Trends

|

TAX LIMIT EFFORTS

November's election provided the opportunity for ballot measures in five states aimed at curbing the growth of state government. In every case the measures were defeated, thanks in part to heavy spending by opponents (chiefly public employee unions) and outspoken criticism by elected officials.

In Colorado the ballot proposition would have required "registered voter approval of all state and local executive or legislative acts which result in new or increased taxes." Hence, no tax increase of any kind could be passed without an election at which a majority, not merely of those voting but of those registered, gave their consent. The measure was drafted and petitioned onto the ballot by Stop Tax Increases, an ad-hoc group organized by engineer Thomas J. Morroni. Although early polls showed as much as 60 percent approval, a court challenge to the measure, combined with an 11th hour publicity blitz by the opposition, led to its defeat.

In Florida, another ad-hoc group developed a proposed constitutional amendment to freeze state employment permanently at one percent of the population. The group apparently did not originally realize that enactment of the measure would require the immediate termination of 11,830 full-time state employees, a fact exploited by opponents, who made emotional appeals about school teachers and policemen being fired. Still, the proposal garnered 47 percent of the vote.

In Utah and Montana voters rejected ballot proposals to freeze all state government spending at present levels for five years and phase out all Federal aid over this period. The proposals were sponsored by the right-wing American Party, but were opposed as too radical and potentially disruptive by such groups as the state chambers of commerce and even the Utah manufacturers and taxpayers associations.

The most professional proposal of all was developed by Taxpayers United, a Michigan coalition of taxpayers and small businessmen. Their plan would have limited state taxes and spending to 8.3 percent of personal income, the current level. It was inspired and backed by the National Tax Limitation Committee, whose members include Nobel laureate Milton Friedman, former Council of Economic Advisors chairman Paul McCracken, and Ford Motor Co. chief economist William Niskanen. Friedman and Niskanen were two of the chief architects of a similar tax limitation plan, defeated in California several years ago. The campaign in Michigan resembled the California experience. Although early polls showed the plan ahead by a two to one margin, the state teachers union mounted a heavily funded campaign, claiming that the plan would lead to increased property taxes and/or to massive, crippling cuts in public services. State officials, from the governor on down, sounded the warning. As a result, the final margin was six to five against the initiative.

The defeat of these measures is disheartening, but the fact of their existence is still significant. The expansive growth of government has finally become a major political issue. Next time perhaps there will be such measures on 20 or 30 state ballots instead of five.

SOURCES:
• "Voters to Decide on Legal Tax Protest," William Endicott, Los Angeles Times, Oct. 29, 1976.
• "Anti Forces Are Pro Action on State Ballots," Neal R. Peirce, National Journal, Nov. 2, 1976.
• "A Campaign to Curb Taxes in Michigan," Business Week, Oct. 25, 1976.

FREE MARKET ENERGY

Decontrol of the domestic petroleum industry would create new jobs and contribute to real growth in the GNP, according to a study published by the International Institute for Economic Research at UCLA. The authors, economists John Cogan, M. Bruce Johnson, and Michael P. Ward, found that decontrol would be the least costly way to reduce U.S. dependency on foreign oil sources.

Using a detailed analytical model of the industrial economy, the authors examined the likely effects of several alternative government energy policies: decontrol, subsidized coal production, import quotas, a tax on crude oil, and subsidized domestic oil production. All were designed to reduce dependence on foreign oil. In each case the model was used to predict the effects of the policy on such factors as aggregate U.S. employment, real gross national product, and U.S. dependency on imported sources of energy.

The study reached a number of conclusions. Policies that raise oil prices by moderate amounts (decontrol and the tax on crude) increase the efficiency of the economy in the long run and raise the GNP per capita. Policies that seek to increase the supply of alternatives to oil (e.g. coal subsidies) are ineffective both in increasing employment and in reducing U.S. energy dependency. Most importantly, the least-cost strategy for reducing energy imports dramatically is complete decontrol of the domestic crude oil and natural gas industries. One hopes that the new president and Congress will pay some attention to these results.

SOURCE:
• "Energy and Jobs: A Long Run Analysis," John Cogan, M. Bruce Johnson, and Michael P. Ward, International Institute of Economic Research (1100 Glendon Ave., Los Angeles, CA 90024), July 1976.

FULL DISCLOSURE?

City governments are not giving taxpayers and investors in municipal bonds the same kind of consolidated financial statements that corporations are required to publish. And present local government accounting procedures are "largely irrelevant for standards of reporting to the public." So concludes a report issued by Coopers & Lybrand, one of the Big Eight CPA firms, and the University of Michigan.

The report is based on a study of financial disclosures by 46 of the country's 50 largest cities. It compares the 1974 financial report of a typical large city with that of General Motors, and finds reams of meaningless city data compared with succinct but detailed data from the corporation's report. The typical city report conceals far more than it reveals, including such key financial matters as the extent of unfunded pension liabilities. Out of the 46 cities surveyed, 76 percent failed to reveal the actuarial value of unfunded pension liabilities—which totaled over $1 billion in several of the cities. Some 84 percent did not disclose the accrued cost of vacation and sick leave benefits. Over half failed to show lease obligations, and one-fourth did not compute the value of long-life assets such as buildings and heavy equipment.

The Federal government, via the SEC, has enforced rigorous disclosure requirements on private industry, only to let the public sector off scot-free. The report recommends that the states or the Federal government impose uniform disclosure requirements on local governments, similar to those required of industry. Taxpayers would do well to make the same demand.

SOURCE:
• "Defogging the Cities' Financial Reports," Business Week, Oct. 4, 1976, p. 36.

TRANSPORTATION NEW-THINK

The old liberal panacea for solving urban transportation ills—multibillion dollar mass transit systems—is coming into question, and market-oriented approaches to transportation are suddenly being taken seriously. At least that seems to be the trend in California.

A study of the highly-touted Bay Area Rapid Transit system by the University of California at Berkeley describes BART as "a fundamental mistake." The $1.6 billion system is extremely costly (fares cover only one-third of the operating costs) and has attracted few riders, because it sacrifices the features commuters want most—door-to-door, no-wait, no-transfer service—for high top speeds and technological gimmickry. The BART experience, says the study, should be viewed as a warning against building "a series of multi-billion dollar mistakes scattered from one end of the continent to the other." Study director Melvin Webber thinks the only way freeway congestion can be improved is by such means as jitneys, subscription buses, and franchised van pools.

Such heretical ideas are embodied in the new draft state transportation plan of the California Transportation Board. Included in the plan are such ideas as freeway user charges and incentives for increased use of jitneys, car pools, and van pools. The City of Berkeley is proposing a user charge of $1 or $2 per day for use of local streets, and the state transportation secretary is encouraging other local governments to consider the idea.

Cal Trans director Adriana Gianturco is a strong proponent of jitneys, noting their widespread use in Los Angeles early in this century, until outlawed by the state under pressure from trolley car systems. Jitneys exist all over Europe, she notes, and are extremely effective and cheap in providing urban mobility. In general, Gianturco favors eliminating the distortions caused by government transportation subsidies (e.g. roads vs. rails)—by eliminating the subsidies. She questions continued expansion of both freeways and mass transit systems. The alternative? "I think we ought to have a lot more free market activity in transportation and not heavily subsidized government programs," she states.

SOURCES:
• "Car Lovers Giving BART a Bad Time, Study Finds," William Endicott, Los Angeles Times, Oct. 5, 1976.
• "State Plan Favors Buses, Car Pools," AP (Sacramento), Oct. 1, 1976.
• "Should motorists Pay a Road Toll?" Ibid., Oct. 27, 1976.
• "New Cal Trans Chief Moves Out of Fast Lane," Santa Barbara News, & Review, Oct. 8, 1976.

GOVERNMENT VS. PROSPERITY

What many free market economists have long contended is now being documented by extensive empirical data: the larger a country's public sector, the smaller its rate of real economic growth. These findings have recently emanated from such sources as the Hudson Institute Europe, England's National Westminster Bank, and the Bank for International Settlements. Although the studies differ in detail, the general conclusion is that the expansion of the public sector has cut growth rates by as much as one-third in the past 15 years.

The principal reason for this result seems to be a "crowding-out effect"—i.e., a larger public sector requires higher taxes which reduces the amount of wealth going into capital investment. The Hudson Institute has found a significant causal relationship between a rising income share for public spending and a lower share for private investment. David Smith of the National Westminster Bank estimates that each five percent increase in disposable income absorbed by state consumption implies a one percent drop in the growth rate.

The public sector keeps increasing, of course, because of political factors. Recessions provide a powerful incentive for increased government spending, but prosperity seldom, if ever, leads to corresponding spending decreases. Hence, a kind of ratchet effect comes into play. Alexandre Lamfalussy, chief economist of the Bank for International Settlements, concludes that "in many advanced countries, taxation seems to have approached or exceeded the limits of economic efficiency." That's putting it rather mildly. Nevertheless, it's encouraging to see the growing realization of the pernicious effects of expanding government.

SOURCE:
• "Government Growth Crowds Out Investment," Business Week, Oct. 18, 1976, p. 138.

MILESTONES

Free Choice Upheld. The right of individuals to choose their own medication was recently upheld in a Federal appeals court. The 10th U.S. Circuit Court of Appeals ruled that Oklahoma district court judge Luther Bohanon had not exceeded his authority in allowing cancer victims to purchase Laetrile, despite the FDA's ban on the substance. Bohanon's decision, which found the FDA's position unconstitutional, therefore, stands, unless the agency appeals to the Supreme Court and wins. (Source: "Appeals Court Upholds Judge's Laetrile Ruling," UPI (Denver), Oct. 13, 1976.)

Decriminalization in Maine. The Maine legislature has enacted a new criminal code which repeals the state's prohibition of adultery, cohabitation, consensual homosexual acts, and social gambling. These changes accompanied the more widely reported reduction of the state's penalties for marijuana possession to a small fine. One hopes that as Maine goes, so will go the remainder of the nation. (Source: "Maine Legalizes Victimless Crimes," Ergo, Sept. 22, 1976.)

Grim Tax Facts. Although the cost of living has gone up 5.6 percent in the past year, the average Federal tax bite has increased 23.4 percent over this time period, according to the government's own Department of Labor. That figure applies' to the average worker in private industry supporting a family of four. The increase is due to higher Social Security taxes and the impact of moving into a higher income tax bracket as one's income increases. One consequence is that the average worker's buying power has gone down 0.3 percent in the past year, despite the much-vaunted economic recovery. (Source: "Fastest Growing Pay Bite—Taxes," AP (Washington), Oct. 4, 1976.)

Counterproductive Law. Yet another oppressive law has been found to produce perverse consequences. New York's tough 1973 drug law, which stresses mandatory penalties, reduced plea bargaining, and stricter definitions, has actually resulted in fewer prison terms being handed down than under the old law it replaced. An outside evaluation of the law's effects found that "The risk of punishment facing offenders did not increase noticeably…the speed with which cases were processed did not improve." The law has succeeded in accomplishing at least one objective: it has increased the size of the judicial establishment. Over $55 million has been spent to hire new judges and other personnel. (Source: "N.Y. Drug Law Not Working, U.S. Says," AP (Washington), Sept. 9, 1976.)

Advertisement