#FEES – Let’s start with a practice that seems reasonable enough, namely charging user-based fees for services provided. Funding services with fees may actually be preferable to using tax revenues because it puts the burden on users versus the population as a whole. Establishing government charges and fees, Government Finance Officers Association, accessed 9/3/16.
When certain services provided especially benefit a particular group, then governments should consider charges and fees on the direct recipients of those that receive benefits from such services. *** Well-designed charges and fees not only reduce the need for additional revenue sources, but promote service efficiency.
Here are two examples at the federal level, neither of which we would be inclined to quibble with. Visitors to national parks are charged entrance fees that partially defray the cost of maintaining park facilities and paying park employees. Applicants must pay fees to obtain passports, which are necessary for travel outside of the United States. If you don’t visit national parks or travel abroad, you don’t have to pay these fees.
In other cases, fees look a lot like taxes. Consider all the mandatory charges that are tacked on to monthly cell phone bills, regardless of whether you benefit from the functions being funded or not. Up to 35% of your cell phone bill may be taxes and fees, Jeanne Sahadi, cnn.com, 10/9/14.
All in, wireless customers end up paying tax and fee rates that are about twice as much as the average sales tax rate on other goods and services, the Tax Foundation found.
To keep service fees under control, we would suggest some common sense principles:
•Agencies should not be empowered to collect fees for services that recipients don’t choose to receive. Thus, one wouldn’t expect to pay the IRS a fee to cover the cost of a tax audit.
•Authority to impose fees or raise fee levels should not be delegated to administrative agencies, thereby incentivizing regulatory expansion. This was reportedly one of the motivations for the Federal Communication Commission to regulate the Internet. Obamas’ plan for a backdoor internet tax, James Gattuso, dailysignal.com, 11/14/14.
The tax, which could total over $7 per month on the typical American’s broadband bill, would be imposed as a consequence of regulating the internet via “net neutrality” rules that President Obama has urged the FCC to adopt.*** [Telecommunication companies] would have to pay a portion of their Internet revenue to the FCC’s “Universal Service Fund (USF),” which provides subsidies for Internet service. This fee currently is set at 16.1 percent of revenue, or $7.25 per subscriber per month according to one estimate. And don’t look for the FCC to waive this new found windfall. [Commissioner] O’Reilly (who opposes the plan) reports the FCC already is planning a “spending spree” on USF subsidies.
•Fees collected should be remitted to the US Treasury rather than held and used by the administrative agencies in question, thereby ensuring that all government operations will remain subject to legislative oversight.
#LOANS – Let’s say the government makes a loan to cover the cost of a given facility or program, the rationale being that the expenditures involved are a capital investment that will generate future benefits. The loan isn’t charged against the current budget, although the cash outlay increases the federal debt (subject to reversal when the loan is repaid). If the borrower defaults, the loan loss will be charged against a future budget.
Here’s an example of such a loan, which the vice president recently announced in a Wilmington, Delaware train station named in his honor. Critics suggest that the loan outlays will wind up being paid for by taxpayers because Amtrak invariably loses money overall, so it would have been more honest to provide the funds in the form of a government grant. The new $2.45 billion question at Amtrak, Susan Crabtree, Washington Examiner, 8/30/16.
"Amtrak is not relying on federal grants for this project," the company said in a fact sheet about the new investments in Acela trainsets it plans to make with the money. But that statement has drawn scrutiny from budget hawks in Washington who argue that Amtrak has never turned an overall profit, and has taken billions of dollars each year to continue to exist even though it's Northeast corridor is used the most and makes the most revenue.
Loan guarantees have a similar effect, except that there is no initial increase in the federal debt. They can make a given operation look like a money maker when it is actually a burden on taxpayers. Some examples: Fannie Mae & Freddie Mac (now operating under government conservatorship), Solyndra ($535M loan guarantee went sour), and the Export-Import Bank.
In the last case, there has been a running debate about whether the EIB does or doesn’t make money for taxpayers. The answer boils down to assumptions about default rates. Press release, House Financial Services Committee, Rep. Jeb Hensarling, 5/22/14.
If the Export-Import Bank were to use fair-value accounting, as the [Congressional Budget Office] recommends, the Bank’s ledger would actually show a loss of money for the taxpayers – not a profit. I have long believed that many taxpayers feel it is indeed time to exit the Ex-Im, and this CBO report certainly reinforces that belief,” said Financial Services Committee Chairman Jeb Hensarling (R-TX), who opposes re-authorizing the Export-Import Bank.
The main takeaway is to minimize the use of government loan and loan guarantee programs, which tend to obfuscate the economic merit of programs being supported and the level of risk the government is assuming. All of the above ventures are (or in the case of Solyndra were) dubious, in our opinion, and the government should never have gotten involved in supporting them.
#LEGAL ACTION – Government suits against business firms have flourished in recent years. The starting point was to blame financial institutions for the “Great Recession,” while ignoring the mistakes of government policy makers, and then sue the alleged culprits for restitution based on a raft of legal theories. The great bank robbery, 12/16/13.
There have been so many lawsuits stemming from the financial crisis that it’s hard to keep track. Most of them have resulted in settlements, and the aggregate payout by the big banks (notably Bank of America and JPMorgan) and other financial firms is expected to handily top $100 billion.
Even big firms can’t hope to match the resources and clout of the government in legal battles with the government, and smaller businesses are hopelessly outmatched. Like the Godfather, the Feds have grown accustomed to making offers their targets “can’t refuse.” Lawfare is a growing danger, 10/27/14.
Used for both offensive and defensive purposes, government lawfare threatens this country’s underpinnings. Legal guns for hire (attorneys willing to represent dubious positions and string out litigation endlessly) – shock and awe (inappropriate use of strong arm tactics) – zero tolerance (of private sector mistakes) – double standard (lack of concern about government failings).
Litigation re the 2008 financial crisis is winding down, but there are new controversies. Thus, Volkswagen has experienced a tidal wave of litigation as the result of the use of a “defeat device” in its diesel-powered cars to indicate compliance with nitrogen oxide emission restrictions in tests at auto inspection lanes.
Not to defend what VW (and probably other car companies) did, but it’s far from clear that the billions of dollars in fines that have been imposed already – plus additional penalties under consideration – are appropriate. The Environmental Protection Agency made a big mistake by imposing needlessly stringent limits for NOx emissions and then lashing out to show who was boss after learning that VW had finessed them. The auto emissions crackup, Holman Jenkins, Wall Street Journal, 4/22/16.
Take the Environmental Protection Agency standard that Volkswagen, in its still-unexplained obsession with reconquering the U.S. market with diesel cars, is guilty of flouting. EPA’s latest target of 0.07 grams of nitrogen oxide per mile represents a 90% reduction from NOx output of the average car on the road today. It represents a 97% reduction compared to the 100 million pickup trucks on the road. The law of diminishing returns, if agencies behaved rationally, would have caused EPA long ago to declare victory on nitrogen oxide and turn to other matters.
Ironically, a somewhat more enlightened approach seems to be emerging in emission restrictions for heavy trucks. Firms that cannot meet the EPA’s new greenhouse gas and fuel efficiency standards will be permitted to pay a fine for not doing so, which apparently won’t be set high enough to drive them out of business. Can’t meet EPA’s pricey truck rules? Just pay the fine, John Siciliano, Washington Examiner, 8/15/16.
Congress enacted a change that requires the EPA to establish the special penalties "to protect these technological laggards by allowing them to pay a penalty for engines that temporarily are unable to meet the applicable emission standard, while removing any competitive advantage those technological laggards may have," the EPA said. [Court challenges had raised questions about a previous EPA attempt to impose such a scheme by regulations.]
No doubt it is appropriate for governments to sue private firms in some cases, and they will surely continue to do so, but the old story about the king who killed the goose that laid the golden eggs comes to mind. We would urge that the federal government (and also other governments) remember that endless litigation against private firms – like high taxes and excessive regulations – can create an unfavorable climate for economic growth.
Also, side payments to activist groups (e.g., La Raza) should not be required in the settlements that are negotiated. To this end, it’s been proposed that all litigation recoveries flow to the US Treasury and/or bona fide “victims.” GOP moves to shut down Obama’s latest “slush fund,” Pete Kasperowicz, Washington Examiner, 8/30/16.
From the author of “A budget red line for the federal government,” which was posted and discussed in SAFE’s 1/4/16 blog entry: I agree wholeheartedly about Congress's “shenanigans,” and think that the solution might be to “red-line” the federal budget by limiting spending for the current year to actual revenues of the previous year. All sincere members of Congress should be able to accept this rule without violating their commitments to zealously represent the interests of their respective constituents. All they would have to do is commit to the TOTAL spending that Congress could gleefully spend, within which limit they would be free to compete in seeking to “bring home the bacon.” This presupposes that the whole Congress would abide by the prior resolution NOT to exceed the Red-Line, but if this idea got enough publicity I think it could become reality. What do you think? – SAFE member Dick Timberlake, GA [Comment: This approach is very straightforward, and if followed should result in gradual debt repayment. Assuming acceptance of the principle that budgets are meant to be balanced, it would deserve serious consideration.]
In a note forwarding our note about the entry: Makes sense to me. Considering the immensity of the fiscal problem, this is one of those times when you feel like a Christian Scientist with appendicitis. SAFE has good ideas for what should be done, but political realities de-focus on constructive actions. – College classmate, SC
Why should they change? Politicians always push off nasty events upon others or off into the tax pits. There is no reason why they should change because not a single vote hangs on the spending or debt. This is not the age of Perot. – SAFE director