Government expenditures, the subject of my prior posts, are not the extent of government activity. Instead of doing something itself, the government often uses inducements, restrictions and controls to influence – or force – private organizations or individuals to do it, or not do it, instead. Such inducements and requirements impose costs, but do not require the collection of taxes (except for enforcement), so they are in that sense “off the books.” That doesn’t mean, however, that the costs aren’t real. The possibility of using inducements and controls as a substitute for public revenues and expenditures is central to the developing health care debate. Rather than having the government collect taxes and fund health care for working age adults, Massachusetts has decided to try to force individuals and businesses to spend more of their own money on health care, a policy that from a budget perspective is “free.”
Hopefully those bothering to read these posts are not fooled by this, and understand that the relative costs and benefits, not whether the costs are on or off the books, should decide if and how the government seeks to provide benefits. Inducements and requirements that can be traded off with public expenditure and programs are just one example of the regulatory power of government. Any government activity that provides protection for some people also imposes restrictions and controls on others, including criminal laws enforced by the police and the courts. The extent of such restrictions and controls is difficult to measure, but can be glimpsed at through a variety of indicators.
The first is public spending, as tabulated in the attached spreadsheet. Total spending on restrictions and controls was $239 billion in 1998, with two-thirds of this at the state and local levels. That was 8.2 percent of total government spending in the table, but the actual share is higher. Data on public spending is generally tabulated at the agency level, but many agencies combine both regulatory and service functions. For example, many local health departments not only provide services such as vaccinations, but also issue permits and conduct inspections. The spreadsheet only includes agencies and functions that can be easily identified using readily available data.
The most severe control is removing people from society and placing them in a completely regulated environment – prison. State and local governments – generally state governments – spent over $42 billion on prisons and other correctional activities, such as parole, in 1998. At that time, according to Table 335 in the 2001 Statistical Abstract, 6.1 million U.S. adults were in prison, in jail, on probation, or on parole; this was 3.1 percent of the adult population. Probation accounted for more than half of this, at 3.7 million. About 1.3 million people were in jail or prison, or about one half of one percent of the U.S. population.
State and local governments spent $50 billion on police protection in 1998, in addition to federal spending on police and police-like agencies such as the FBI, the Coast Guard, and the Immigration and Naturalization service and, today, the Department of Homeland Security. The number and share of Americans who had contact with law enforcement officers was tabulated in a national survey in 1999, published in Table 317. According to that survey, while only 2.1 percent of the population contacted the police that year, 10.9 percent were contacted by the police; of these most were stopped for motor vehicle related reasons. In addition to being the most common reason to interact with the police, motor vehicle safety has an entire regulatory system of their own, which cost $12.4 billion to operate in 1998. According to another table (308), there were 10.6 million arrests in 1999, though some people were arrested more than once.
Federal, state and local governments spent $65 billion on financial administration in 1998; the most important financial function is the collection of taxes. Virtually every person has had to file some form of paperwork with some tax authority. At the federal level, over 120 million tax returns were filed, and one percent of these were examined (Table 471). For individuals, the average examination led to the imposition of an additional $3,372 in taxes and penalties.
Other regulatory activities can only be estimated in part. The census bureau’s state and local “protective inspection” category, which cost $7.7 billion in 1998, is included, as is data on state departments of motor vehicles. A partial estimate of other regulatory activities at the federal level is obtained from data sources available in the Statistical Abstract and on the Office of Management and Budget website. According to these sources, the federal government spent at least $14.1 billion on regulatory functions in 1998, and probably more.
People are restricted both by public laws and by voluntary agreements they have made. Even voluntary agreements, however, are enforced by the government, generally through the court system. In 1999, 251,000 cases were filed in federal district courts, according to Table 322. During that year, however, federal government judicial and legal workers accounted for only 12 percent of total public sector judicial and legal workers, with state and local governments accounting for far more. While the number of state and local cases is not tabulated in an easily obtained data source, if one assumes equal productivity across the judiciary, then one might estimate that as many as two million civil cases per year are filed. Every such case represents a potential exercise of government control over an individual person or firm.
In addition to providing services and imposing restrictions themselves, the federal, state, and local governments can induce or require other people to take provide services and impose restrictions. The most common means of doing so is tax-based subsidies. This is a back door form of public spending, one that isn’t always counted as such, but should be. It is generally referred to as “tax expenditures,” and the scope of such expenditures is huge.
According to the federal Office of Management and Budget, as cited in the U.S. Census Bureau’s 2001 Statistical Abstract, federal tax expenditures totaled $632 billion in 2000. According to the OMB, “tax expenditures are defined as revenue losses attributable to provisions of the federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of liability. “ The $632 billion in tax expenditures in 2000 is a substantial amount in comparison with the $1,732 billion in actual federal expenditures in 1995.
In some categories, the relative importance of tax expenditures is even greater. The federal government provided $233 billion in aid to state and local governments in 1995. Tax expenditures in support of state and local governments, chiefly the exclusion of state and local taxes and interest on municipal bonds from taxable income, cost it $87 billion in 2000. All three levels of government spent $37 billion on housing and community development in 2000, but tax breaks in support of housing and community development cost the federal government $92 billion in 2000, with the tax break for home mortgage interest payments alone costing $60 billion. The $91 billion in federal tax expenditures for health care have already been discussed. Tax exclusions for those with low and moderate incomes such as the child credit and earned income credit, plus the exclusion of benefit payments for social security and worker compensation, cost $49 billion. Finally, tax expenditures to spur particular kinds of business activities cost $150 billion. Many of these tax expenditures involved federal personal and corporate income taxes. Given that state income taxes often use the federal definition of income, each of these federal tax expenditures creates state tax expenditures as well. State and local personal income taxes are about a quarter of the federal total; state corporate income taxes about 20 percent.
State and local governments also have their own, independent tax breaks. The most widespread and significant are property tax breaks for certain kinds of property, or certain property owners, and the most costly of these is the exclusion of property owned by religious institutions and other non-profit organizations from local property taxes. Increasingly, however, influential large companies are exempted from paying the property taxes that others must pay. It is unconstitutional to charge different tax rates to different people or firms, but it has been found to be legal for state and its local governments may exempt people or firms from taxes altogether, and then collect a lower “payment in lieu of taxes” in their place. Neither the Census Bureau nor any other agency collects information on state and local taxes forgone in a fair minded and comprehensive way. Even at the local level, such information is difficult to come by. What can be said is that in Fiscal 2000, the City of New York collected $136.6 million in “payments in lieu of taxes.” It is not certain how much in taxes would have been due if tax breaks had not been provided.
The opposite strategy of inducing a behavior by excluding it from taxation is discouraging it by placing special, higher taxes on it. This strategy is most prevalent among the so-called “sin” taxes and revenues. In 1995 the three levels of government collected $41.5 million in special taxes on alcohol, tobacco and gambling, or on the direct provision of alcohol and gambling through state owned liquor stores and lotteries. This accounted for 1.5 percent of all government revenue, but 3.0 percent of revenues at the state level, where sin taxation is most popular. Since 1995, the number of jurisdictions where gambling is permitted has increased significantly, with gambling recognized as a separate industry – with 179,000 U.S. employees in 1999 – in the new business classification system, the NAICS. State lotteries have also proliferated, with total sales rising from $2.4 billion in 1980 to $31.9 billion in 1995 and $37.2 billion in 2000, although net revenues have risen more slowly. Finally, tobaccos taxes have soared in recent years, particularly when revenues from tobacco lawsuits are included. One might conclude that state and local governments have gone all out discourage sin. Or one might conclude that, desperate for revenues and with other forms of revenue unpopular, they have become dependent on sin. (Environmental taxes will have the same, morally questionable consequence).
In addition to “sin,” there has been extensive discussion of using taxes and fees to discourage behavior that is harmful to the overall environment or the local quality of life. Such disincentives might include higher energy taxes or taxes or burning fossil fuels, higher highway and bridge tolls during rush hours, and higher water charges during droughts. Though promoted by economists, such policies are as yet uncommon, since those who drive into congested areas or use an unusually high amount of energy do not carry the moral stigma of those who gamble, drink alcohol, or use tobacco. Instead, many have proposed tax breaks on environmental grounds, such as credits for the purchase of efficient appliances and low emissions automobiles.
Finally, in addition to tax and fee incentives and disincentives, the government can also require certain private actions as a condition of other actions – like owning property, operating a motor vehicle, operating a business, or having a child. In some cases, the government provides the service one is obligated to use; for example, parents are required to send children to school, but the government provides schools for this purpose. In other cases, private individuals are simply required to purchase a service in the private market; for example, one is generally not permitted to operate a motor vehicle without purchasing liability insurance.
A substantial share, therefore, of the average of $683 per automobile that people paid in insurance in 1999 was not paid by choice, but was instead required by the government (2001 Statistical Abstract, Table 1223). Worker compensation insurance is another example. Many states have public worker compensation systems that all employers are required to pay into and all employees are covered by. More, however, simply require employers to purchase private worker compensation insurance, or to self-insure against worker disability. In 1999, state and federal worker compensation funds accounted for just under 25 percent of total worker compensation premiums.
It is this aspect of government – mandatory private insurance — that some wish to extend to health care. But simply mandating insurance eliminates the natural redistributive effect of government, which collects taxes from people based on their income, spending (sales taxes) or property worth, but provides services more or less equally to everyone. It is one thing to tell low-income individuals that if they cannot afford insurance they cannot drive, it is another thing to tell them that if they cannot afford insurance they cannot receive health care. And the means proposed to get around that – a whole complicated set of different levels of subsidy at different levels of income – would create a massive administrative burden and a field for scammers. Compared with just extending Medicare managed care to everyone, the only advantage is that the small share of the third party cost of health care that the government isn’t already paying for would not show up on the government’s books.
Public policy by tax break also lacks the natural redistributive aspect of government, since the breaks are bigger the higher one’s income. More on that in the next couple of weeks, as I move from facts to growing outrage. More and more, over the past 25 years, mandates and tax breaks have taken the place of simply collecting revenues and providing services and benefits. To some, this means there is less government. To me, it means ever expanding government influence and control over everyone’s life, with success in life determined more and more by an ability to work the system, without the offsetting benefit of having that control exercised to increase equality. And since the cost of tax breaks and mandates is hidden from those who pay it, there is less accountability, and less ability to see who the beneficiaries really are; at times these have little to do with the original, stated intent. Those who run the governments seem to like it that way.