costs and utility, the worth of user fees, or the disadvantages of selling government out to wealthy private interests. Instead, as has happened with so many federal and state legislative decisions during the past several decades, it will come down to politics. More specifically, it will come down to campaign contributions and the granting of favors. And we know, when that is how the game is played, the people with money and assets end up with more, everyone else ends up paying more, and the promised benefits do not materialize as promised. Someday Pennsylvanians and those using Pennsylvania highways are going to rub their eyes, blink, and ask, "How did this happen?" The response will be, "While you were sleeping."

Perhaps the eagerness with which advocates of private toll highways in Pennsylvania have adopted a modern phenomenon originating in California can be matched by their eagerness in reading carefully this warning from the story about the bankrupt private toll road project near San Diego: The outcome “may wind up testing the wisdom of public-private partnerships.” With a growing string of failures presented by their predecessors, the private toll road advocates in Pennsylvania have a lot of explaining to do, and the governor and the legislature have a lot of studying to undertake. The last thing Pennsylvania needs is another failed private sector promise.

If You Like What Tax Cuts for the Wealthy Brought Us, Are You Uneducated? Exploited? What?

My post, Is Public Truly Getting IRS-Congress Distinction?, has riled up Peter Pappas over at Tax Lawyer Blog. In If You Oppose Tax Increases You’re Stupid, Exploited or Dishonest, he makes a number of points in an attempt to rebut the propositions and conclusions that I set forth.

He doesn’t like the suggestion implicit in my inquiry, “Isn’t it time to counteract the deliberate misinformation campaigns and the foolish repetition of nonsense by the ignorant by stepping up public education, not only in schools but in workplaces, civic associations, and community centers?” He interprets this question as proclaiming my claim that “those who don’t agree with [me] and support tax increases on the rich are being duped by evil rich people.” I don’t see the word “evil” in my question. Yet in a footnote, Pappas concedes, “Maule and Leonhardt are smart enough to refrain from calling those who merely follow conservatives like Sarah Palin evil.” I didn’t use the word evil at any point in my post.

Pappas gets very exercised with my treatment of Sarah Palin’s complaint that “47 percent of households pay no federal income tax.” He particularly is unhappy with my conclusion that Palin’s determination that little of her income will be taxed at special low capital gains rates has triggered the oxymoronic status of her comments. He claims that my conclusion is “pure speculation,” that I have “no way of knowing what, if anything, Ms. Palin has discovered about her tax rates and what effect such a discovery has had on her political positions.” He claims I am “making a pejorative assumption about her motives simply because he doesn’t like what she says.” Actually, Peter, I can’t not like what she says when it is so challenging to figure out what she’s saying, at least until one looks at it carefully. In fact, a close reading of David Cay Johnston’s Tax Notes commentary, What Polls Tell Us About the Public's View of Taxes demonstrates the logic of parsing Palin’s statement. Johnston suggests that his readers try to reconcile Palin’s “sound bite line” with her support of tax cuts. Johnston analyzes why “almost half of households end up paying no income tax last year.” The first of two factors is the economy, which pushed millions of taxpayers into the ranks of the non-taxpaying unemployed. The second of two factors is the Obama $400 income tax credit. Johnston then identifies the people who fall into the category of “not paying income taxes.” He explains, “More than half were elderly – and two-thirds of those old folks got by on less than $20,000. . . . Among households that paid neither income nor payroll taxes, just one in seven was working age and made more than $20,000.” Johnston is confident that “most of those were parents with children making under $50,000 who already paid little tax because of the child tax credit.” Johnston then concludes, “This means that Sarah Palin was complaining about income tax cuts for those who work. Who would have thought Palin was against tax cuts, yet her own words show that either she opposes tax cuts for people with jobs or she has no idea what she is talking about.” Johnston voted for the latter. What Pappas overlooked was my reaction to Johnston’s conclusion: “Perhaps. Or perhaps she very well knows what she is up to, and didn’t realize that some of us are sufficiently blessed with brains and educated with knowledge and understanding of tax law to see through her sound bite rhetoric. Unfortunately, as Johnston notes, the applause she garnered from those in attendance ‘indicates how they failed to connect rather obvious contradictory dots.’” Palin has yet to share a comprehensive picture of her tax policy position, and she continues to make herself unavailable for questioning, as Johnston documents. If Sarah Palin is as upset as Pappas seems to be about how I – and others, not just Johnston – have analyzed her sound bite fest, she surely has more far-reaching platforms than those available to me to illuminate us. So until Palin decides to step up and share some sort of coherent tax policy analysis, it is reasonable to conclude that her quip about “47 percent of households pay no federal income tax” suggests some sort of distress that she’s among the 53 percent who do pay income tax, some of whom see themselves as bearing a greater burden than they should because of the 47 percent. So, to Pappas’ question, why am I “unwilling to give Ms. Palin and those who agree with her the benefit of the doubt?,” I reply, “Because she hasn’t taken the opportunity to erase the doubt, and thus must be trying to gain some sort of advantage by leaving it in place.”

Pappas then complains that I do not “take them at their word when they say they believe that the expansion of government and the confiscation of wealth from successful people is bad for America?” The answer is that “they” (and how the argument shifted from Palin to Palin and her followers is unclear) haven’t proven the basis on which they have reached their “beliefs.” In the face of studies and facts disproving their position, and despite an experiment that put their beliefs to the test and failed, they – or more specifically, leaders of the movement – continue to rile up their followers and recruits with scare tactics that suggest the government is rampaging through cities and towns with the efficiency of Attila the Hun. There’s nothing confiscatory about tax rates in the 30 percent range. Yet polls show that Americans who share the “beliefs” Pappas is defending think that they face tax rates in the 80 percent range. Misinformation has gone viral in America, and it doesn’t earn, at least from me, “benefits of the doubt.”

Pappas asks if I think “all small-government, anti-tax conservatives are motivated by self interest?” Yes, I do. Many are motivated by financial self-interest, as more than a few have admitted to me to my face or in emails. One person said, “I am selfish.” At least he’s honest. Others are motivated by the self-interest of being let alone by government, and that’s clear from their complaint that government is too big and intrusive. They want to do what they want however they want to do it, with no restrictions on their “freedom” and “liberties.” Some of their advocates, of course, claim that they take this anti-tax position because lower taxes mean more jobs, but the experience of the last decade taught us that lowering taxes, in the long run, caused jobs to vaporize, helped the rich get richer, and left everyone else with incomes and assets that declined in real terms.

Pappas claims that my attitude, and those of others who share my views, is “both arrogant and condescending . . . sophomoric and insulting . . .” He then proceeds to give as examples quotes from others, bolstering positions that I may or may not share. My point is that after listening to more than a few followers of the pied pipers of tax reduction, it is clear that they believe in facts that don’t exist, and are in a panic mode because they’ve been told so many boogie-man fables by the denizens of right-wing talk radio. How is it that they conclude people are being crushed by 80-percent tax rates when in fact the reality is different? I didn’t call these people stupid. I called them uneducated. Pappas knows the difference. I did call them exploited. Those who feel threatened by the tides that are sweeping clean the mess of the past decade will do anything to gather votes. Pappas claims I called these people dishonest. I didn’t. I do tag the leaders of this “me first” movement dishonest. Those who spread misinformation or twist facts to fool people or scare people are dishonest.

When Pappas presents his litany of the “many distortions that regularly ooze from the mouths of big government activists demanding higher taxes on the rich, “ he drags out the same worn-out, disproven chestnuts.

To rebut the claim that “the rich don’t pay their fair share of taxes,” he points to the statistics showing that those with higher adjusted gross incomes pay disproportionately higher shares of taxes. For example, 22 percent of income is earned by those who are in the top one percent of income, yet pay 40 percent of income taxes. What these statistics do not show is the amount of income excluded from adjusted gross income by the wealthy, with tax breaks and loopholes not attainable by those without the means to invest in tax shelters and other devices. And, of course, Pappas does nothing to define “fair share,” even though there is much support for the proposition that regressive taxes are not fair.

To rebut the claim, articulated by David Leonhardt, that “rich people . . . who oppose higher tax rates only do so for personal gain while the motives of pro-tax advocates like [me] are pure, Pappas simply alleges that Leonhardt, myself, and others are demonizing our opponents. But where did I claim that my motives are “pure”? In fact, my motives also rest in self-interest. I’m less concerned with maximizing my bank account because I’m more concerned about living in a nation that has untainted food and drugs, pothole-free roads, non-collapsing bridges, safe streets, healthy neighbors and strangers, clean water, an educated citizenry, honest merchants, efficient air traffic control systems, and all the other benefits of living in a civilized society not blemished with the shenanigans of lowly-taxed wealthy pouring money overseas while taking advantage of everyone else by lowering real income and selling tarnished goods. Unlike one correspondent who admits a desire to be left alone, I understand the essential nature of community bound together by something more than a shared sense of greed.

To rebut the claim, articulated by some unidentified person or persons, that “only those who favor tax increases on the rich and an expansion of government are capable of supporting policies that are counter to their private, narrow interests. Everyone else is either a dupe, a moron or a greedy exploiter of the masses,” Pappas merely admits that even though supporting higher taxes is contrary to my own economic interest – and on this, he’s right – I therefore think the anti-tax crowd is incapable of subordinating their “own narrow, private interests to the larger interests of the country as a whole.” I do think the leaders of this movement – a movement rooted in the greed policies of Enron, Bernie Madoff, Goldman Sachs, and others like them – are clearly subscribers to the “me first” philosophy of the me generation. And there are more than a few followers who have communicated directly to me that they are more interested in themselves than in anyone else. But I also think, based on my conversations with people, that once they come to understand the reality of the situation, and think about the consequences of cutting taxes on the wealthy while increasing federal expenditures, they understand that they are being fed a bunch of nonsense. So, yes, until they get straightened out on the facts, they are being duped because those who are trying to dupe them are succeeding.

To rebut the claim that “the poor are audited more often by the rich,” Pappas asserts the opposite and claims that the anti-tax crowd “doesn’t want you to know that because it doesn’t comport with their picture of a society run by greedy, rich men who serially exploit the masses.” The comments to Pappas’ earlier post, IRS Rarely Audits the Poor more than capably explain the reality.

To rebut the claim that the “rich take more from society than they give to it/the poor give more to society than they take from it,” Pappas argues that “[s]oak-the-richers believe that the only way to get the non-rich to support increased taxes on the rich is to convince the latter that the former are a bunch of greedy freeloaders living off the backs of the working class. They euphemistically and dishonestly call this ‘education.’ I, on the other hand, dare to speak it’s true name: Propaganda. The truth is, rich, successful people not only pay most of the taxes in America, they also give the most money to charitable organizations and create the most jobs.” Here’s some education, folks. Take a tour of Enron. Show me the jobs that it created, oh, wait, the jobs it destroyed. Then take a tour of the people who came out on the short end of the financial derivatives gambling game, and guaranteed, the people who made money with that duping scheme aren’t living on the streets.

Pappas asserts that “[a]fter reading Mr. Maule’s post, it is simply impossible to arrive at any conclusion other than that he believes that only an ignorant or maliciously motivated person could possibly be opposed to higher taxes on rich people.” What sort of person can defend tax reductions that fueled a recession? What sort of person is unwilling to remediate the error and put the tax rates back to where they were before they were foolishly reduced? Anyone who studies the experience of the last decade understands why so many Americans are suffering. But the few who hang on desperately to the failures of yesterday, if not ignorant or maliciously motivated, are what? Pappas would say, “They are correct.” I would say, “Doing the same thing over and over again with the same failing result each time is insanity.”

Pappas then shares his reasons for opposing high taxes. He claims “government [is] inefficient,” that he doesn’t “trust the bureaucracy to use [his] money wisely,” that “[g]iving too much power to government is anti-constitutional and poses a threat to freedom,” that “[g]overnment . . . wastes a substantial portion of the tax revenue,” that [g]overnment expansions tend to be permanent,” that the “free market, as imperfect as it is, will circulate wealth in a more efficient and ultimately more just way than the federal government will circulate it,” and that the “clamoring for higher taxes on successful people is a cop out to avoid doing the hard work of cost cutting and a power grab by those who want to remove choice from individuals and give it to an intellectual elite that thinks it knows better than they do what is good for them.” Let’s see, the private sector is efficient, the corporate world can be trusted to use wisely the money it gets from its customers, the private sector did quite well with the reduction of government regulation that has characterized the last few decades, the free market worked so well during the last decade that the economy is booming, and the cutting of taxes on the wealthy has given us a nation of people whose incomes have risen in real dollar terms. Not.

Pappas thinks that those who think he takes his position on account of being ignorant or exploited are shoving the debtate into “the abyss of pejorative and character assassination.” Because I don’t think Pappas approaches this as does the tea party or as does Sarah Palin, I don’t consider him to be within the “uneducated and exploited” crowd. Either Pappas is already among the wealthy, or he is so sure or desirous of joining their ranks that he subscribes to their outlook. Surely he cannot think that the nation is economically better off now than it was before the wealthy engineered their tax cuts a decade ago. Or perhaps he does so think?

Cut Taxes, Cut Spending, Cut Safety?

The Christie administration in New Jersey has rolled out another of its steps to reduce taxes by reducing state spending. This one, it appears, will also cut safety.

New Jersey faces some serious money problems, which the governor thinks can be solved by cutting state spending so that taxes can be cut in turn. This short-term solution is bound to come at a steep long-term price, as I previously explained in Cut Taxes + Cut Spending = Reduced Education?. In that commentary, I focused on the effect of cutting expenditures for the education of tomorrow’s leaders and voters.

Now the New Jersey Motor Vehicle Commission has decided to eliminate automobile safety inspections. Emissions inspections required by federal law will remain, and surely only for that reason. The principal argument for the repeal pretty much boils down to the notion that the cost isn’t worth it. According to a spokesman for the New Jersey Motor Vehicle Commission, as reported on Philadelphia’s KYW, doing away with these inspections would save the state $12 million. He noted that “state officials don’t think that eliminating the mechanical inspections will pose an appreciable additional danger for drivers.” He explained, however, that studies by other states, by universities, and by the National Highway Traffic Safety Administration into the effect of repealing the inspection requirement have been “inconclusive.” According to the spokesman, 6 percent of the 1.9 million vehicles that New Jersey inspects each year fail the test. New Jersey would continue to require that motorists maintain a safe vehicle. Those that do not do so would be issued a ticket “if a mechanical default was a factor in an accident.”

Twenty-nine states do not require safety inspections, including some that once did but repealed the requirement. When North Carolina studied the matter, it reported that the legislature’s Program Evaluation Division “found no proof inspections improve road safety” and that there had been “no increase in accidents” after two other states ended vehicle inspections. In North Carolina, 5 percent of the 1.9 million vehicles undergoing a safety inspection failed. The top five reasons for failure were defective tires, defective stoplights, defective windshield wipers, defective license plate lights, and defective steering mechanisms. North Carolina’s study also determined that mechanical failure contributed to accidents only 1 percent of the time. North Carolina also determined that inspections sometimes were done too quickly, and in some instances vehicles with problems nonetheless were passed.

A study by the World Health Organization, World Report on Road Traffic Injury Prevention states:

Though periodic vehicle inspections have not been found useful in reducing injury crashes, inspections and checks for overloading and safety-related maintenance for larger commercial vehicles and buses could be important for vehicles more than 12 years old (152). While there is in general no evidence that periodic motor vehicle inspections reduce crash rates, the exception is in the field of commercial vehicles, where defective brakes on large trucks have been shown to be a risk factor (153).

citing “O’Neill B et al. The World Bank’s global road safety and partnership. Traffic Injury Prevention, 2002, 3:190–194.” and “Jones IS, Stein HS. Defective equipment and tractor-trailer crash involvement. Accident Analy¬sis and Prevention, 1989, 21:469–481.” Yet the same report, though, points to seat belts, child restraints, and air bags as examples of improvements that are very efficient in saving lives and reducing injuries without explaining how one can determine if such items are continuing to work properly in the absence of periodic safety inspections.

If one accepts as true that roughly 114,000 vehicles with defective equipment are traveling the roads of New Jersey and roughly 95,000 vehicles with defective equipment are out and about on North Carolina’s highways, is it plausible to conclude that NONE of these vehicles will fail at a time and in a place that leaves the driver powerless to prevent an accident? Only some sort of miracle would prevent every single failure of steering, brakes, or lights, for example, from causing the vehicle to crash. At least in North Carolina there is an admission that mechanical failure is a factor in some accidents. New Jersey tries to brush the matter aside with the notion that there would be no “appreciable additional danger for drivers.” One only need read or listen to the many reports of accidents caused by large trucks on account of mechanical failure to understand that even if some trucks with problems manage to avoid causing crashes, at least until the next time they are inspected, there are enough that do collide with objects or other vehicles to demonstrate the high risk of dismissing vehicle safety inspections for any sort of highway vehicle as unnecessary, unless one thinks that by some magic cars with defective components don't ever crash.

What of the states that do not require safety inspections? Their residents, visitors to those states, and people living in states into which residents of the inspection-free states bring their vehicles are all at higher risk of death or injury. Perhaps not “appreciably” higher, but higher. The fact that accidents did not increase in the two states that repealed vehicle inspections proves nothing because it is quite possible that had inspections not been repealed, there would have been a slight DECREASE in accidents.

Because vehicle owners have a responsibility to maintain safe vehicles, there’s no reason not to require them to have those vehicles inspected. The cost of inspection is a cost of ownership and ought to be financed by the vehicle owners. If the problem in New Jersey is that the inspection fees are too low, thus requiring the state to shell out dollars to subsidize inspections, the solution is to increase the fees so that they cover the cost of having the vehicles inspected and having the state oversee the inspection system. This is a classic example of a user fee. There is no reason it ought not be set at the appropriate price. If inspections are done by licensed private enterprises, then the private companies are free to set a price in an environment of healthy economic competition, to which would be added the small portion remitted by the private company to the state to finance the oversight. There are states in which it works in that manner, and the state does not lose any money on the deal.

In North Carolina, the report emphasized the money that could be saved by vehicle owners if they were no longer required to have their vehicles inspected. But how much money is saved in the long term if an uninspected vehicle fails? Who wants to be the owner of such a vehicle? Surely insurance companies will raise rates to generate funds to pay for the inevitable increase in accidents that will occur as more and more vehicles deteriorate but remain on the road in an unrepaired state. In the long run, the money saved by vehicle owners will not be as much as expected.

I suspect there is more involved in this decision than simply money. I suspect that some of the pressure to eliminate state inspections comes from people who don’t want to be told what to do, who want the freedom and privilege of driving but don’t want the responsibilities that go with it. Will there be people who get their cars inspected even absent a law requiring them to do so? Of course. Will there be people who stop getting their cars inspected once the repeal goes into effect? Absolutely. Do you want to be driving on the road when the vehicle coming toward you has defective steering that would have been caught and repaired had the vehicle been inspected under the existing system?

Little solace can be found in the assurance that if an accident is caused by the mechanical failure of a vehicle a ticket will be issued to the vehicle owner. That threat will not deter the people most likely to let their vehicles go uninspected. The threat of a ticket being issued to the person whose vehicle killed someone’s child, spouse, parent, or friend is a wholly ineffective waste of time that comes way too late. Does it matter that there will be only an unappreciable increase in accidents on account of inspection repeal? Unquestionably, if the additional person killed on the highways after the repeal goes into effect is someone’s friend or family member.

Considering that state vehicle inspections can be funded through user fees and that the state budget can be reduced by increasing inspection fees to do away with the state subsidy, why go for a short-term fix that will bring long-term costs, including death and injury? Is it simply a matter of being able to proclaim that the governor “got the government off your back”? That’s too bad, especially when you are trying to get someone’s uninspected, unsafe vehicle off your child’s back. Think about that when pondering the Christie administration’s outlook that the cost of state vehicle inspections isn’t worth it. Hopefully no one’s friend or relative will need to pay the price.

Taxes and Priorities

The tension between demands for reduced taxes or reduced tax increases and demands for government services is escalating. Several recent developments highlight the need to find ways for tax and spending decisions to be prioritized. It is in the setting of priorities that answers are found to the challenge of matching government revenues with government expenditures.

In the first bit of news, opinions were strongly advanced by citizens who attended a public hearing on the budget plan offered by the mayor of Philadelphia. As reported in Nutter's Budget Plan Pummeled at Public Hearing, if anyone likes the plan, they’re not saying much. Not only were the mayor’s proposed soda tax and trash pickup fee blasted, the alternative plan by some members of City Council to raise property taxes also was, sorry, trashed. One taxpayer concluded, “I don’t have any more money for you,” after pointing out her disappointment that tax dollars were used to build sports stadiums and that new construction continues to get a 10-year real property tax break. Other speakers at the hearing claimed that the problem arose from overspending during past years. One person did support raising property taxes to levels equivalent to those in the surrounding suburbs, which are more than three times higher, but that suggestion started a “shouting match” that had to be gaveled down. I shared my views on the soda tax and trash pickup fee ideas in Yes for The Proposed User Fee, No for the Proposed Tax.

In the second bit of news, reported in this article, the Supreme Court of Pennsylvania, in a ruling issued without any explanation, permitted the scheduled vote on abolishing Philadelphia’s Board of Revision of Taxes to go forward. The ruling, however, does not preclude the BRT from challenging the outcome of that vote, if it turns out as expected in favor of eliminating the BRT. My previous commentaries on the saga of the BRT can be found in An Unconstitutional Tax Assessment System, and followed by Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, and How Can Asking Questions Improve Tax and Spending Policies?, This Just Taxes My Brain, Tax Bureaucrats Lose Work, Keep Pay, Testing Tax Bureaucrats Just Part of the Solution, A Citizen Vote on Taxes, Freezing Real Property Tax Reassessments: A Nice Idea, The Tax Price of a Flawed Tax System, and Can Bad Tax Administration Doom the Tax?.

In the third bit of news, according to this Philadelphia Inquirer article, Philadelphia announced that it would not send police officers to deal with minor vehicle accidents, in order to increase the amount of time police can devote to fighting crime. There are roughly 68,000 minor accidents in Philadelphia each year. If the motorists agree to exchange information, no one is injured, and the cars can be driven, the police will not show up. Motorists will need to go to the nearest police station or call in the accident by phone.

In the fourth bit of news, described in this report, the governor of Pennsylvania is calling the legislature back into session to deal with a budget deficit triggered by the Federal Highway Administration’s refusal to approve plans to impose tolls on I-80. The proposed state budget had counted on those tolls to provide funds to fix roads and bridges and to improve mass transit. The governor advocates a gross profits tax on oil companies. Previously he had planned on leasing the Turnpike. Others have suggested increasing gasoline taxes, motor vehicle registration fees, or real estate transfer taxes, and putting tolls on I-95, outsourcing highway maintenance, permitting local governments to impose transportation taxes, and paying for state police from sources other than the Motor License Fund. I shared my views on the I-80 tolling proposal in, among other posts, User Fee Philosophy Vindicated, and I explored the Turnpike lease idea in, among other commentaries, Selling Off Government Revenue Streams: Good Idea or Bad? and in Selling Government Revenue Streams: A Bad Idea That Won't Go Away.

In the fifth bit of news, detailed in this article, high school students in many South Jersey school districts walked out of class to protest the budget cuts proposed by the state’s governor. Students who were interviewed made it clear that they were not looking forward to attending schools that would need to “take away sports and drama and everything else.” The walkout was organized – using facebook—by a college student who graduated last year from one of the schools, and who was concerned about possible elimination of arts programs. The reaction? The Education Commissioner said, “Schools should enforce their attendance policies. They should not be permitting students to walk out of class.” A spokesman for the governor explained, “Students would be better served if they were given a full, impartial understanding of the problems that got us here in the first place and why dramatic action was needed." My latest analysis of the impact of New Jersey’s proposed cuts in education spending can be found in Cut Taxes + Cut Spending = Reduced Education?.

What ties all of these stories together is that they are just a few of the many fronts on which the, sorry, collision between tax resistance and demand for services demonstrates its seriousness. The problem is a bit more complicated, though, than most advocates on either side of the debate seem willing to admit. Sound bites are difficult to create when an issues resists being dumbed down to simplistic themes. For example, the problem in Philadelphia involves not only the question of tax increases and reduced spending, but also the matter of special tax breaks. What would have happened had the moratorium on new construction taxes not been enacted or if it is repealed? What would have happened had particular corporations not received special tax breaks? Would the city’s economic base have shrunk even more? Or would the corporations continued to do business in the city because there were no practical alternatives? Would new construction have ground to a halt? Does one dollar of a special tax break bring, in present value terms, the equivalent of one dollar of tax revenue from other sources? Does the one dollar of a special tax break generate, in present value terms, sufficient additional economic activity that generates not only a dollar of tax revenue but increased after-tax dollars for the city’s residents? Have independent studies been undertaken with respect to the specific special interest tax breaks that Philadelphia enacted? Similar questions can be asked about using public money to fund private sports enterprises that are of interest to some, but surely not all, city taxpayers, who end up footing more of the bill than their counterparts, including fans, living outside the city. Perhaps the investment paid off in higher city tax revenues from transactions into which both residents and nonresidents entered. Without the necessary information, assertions such as those made at the hearing reflect more emotion than rational analysis. I don’t know the answer, but I’m simply suggesting that someone who shows up with an independent auditor’s report on the question will speak words far more authoritative than someone who simply challenges the matter without evidence.

It is noteworthy that the outpouring of tax resistance protestors apparently will be matched by the outpouring of those who object to the consequences of underfunding government. The attractiveness of short-term solutions that ignore long-term planning is exposed for the sham that it is when tomorrow’s voters pour out of their schools to register their displeasure with the short-sighted decisions being made by the friends of the wealthy now in control of New Jersey. Only time will tell how motorists react to the lack of police attention when minor accidents, which in the city of Philadelphia too often escalate into something more serious, increase the aggravation factor. The ballot box will determine if Philadelphia’s voters are as fed up with the BRT as they appear to be, and whether reform will increase real property tax revenue without imposing inequitable levies on property owners. The debate over funding highways, bridges, and mass transit will require the state’s citizens to choose between higher fees or worsening infrastructure.

This clash between those who want government services to be maintained, if not increased, and those who do not want to pay more taxes, is going to rip apart the social fabric of the nation unless someone takes hold of the public debate and uses leadership skills to infuse it with educated, informed, authoritative, and unbiased information. What is required is a process that causes people to realize that even at the individual level they are taking inconsistent positions. The parent who wants the school to provide extracurricular activities for his or her children, but who also objects to paying taxes, needs to think through the implication of this dual position. What it pretty much amounts to is the idea that someone should give something to the children but the person doing so ought not be reasonably compensated. There’s a word for that. The motorist who complains heartily, and understandably, about the miserable condition of many of Pennsylvania’s roads, but who also objects to tolls, increased gasoline taxes, or any other sort of fee, needs to think through the implication of this dual position. What it pretty much amounts to is the idea that the motorist wants something but wants it provided by someone else. There’s a word for that. The city residents who want their trash picked up, their streets plowed, their homes protected from fire and theft, their air to be clean, their water to be flowing, their shopping to be fraud-free, and all the other services they seek, but who object to paying the true cost of these services and continue voting for those who have enabled inefficiencies such as the BRT, need to think through the implication of their dual position. What it pretty much amounts to is the idea that they don’t like what those elected to office are doing but they keep sending them back to do more. There’s a word, a different word, for that.

The ultimate irony of this growing civil discord concerning taxes and spending is the hypocrisy of the unspoken motivation underneath the anti-tax argument. The tax resistance folks ultimately, when pressed, will admit that their principal objection is to the idea of money they pay in taxes being funneled to people “who take more than they give.” Yet careful analysis, corroborated by huge deficits in government budgets at every level, warrants the conclusion that pretty much everyone in this nation is taking more than they give. Most, if not all motorists, impose costs on highway and bridge infrastructure that exceed the tolls, gasoline taxes, and other fees that are paid. Most, if not all parents, through their children past, present, and future, impose costs on the school system that exceed the school taxes that they pay. Most Social Security recipients take out more than they put in. Perhaps it is time to consider that, when it comes to taxes, we have met the enemy and it is us.

Working out of this crisis before it becomes catastrophic requires educated guidance and informed debate, so that people can make sensible decisions about priorities in government services and spending. If a majority wants to reduce government to levels comparable to levels of taxation in the colonial era, and is willing to tolerate the reduction of government services to what existed 234 years ago, so be it. But it wouldn’t surprise me, or anyone else who thinks about these matters carefully and seriously, if those same members of the anti-tax movement were the first to complain about the miserable condition into which their lives had accordingly sunk. What an awful price to pay to learn about giving due consideration to evaluation priorities. I’m suggesting that there is an easier way.

Is Public Truly Getting IRS-Congress Distinction?

David Cay Johnston’s latest Tax Notes commentary, What Polls Tell Us About the Public's View of Taxes, republished by Paul Caron’s TaxProf Blog, addresses one of my favorite topics. In his commentary, Johnston calls attention to the adverse impact on the tax policy debate of the huge amounts of misinformation being delivered by news organizations, politicians, and the tea party movement. Some of what Johnston concludes matches what I’ve been writing for the past few years. On one point, he reaches a conclusion that reflects an outlook much more optimistic than the perspective I have had, and it remains to be seen whether he is correct. I hope he is.

Johnston complains that the “well-rounded discussion” that the nation needs with respect to tax policy is not well served by the “often fact-free observations” delivered by talk show hosts and guests and the recycled nonsense, sometimes “mixed with hard facts and thoughtful reporting” broadcast by news shows. About a month ago, in IRS Ought Not Be the Health Care Enforcement Administrator, I complained about “the use of “anti-IRS” sound bites by certain politicians” which find their way into public consumption as though they were statements of truth. More than two years ago, in What’s in a Tax Label, I lamented “The nation's addiction to sound bites, and dislike of thorough analysis.” By giving in to the inability of most Americans to endure more than twenty seconds of discourse on any one issue, those taking on the responsibility of educating the American public are falling short. As Johnston notes, they not only fail in this effort, they tag themselves with slogans that suggest that they have been, and will continue to be, successful.

Johnston explains that though the people identifying themselves as members of, or supportive of, the tea party movement, though “engaged as citizens and venting their frustration,” are “being used by wealthy interests known for backroom deals and campaign contributions aimed at shifting their tax burdens onto the hoi polloi.” This is a concern that troubles me deeply. I continue to wonder why those on the lower end of the economic array continue to fight against their own interests as they take positions that benefit only the wealthy. More than five years ago, in Consumed by Consumption Taxes, I suggested that one reason that those not counted among the wealthy argue against their own interest might be that “they're fairly confident they can break into the upper class (the wealthy, super wealthy, hyper wealthy, etc.).” I returned to this theme about a month ago, in Tax Lessons from New Jersey, where, after asking “why are people voting for a philosophy that benefits the wealthy and jeopardizes the poor and middle class?” I answered my own question:

Some of the staunchest defenders of low taxes for the wealthy do not come from the ranks of the wealthy but from those who face increased burdens – in the form of higher taxes, increased government debt, or reduced government services – in order to pay the price of those low taxes for the wealthy. I suspect that most people see themselves as being wealthy some day and want to make certain that the tax-comfortable environment now in place remains in place when they arrive. Unfortunately, so few will attain that status that it’s the equivalent of using lottery-playing rationale to determine tax policy.

The anomaly becomes even easier to understand when one considers who owns, and who can afford to buy time on or influence what takes place on, major media outlets.

That brings Johnston to yet another troubling aspect of the tea party movement, which Johnston sees not as the problem but as a victim of “the inchoate comments on tax by its leading speakers.” Because the media loves sound bites, and because the sound bites spewed by the tea party movement instigators are so deeply erroneous, we end up with, according to Johnston, “tax misinformation that gets attention all out of proportion to its audience or its significance.” Less than a week ago, in Tax Education is Not Just for Tax Professionals, I wondered, “isn’t it time to counteract the deliberate misinformation campaigns and the foolish repetition of nonsense by the ignorant by stepping up public education, not only in schools but in workplaces, civic associations, and community centers?” It’s no coincidence that tea party movement members are being duped into fighting taxes used to pay for public education. An educated public is the worst enemy that the wealthy elite can imagine.

Johnston then focuses on Sarah Palin’s Boston speech to illustrate “how nonsensical and contradictory the comments of Palin and some other prominent tea party speakers are.” Palin, though calling for tax cuts, then complained that “47 percent of households pay no federal income tax.” This would fit nicely into the tea party movement’s ostensible philosophy if the 47 percent that pay no tax were the wealthiest 47 percent. But careful analysis of the information – which takes time to do and time to explain – reveals that most of the households paying no federal income tax are those headed up by the unemployed and the elderly, two thirds of whom have annual income under $20,000. Only 14 percent of households paying no taxes were headed up by someone of working age and making more than $20,000, of whom most probably are parents with children who claim the child tax credit. Lastly, the $400 income tax credit that Obama persuaded the Congress to enact pushed millions of Americans in the bottom 75 percent of the income array from a low tax liability status into a no tax liability status. So is Palin suggesting that the elderly, the poor, and workers should be paying more taxes? Johnston concludes that Palin “either opposes tax cuts for people with jobs or she has no idea what she is talking about” and goes for the latter. Perhaps. Or perhaps she very well knows what she is up to, and didn’t realize that some of us are sufficiently blessed with brains and educated with knowledge and understanding of tax law to see through her sound bite rhetoric. Unfortunately, as Johnston notes, the applause she garnered from those in attendance “indicates how they failed to connect rather obvious contradictory dots.”

But it gets better. Palin’s entry into the public spotlight has brought her a flood of income, putting her in a category greater than 99.99 percent of all taxpayers. But because she has so little capital gains taxed at special low rates, she had discovered that most of her income will be taxed in the top bracket. Is it any wonder that she doesn’t like the idea that “47 percent of households pay no federal income tax.” Translated, she is complaining that she would pay less tax if those households – the elderly and the working poor – paid more tax. What Palin doesn’t mention is that when the Obama $400 tax credit expires and as the economy improves, the percentage of households paying no income tax will drop to 45 percent in 2010, into the high 30 percent range within an few years, and by 2020, into the low 30 percent range. Johnston points out that Palin refuses to permit herself to be questioned about this, or any other, analysis that she trumpets, and so opening up a dialogue with her is impossible. Surely she understands the risk of debating the point, because it is tantamount to a risk of exposing her game to the people she exploits as she moves into an income bracket that has nothing in common with the people she has duped into supporting her positions.

Johnston finds hope in some poll numbers that he dug up from some Fox News polls and a CBS poll. These polls measured favorability ratings, and Johnston selected the results for Sarah Palin, President Obama, several members of Congress, and the IRS. In last place, at 12 percent, is House Minority Leader John Boehner, edged out by Senate Majority Leader Harry Reid at 16 percent. Next, with fewer than one in four viewing her favorably, is Sarah Palin. House speaker Nancy Pelosi is at 29 percent, The tea party movement has a 36 percent favorability rating. The IRS comes in at 49 percent, just one percentage point below the President.

Johnston derives several conclusions from these numbers. He argues that they tell us “that sound tax policies . . . can be attained.” He concludes that, “The public evidently gets that the IRS is only the tax police, enforcing the law Congress makes.” He suggests that this reality, certainly understood by most tax professionals “is starting to seep into the mind-set of the rest of America.” I’ve been hammering home the IRS – Congress distinction for years. Several years ago, for example, in A Holiday “Gift” from the Congress, I asked “The public has a negative view of the IRS, but can it not come to understand that the IRS is a creation of the Congress and that in this instance IRS employees are going above and beyond the call of duty to fix yet another mess created by the Congress?” Earlier this month, in Can Bad Tax Administration Doom the Tax?, I noted, “Most of the people who are upset with the complexity of the federal income tax law, and who object to the loopholes and special interest provisions found in it, direct the bulk of their anger at the IRS. At the same time, there is a growing aggregation of individuals who object, not to the administrative agency, but to taxation itself. What harmonizes these seemingly discordant approaches is the tendency of people to lay blame in the wrong place. Congress, not the IRS, is responsible for the complexity and loophole corrosion of the federal income tax.” Perhaps more people are reading MauledAgain than I realize.

It is Johnston’s suggestion that “the poll shows the body politic is not completely infected by demagoguery when it comes to taxes and the IRS” that causes me to hesitate. If he is correct, I’m glad. But I wonder if the timing of the poll had an impact on the outcome. The poll was taken at a time when many people were receiving refund checks or deposits into their bank accounts. Would this not cause at least some people to think of the IRS in less harsh terms than they usually report? I don’t know. I do know that people keep sending back to Washington the same members of Congress, or their clones, that has brought us thirty years of bad tax policies. I do know that all those people flocking to the tea party banner continue to remind me of sheep being led unwittingly to the slaughter.

Even Johnston understands that the poll numbers don’t suggest that America has woken up to what has been going on during the past decade. He asks, “Can we get a broad swath of the public to recognize how oligarchs who are undermining our democracy are stealthily financing tea party events and exploiting those who show up so they can continue to shift their tax burdens onto the rest of us, including tea party supporters?” I don’t know the answer. I do know that without more, rather than less, public education on matters of taxation, tax policy, and public finance, the answer will be “no.” In other words, I don’t know if we can get a broad swath of the public to recognize how important it is to fund and encourage education, at all levels, with respect to taxation, tax policy, and public finance so that the oligarchs can no longer continue to undermine our democracy through stealth financing and exploitation of the ignorant. If what I explained on Monday in Cut Taxes + Cut Spending = Reduced Education?, exploring the lessons to be learned from the school budget vote in New Jersey, tells us anything, it’s that the effort to fix the problem is going to be challenging, heated, time consuming, and infected with sound bite lies and nonsense.

Cut Taxes + Cut Spending = Reduced Education?

In Tax Lessons from New Jersey, I described the battle over taxes that has enveloped the state of New Jersey. In the latest chapter in this ongoing drama, as reported in this Philadelphia Inquirer article, voters in 59 percent of school districts rejected the budgets proposed by their respective school boards. This is the highest rejection rate since 1976. New Jersey has an interesting arrangement, which requires proposed school district budgets to stand for approval in an election. If a budget is not approved, the town council or commission, depending on the locality, must come up with revised budgets, though the degree to which they can reduce the proposed budget is limited. They are not required, however, to cut the budget. If the school board does not like the outcome, it can appeal to the State Department of Education, but the state’s governor surely isn’t going to sympathize with the school districts.

The mixed outcome in New Jersey highlights the competing pressures that have come to bear on the issue. In the 19 districts in which teachers agreed to give up contract rights and let their pay be frozen, among other economic disadvantages, only 13 budgets were approved. Six were rejected despite the concessions by the teachers. If those concessions aren’t enough to bring approval of the proposed budgets, what else do these voters want? Teachers who work for free?

What is amazing is that only 27 percent of eligible voters turned out for the election. Still, that’s more than the usual 15 percent. Why do so many people sit out these critical votes? In several districts, the number of voters rejecting the proposed budget exceeded the number of voters supporting it by one. Yes, one. If one ever needs proof that every vote counts, it can be found in these ballot box dramas that will have lifetime effects on hundreds of children. Studies indicate that when turnout increases, as it did this year, budget rejections increase. The implication is that a small group of anti-tax voters, constituting perhaps 10 percent of eligible voters, manage to put school boards and localities in a position that requires them to cut programs and education efforts. In a few instances, perennial rejection of proposed budgets has nothing to do with taxes but is a manifestation of voter unhappiness with school district realignments.

When the local governments deal with the rejected budgets, they are required to determine what the tax rate will be. In effect, they determine the total budget amount, and even if they compute that amount by doing line-by-line chopping, the school board need not follow those cuts but must come up with some combination that fits within the amount generated by the tax rate approved by the local government.

So what’s going to be cut? What voters apparently did not understand is that all sorts of cuts already had been made before the proposed budgets were released. The governor, who campaigned on a promise of reduced spending, cut state aid to education by more than $800 million for the year beginning July 1, 2010, a reduction that follows a $475 million reduction in the year ending June 30, 2010. At the same time, the amount spent by the governor for operating his office has increased, though the extent to which it has increased has been the subject of charges and countercharges between the governor’s office and journalists. In the meantime, the governor told voters to reject proposed budgets in districts where teachers had not agreed to economic concessions. By cutting state aid, the governor forced school districts to propose budgets requiring tax increases to make up for the lost state aid, permitting the governor to direct voter anger at school districts. All of this transpired while the governor resists maintaining an income tax increase put in place last year for millionaires, as I discussed in Tax Lessons from New Jersey.

To illustrate the effect of these reductions that are already in place, school districts already have eliminated positions, which translates in many instances to elimination of programs. The Cherry Hill School District has already cut 89 positions. Its proposed budget, which would have increased taxes by 4 percent, was rejected, so unless the town government ignores the outcome of the vote, even more jobs and, in all likelihood, entire programs will be axed. The Cinnaminson School District had already mapped out 27 job cuts before tackling the budget issues. It appears that class size will increase, even though increased class size usually translates into reduced learning by students because of unavoidable reduction in time for one-on-one assistance.

Despite the adverse effect of reduced state aid and opposition to taxes on education, New Jersey’s governor called the vote “a watershed moment.” Indeed it is. Years from now, when people look back to see when the deterioration of education quality in New Jersey’s public schools began to accelerate, compounded by the effects of people moving their children into private schools if they could afford to do so or leaving the state, they will look back at this vote as the beginning of what Christie called “significant change.” Significant, but definitely in a disadvantageous way.

The irony in all of this, aside from the overwhelming majority who didn’t bother to let their voices be heard in the matter, is the high likelihood that few of those voting have any idea of what is in the proposed budgets. It is no less likely that when the additional cuts are announced, many of those voting for those cuts will be leading the parade of parents offended by the cuts. Parents of children in football will protest the cuts in that program and yell for cuts in advanced placement math classes. Parents of children in those classes will propose leaving those classes intact while cutting the amount of money invested in the spring musical. And so on. People without children in the schools will continue to complain about taxes and clamor for cuts in everything, arguing that they don’t benefit because they have no children in the school, forgetting that when they were in school plenty of taxpayers without children in the schools contributed to their own education and forgetting that while their own children were in school others without children, now long gone, were pitching in. And they’re clueless when it comes to identifying the indirect benefits they receive by living in a nation with an educated citizenry and workforce that contributes to the high standard of living they’ve had the opportunity to attain, in comparison to most other places on the planet. These folks are expertise in the “taxes are good when they benefit me but otherwise are evil” approach and in the “I like to take but hate to give” philosophy of life.

Fortunately, in a few school districts, voters approved the budgets. In one instance the tax increase is 9 percent, thanks to Christie’s cutting of state aid in order to revive tax cuts for millionaires, but the voters understood that they were voting for the preservation of high quality education. What’s missing, unless it’s out there and I haven’t found it, is a study that correlates the percentage of residents and percentage of voters with the vote outcome in each school district. Surely there is something to be said for the idea that those who have less education might put much less value on education and are thus more likely to vote against spending for education. And with less education, these folks are more susceptible to the simplistic sound bite arguments tossed about by those who want to cut services in order to fund tax cuts for the wealthy.

Perhaps there should be added to the curriculum, not only in public schools but also in community colleges and adult evening education programs, a course in public school education budgeting. It would be interesting to dissect a school district budget and to see where the money goes. Are the people voting for reduced expenditures ready to say goodbye to school sports? To extracurricular activities? To bus rides for children living within 2 miles of the school? To the special programs in place for the disciplinary problems? What about the cost of lawsuits brought by parents who seek special treatment for their children? Ought the parents who impose these costs on the system be permitted to vote against taxes, thus requiring that the fees paid by the school district to defend these lawsuits be taken out of education of other children? It brings the analysis full circle to my discussion of these issues in Tying Tax Revenue to Voter Responsibility, in which I concluded, “Ultimately, when complaints about high taxes circulate, the response, ‘You voted for it,’ should either dampen the griping or inspire people to reconsider, and cut back, their government services wish list.”

One thing that could be done to reduce the cost of education in New Jersey without impairing its quality is to combine the small school districts to achieve economy of scale. Yet every time this is proposed, voters shoot it down. Why? Because they like the small-town feel of a school system with hundreds rather than multiple thousands of students. There’s no question that smaller is better in many respects, but if that’s what voters want, then they need to pay for it. Perhaps the ballot next time should be a choice between (A) higher taxes and retention of the very small school districts or (B) lower taxes and consolidation. Now that’s an election that would be very interesting to watch.

Tax Education is Not Just For Tax Professionals

The other day I received an email from a reader who described having attending a local government meeting, at which a local resident introduced two visitors who were bringing “ideas.” The local resident enthusiastically supported the propositions that these visitors were sharing. The first visitor, it seemed, did nothing more than complain about income taxes. That’s not surprising, considering that this visitor was a campaign worker for a gubernatorial candidate with some sort of affiliation with the Tea Party. The other visitor explained that after God and people, sheriffs are the most important enforcers of law in this country. This visitor suggested that if a federal official tries to force a person to do something that infringes on the person’s rights, the person should call the sheriff. The two visitors claimed that the IRS would be taking money from people’s personal bank accounts to pay for an individual’s mandatory health insurance.

To ask how such nonsense gets started achieves nothing. This nonsense gets started either when someone lacking education, analytical skills, and common sense makes a proclamation to one or more other persons or when someone who should know better deliberately plants a falsehood, often using AM talk radio. The more important question is how this nonsense spreads and comes to be believed by millions of people. Certainly someone standing on a street corner, foaming at the mouth, and proclaiming that squirrels are robbing a bank would get very little attention from just about everyone other than a few curious stares and perhaps an attempt to get the person into some sort of treatment center. Yet somehow, equally implausible assertions acquire a following among far too many Americans. Part of the answer is that almost everyone knows that squirrels cannot rob banks, but very few people know that the IRS does not, and will not, have power to levy on people’s bank accounts to collect the tax imposed on those who do not have health insurance coverage. Anyone who bothered to read the health care legislation, or a professional explanation, such as the one I provided in Health Care: Enlarging the Code and Stressing the IRS, would know that the claim of IRS power to take money out of people’s bank accounts to pay for an individual’s mandatory health insurance is about as believable as the ranting of a foamy-mouthed squirrel-obsessed lunatic on the street corner.

It’s obvious that too few Americans have read the health care legislation or an explanation from a reputable source. It’s obvious that too few Americans understand enough about tax law or finances. It’s also obvious that one of the reasons is that insufficient funds are provided to educate the nation’s children about these things as they move through its school systems. As I commented to the reader who had emailed me about the two visitors, “Perhaps people sympathetic to the first guy have succeeded in tax resistance so effectively that there were insufficient funds to educate the second guy.” If the nation continues to resist paying for quality education of its children, it will soon become a nation of the ignorant.

Surely, it was just coincidence – or perhaps not – that earlier in the same day I had come across an article about How Pennsylvania is Addressing Financial Illiteracy. In the article, Mike Armstrong noted that after he had written about the nation’s lack of financial literacy, his readers had responded with pointers to other surveys demonstrating the widespread nature of the problem. After explaining that “It would be understandable if there were a lack of resources on personal finance. But it’s bewildering given all the shelves of books in libraries and bookstores, as well as the many Web sites, magazines, TV shows and newspaper columns devoted to the topic,” Armstrong asked a good question, “As financial illiterates, are we drowning in a river of too much information, or parched because we don’t have sense enough to drink?” He thinks it’s “a little of both.”

In the article, Armstrong recounts information from Pennsylvania’s Office of Financial Education, a division of the Banking Department. The OFE “has trained 2,000 teachers in personal finance since 2005 and estimates 400,000 students have benefited from that knowledge transfer.” Yet a survey by the OFE shows that only “44 of the 584 schools contacted in 2009 by Penn State’s Survey Research Center reported requiring a stand-alone course in personal finance for graduation.” Other schools have elective courses but “less than 50 percent of graduates” enroll in it. An official at the OFE suggests that children learned about personal finance from parents, but that as the financial sector has become more complicated, parents are less confident about what to teach their children. If children are learning about taxation and mandatory health care from their parents, one must hope that their parents are not as misinformed as the visitors who showed up at the township meeting. Unfortunately, I suspect that it’s far more likely the nation’s children are being taught nonsense than are being taught reality, considering the speed with which the tax misinformation virus has infected the population.

My concern about education gaps with respect to taxes, finance, and civics is not a new one. A year and a half ago, in Does It Matter Who or What is to Blame?, I wrote:

And more than three years ago, in Economically Depressing?, I referred to "my expressed desire that K-12 education be revamped so that high school graduates enter society with the survival tools needed for life in the 21st century." According to the 2005 report of the National Council on Economic Education, the latest I could find, only seven states require personal financial education as a high school graduation requirement, one requires high schools to offer a course in the subject though it is not a required course, and one state requires that it be taught in middle school. There are 50 states in the union, plus the District of Columbia and some overseas possessions. Surely personal finance is no less important than other subjects being taught in middle school and high school.

Two years ago, in Preventing Foreclosure Through the Tax Law? Not This Time, describing the The Foreclosure Prevention Act of 2008, I commented, “Interestingly, this provision also requires the Department of Defense to counsel members of the military with respect to financial difficulties. Why not require financial education for all Americans?” Indeed, isn’t it time to counteract the deliberate misinformation campaigns and the foolish repetition of nonsense by the ignorant by stepping up public education, not only in schools but in workplaces, civic associations, and community centers? Isn’t it time to fight the darkness by turning on the light? If not now, when?

Does Tax Break for Volunteering Makes Volunteers Mercenaries?

When, in Tax Law Going to the Dogs in a Fishy Proposal, I commented on the proposal to allow deductions for pet care expenses, I thought I had seen one of the most unwise tax ideas suggested for addition to the tax law. But now another idea has come along that is just as unwise. In Re-envisioning the Charitable Deduction to Legislate Compassion and Civility: Reclaiming Our Collective and Individual Humanity Through Sustained Volunteerism, 19 Kan. J.L. & Pub. Pol'y 269 (2010) (hat tip: Paul Caron’s TaxProf blog), Professor Alice M. Thomas argues that a tax deduction should be added to the Internal Revenue Code for “volunteerism.” In other words, taxpayers would be permitted to deduct some amount representing the value, or some presumed value, of the services they provide when they volunteer. The disadvantages of this proposal are numerous.

First, unless some arbitrary per-hour amount is prescribed for all taxpayers, the proposal, if enacted, would burden taxpayers and the tax return preparation system with the task of determining the value of the volunteer work provided by the taxpayer. If a physician does two hours of carpentry work for Habitat for Humanity, should the deduction reflect the hourly rate charged by carpenters or by physicians? If the quality of the carpentry isn’t of good quality and needs to be redone by someone else, does the taxpayer still get the deduction?

Second, who monitors whether the volunteer has done something of value? How does one administer a deduction that reflects volunteer work without determining if any work was done?

Third, who keeps track of the hours donated by volunteers? If the organization does not do so, almost every taxpayer in the country will claim to have volunteered. If the organization must keep track of volunteer hours, is that not a diversion of its resources away from its primary mission?

Fourth, does it make any sense to allow a deduction, or even a credit, for something in which the taxpayer has no basis? Unfortunately, some taxpayers are permitted, under certain circumstances, to claim a deduction for the fair market value of donated property even though they have not included in gross income the appreciation in that property. This is an atrocious tax rule, has been nominated for repeal on numerous occasions, and very well may not survive the next focus by Congress on available revenue sources to deal with the federal deficit. But its existence ought not be used to sell another atrocious idea as palatable.

Fifth, accepting the premise that encouraging volunteerism is a good thing, why use the tax code to accomplish that goal? Brushing and flossing one’s teeth is also a good thing, but there is no deduction for doing so, and hopefully no one proposes that there be one. There are all sorts of good things, but the tax law ought not be the driving force behind those good things.

Sixth, if a deduction for volunteerism in fact does increase the amount of volunteerism, is it going to bring into the soup kitchen, into the houses being rebuilt, into the hospitals the sort of people who truly understand what volunteering means and who can function other than as someone serving out their time in order to get a tax break? What genuine volunteer wants to be working alongside a mercenary?

Seventh, is a person “volunteering” if the person is doing something because there is an economic benefit, namely, a tax break, to be gained by engaging in the activity? When someone obtains an economic benefit from doing work, we call that a job.

This sort of proposal speaks volumes about two major trends in the disintegration of American culture. First, it is yet another theoretical idea that sounds good but when subjected to the realities of the tax practice world falls apart, and when subjected to the realities of tax policy comes up short. Professor Thomas makes a great case for why volunteerism is a good thing but fails to explain why the tax law is a better device to encourage more volunteerism than are the other means more readily available to society. Second, if it takes a bribe in the form of a tax break to get people to step up and help out, that’s a sad statement about the this country’s current cultural condition. Perhaps too many children have been successful with “I’ll do chores if you pay me” arguments presented to their parents, thus causing the “I won’t do anything without an economic benefit” mentality to permeate, and increasingly erode, the nation’s foundational value system.

If can be proven that it’s unavoidably necessary to use the tax code to fix yet another deep social problem, perhaps it makes better sense to have a special tax deduction for contributing to a program designed to educate parents on how to instill caring about others – rather than caring about self – in their children. I prefer not to use the tax code at all, but using the tax code to mask symptoms rather than getting to the root of the problem is even more foolish than using the tax code to deal with social, psychological, and cultural issues.

Unfortunately, this sort of proposal will appeal to some office-seeking candidate who would support it for the sole purpose of winning votes from people easily fooled into thinking that supporting this type of idea makes the person better suited for influencing the nation’s policies than are the people actually doing volunteer work for the right reason. The past several decades have demonstrated that the Congress has no qualms about cluttering the tax code, enacting bad legislation, and catering to whomever needs to be mollified in order to get, and hold on to, power. It is dangerous, and unwise, to put bad ideas into the heads of politicians. There are enough bad ideas already residing in the collective political brain, and it’s time to dislodge them with good ideas. What Professor Thomas has advanced does not qualify for that purpose.

The IRS as Health Care Political Pawn

The challenges posed by having the IRS enforce and regulate the newly-enacted provisions in the health care legislation requiring individuals to purchase health insurance and requiring certain employers to provide it to their employees are growing by the day.

In IRS Ought Not Be the Health Care Enforcement Administrator, I explained why health insurance regulation and enforcement belongs somewhere in the federal government other than the IRS. In Health Care: Enlarging the Code and Stressing the IRS, I expressed concern about the impact on the IRS and tax law administration of relying on the wrong agency to handle the reporting and insurance purchase requirements. In More Challenges of IRS Health Care Oversight, I shared a reader’s description of practical problems with the limited enforcement powers available to the IRS, which will encourage people to delay purchasing health care insurance until after they need the coverage. In effect, the enforcement mechanisms in the legislation are so lacking in teeth that they are pretty much useless.

Now comes yet another challenge, one that was expected. With great glee, Representative J. Randy Forbes of Virginia has introduced legislation to prohibit the IRS from doing anything with respect to the health care legislation. The proposed statute is sufficiently brief that it’s worth presenting in its entirety:

A BILL

To prohibit the Internal Revenue Service from hiring new employees to enforce the Federal Government's invasion into the health care lives of American citizens.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.

This Act may be cited as the ‘‘Prevent IRS Overreach Act of 2010’’.

SEC. 2. PROHIBITION ON IRS FROM HIRING NEW EMPLOYEES TO ENFORCE PATIENT PROTECTION AND AFFORDABLE CARE ACT AND HEALTH CARE AND EDUCATION RECONCILIATION ACT OF 2010.

No position within the Internal Revenue Service may be filled, by transfer or any other appointment taking effect on or after the date of enactment of this Act, if the duties and responsibilities of such position include the enforcement of any provision of, or amendment made by, the Patient Protection and Affordable Care Act or the Health Care and Education Reconciliation Act of 2010.

That’s it. The translation is simple: “Even though opponents of health care reform and health care for those without health insurance lost in their attempt to maintain the status quo, they intend to prevent implementation of the legislation so that there is no health care reform and so that those without health insurance coverage continue to suffer.” If the concern of Representative Forbes and his allies was mine, namely, that the IRS is not the appropriate agency to enforce the legislation, the proposed legislation would contain a section 3 that shifted the responsibility to some other federal department or agency. The lack of any such provision makes it clear what Forbes wants to do. His approach is not unlike that of a basketball coach who, after his team loses a game, ignores the meaning of the final buzzer, and tries to prevent the officials from sending the score to the league office.

This tactic is worse than what happens when Congress imposes an obligation or duty on the states but fails to provide funding to the states to pay for implementation. That tactic causes the debate to be one of who pays for enforcement rather than whether the program in question should be undertaken. The Forbes tactic is one in which the losers try to replay the game because they don’t know how to accept decisions made by a majority of legislators elected to the Congress.

Forbes justifies his actions by arguing that “The simple truth is that spending $10 billion for the government to force federally mandated healthcare on families and businesses will not initiate business growth or create lasting career opportunities for Americans. By prohibiting the funding of those new IRS employees, we will allow American taxpayers to keep their money and begin to draw a line in the sand on matters of unnecessary growth in government.” He also argues, “Americans remember an era of IRS overreach and abuse and don’t want that time back. Whether preventing 1,000 new IRS agents or 16,000 new agents as some have predicted, this bill is intended to stem the growth in big government’s control and authority in the lives of American citizens.” How much of this makes sense?

First, there is nothing to support the claim that it will cost $10 billion for the government to enforce the health care legislation. Forbes himself admits that there could be “1,000 new IRS agents or 16,000 new agents.” Surely the overall cost could be anywhere between some amount and sixteen times that amount, though the latter outcome is highly unlikely because the IRS has asserted it will not need 16,000 new agents. Maybe it will cost $500 million (which would permit hiring as many as 4,000 agents), maybe it will cost $1 billion, but $10 billion appears to be more of a number drawn out of thin air to add drama to the issue than it is the product of a cost accountant’s detailed research and analysis. Even if half the $10 billion were used for things other than the cost of paying salary and benefits to health insurance verification form clerks, the other $5 billion would pay for as many as 50,000 employees. That’s triple the extremely high number at the top end of Forbes’ “estimate.”

Second, however many people are hired by the IRS, or any other federal agency, to administer the new legislation, those will be new jobs. Those jobs will take people off the unemployment line and off unemployment benefits. Those jobs will reduce government spending on unemployment benefits. How can Representative Forbes not understand, and like, that outcome? His claim that there will be no career opportunities is unfounded.

Third, the insurance companies will need to hire people to assist them in complying with the legislation. Perhaps they will cut the salaries of their employees who earn more than $1 million a year to find funding sources. No matter how they pay for the new employees, they will be creating more jobs. That’s even more people taken off unemployment or other public benefits, and thus there will be even more reduction in government spending. Representative Forbes’ claim that the legislation “will not initiate business growth” is nonsense.

Fourth, the private sector having had decades to establish a health care marketplace that works for all Americans, does growth in government required to assist those who need health care fall into the category of “unnecessary” or “necessary”? Perhaps it is not necessary to do something about people who go without medical care because they have no health insurance and no independent source of funds to pay for care. All of this presumes that the health care legislation will cause government to grow, when it is quite likely that by making preventative care available to everyone, there will be a huge reduction in the number of people who need far more expensive care at some later date because a disease was not caught in its early stages and who, if uninsured, would require government outlays far in excess of the cost of paying for universal preventative care. One wonders who has the vested interest in the current system. As for the expected argument that people without health care would not be in that situation had they not lost jobs, and that reducing the size of government protects and creates jobs, one need only point to what happened while those opposed to health care reform were calling the shots. Perhaps they would like to put on center stage the reduced regulation of banks, mortgage lenders, and other financial institutions, which permitted reduction in size of certain regulatory agencies, and then explain how the misfeasance and malfeasance of individuals within those industries had nothing to do with people losing their jobs and, concomitantly, their health insurance. Isn’t it amazing how the kids who spill milk start getting so critical of the way in which the parents trying to clean up the milk are going about their remedial efforts?

Fifth, when Forbes refers to “an era of IRS overreach,” is he referring to an IRS that was doing more than it was authorized to do under law? If so, perhaps he ought to check the political party affiliation of the President who ordered the IRS to engage in those activities. When he refers to “abuse,” is he trying to re-open the now-discredited Congressional hearings, brought to the nation courtesy of the same group, that pretty much failed, in the long run, to demonstrate abuse? Is he trying once again to shift onto the IRS blame for the tax complexity and tax compliance nightmares that torment so many people, when in fact these are gifts to the nation from the very Congress in which Forbes sits? This sort of spin might do well in the media, but it falls apart when careful and thoughtful reasoning is brought to bear on the matter.

Sixth, when Forbes decries “growth in big government’s control and authority in the lives of American citizens,” has he considered why the government has needed to become involved in matters such as health care? If the private sector, operating in the so-called free market, was doing a top-notch job with health care, there would not be such a mess in American health care. There would not need to be government intervention if those treating the word “free” in the phrase “free market” to mean “free to do what we want to do” had not made such a mess of so much of the lives of American citizens. Every time something that needs to be regulated is deregulated, calamity befalls Americans, and when attempts are made to repair the damage, the folks who brought us the deregulation jump up and bewail the very thought of restoring some sort of order through government regulation or intervention. As I learned as a child, if you don’t want a poor grade, do what you need to do to learn how to do it properly, and if you don’t want to be reprimanded, do what you should be doing and do it properly.

It is highly unlikely that the legislation introduced by Forbes will be enacted. It is highly likely that he knows this. So why invest time in drafting and introducing the bill? The answer is simple. It will earn Forbes votes. It will bring him votes from people who, because of inadequate education attributable in part to the refusal of some communities to invest in their children’s futures, are unable to understand the reality and are susceptible to catchy-sounding but deeply erroneous, and dangerous, platitudes. Forbes, however, does not lack the ability to understand this. So, though I disagree with the voters who flock to his side, I am sympathetic to their plight. But my disagreement with Forbes is not tempered by any such sympathy. He holds a position of public trust and he should know better.