They say that the devil is in the details. The public policy equivalent to that would be that statism is in local government policies. The big principles being discussed and fought over at the national level of politics are often put to work in our own neighborhoods; counties and cities offer some of the most interesting examples of what misguided policy can lead to, especially when it comes to mismanaging taxpayers’ money.
One example of this comes from Whitehall, Ohio, where the city is trying desperately to boost its property values. Why? Well, let’s see what The Columbus Dispatch has to say:
Bringing homeowners into Whitehall is so important to city leaders that they might be willing to pay for them. A program introduced this week would lend up to $5,000 to homebuyers for down payments, a new tactic the city is considering to tackle its decades-old problem of rental saturation.
Where does the money come from? This is a city with a $25 million annual budget, half of which is spent on public safety. And, more importantly, why are they doing this?
More than half of the occupied homes in Whitehall are rentals. Its home-ownership rate from 2006 to 2010 was 43 percent, compared with Franklin County’s 57 percent and Ohio’s 69 percent, according to the U.S. Census Bureau. “Increasing homeownership has been something that city leaders have talked about for a great number of years without coming up with something concrete,” said Zach Woodruff, the city’s economic-development director. “Everyone is recognizing this is vital to Whitehall’s moving forward.”
The answer to why the city wants to give out down payment loans to home buyers is not to be found in fluffy statements about the city “moving forward”. The reason is instead, in all likelihood, that low and falling property values depress property values and thus erode tax revenues for local governments. As I explained last year, this is a major problem in other parts of Ohio.
That does not mean that the answer is for government to get back in the property lending business. So long as the free market has a say in where people choose to live, the elected and appointed officials in Whitehall should keep in mind that there is always a rational motive involved when people choose not to buy a house in their city.
More on that in a moment. First, let’s get back to the Dispatch story and learn more about the details of this loan program:
The city council is expected to discuss the program at its meeting on Tuesday and could vote on it on Sept. 18. If the council approves the legislation, the city and its partner, Huntington Bank, will immediately begin taking applications from potential homeowners. The city would forgive the loans as long as the buyers live in their home as their primary residence for five years. If they were to rent it out or move out of Whitehall, a percentage of the loan would have to be repaid, based on how long they lived there. If they would sell the home and stay in Whitehall, the loan would still be forgiven, but they could not apply for another one. The loans would cover 4 percent of the purchase price of the home, up to $5,000. Homebuyers would qualify if their household income is less than $125,000. The buyer would have to contribute at least $500 to the down payment.
Wait a second here. Are the city officials in Whitehall going to tell us that a family making $100,000 and more cannot come up with five grand for a down payment on a house?? Are we supposed to believe that a family that has broken into the six figures needs a $5,000 gift from government to buy a property??? What kind of warped reality do these politicians live in?
If you are making six figures in this economy, you’ve done well. You are a hard worker with lots of fortitude and commitment to your career and your family. You are among the last people in this country that needs a government handout.
The ridiculousness of giving a handout to six-figure income families becomes even more glaring when we contrast the potential costs of the program against the potential gains for the city. In order to motivate why the city should give a $5,000 check to a $100+K income family, the city must count on that family increasing the city’s tax revenues by five grand within a reasonable period of time. While governments in general are not known for sound finance, at least let us expect that there is some sort of net revenue calculation behind this whole thing. If so, it would have to conclude that:
a) the taxes that a family earning $100,000 is paying would have to be big enough to exceed $5,000 within the five-year period over which the loan is forgiven; and
b) the family’s tax payments would have to be a net addition to the city’s tax revenues.
The first condition is not that hard to meet: a $100K income should yield about $2,500 in income taxes for Whitehall. The property tax revenue is a bit more murky to nail down. The city only receives about $500,000 in property-based taxes per year; four out of five general-fund revenue dollars come from income taxes. This means that the property tax share of Whitehall’s revenues is about one tenth of what it is for the average local government in Ohio; income taxes, by contrast, are twice as important in Whitehall as they are in the rest of Ohio.
Therefore, the higher the income of the in-moving family, the more likely it is that the city will get the $5,000 back. If the average property buyer pays only $1,000 in local income taxes per year, the city will get the five grand back in five years.
Provided, of course, that we can meet the second condition as well. Which is a bit tricky. If someone buys a property, then reasonably someone else is selling that property. This also means that the property buyer, an inbound taxpayer, replaces a property seller, an outbound taxpayer. In order for the city to get its money back on the property purchase handout program, the inbound taxpayer must pay $5,000 more in income taxes over five years than the outbound taxpayers. (We assume that the property tax revenues will stay unchanged – Ohio does not have an acquisition-based property tax assessment system, and therefore there is no re-assessment when a property changes hand.) This means, plain and simple, that the inbound taxpayer must make $40,000 more than the outbound taxpayer.
Is this at all a realistic calculation? According to Sperling’s Best Places, a city comparison service, the average household income in Whitehall was $35,682 in 2010. This means that for the Whitehall property purchase handout program to fund itself, the inbound taxpayer has to make on average $75,000 – provided the outbound taxpayer has an average income.
A $35,000 annual income is a low income, while $75K is a high income. Why, now, would low income families leave Whitehall and high-income families move in to Whitehall? Has the city made any drastic changes that would allow it to compete with other suburbs of Columbus for the high earners and high taxpayers?
It is fair to say that the answer is “no”. First of all, this calculation assumes that the inbound taxpayer, which has to make more than twice what the outbound taxpayer makes, will move in to the same neighborhood that the outbound taxpayer is leaving. But it is very rare that a family making $75K buys a house in a neighborhood where people make $35K and houses are of a standard that meets a $35K budget. More likely, the home buyer will be someone who makes roughly the same as the home seller.
Furthermore, how likely is it that a family making $75-$100K, thus having the means to choose where to live, would buy a house in a high-crime neighborhood? Again according to Sperling’s, Whitehall has among the highest crime rates in America: the city scores a 9 out of 10 in violent crime and a 10 out of 10 in property crime. You have to travel to notorious Camden, NJ to find a place with higher crime (though I would not recommend a trip to Camden…).
This property purchase handout program is an extremely risky financial gamble. If the city ends up trading inbound and outbound taxpayers in the same income bracket, it will not gain a dime from the program. On the contrary, it stands to lose up to $5,000 per property that changes hand in the city. If 100 properties change hands in Whitehall over the next year, and all qualify for this program, the city will lose as much money on this program as it takes in on property taxes. Given that, according to realtor.com, there are 155 three-bedroom properties for sale in Whitehall today, this is not a far-fetched scenario.
It is understandable that the city officials in Whitehall want to revive their community. But instead of giving every new home buyer $5,000 the city should perhaps focus on reinforcing its core functions: the protection of life, liberty and property. It is not a good answer to say that the city is already working hard on that – the high crime rate shows that their efforts have not paid off yet. Until crime is down significantly, Whitehall won’t be able to attract the kind of residents it wants.
On the other hand, when crime is down the city will become attractive without having to bribe people to move there. That makes a lot more sense, both financially and morally.
While the lawmakers in Washington, DC are fighting their usual petty budget battle over entitlements and taxes, the legislators in Ohio are at least as oblivious to the austerity tsunami approaching on the horizon. According to the Columbus Dispatch, the Buckeye budget battle is basically a war over how to best restore spending-as-usual as the principle governing the state budget – with absolutely no insight into the dire need for long-term downsizing of government:
A wide-ranging budget revision that passed the [State] House yesterday offers a glimmer of hope for schools and local governments that they could see partial relief from heavy state budget cuts. But the discussion might be for naught if Gov. John Kasich is not on board — and today, he laughed when asked if it’s time to discuss spending surplus state revenue. Though Republicans rejected a Democratic attempt yesterday to provide $400 million to help ease $1.4 billion in cuts last year, Rep. Ron Amstutz said the state could see a budget surplus of up to $800 million by the end of the fiscal year, and he offered to work with minority members on ways to use it.
The best way to use a budget surplus is to let it provide a cushion during a transition period. That transition period should be entirely focused on:
- phasing out entitlement programs like cash assistance, food stamps and child care;
- cutting taxes to give the private sector enough room to provide those services on a free market; and
- deregulate accordingly so private for-profit and non-profit providers can replace government.
In my new book Ending the Welfare State: A Path to Limited Government That Won’t Leave the Poor Behind I offer a model – actually based on Ohio – on how a state can transition from government-provided services and entitlements for the poor into a private-based model. These things can be done; all it takes is some courage and fortitude among our elected officials.
Unfortunately, none of that seems to be present in the Ohio state legislature. On the contrary, the only prevailing sentiment there is spending-as-usual:
Republicans added a provision to Kasich’s proposed midbiennium review that would give them control of any available surplus money, instead of it automatically going into the state’s rainy-day fund. But Democrats stressed that the time for action is now, particularly as [school] districts report hundreds of new teacher layoffs. They pushed their Kids and Communities First plan, which would provide up to $400 million for schools and local governments. The plan would take $265 million in surplus money, $120 million from the state rainy-day fund and $15 million in new “fracking” taxes that were initially proposed by Kasich, though he said the money should eventually be used for a state income-tax cut.
And when the rainy-day fund is empty and the surplus is gone, where are they going to look for their next revenue fix? This is exactly the problem with the welfare state: government makes promises to people and then goes out to try to find the money as an afterthought. It is this spending-as-usual attitude that has brought us into the dire fiscal straits we are in now.
Governor Kasich is not very proactive when it comes to reducing the size of government, but at least he deserves some credit for trying to keep the leash on the state budget:
Kasich said that coming off a multibillion-dollar budget shortfall, he is opposed to new spending, whether it’s surplus money or a separate House GOP plan to give $30 million more to nursing homes that also was added to his midbiennium review. “Now that we begin to see some sunlight, people start thinking how we can go back to spending again,” he said today. “That’s just not acceptable.” It’s one thing to spend on a crisis situation, Kasich said, “but this idea that you’re out there just trying to take care of one group or another is not good. After some meetings this morning, I feel pretty good that the amount of money spent through this (bill) will be eliminated. I also made it clear to them that any effort at runaway spending is unacceptable and will be dealt with.”
Establishing this as a norm for government budgeting is a first step in the right direction. A small one, admittedly, but nevertheless a step in the right direction. Now it’s time for the free-market forces in Ohio to take the lead and pull the public debate in the Buckeye state in the direction of long-term, structural free-market reforms.
One of the eternal questions that you can spend a lifetime trying to find an answer to is: when is government big enough for a statist? We may never find an answer to that question, because the statists themselves don’t know. What they do know, though, is that they will always resist any effort to reduce the burden that government imposes on taxpayers and the free economy. The debate over state taxes in Ohio is an excellent example. Today the Cincinnati Enquirer is criticizing Governor John Kasich for wanting to lower The Buckeye State’s income taxes:
Lower Ohio’s burdensome personal income taxes. Create jobs. That’s what Gov. John Kasich proposed last week in an expansive plan to reform government and improve the state’s economy. Kasich said Ohio’s income tax burden is among the highest in the country. Actually, Ohio’s income taxes are about average, it turns out. We don’t pay as much in state income tax as Kentuckians, but we pay more than our neighbors in Indiana, Pennsylvania and Michigan, according to the Washington-based Federation of Tax Administrators. In fact, residents in 25 states and the District of Columbia pay higher income taxes than Ohioans; taxpayers in 24 states pay less, the group says.
The Cincinnati Enquirer does not link to any source at the Federation of Tax Administrators, which raises the suspicion that they have something to hide – or simply have not done their homework. Here at The Liberty Bullhorn we take our work seriously, so we dug up this 2010 state tax collection table from the FTA’s website. We then did our own calculations of state tax burdens for 2010, using raw data from the Bureau of the Census for tax collection and from the Bureau of Economic Analysis for personal income data. Our results are basically the same as in the FTA table (in other words, the FTA almost got it right):
|State taxes as share of state personal income, 2010|
|17||North Carolina||6.4%||50||New Hampshire||3.7%|
The total state tax burden on personal income in Ohio is 5.7 percent, which is the 30th highest rate in the country. A similar calculation with state income tax collections puts Ohio 29th among the 43 states that had an income tax in 2010.
In other words, from the superficial viewpoint that The Cincinnati Enquirer takes, things look fairly good. However, there are two important reasons why Ohio comes across as a moderate-tax state and not a high-tax state.
However, when we look at state government from the other side of the equation, all of a sudden things look slightly different. There are, as we know, three funds categories of government spending: General, Federal and Other. Historically, the General Fund has been “the” budget, but in recent years there has been a growing awareness of the two other funds. One reason is that politicians in some states (such as West Virginia and Colorado) route a large or growing share of state spending through Other Funds. Since Other Funds are, in theory, funded by fees and not taxes, and since the purpose is, in theory, to fund current operations of the government bureaucracy, it has been relatively easy for state legislators to move spending off the General Fund and in to the Other Funds.
Ohio appears to be safe from this practice, but it is nevertheless worth keeping in mind that Ohio taxpayers pay, out of their pockets, for both General Fund spending and Other Funds. Adding together General and Other Funds spending in 2010, and comparing to other states, Ohio’s relatively favorable ranking suddenly changes (state spending data from the National Association of State Budget Officers):
|In-State Sourced State Government Spending as Percent of State Personal Income, 2010|
|1||West Virginia||26.8%||18||North Dakota||10.4%||34||Maryland||8.2%|
|7||New Mexico||14.2%||24||New York||9.4%||40||New Jersey||7.6%|
And we have not yet even looked at the burden of local governments. If we add locally funded local government spending to in-state sourced state government spending, and again divide by personal income (phew!), we get:
|State and local gov. spending, excl. fed funds, pct of personal income|
|5||North Dakota||14.1%||22||New Jersey||12.5%||38||Arizona||11.4%|
|16||Kansas||12.9%||33||Rhode Island||11.8%||49||New Hampshire||9.7%|
|17||North Carolina||12.7%||50||South Dakota||9.6%|
Ohio is now even further up the scale, essentially tied for 14th place with Iowa and Kansas.
This is the true government burden on taxpayers in Ohio. Given that Ohio, according to Bureau of Economic Analysis data, has one of the two worst GDP growth rates over the past decade (Michigan is The Buckeye State’s only competitor at the bottom) it is worth taking the government burden on Ohioans very seriously.
There is one last point to add to this. Even if we stay focused on state income taxes, and even if they on average impose a moderate burden on taxpayers, the structure of the income tax is in itself a burden. Ohio has nine income brackets, which makes the state’s income tax one of the most work-discouraging in the country. Hawaii imposes an astounding 12 brackets, Missouri has 10 and Iowa matches Ohio’s 9 brackets.
However, Iowa flattens out its tax (imposes the highest bracket) at less than $29,000, and Missouri reaches its highest bracket at a low $9,000 annual income (both for single filers). Ohio, by contrast, spreads its brackets out over incomes up to $200,000 (single filers).
This means, in plain English, that while comparable states stop penalizing people who work hard, educate themselves, start businesses and pursue a career at some point, Ohio keeps going after them deep into the six figures.
It is pure fiction to say that Ohio does not need tax cuts. Ohio taxpayers do need tax cuts, and they need them badly. Is it too much to ask of the opponents to tax cuts that they do their homework before they try to stop Governor Kasich from making lives a little easier for Ohio families?
What price are we willing to pay to preserve the government’s monopoly on elementary education? The jury may still be out on the answer to that question, but an incident in a small Ohio village has given us a new perspective on this question. From the Columbus Dispatch:
Embattled police Chief Mike McCoy announced last night that he will soon resign from his village post, though he insisted it has nothing to do with the fact that one of his officers shocked a 9-year-old boy twice with a Taser last week. McCoy, who was placed on paid leave late last week after he did not tell Mount Sterling Mayor Charlie Neff of the incident, said he wasn’t pressured to resign. Instead, after an hour-long, closed-door meeting between his personal attorney and village officials, McCoy read a statement that said the village’s declining budget keeps him from doing his job. He said he did nothing wrong by not immediately telling Neff what had happened because, as chief, he felt he needed to check into the incident himself first.
And why was this boy tasered? The boy’s mother, Mrs. Perry, explains via her attorney that police had been sent to their house…
…to arrest her son for truancy [but] Mrs. Perry never expected that he would be subdued with a Taser. “She certainly never wanted this to happen,” Comisford said. Village officials released the police report yesterday. According to [officer] O’Neil’s written account: He went to the boy’s S. Market Street home about 8:30 a.m. to serve a complaint filed against Jared for truancy. Jared — listed on the report as between 5-foot-5 and 5-foot-8 inches tall and between 200 and 250 pounds — refused to cooperate. He begged his mother to let him go to school rather than with the officer, but Perry told her son it was too late.
So the school, which is a government agency and the only provider of education in the village (except for home schooling), has the authority to send police after children who do not show up for school. If the kids refuse to comply with the police officer’s order to go to school, they get arrested for resisting a police officer (emphasis added):
O’Neil wrote that after repeated warnings, he pulled Jared from the couch, but he “dropped to the floor and became dead weight … flailing around,” and the boy lay on his hands to prevent being handcuffed. O’Neil demonstrated the electrical current from the Taser into the air “as a show of force.” Then, he wrote, Perry told her son to do as O’Neil said or he would be shocked. The report indicates that after being shocked once, Jared still didn’t cooperate and was shocked a second time. An ambulance was called, but Jared had no sign of injury; Perry signed a waiver for medical treatment. Jared was taken to the sheriff’s office, and a delinquency count of resisting arrest was added to his truancy charge.
So a 9-year-old boy is charged with resisting education. This charge leads to a second charge of resisting arrest. All because the government felt a need to assert its authority over the education of our kids.
It is entirely possible that this kid is so troubled that he cannot get his act together and go to school in the morning. If that is the case, he and his family need help. Instead of dispatching a police officer to forcefully take the 9-year-old to school, maybe the school should dispatch a therapist, a child psychiatrist or a social worker.
Better still, instead of putting a kid like this on a downhill slope with criminal charges, the school district should offer to support alternative forms of education. How about giving parents the choice of home schooling, where the parents get compensated with the same amount that the school gets per student? With a voucher model like this, it is entirely possible that several families could get together and pool enough money to pay someone to teach their kids at home.
Apparently, no one has pushed for these alternatives. Instead, a kid was tasered and arrested for resisting public education.
Is government really that important in our lives?
As I explained in my book Remaking America: Welcome to the Dark Side of the Welfare State, it won’t be pretty when the welfare state runs out of our money. The statist politicians who want to keep the welfare state will do so by keeping their spending programs, and the taxes that pay for them. But since their revenue stream is shrinking – as a result of the high taxes – they cannot maintain spending at the same level as before. This is where the welfare state goes from being misguidedly beneficial to being harsh, stingy and hostile towards its users.
This has already happened in Europe. Over there, they know the policies on dark side of the welfare state as “austerity”, a type of policy we have not seen much of here in America. Not yet. But as I have shown on numerous occasions, we are getting there in America, too. There is little sign of austerity at the federal level, but cities, counties and states have already, to a larger or lesser degree, taken to these measures. Here is a new example, this time from Ohio:
Because federal funds won’t be increasing and state money is diminishing, county boards of developmental disabilities across Ohio are cutting their budgets. “The money we all once had isn’t coming back, and programs are adjusting accordingly. And, yes, change is difficult, particularly when our sons and daughters are vulnerable,” John L. Martin, the director of the Ohio Department of Developmental Disabilities, told board members in charge of such programs in Union County last week.
When tax dollars dry up, people who have become dependent on government – such as those with developmental disabilities – are left with no alternatives. Since the governments that cut or froze funding, the state and the federal government, are not lowering the taxes they take in, there is no more money in the economy to buy privately the services that counties are forced to cut.
There is a silver lining in this. A short one, though. As a response to this situation, some counties are innovating with how they organize and deliver services:
Yet 15 counties say they can both save money and improve programs. Others are taking notice. … Union County is considering privatizing services as a way to cut $10 million from its budget in the next decade. Superintendent Kim Miller said he has discussed sharing administrative costs with other counties. He and the board see that as the future. … One cost saving is that, although the administrators’ salaries might get a bump because their workload increases, individual counties are responsible for only part of the salary.
A slimmer, more efficient government is good for taxpayers. It means that taxpayers do not have to fork over more money each year. At first, it is also good for those who use the services provided by government: more of the available resources are focused on the users and not on the bureaucracy.
However, these gains are only transitional. The politicians who have decided that government shall deliver a certain package of services, courtesy of taxpayers, are not expecting less just because there is less tax revenue available. Therefore, when the government agencies that deliver, e.g., services to the developmentally disabled have effectuated their slim-down and productivity-enhancing measures, they will simply have to start cutting into services.
What does this mean in practice? There are plenty of these examples in socialized health care in Europe. In a nutshell, the service cuts that come when there are no more organizational improvements to make, will consist of loading more service takers on the shoulders of each employee. In this example from Ohio that means more developmentally disabled children per care worker. This is effectively the same as creating longer waiting lines for those who demand the services. And since government has promised to deliver the service to everyone who needs it, the burden will be on the shoulders of the austerity-ridden government agency’s employees to still deliver. That is, of course, not possible, so the end result will be a deterioration in service quality, longer waiting lists and more dissatisfaction among service takers.
And keep in mind that the taxes that fund these operations have not been cut. They remain the same, or even go up.
But what about privatization, as one county is planning on? This may help the county eke out more productivity gains in the service delivery end of the operation, but at the end of the day the tax revenues remain the same. This means that the private entrepreneur does not have more money do work with than the government operation it replaces. Furthermore, politicians who want privatization are not going to lower the standards of the services they require, so the private entrepreneur will find himself caught between the same rock and the same hard place that the government agency did.
The solution lies in privatization of funding. Then, and only then, will services such as care for the developmentally disabled be shielded from the austerity trap that government places it in. This funding can, e.g., come from private charities, but also from traditional competition on a free market.
Privatization of funding means tax cuts that correspond to the cuts in government spending from that same privatization. If implemented gradually, a reform of this kind can be a win-win for all parties involved.
If, on the other hand, government is left to continue to provide this care, austerity will eventually take over and it will become a lose-lose for all parties involved. The consequences of that scenario are devastating.
In my recent article about property tax assessments in West Virginia I pointed out that property taxes are unethical because…
…they can drive people from their homes. Law abiding citizens can be forced to sell or give up their homes for no other reason than that they could not give government what government demanded.
My article about the latest GDP data adds another angle to this problem: nationwide, investments in residential buildings – apartment buildings, single-family homes and everything in between – has been falling for six years in a row. This means that the downward pressure on residential properties is continuing across the country. Rising property values and homes moving fast on the market are exceptions, not the norm.
This depressed housing market has a direct effect on property tax revenues for local governments. As the aforementioned story from West Virginia indicates, the reaction from government is to try to jack up assessments – or millings to be precise – and squeeze cash-strapped taxpayers for even more money. But just because the government determines that my house is worth more one way or the other, does not mean that I have more money to spend on taxes. In fact, all it means is that I will spend less money in local stores and thereby contribute to lower sales tax revenues for the very same government that just raised my property taxes.
Now the property tax issue is heating up in Ohio. The Dayton Daily News reports of dramatic revenue losses for school districts in Montgomery County:
Four Dayton-area school districts and two townships will lose significantly more property tax revenue in 2012, due to falling values, than was originally reported this month. Centerville schools’ loss is projected at $922,586 for 2012, more than $650,000 higher than was listed in a Jan. 15 chart in the Dayton Daily News. The data for that chart was provided by the Montgomery County Auditor’s Office, which now confirms that it sent the newspaper out-of-date information. … As reported earlier, local jurisdictions will lose millions from falling property values this year.
There is a not-so-subtle hint in this story that part of the problem is a piece of legislation that protects property owners from the unethical side of property taxes that I referred to above:
And a little-known piece of Ohio law permanently caps many of those jurisdictions’ levies at new, lower levels.
Then the story goes on to list the losses from lower property values that are spreading through the Dayton area:
Of 57 Montgomery County taxing agencies, 56 will lose revenue in 2012 (Perry Twp. will see a $1,857 increase). The total loss is $29.3 million. … Kettering schools’ loss is $593,727 worse than was listed — meaning 2012 tax revenue will actually be down $1.72 million from 2011. Trotwood schools’ loss is $385,265 worse, meaning 2012 revenue will drop $866,000 from 2011. Washington and Miami townships also fare significantly worse than was listed, as do Oakwood schools.
There is little doubt that this will cause protests against coming cuts in school spending. But when that happens, it might be worth remembering that local governments are not exactly innocent in this drama. If the county and the cities and townships involved showed better stewardship of their own spending they could actually help fill the gaps in the budgets of their school districts. A good example is the city of Dayton, which has a tragic spending record that I pointed to in July last year:
The city of Dayton could easily reduce its spending … All it needs to do is reduce or eliminate: $4.1 million for “Downtown”; $22.3 million for “Community development and neighborhoods”; $15 million for “Economic development”; $41 million for “Leadership and quality life”; and $17.1 million for “Corporate responsibility”. These fluffy and non-essential spending items cost the city $99.5 million in 2009. They exceeded by far the $29.8 million budget deficit the city ran that year, and they are a perfect starting point for slimming down city government.
At the heart of the problem is of course the prevailing myth that government is the only venue for educating our children. But even if we maintain a public school system largely as it is today, the example from Dayton shows that there is a lot of unnecessary, sometimes outright wasteful things that local governments can eliminate from their budgets. Thereby they can free up money for essential and semi-essential government functions (assuming public education belongs in the latter category).
It remains to be seen what will come out of this emerging fiscal panic in Montgomery County, Ohio. A safe prediction is that the school districts will try to get state or even federal funds to compensate for the revenue losses. Let us hope that both jurisdictions are prudent enough to say no. School funding should always be a local matter, and eventually strictly a matter for the parents. Instead of desperately seeking more revenues, the politicians who are elected to run the school districts in question should take this as a learning experience. It is, in fact, a good opportunity to rethink the size, scope and purpose of government, in this case public education.
Recently president Obama has been trying to come across as a free-market’ish kind of nice guy. His decision to elevate the Small Business Administration to a cabinet-level position is apparently meant to give the impression that the president likes small business owners (like Joe the Plumber). Next to his draconian “Affordable Care Act”, his relentless incursions into private businesses with new environmental regulations, his socialization of student loans, takeover of General Motors and insistence on preserving the federal government’s virtual monopoly on mortgages, this elevation of the SBA looks like trimming the beard on a portrait of Karl Marx.
The president’s feeble efforts at looking like he likes economic freedom are not exactly helped by his vice president. Now Joe The Gaffe Machine Biden has decided to derogate private universities who compete on unfair terms with tax-subsidized public universities. As if to make things even more embarrassing for the administration, The Gaffe Machine got his facts wrong. From the Columbus Dispatch in Ohio:
Vice President Joe Biden was referring to Wesleyan University in Connecticut, and not Ohio Wesleyan University, when he was trying to compare the average debt Ohio college students rack up at public schools versus private institutions during his appearance at Gahanna Lincoln High School on Thursday. During his speech, which lamented rising college costs, Biden said 68 percent of college students in Ohio borrow money to attend school, and their average debt “as they receive that diploma on stage is 27,000 bucks. If they go to Wesleyan, they go to a private school, it’s closer to ($65,000).” Yesterday, a Biden spokeswoman said he was referring to Connecticut’s Wesleyan instead of the Delaware, Ohio-based private school by a similar name, despite the context in which the reference was made. In an email, Ohio Wesleyan spokesman Cole Hatcher said students graduate from the school with a rough average of $30,900 of debt. Ohio college students who graduated in 2010 owed an average of about $27,700 in loans, according to a report released in the fall by the Project on Student Debt. … A freshman at Wesleyan University, in Middletown, Conn., would pay about $56,000 for tuition, room and board this school year.
This attack on private enterprise in the business of higher education is not only ideologically charged, but also factually wrong. That combination reveals that the real purpose is to once again go after private enterprise in favor of government.
The vice president obviously avoided telling the high school students that their parents are subsidizing public colleges through taxes. In the fiscal year 2012 the state of Ohio spends $2.3 billion on higher education through its Board of Regents. These funds, which serve the public university system of Ohio and its 600,000 students, work out to a per-student subsidy of more than $3,800 per year, or $15,200 for a four-year degree. This subsidy should be defined as a loan, as it is not the student’s own money nor a voluntary donation. If we treat it this way, and if the vice president’s figure for student debt upon graduating a public college in Ohio is correct, then the average student graduates a public college in Ohio with a debt of $42,200, or 56 percent more than the number the vice president used in his (factually incorrect) comparison with a private university.
On top of the state funds, the federal government is deeply involved i the college education business with our tax dollars. In 2010 alone the federal government shipped $3.1 billion to the states for the purposes of higher education expenses. This works out to a pretty big tab for taxpayers.
If state governments and the federal government did not conceal a good part of the cost for attending state universities, there would be a case for price-based competition between private and public schools. That in turn would keep costs down and make education a lot more attainable for everyone. Better still: if government got out of the higher education business altogether by privatizing its universities, it would boost private competition and give people even more genuine choices when pursuing a college or graduate degree.
Our country is wading up to its knees in homes that no one wants to buy. The Columbus, Ohio area is no different: while home sales were up in the last five months of 2011, prices were down five percent over 2010. This means, in plain economics speak, that the only reason why more homes are sold is that prices, which went up in 2010 over 2009, are now falling again. The market is still struggling with a large excess supply, which means that this is a bad time to increase that supply. You might want to especially avoid building new homes and try to push them on to the market. Private businesses know this, which is why they do not want to lend to such projects. But that does not stop the government’s real estate central planners from doing exactly the wrong thing at the wrong time. After all, they can forcibly take other people’s money for their projects, so market conditions do not apply to them. And when things don’t work out the way the central planners foresaw, all they have to do is pass the buck on to taxpayers. Literally. From the Columbus Dispatch:
The public-housing agency that plans to complete a Near East Side condominium project will seek at least $1.7 million in private financing to pay off construction loans, expecting rent from the 28 Whitney units to pay off the new loan. By doing that in today’s climate, the Columbus Metropolitan Housing Authority is taking a “ significant risk,” Columbus Housing Administrator Rita Parise said on Friday. “Clearly, we all understand accessing financing for real-estate projects is not an automatic.” But CMHA officials are confident that they’ll be able to obtain the financing, fill the units and generate a solid cash stream.
And in order to pull this off they “forgive” a loan from taxpayers:
CMHA is taking over the project as part of a deal in which the Columbus City Council forgave a $3.4 million loan of taxpayer money.
In other words, the city of Columbus makes an offer to its residents that they can’t refuse: lend us $3.4 million or go to jail for not paying your taxes. Then the city uses the “loan” to build new condominiums in the midst of the worst real estate crisis this country has seen in decades. To every government central planner’s amazement, no one wants to buy the condos – “The collaborative had planned to sell the condominiums, but none has been sold” – so the city dumps the project on the desk of another government agency to escape the embarrassment. As a sweetener for the deal the city of Columbus graciously forgives the “loan” its taxpayers made, so the new government agency, the CMHA, won’t have to worry about paying taxpayers back; i.e., the city pays the CMHA $3.4 million of its taxpayers’ money to get the project off the city’s hands.
But the $3.4 million that Columbus city taxpayers will never see again is not the only taxpayer money involved in this project, planned as it is by Potemkin, Inc.:
[The CMHA] plans three major financing steps after it takes over: • It will spend close to $2 million from its nonfederal reserves to finish the remaining units by this summer. No money is being diverted from other projects, Brown said. The agency has $12.8 million in nonfederal reserves, he said. • CMHA also plans to pay off a $950,000 construction loan from the nonprofit organization Finance Fund. • After that, CMHA plans to acquire a mortgage of at least $1.7 million on the property, Brown said.
First, there was the “forgiven loan” from the taxpayers in Columbus. Then the CMHA throws in $2 million of its on funds, acquired from taxpayers. That makes $5.4 million in taxes in this project thus far. But it does not stop there. The Finance Fund provides loans that at least partly originate with taxpayers. It is not possible to get a clear view of how large a share of the loans they provide are funded by taxpayers, but their list of tax-funded investors is long:
As their public policy positions explain, the Finance Fund also lobbies for more federal funds in real estate, which increases the suspicion that taxpayers are at stake for a big share of the money they lend.
Assuming that half of the money that the Finance Fund will lend is from taxpayers, 78 cents of every dollar spent on this condominium project is taken forcibly from private citizens.
Corleone Construction could not have had more secure funding.
And still, the new project management is worried sick over the remaining 22 cents, which they actually intend to pay back. To do so, though, since they cannot sell the condos they are planning on renting them:
CMHA agreed to finish the project as rental town houses because of the struggling real-estate market.
Normal, private real estate corporations have to cover 100 percent of their costs. There is a reason why these condos were not built on those terms. That reason, again, is that there simply is no market for more real estate, especially not in Columbus, Ohio.
It does not help that some of the tax-paid bureaucrats involved in this project are pushing it as a “community revitalization” project. You don’t need to force taxpayers to pay for community revitalization. That, too, can be done perfectly well with private funding. Compare this tax-paid disaster in New Orleans to this privately funded success story out of Baltimore.
It is time to get government out of real estate, once and for all.
Central economic planning is among the most cherished elements of socialism. Ask any hard leftist with an advanced degree in economics, political science or even history, and he will give a long, passionate speech, voice trembling, eyes wet, about the endless virtues of central economic planning. Aside the obvious failures of the centrally planned countries within the Soviet sphere, as well as the notorious inability of Cuba and North Korea to feed its own population, anyone who wants to know what central planning is like can study examples of it here at home. Try mass transit, e.g., especially with focus on high-speed passenger trains. The latest chapter in that sordid story was recently chronicled by Brent Larkin, former editorial director at the Cleveland Plain Dealer:
A year ago, Gov.-elect John Kasich received a note in the mail from California Gov. Arnold Schwarzenegger. It arrived a few days after Kasich told the Obama administration he didn’t want $400 million in federal money to build a so-called high-speed rail system in Ohio. The note from Schwarzenegger, written on thick, gold-embossed stationery, thanked Kasich for his decision and promised the redirected money — most of which went to California for its rail project — would be put to good use. … In a letter to Secretary of Transportation Ray LaHood, Schwarzenegger professed his “astonishment” that Kasich and other governors-elect didn’t want the rail money. Schwarzenegger should have saved California taxpayers the postage and tossed the letters in a drawer. It’s now abundantly clear Kasich’s decision was the right one. Across the country, high-speed rail projects are flying off the tracks, with states either pulling the plug on them or grappling with epic cost overruns.
It is not just high-speed trains that run amok, cost-wise. Mass transit projects are always open-ended commitments on behalf of taxpayers, something voters in the Atlanta region will soon find out the hard way.
And nowhere are those overruns worse than in California, where most of Ohio’s $400 million ended up. U.S. taxpayers have contributed $3.5 billion in federal stimulus to the initial, 178-mile leg of California’s 800-mile, high-speed rail project. And while not an inch of track has been laid, the cost overruns are already staggering. A state report issued last month estimated the cost of the project at $98 billion — nearly triple the original estimate of $33 billion. That’s more than $122 million a mile.
And that’s before they have even gotten started. Compare this to $20-$40 million per mile to build an interstate, which are documented costs from projects that have actually been completed. In other words, California could get 2,400 miles of congestion-easing, safe, fast and convenient interstate highways for the same money that, under the best possible conditions, might give them 800 miles of high-speed rail. And that’s before anyone has even started building the trains that are supposed to run on those tracks.
The completion date has been moved from 2020 to 2033. So gigantic are the overruns that the House Transportation and Infrastructure Committee has held two hearings to examine how a project could go so wrong so soon. And three weeks ago, California’s legislative budget office said the overruns are now so great that it is “highly uncertain” the project will ever be built.
You know the cost overruns are bad when Congress – yes, the United States Congress , land of the free spending spree and home of the brave budget busters – finds it necessary to get involved.
With a couple of exceptions, newspaper editorial boards in the state have turned against the rail plan, as have some Democratic legislators who were once among its loudest cheerleaders. In November, a Washington Post editorial begged, “Somebody please stop this train.” There is now a move afoot to put the issue before California’s voters. If that happens, polls show it’s doomed. The California project is managed by the Parsons Brinckerhoff engineering firm. This is the same outfit the Strickland administration handed a $23 million no-bid contract to do planning and design work on the Ohio project that Kasich killed.
Talk about fast cash. You draw a few rail lines on a map, make a couple of nice-looking 3D images of high-speed trains on your computer and copy some scenes from TrainSimulator, and all of a sudden the government writes you a check for $23 million.
I’m obviously in the wrong business.
Ken Orski is a former administrator for the federal Urban Mass Transportation Administration who for more than 22 years has published what the National Journal describes as “an influential and widely read transportation newsletter.” Orski told me the plan advocated by former Gov. Ted Strickland gave high-speed rail a bad name. “The Ohio idea was really just marginal improvement in Amtrak service,” he said. “There has to be a place in the transportation spectrum for high-speed rail, but the Ohio project was one of the poster children for how not to do this.” That’s what happens to a state’s reputation when it proposes spending $563 million in taxes on a train system that would move passengers from Cleveland to Cincinnati at a slower speed than the New York Central took them in 1935.
Government at its best. And central economic planning taking you for a ride on the road to nowhere.
Doesn’t it comfort you enormously to know that the people who can’t even plan and execute a train system on time and budget are soon going to be in charge of your health care?
Almost all state budgets are subject to an over-arching mandate of annual balance between revenues and spending. There is some virtue to this – unlike the federal government the states cannot borrow from themselves by printing money – but from a practical fiscal policy viewpoint the balance requirement unnecessarily restricts the room for reforms. To jump start a struggling state economy you need long-term oriented policies. A major problem is that you need to cut taxes “now” to let them go to work in the economy, while it takes time to execute prudent, morally and economically acceptable spending cuts. This might require temporary deficits during a transition phase, something that is technically not allowed under the balanced budget regulations that almost every state has on the books.
From time to time newspapers around the country offer “budget simulators” to let the readers play around with some of the variables that their elected officials have to work with. This one from the Columbus Dispatch is one of the better. It helps highlight the dilemmas that the state’s legislators and governor face in the state’s budget process.
One thing to take away from experiments like this is: should balanced-budget requirements be this rigid? Or should there be flexibility for a dynamic fiscal policy with more fundamental goals than just to produce an annual, balanced state budget?