DEFUNDING AMERICAN EXCEPTIONALISM

AMERICAN EXCEPTIONALISM has had a long and tortuous history well before it was used as a test of President Obama’s patriotism. During a 2009 visit to Europe, the new President was asked "[C]ould I ask you whether you subscribe, as many of your predecessors have, to the school of 'American exceptionalism' that sees America as uniquely qualified to lead the world, or do you have a slightly different philosophy?"

That’s a tough question for a head of state while abroad. Many Obama critics seized upon the first sentence of his response (quoted below) and gave his answer a low grade. He was apparently insufficiently proud of our uniqueness and superiority. But in the rest of his answer (included at the end of this posting), he hints at the list of exceptionalisms that have been claimed in the past.

"I believe in American exceptionalism, just as I suspect that the Brits believe in British exceptionalism and the Greeks believe in Greek exceptionalism."

A popular view of what makes America exceptional is individual opportunity. Even before America became the U.S., it was a favored destination for Europeans seeking political, religious or economic freedom. With time, government and private investments continually improved the quality and access to human and physical capital.

By the 1960s, America offered, with the tragic exception a few notable and substantial communities, universal free education, telephone service, clean water, electricity, and the benefits of an incomparable scientific and academic establishment providing a matchless ladder for upward mobility.

But over the last 40 years, the emphasis of public subsidy and private investment has resulted in perverse outcomes:

1.    Booms in upscale housing and deteriorating quality and availability of homes for ownership and rent by low-income families

2.   Increasingly palatial venues for professional and Division 1 college sports but increasingly underfunded public education, especially for music and art

3.   Steadily declining physical infrastructure, most obviously in traffic congestion, dangerous bridges, water main breaks, gas pipeline explosions, and an increasingly fragile electric power grid.

Recent smaller government/”cut-the-deficit” suggestions have featured accelerated diminishing of the investments that make America exceptional.

A useful contrast in approaches to budget priorities is presented in a February  publication, Cuts vs. Investments: Comparing Budget Plans and their Impact on the U.S. Economy, from the Center for American Progress.

An important insight from the report is the distinction between investment and other kinds of spending, especially by government agencies. The Republican Continuing Resolution (H.R. 1) for the remainder of fiscal year (FY) 2011 is contrasted to the Obama administration’s proposed budget for FY 2012, especially when it comes to transportation, infrastructure, science, and technology.

Obama’s plans call for a National Infrastructure Bank for financing infrastructure development, increasing investments in highways by 66 percent, and rail by 88 percent over the 2010 levels.

H.R. 1 cuts money for transportation infrastructure by 9 percent, reducing rail by $2.7 billion, $675 million from federal transit investments, and nearly $1 billion from highways from 2010 amounts.

The president increases “funding for the National Science Foundation by 13 percent, the National Institute of Standards and Technology (NIST) by 15 percent, the Department of Energy’s Office of Science by 10 percent, and funding for science and technology research at the Department of Homeland Security by 18 percent.

Alternatively, the Republican budget slashes investments in science and research by more than $6 billion, including cutting one-third of funding to NIST and the Office of Science, $360 million from NSF, and almost $600 million from the Department of Homeland Security Science and Technology program.”

There are genuine disagreements over the value of new ventures such as high-speed rail or whether carbon dioxide as a green house agent is a pollutant subject to EPA regulation.

However it is generally accepted that there are a several Katrinas waiting to happen. By Katrinas, I don’t mean unpredictable natural catastrophes inadequately handled. I’m referring to well understood, avoidable civil engineering failures waiting to happen. The levees holding back the Mississippi from the largely sub-sea level City of New Orleans were, for several decades, known to be vulnerable to a level 4 or 5 hurricane. The cost to fix was also well known, yet almost nothing was done.

A list of future Katrinas is cataloged in the American Society of Civil Engineers’ Report Card 2009. It should be required reading for all budgeteers. There is also a video that leans very heavily on the Report Card: The Crumbling of America from the History Channel.

The list is either ignored or given only token reference in the various deficit schemes. It should be among the no-brainers among spending priorities. There is no dispute that they must be fixed; the longer we wait, the more expensive it will be and the less exceptional we will become in any positive meaning of the term.

***

President Obama’s complete response to a question about his attitude about Amercan Exceptionalism:

"I believe in American exceptionalism, just as I suspect that the Brits believe in British exceptionalism and the Greeks believe in Greek exceptionalism. I'm enormously proud of my country and its role and history in the world. If you think about the site of this summit and what it means, I don't think America should be embarrassed to see evidence of the sacrifices of our troops, the enormous amount of resources that were put into Europe postwar, and our leadership in crafting an Alliance that ultimately led to the unification of Europe. We should take great pride in that.

"And if you think of our current situation, the United States remains the largest economy in the world. We have unmatched military capability. And I think that we have a core set of values that are enshrined in our Constitution, in our body of law, in our democratic practices, in our belief in free speech and equality, that, though imperfect, are exceptional.

"Now, the fact that I am very proud of my country and I think that we've got a whole lot to offer the world does not lessen my interest in recognizing the value and wonderful qualities of other countries, or recognizing that we're not always going to be right, or that other people may have good ideas, or that in order for us to work collectively, all parties have to compromise and that includes us.

"And so I see no contradiction between believing that America has a continued extraordinary role in leading the world towards peace and prosperity and recognizing that that leadership is incumbent, depends on, our ability to create partnerships because we create partnerships because we can't solve these problems alone."

Defund Planned Parenthood: Class Warfare Strategies from the Anti- ACORN playbook

Hoax video “evidence” leads to congressional defunding.
This February, the target was Planned Parenthood. Recently, Planned Parenthood was targeted for defunding through legislation pushed in congress by Rep. Pence (R-Indiana).  ACORN’s turn was in 2009. The Association of Community Organizations for Reform Now (ACORN) is a now-defunct coalition of membership community organizations that advocated for low- and moderate-income families in social issues, including voter registration, health care, and housing. Both defunding campaigns involved actors posing as pimps and prostitutes to induce employees to make improper statements or, even better, take actions in violation of federal funding rules.
But the similarities are more profound than simple staging. By providing social services and advocacy for low-income families, these two nonprofits are associated with the base of the Democratic Party.
ACORN had the additional stigma of identifying with communities of color, making it vulnerable to accusations of resorting to intimidation and potential violence.
The necessity of cuts to government programs to show fiscal responsibility offers additional and neutral sounding justification for going after politically weak adversaries. 
With the 2012 election in the background, deficit fights are an attractive arena for ACORN-like crusades.
Pimps and prostitutes were the most lurid means of public relations assault, but the elements of the campaign against ACORN illustrates the rich assortment of tactics available. It’s worth reviewing the history of ACORN’s demise to help recognize the pattern when we see it the next time.


By late September 2009, the multi year campaign to kill ACORN was close to triumph. In a Forbes magazine opinion piece in September 2009, Sol Stern, a Manhattan Institute Senior Fellow, suggested a solution for President Obama’s ACORN “problem”: 
 “Acorn is now exclusively a Democratic Party albatross. The organization’s many abuses of power now coming to light have been enabled by Democratic mayors, governors and congressmen. If Barack Obama wants to effectively refute the charge by some on the right that he has a secret socialist agenda, he has the perfect opportunity. All he has to do is declare that his administration will henceforth act to block taxpayer funds from ever again going to this very openly radical and socialist organization.”


If ACORN supporters didn’t want to get hurt, all they had to do was withdraw support and walk away. 
ACORN’s success in the Community Reinvestment Act process, promoting voter registration and involvement in the census count participation in underrepresented communities was why it drew so much fire.


ACORN as the enforcer of the CRA
The Community Reinvestment Act of 1977 (CRA) says that, in exchange for benefiting from federal deposit insurance, banks must make loans in their branch neighborhoods including the poor, without sacrificing financial safety.  
As CRA legislation and accompanying regulations evolved, community voices were allowed to influence whether bank mergers would take place. Interestingly, some of the mergers touched by CRA ratings resulted in the banks that had to be bailed out because they had grown "too big to fail".


In the run-up to the 2008 general election, The Wall Street Journal editorial page conflated ACORN's CRA activities with their efforts in voter registration to explain the banking collapse, and how the Democrats and presidential candidate Obama were in on the scheme. 
Obama and Acorn: Community organizers, phony voters, and your tax dollars. OCTOBER 14, 2008:
"Acorn...  has been around since 1970 and boasts 350,000 members. We've written about them for years, but Acorn is now getting more attention as John McCain's campaign makes an issue of the fraud reports and Acorn's ties to Mr. Obama. It's about time someone exposed this shady outfit that uses government dollars to lobby for larger government.
Acorn uses various affiliated groups to agitate for "a living wage," for "affordable housing," for "tax justice" and union and environmental goals, as well as against school choice and welfare reform. It was a major contributor to the subprime meltdown by pushing lenders to make home loans on easy terms, conducting "strikes" against banks so they'd lower credit standards…
Acorn is spending $16 million this year to register new Democrats... The big question is how many of these registrations are real...
The Obama campaign is now distancing itself from Acorn, claiming Mr. Obama never organized with it and has nothing to do with illegal voter registration... The Justice Department needs to treat these fraud reports as something larger than a few local violators. The question is whether Acorn is systematically subverting U.S. election law -- on the taxpayer's dime."


ACORN involved in "fraudulent" voter registration?
During the October 15, 2008 debate, just before the general election the Republican candidate tried to tie the Democratic candidate to ACORN voter fraud. "We need to know the full extent of Senator Obama's relationship with ACORN, who is now on the verge of maybe perpetrating one of the greatest frauds in voter history in this country, maybe destroying the fabric of democracy. The same front outfit organization that your campaign gave $832,000 for 'lighting and site selection.' So all of these things need to be examined, of course." McCain’s statement punctuated a multi-year partisan campaign against ACORNs voter registration efforts. The GOP activities generated enough public accusations to initiate investigations and then prosecutions. Sometimes the prosecutions didn't come hard enough nor soon enough to satisfy the GOP.
The 2007 congressional investigations into the 2006 firing of nine U.S. attorneys have uncovered at least one likely political motive for the dismissals. Apparently, some of the Justice Department lawyers were insufficiently aggressive while pursuing voter fraud cases. Fraud charges were either not being pursued or were not producing timely prosecutions for the purposes of helping Republican candidates.
At least two cases focused on ACORN.
In 2009, Chair of the Republican National Committee Michael Steele mass mailed a fund raising letter that placed ACORN at the center of a plot, in coordination with the Obama administration, to falsify the census to distort the congressional apportion map in favor of the Democratic Party.
The media climax arrived when political operative "videographers" went public with a collection of highly edited video clips showing ACORN employees who appeared to be giving advice on how to evade taxes and other questionable if not illegal acts. Several ACORN employees were fired. After investigations by several prosecutors in the several distinct jurisdictions corresponding to the locations of the recordings, ACORN was cleared of criminal wrongdoing. All of the videos were found to have been pieced together a highly incriminating video from milder source material.


The onslaught started to take a serious toll on ACORN in the fall of 2009.
A government agency, in effect took, Sol Stern's advice. During the same month, September 2009, Robert M. Groves, Director of the U.S. Census, sent a letter to Ms. Maude Hurd, National President of ACORN terminating their partnership to work together on the 2010 census.


Posted by GOP Leader Press Office on September 15th, 2009:
Today House Republicans, led by Republican Leader John Boehner (R-OH), are sending the following letter to President Obama asking him to use his authority to end all funding to and break all government ties with ACORN:
Dear Mr. President:
We write to you today in the wake of new reports of potentially criminal activity involving associates of the Association of Community Organizations for Reform Now (ACORN) to respectfully request that you use your authority to publicly disclose and terminate all federal funding to ACORN and its affiliates...
Congressional pressure, coupled with the impact of recent media reports, prompted the U.S. Census Bureau on September 11 to end its partnership with ACORN.  We support this decision by the Census Bureau, and believe it is vital that all other federal agencies with ties to ACORN follow the Census Bureau’s example by severing all ties to ACORN and its affiliates, whether those ties consist of partnerships or the awarding of federal funds, including federal funds distributed through state and local governments from federal block grants...

The Census Bureau has made the commendable decision to sever ties with ACORN, and it is now critical that all remaining federal entities with ties to ACORN do the same.  We ask that you use your authority to ensure that all federal funding of ACORN is publicly disclosed and terminated immediately.  To facilitate this effort, the Republican staff of the Oversight Committee has compiled a complete list of the corporations that form the ACORN Council, and we would be pleased to share it with you and members of your administration.
We thank you for your attention to this request.


But the real target of this line of aggression is the poor - not ACORN so much. In a torrent of anti-ACORN activism, there is rarely if ever a mention that ACORN’s clients could be better served by some other, more acceptable organization. The services they provide are at best, afterthoughts.
Much like ACORN, Planned Parenthood delivers much more to underserved communities than what it is most known for- abortion services. 
Abortions are just the most publicized reproductive health care services and education delivered to low-income clients, most of which is directed to prevent unwanted pregnancies and resulting neglected children.  It also helps to arrange adoptions for parents unable to raise a child but decide not to end a pregnancy.
Planned Parenthood is unlikely to be defunded by congress, but this latest exercise from the defund ACORN playbook should serve as a context for following the continuing efforts to keep social services for low income families at the top of the budget cut list.

If we can put a man on the moon, why aren't we shovel ready?

If you are a member of the “Greatest Generation” and lived during the Great Depression and World War II, or are a Baby Boomer and were among the children of the “Greatests”, you probably had to hear a lot of “disappointment” about the use of technology. The expression began with “If they can put a man on the moon, why can’t they...” and followed by the problem of the day that was in need of a technology fix.  Examples ranged from the trivial (make the public address system in the New York City subway understandable to the altruistic (eliminate world hunger) and the strategic (solve the energy problem). Unsurprisingly, the expression was most popular during the 1970s right after the first manned lunar landing in July of 1969 when a lot of technological fixes seemed to be required: the first economy-threatening energy crises; air and water pollution; the increasingly obvious results of deferred maintenance of physical infrastructure, especially the mass transit systems, roads and bridges in urban America.

But the 1970s also came at the end of a century-long sequence of federally sponsored projects that collectively affected almost every American:
1. Transcontinental railroad
2. Land Grant Universities
3. Interstate Highway System
4. Manhattan Project to develop the atomic bomb
5. Large scale hydroelectric projects, including the Hoover and Grand Coulee dams

Less direct but equally influential were federal roles in:
1. cutting a deal with AT&T/Bell Telephone System to provide “universal telephone service”  in exchange for keeping their telephone monopoly
2. facilitating the construction of the now under-appreciated national electric power grid
3. upgrading secondary school education in math, science and foreign languages with the goal of producing more engineers. The National Defense Education Act (1958) was a reaction to the successful launching of the Soviet Sputnik satellite in 1957.

Many of these projects are iconic symbols of American engineering and science innovation as well as management skills. While not all such government endeavors have been successful (Nixon’s War on Cancer), it’s hard to imagine what the U.S. would be like without the ones that did work. These massive programs along with widely applied high American standards of building construction, water and sewage supplies and safe roads raise the quality of life of almost every American above that of most countries, even rich ones.

That last point is a very important one. The benefits were very broadly spread - with some significant exceptions - notably the poorer communities of the Mississippi River Delta, Indians stuck on reservations and stretches of Appalachia.  

The Apollo landing on the moon in 1969 seemed mark the end of the sequence of great technology initiatives. After that, many people wondered when the next megaproject would come up with the technological fix to meet the challenge of energy shortages or transportation congestion. Hence the question, “if they can put a man on the moon, why can’t we…?”

The answer most people might give as to why these programs didn’t continue is lack of money. The federal government has been accumulating deficits ever since the 1960s. Maybe if we threw enough money at a problem that would help. But the Stimulus Act (American Recovery and Reinvestment Act of 2009) contained funds for “shovel ready” construction and repair projects. The delays in implementation brought attention to the fact that there was no such thing as “shovel ready”. In other words, there were very few project plans that are sitting on agency shelves with all the engineering and regulatory approvals complete and “good to go” except for cash.

Two types of barriers contribute to these hold-ups: local control and environmental impact procedures. There have always been ways for regular citizens to organize themselves to stop projects they didn’t like, but it is a lot easier today. In many parts of the country there have been parts of the Interstate Highway System that have been stalled out for decades because of local resistance - Interstate 710 in Los Angeles County is an outstanding example. There are also air and water quality requirements that provide procedures for slowing or stopping projects on environmental impact grounds.

Both local control and environmental impact rules were brought on by past abuses. A famous example is the stretch of U.S. Interstate 95 that destroyed several neighborhoods in the Bronx as it cut a diagonal through that New York City borough during the 1950s. And by the late 1960s, it was clear to everyone that air and water quality were deteriorating to unacceptable levels.

It should also be recalled that there were great waves of deregulation in commercial aviation, trucking and telecommunication service at the same time - during the 1970s and 1980s.

However it would be a mistake to hold new regulations and local bureaucracies solely responsible for all of the infrastructure malfeasance. Lack of money, and not government hindrance is what has held up the overdue maintenance of the water, and transportation systems that are already in place. The American Society of Civil Engineers regularly publishes a Report Card for America’s Infrastructure indicating the degree of obsolescence and disrepair of the systems that were mostly built decades ago. They come up with a 5 year shortfall of $1.176 trillion between what the U.S. is scheduled to spend and what is needed to bring those systems back to acceptable operating conditions. The report card summarizes the failure to fund the necessary efforts to attain the accepted engineering standards for upgrading the air traffic control system, cleaning up toxic and hazardous dumps sites, along with the more conventional bridge and levee upgrades and repairs. No doubt, lack of willingness to spend money is an issue.

But ignorance of the threats is not. The vulnerability of the New Orleans area to a category 4 or 5 hurricane was well known by state officials well before 2005. The price tag for fixing the levees was around $12 billion. The direct damages of Katrina was estimated at $16 billion. Total expenses for dealing with the disaster exceeded $100 billion. Although the $12 billion levee fix would not have prevented all the damage, it would have been a bargain.

The costs and hazards brought on by neglected technology challenges are fairly well understood, at least by the technicians who are responsible - and get worse with time. So why have responses taken so long in coming and been so weak?

The last 40 years have seen a resistance to an expanded role of the federal government in the economy. Although it would be a mistake to assume that there was unanimity in support for the the Interstate Highway System or other now-universally accepted facilities, the track record of bringing large scale non-military projects to execution suggests that the obstacles are much higher today.

One of characteristics that makes the United States an exceptional country, especially in the eyes of the rest of the world, is American success at designing, financing, and organizing massive engineering projects for peaceful objectives as well as for war.

Rather than try to find the complete political explanation for our recent retardation, we need to find a new way to harness the intellectual and management firepower to implement to technological fixes. There is no point in waiting for the solutions to become shovel ready.

Earmarks, the Pentagon, and the Federal Deficit

More Ways to look at the forthcoming deficit debate

In a May 2010 speech on defense spending given as part of a celebration of the 65th anniversary of the end of World War II in Europe, Defense Secretary Gates argued for a more effective use of military funds. He invoked the memory of Eisenhower’s skepticism about bloated military budgets to call for the end to, among other wastes, congressional funding for unwarranted military purchases:

“For example, in this year’s budget submission the Department has asked to end funding for an unnecessary alternative engine for the new Joint Strike Fighter and for more C-17 cargo planes.  Study on top of study has shown that an extra fighter engine achieves marginal potential savings but heavy upfront costs – nearly $3 billion worth.  Multiple studies also show that the military has ample air-lift capacity to meet all current and feasible future needs.  The leadership of the Air Force is clear:  they do not need and cannot afford more C-17s. Correspondingly, the Air Force, Marine Corps, and Navy do not want the second F-35 engine. Yet, as we speak, a battle is underway to keep the Congress from putting both of these programs back in the budget – at an unnecessary potential cost to the taxpayers of billions of dollars over the next few years.  I have strongly recommended a presidential veto if either program is included in next year’s defense budget legislation.”

What he was protesting was “congressionally directed spending” that trumps the Pentagon’s own priorities. There should be no confusion though. Gates was not arguing for cuts in the Pentagon’s overall spending that might contribute to reducing the federal budget deficits. He was complaining about congressional interference with the military’s own plans by misdirecting funds to “non-strategic” ends. Whether the Pentagon’s wish list is any more “strategic” is not the current topic. Military “earmarks”, on the other hand, is.

The Congressional Research Service (CRS) issued a memorandum (2006) cataloging earmarks in a series of appropriation bills. (Earmarks in Appropriation Acts: FY1994, FY1996, FY1998, FY2000, FY2002, FY2004, FY2005). It identified:

“Earmarks. Conference committee reports on defense appropriations bills allocate funds to particular programs in great detail, specifying, for example, how many weapons of what types are to be procured or how much money is available for recruiting. If earmarking is defined broadly, therefore, virtually all funds in defense bills are fully earmarked. Usually, however, in the case of defense-related legislation, the term earmark is used to mean allocating funds at a level of specificity below the normal line item level. Understood in this way, a congressional committee would not be said to earmark funds if it adds money to buy additional fighter aircraft, for example, but would be said to earmark funds if it specifies that a particular kind of radar is to be incorporated into an aircraft upgrade program. This assessment uses the more narrow definition of an earmark.”

Could this time be different?

Department of Defense (DOD) expenditures represent roughly half of discretionary federal spending. Any other government agency with DOD’s poor record of fiscal controls (its financial accounting records have been non-auditable for decades) would be high on the list for management overhaul. Under the cover of national security, defense appropriations have historically been the politically safest place to advocate for increased spending. But budget deficits have grown to the point where even military spending may be put “on the table”.

Pentagon spending is, possibly, the only budget category where eliminating earmarks would save money. It’s also the area where earmarks will probably be redefined in a way so they don’t apply - and back "off the table".

Budget earmarks and marijuana: Two publicly scorned but useful items that could benefit from limited legalization

Right after election day, earmarks shared headlines with marijuana, at least in California. Proposition 19 would have legalized the possession and cultivation of limited amounts of marijuana for personal use. Proponents of the measure claimed that it would facilitate medical use, create a new tax base, and reduce costs associated with drug law enforcement. Prop 19 failed.

Prompted by Republican success in congressional races, future House speaker John Boehner suggested in a Wall Street Journal opinion article “What the Next Speaker Must Do”.
He listed four items as his high priorities
• No earmarks.
• Let Americans read bills before they are brought to a vote.
• No more "comprehensive" bills.
• No more bills written behind closed doors in the speaker's office.

He saw these as necessary steps to restore voter confidence in the congressional lawmaking process. He may be waiting for the two bi-partisan commissions that are working on deficit reduction recommendations before he identifies his spending cut priorities. But why are earmarks, of all the ways it which the federal budget is built and manipulated, such a worthy target for reform or even elimination?

One answer is that earmarks make popular targets. They are relatively easy to understand and they are popularly understood to be selfish, corrupt grabs at public funds easily lumped in disrepute with pork barreling and log rolling.

Earmarks and marijuana tend to draw similar reactions from elected officials. Both probably have socially redeeming attributes but the political risk of publicly supporting even their limited use is too high. Just ban them.

What are earmarks?

There are no standard government definitions, but here are a couple of attempts from federal agencies:

In The Honest Leadership and Open Government Act of 2007, a conflicts of interest disclosure program, congress calls earmarks  “congressionally directed spending items” and defines them as:
“a provision or report language included primarily at the request of a Senator providing, authorizing, or recommending a specific amount of discretionary budget authority,
credit authority, or other spending authority for a contract, loan, loan guarantee, grant, loan authority, or other expenditure with or to an entity, or targeted to a specific State, locality
or Congressional district, other than through a statutory or administrative formula-driven or competitive award process."

The Office of Management and Budget defines them as:

"congressional direction (in bill or report language) [which] circumvents the merit-based or competitive allocation process, or specifies the location or recipient, or otherwise curtails the ability of the Administration to control critical aspects of the funds allocation process"

A more expansive notion of congressionally directed spending would importantly include tax expenditures. In fact the Honest Leadership act also sought to enhance disclosure of congressional handouts of  ‘limited tax benefit’ defined as:
‘‘(1) any revenue provision that—
(A) provides a Federal tax deduction, credit, exclusion, or preference to a particular beneficiary or limited group of beneficiaries under the Internal Revenue Code of 1986; and 

(B) contains eligibility criteria that are not uniform in application with respect to potential beneficiaries of such provision.”

Regardless of definition, the underlying earmark concept is easy to grasp: extracting money from the policy driven process and assigning it to recipients picked by elected officials.

Taxpayers for Common Sense is one of several policy analysis groups that specialize in earmarks. Their review of Fiscal year 2009 spending bills found 11,286 earmarks worth $19.9 billion.

Their objection to earmarks is rooted in their finding that “In too many cases, these line-item provisions siphon off cash from important national needs for more parochial political benefit in the district of powerful lawmakers. In addition, earmarks remain a petri dish for corruption. In addition to well-known earmark scandals of the past...  Funding decisions should be made in the open and based on competitive, merit, or even formula funding processes that Congress develops, monitors, and oversees with the Executive Branch.”


For many voters, channeling federal dollars into their state, or preferably to their congressional district is one of the ways for legislators to earn re-election. As with most election campaigns, this year’s congressional incumbents were criticized for failing to bring home enough federal dollars to prevent jobs losses - even by voters who objected to excessive spending. In other words, they didn’t secure enough earmarks.

Explanation for such a paradox may have several sources:

1. Voters only dislike earmarks that are heading for states and districts other than their own.
2. Citizens don’t know enough about how federal dollars are distributed back to their localities to be clear on the difference in fairness or effectiveness between earmarks and regular funds.
3. Furthermore, most people don’t know how much money is from Washington, D.C., the state capital or their town’s own sources.

Using a narrow definition the share of federal funds that might be called earmarks are too small to matter in a discussion about deficits. In fiscal year 2009, they are about .6 % of the total on-budget federal outlays and equivalent to 4% of federal grants. But more importantly, earmarks are not additions in spending. They  re-channel funds that have in effect already been spent. In other words, eliminating earmarks does not change the deficit. Boehner doesn’t suggest that it does although others have.

Some elected officials question whether congress’ formula funding process is necessarily more effective or fairer than earmarks.
Many federal projects by their very nature would tend not to spread money evenly across congressional districts and are delayed when appropriated moneys are funneled away:

   1. National high speed rail network
   2. Superfund toxic waste cleanups
   3. Terrorist threat deterrence

Earmarks may be just a way of making sure the home district gets its proper share. Not surprisingly, both earmarks and general federal spending track similar patterns. Disproportionate shares tend to flow to less populous states with senate representatives in appropriating congressional committees.
On the other hand, as mentioned in an earlier posting ("Shovel-Ready" Stimulus Projects and "Earmarks") earmarks can facilitate access to federal funding programs. Some earmark cash is used to prepare the environmental impact statements, preliminary engineering studies and other expensive components of grant applications. It might also be used to meet matching fund requirements.
Like marijuana, earmarks have a dubious image, but can serve a useful purpose and in many cases have few suitable substitutes.
One alternative resolution for both “scourges” is limited legitimization. A limited number of dollars could be allocated to each member of congress based on population. Each representative could get identical amounts since their districts are roughly the same in population, and each senator would get an amount based on the population of their state. There might be restrictions on who could receive it: private v. public; profit v. nonprofit, etc. State delegations could pool assets for certain purposes.

One final Note
Under certain definitions, most defense- related procurements are earmarks. That’s why the Pentagon can wind up with weapons systems it didn’t ask for: because Congress “directed spending” toward their favorite contractors. Boehner’s elimination of earmarks could very well make reduced Defense Department spending an important contribution toward balancing the budget.

“Tax Entitlements” on the California Ballot

The California ballot this November 2 features Proposition 24 along with eight other voter initiatives. Prop 24 cancels a package of California business tax breaks that were legislated in 2008 and 2009 as part of negotiations to close budget deficits. In short, the provisions allow for the the reduction in taxable income using three methods:

   1. Net operating losses could be applied against tax liabilities incurred in the previous two years (“carry back”, currently disallowed) or future profits (“carry forward”) more flexibly than current law allows. Carry forwards could be applied up to 20 years forward instead of the current 10 years.
   2. Multi-state companies would have more flexibility in what sales-based formula they use to determine their taxable income
   3. Business “groups” would get more options on how they share tax credits among members

The state legislative analyst estimates full enactment by 2012-2013 would reduce annual state revenues by $1.3 billion.

The composition of the two sides in the election holds few surprises. The opponents are “pro business” groups that are labeling Prop 24 a job killing tax hike (It’s actually the repeal of a tax reduction). Proponents include those under threat by the cuts necessary to shrink the $18 billion deficit: public employee, recipients of government services and their advocates.

The job-killer description for Prop 24 is in sync with the many-decade narrative which tags California as a high tax anti-business environment. On closer examination California doesn’t seem to have an exceptionally hostile tax code. A Los Angeles Times article of October 25 included a list of California tax features that challenge the anti-business reputation, at least as far as taxes are concerned:

   1. According to a study by the Council on State Taxation, the state’s tax share of  gross state product (gsp) is 4.7%, which is also the national average. Maybe surprisingly, the California rate is lower than for New York (5.5%) and Texas (4.9%). Two of the states usually held up as magnets for disgruntled California employers have higher rates: Arizona (4.8%); Nevada (4.9%).
   2. California’s research and development tax credit provision (15% of R&D expenditures over a specific base level) is considerably more generous than the national median of 6.5%.
   3. The well known Proposition 13 (1978) that caps real estate tax rates and annual increases favors business taxation since business ownership of commercial real estate changes far less often than for residential properties and is therefore less exposed the full tax adjustment triggered when deeds change hands. As a result, the business share of property taxes has declined steadily. In Los Angeles County, the residential share has climbed from 53% in 1975 to a current 69%.

More generally, the business share of California and federal income tax revenues has declined for decades. Business taxation rates expressed as a fraction of either profit or state or national gross product has not been increasing, this is particularly true for larger corporations. Through tax credits and other favorable “tax entitlement” the tax burden has steadily shifted to individuals and smaller businesses.

The tax and revenue systems of our respective states are complex and largely unfamiliar to citizens and journalists alike. So it would seem reasonable to make public the favors dispensed by the government. In California’s case such disclosure should be a prime candidate for the recently installed but seriously underused transparency-in-government efforts.

In California, Assembly Bill 2666 was passed by the state legislature and finally vetoed by the governor this summer. In the words of the legislative floor summary AB 2666 “requires the Franchise Tax Board (FTB) to compile information on tax expenditures claimed and reported by publicly traded companies and requires the State Chief Information Officer (CIO) to publish this information on the Reporting Transparency in
Government Internet (RTG) Web site.”

Tax expenditures, or what I prefer to call tax entitlements, are shrinking the tax base, shifting the burden to those who don’t have the political wherewithal to extract favors from their respective legislative bodies. This continuing trend restricts the deficit debate to a choice between cutting government spending and raising “job destroying” tax rates.

In California’s case, none of the tax breaks referred to in Prop 24 are aimed at or justified on the basis of job creation - except in the claims of the campaign literature. However, they clearly enhance after-tax income.

The California decision on Prop 24 distills the abstract national debate over whether cutting business taxes creates job down to a yes/no vote on a single proposition. The contexts are different but the question is really the same.

In testimony (Policies for Increasing Economic Growth and Employment in the Short Term) before congress in February 23, 2010, CBO Director Douglas W. Elmendorf offered the following: “increasing the after-tax income of businesses typically does not create much incentive for them to hire more workers in order to produce more, because production depends principally on their ability to sell their products.”

The Culture of Poverty versus the Culture of Poverty Studies

Recently, (October 18, 2010) a New York Times article   covered the resurgence of scholarly interest in the “culture of poverty”. The reporter focused on academic meetings and a congressional briefing linked to a special issue of The Annals, the Journal of the American Academy of Political and Social Science.

The article probably overstates the academic withdrawal resulting from association between “culture of poverty” and “blame the victim” established by the early 1970s. Research of the 1980s and 1990s focused on the new term “urban underclass” but continued to provide a rationale for ignoring pleas for anti-poverty efforts from the federal government.  Nevertheless, the recent interests does seem to represent a heightened participation by researchers and their funders.

Studies by Daniel Patrick Moynihan before he became a senator from New York and the anthropologist Oscar Lewis among others, described the urban black family as trapped in a “tangle of pathology” and moral deficiencies resulting in a community of welfare-dependent unmarried mothers. The underlying racial theme repelled many for decades, so the renewed interest in this subject is noteworthy. There is a careful avoidance of terms like pathology, and language that sounds like blame.

We know that this is not a purely academic exercise if for no other reason than the congressional briefing. The Times article highlights this connection directly:

“The topic has generated interest on Capitol Hill because so much of the research intersects with policy debates. Views of the cultural roots of poverty ‘play important roles in shaping how lawmakers choose to address poverty issues,’ Representative Lynn Woolsey, Democrat of California, noted at the briefing.”

But this current research is not so focused on distinguishing which cultural attributes cause or sustain poverty rather than being caused by poverty. Separating cause and effect is important. Marriage promotion has been advocated as an anti-poverty strategy because marriage appeared to be one of the striking differences between the poor and the non-poor. But is marriage a cause or the result of higher income?

Why is the focus on the behavior of the “losers” in the economic competition as opposed to all players? Pathologies of the rich would seem to be at least as interesting, but draw much less attention at universities where the research is conducted or the government
agencies and charitable foundations that hand out the research grants. Wouldn’t it be constructive to learn how and why middle class families are convinced to vote pathologically against their economic interests; or how the truly rich are able to separate their weekend religious beliefs from their profit generating weekday activities when in comes to interactions with other economic classes?

One of the arguments against aid to the poor is that it encourages a “culture of dependency”. Policy analysts don’t identify the same flaw in tax benefits and subsidized mortgage rates for middle class homeowners. Or at least it doesn’t seem to be of “cultural” interest.

When the sub prime mortgage collapse expanded into a banking crisis, some argued that not only was government intervention on behalf of low income homeownership bad for the poor, but that it could destroy capitalism for everyone. The diseases from the culture of poverty could escape quarantine even if poor people couldn’t. The pathology of the poor had transformed into a contagion infecting the rest of us.

Advocates for homeownership claim a list of benefits for society: increased satisfaction with their homes and neighborhoods; increased likelihood to participate in voluntary and political activities; and prolonged stays in their homes, contributing to neighborhood stability. But housing subsidies to the poor are devoid of any analogous self-empowerment – in other words, no means to accumulate wealth in the form of equity, or effective participation in the operation of the public housing project. As a result, many of the elements that contribute to the advantages of homeownership are “designed out” of low income housing subsidies.

Instead of focusing on culture, this blog advocates a focus on the federal and state government spending policies that unfortunately contribute to differences in economic opportunity.

This structural approach suggests a different set of questions than those emphasized by a focus on culture. What is it about the rules of the economic game that produces so many losers and could the game be made fairer? Why isn’t the poverty level a higher priority
target of economic performance along with growth in gross national product and the unemployment rate? In other words, isn’t a persistent, and now climbing, poverty level a sign of failure for fiscal/tax policy?

What about the Culture of Poverty Studies?

Unlike engineers or others involved in technology, social scientists are not expected to solve the problems they study. Although they as individuals may care about the fate of the poor, these researchers have a perverse incentive to keep poverty around.

If the focus on the poor is driven by a desire to solve the poverty problem, then I would expect more emphasis on solutions-oriented research. I would expect more emphasis on the structural obstacles to escape from the poverty trap. Instead, there is at least as much
interest in developing new theoretical frameworks, and applying novel experimental designs to examine poverty in fresh ways. In fact there doesn’t seem to be a high expectation of eliminating poverty through social science research.

It’s not as if solutions-oriented experts don’t exist: but they are not really asked to deliver them.

Besides the PhD. policy analysts at D.C. partisan and nonpartisan think tanks, there are government economists, statisticians and attorneys at the Federal Reserve, Office of Management and Budget (OMB), Congressional Budget Office (CBO), Commerce, Agriculture, Housing and Urban Development (HUD) and other agencies representing a staggering amount of intellectual and computational firepower who are never directly asked the question they have spent most of their careers fantasizing about: "How would you fix this poverty mess?”

In many cases, government policy analysts, e.g. CBO, are prohibited from giving recommendations, presumably to assure “objective, impartial analysis” of the policy under consideration. Instead they get to make diplomatic comments, analyses and forecasts about what congress is about to consider, and they are occasionally asked to comment on some tangential details in a congressional hearing. But wouldn’t we all like to know what they are muttering to themselves when they are asked everything else but “How would you fix this mess?”

At its simplistic core, solutions to poverty don’t require that much intellectual fire power. Once you set aside those who are physically or mentally incapable of holding a productive job and those who avoid working, the missing element is self-evident. There are not enough jobs at the appropriate skill level paying enough to keep job seekers above the poverty level. Aren’t there rich countries that have much lower levels of poverty? How do they do it?

Instead of studying the “culture of poverty”, maybe we could disrupt the culture of poverty studies and give some “experts” a serious chance to solve problems using the proper incentives. It’s not an accident that the most successful advocates in Washington are the ones that are paid for winning – lobbyists and vendor/contractors.

Renewable Energy Tax Credit: Worthy Goal, But There is a Better (and Tried) Path

Tax cuts, in their various forms, have emerged as the fiscal instrument of choice for a variety of goals: stimulate the overall economic growth, create jobs, reduce unemployment and attract investment.

The Kennedy and Reagan Tax cuts are sentimental and bipartisan examples used as arguments for applying the same strategy today. Those episodes from recent history are subject to easy challenge as useful models because the contexts are so different and the cause/effect conclusions are never as tight as politically driven proponents would have us believe.

Even for a specifically targeted sector as opposed to general economy, tax cuts in the form of investment tax credits were chosen as an important vehicle in the 2009 economic stimulus package (ARRA). The Renewable Energy Tax Credit Program (RETC) uses tax credits to encourage the development of manufacturing facilities making “solar, wind, and geothermal energy equipment; fuel cells, microturbines, and batteries; electric cars; electric grids to support the transmission of renewable energy; energy conservation technologies; and equipment that captures and sequesters carbon dioxide or reduces greenhouse gas emissions.”
Quoting Energy Secretary Steven Chu:  "These tax credits will help create thousands of high quality manufacturing jobs in some of the highest growth segments of the economy.  This is an opportunity to develop our global leadership in clean energy manufacturing and build a secure, sustained base of jobs for America's workers."
(August 13, 2009 TG-262 Treasury, Energy Announce more than $2 Billion in Recovery Act Tax Credits for Energy Manufacturers http://www.treas.gov/press/releases/tg262.htm US Treasury)

The program provides a 30% credit for investments in new, expanded, or re-equipped advanced energy manufacturing projects. 
 

The credits are awarded in a process that is surprisingly devoid of market influence. Quoting from the Department of Energy description- “The Department of Energy (DOE) and the Internal Revenue Service (IRS) will review and make determinations on the eligibility and merit of MTC (Advanced Energy Manufacturing Tax Credit) applications.  Applicants will receive tax credits based on the expected commercial viability of their project and the ranking of their project relative to other projects.  Rankings based on: expected job creation, reduction of air pollutants and greenhouse gas emissions, technological innovation, and ability to have the project up and running quickly.  Technology, geographic & project size diversity, and regional economic development will also be considered when rating projects.” (http://www.energy.gov/recovery/48C.htm)
 

But using tax credits to encourage new ventures in new technologies can’t depend on nostalgia for support because there really isn’t any history to count on. 

Tax credits tend to be most useful to full tax payers. Enterprises that are in the product development stage and have not hit their stride in revenue or profits don’t have tax liabilities to offset. The written-in ability to use the credit over the next 20 years is better than nothing, but that’s not necessarily what that type of company most desperately needs. What they want is long term fixed revenue for their products or services. In other words, customers with deep pockets – like the federal government.

Such credits are most useful to established firms with current tax liabilities to erase. The credits won’t necessarily change their investment behavior, but it will enhance the after-tax income statement.

Why do companies in the renewable energy business need tax incentives at all? Why aren’t “market forces” sufficient. The risks of doing business in an emerging technology are several: risk of technical failure; uncertainty of demand volume; the pricing of competitive products, especially from existing technology. These are the risks examined by all involved, including potential investors. Occasionally the federal government tries to accelerate market progress either because it needs better products for its own purposes, such as military applications or because certain constituencies are not being served by unfettered capital such as what inspired federal sponsorship of rural electrification or universal telephone service. When these legacy supports or subsides outlive their original intent, they can become obstacles to emerging technological replacements.

Such is the case with renewable energy. The goal is to eventually replace the slowly dwindling supply of non-renewable, a.k.a. fossil fuel with renewable energy sources delivered through more efficient, adaptive and intelligent energy storage and distribution systems. Customers are reluctant to switch over to a new source if it is not predictably cheaper, and at least as reliable in the long run as oil and coal. Given that there are no new sources of fossil fuels, we already know that eventually the supply will run out and will be very expensive. We just don’t know the timetable.

Some of the uncertainty in timing comes from the current regime of subsidies for fossil fuels, both direct and indirect. The normal price fluctuations associated with the trading of energy commodities are further influenced by federal programs that: provide security at geo-politically challenging choke points such as shipping sea lanes from the Pentagon; standby fuel cleanup capacity; strategic fuel storage; carbon capture and storage, essentially none of which is incorporated into energy prices. Additional direct subsidies to the oil and gas industry are embedded in the tax code: produces are allowed to take deductions normally reserved for domestic manufacturing even though such production isn’t normally thought of as manufacturing; “intangible” costs like the use of machinery and materials that get consumed that are normally written off over the life of the gear, are allowed to be expensed immediately; special “percentage depletion” provisions allow for the cost of using up property as a percentage of gross revenues instead of actual costs over time until the asset is exhausted. All of these, plus several more, reduce the tax burden of producing fossil fuels.

These federal interventions serve to distort the real value of vanishing energy supplies, encourage overuse, accelerate inevitable depletion, but most relevant here, and make an already difficult terrain for emerging technologies even more hazardous.

Over the last 100 years Federal roles have been prominent in the development of several industries and infrastructures
○    Nuclear technology
○    Modern pharmaceuticals
○    Interstate highway system
○    Rural electrification
○    Universal telephone service
○    Civil aviation
○    Information technology (IT) – (electronic computers, computer software, semiconductor based electronics/integrated circuits, and the Internet)
The last two are particularly applicable to the renewable energy sector.

Civil aviation fits, because it is an example where the federal government helped to spawn commercialization through its role as customer: as a shipper of airmail.

A much more comprehensive and useful example would be the IT industry. Both IT and energy are critical to national and economic security, and are industries where the federal government is a large, and in the case of the military, technologically demanding customer.

Rather than follow recent energy policy which, in addition to tax breaks, consists of
●    Direct and indirect subsidies to energy production (e.g., Synthetic Fuels Corporation)
●    Intermittent subsidies to consumer conservation efforts (1978 tax credits dismantled during the Reagan administration)
●    Mandated use of politically selected alternative fuels (e.g., ethanol),

we might adopt some lessons learned from the federal role in the development of the post World War II information technology (IT) sector.

Early federal participation in IT was characterized by:
●    Public funding of R&D, both academic and commercial leading to accelerated diffusion of technologies that otherwise might have been inhibited by monopolistic behavior on the part of patent holders
●    A procurement policy that importantly came during early stages of industrial development that, in many cases, required multiple suppliers which encouraged new industry entrants as well as larger established firms
●    Bipartisan cooperation brought on by the cold war/national security environment
●    Relative absence of mandated technology: instead mostly mandated performance specifications
●    Rapid commercialization: by the 1960s private industry’s requirements overtook the military influence in setting the IT industry agenda.

Against this backdrop, a more market-focused federal energy strategy might deliver widely accepted results.
Policy Objective: accelerate rather than substitute for market processes in developing new energy-related industry capabilities – products, providers and distributors
1.    Government should not defeat the proper role of the market by selecting specific technologies or individual, exclusive suppliers.
2.    It should not favor one side of the market (supply) as do current tax expenditures, but rather encourage demand for energy-efficient products including those for construction and transportation, through procurement policies.
3.    Develop intellectual property policies that allow relatively free flow of innovation (where the intellectual property belongs to the government) among suppliers and generally favor multiple suppliers for large orders. These practices will tend to discourage or eliminate monopolistic behavior and thereby improve market performance.
 

The federal role in financing research should not be underestimated. A recent article on the government role in new technology focused on a few illustrative examples including nanotechnology:
 

Scientific research in nanotechnology, much of which has important defense applications, may be an example of another field in which federal R&D funding could play an important role in the development of a general-purpose technology. .. Steve Jurvetson, recently characterized the role of private investment in the development of nanotechnology applications as follows: “ We [venture capitalists] have come in much later, after [something that] was an incredibly risky proposition bears some fruit in terms of a prototype of some products. That’s when we first invest…. Every one of our nanotech and related companies was first federally funded in a university setting or in a government lab” (from “The Federal Role In Financing Major Innovations: Information Technology during the Postwar Period”, Kira R. Fabrizio and David C. Mowery in Financing Innovation in the United States, 1870 to the Present, edited by Naomi R. Lamoreaux and Kenneth L, Sokoloff, MIT Press 2007)

Conclusion

Much of the criticism directed at the government participation in industrial development is the prospect of the government substituting for the market in picking winners and losers. However, when federal agencies use their purchase dollars to provide a minimum of demand based on performance specifications (rather than specific techniques or technologies and built-in advantages for existing large firms) and encourage multiple suppliers, then new sectors can be jump-started and induced to survive their most fragile formative stages.

New entrants, unencumbered by legacy technologies and manufacturing capacity need the promise of demand over extended production runs to achieve cost-effectiveness the ability to attract capital at a competitive rates.

One additional bonus to rapidly cranking up demand for the new products: the accelerated increase in steady demand will encourage investment in automated manufacturing, reducing the relative advantage of cheap foreign labor, and increase the relative cost of shipping the finished products from Asia. Otherwise the “green jobs” will be limited to installing the new imported devices and not manufacturing.

If affections for manipulating the tax code can’t be overcome, then use the IRS to encourage conversion to non-fossil fuels by subsidizing purchases from renewable supplies.

"Tax Entitlements" for Housing : When Tax Expenditures Finance Inequality Part 2

 The federal tax breaks for middle class home ownership and renters are sharply different in size: they are just as dramatically different in how they are delivered.

The largest federal source of funding for increasing the supply of rental housing is the Low income housing Tax Credits (LIHTC). These are subsidies to developers of apartment complexes granted in the form of federal income tax credits. In exchange, the developer agrees to rent a portion of the apartments in the development to low-income families. Provided the property complies with all requirements, investors receive a dollar-for-dollar credit against their federal tax liability each year for 10 years. This program represents about half of the bar in the graph labeled Tax Expenditures for Rental Housing in Part 1.

Primary among the requirements for obtaining the credits are the resident income profiles. The receipt of tax credits depends on the developer reserving units for low-income tenants. Federal code requires that a minimum of 20% of the apartment units in every development be reserved for the very poor - those with incomes at 50% or less of the Area Median Family Income (AMFI); or that 40% be occupied for households with incomes at 60% or less of AMFI. The process includes a public comment process, whereby community organizations can support or object to proposed low income housing developments.

Proponents of LIHTC point out that the program is responsible for about half of the low income rental housing built nationally. But that reflects the withdrawal by the federal government from the low income housing construction business since the beginning of the Reagan administration. It was introduced as a provision of the Tax Reform Act of 1986 when it was realized that with dramatically reduced federal construction money and removal of tax shelter incentives for building rental housing, that there would probably be an end to new low income housing and that the “affordable housing” situation was not likely  to solve itself. In other words, LIHTC is praised for producing a high fraction of the low income housing built when it is essentially the only game around.

From: Government Accountability Office, GAO/GGD/RCED-97-55 Low-Income Housing Tax Credit

Following the numbered lines on the diagram:

(1) Internal Revenue Service Apportions Tax Credits to the Allocating Agencies, typically the state housing finance agency: the allocation is currently limited to $1.75 per state resident,
(2) Developers Apply to the state allocating Agencies for Tax Credits

(3) Allocating Agencies in each state Award Tax Credits to Selected Housing Projects: according to their state’s qualified allocation plans.
(4) Tax Benefits Provide a Return on Equity Investments:
syndicators (investment partnerships) are the primary source of equity financing for tax credit projects. They recruit investors who are willing to become limited partners in housing projects based on expected tax advantage.

As tax advantaged limited partnerships, LIHTC deal structures are not exceptionally complicated but as a source of capital for financing low income apartment complexes, they have some important disadvantages.

The LIHTC is at the core of a very shaky business model.

Untimely funding source

Allocating, awarding, and then claiming the LIHTC is complex and time consuming. On average, only one application in five submitted by developers receive a tax credit allocation. As a result, a lot of administrative capacity (grant writing, and all the follow-up responsibilities) is wasted on failed applications. Generally, developers exchange the tax credits with a real estate investor for equity. Since the tax credits cannot be claimed until the development is operating, more than a year or two can pass between the time of tax credit allocation and the time the credit is claimed.

Uncertain value of the credit is determined by developers and investors.
 

LIHTC investors who buy the credits do not expect their real estate developments to generate income. Their returns on investment come from offsetting their income tax liabilities. The value of the
tax credit is therefore dependent on the prevailing effective corporate tax rate and not the demand for low income housing. Financial institutions are typically the best candidates as investors
because, among profitable corporations, they have relatively few ways to shelter their profits from taxation. Banks are also motivated by the fact that investing in LIHTCs gets them points for their Community Reinvestment Act rating, one of the hurdles for moving branches or engaging in mergers or acquisition with other banks. When banks are unprofitable the value of the credits decline. The market for these credits collapsed in 2008 when the sub prime problems started to hit the bottom line of the large banks.

Bare Bones Construction Budgeting

There are a lot of forces that prevent subsidized rental units from ever resembling a luxury complex. Limited access to funds restricts unit size and amenities that any given project can build. The  uncertain LIHTC is a partial source of equity capital to be complemented with debt. Restrictions on the ability to raise rent reduce the ability to absorb any unexpected costs. Constraints on tenant income mixes and upper limits on rent rates make adjustments to uncontrolled variable operating costs such as utilities and insurance encourages unconstructive measures such as deferring maintenance. Although there no limits on the rents charged to tenants in “unsubsidized units”, the tendency is to maximize the number of low income dedicated units to make the application for the credits more competitive. This is why, among other factors, so many low income apartment complexes are in disrepair.

Housing projects, especially the urban variety have the reputation of being physically unattractive, even resembling Stalin era soviet apartment blocks, validating “Not-in-my-back-yard” community resistance. To avoid this, sponsors  may rely on help from private foundations or the participation of a community development bank to help with the financing.

Required local government approvals and cooperation can invite corrupt practices in some jurisdictions. Local elected officials have been known to expect to be compensated for their necessary support of the project application.

A recent case involved Dallas city council officials and a Texas state legislator taking payments from a low income housing developer, Southwest Housing in exchange for facilitating approvals for their development projects.

Is LIHTC productive from the federal government's point of view?

1. In other words, is the program efficient? How many of the tax credits dollars handed out by the government actually end up in the construction of  homes?
2. How effective is the program in addressing the shortage of affordable housing?
3. Is there equitable treatment among citizens seeking housing assistance?

Efficiency

From the time that the IRS  allocates the credits to the states, we know how much the federal government has spent: about one hundreds cents on each dollar of the credits distributed to the states. Some of that money will be returned to the IRS if it has not been awarded to housing projects or was awarded to projects that subsequently failed. What’s much less clear is how many of those dollars get used in construction expenses.
First, investors never pay 100 cents on the dollar for the credits. Second, the transaction costs incurred by fees to syndicators, consultants and the paperwork involved in applying for, and complying with the tax credit process are unavoidable. It’s not a popular way for program proponents to look at the program, but it’s hard to see how more than 50 cents on each tax credit dollar winds up in construction. During 2008 and 2009, the demand for the tax credits collapsed along with the taxable profits of the usual customers: large commercial banks, Freddie Mac and Fannie Mae. The tax credits that had been awarded to housing developers became unsaleable.

Is it an effective solution?

Some critics argue that LIHTC simply enhances the profits of developers and that the housing that gets built would have been built without the tax credit. Since there are a wide variety of developers – for profit, non profit, government agencies – with different priorities, the conclusion that LIHTC does not add to the volume of housing built is not so obvious. The arguments are based on a lot of assumptions about developer behavior, but it raises legitimate questions about how effectively the funds actually reach the target areas. These critics also compare the tax credit form of supply subsidy unfavorably to a more market-oriented demand subsidy such as Section 8 vouchers.

What about Equity?

But the more interesting contrast is with the type of tax subsidy available to  middle class homeowners. In addition to the generous and politically unassailable tax deductions on mortgage interest payments there are other tax-derived subsidies for middle class home ownership: the first-time home buyer credit, the exclusion for capital gains on the sale of the home, and the deductibility of state and local property taxes. The mortgage interest deduction represents about 65 percent of the tax expenditures for home ownership in the Federal Support for Housing chart, shown in Part 1. The process to claim these benefits is simple and takes a matter of minutes when filing your tax return.

Conclusion
When congress visits the tax code for solutions to the federal deficit, will tax breaks built into our social welfare system be a serious part of the check list? Should we be subsidizing home ownership for the well-housed while low income families scramble to avoid homelessness? Shouldn’t  we at least expose the hidden ways in which federal government programs actually increase the economic inequality that has been expanding over the last three decades?

"Tax Entitlements" for Housing: When Tax Expenditures Finance Inequality Part 1

“The most important difference between the United States and other rich countries is not how much it transfers, but rather how, through whom, and to whom transfers flow.”

-from Wealth and Welfare States: Is America a Laggard or Leader? by Irwin Garfinkel, Lee Rainwater, and Timothy Smeeding

“Big Government” is getting a lot of headline space this year. Most of the noise (most of the words don’t rise to the level of debate) is about the cost of government growth, the dangerous levels of debt, and the many aspects of our lives the government now touches.

The book quoted above points out that, if education is included with health care, housing and retirement benefits, the U.S. welfare state is not so different in size from that of other developed countries. However, there is a difference in the distribution of benefits.

Picking up the discussion on tax expenditures (or what I’m dubbing as “tax entitlements” from a previous posting), federal financial assistance in housing illustrates how strongly distinctions in domestic spending are made between economic classes. Aid to low income families is not only less generous when compared to aid to upper income families, but the assistance is less reliable, more bureaucratic and politically vulnerable the poorer you are. Those sharply distinct methods have led to radically different outcomes for low income renters versus upper income homeowners: for renters, underfunded, under-maintained, stigmatized housing projects  while for homeowners, overpriced, over-sized single family suburban tracts that periodically experience finance-enabled booms and busts.

The first class distinction you need to know about when discussing tax breaks is that they are only directly useful to tax payers. Low income families can’t use tax deductions because they don’t itemize deductions when filing their tax returns and because of features introduced into the code by the Tax Reform Act of 1986, investment-related tax credits are really only useful to tax paying corporations. So how and why are tax credits used by congress to build low income housing and how do they compare to the tax breaks given to homeowners? First some history.

All the History of Housing Policy you need to know

In common with other federal social programs, federal intervention in the housing market started with efforts to recover from the Great Depression. A simplified but useful way to think about the federal approach to helping families with housing is to follow the development of a simple financial transaction - the so-called traditional 30 year amortizing fixed rate or prime home loan. Until the Depression, most home mortgages were short-term loans that had to be rolled-over every five years or so. When the banking system collapsed, a foreclosure crisis followed the inability to refinance.

Congress encouraged the development of the saving and loan industry by passing the Federal Home Loan Bank Act in 1932. This legislation set up the  Federal Home Loan Bank system that provided funding for long term, self-amortizing (as opposed to short term loans with balloon payment) home loans. The Homeowners Refinancing Act created the Home Owners' Loan Corporation (HOLC) in 1933 to refinance homes in order to avoid foreclosures by making available self-amortizing long term mortgages to replace the short term balloon payment mortgages that were coming due in early stages of the Great Depression. The bank could finance the loan with deposits with a cost that was largely fixed by federal regulation (regulation Q).

The Federal National Mortgage Association (Fannie Mae) was established in 1938 as a federally chartered government-sponsored enterprise to provide liquidity in the mortgage market by selling bonds and then, with the proceeds, purchasing mortgages from lenders, primarily savings and loan associations and commercial banks. Fannie Mae was privatized 30 years later and joined by Freddie Mac two years later to give it some competition.

This tightly wrapped package started to unravel with the high inflation of the 1970s when interest rates could no longer be held down to the level that banks were engineered to assume. Congress tried to adjust to the new conditions with step-by-step deregulation of the system. Some observers suggest that the loosening-up that started in 1980 accumulated speed and ran off the tracks twice: the Saving and Loan crisis of the late 1980s and then the recent “sub prime” collapse.

Critical to the story line: this government model did not apply to all Americans. Redlining, or the practice of delineating neighborhoods where banks would not lend became an operating convention of the prime mortgage industry. It originated with the racial rhetoric of the management handbooks of the HOLC and found a secure home at Fannie Mae and the private banking industry, assuring that the traditional mortgage was almost exclusively available for white families. 

By the 1960s, the effects of preferential treatment for segregated suburbs were clear to most.

Families that were not covered by the prime mortgage umbrella were sent on a separate track called subsidized rental housing: a.k.a., the projects. The Housing Act of 1949 greatly expanded the federal role in building low income housing that had started slowly in 1937.

Who gets the “tax entitlements?”

Both low income renters and upper income homeowners are on the receiving end of special federal tax treatment to assist with their housing needs. The following graphs from the Congressional Budget Office gives an idea of the difference in generosity.

Federal Support for Housing, 2009

(Billions of dollars)

Sources: Congressional Budget Office (for spending amounts); Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2008–2012 (2008) (for tax expenditure amounts).

However, there are more interesting differences than the volume of dollars available. 

To be continued in "Tax Entitlements for Housing: When Tax Expenditures Finance Inequality Part 2"