4/4/13 – How We Are Solving the Problems

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Apr 4, 2013 11:39:56 AM

and tagged Politics and the Economy, Yesterday's News

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In my response to David Stockman’s op-ed piece in the New York Times, I stated that our problems are, in fact, solvable, and that we are—however slowly and painfully—in the process of solving them.

Not everyone is convinced, to put it mildly, and to state it is not to demonstrate it. Looking through today’s papers, though, I found a couple examples of exactly what I was talking about.

The first, on page A2 of the Wall Street Journal, is titled “State Gas Taxes Head Higher.” The thrust of the story is that states are raising gas taxes to fund road construction and maintenance. The trend is bipartisan, including states dominated by Republicans.

Why is this happening? Facts and necessity.

Facts, in that the typical tax rate, set at X cents per gallon, hasn’t changed for decades and has been eroded in real terms. Effectively, many states have reduced real taxes on gasoline over time. Both Virginia and Maryland last changed the gas tax rate more than two decades ago, and the federal gas tax was last changed in 1993. Expenses for road construction and maintenance, in the meantime, have increased with inflation. Like it or not, state governments have had to deal with the fact that existing revenue doesn’t match current expenses. One particularly relevant quote from the story came from Texas state senator Robert Nichols, a Republican: “It doesn’t matter whether you’re Republican, Democrat, tea party. Everybody recognizes the need for transportation funding.”

There are a couple of takeaways here. First, because they’re unable to run deficits, states are forced to match revenues and expenses to a degree that the federal government hasn’t had to. This has led to the kind of compromise we haven’t yet seen at the federal level. The use of matched taxes and expenditures will, I expect, be a growing trend. We have seen this in California as well, which is often a leading indicator. By taking the discretion out of spending, taxes may be an easier sell to voters of both parties.

The second takeaway: gas taxes are being coupled with other fees to raise revenue from specific beneficiaries. This trend—making specific charges as opposed to covering costs from general taxation—is another way to reduce the public pain of necessary measures. Plus, it has the benefit of being more efficient and more just—and, therefore, an easier sell to both parties.

Another story that raises similar issues at the federal level appears on page A3 of the New York Times, “Misperceptions of Benefits Make Trimming Harder.” The article reports that the President spoke to Republicans about how the average elderly American receives a multiple of what he paid into the system via payroll taxes in social security and Medicare benefits. In other words, there is a serious and unsustainable mismatch between revenue and expenses, just as we see in gas taxes and road costs. The article has Senate Republicans “nodding in agreement” at the President’s speech. Senator Ron Johnson, a Republican from Wisconsin, is quoted as saying, “I’ll know President Obama is serious about working with us when I start hearing him tell the American people what he told us in private.”

Here’s what I take away from this article. First, even at the federal level, growing concern about the debt and deficit has begun to force the parties to start fact-based discussions. At least, the two sides are talking and starting to agree on the problem—a necessary prerequisite for deciding how to solve it.

Second, by highlighting the mismatch between the amount paid in and benefits received, the discussion offers a reasonable basis for any adjustments that need to be made. As at the state level, this provides support for both parties when going to their voters.

Third, in conjunction with the gas tax measures being adopted by the states, we’ve at least started on a “doesn’t matter whether you’re Republican, Democrat, or tea party” discussion that could end up with an “everybody knows” consensus.

We certainly aren’t there yet, and, according to Stockman’s analysis, we may not get there. I would argue, though, that these two articles demonstrate that the problem-solving process is already under way, and many similar conversations are likely happening as well. I don’t know who said “It always takes longer than you think, and longer than it should,” but it was probably a politician.

We’ll get there.

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