Cost of Government Day - 2011

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2011 REPORT

COST OFGOVERNMENT DAY

mericans for Tax Reform Foundation / Center for Fiscal Accountability 722 12th Street, NW, Fourth Floor Washington, DC 20005 (202) 785-0266 F: (202) 785


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Cost of Government Day 2011

2011 Americans for Tax Reform Foundation / Center for Fiscal Accountability

Published by:Americans for Tax Reform Foundation / Center for Fiscal Accountability

722 12th Street, NW, Suite 400

Washington, D.C. 20005

Phone: (202) 785-0266

Fax: (202) 785-0261

www.atr.org

www.fiscalaccountability.org

For more information, contact ATR Communications Director, John Kartch

[email protected]

Jacob Feldman, Author

Designed by Instinct Design, LLC.

Fairfax, VA

Americans for Tax Reform Foundation (ATRF) performs research and analysis in order to educate taxpayers on the true causes and effects

of legislation and regulatory affairs. ATRFs efforts inform debate, initiate conversation, and emphasize the importance of fundamental tax

reform and spending restraint. In addition to the Cost of Government Day Report, ATRF also produces and publishes the International Property

Rights Index and the Index of Worker Freedom.

The Center for Fiscal Accountability (CFA), founded in 2008, is a joint project of Americans for Tax Reform and Americans for Tax Reform

Foundation, a national taxpayer advocacy organization. Acknowledging that the American people and its economy can best thrive and prosper

when the role of government is limited and subject to scrutiny by taxpayers, the Center for Fiscal Accountability seeks to shed a light on

government expenditures and to promote transparency, accountability and restraint in government finance.

Funding for the Cost of Government Day Report is provided by the Americans for Tax Reform Foundation.


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About the Author ............................................................................................................................2

The Thomas Jefferson Fellowship ....................................................................................................2

A Message From Grover Norquist and CFA Executive Director Mattie Corrao................................3

Overview of Results ..........................................................................................................................4

Cost of Government Day Components ............................................................................................5

State by State Breakdown..................................................................................................................7

The Government Spending Burden ..................................................................................................9

Federal Spending ......................................................................................................................9

Special Focus: Spending and the Federal Budget Deficit ........................................................10

State and Local Spending ......................................................................................................12

State Tax Increases ..........................................................................................................................13

Government Employees..................................................................................................................15

The Regulatory Burden ..................................................................................................................18

Case Studies....................................................................................................................................22

A Continuing Case Study: TARP and AARA ........................................................................22

The Patient Protection and Affordable Care Act (PPACA) ....................................................23

Dodd-Frank............................................................................................................................26

Environmental Protection Agency (EPA)................................................................................30

Interstate Taxation ..................................................................................................................34

Post-Office Reform ................................................................................................................35

Federal Takeover of Tax Preparation ......................................................................................37

Concluding Remarks: The Path Towards an Earlier Cost of Government Day ..............................38

Methodology ..................................................................................................................................40

TABLE OF CONTENTS


4/48COST OF GOVERNMENT DAY 2011 REPORT2

ABOUT THE AUTHORThis report was authored by 2011 Thomas Jefferson Fellow Jacob Feldman.

Jacob holds a double major B.A. in Economics and Jewish Studies after accelerating graduation from the University of

Virginia in three years. He is currently a second year Mercatus M.A. Fellow in the Department of Economics at George

Mason University. His primary research interests include federal tax policy, budget issues, and regulatory policy.

As of 2011, Jacob co-authored two Mercatus working papers and presented a solo-authored paper on the labor economics

of post-Soviet mass immigration to Israel at the 2011 Association for Private Enterprise Conference in the Bahamas.

In 2010, Jacob wrote briefs on the 2001 EGTRRA and 2003 JGTRRA tax cuts at the Heritage Foundation. Other

occupation opportunities have included the Koch Summer Fellowship Program, a budget fellowship with Congressman

Diane Black, the Miller Center for Public Affairs, and the Crystal Ball publication at Larry Sabato's Center for Politics.

In May 2009, he began work at Americans for Tax Reform as an associate for the Tax Policy Director. He was awarded the

Thomas Jefferson Fellowship in May of 2011.

THE THOMAS JEFFERSON FELLOWSHIPThe Cost of Government Day Report is published in the context of the Thomas Jefferson Fellowship, a program run by the

Center for Fiscal Accountability (CFA). CFA offers this fellowship to a graduate or highly qualified undergraduate student

with a background in the field of economics interested in the areas of federal and state fiscal and regulatory policy.

The fellowship is named after one of the most influential thinkers in American history, and one of the leading proponents

of accountable government Thomas Jefferson, Founding Father and third president of the United States of America.

Acknowledging that the American people and their economy can best thrive and prosper when the role of government is

limited and subject to the scrutiny of taxpayers, the Center for Fiscal Accountability seeks to shed light on government

expenditures, and to promote the Jeffersonian ideals of fiscal accountability, fiscal restraint and free market principles.

The aim of the fellowship is to offer a student the opportunity to work independently in the area of federal and state fiscal

and regulatory policy and in collaboration with prominent experts and institutions in the field. The primary task during the

fellows time is to craft CFAs hallmark study, the Cost of Government Day Report.


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This year, Cost of Government Day (COGD), the day of the calendar year on which the average American worker

has earned enough gross income to pay off his or her share of the spending and regulatory burdens imposed at the

federal, state and local levels, falls on August 12.

This marks a slight, but likely temporary, reversal in trends from previous years. Prior to 2009, COGD had never fallen later

than July 21. However, upon taking office President Obama authored an 84 percent jump in discretionary spending and

pursued an aggressive regulatory agenda. As a result, the last two COGDs have fallen in August; this years COGD marks

the first time since the start of the Obama Administration that COGD has fallen earlier than the previous year.

However, COGD comes only two days earlier than last years revised date of August 14. This small step towards an earlier

Cost of Government Day is likely temporary. The coming implementation of regulatory behemoths that will also cause

federal spending to skyrocket augur a dismal future for taxpayers. The implementation of the Dodd-Frank financial

regulatory overhaul, coupled with adjudication of the Patient Protection and Affordable Care Act, portend far later COGDs

in the future.

However, taxpayers have reason to hope the escalating cost of government may not be inevitable. After working through

half of the fiscal year without a budget, Congress authorized FY2011 funding levels that cut almost $40 billion from the

previous years spendingthe first time a continuing resolution has done so.

Whats more, after refusing to pass a budget the previous year, the House of Representatives approved a spending plan that

would cut nearly $6 trillion from spending baselines over the next decade while reforming the ballooning entitlement

liabilities.

The battle on the size of government, however, seems to just be beginning. The debate over the countrys debt has

precipitated remarkable scrutiny of government spending. The discussion of the governments overspending problem has

shifted from billions to trillionsa significant step towards coming to terms with the countrys fiscal recklessness.

Barriers to an earlier COGD remain. As of this writing, a deal to raise the debt limit in exchange for significant spending

reform has not been reached. As the country exhausts its nearly $15 trillion in borrowing authority, the evolving debt debate

represents an unprecedented opportunity to shift the paradigm of government spending. If it fails to do so, the forecast for

future Cost of Government Days looks bleak.

Onward,

A MESSAGE FROM

GROVER NORQUIST ANDCFA EXECUTIVE DIRECTOR MATTIE CORRAO

Mattie Corrao

Executive Director

Center for Fiscal Accountability

Grover Norquist

President

Americans for Tax Reform Foundation


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OVERVIEW OF RESULTS

4 COST OF GOVERNMENT DAY 2011 REPORT

DefinitionCost of Government Day (COGD) is the date of the calendar year

on which the average American worker has earned enough gross

income to pay off his or her share of the spending and regulatory

burden imposed by government at the federal, state and local levels.

Cost of Government Day 2010Cost of Government Day for 2011 is August 12. On average,

workers must toil 224 days out of the year just to meet all costs

imposed by government. In other words, the cost of government

consumes 61.42 percent of national income.

Cost of Government Day: Trends

Cost of Government falls two days earlier than last years revised date of

August 14. In 2011, the average American will have to work an

additional 41 days to pay off his or her share of the cost of government

compared to ten years ago in 2001, when COGD was July 2.

In fact, between 1977 and 2008, COGD had never fallen later than

July 21. 2011 marks the third consecutive year COGD has fallen in

August. The difference between 2008 and 2009from July 16 to

August 14was a full 29 days. The increase was spurred by

government intervention in the form of the Emergency Economic

Stabilization Act (EESA) that created the Troubled Asset Relief

Program (TARP) and the American Recovery and Reinvestment Act

of 2009 (ARRA).

The two day decrease of the 2011 COGD is only a temporary fall

before projections of increased future spending. In March 2010,

President Obama signed the Patient Protection and Affordable Care

Act (PPACA) into law which will add $2.3 trillion to COGD over its

first decade.1 Even without counting Obamacares contributions to

future COGDs, the three years of the Obama Administration have

been three record-setting years of federal government regulation and

spendinga 21.78 percent increase relative to the average size of the

federal government between 1977 and 2008.

Additionally, 2011 COGD estimates are premised upon CBOs

ambitious 2011 calendar year estimate of 3.7 percent GDP growth.

CBO numbers may overestimate annual growth because first quarter

growth was limited to just 1.8 percent while real wages, durable-

goods orders, manufacturing production, home sales, and real per-

capita disposable incomes have been in decline since April.2

Therefore, the estimate in this report may significantly underestimate

the real cost of government for 2011.

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7/97/10

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Cost of Government 1977-2011


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Federal SpendingThe average American worker will have to labor 103 days just to pay

for federal spending, which consumes 28.15 percent of net national

product. Last year, individuals had to work 105 days to pay off federal

spending and 102 days in 2009.

The decrease from 2010 may be attributed to reaching the peak of

stimulus spending as well as renewed efforts to cut spending at the

opening of the 112th Congress. Coupled with the longest recession

since the Great Depression, federal spending as a share of the national

economy remains at a three-year high since the first COGD report in

1977. Between the end of 2008 and today, the Obama

Administration has increased federal spending by 13 Cost of

Government Days.

State and Local SpendingLikely due to increased federal assistance, independent state and

local spending has decreased since 2008. In 2011, the average

American has to work 44.2 days to pay for state and local

expendituresroughly the same number of days in 2010 and one

day less than the 45.4 days worked in 2009.

Regulatory Costs

The average American must labor 77 days in 2011 just to cover the

cost of government regulationsidentical to the 77 days worked in

2010 and slightly less than the 79 days worked in 2009. 2011

regulations will consume 21.2 percent of net national product

which, compared to 16.1 percent ten years ago in 2001, is a 31.6

percent increase in the regulatory burden within only 10 years.

Cost of Government Day Components

49.75 daysworked to pay forfederal regulations

44.16 daysworked to pay for

state and localspending

27.6 daysworked to

pay for state andlocal regulations

102.83 days workedto pay for federalspending

COST OF GOVERNMENT DAY COMPONENTS


8/48COST OF GOVERNMENT DAY 2011 REPORT6

2011 Cost of Government Day for States

MS

TN

SC

LA

NM

SD

WV

AL

AZ

KY

NV

OK

AK

AR

GA

ID

ME

MI

IN

MT

HI

IA

NC

OH

MI

TX

CO

OR

NH

DEKS

UT

VT

FL

ND

NE

VA

RI

WY

MA

PA

IL

CA

MN

WA

WI

DC

MD

NY

NJ

CT

The calculation of the Cost of Government Day for each state is

based on the varying government burdens suffered in each state.

Federal tax and spending burdens are large contributing factors.

These federal burdens vary because relatively higher burdens are

borne by states with relatively higher incomes. State and local tax and

spending burdens vary as well.

As in previous years, the latest Cost of Government Day is in

Connecticut, with the average worker toiling all the way until

September 10 (twenty nine days past the national average) to pay off

all the costs of government. The dubious honor of second place is

held by New Jersey, with COGD falling on September 6. New York

follows right behind on August 30, with Maryland maintaining

fourth place for the second year in a row at August 20.

STATE BY STATE BREAKDOWN


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State Rank in Rank in # of Days State2010 2011 Worked COGD

Mississippi 3 1 200 19-JulTennessee 6 2 201 20-JulSouth Carolina 10 3 204 23-JulLouisiana 1 4 207 26-JulNew Mexico 6 4 207 26-Jul

South Dakota 4 4 207 26-JulWest Virginia 6 4 207 26-JulAlabama 8 8 210 29-JulArizona 14 8 210 29-JulKentucky 10 8 210 29-JulNevada 8 8 210 29-JulOklahoma 21 8 210 29-Jul

Alaska 1 13 211 30-JulArkansas 10 13 211 30-JulGeorgia 27 13 211 30-JulIdaho 27 13 211 30-JulMaine 14 17 213 1-Aug

Missouri 14 17 213 1-AugIndiana 21 19 214 2-AugMontana 18 19 214 2-AugHawaii 32 21 216 4-AugIowa 14 21 216 4-AugNorth Carolina 24 21 216 4-AugOhio 27 21 216 4-AugMichigan 27 25 217 5-AugTexas 18 25 217 5-AugColorado 33 27 219 7-AugOregon 27 27 219 7-AugNew Hampshire 21 29 220 8-Aug

Delaware 33 30 221 9-AugKansas 24 30 221 9-AugUtah 35 30 221 9-AugVermont 40 30 221 9-AugFlorida 18 34 223 11-AugNorth Dakota 10 34 223 11-AugNational Average - - 224 12-Aug Nebraska 24 36 224 12-AugVirginia 40 36 224 12-AugRhode Island 38 38 226 14-Aug

Wyoming 35 38 226 14-AugMassachusetts 44 40 227 15-Aug

Pennsylvania 40 40 227 15-AugIllinois 35 42 229 17-AugCalifornia 44 43 230 18-AugMinnesota 40 43 230 18-Aug

Washington 46 43 230 18-AugWisconsin 38 43 230 18-AugDistrict Of Columbia - - 230 18-AugMaryland 47 47 232 20-AugNew York 48 48 242 30-AugNew Jersey 49 49 249 6-SepConnecticut 50 50 253 10-Sep


10/488 COST OF GOVERNMENT DAY 2011 REPORT

In addition to showing state rankings for COGD in 2011, the largest changes in cost of government days and overall ranking since

2010 are highlighted.

Top 5 2011 IncreasesCOGD by Rank

5 Largest COGD IncreasesRelative to National Average

North Dakota 24 Alaska 11

Florida 16 North Dakota 8

Alaska 12 Florida 7

Nebraska 12 Louisiana 6

New Hampshire 8 Nebraska 5

Top 5 2011 DecreasesCOGD by Rank

5 Largest COGD DecreasesRelative to National Average

Georgia -14 Georgia -10

Idaho -14 Idaho -10

Oklahoma -13 South Carolina -10

Hawaii -11 Tennessee -10

Vermont -10 Oklahoma/Vermont -8


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THE GOVERNMENT SPENDING BURDEN

Federal SpendingFederal spending continues to be the single largest component of the

total cost of government and the main driving force leading to the

substantial increase in the cost of government over the last decade.

Record-breaking costs of government were driven by provisions of the

Emergency Economic Stabilization Act (EESA) of 2008 and the

American Recovery and Reinvestment Act (ARRA) of 2009 in

conjunction with limited economic growth.

The average American will have to work 103 days just to pay for the

cost of federal spending, which will consume 28.2 percent of net

national product this year. This is a jump of over 23 days compared

to ten years ago in 2001 and over 13 days compared to 2008. Federal

spending relative to the economy has increased by 29.1 percent since

2001.

.

Days Worked for Federal Spending

After only 28 days in office, and only 13 days after his first tax

increase on middle-income Americans, President Obama signed the

$821 billion American Recovery and Reinvestment Act into law. 3

Shortly thereafter, Obama signed the Omnibus Appropriations Act

of 2009 on March 11, a $410 billion piece of legislation with over

9,000 earmarks. Coupled with TARP bailouts for only certainfirms, the Obama Administration fostered economic uncertainty

for businesses, financial institutions, and banks awaiting the federal

governments next move to either help or hurt competitors. ARRA

and TARP receive greater examination in the Case Studies section

of this report.

March 2010 oversaw the enactment of The Patient Protection and

Affordable Care Act (PPACA). Estimated at a first decade cost of $2.3

trillion (and increasing thereafter), President Obama and a

Democrat-controlled Congress increased Washingtons spending

problem indefinitely. While the tax hikes to fund Obamacare took

effect almost immediately, spending under the plan doesnt begin

until 2014. The effects of PPACA will also be discussed in the Case

Studies section of this report.

Policy changes such as ARRA, TARP, and Obamacare have hampered

business investment. When downturns in business cycles occur,

businesses need time to recover and reinvest without fear of rapidly

rising debt and higher taxes, health care and financial costs, and

increased regulatory burdens.4 The economic dilemma of the

stimulus plan is not only how many jobs were saved, but whether

the benefits of those jobs were 1) worth the opportunity cost of at least



$170,000 per job and 2) worth the cost of delayed business recovery

due to economic uncertainty surrounding federal interventions.5

Greater uncertainty about higher taxes follows businesses as

government spending continues to skyrocket. In only ten years,

federal spending increased from $1.980 trillion in 2001 to an

estimated $3.789 trillion for 2011 (an increase of 91.4 percent).

Accelerated spending under the Obama Administration has led to

the three largest deficits in United States history: $1.477 trillion

(2009), $1.512 trillion (2010), and $1.615 trillion (est. 2011).6

These spending sprees constitute the largest deficits as a percentage

of GDP since World War II. In the past three years alone federal

debt has increased by nearly 80 percent, compared to an increase of

25 percent over both terms of the previous Administration. Debt

now stands at its highest level since 1950.7

From November 2011 to April 2011, seven short-term continuing

resolutions were passed until a full year appropriations bill could be

agreed upon in April 2011. Despite significant resistance, $38

billion was cut in the budget negotiations. Although $38 billion is

estimated to be only 1 percent of all federal spending in 2011, it is

the largest cut to enacted spending in recent US history.

Special Focus: Spending and the FederalBudget Deficit

Given the explosive spending growth of the past three years, the

federal deficit has received a significant amount of media attention.

The more relevant and pressing numbers for understanding the size

of government are the levels of federal spending and federal taxes.

The deficit is not a major driver of economic performance. Taxes,

and the total burden of government spending, are the major factors

affecting the economy as they determine the incentives for saving,

investment, entrepreneurship, and employment.

However, national debt at a certain threshold is correlated with

negative economic growth. A 2010 study by Reinhart and Rogoff

found that, Median growth rates for countries with public debt

over 90 percent of GDP are roughly one percent lower than

otherwise; average (mean) growth rates are several percent lower.8As

long as Obama oversees deficits over $1 trillion annually, the rapid

pace to 90 percent becomes increasingly evident. Even if Obama

and Congress do not enact more major spending plans and

projected marginal tax increases are prevented, the federal debt is on

track to reach 101 percent of GDP by 2021.9 Incorporating state

and local debts, US debt is already 92 percent of GDP.10Whether

the debt is federal or local, interest payments tie down resources and

slow down economic growth.

The 2011 federal deficit is expected to more than triple in size

compared to 2008jumping from $461 billion to almost $1.615

trillion. This means that the deficit relative to GDP will balloon

from 3.2 percent in 2008 to 9.8 percent at the end of 2011. 11

The presumption that spending will average 23.2 percent of GDP

for the next ten years is premised upon economic growth averaging

4.71, even though the annual growth rate from 1948 to 2010 has

only been 3.28 percent. If nominal spending estimates remained

constant, while economic growth was constrained by historical

averages, federal spending as a percentage of GDP would

consistently rise every year to 27.6 percent by 2021.12

Keeping spending in check is the only way deficit concerns can ever

be ameliorated. Tying federal spending to growth in net national

product or the consumer price index (CPI) would be one solution.

If federal spending had been chained to net national product, then

$4.541 trillion in spending would have been prevented from 2001-

2010. Tying federal spending to the CPI would have generated

$8.442 trillion in savings and would have produced a $1.712

trillion surplus over the last ten years.13


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2.5 1.3

-1.5

-3.4 -3.5-2.6

-1.9-1.2

-3.2

-10.0-8.9

-9.8

-7.0

-4.3-3.1 -3.0 -3.4 -3.1 -2.9 -3.2 -3.2 -3.2

18.2 18.219.1

19.7 19.6 19.9 20.1 19.620.7

25.023.8

24.7

23.3 23.1 23.0 23.123.5 23.4 23.3 23.7

23.9 24.0

SpendingDeficits

Federal Spending and Budget Deficit/Surplus as a Percentage of GDPFY 2000-2021

147

-65

-422

-553 -531

-418

-292

-408

-917

-1,593-1,530

147

39

-221

-311 -316

-150

-25 -32

-248

-504

-421

14786

-143 -132

-13

270

521578

453

-1

93

Federal Spending Constrained by Economic Growth ($billion)

Actual Deficits Deficit/Surplus Constrained at National Income Deficit Constrained By CPI

Source: Congressional Budget Office, The Budget and Economic Outlook: Fiscals Years 2011 to 2021


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State and Local SpendingIn 2011, the average American will work 44 days to pay for state and

local spending. This is the same as 10 years ago in 2001 and down

from 46.5 days in 2008. The decrease in state and local spending

since 2008 amounts to a 5 percent reduction. Much of the fall in state

and local spending is likely attributed to increased federal assistance

to state and local governments.

State spending looks likely to increase in future years because state

and local outlays plus federal aid have reached an all time high since

the 2009 stimulus plan. Federal money came with many strings

attached that prevented states from offsetting infusions of federal cash

that swelled baseline spending. When this injection of federal dollars

finally dries up, taxpayers in the states will be on the hook to pay for

the expansion of state spending programs upon which acceptance of

the stimulus funds was contingent.

One of the best examples of this conundrum is Illinois, a state with

an unfunded pensions-per-capita ratio of $17,230:1.14 In 2010, the

state held more than $6 billion in accumulated operating debt and

over $83 billion in unfunded public employee pension liabilities. 15

Rather than enacting spending reductions in an economic

downturn, the Illinois Government under the leadership of

Governor Quinn enacted a $7 billion tax increase in 2011.

Accounting gimmickry that allows states to mask the true cost of their

spending liabilities is more difficult in states where government

expenditures are subject to public scrutiny. Since the passage of the

federal Funding Accountability and Transparency Act of 2006 and

the creation of www.USASpending.gov, the Center for Fiscal

Accountability has been working with lawmakers on both the federal

and state level to implement and improve policies that open

government books to public scrutiny. New improvements have been

made at the federal level, with legislation introduced that looks to

streamline the vast web of reporting data into a single, consistent

electronic platform.

State governments are following suit, creating and improving their

own transparency portals. As of June 2011, thirty-five searchable

websites for government expenditures mandated by legislative or

executive action have already gone live. In addition, several state

constitutional officers have independently implemented measures to

increase accountability through transparency. Through these efforts,

detailed information on government spending is placed at the finger

tips of taxpayers, who can track every tax dollar with a mouse-click.

It is time for the states to put their fiscal houses in order. Now, more

than ever, states would be well-advised to enact constitutional tax and

expenditure limitation measures. Constitutional supermajorities for

tax increases, such as the two-thirds requirement enacted in

California, have successfully prevented major tax hikes in many years

the Golden State has spent beyond its resources. After rejecting a

nearly $60 billion tax increase in this years budget, California

lawmakers passed a budget in June 2011 that specifies up to $2.5

billion in additional spending cuts if the state does not match its

revenue targets.16 These sequestration measures are a key means of

ensuring fiscal responsibility.


44.79

45.24

44.36

43.7243.83

43.90

45.00

46.57

45.38

44.0644.16

Days Worked for State and Local Spending


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In recent years, most states increased taxes to continue to increase

spending even during economic downturns. This report compiles a

list of state tax increases by state from FY2002 to FY2011. The list

is based on data from the National Association of State Budget

Officers (NASBO) with three adjustments. First, we compounded

the tax increases to reflect hikes adopted since FY2002 which have

to be paid in successive years. Second, we adjusted each states tax

increase by population to produce a better comparison across states.

Third, the taxes for each year are indexed so all tax increases are

stated in term of 2011 dollars.

The index shows that, as in past years, New Jersey continues to be

the leader among all states in terms of tax increases. Since FY2002

the Garden State government increased taxes per resident by $4,905

for a total net tax increase of over $42.8 billion. Residents of

Connecticut, Rhode Island, Nevada, New York, Delaware,

Tennessee, Minnesota, Ohio, Indiana, Vermont, and Oregon also

suffered per capita increases of over $1,500 in the same period.

From 2002 to 2011 only nine states reduced their taxes. This group

is led by Idaho, North Dakota, and Florida, all of which reduced

taxes by over $350 per capita.

North Dakota leads the states in terms of tax cuts per capita in

2011. The North Dakota legislature reduced taxes by $100.70 per

capita for a total of $65.8 million in the FY2011 budget. Overall,

for the FY2002-FY2011 period North Dakota cut taxes by a net

$197 million. However, North Dakota is only one of three states to

cut taxes both over the FY2002-FY2011 period and in 2011.

FY2011 net tax increases across the states totaled $6.4 billion, less than

last years $25 billion. However, unabated spending continues to place

the fiscal health of states in jeopardy and paves the way for higher

taxes. Most federal grants provided to local and state governments

work under a matching basis. For example, federal funding may beprovided on a 2:1 basis to state and local spending. As federal grants

are decreased, state and local politicians feel increased pressure to

maintain previously subsidized levels of spending.

A study by economists Russell Sobel and George Crowley found

that federal grants lead to a 33 to 42 cent increase in state and local

revenues in the long-run because of increased taxes. 17 Sobel and

Crowley estimate an aggregated $80 billion increase in future state

and local taxes because of the federal stimulus bill. If the $80

billion in increased taxes occurred in 2011, COGD would increase

by another two days due to the stimulus a four percent increase

in state and local spending.

For example, for the 2011 tax year, Illinois Governor Quinn

increased state taxes by $7 billion And yet, despite the largest state

tax hike as a percentage of GDP since the Great Depression, Illinois

will make no progress on reforming its future unfunded liabilities.

The only sustainable solution is to cut spending.

Some states aim for targeted tax increases, instead of politically

unpopular broad-based tax hikes through the personal income tax

or sales tax. Tax increases on particular consumption such as

tobacco, gambling, and alcohol tend to be more appealing to

politicians. Only a portion of the voting population will pay a

substantially higher share of their income in the form of higher

prices. Additionally, politicians claim to assist the poor by

restricting their financial access. In resorting to such sin tax

increases, the government is placing itself in the contradictory

position of discouraging certain behavior, while at the same

continuing to rely on that behavior to finance coffers.

Alternative revenue measures outside of the personal income tax

and sales tax are often regressive and/or hamper growth more than

a broad-based approach. In 2011, seven states increased their

tobacco tax rates, 17 states had introduced fees (which enacting

politicians often claim are not taxes), and seven states had increased

the corporate income tax on job creators.18 Additionally there are

taxes on phones, insurance providers, and even family businesses

after the owners death. The narrow nature of these taxes extracts

significant portions of paychecks from low-income families while

other taxes discourage job creation.

More audacious states increased personal or sales taxes, eight and

nine respectively. Five states were emboldened to increase both:

Arizona, Georgia, Maine, New York, and Virginia. Nationally, sales

taxes were increased by $1.9 billion in 2011 and personal income

taxes were increased by $423.5 million.19

STATE TAX INCREASES



Per Capita (02-11) Per Capita (FY 2002-2011) Rank $ $

thousand millions

New Jersey 4,905.2 42,836.5 50Connecticut 2,969.9 10,474.7 49Rhode Island 2,758.0 2,914.9 48Nevada 2,714.6 7,206.6 47New York 2,650.3 51,886.1 46Delaware 2,544.6 2,268.4 45Tennessee 1,909.3 12,101.5 44Minnesota 1,842.7 9,748.9 43Ohio 1,721.0 19,846.2 42Indiana 1,709.6 11,019.2 41Vermont 1,656.0 1,030.8 40Oregon 1,590.3 6,131.4 39North Carolina 1,377.8 13,032.5 38

Michigan 1,347.5 13,382.1 37Massachusetts 1,285.4 8,523.9 36New Hampshire 1,270.1 1,681.0 35Kansas 1,154.8 3,280.9 34Illinois 1,066.9 13,809.8 33

Wyoming 1,000.2 547.8 32Maine 959.7 1,260.1 31California 923.6 34,421.1 30Virginia 643.1 5,114.3 29Maryland 587.7 3,371.7 28

Washington 587.3 3,962.2 27Colorado 496.5 2,530.0 26

Wisconsin 457.1 2,590.9 25New Mexico 418.1 850.4 24

Oklahoma 396.9 1,478.1 23Alaska 385.5 273.3 22Kentucky 330.7 1,435.1 21

Alabama 294.6 1,393.6 20Utah 247.5 700.6 19South Dakota 240.5 197.2 18Texas 116.8 2,945.9 17Georgia 101.4 1,004.3 16

Arkansas 84.1 244.8 15Mississippi 70.4 208.5 14Montana 42.1 41.2 13Iowa 38.8 117.3 12Missouri 7.5 45.2 11Nebraska 1.3 2.4 10

Arizona -58.2 -388.5 9Hawaii -70.1 -91.1 8South Carolina -102.4 -470.8 7Pennsylvania -148.9 -1,881.9 6

West Virginia -188.0 -343.1 5Louisiana -215.6 -976.7 4Florida -365.9 -6,834.1 3North Dakota -369.0 -241.2 2Idaho -542.4 -846.1 1

Cumulative State Tax Increases FY 2002-2011


17/48

15 out of 18 federal bureaucracies have expanded their payrolls

increasing the number of civilian federal employees by 2.83

percent within one year.20,21 Meanwhile, state and local

governments enacted some austerity measures by reducing payrolls

by 179,600 workers.22 This is likely due to state and local worker

unionization rates that are five times greater than the private

sector.23 Recently, austerity measures for state and local workers

precipitated by rampant government spending during a recession

were resisted by Wisconsin unions. Rather than accept

compensation concessions, unions forced the state and local

governments to lay off workers. This is one explanation for why

payrolls decreased while spending increased for state and local

governments.

Given the 2011 federal worker pay freeze at 2010 levels, 53,344

new federal workers will cost taxpayers $373 billion.i In 2010, the

Americans for Tax Reform Foundation calculated the cost of

hiring new GS-11 federal employeesthe median federal salary

level.24,25 On average, each newly-hired GS-11 employee costs

taxpayers $7 million dollars over the course of a 40 year career.

The most significant bureaucracy expansions include:

GOVERNMENT EMPLOYEES

A widely cited 2010 USA Today study found that average federal

salaries exceeded private sector salaries across 83 percent of

industries.26 These federal workers are less educated and less experienced

than private sector workers in the same level of occupational

responsibility.27

These findings suggest that federal workers receive apremium compensation package while taxpayers pick up the tab.

In March 2011, an American Enterprise Institute (AEI) study

quantified those taxpayer costs for salaries and benefits. AEI found

federal employees received 63 percent more non-wage compensation

in the form of health care, pensions, or other benefits, than in large

private sector firms. The study concludes that federal workers arepresently paid an additional $77 billion in compensation per year

Department 2010 Employment 2011 Employment Increase % Increase

Department of Education 4,242 4,604 362 8.53%

Department of the Air Force 165,055 175,876 9,062 6.56%

Department of State 11,625 12,250 625 5.38%

Department of Health and Human Services 80,631 84,620 3,989 4.95%

Department of Veteran Affairs 301,759 314,066 12,307 4.08%

Department of Homeland Security 185,295 192,845 7,550 4.07%

Department of the Navy 191,541 198,878 7,337 3.83%

Department of Defense 105,452 109,091 3,639 3.45%

Department of the Army 281,340 290,402 9,062 3.22%

i

Assumptions:

The employee is assigned a Step 5 in the GS table for a 40-year career.

The assumed COLA is the five-year moving average for the DC areas COLA: 3.55%.

In order to account for benefits, pension contributions, and payroll taxes, the GS dollar levels are increased by 33 percent (standard budgeting practice in the Department of Labor in the

Bush Administration)

The dollar value is expressed in nominal terms and after-inflation (2.5%)

Source: US Office of Personnel Management, Employment March 2011 and Employment March 2010



above an equivalent marketplace valuation of their labor.28 If federal

workers were paid at private sector levels, COGD would be decreased

two days.

The problem of overpaid public workers bleeds into state and local

government budgets. The Bureau of Labor Statistics found that:

Total employer compensation costs for private industry workers

averaged $28.10 per hour worked in March 2011. Total employer

compensation costs for state and local government workers averaged

$40.54 per hour worked in March 2011.29 53 percent of state and local

government workers are in the educational sector.30 If government

employees were paid at average compensation levels for the education

in the private sector, state and local governments would save over $9

billion each year.

Whereas the federal government continues to put taxpayers on the

hook for more workers, state and local governments have cut

employment while increasing spending. Although state and local

government workers have decreased by about one percent since last

year, spending increased by 4 percent. Many states are facing pension

crises as prior commitments to unrealistic benefit packages catch up

to state coffers.

COGD Absent Overpaid Federal Workers


19/48

As of March 2011, state and local governments have an

outstanding debt of $2.447 trillion.32 Furthermore, state and local

governments are facing a $3.1 trillion shortfall in projected

pension spendinga shortfall of $21,500 for every UShousehold.33 These liabilities are government worker pension

promises that outpace the size of financial assets held by state and

local governments. State and local governments unfunded

liabilities comprise a massive 22 percent of GDP. All but 10 states

have unfunded liabilities above 15 percent of state GDPfour

states (Alaska, Hawaii, New Jersey, and Ohio) even have unfunded

liabilities exceeding 35 percent of state GDP. 34

However, the true $3.1 trillion cost of state and local government

promises continues to be masked with accounting gimmicks. States are

significantly overestimating the rate of return on their pension assets.

When scoring future net liabilities, discount rates are pegged at 8percenta nominal interest return which is not realistic. Between 2004

and 2008, the nominal return on Treasury Inflation-Protected

Securities averaged 4.35 percent.35 Therefore, a significant gap emerges

between how states and localities plan future liabilities and the assets

available to pay for those pensions. Reduction in the number of

government workers and their benefits is essential for responsible fiscal

governance. With continued misinformation on budget gimmicks, the

problem of unfunded pensions will grow worse over time.

State and Local Employees (thousands)

State Local Total State Local Total

Alabama 111.8 216.8 328.6

Alaska 26.4 41.7 68.1

Arizona 85.1 280.6 365.7

Arkansas 78.1 122.1 200.2

California 493.1 1685.0 2178.1

Colorado 99.0 244.8 343.8

Connecticut 70.0 160.3 230.3

Delaware 33.1 26.5 59.6

Florida 221.8 775.3 997.1

Georgia 152.4 413.7 566.1

Hawaii 74.5 18.4 92.9

Idaho 28.6 80.0 108.6

Illinois 154.4 621.1 775.5

Indiana 119.1 283.6 402.7

Iowa 68.3 172.0 240.3

Kansas 55.4 185.5 240.9

Kentucky 103.4 188.6 292

Louisiana 112.3 218.1 330.4

Maine 28.2 61.8 90

Maryland 118.8 249.4 368.2

Massachusetts 126.9 268.7 395.6

Michigan 185.5 402.0 587.5

Minnesota 102.4 288.7 391.1

Mississippi 61.6 160.5 222.1Missouri 108.8 286.6 395.4

Montana 25.4 51.0 76.4

Nebraska 41.6 111.7 153.3Nevada 38.2 99.8 138.0

New Hampshire 26.9 65.9 92.8

New Jersey 147.4 429.7 577.1

New Mexico 60.5 107.8 168.3

New York 254.9 1121 1375.7

North Carolina 195.9 446.3 642.2

North Dakota 25.3 47.5 72.8

Ohio 167.9 540.4 708.3

Oklahoma 86.5 204.1 290.6

Oregon 82.4 194.1 276.5

Pennsylvania 162.2 499.1 661.3Rhode Island 16.2 35.2 51.4

South Carolina 95.4 209.9 305.3

South Dakota 19.0 48.6 67.6

Tennessee 99.2 286.9 386.1

Texas 385.3 1304 1689.2

Utah 67.2 116.0 183.2

Vermont 18.2 31.8 50.0

Virginia 160.8 380.5 541.3

Washington 151.8 325.0 476.8

West Virginia 49.3 80.4 129.7

Wisconsin 96.8 304.4 401.2Wyoming 17.1 50.0 67.1

State and Local Employees (thousands)

Total: 19,583,00031

Source: US Bureau of Labor Statistics, Employment, Hours, and Earnings State and Metro Area


20/488

The large jump in regulatory costs between 2008 and 2009 is because

of an update to the Crain methodology used for calculating

regulatory costs. Crain uses a World Bank index that is more

comprehensive than the OECD index. The index values come from

1,751 data points. Significant advantages over the OECD index

include: 1) Larger data series, 2) Regulatory Quality Index (RGI)

covering international economic regulations in addition to domestic

that newly includes rules and mandates affecting factor markets (for

example, Americans with Disabilities Act), and 3) the World Bankindex covers all business sectors.

Our conservative estimate of total regulatory costs takes into account

only the cost of complying with regulations: the material resources

and labor needed to carry out compliance. For example, if a

regulation requires new pollution control equipment for power

plants, compliance costs include the costs of manufacturing,

installing, operating and maintaining the equipment.

Not counted are the negative economic effects of regulatory

requirementsthe deadweight loss of these policies. Deadweight loss

is societys valuation of goods and services forgone due to government

rules. These hidden costs stifle the growth of the economy because

they introduce inefficiencies and distortions, while reducing the

economic reward left over for productive activity. Regulations may

prevent new firms from entering the market or stop existing ones

from expanding. They may even force some existing firms out of

business altogether. In fact, regulations place small manufacturers at acompetitive disadvantage relative to large manufacturers since

compliance costs per worker are twice as high.36 Overbearing

regulations could be disastrous for job creation since 64 percent of net

jobs in the last 15 years were created by small businesses.37 The end

result of regulation is a reduction in overall output, fewer jobs, lower

wages and suppressed economic growth.

COST OF GOVERNMENT DAY 2011 REPORT

THE REGULATORY BURDEN

The average American will have to work 77 days in 2011 to pay for

the cost of government regulation, which is estimated to consume

21.2 percent of net national product. This is up a quarter of a day

from 2010.

Days Worked for Total Regulatory Burden


21/48

Each year, government regulators receive more funding to raise the

costs of goods and services that taxpayers buy. In effect, taxpayers pay

twice for regulations: Once for agencies to monitor growing

government regulations and again when regulations increase prices

those citizens pay. Although not counted as a part of the COGD for

regulation, the budget for regulators was $54.85 billion in 2011 or

1.5 days. Regulator budgets have grown by 72.5 percent (2011

inflation adjusted dollars); much faster than the decades growth in

regulatory costs. Former head of the Office of Information and

Regulatory Affairs (OIRA), Susan Dudley, projects these costs will

grow nearly $2.5 billion by 2012.

An April 2011 study by the Phoenix Center found that the expansion

of federal regulator budgets led to decreased economic growth and

private sector job losses. The study finds that the regulators budget

provides a financial gauge of regulatory activity. According to the study,

a 5 percent reduction in regulator budgets would increase GDP by $376

billion and expand employment by 6.2 million jobs over five years.

Conversely, for the 2011 $2.95 billon regulator budget increase, the

economy loses 6.2 million jobs over five years.39 The data suggests that

the macroeconomic benefits of cutting regulations are very large.

Higher regulatory costs will include more expensive bank credit as

the Consumer Financial Protection Bureau (CFPB) publishes

regulations that drive up industry costs for consumers. The CFPB

will begin with a budget of over $500 million.

The Reagan Administration attempted to simplify the regulatory

burden on taxpayers and businesses in the face of a slowing economy

in the 1980s. These policies made US firms more competitive and

decreased the scope of government. This is reflected by the number of

pages in the federal registrar, the national publication of all federal

regulations, which fell from over 85,000 to under 55,000 by the end

of Reagans presidency.

Regulators Budget38

Billions of Dollars

Source: Susan Dudley & Melinda Warren, Fiscal Stalemate Reflect in Regulators Budget: An Analysis of the US Budget for Fiscal Years 2011 and 2012



65,603

61,261

77,498

87,012

63,554

58,494

57,704

50,998

53,480

47,418

49,654

53,376

53,842

53,620

67,716

62,928

69,688

68,108

67,518

69,368

68,530

72,356

73,880

83,294

67,702

80,332

75,795

78,85177,752

78,724

74,408

80,700

69,676

82,5

45,000

50,000

55,000

60,000

65,000

70,000

75,000

80,000

85,000

90,000

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2 0 1 0

Pages in the Federal Register

The scope of federal regulations and the size of regulators budgets

will grow in the coming years as PPACA is enacted while financial

and environmental regulations are developed. The Obama

Administrations agenda imposes higher regulatory and tax costs on a

select few: rewarding friends and punishing opponents. The

exemptions currently being granted under the Presidents healthcare

plan are illustrative: of the nearly 1,400 Obamacare waivers granted,

more than 50 percent have been given to firms with union

membership.40 The problem is that only 12 percent of workers are

unionized on a national level. At the beginning of May, over 1,372

exemptions had been granted by the administration encompassing

more than 3 million workers.41 Of the 204 insurance mandate

exemptions distributed in April, 20 percent of them went to former

Speaker of the House Nancy Pelosis district. 42

The danger of regulatory regimes is that big government chooses the

winners and losers. Not only does the dead hand of government foster

inefficiency, it generates economic uncertainty about who is welcome

to journey along the road to recovery.

The case studies section of this report will discuss specific harm caused

by overzealous regulatory action under the Obama Administration: We

focus on both prominent aspects of the Environmental Protection

Agency Agenda and the economic implications of Dodd-Frank.

Source: National Archives and Records Administration, Office of the Federal Register

Ronald Reagan


23/48



A CONTINUING CASE STUDY: TARP AND ARRA

According to the CBO, the Troubled Asset Relief Program (TARP)

cost $19 billion when taking account of net present value of cash

holdings.43 CBO only scored TARP at 25 percent of enacted outlays

because of the expectation that much of the outlays would be repaid.

However, CBO numbers measure only the budgetary costs of TARP.

Another issue unaddressed by budget sheets is the distortion in

economic behavior by banks and non-bank financial institutions

when the government promises bailouts (particularly when youre

defined as too big to fail as in the Dodd-Frank bill). A report by the

Office of the Special Inspector General for TARP (SIGTARP) on

government assurance of Citigroup said, It did more than reassure

troubled marketsit encouraged high-risk behavior by insulating

risk-takers from the consequence of failure. 44

Businesses valuation of assets should be reflective of the risk they are

willing to assume. For the strongest economic growth to occur, assets

should be valued by those willing to pay the highest price in a

competitive market. They should not be held by firms largest enough

to receive the government special on subsidized risk. The true cost of

TARP is not the $19 billion added to debt; its the loss of economic

productivity from businesses uncertain of what competition might

look like because the Administrations policies select winners and

losers through handouts. Rather than being based on clear criteria,

the Citigroup bailout was decided on a strikingly ad hoc basis. 45

TARP began with the claim of needing to support systemically

significant organizationsa broad justification that came under

scrutiny when political friends and car manufacturers began to receive

aid. Furthermore, some financial institutions were required to take

TARP funds even when they didnt ask. We didnt need the TARP

money, said Jamie Dimon, the CEO of JPMorgan Chase. We took

it because they asked us to.46

Thomas M. Hoenig, the president of the Federal Reserve Bank of

Kansas City, noted that the five largest banks are 20 percent larger

than before the crisis, and now manage $8.6 trillion in assets or nearly

60 percent of GDP. These firms reached their present size through

the subsidies they received because they were too big to fail. 47 In the

aftermath of intervention, the administration increased national

reliance on the financial institutions of which it is supposedly wary.

The Obama Administrations hallmark spending spree, the American

Recovery and Reinvestment Act (ARRA), has failed to live up to all

of its major promises of economic salvation. Obamas chief economist

Christina Romer claimed that the stimulus would save millions of

jobs, keep unemployment below eight percent, and that 90 percent of

the jobs saved would be private sector jobs.48 Instead, federal

employment grew by 75,000 jobs during the Great Recession, while

private sector employment fell by 6.6 million.49,50

COGD 2011 Absent Remaining TARP & ARRA Funds


25/48

Unemployment has consistently remained above 8.8 percent since

April 2009. Despite the Administrations optimistic predictions of

government management over the economy, data shows each job

saved by the stimulus may have cost anywhere between $170,000

and $400,000.51 Preceding President Obamas inauguration, three

hundred economists signed a statement warning the President-elect

against such a use of federal funds. 52

CBO projects another $148 billion in ARRA outlays for 2011 and

$94 billion for 2012-2019.53 $10 billion in TARP outlays are

forecasted between 2012-2021.54 If remaining ARRA and TARP

funds were repealed within 2011, COGD would decrease by $242

billion or 6.81 days. Despite the Obama Administrations insistence

that the US industries are recovering, stimulus funds remain

enacted. As ARRA outlays are currently enacted, CBO estimates

ARRA will increase the federal deficit by $821 billion$34 billion

above the original projection.55

The first seven years of PPACA, known as Obamacare, will see

steadily rising costs to an additional four COGD days by 2021a

$1.16 trillion increase in federal spending for only one program in its

infant phase.56Almost 75 percent of costs are back-loaded to the last

five years of CBO scoring. Additionally, the CBOs model seems to

underestimate behavioral responses to incentives of government

subsidized health care. Despite a system of taxes and penalties for not

covering workers, many companies are planning on dropping

employee coverage because of Obamacares rising health care costs. At

least some of these formerly-covered employees will claim an

Obamacare federal subsidy.

PPACA: Drops in Employer Provided Coverage

According to a June 2011 survey by McKinsey Quarterly, 30 percent

of companies providing employer-sponsored insurance will definitely

or probably drop coverage.57 Originally, CBO reported only 9-10

million workers, or 7 percent of employees, would have to switch to

the subsidized federal exchange program in 2014. 58 An increased

number of participants on the subsidized federal exchange willincrease the cost of government as mandatory federal spending rises

above baseline forecasts.

Although the McKinsey survey suggests that other employee benefits

will rise, it is uncertain whether employers that dropped health care

coverage would provide the same value of benefits. However, the

McKinsey study found that 30 percent of these employers would gain

economically by dropping coverage even if they completely

compensated employees with alternative benefits.

In contrast to all of the Obama administrations claims about the

imperative nature of employer-sponsored insurance, 85 percent of

employees said they would continue working at their business if

health coverage was dropped. The McKinsey Quarterly Survey reveals

that although health care is important, it is not a necessity in the

minds of many Americans. Allowing the employer-employee

relationship to determine the package of benefits and salary is the

bedrock to providing the greatest care for American workers.

PPACA: Independent Payment Advisory Board (IPAB)

The Patient Protection and Affordable Care Act in 2009 created

IPAB as a mechanism for controlling skyrocketing health care costs.

IPAB consists of 15 full-time members appointed by the President

and confirmed by the Senate for six-year terms. Their goal is to reduce

Medicare spending when the five-year outlook for the average growth

rate in Medicare per beneficiary is projected to exceed target growth

rates. IPAB is prohibited from rationing care, increasing taxes,

changing Medicare benefits or eligibility, increasing beneficiary

premiums and cost-sharing requirements, or reducing low-incomesubsidies under Medicare Part D.59With certain other limitations on

spending, the 15-bureaucrat board may pull upon a variety of

Medicare cuts, such as physician reimbursement rates under Medicare

Part B.60

CBO scored IPAB to reduce the deficit by $28 billion between 2015

and 2019.61 Using the updated CBO baseline for Medicare

expenditures, these savings only amount to .743% of all Medicare

expenditures from 2015-2019.62,63 These supposed cuts are promoted

CASE STUDY: THE PATIENT PROTECTION

AND AFFORDABLE CARE ACT (PPACA)



by lawmakers as a sign they are serious about reducing federal spending.

The reality is IPAB hardly puts a dent in ballooning Medicare liabilities.

Lastly, these cuts only occur if medical costs do not rise faster than CBO

estimates. These supposed cuts allow for the plans proponents to claim

fiscal austerity now without any guarantee of cuts later.

Popular idealization of IPAB promotes a future of cost control

centered upon hiring more bureaucrats without clear and transparent

guidelines to find spending cuts, rather than politicians being

personally accountable for fiscal austerity. IPAB reflects the

continued bureaucratization of health care, rather than holding

elected officials accountable.

PPACA: $480 Billion In New Taxes

In addition to explosive new spending and regulatory uncertainty,

Obamacare imposes a litany of new taxes, many of which will affect

taxpayers making less than $250,000 a year. Some of the most

significant taxes or reporting burdens include:

These taxes only cover part of the $1.16 trillion spending surge for

Obamacares first seven years, even less as Obamacare costs rise after

2021. The Patient Protection and Affordable Care Act increases the

cost of government by 3.5-4 days by 2016. CBO estimates for

Obamacare may be overly optimistic considering how more

employers are dropping employee coverage than previously

forecasted. Additionally, PPACA will likely add more days to

COGD when the ambitious CBO projected average growth rate of

4.71 percent through 2021 is not achieved.

Total Taxes: $479.9 billion64

3.8 Percent Surtax on Investment Income(Jan 2013 / $123 bil)

Hike in Medicare Payroll Tax(Jan 2013 / $86.8 bil)

Individual Mandate Tax and Employer Mandate Tax(Jan 2014 / $65 bil)

Tax on Health Insurers(Jan 2014 / $60.1 bil)

Excise Tax on Comprehensive Health Insurance(Jan 2013 / $32 bil)

Biofuel tax hike (Immediate / $23.6 bil)

Tax on Innovator Drug Companies(Jan 2010 / $22.2 bil)

Tax on Medical Device Manufacturers(Jan 2013 / $20 bil)

Increased Spending Threshold for Medical Itemized Deduction(Jan 2013 / $15.2 bil)

Savings / Health Account Taxes(Jan 2013/2011 / $14.4 bil)

Codification of the economic substance doctrine(Immediate / $4.5 bil)

Employer Reporting of Insurance on W-2(Jan 2011 / $min)


27/48

If COGD increases are premised upon an average historical growth of 3.28 percent, even without accounting for the likely increase in federal

health plan exchange participants, the cost of PPACA will be steadily growing over 4.5 days by 2021.

CBO: PPACA Cost of Government Day Increases

PPACA Cost of Government DayIncreases Constrained by Average Historical Growth



CASE STUDY: DODD-FRANK

What is Dodd-Frank and Why Was It Enacted?

The Dodd-Frank Act was enacted in July 2010 with the intent of

avoiding another financial crisis like 2007. The Act constitutes the

most sweeping financial regulatory reform since the Great

Depression. 65According to the US Chamber of Commerce, Dodd-

Frank calls for over 500 regulatory rulemakings, 60 studies, and 93

reports. Sarbanes-Oxley, another reactive financial regulatory bill

passed in 2002, only required 16 rules and 6 studies.66 Even without

addressing the economic effects of the Act, there are an estimated

$20 billion in compliance costs. However, $20 billion likely

underestimates the true costs of Dodd-Frank as many of its

regulations have not been formed.

Dodd-Frank has two primary goals: (1) Limit the risk of banking

and financial institutions and (2) Limit the damage when risk turns

into failure. The idea of a safer banking system is appealing, but at

what cost should policies purport to increase safety? When

regulators control the permissible level of risk for investments,

certain economic growth that would have been based on those

investments must be foregone. Regulators presume to know more

than what financial institutions already have the incentive to know:

which investments are profitable and which are not. Presumption of

knowledge about markets leads to outcomes such as the Durbin

Amendment to place price controls on debit card swipe fees that

will decrease consumer benefits.

Financial market theories premised upon regulators knowing more

about a firms affairs than the firm itself will lead to dangerous

conclusions. Regulators dictation of permissible leverage

decreases liquidity and can encourage increased quantitative easing

when the Federal Reserve questions why there is a lack of liquidity.

An alternative government justification for regulation is that

financial institutions are engaged in a metaphorical race to the

bottom of risk. According to this worldview, financial institutionsand their CEOs make decisions on the basis of fearing exclusion

from the market when high risks pay off for competitors, rather

than investing on return expectations. Regulators view themselves

as societys economic saviors by restricting financial investors by just

the right amount so that only the right risks are taken. Ironically,

for businesses defined as too big to fail by regulators, racing to the

bottom will continue to be a common phenomenon when entities

arent responsible for paying the costs of their investment failure.

The Dodd-Frank response to the race to the bottom does not

eliminate the causal factor: government subsidized risk. Instead,

Dodd-Franks provisions try to (1) foresee crashes and (2) enact

binding rules for a systemic firms liquidation. However,

unintended consequences of regulations that do not address the

causal problem restrict capital to businesses and banking benefits

for Americans.

In order to foresee crashes, there are three concerns that regulators

ought to address: (1) Can enough information about the firm and

market be acquired to accurately foresee a financial crash, (2) Is a

policy prescription available that would lead to a net benefit

outcome, and (3) Would the regulation be implemented in a timely

fashion applicable to the information that was previously collected?

In order for a regulation to positively impact the market there must

be a sizeable staff to collect vast information in a timely manner

(assuming regulators even have knowledge of businesses risk

assessments on their investments), the political and regulatory

process must be favorable to the passage of the ideal regulation, and

the regulation must remain applicable to the market despite the

markets constant adjustments and readjustments. The vast

resources and considerations required to examine whether a

regulation might be beneficial should not inspire confidence in even

the best-intentioned regulator.

In order for the Dodd-Frank regulations to take affect, it must go

through the regulatory process. First, there is a notice of proposed

rulemaking in the Federal Register that allows firms and citizens to

respond to the analysis and provide their thoughts at least 30 days

before the regulation takes effect. Additionally, depending on the

regulation, hearings may need to be held. Agencies under the

Executive Branch must then send any rule with an impact over

$100 million to the Office of Information and Regulatory Affairs

(OIRA). After outside review and feedback, the agency will either

revoke its proposed rule or it will publish a final rule that willbecome the law of the land.

However, the Treasury and other independent agencies are not

required to report major rules to OIRA. This exclusion extends to

the Consumer Financial Protection Bureau created in the Dodd-

Frank bill that will serve as an independent agency within the

Treasury. OIRA exemption for the Treasury removes a significant

level of government accountability within the rulemaking process.


29/48

According to the Act, in the event a systemically significant firm

fails, the FDICs liquidation guidelines are enacted to ensure that

the firms creditors are reimbursed. In theory, each of these systemic

firms submits a living will that can be claimed by the FDIC in a

time of financial insolvency. In June 2010, Treasury Secretary

Geithner testified that Dodd-Frank would end too big to fail. 67

Theoretically, the Treasurys goal is to maintain a credible monetary

policy so firms invest with only market expectations, rather than

also incorporating expectations of government intervention.

However, two large problems emerge for Dodd-Frank to make a

credible commitment to no more too big to fail.

The first is many of these too big to fail institutions have

international operations that make the concept of FDIC asset seizure

a less picturesque reality.68 Defining a $50 billion threshold of too

big to fail may only create a safety net for banks. Therefore, it

remains to be seen whether the complicated and numerous

provisions set by regulators can be consistently adhered to, rather

than providing loose guidelines for financial behavior and

continuing to subsidize risk-seeking. If markets perceived Dodd-

Frank as a turning point in Treasury policymaking against bailouts,

then Dodd-Frank would mark a new era of ending subsidized risk.

However, Treasury Secretary Geithner has shown his hand on the

credibility of Dodd-Frank claiming that in the future we may have

to do exceptional things again and you dont know whats systemic

and whats not.69

Secretary Geithners comments reflect the administrations

propensity for ad-hoc market interventions. Regulatory action

already has negative costs of compliance, of restricting opportunities

for economic growth, and of supporting larger bureaucracy. The

administration goes one step further by claiming that costly rules

are only guidelines, and that more intervention is still possible.

Questions for regulators:

What economic and job growth would not occur because of thisregulation?

How much does this regulation decrease the probability offinancial insolvency?

What is the estimated cost for financial insolvency after a firmliquidates?

Is the expected economic value of regulation greater than theexpected value of allowing economic growth?

Dodd-Frank: Durbin Amendment

One of Dodd-Franks provisions is Section 1075, known as the Durbin

Amendment. The Durbin Amendment is a price control on the

interchange feethe fee a business pays to a card issuer for each consumer

transaction. Although the law was only supposed to affect large financial

entities with assets over $10 billion, many smaller financial institutions

have stated that the Durbin Amendment could have devastating effects. A

proposed rule issued by the Federal Reserve in December 2010 set up

price controls at 7 or 12 cents per transaction, rather than the current 44-

cent industry average.73 The final rule was enacted on July 21 at 12 cents.

These price controls may generate additional uncertainty for businesses as

the Federal Reserve Board may adjust the exchange fee as they see fit.

Testifying on behalf of credit unions and community banks in front

of Congress, one credit union CEO explained the costs of processing

debit card transactions were underestimated by regulators. 74 He noted

that the Fed did not account for how interchange fees were used to

charge-off fraud losses. More subtly, the testimony addressed how

increasing the costs of financial activity can restrict consumer benefits.

In surveys of NAFCU members, 65 percent of surveyed credit

unions are considering eliminating free checking in order to

compensate for higher costs, and 67 percent are considering imposing

annual/monthly fees on debit cardholders.75 Survey responses also

included job layoffs, reduced dividends, or closing credit unions.

Other financial institutions are likely to cut benefits as well.

The federal register notice for the regulation hardly considers how

businesses might respond to the final rule. One section articulates a

belief that firms will find innovative cost-reduction methods to bring

down interchange fees by 32 cents as a consequence of the regulation.77

This logic begs the question why any responsible businessman would

not have sought cost minimization already. A more likely response,

entirely overlooked by the final rule, is that consumer benefits will be

cut. No regulatory impact analysis was conducted for the final rule

although it will have significant costs. If the Treasury was subject to

oversight from the Office of Information and Regulatory Affairs

(OIRA), a cost-benefit analysis would have been required.

In response to the price controls on interchange transaction rates, 17

organizations wrote letters to the Secretary of the Board of Governors

of the Federal Reserve System opposing the rule.2 The law offices of

Morrison and Foerster found that the Federal Reserve had failed to

measure the incremental costs of authorization, clearance, settlement of

2 The Consumer Banker Association, SunTrust Bank, Peoples United Bank, Commerce Bancshares, Inc., National Association of Federal Credit Unions, Navy Federal Credit Union, The American Bankers

Association, The Clearing House, The Financial Services Roundtable, The Independent Community Bankers of America, The Credit Union National Association, Midsize Bank Coalition of America,

The Consumer Bankers Association, VISA, Discover Financial Services, Total System Service, Inc., and Citigroup, Inc.


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electronic debit transactions, and other specific debit transactions

totaling 27 cents per transaction.77 Many of these firms explicitly stated

that costs will be shifted to consumers.78 The Fed has not conducted

vital economic analysis examining how business behavior will change in

response to price controls.

A February 2011 consumer study found that the regulation would

eliminate $33.4 to $38.6 billion of debit card interchange fee

revenues within two years. Much of this would be passed on to

consumers and businesses in form of higher fees or reduced card

rewards and services.79

The study concludes that unbankedindividuals will likely increase by more than 1 million low-income

households thereby taking away the interest and security of banking

for the countrys poorest. Additionally, its estimated that the costs

of $4.2 to $4.8 billion of debit card interchange fees from small

business accounts will be borne by those businesses. As many of

these small businesses do not accept debit cards, the price controlled

interchange losses will impact businesses in the form of fewer

banking benefits.80

Dodd-Frank: Volcker Rule

One of the other significant financial regulations from Dodd-Frank is

the Volcker Rule. The Volcker rule restricts banks from engaging in

financial activities that are deemed too risky. The rule restricts

financial investments in hedge funds and private equity funds by not

permitting a bank to invest more than three percent of its assets.

Those particular investments are called proprietary trading. The

uncertainty about the particulars of the Volcker Rule, prior to its

April 2011 final rule form in the federal register, may have delayed

economic recovery by dissuading investors from arbitrage

opportunities. For example, eleven traders in Goldman Sachsdeparted from proprietary trading to work for different equity or

hedge funds after passage of Dodd-Frank.81 This is in addition to $400

million Citi Group fund shutdown and Morgan Stanley

disinvestment.82At a time when all avenues of economic growth are

important to recovery, regulatory action barring investments deemed

too risky by bureaucrats does not instill confidence in the

Administrations commitment to recovery and impinges on

important growth.

One large expansion of government activity in marketshas been Fannie Mae and Freddie Mac. Thesefederally supported businesses guarantee access to mortgage

markets below market rates and taxpayers assume all the risk.

A CBO study found Fannie Mae and Freddie Macs

subsidization of mortgage interest payments increased the

national debt by $317 billion through March 2011. 70 The

$317 billion is the difference between the asset values of

acquired mortgages and the costs of mortgage subsidization.

During the economic downturn, government-backed

subsidized mortgages increased on the backs of taxpayers as

interest rates rose in the private sector. Over the next 10 years,

taxpayer-funding of subprime housing markets is projected to

increase by $41.6 billion.71

Fannie and Freddie own more than 40 percent of all residential

mortgages in the country. Their operations are focused within the

conforming sector of the mortgage market: mortgages not

exceeding $417,700 (in 2009). Both are government-sponsored

enterprises (GSE) with charters from the federal government. In

exchange for following certain regulations and conditions, Fannie

and Freddie receive the governments financial support and a

quasi-monopolistic position in the conforming sector of the

market. Because Fannie and Freddie receive such significant

government support, market entry is far too costly for possible

competitors.72 Using taxpayer subsidized funds against promising

businesses enables a Big Business monopoly over the

conforming mortgage market.

Competition under equal treatment of the law provides quality

improvements, sound risk taking, greater customer satisfaction,

and higher economic and job growth. Crony capitalism, such as

a high degree of cooperation between regulators and Big

Business, leads to opposite results. Worse, as businesses become

captured by political interests, they become symbols of

government performance that politicians try to present as

model regulatory successes. Rather than umpiring competing

firms, government becomes a player as well.


FANNIE AND FREDDIE


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Dodd-Frank: Over-the-Counter (OTC) Derivative Regulations

A derivative is a contract between at least two parties where the

value of the derivatives underlying assets (stocks, bonds,

commodities, etc.) determines its price. OTC derivative swaps

occur among derivative dealers outside of a centralized exchange.

OTC derivatives usually emerge from small businesses which do not

meet exchange listing requirements. One of the proposed rules

under Section VII of Dodd-Frank is to subject OTC derivative

traders to capital and margin requirements.

These requirements would mandate minimum levels of financial

backing to derivative trading. Dodd-Frank reduces market

transactions and increases interest rates through capital

requirements. Decreased derivative supply and increased interest

rates act as a brake on trading and slow economic growth.

In exploring the possible costs of capital requirements, Keybridge

Research polling found that 61 percent of firms report that

proposed regulations would have a moderate to significant impact

on the level of working capital required to operate their businesses.83

A regulatory decrease in working capital would lower financial

liquidity for certain firms and cause a decrease in investment and

job creation. Keystone estimated that a three percent backing rule

for S&P 500 firms would require $12.7 billion in aggregate

collateral and eliminate 100,000 to 130,000 jobs.84 Regulation of

OTC derivatives will decrease financial liquidity and decrease funds

available for investment. The regulation, when published, should

show a clear impact of how consumers are bettered by a rule that

restricts funds to businesses. However, it is unlikely that the

forthcoming rule will examine the lost economic productivity of the

regulation.

Dodd-Frank: Consumer Financial Protection Bureau (CFPB)

Dodd-Frank established the CFPB for regulators to intervene in

financial market practices. As an independent agency, CFPB

already has 62 regulations on the docket that will not receive

binding review by intergovernmental agencies.85

The CFPB willregulate and punish unfair lending practices, abusive loans and

loan terms. The differences in these practices have yet to be defined

by the agency. The CFPB claims to protect consumer interests, but

in practice will harm consumers by limiting credit and inhibiting

job growth in small businesses. Continued uncertainty about the

impact and form of the CFPB regulations hinders economic

recovery.

David Evan, Chairman of Global Economics Group, testified

before Congress that the CFPB could drive up the price of credit and

depress job growth particularly among new small businesses. In fact,

Evans reported that the CFPB has a genetic makeup that may make

it inherently hostile to companies that want to lend money and to

consumers that want to borrow money.86

Todd Zywicki, Professor at George Mason University Foundation

School of Law, claims that without a monitor for the CFPB, the

organization will ironically produce higher levels of fraud and abuse of

American consumers.87 Aside, from Zywickis first recommendation

that the CFPB be liquidated, he suggests that the agency be subject

to oversight and transparency like other bureaucratic agencies in

relation to OIRA. Never before has one independent agency existed

as a subdivision of another independent agency (the Treasury).

As the CFPB creates new regulations it is essential that a thorough

cost-benefit analysis be conducted of the proposed rules, particularly

as certain rules hinder marketplace competition. At all times, a

systemic problem should be identified that the proposed rule attempts

to avert. Anecdotal justifications for government intervention should

not take the place of a comprehensive, well-defined study.

Concluding Remarks on Dodd-Frank

The question remains whether the net benefits of regulatory action

contained in Dodd-Frank outweigh the net benefits of allowing firms to

assume risks of their investments. Whether regulatory regimes are or are

not in place, sound financial behavior must be premised on the

expectation that firms are responsible for the risks that they assume.

According to North Carolina Professor Lissa Broome, Financial

institutions that do not bear the full costs of their risky activities have no

incentive to reduce or alleviate that risk.88Otherwise, $50 billion asset

holders with too big to fail backing receive a competitive advantage

over smaller growing businesses. Secretary Geithners comments should

not warrant confidence that the era of too big to fail is ended.

If the $20 billion annual compliance costs began in 2011, Dodd-Frank would add half a cost of government day indefinitely. These

costs still underestimate the economic cost of Dodd-Frank. The

increased costs of doing business due only to the Durbin Amendment

and restricting OTC derivatives is approximately $48.7 billion in

foregone economic growth. Although these costs do not count

toward the cost of government dimension of compliance costs, they

are significant economic burdens borne by citizens experiencing

decreased banking benefits and job availability.



CASE STUDY: ENVIRONMENTAL PROTECTION AGENCY (EPA)

Bureaucracies and government interventionists call for regulation of

air and environment quality as a way of addressing a race to the

bottom phenomenon where polluters take advantage of society

through uncontrolled emissions. These parties have long seen the

EPA as a necessary source for solving market failure. However, from

the 1940s until the 1970 founding of the EPA, the environmental

race to the bottom was not occurring.

A 2000 study by Indur Golansky examined air quality historical

trends in the US prior to the 1970 formation of the EPA. His

empirical data showed a decrease in smoke, total suspended

particulates (TSP), sulfur dioxide (SO2) air quality, and stationary

source carbon monoxide (CO) emissions prior to the EPA. It is not

a race to the bottom of environmental quality but to the top of the

quality of life.89

In the early stages of economic and technological development, US

society placed a greater emphasis on improving quality of life

through affluence and reduction of diseases such as malnutrition

and parasitic diseases; tolerating some environmental degradation.

As wealth grew, society placed greater emphasis on environmental

needs because air quality became a relatively more important

determinant for the quality of life.90 Substantial improvements

occurred because society valued the technology to reduce emissions,

not because regulations existed to punish businesses.

Since the 1970s, there have been significant reductions in certain air

pollutants. However, that is not a sufficient measure of a successful

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