The political and religious musings of a Right-leaning, libertarian, formerly Orthodox Jew who emphasizes rationalism, pragmatism, common sense, and free, open-minded thought.
Showing posts with label State and Local Policy. Show all posts
Showing posts with label State and Local Policy. Show all posts
"Eliminate the state income tax" is one of those proposals that sounds like it fits libertarianism like a glove. Personally, I don't need much convincing that there are problems with taxing income. I wasn't exactly thrilled in 2013 when the federal income tax reached its 100th birthday. This brings us to current events.
Tomorrow, the citizens of Missouri are voting on a ballot about whether to eliminate the state income tax. In concept, I like it. All things considered equal, I prefer a consumption tax over an income tax because it generally does lest discourage work, saving, investment, and entrepreneurship. The proposed amendment has stages to phase out the income tax while giving lawmakers a way to find ways to replace the lost revenue. However, my enthusiasm wanes when it collides with economic reality.
The concern is not simply whether I think consumption taxes are better than income taxes. It is about what happens afterwards. State governments still have expenses, and the state income tax makes up about 69 percent of the state's discretionary revenue fund. Unless the state decides it is going to spend a whole lot less, it needs to make up that lost revenue somehow. The question is whether Missouri can generate enough consumption tax revenue without causing more problems.
I asked a similar question last year when analyzing Mississippi's income tax elimination proposal, and noted that not every state is built the same. Florida can lean on tourism. Alaska has oil. Nevada has Las Vegas. Texas excels in energy production, has rapid population growth, and property taxes to help make up.
Missouri certainly has a diverse economy, but what is its equivalent to Texas' energy sector or Florida's tourism sector? This doesn't mean that it is doomed to fail. But it also means that Missouri cannot copy other states and except the same results. I don't see an obvious revenue source replacing over $6 billion in revenue. Every dollar not collected through the income tax has to be replaced somehow, or not spent in the first place. That is the part where I think Missouri will have quite the uphill battle, and that is the part where I would like for them to show me how they would succeed.
If that weren't enough, there is another challenge. Replacing income taxes with consumption taxes is not as simple as increasing the sales tax rate. Even organizations that generally favor shifting away from income taxes have warned about the difficult.
The Tax Foundation recently examined this topic and found that replacing state income taxes is much more difficult than estimates suggest. The reason is that a realistic consumption tax base is narrower than advocates often assume. Taxing business inputs creates its own problems, which excluding them means that the tax rate may need to be substantially higher.
The lesson is not that states should keep income taxes forever. The lesson is that tax reform requires careful design. A poorly structured consumption tax can create problems of its own. I hope Missouri succeeds in create a more economically efficient tax system because that is a goal worth pursuing.
However, lowering or eliminating a tax is only one part of reform, much like I brought up with the Kansas tax cut experiment last decade. The state must ensure that the replacement system is sustainable, transparent, and does not create unintended consequences. So far, it has not done a good job to show me that.
Across the United States, homeowners are feeling the squeeze not only in terms of housing costs, but also in terms of increasing property taxes. The National Mortgage Association pointed out that since 2019, the median American has experienced a property tax increase of 27.4 percent (Cotality). The state of Florida is not an exception to this trend. Major Florida cities, such as Tampa, Miami, and Jacksonville, have experienced above-average property tax rate increases. Florida Governor Ron DeSantis seized on the public frustration, leading him to propose abolishing the property tax last month.
Why Economists Prefer the Property Tax
On some level, I can see why the property tax is preferred over other taxes. A paper from the Organisation for Economic Co-operation and Development (OECD) found that property taxes provide a more stable source of revenue relative to most other taxes (Blöchliger et al., 2015). Property tax is less sensitive to economic downturn because people still need property, regardless of the level of economic prosperity. In terms of distortion, the immobile nature of land can have some influence on homebuilding decisions (Arnott and Petrova, 2002), but is less distortive than the income or sales tax. Out of local tax sources, property tax is the least distortive. While property taxes can be moderately regressive, they are not as bad as sales taxes, excise taxes, or capped payroll taxes.
Why Homeowners Despise It
I can also see why people despise the property tax. It is not only because about two-thirds of taxpayers believe that the property tax is too high (Harris/AP NORC). The property tax is a large, lump-sum payment that is more visible than the sales tax. Because of the opaque assessment system to determine the property tax amount, taxpayers feel like they have little over a system that seems quite arbitrary. For DeSantis, he views property taxes as oppressive and ineffective, which is why he wants to eliminate them.
The Libertarian Dilemma
From a libertarian lens, property tax can be viewed as a violation of private ownership because property taxes are a partial seizure of the property one owns. Property tax is like perpetually paying rent to the government. I understand a libertarian impulse to want to eliminate it because it would mean less coercion and more freedom. Upon further examination, abolition is not a viable option because property tax is embedded into local government finance.
Fiscal Reality Check
The Right-leaning, pro-free-market Tax Foundation released a piece calledThere's No Good Way to Pay for Property Tax Repeal last month. The first point of consideration is that property taxes account for 70 percent of all local tax revenue. One of the reasons why DeSantis' plan is problematic that he does not have an answer to how he would replace that tax revenue. This gets at the heart of the issue: which tax would replace the property tax? It is not as if the idea of abolishing a tax is unprecedented. There were multiple countries that eliminated the wealth tax because it was so ineffective, yet there are no examples of property tax abolition. We can take a look at why.
Income tax is collected at the state level. Aside from being a more distortive tax than property tax, relying on income tax revenue would make local governments more dependent on state government. Greater reliance on the state government risks having less liberty, not more. Plus, the Florida state constitution prohibits a state income tax.
What about the sales tax? The sales tax is subject to volatility, whether seasonal cycles, economic cycles, or disasters, such as hurricane season in Florida. Texas was considering the idea of abolishing the property tax. To do so, the Texas Taxpayers and Research Association calculated that replacing all the property tax would require a sales tax of 19 percent, which would be an approximate increase of 11 percentage points. Even when Idaho reduced property tax, it was offset by a sales tax increase. For Florida to replace property tax revenue, the Florida Policy Institute estimates that Florida would need $50 billion.
Local government does not have many other tax levers aside from the property tax. Whether it is sales, income, excise, or corporate tax, that would in most cases come from the state level. Taking away property tax would make local government more dependent on state government. A reason why property tax abolition has not happened at scale is because no feasible replacement maintains fiscal balance and local autonomy.
If Florida were to abolish the property tax, cities and counties across the state would face a multi-billion dollar gap. It would either require a collapse of local government or local government would lose autonomy to the Florida state government. Would Florida honestly be more free with fiscal collapse or if local governments decide to rely on more regressive forms of taxation? Property tax abolition would likely increase coercion because local choice would disappear, state bureaucracy would grow, and taxation would become less transparent.
A Libertarian Case for Reform, Not Abolition
Property tax is the structural foundation that keeps local government going. They fund schools, police departments, roads, and local services. A pragmatic libertarian approach is not to fantasize about abolition, but rather reform tax policy. The James Madison Institute (JMI), which is Florida's conservative/free-market think tank, takes this approach. JMI views the property tax as increasingly burdensome, but stops short of abolition. A few suggestions that JMI provides include homestead exemptions, appraisal caps, levy caps, sales tax swaps, and gradual elimination of school-property tax millages. Other structural reforms, including assessment reform, zoning modernization, and spending caps, would help make the property tax reform options more lasting. With firm spending restrictions, property taxes and limited government can co-exist. But the way for that co-existence to occur needs to be with arithmetic and solid reform ideas, not alchemy or wishful thinking.
After months of infighting in its legislature, Mississippi passed a bill (House Bill 1) earlier this month to eliminate its state income tax. This will make Mississippi the tenth state to eliminate its state income tax. With the exception of the state of Washington, the other eight states are red states: Alaska, Florida, Nevada, New Hampshire, Tennessee, South Dakota, Texas, and Wyoming. The Mississippi Center for Public Policy, which is a free-market, conservative think tank, was happy because it believes that eliminating the state income tax will be a magnet for growth. Does this theory play out in practice or is this simply a free-market fantasy that will come back to bite Mississippi later?
When thinking about government budgeting, there are two basic components: tax revenue and spending (expenditures). Taking a look at Mississippi, an important question is how they will deal with taxing and spending as their income tax phases out over the next decade. Will Mississippi increase other tax rates to compensate for the revenue loss?
I have some concerns for Mississippi specifically. Other states have better mechanisms to compensate for a lack of income tax, usually through consumption taxes. Florida can sustain its economy with tourism, agriculture, and healthcare. Texas and Alaska have large oil reserves. Nevada has Las Vegas. Mississippi has historically relied on more labor-intensive industries combined with a lower labor force participation rate, lower educational attainment rate, and higher poverty rate.
There are also general concerns about relying on the sales tax in lieu of the income tax. As the National Conference of State Legislatures (NCSL) brings up, the average sales tax breadth, which is the percent of the economy included in the sales tax base, was higher in the 1970s than it is now, i.e., 49 percent versus 30 percent. This lower sales tax breadth has been combined with a higher sales tax rate. To make sales tax a viable replacement, the sales tax would need to be high enough and applied to enough of the state economy to generate adequate revenue.
So if Mississippi cannot completely compensate for revenue losses with consumption taxes, will Mississippi get its spending under control? That would be nice, but I am concerned about Mississippi's ability to cut budgetary spending because Mississippi has not shown budgetary restraint in recent years. On the other hand, Mississippi has the fourth lowest dependency on the income tax out of all states.
Looking at the Financial State of the States report from think tank Truth in Accounting, I am not surprised that three out of the five states in the best shape do not have an income tax, whereas the states in the worst shape (especially in terms of per capita debt levels) are amongst the states with either the highest income tax rates or well above average. The American Legislative Exchange Council (ALEC) shows some data in its Rich States, Poor States report that income rates and progressivity factor into the equation. Clearly, the income tax rate is not the only factor in fiscal health. However, it would be naive to think it does not play any major role whatsoever, especially given net migration patterns in which those living in higher-tax states are heading for lower-tax states (Census).
A longitudinal study from the Cato Institute examined income taxes from 1964 to 2004. The conclusion was that states with higher income taxes "stifled economic growth, entrepreneurialism, and access to capital (Poulson and Kaplan, 2008)." So maybe the Mississippi Center for Public Policy is right. Even if Mississippi is not in the best of shape right now, maybe that lower income tax could attract investment and more talented labor to build Mississippi's economy into a formidable one.
However, I do not think that the answer is a simple "yes or no." As I have brought up before, good tax policy is not as simple as "tax cuts good, tax hikes bad." If a state is looking to avoid some of the less desirable aspects of an income tax, then there needs to be an alternative that is fiscally sustainable.
As the Council on State Taxation (COST) details in its extensive report, the U.S. sales tax system deviates from the three main components of an optimal consumption tax: (1) a harmonized and broad-based consumption tax on household goods and services; (2) an exemption (or credit) for business inputs; and (3) centralized and simplified tax administration. COST ultimately recommends a hybrid federal/state government consumption tax similar to that of Canada.
Regardless of how states go about it, I will say this to conclude. If states are going to transition from relying on income tax to consumption taxes, they need to be sure they have a source of revenue that is adequate to replace the income tax and can do without creating economic distortions or administrative issues. Aside from the restructuring of tax systems, there would need to be a reassessment of government spending. Otherwise, the potential for state economic instability is real.
I recently came back from a sublime vacation in Colombia. I did so much in 11 days. I tried scuba diving, mud-bathing, paragliding, and riding and ATV for the first time. I also went surfing, learned salsa dancing, went on two separate hikes, and so much more. One of the issues I ran into during my trip was during my stay in Bogotá. One of the first things I noticed as I took a taxi through Bogotá was the graffiti. I have traveled through other cities before, including Chicago, New York, Philadelphia, Mexico City, Quito, Paris, and Stockholm. Yet never have I seen as much graffiti as I did in Bogotá.
It made me wonder why Bogotá was saturated with graffiti, whereas the other two cities I visited in Colombia (Cartagena and Cali) did not have that level of graffiti. In 2011, a 16-year old Bogotano by the name of Diego Felipe Becerra was spray-painting a picture of Felix the Cat on the walls of an underpass. Police caught Becerra in the act and killed Becerra as he was fleeing the scene of the crime. When a police colonel manipulated the crime scene, the people were in an uproar. This political pressure created by the protesting resulted in the subsequent decriminalization of graffiti in Bogotá.
The fact that Bogotá has a ton of graffiti makes sense. When something is decriminalized or legalized, you tend to get more of it because the barrier of criminalization is out of the way. Yet I found the proliferation of graffiti in Bogotá to be more than aesthetically unappealing. It was unsettling, as if it were an external symbol of the tumultuous nature of Bogotá.
Before continuing, I need to make the distinction between graffiti and street art. For one, graffiti tends to be more word-based, whereas street-art is more commonly image-based. About 80 percentof graffiti comes in the form of tagging. There are also throw-ups, blockbusters, wildstyle, and other forms of graffiti, but tagging is by far the most common. Street artists use other materials, but graffiti is typically created with spray paint. Street art is also perceived to be more positive than graffiti. This could do with the fact that street artists almost always ask for permission first, whereas those spray-painting graffiti do it when no one else is around to make sure they do not get caught. This latter distinction is where I take issue with graffiti.
The pro-graffiti side argues that graffiti is a form of expression and is thus inherently democratic, especially for those who otherwise do not have a voice (e.g., Carroll, 2019). I indirectly addressed this topic the context of pro-Palestine protestors a few weeks ago. Not every form of expression constitutes as freedom of speech, including violence, actual threats, bona fide intimidation, incitement of violence, discriminatory harassment, or the heckler's veto. Graffiti falls under this list of exceptions. Why?
It does not matter if you view graffiti as art or not. In libertarian thought, the premise of the nonaggression axiom is that your rights stop where mine begin, much like with second-hand smoke. Those who are spraying graffiti on walls are almost never doing it on their own property. They are most likely doing it on someone else's property. Property rights are valued highly, not only in libertarian thought, but in any free society. When you are spraying graffiti on someone else's property without their permission, it is not freedom of speech. It is a form of vandalism that is often accompanied with trespassing.
Freedom typically does not come at a cost to someone else. I made this argument when I refuted the supposed "right to healthcare." In 2015, American paint manufacturer Valspar released a technical paper finding that graffiti removal cost $12 billion a year. In 2008, the Environmental Protection Agency estimated that it was as high as $15 to $18 billion. If you adjust those figures for inflation, the estimated cost of graffiti removal is higher. This does not even get into property devaluation. According to the National Association of Relators, graffiti can devalue a property by as much as 25 percent. If it were truly a matter of freedom of speech, it would not come with this sort of price tag.
I am not going to get into the theory of whether graffiti is a gateway crime or if it encourages more crime. What I will say is that violating property rights by spraying graffiti has no place in civil society. If you want to artistically express yourself on someone else's property, ask for permission first. That is what the vast majority of street artists do. Yet we know graffiti artists do no such thing.
Most libertarians believe in limited government. It is rarer for a libertarian to say when the government should actually be present. I find that graffiti is one of those times that the government should intervene. Graffiti is vandalism and visual pollution under the guise of free speech. It comes with the direct costs of removing the graffiti, as well as indirect costs of devaluing property. These negative externalities are violations of the nonaggression axiom, especially with regards to defacing private property. Aside from enforcement or improving programming alternatives so they do not feel inclined to spray graffiti, encouraging street art could be another step in dealing with the blight of graffiti. Whatever the solution might be, decriminalizing graffiti has no place in libertarian thought or civil society.
"If you don't first succeed, try, try again." Those who are against Colorado's Taxpayer's Bill of Rights (TABOR) are no exception to this rule of thumb. TABOR opponents tried to get rid of TABOR in 2013 and 2019 in the state of Colorado to no avail. What do these opponents have against TABOR? The state of Colorado passed TABOR into 1992 to limit the amount of tax revenue the state can retain and spend. The TABOR formula looks something like this:
Total Spending Limit = Previous Year's Spending + (Previous Year's Spending X Inflation Factor) + (Previous Year's Spending X Population Growth Factor)
As we will explore shortly, I surmise that the TABOR opponents seem to take issue with spending caps hamstringing growth in government spending, which implies as a less flexibility in new government programs. On November 7, the state of Colorado is going to vote on Proposition HH. There are multiple facets to Proposition HH, which do not make it easy to follow. The local NBC 9 News has a good primer (also see video above), as does the Colorado General Assembly (see Figure below as part of that primer) and Ballotpedia.
The first main feature is a reduction in the growth of property taxes. This will entail in a reduction of property taxes for most residential types. More on that in moment. First, I want to point out that there is already something taking place in Colorado related to but independent of Proposition HH: property taxes rates are going to soar. What happened? The value of Colorado homes skyrocketed in value compared to a couple of years ago. In Colorado, the formula used for property taxes is "Property Tax Rate = Actual Value x Assessment Rate x Mill Levy." Looking at the formula and knowing what happened with property values, it should not be a surprise. However, Coloradans were surprised with notices that their property taxes went through the roof. Colorado Public Radio analyzed Colorado Department of Local Affairs (DOLA) data on property valuation to discover that the median Colorado home increased in value by 37 percent.
What Proposition HH proposes is to reduce the assessment rates on property tax. The reduction in assessment rate does provide some relief to the taxpayer relative to what is the status quo. However, this property tax relief is only part of the Proposition, which is why we cannot look at the property tax relief in isolation.
The second major component of Proposition HH will be an increase in the spending limit under TABOR. If Proposition HH passes, the spending limit would increase by an additional 1 percent annually until 2032. This would not only boost government spending, but it would shrink the income tax refunds under TABOR. Excess revenue would be distributed to school districts and other local government entities.
Lower property taxes would likely be offset by higher state taxes, which is especially undesirable if you are a renter who does not pay property tax. The Right-leaning Common Sense Institute (CSI) calculated that Coloradans could save $9.92 billion between now and 2032, whereas state taxes could increase by $9 billion, or a net savings of $0.2 billion. While this does not de facto eliminate TABOR state income tax refunds, it does make it less likely for Colorado's taxpayers to receive these tax refunds.
Proposition HH gives the legislators the opportunity to vote in 2032 whether to extend the tax cut and the spending growth. If the legislature passes the extension, it could mean a tax increase of $20.9 billion between now and 2040 (CSI). The reason for a larger difference between 2032 and 2040 is the compounding nature of adding an additional 1 percent on the spending cap per annum. That is the impact on the statewide level.
For the median individual, there would be a reduction in taxes of $4,641, whereas there would be an increase in state taxes of $5,119 by 2032. The net impact for the median household? An increase in taxes of $478 per annum (ibid.) if Proposition HH is enacted through 2032.
It is not only the net tax effect that is worrisome; it is also the spending. The Dean at the CU School of Public Affairs saw this as a "clever strategy" to grow spending levels that are comparable to other states. Since the proposed change is compounding in nature, the amount of spending that would increase would be more grave over time. If Proposition HH passes, that means the spending limit would grow from $170 million in 2024 to $2.2 billion in 2032. If extended, that would mean an additional cap of $5.8 billion by 2040.
The Left-leaning Bell Policy Center (BPC) brings up two relevant criticisms. One is that the CSI is projecting out too far because it is difficult to make macroeconomic projections, especially out to 2040. I brought up this concern about modeling when discussing climate change as to how difficult it can be. Last year, I tried figuring out if we were in the middle of a recession. While I thought it was likely and I made sure to caveat my prediction, it turns out that the National Bureau of Economic Research did not declare a recession for 2022. I would not take the projections literally so much as I do seriously. Regardless of the exact magnitude of government spending, having a spending cap increase larger than the property tax cut is cause for concern.
The second criticism from the BPC is that nothing in Proposition HH raises. This is technically true. The second major component on Proposition HH is not a state tax hike, but it is an increase in the spending cap. At the same time, I have to ask myself two questions. The first is how likely it would be politicians, especially in a swing state that has a Democrat majority in both branches of its legislature, is likely to keep government expenditures significantly below the spending cap. The second question is why TABOR came into being in the first place. To reiterate, TABOR limits the amount of revenue the government can retain and spend. TABOR also gives Colorado citizens the power to approve tax increases, which it has not done for state income or sales taxes. When you spend way more money than you have in the long-run, there ends up being debt. Government spending is the major driver in the federal government's fiscal crisis so much so that Fitch's lowered its credit rating for the United States back in August. State government is not immune from the adverse effects of such fiscal irresponsibility.
Relaxing the spending caps can be problematic since they have been proven as a tool for fiscal discipline and solvency. One study from the European Central Bank shows that spending limits are superior to anti-deficit rules (Benalal et al., 2022). A paper from the International Monetary Fund (IMF) shows that fiscal rules bring about fiscal discipline, especially in election years (Eklou and Joanis, 2019).
Especially for a swing state drifting towards being a blue state, Colorado has been able to maintain fiscal sanity. That is in large part due to TABOR and the spending caps implemented. The American Legislative Exchange Council (ALEC) released a report in November 2022 showing how Colorado's TABOR became a gold standard of state fiscal rules. If Coloradans vote "Yes" on Proposition HH, their fiscal state will look less like one of stability and more of the fiscal dysfunction that is common with such blue states as Illinois. Especially if extended to 2040, Proposition HH would undo all of the fiscal discipline that TABOR brought to Colorado for the past thirty-plus years. If you live in Colorado, please vote "No" on November 7.
Last week, I was getting on the bus and I noticed something uncanny: almost no one was paying fare to get on the bus. I thought perhaps this was a remnant from the COVID era when they suspended bus fares to maximize social distancing between the bus driver and passengers. Alternatively, I thought people skirting fare payment was another symptom of higher crime here in the Washington D.C. area. It very well could be neither one of those things. In December 2022, the D.C. Council unanimously approved eliminating the $2 bus fare for all D.C. buses, which made D.C. the largest U.S. city to implement zero-fare buses.
This plan was to take effect in July 2023. However, it was in May 2023 that the Washington Metropolitan Area Transit Authority (WMATA) asked that the plan be delayed for a year. As of date, WMATA still shows the $2 charge on its website. Fare evasion has become an issue to the point where the D.C. Council is trying to pass a bill to step up fare evasion enforcement. Regardless of whether WMATA approves the elimination of bus fares begs the question of whether the idea of free-fare buses are wise transit policy.
The premise behind offering zero-fare transit is to boost declining ridership. There are some who view zero-fare buses as a way to improve transit access to lower-income individuals. Zero-fare buses do indeed increase ridership. You would hope that giving something away at no cost to an end-user would increase usage. In spite of increased ridership, zero-fare buses did cause other unintended consequences.
As the 2012 National Academies report entitled Implementation and Outcomes of Fare-Free Transit Systems points out, increased ridership also increased delays, overcrowding, and "problem passengers." The increased rowdiness from these "problem passengers" could actually increase a need for security services that exceed the contact between law and enforcement and riders for evading fares (e.g., Studenmund and Connor, 1982). These are actually some of the reasons why Austin and Denver abandoned their free-fare transit.
Another argument for the policy is to divert people from using their cars in favor of public transit, which would help with carbon emissions. A third rationale would be to ease bottlenecks on already-congested transport networks. To quote the Left-leaning news outlet CNN, "fare-free supporters also hope dropping fares will improve congestion, carbon emissions, and noise pollution from cars by getting more drivers to take transit. But results from European cities reveal little evidence it accomplishes these goals."
A September 2020 study from the International Association of Public Transport showed this lack of evidence by concluding that "there is no evidence that free fare public transport (FFPT) alone is not enough to bring about modal shift, social inclusion, and economic development to a city." The lack of modal transfer was observed in the Estonian capital of Tallinn (Cats et al., 2017), as well as Trenton, New Jersey and Denver, Colorado (Studenmund and Connor, 1982).
Then there is the ill-conceived notion that this would actually be free. As Nobel Prize economist Milton Friedman was fond of saying, "there is no such thing as a free lunch." Scarcity is a key concept in economics because we live in a world of limited resources. As such, supply will almost always, if not always, exceed demand for a good or service. Part of economics is to find ways to best allocate limited resources in the midst of scarcity.
Public transit is no exception and couching support for zero-fare buses in terms of "return on investment for empathy, compassion, and social equity" does nothing to skirt that reality. As a matter of fact, the reason why WMATA asked for a delay for zero-fare buses is because WMATA is anticipating a $750 million budgetary shortfall in 2025. I could hear a clamoring for increased taxes to help pay for zero-fare buses. Here is the thing: a March 2022 report from the Congressional Budget Office (CBO) pointed out that two-thirds of the income for transit agencies comes from government sources (i.e., taxation). Budgetary woes were an issue for transit agencies across the United States pre-COVID. The pandemic only exacerbated these shortfalls. Zero-fare advocates cannot contend that lost funds need to be recuperated somehow.
Zero-fare systems deprive transit systems of funds that they can use to improve quality of service. According to a 2019 survey of transit riders across multiple U.S. cities from transit advocacy group TransitCenter, the main area of improvement identified by transit riders was quality of transit services. Concerns about fares were much lower on this list of priorities. This lines up with WMATA survey results from Fall 2022 that indicated that fast, frequent, and reliable service are top priorities for WMATA passengers.
Much like with bans, a blanket zero-fare policy are a blunt instrument that causes further damage to the transit system that they are trying to save. Using zero-fare systems to deprive transit agencies of much-needed revenue would plausibly make transit less reliable, less frequent, and less safe.
Ideally, I would have transit be privately owned, operated, and funded (also see Cato Institute analysis here). Short of that, you could have a targeted fare policy in which you offer lower-income household reduced fares to balance transit agency budgetary concerns with access to public transit. Unfortunately, I see the zero-fare crowd gaining traction because it is an easy political win that does nothing to help improve bus service quality or the budgetary woes of transit agencies.
An even-numbered year in U.S. politics means it is an election cycle. One of the aspects of the election cycle I enjoy most is the ballots on the state and local level. The variety of topics and the potential impact I find intriguing. This election cycle will bring ballots on abortion, as well as five states determining whether marijuana should be legal. While those are important topics, the ballot that I think is most consequential this election cycle is in the Commonwealth of Massachusetts.
This month, the citizens of Massachusetts will vote on a ballot called the Tax on Income Above $1 Million for Education and Transportation Amendment (also known as Question 1 or the "Massachusetts Millionaire Tax"). Question 1 asks whether the state government should amend the state constitution to create an additional 4 percent income tax on those making an income over $1 million. For millionaires, this would be an additional 4 percent on the already-existing 5 percent, thereby bringing the total to 9 percent. The Tax Foundation has a nice map of state income tax rates (see below). By New England standards, the Massachusetts state income tax is relatively low. That would change if Question 1 passes.
Fair Share MA, who are the main proponents of Question 1, argue that this will make the Commonwealth better for all, especially since the funds would be directed towards public education, roads, bridges, and public transportation. For public education in particular, this funding would help students in public schools to thrive. This, of course, ignores how the school closures disrupted learning in the pandemic in the first place. Leaving that aside, the premise of the argument is that this tax revenue would help the economy and help the Commonwealth recover from COVID-19.
I get skeptical when people talk about "fair share" with taxation because it such a subjective concept. I have analyzed multiple attempts at making taxation "fairer," whether that has been the wealth tax, the corporate tax, Illinois' failed attempt to pass a "fair" state income tax, or the marginal tax rate for federal income taxes. An attempt to make taxation "fairer" often leads to negative unintended consequences. I have to wonder whether the tax proposed in Question 1 will have similar, negative effects.
Tax Revenue
A report from Tufts University's Center for State Policy Analysis evaluates the Massachusetts Millionaires Tax. Tufts calculated that the tax would raise $1.3 billion of revenue in 2023, which is the equivalent of 0.3 percent of Massachusetts state income. A report from the think tank Beacon Hill Institute comes to similar findings with tax revenue (see below). The Tufts study finds that short-term economic impact would be negligible.
The Tufts study posits that the size of the tax is too small to have any major economic impact. At the same time, it recognizes that the tax revenue from this tax would be 35 percent higher if it were not for tax evasion and cross-border migration. Most of that tax loss in 2023 would be due to tax evasion ($670M), as opposed to cross-border migration ($100M). I appreciate the sense of nuance because I recognize that tax policy goes well beyond the over-simplified argument of "lower taxes = good; higher taxes = bad."
Negative Economic Impacts
The Tufts study comes up short because it only asks what the impacts on the tax revenue are. While it mentions other economic impacts, it does not attempt to quantify them. Tax evasion and cross-border migration have economic impacts both in the short-term and the long-term. The Tax Foundation makes this point abundantly clear in its analysis on the Massachusetts Millionaire Tax.
Declining GDP Output: The Tax Foundation cited a paper from economists Christina Romer and David Romer (Romer and Romer, 2010). Both are Keynesian economists and the former worked in the Obama administration. The Romers found that a tax increase equal to 1 percent of GDP results in a 3 percent decline of GDP in three years. Using that ratio and applying it to this Millionaires Tax, it would mean that the Commonwealth would lose an estimated $5.96 billion in GDP output by the end of 2025. The catch is that the Romer finding is based on federal income tax data. Since it is easier to avoid state-level taxes than it is federal-level taxes, it is likely that this $5.96 billion in lost GDP is a low-bound estimation.
Labor Fleeing the Commonwealth: Not only will the GDP decrease as a result, but so will the labor market. The Beacon Hill Institute report estimates that employment will drop by 9,329 individuals within the first year due to people leaving the Commonwealth (see below). This is not merely conjecture. A paper from the Journal of Economic Perspectives, which includes economists from Princeton and the London School of Economics, recognizes that high-income individuals sometimes move across borders in response to higher taxes (Kleven et al., 2020). Again, the Tufts study also recognizes there will be at least some outmigration.
Adjusted Gross Income: What should be more disconcerting is the net outmigration of adjusted gross income (AGI). As the Tax Foundation astutely points out, AGI is an important metric because income levels drive household spending. In terms of tax revenue, 57 percent of Massachusetts state tax comes from the individual income tax. Massachusetts has had net negative AGI since 1993 (see below).
In 2020, the biggest destinations for net migration Massachusetts AGI were New Hampshire and Florida, which are both states without income tax (see below). This trend largely held true between 2012 and 2020. If this ended up being the case before the Millionaires Tax, imagine how much more migration there will be if the tax is passed.
Will The Tax Revenue Be Spent on Education and Transportation?
Then there is the matter of how the tax dollars are actually spent. Tufts University believed that long-term economic impact would depend on whether the funds are actually used to increase education and transportation investments. This is because the tax revenue dollars remain fungible, which is to say that other tax dollars could be spent in a way that allows for the overall budgetary state of affairs for education and transportation to remain roughly the same. Plus, the text of the ballot measure clearly states that the revenues are "subject to appropriation," which means that the taxes can ultimately be spent on whatever the Commonwealth wishes.
Is This Additional Tax Revenue Necessary?
This also assumes that there needs to be increased expenditures. In general terms, Massachusetts tax revenue has been growing even in spite of the pandemic and lockdowns. You can see the Commonwealth's tax revenue data, as well as the data from the Federal Reserve Bank of St. Louis (see below). The graph below looks a bit volatile because the Fed collects and reports the data on a quarterly basis, with the fourth quarter being the largest quarter for tax collection purposes. Even so, the overall trend is still an upward one.
While increasing education spending has wide political appeal, Massachusetts already has the seventh highest per capita education spending. What about transportation? In its report on state highway performance rankings, the Reason Foundation ranked Massachusetts 47th in cost-effectiveness and condition. To quote Beacon Hill Institute report, "outside of general repairs and maintenance, the case for higher spending on transportation in Massachusetts is weak."
It Does Not Only Affect Millionaires
In spite of the title "Millionaire's Tax," it will not only affect the super-wealthy. This has the potential to hit middle-class workers who would be deemed "one-time millionaires." A small business owner (e.g., subchapter S-corporation, LLC, partnership) can sell their company, either at retirement or beforehand. This sale counts as "pass-thru income" on their individual tax forms, thereby making it taxable under the proposed constitutional amendment. This tax would diminish an owner's retirement savings. What about someone who decides to sell a home? If someone sells a modest vacation home that they bought 30 years ago, it could push them in this new income bracket that would raise their taxes by 80 percent. Such taxation can adversely impact the investments, including the nest eggs, of non-millionaires who are looking to retire. While this tax policy will not directly affect low-income households, this point serves to illustrate how imprecise tax policy can affect more than the millionaires that the amendment seeks to tax.
Postscript
Massachusetts has been faced with five previous attempts within the past century to soak the rich with taxes: 1962, 1968, 1972, 1976, and 1994. Each time, this relatively liberal state has been able to avoid such temptation. Given the increased political discourse around income inequality and "tax the rich" that has taken place since 1994, I have to wonder if the Commonwealth can resist such temptation.
The flat income tax is one of the only advantages of the Massachusetts tax system, according to the Tax Foundation's State Business Tax Climate Index. If passed, it would most likely be a repeat of what happened in Connecticut when it switched to a highly progressive tax system in 1996: lower GDP, higher unemployment, and higher migration to other states. The economy is not some abstraction or mere collection of numbers. Economic climate affects the overall wellbeing of everyone, not just millionaires.
Massachusetts has struggled with outmigration of economic activity for a number of years. This surtax on millionaires would only exacerbate economic trends in the Commonwealth. I hope that Bay Staters can resist the urge of populist economic policy and vote "No" on Question 1 this November.
With a pandemic, recession, social unrest, and a presidential election dominating the news cycle, you would think there would be little room for much else. And yet, there is some space for sports betting. As of August 2020, 19 states have legalized sports betting since the Supreme Court ruled that sports betting should not be under the purview of the federal government (Murphy v. NCAA, 2018). This Tuesday, there are two states that are voting on ballot initiatives to be added to the list of states that legalize sports betting: Maryland and South Dakota. South Dakota is deciding whether to allow for sports betting within the limits of the town of Deadwood, which houses a casino and is near Mount Rushmore. The net municipal proceeds would go to the Deadwood Historic Restoration and Preservation Fund. In Maryland, the state revenue funds generated are intended to go to fund public education. In both cases, the ballot initiatives bring up the question of whether we should legalize sports betting.
Revenue and Jobs Generation: One of the obvious benefits is the money that sports betting generates. In May 2017, Oxford Economics released a report saying that legalizing sports betting in the United States would add anywhere between $11.6 billion and $14.2 billion to the United States GDP. Oxford Economics also found that it could generate 86,819 jobs directly, as well 129,852 indirect jobs. Keep in mind that would be the case if the entire country legalized sports betting. The state of Maryland's legislative analyst estimated that a 20 percent table games tax rate would translate into $18.2 million of tax revenue for the state of Maryland. While there is greater economic potential in the private sector, the Tax Policy Center warns of the limits of counting on sports betting being a cash-cow, especially given how sports betting operates and is taxed (Auxier, 2019).
Issues of Underground Markets and Exploitation: Whether it has been marijuana, prostitution, or human organ sales, there is a major concern of what happens when you drive something to the underground market. For one, the legal economy is deprived of the revenue generated from that commerce. This is important, especially considering that sports betting is a $155 billion market [in 2017 dollars], 97 percent of which was generated illegally in underground markets, as of 2017 (Reason Foundation). It is clear that sports betting, regardless of its legal status, is a desired trade. Second, underground markets lead to abuse of power and empower criminals. We see this when pimps abuse their prostitutes, drug lords are able to carry out unspeakable acts, or when a dysfunctional immigration that keeps workers undocumented, which not only keeps their potential in the labor down, but also leaves them open to exploitation in the workplace. In the case of sports betting, keeping sports betting illegal empowers bookies. Keeping sports betting illegal drives people into the arms of the criminal underworld.
Is Gambling Addiction a Concern with Legalization?: This is one of the main concerns of those who are against sports betting. Their theory is that if we legalize sports betting, this will increasing the amount of gambling addiction. A 2016 study from the National Institutes from Health sheds some light on the matter (Welte et al., 2016). The NIH study looks to see if an increased amount of gambling legalization and availability of gambling options increased the rates of gambling addiction and problem gambling. Interestingly enough, these rates remained stable with increased legalization. The best explanation for that is because the ubiquitous nature of the black market makes gambling easily accessible. This is yet another reason to legalize. Instead of stigmatizing gambling addictions related to sports betting, legalization would bring it to light in a way that would help those who need it. Making sports betting doesn't make the gambling problems go away. It sweeps them under the rug while adding on other problems that come with the underground markets.
Conclusion: It makes very little to no sense to keep sports betting illegal. As has already been proven, people will find a way to partake if they want, whether it is by going underground or crossing state lines to a place where it is already legal. Legalizing sports betting is shown not to increase gambling rates, and keeping it illegal is not shown to make gambling addiction go away. Even better, legalizing sports betting does not make game fixing more likely (Morris and Bentley, 2017). Legalizing sports betting helps to keep power away from those operating activities while generating revenue for both the government and the economy at large. If you live in Maryland or South Dakota, please vote "yes" to legalize sports betting.
The right to a pretrial bail is so old that it predates the Magna Carta. It is a right that is also protected in the United States Constitution under the Due Process clause (United States v. Salerno, 1987). This upcoming November, the state of California is voting on Proposition 25 in the hopes of doing away with cash bail. Back in 2018, the California legislature passed legislation on replacing cash bail with an algorithm-based risk assessment to determine whether the suspect is a flight risk enough to be incarcerated pretrial. This assessment would result in certain monitoring conditions throughout the trial. Unsurprisingly, the bail industry filed a veto referendum to dispute SB 10. If Proposition 25 passes, then cash bail will be a thing in the past. Here's what I am wondering: if pretrial bail has been such an enshrined right historically, why take issue with it?
The purpose of cash bail is to provide an incentive for those who are released pretrial to appear for their court dates. For those in favor of Proposition 25, there is the criticism that the cash bail system does not judge an individual based on an actual flight risk. Those who fare better in the cash bail system are those who are wealthier. Most who are wealthy can afford bail with little to no impediment. As for those who are poorer, they are forced to pay a disproportionately large amount of cash to work and be with their family as they await trail, regardless of whether they are minimal flight risk. On top of that, it entails giving the bail companies a nonrefundable premium worth 10 percent of the bail (e.g., a $50,000 bail means losing out on $5,000). For those who cannot afford to pay, they stay in jail. Not only are they deprived of working in while awaiting trial, but those who are stuck in jail are often forced to accept harsher plea deals than those who can fight the charges unincarcerated (Donnelly, 2018).
This brings us to the cost of the California bail system. As of 2014, 62 percent of prison beds (or about 50,000 beds) in California were filled with those awaiting trial, according to the Public Policy Institute of California [PPIC]. A Human Rights Watch report uses an estimate that the daily cost per prisoner is $113.87. Assuming that cost is accurate, that would mean the daily cost of imprisoning unsentenced individuals is about $5.7 million daily (or $2.09 billion annually). If we use the daily cost nationwide of $77.67 found in a December 2018 report from the centrist Brookings Institution, that would still mean an annual cost of $1.4 billion. These calculations would assume, of course, that all the unsentenced individuals would not be incarcerated. The high-bound assumption could be why the California Legislative Analyst Office [LAO] estimated that the reduction in local jail costs would be in the high tens of millions, instead of a higher amount.
This leads to the trade-off of replacing it with a risk assessment system. The aforementioned LAO fiscal impact report estimated that a new system under Prop 25 would cost in the mid-hundreds of millions of dollars, implying that the net cost could be higher under Prop 25. The fact that the LAO does not put a dollar amount on it makes it more difficult to determine net cost. The PPIC had a similar issue of putting a price tag on Prop 25 this past August.
Many Left-leaning individuals have been for Prop 25. However, there are some on the Left (and not just the American Bail Association) that believe that Prop 25 will make matters worse. The Essie Justice Group believes that it will have an even larger, disproportionate effect on minority communities. This seems to have been the case when the state of Kentucky removed its cash bail system (Albright, 2019). New Jersey had mixed results. On the one hand, pretrial imprisonments dropped by 27 percent since it removed cash bail in 2017. On the other hand, racial disparities did not budge. The ACLU of New York released a policy brief this year on how risk assessment tools perpetuate socio-economic and racial disparities. A group of researchers, including those from Harvard and MIT, signed a letter in 2019 saying that these tools do not reduce racial disparities.
The fact that the cash bail system de facto punishes many by throwing hundreds in jail before being tried, many of whom are low-risk, non-violent offenders, makes the idea of "innocent until proven guilty" a cruel joke or something that only applies to those who can afford it. Bail reform is needed. At the same time, one could argue that risk assessment tools perpetuate past biases of the criminal justice system. While there are issues with both the current cash bail system and risk assessment tools, I think I have a slight preference for Prop 25. I like how the Brennan Center for Justice concludes: If California votes "no," they should go back to the drawing board, get rid of cash bail, and avoid risk assessment tools. If California votes "yes," we should monitor the implementation of risk assessment tools to make sure disparities are not being perpetuated in the criminal justice system.
One of the things I enjoy most about election season is not the presidential election hullabaloo or even when you have Supreme Court justice vacancies. I personally get a kick out of the state ballot measures voted on in November. They are voluminous, they cover a wide range of topics, and they have greater impact on our lives than we can anticipate. Some of the fun ones I have covered in past years have included single-payer healthcare, condom use in the porn industry, the right to hunt, and labels for genetically modified food. Today, I will cover minimum wage, tax reform, labor market reform, and marijuana.
Florida Minimum Wage: Florida is looking to increase its minimum wage to $15 per hour by September 2026 (Amendment 2). The legislative branch's research arm, the Florida Office of Economic and Demographic Research (EDR) conducted a fiscal analysis of the ballot initiative. The EDR found that by 2027, it would cost the state of Florida $540 million per annum. Proponents argue that Florida needs to increase the minimum wage to account for rising costs in housing and transportation. Aside from contributing to the broader economy, the additional spending would offset the unemployment losses.
The Congressional Budget Office (CBO) released a study on what a $15 federal minimum wage would look like. CBO found that while 1.3 million would be pulled out of poverty, the same amount of people would become unemployed. That on top of the fact that it would have a net cost of $8.1 billion. Not exactly an economic booster! Data from the last recession also found that minimum wage increases prolong recessions. Not exactly a winning policy if one of the main goals is to pull Florida out of the recession. Generally speaking, minimum wage increases such as these make it more difficult for low-skill labor to find or retain work, it is a poorly targeted policy when it comes to poverty reduction, and adversely impacts business operations. If you live in Florida, vote "No" on Amendment 2. For further analysis on Amendment 2, see the Reason Foundation's analysis here.
Illinois "Fair" Tax: The main ballot initiative in Illinois this November is for what has been colloquially referred to as a "fair" tax. Essentially, Illinois is looking to switch its income tax from a flat tax (everyone pays the same percentage) to a graduated tax system (the richer you are, the higher percentage you pay). I covered the Illinois "fair" tax last year, but the proposed brackets are the same, so the analysis still applies. Aside from asking what constitutes as "fair when it comes to taxation, I took issue with the following:
The tax will not close the budgeting gap.
The tax reform does nothing to change Illinois' atrocious spending habits.
The "fair" tax does not adequately address the issues of fairness that proponents purport.
Illinois already has lousy tax competitiveness. Switching to a graduated tax system will simply incentivize more people to move outside of Illinois.
Illinoisans should vote "no" on the "Illinois Allow for Graduated Income Tax Amendment." If you want more recent analysis on the ballot initiative, here is one from the Tax Foundation.
California Gig Economy: Last year, the California legislature passed Assembly Bill (AB) 5, which applied a three-factor test to determine whether a worker could be classified as an independent contractor under California law. AB 5 had considerable implications for gig workers, but especially app-based drivers (e.g., Uber, Lyft). If it passes this November, Proposition 22 would essentially reverse AB 5. I covered AB 5 last year shortly before it became law this past January. I thought AB 5 was inferior policy because a) it would cause greater unemployment, b) cost the California economy millions, c) increase costs for consumers, and d) eliminate the flexibility in hours that most app-based drivers prefer to the 9-5 work hour.
Looking at the analysis by the California Legislative Analyst, it would create a minor boost in income tax revenue because drivers would be earning more in income. More to the point, passing Proposition 22 would "would allow the companies to charge lower fares and delivery fees. With lower prices, customers would take more rides and place more orders. This could increase the companies' profits. High profit would increase the companies' stock prices." This analysis points out that AB 5 has been hurting app-based drivers, customers, and companies that hire gig workers alike. In case you need more convincing, here are analyses from Reason Foundation and the American Action Forum. I urge Californians to vote "Yes" on Proposition 22 this November.
Marijuana Legalization: This November, we have four states looking to legalize recreational marijuana - Arizona, Montana, New Jersey, and South Dakota. Reason Foundation provides analysis on each of these ballot initiatives. There is a reason states have been trending towards legalizing marijuana in recent years. It is because the fears and stigma surrounding marijuana have been overblown, to say the least. Colorado legalized in 2014, and it has not been anywhere near the disaster that naysayers thought it would be. Economically speaking, marijuana legalization makes sense. We're not spending millions to enforce laws (that includes policing, prosecuting, and imprisonment costs), which means we can focus on more serious crimes. There is more government revenue, which means that if government dollars can be spent, it could spent where it could do more good, instead of punishing a victimless crime. Also, we can reduce the size of the underground market. This is great not simply because it expands the legal economy, but because less commerce in the underground market gives criminals and drug lords less power. Let's continue the trend towards marijuana legalization by voting these ballots and making them the law of the land for these states.
As if it were not enough that Congress passed a stimulus bill (the CARES Act) that exceeded $2.1 trillion, the House now wants to pass another $3 trillion bill: Health and Economic Recovery Emergency Solutions (HEROES) Act. If the HEROES Act passes, it would nearly double the $3.6 trillion Congress has spent since mid-March. Part of the HEROES Act is the Coronavirus State Fiscal Relief Fund, which would be to the tune of $540 billion. The purpose of this Fund is to provide aid to states that are financially struggling due to the unanticipated costs of coronavirus. As nice as it might sound to help states in need during this pandemic, this is a deficient policy response for a few reasons.
1. The aid does not address coronavirus-related costs. If you look at the language of the HEROES Act, it states that the funds are available "for making payments to States, territories, and tribal governments for any purpose (own emphasis added)." This is essentially unrestricted aid that does not directly respond to costs incurred because of the pandemic. This is not coronavirus aid or relief; it is a bailout to state governments.
2. States already have rainy-day funds. As the Tax Foundation illustrates (see below), states have rainy day funds. Rainy day funds exist precisely for when such unforeseen circumstances as this pandemic happen. It is reassuring that rainy day funds fared better now than they did before the Great Recession (Pew Charitable Trusts). Plus, Congress already provided $150 billion to states in coronavirus-related aid in the CARES Act to supplement its rainy day funds.
If you are a government official that is worried about your coffers, perhaps it is time to reconsider the lockdowns. Since the current economic downturn is caused by suspending various forms of economic activity, it is possible that such funding could shield states from the costs of implementing lockdowns, thereby delaying economic recovery.
3. The HEROES Act would continue to reward fiscal mismanagement. The unrestricted nature of the aid combined with the fungible nature of money would make the Fund a de facto bailout of debt primarily created by burgeoning pension costs and retiree health costs (Pew Charitable Trusts). As the Wharton School of Business at Penn State mentions, the pension issue has been around for decades. Much like I brought up with the U.S. Postal Service earlier this week, the problems of state governments predate the COVID-19 pandemic.
According to another report from Pew Charitable Trusts, the states that managed their funds best are the ones who took their actuaries' advice, as well as cutting benefits and increasing contributions when needed. How fair is it for states who exercise fiscal discipline to pay for those who do not? My home state of Illinois is a good example. Out of the $33.6 billion it requested for its state budget (the remaining $6.4 for UI benefits), only $2 billion [for Medicaid benefits] would have been for pandemic-related expenditures.
To reiterate, funding has been provided to address the immediate concerns brought on by the pandemic. Anything beyond that would be imprudent.
4. Past bailouts of state government created greater and more inefficient government spending. In response to the market turndown of 2002-2003, the Bush Administration approved $20 billion in state government bailouts through the Jobs and Growth Tax Relief Reconciliation Act of 2003. Instead of getting finances under order, state spending increased by 33 percent from 2003 to 2008 (Norcross, 2010).
State budgeting did not fare better under the Great Recession. The American Recovery and Reinvestment Act (ARRA) allocated $300 billion to state governments as a bailout. About $50 billion was meant for education systems stabilization. But as the Right-leaning Heritage Foundation points out, most of that education funding was not for stabilizing, but for expanding staff, especially non-teaching staff. In spite of the $90 billion in ARRA Medicaid funds meant to be a one-time provision, 28 states built in their 2011 budget the expectation of higher Medicaid funding (Norcross, 2010). According to the Federal Reserve Bank of San Francisco, the $70 billion allocated towards transportation projects were skewed towards state with lower unemployment, i.e., states who needed the funding less (Wilson, 2009).
Through these bailouts, we see the federal government becoming more responsible for state budgets. The percent of state funds from federal revenue grew from 26.3 percent in 2001 to 32.4 percent in 2017 (Pew Charitable Trusts). All this moral hazard done is created greater incentive for states to rack up unfunded liabilities while depending on the federal government to solve their problems.
5. This would create fiscal pain and a disturbing precedent for the future. If we throw billions of unrestricted dollars to state governments now, it would create moral hazard of a high magnitude because it would create poor incentives while doing nothing to solve state budgetary issues. It would allow for the federal government's increasing role in future state-level government affairs, which would further erode state sovereignty. More to the point, past bailouts have already eroded fiscal discipline for many states and have made state budgets less resilient in future crises. Plus, it would push the U.S. federal debt closer to a level of disaster because it would mean we would pay interest in the long-term.
Ultimately, Congress' response should be towards the temporary and targeted approach to the pandemic, not by creating perverse incentives that will affect budgeting processes for years to come.
There are those, such as Peter Nicholas over at The Atlantic, that argue that there is no such thing as a libertarian in a pandemic. How can there be? We are faced with a pandemic in which only the government can provide the solution, or so goes the argument. I can acknowledge that the government has a role to play in handling the pandemic. For example, testing is vital in fighting coronavirus (COVID-19), which is why I wouldn't have a problem with government subsidies for both molecular and serological testing. After all, I am a proponent of limited government, not a proponent of no government whatsoever. At the same time, I remain skeptical of government largesse being the solution to the problem. Over the past few weeks, I have been keeping track of the developments of COVID-19 and how we, either as a society or a nation, have responded. What I have noted is that there were multiple instances in which government regulation that existed prior to the COVID-19 outbreak undermined our response to adequately fight COVID-19. Not convinced yet? Read on.
1. Federal testing regulations. One of the largest criticisms of the United States' response to fighting COVID-19 is that there was not mass testing at the onset. If we were able to identify hotspots, who is infected and needed to be isolated, along with other epidemiological data, we could have greatly limited COVID-19's influence on our lives. I agree that President Trump did not respond to the severity of COVID-19 soon enough. Even if he had, something else was already in the way: the Food and Drug Administration (FDA).
The first emergency use authorization (EUA) that the FDA issued was on February 4 for a real-time diagnostic panel. The issue with this diagnostic panel is that only the Centers for Disease Control and Protection (CDC) could administer it. Its next emergency use authorization was not until March 13.
While private-sector organizations and postsecondary institutions were all too eager to get testing kits manufactured, the CDC warned them to not do their own testing without an EUA from the FDA. It took until February 29 for the FDA to start developing a fast-track, which was over a month after the first COVID-19 case was identified in the U.S. on January 21. Here is an article from the New York Times outlining it further.
Even better, Germany already had a test available, and China had five COVID-19 tests on the commercial market. The FDA does not grant reciprocal approval for testing already approved in other countries because FDA regulations dictate that they need to be approved by the FDA first. If the FDA were not strangled by its own red tape, we would not have had nearly as bad of a shortage in testing kits as we had.
As of date, the FDA's EUAs do not apply to at-home testing. Let's forget that errors can be detected with positive/negative controls, at which point you simply do a re-test. The main issue with this restriction is that merely visiting the hospital can result in a COVID-19 infection.
If you need a timeline for how the FDA and CDC dropped the ball on the testing, here is one from The Dispatch. Also, here are scathing reports from ProPublica and USA Today on this debacle.
2. Tariffs on medical products. I have no love for Trump's trade war for China. As I have argued before (see here and here), Trump's tariffs on Chinese imports have lowered employment, translated in a smaller GDP, and made consumer goods more expensive. Now we have another reason to show disdain for this trade war: the tariffs on imports of Chinese medical products. In its analysis on these tariffs, the Peterson Institute for International Economics shows how these tariffs have made it more difficult for the United States to get valuable medical equipment (see below). The differences were especially noticeable for CT systems, patient monitors, and thermometers. Even for those where imports were not negative, the tariffs cost additional resources, resources that could have been spent on fighting COVID-19.
3. Certificate of need laws and hospital beds. This next grievance has to do with state-level policy. In 35 states, there exists what is known as certificate-of-need (CON) laws. The idea of CON laws is to have state planning agencies approve major capital expenditures for certain health facilities in order to keep hospitals from overspending. According to Mercatus Center data, 28 states have CON laws for hospital beds. More striking is the research that the Mercatus Center conducted on CON laws in its February 2020 report. The takeaway from this reports that "controlling for other factors, relative to patients in non-CON states, patients in CON states have access to fewer hospitals per capita, fewer hospital beds per capita, fewer dialysis clinics, fewer ambulatory surgical centers, fewer medical imaging services, and fewer hospice care facilities." What is scary is what Mercatus Center found for the state of New York, the state most heavily hit by COVID-19. If CON laws did not exist in New York, New York would have 317 hospitals across the state instead of its current 220 hospitals. CON laws have not only limited healthcare access in a time of need, but they put thousands of lives at risk in the middle of this pandemic. Even without a pandemic, the Mercatus Center found that the mortality rate for states with CON laws was higher than those without (Koopman and Stratmann, 2016).
4. Anti-price gouging laws. When disasters hit, people stock up on things. In this case, people fear that they will be stuck in their homes for a certain amount of time without essential supplies. Anti-price gouging laws exist to try to prevent companies from "exploitative behavior." I covered the topic of price-gouging in 2012, but it merits repeating. Prices increase and decrease all the time. Prices especially increase during an emergency. But prices are not just about a dollar amount. Prices are a mechanism that signal to producers and suppliers what consumers want the most. Not only does allowing for prices to increase decrease the incentive to hoard, but it allows for much-needed goods to get to consumers faster than they otherwise would. If you want to know why there is a shortage of toilet paper and hand sanitizer, you can thank anti-price gouging laws.
5. FDA regulations on surgical face masks. The testing is not the only thing that the FDA is impeding. HHS official Dr. Robert Kadlec estimated we would need 3.5 billion masks to fight COVID-19, but only have 1 percent of that on hand. The reason that companies have not ramped up production is not because they don't want to, but because of the FDA's "premarket notification" guidelines. These guidelines dictate the approval process takes six months for a new product. The FDA rescinded these guidelines as of March 26, but as we saw with the testing kits, delaying production has all sorts of negative consequences.
6. CDC regulations on N95 masks. It is not only a shortage on surgical face masks (see difference between surgical mask and N95 mask here), but N95 masks, which are close-fitting masks that has a very efficient filtration of airborne particles. The regulations behind N95 masks fall to the CDC. The issue with current regulations is that it can take 45 to 90 days to get approved. While this might not seem like a long time, it is a lifetime in the middle of a pandemic.
7. FDA regulations on hand sanitizer. Washing our hands is one of the best ways, along with social distancing, to help minimize the spread of COVID-19. Hand sanitizer is flying off the shelves, which has caused a shortage. Alcohol distilleries want to produce hand sanitizer, not only because they want to help, but also it will help keep their businesses afloat during these tough times. Nearly 600 distilleries have shifted some of their production to hand sanitizers. However, it is difficult when FDA regulations get in the way. Although the FDA released follow-up guidance on March 27 saying they won't take action against these distilleries, but nevertheless expect them to follow strict guidelines. One major guideline is requiring a denaturant, which is not required by World Health Organization (WHO) standards. These FDA regulations are making it more difficult for people to acquire a much-needed product.
8. FDA regulations on ventilators. Ventilators are another key good into fighting COVID-19 since it is an upper respiratory disease that requires a ventilator for those with severe symptoms. Many states have dealt with ventilator shortages. Anesthesia gas machines and positive-pressure breathing devices could have been converted into ventilators when COVID-19 was first an issue. However, it was not permitted by the FDA until they issued an EUA on March 27. This EUA also allows for some modifications to be made on hardware, software, and materials, which is nice because normal approval vis-a-vis the 510(k) takes over 100 days. While it's better late than never, we had ample warning that COVID-19 was coming, and the FDA getting out of the way could have meant having more ventilators ready before the COVID-19 peak arrived.
9. Employer-sponsored insurance. Employer-sponsored insurance is a tax break that allows employers to exempt certain health-care uses of income from being taxed if they are to pay for an employee's health insurance. I have criticized this tax break (see here and here) because it makes income inequality worse, it drives up health care costs in a way not seen in other countries because only the United States has this tax break, and the most relevant of reasons to hate it: it ties health insurance to employment. This has not become apparent because only recently have we seen the massive job losses. With millions losing their jobs, we are going to see decreased health access, which has the real potential to strain the healthcare system and impede our responsiveness to COVID-19.
10. H-1B Visa Caps. The H-1B Visa Program has allowed U.S. companies to hire foreign technical talent, and has overall been helpful to the United States. Presently, there is an annual H-1B visa cap of 65,000 professionals and 25,000 students. This becomes problematic with COVID-19 because more than one in six medical professionals are foreign-born. It is not just hospitals that use the H-1B visa, but also biomedical companies. Keeping out foreign-born medical professionals and researchers only hinders our ability to come up with a response to COVID-19.
11. Telemedicine. Videoconferencing has given healthcare professionals the ability see and sometimes treat patients from long distances. This sounds like a great way to help patients, especially with the recommended social distancing for COVID-19. A trip to the hospital could risk COVID-19 infection for either the patient or the physician, which is why allowing for telemedicine is all the more important. While President Trump allowed for telemedical consultations, that order only applies for Medicare. There are 36 states (and DC) that require an in-person visit for write a prescription. Some states even require an assistant ("telepresenter") to be present. 12. State-level scope-of-practice laws. As the Mercatus Center brings up in its analysis on these laws, there is 1 physician for every 500 U.S. citizens. If you include nurses, physician assistants, and other medical professionals, that number goes up to 1.6 caregivers per citizen. A 2015 study from the University of California-San Francisco suggests these laws lower access to care. Mercatus Center research also shows that these laws drive up costs without making patients safer. A report from the Brookings Institution comes to a similar conclusion about these laws. Providing caregivers full practice authority would improve their ability to pick up the slack when the demand for medical services is so high.
13. Occupational licensing. Occupational licensing is a government regulation mandating a license before practicing a certain vocation. I have criticized occupational licensing under normal circumstances since it restricts employment (especially for individuals of a lower socio-economic status), boosts the prices for goods and services, and exacerbates income inequality. Occupational licensing comes with another flaw: a lack of portability across state lines. One state is going to have a greater need for healthcare workers than others. With the current occupational licensing scheme, physical assistants and nurses cannot cross state lines to help those in greater needs. Massachusetts' Governor Baker has allowed for temporary licenses for out-of-state nurses, as did the governors of Maryland, South Carolina, and Texas. The barriers of occupational licensing normally limit access to health care, and are particularly acute in an emergency such as this one. Let's hope governors have the sense to lift these barriers during the pandemic, as well as evaluating the idea of universal license recognition once we're out of this crisis.
14. Freight and hours of service (HOS) rules. The freight industry is the lifeline that is helping keep the current economy afloat. Normally (49 CFR §395.3), a trucker can work 14 hours a day, which includes 11 hours of driving and a number of breaks. The Federal Railroad Administration (FRA) temporarily waived these rules for trains, as did the Federal Motor Carrier Safety Administration for trucks. States are also removing their own HOS rules. While this is an improvement, there are still regulatory ambiguities, including what is considered "routine" and which products fall under exemption.
15. The Jones Act and Shipping Costs. Known as the Merchant Marine Act of 1920, the Jones Act restricts the transport of U.S. goods by mandating that any transport of goods between U.S. ports has to be done on U.S.-made and U.S.-operated ships. Much like with HOS rules, the Jones Act makes freight shipping more difficult. The Jones Act is bad enough policy under normal circumstances by driving up the cost of shipping and costing the U.S. economy. By repealing the Jones Act, it will lower freight costs for to ship medicinal goods, which will make it easier to fight COVID-19.
Postscript: This list doesn't touch upon the government's response either through monetary policy or such fiscal policy as the gargantuan CARES Act, the latter of which I intend to cover in future blog entries. This list is what government regulations existed prior to COVID-19 that created shortages in healthcare workers, necessary medical supplies, and made it more difficult for people to buy goods in a time of crisis. If the pandemic has taught us anything, libertarianism and the call for limited government are far from dead. If anything, we could have been better prepared had it not been for all of these inane and burdensome regulations. Because of the red tape at both the federal and state levels, COVID-19 ended up taking more lives than it otherwise would have. It has been a sobering lesson in how unnecessary the vast majority of government regulation truly is.
What we are seeing is a surge of deregulation so that companies are free to solve problems instead of being hobbled by red tape. Even better, companies don't need a directive to help. Pulmotect's aerosol drug, PUL-042, that has already been effective in fighting SARS and MERS, is being tested to see if it can treat COVID-19. Clearwater Paper is manufacturing more paper products. Honeywell and 3M are creating more N95 masks. Not only is Dyson ramping up ventilator production, Medtronic voluntarily released the patent on its ventilator so everyone can produce more ventilators. The list goes on, but U.S. companies are stepping up to help defeat COVID-19.
While there is a role for government to play in helping the spread of infectious disease, its main role should be to get out of the way and let private-sector actors fight the good fight.
