cost of government daycostofgovernment.org/files/files/cost of government day - 2011.pdf · when...

2011 REPORT

COST OF GOVERNMENT DAY

Americans for Tax Reform Foundation / Center for Fiscal Accountability • 722 12th Street, NW, Fourth Floor Washington, DC 20005 • (202) 785-0266 • F: (202) 785-0261

®

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. ATRF’s 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.

1

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

coSt 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 ofVirginia in three years. He is currently a second year Mercatus M.A. Fellow in the Department of Economics at GeorgeMason 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 economicsof 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. Otheroccupation opportunities have included the Koch Summer Fellowship Program, a budget fellowship with CongressmanDiane 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 theThomas 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 theCenter for Fiscal Accountability (CFA). CFA offers this fellowship to a graduate or highly qualified undergraduate studentwith 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 proponentsof 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 islimited and subject to the scrutiny of taxpayers, the Center for Fiscal Accountability seeks to shed light on governmentexpenditures, 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 fiscaland regulatory policy and in collaboration with prominent experts and institutions in the field. The primary task during thefellow’s time is to craft CFA’s hallmark study, the “Cost of Government Day® Report.”

3

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 year’s 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 year’s 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 year’s spending—the first time a continuing resolution has done so.

What’s 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 country’s debt has

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

shifted from billions to trillions—a significant step towards coming to terms with the country’s 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 AND

CFA EXECUTIVE DIRECTOR MATTIE CORRAO

Mattie Corrao

Executive Director

Center for Fiscal Accountability

Grover Norquist

President

Americans for Tax Reform Foundation

OVERVIEW OF RESULTS

4 coSt of government day® 2011 report

DefinitionCost of Government Day (COGD) is the date of the calendar yearon which the average American worker has earned enough grossincome to pay off his or her share of the spending and regulatoryburden 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 costsimposed by government. In other words, the cost of governmentconsumes 61.42 percent of national income.

Cost of Government Day: TrendsCost of Government falls two days earlier than last year’s revised date ofAugust 14. In 2011, the average American will have to work anadditional 41 days to pay off his or her share of the cost of governmentcompared to ten years ago in 2001, when COGD was July 2.

In fact, between 1977 and 2008, COGD had never fallen later thanJuly 21. 2011 marks the third consecutive year COGD has fallen inAugust. The difference between 2008 and 2009—from July 16 toAugust 14—was a full 29 days. The increase was spurred bygovernment intervention in the form of the Emergency Economic

Stabilization Act (EESA) that created the Troubled Asset ReliefProgram (TARP) and the American Recovery and Reinvestment Actof 2009 (ARRA).

The two day decrease of the 2011 COGD is only a temporary fallbefore projections of increased future spending. In March 2010,President Obama signed the Patient Protection and Affordable CareAct (PPACA) into law which will add $2.3 trillion to COGD over itsfirst decade.1 Even without counting Obamacare’s contributions tofuture COGDs, the three years of the Obama Administration havebeen three record-setting years of federal government regulation andspending—a 21.78 percent increase relative to the average size of thefederal government between 1977 and 2008.

Additionally, 2011 COGD estimates are premised upon CBO’sambitious 2011 calendar year estimate of 3.7 percent GDP growth.CBO numbers may overestimate annual growth because first quartergrowth 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 underestimatethe real cost of government for 2011.

7/6

6/306/26

7/47/7

7/217/20

7/9 7/107/12

7/10

7/4 7/47/8

7/167/19

7/17

7/127/137/10

7/57/2

6/296/287/2

7/8 7/97/7 7/7 7/8

7/10

7/16

8/148/148/12

Cost of Government 1977-2011

5

Federal SpendingThe average American worker will have to labor 103 days just to payfor federal spending, which consumes 28.15 percent of net nationalproduct. Last year, individuals had to work 105 days to pay off federalspending 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 theopening of the 112th Congress. Coupled with the longest recessionsince the Great Depression, federal spending as a share of the nationaleconomy remains at a three-year high since the first COGD report in1977. Between the end of 2008 and today, the ObamaAdministration has increased federal spending by 13 Cost ofGovernment Days.

State and Local SpendingLikely due to increased federal assistance, independent state andlocal spending has decreased since 2008. In 2011, the averageAmerican has to work 44.2 days to pay for state and localexpenditures—roughly the same number of days in 2010 and oneday less than the 45.4 days worked in 2009.

Regulatory Costs

The average American must labor 77 days in 2011 just to cover thecost of government regulations—identical to the 77 days worked in2010 and slightly less than the 79 days worked in 2009. 2011regulations will consume 21.2 percent of net national productwhich, compared to 16.1 percent ten years ago in 2001, is a 31.6percent increase in the regulatory burden within only 10 years.

Cost of Government Day Components

49.75 days worked to pay for federal regulations

44.16 days worked to pay for

state and localspending

27.6 days worked to

pay for state andlocal regulations

102.83 days workedto pay for federal

spending

COST OF GOVERNMENT DAY COMPONENTS

coSt of government day® 2011 report6

2011 Cost of Government Day for States

MSTNSCLANMSDWVALAZKYNVOKAKARGAID

MEMIIN

MTHIIA

NCOHMITXCOORNHDEKSUTVTFLNDNEVARI

WYMAPAIL

CAMNWAWIDCMDNYNJCT

2

The calculation of the Cost of Government Day for each state isbased 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 areborne by states with relatively higher incomes. State and local tax andspending burdens vary as well.

As in previous years, the latest Cost of Government Day is inConnecticut, with the average worker toiling all the way untilSeptember 10 (twenty nine days past the national average) to pay offall the costs of government. The dubious honor of second place isheld by New Jersey, with COGD falling on September 6. New Yorkfollows right behind on August 30, with Maryland maintainingfourth place for the second year in a row at August 20.

STATE BY STATE BREAKDOWN

7

State Rank in Rank in # of Days State 2010 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-JulSouth 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-JulAlaska 1 13 211 30-JulArkansas 10 13 211 30-JulGeorgia 27 13 211 30-JulIdaho 27 13 211 30-JulMaine 14 17 213 1-AugMissouri 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-AugDelaware 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-AugNebraska 24 36 224 12-AugVirginia 40 36 224 12-AugRhode Island 38 38 226 14-AugWyoming 35 38 226 14-AugMassachusetts 44 40 227 15-AugPennsylvania 40 40 227 15-AugIllinois 35 42 229 17-AugCalifornia 44 43 230 18-AugMinnesota 40 43 230 18-AugWashington 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


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 11Florida 16 North Dakota 8Alaska 12 Florida 7Nebraska 12 Louisiana 6New Hampshire 8 Nebraska 5

Top 5 2011 Decreases COGD by Rank

5 Largest COGD DecreasesRelative to National Average

Georgia -14 Georgia -10Idaho -14 Idaho -10Oklahoma -13 South Carolina -10Hawaii -11 Tennessee -10Vermont -10 Oklahoma/Vermont -8

9

THE GOVERNMENT SPENDING BURDEN

Federal SpendingFederal spending continues to be the single largest component of thetotal cost of government and the main driving force leading to thesubstantial increase in the cost of government over the last decade.Record-breaking costs of government were driven by provisions of theEmergency Economic Stabilization Act (EESA) of 2008 and theAmerican Recovery and Reinvestment Act (ARRA) of 2009 inconjunction with limited economic growth.

The average American will have to work 103 days just to pay for thecost of federal spending, which will consume 28.2 percent of netnational product this year. This is a jump of over 23 days comparedto ten years ago in 2001 and over 13 days compared to 2008. Federalspending relative to the economy has increased by 29.1 percent since2001..

Days Worked for Federal Spending

After only 28 days in office, and only 13 days after his first taxincrease 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 Actof 2009 on March 11, a $410 billion piece of legislation with over9,000 earmarks. Coupled with TARP bailouts for only certainfirms, the Obama Administration fostered economic uncertaintyfor businesses, financial institutions, and banks awaiting the federalgovernment’s next move to either help or hurt competitors. ARRAand TARP receive greater examination in the Case Studies sectionof this report.

March 2010 oversaw the enactment of The Patient Protection andAffordable Care Act (PPACA). Estimated at a first decade cost of $2.3

trillion (and increasing thereafter), President Obama and aDemocrat-controlled Congress increased Washington’s spendingproblem indefinitely. While the tax hikes to fund Obamacare tookeffect almost immediately, spending under the plan doesn’t beginuntil 2014. The effects of PPACA will also be discussed in the CaseStudies section of this report.

Policy changes such as ARRA, TARP, and Obamacare have hamperedbusiness investment. When downturns in business cycles occur,businesses need time to recover and reinvest without fear of rapidlyrising debt and higher taxes, health care and financial costs, andincreased regulatory burdens.4 The economic dilemma of the“stimulus” plan is not only how many jobs were “saved,” but whetherthe 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 recoverydue to economic uncertainty surrounding federal interventions.5

Greater uncertainty about higher taxes follows businesses asgovernment spending continues to skyrocket. In only ten years,federal spending increased from $1.980 trillion in 2001 to anestimated $3.789 trillion for 2011 (an increase of 91.4 percent).Accelerated spending under the Obama Administration has led tothe 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 percentageof GDP since World War II. In the past three years alone federaldebt has increased by nearly 80 percent, compared to an increase of25 percent over both terms of the previous Administration. Debtnow stands at its highest level since 1950.7

From November 2011 to April 2011, seven short-term continuingresolutions were passed until a full year appropriations bill could beagreed upon in April 2011. Despite significant resistance, $38billion was cut in the budget negotiations. Although $38 billion isestimated to be only 1 percent of all federal spending in 2011, it isthe largest cut to enacted spending in recent US history.

Special Focus: Spending and the Federal Budget Deficit

Given the explosive spending growth of the past three years, thefederal deficit has received a significant amount of media attention.The more relevant and pressing numbers for understanding the sizeof 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 factorsaffecting the economy as they determine the incentives for saving,investment, entrepreneurship, and employment.

However, national debt at a certain threshold is correlated withnegative economic growth. A 2010 study by Reinhart and Rogofffound that, “Median growth rates for countries with public debtover 90 percent of GDP are roughly one percent lower thanotherwise; average (mean) growth rates are several percent lower.”8Aslong as Obama oversees deficits over $1 trillion annually, the rapidpace to 90 percent becomes increasingly evident. Even if Obamaand Congress do not enact more major spending plans andprojected marginal tax increases are prevented, the federal debt is ontrack to reach 101 percent of GDP by 2021.9 Incorporating stateand local debts, US debt is already 92 percent of GDP.10 Whetherthe debt is federal or local, interest payments tie down resources andslow down economic growth.

The 2011 federal deficit is expected to more than triple in sizecompared to 2008—jumping from $461 billion to almost $1.615trillion. This means that the deficit relative to GDP will balloonfrom 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 GDPfor the next ten years is premised upon economic growth averaging4.71, even though the annual growth rate from 1948 to 2010 hasonly been 3.28 percent. If nominal spending estimates remainedconstant, while economic growth was constrained by historicalaverages, federal spending as a percentage of GDP wouldconsistently rise every year to 27.6 percent by 2021.12

Keeping spending in check is the only way deficit concerns can everbe ameliorated. Tying federal spending to growth in net nationalproduct 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 $1.712trillion surplus over the last ten years.13

11

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 18.2 19.1 19.7 19.6 19.9 20.1 19.6 20.7

25.023.8 24.7

23.3 23.1 23.0 23.1 23.5 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

14739

-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”

State and Local SpendingIn 2011, the average American will work 44 days to pay for state andlocal spending. This is the same as 10 years ago in 2001 and downfrom 46.5 days in 2008. The decrease in state and local spendingsince 2008 amounts to a 5 percent reduction. Much of the fall in stateand local spending is likely attributed to increased federal assistanceto state and local governments.

State spending looks likely to increase in future years because stateand local outlays plus federal aid have reached an all time high sincethe 2009 “stimulus” plan. Federal money came with many stringsattached that prevented states from offsetting infusions of federal cashthat swelled baseline spending. When this injection of federal dollarsfinally dries up, taxpayers in the states will be on the hook to pay forthe expansion of state spending programs upon which acceptance ofthe “stimulus” funds was contingent.

One of the best examples of this conundrum is Illinois, a state withan unfunded pensions-per-capita ratio of $17,230:1.14 In 2010, thestate held more than $6 billion in accumulated operating debt andover $83 billion in unfunded public employee pension liabilities.15

Rather than enacting spending reductions in an economicdownturn, the Illinois Government under the leadership ofGovernor Quinn enacted a $7 billion tax increase in 2011.

Accounting gimmickry that allows states to mask the true cost of theirspending liabilities is more difficult in states where governmentexpenditures are subject to public scrutiny. Since the passage of thefederal Funding Accountability and Transparency Act of 2006 and

the creation of www.USASpending.gov, the Center for FiscalAccountability has been working with lawmakers on both the federaland state level to implement and improve policies that opengovernment books to public scrutiny. New improvements have beenmade at the federal level, with legislation introduced that looks tostreamline the vast web of reporting data into a single, consistentelectronic platform.

State governments are following suit, creating and improving theirown transparency portals. As of June 2011, thirty-five searchablewebsites for government expenditures mandated by legislative orexecutive action have already gone live. In addition, several stateconstitutional officers have independently implemented measures toincrease accountability through transparency. Through these efforts,detailed information on government spending is placed at the fingertips 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, morethan ever, states would be well-advised to enact constitutional tax andexpenditure limitation measures. Constitutional supermajorities fortax increases, such as the two-thirds requirement enacted inCalifornia, have successfully prevented major tax hikes in many yearsthe Golden State has spent beyond its resources. After rejecting anearly $60 billion tax increase in this year’s budget, Californialawmakers passed a budget in June 2011 that specifies up to $2.5billion in additional spending cuts if the state does not match itsrevenue targets.16 These sequestration measures are a key means ofensuring fiscal responsibility.


44.79

45.24

44.36

43.72 43.83 43.90

45.00

46.57

45.38

44.06 44.16

Days Worked for State and Local Spending

13

In recent years, most states increased taxes to continue to increasespending even during economic downturns. This report compiles alist of state tax increases by state from FY2002 to FY2011. The listis based on data from the National Association of State BudgetOfficers (NASBO) with three adjustments. First, we compoundedthe tax increases to reflect hikes adopted since FY2002 which haveto be paid in successive years. Second, we adjusted each state’s taxincrease by population to produce a better comparison across states.Third, the taxes for each year are indexed so all tax increases arestated in term of 2011 dollars.

The index shows that, as in past years, New Jersey continues to bethe leader among all states in terms of tax increases. Since FY2002the Garden State government increased taxes per resident by $4,905for a total net tax increase of over $42.8 billion. Residents ofConnecticut, Rhode Island, Nevada, New York, Delaware,Tennessee, Minnesota, Ohio, Indiana, Vermont, and Oregon alsosuffered per capita increases of over $1,500 in the same period.

From 2002 to 2011 only nine states reduced their taxes. This groupis led by Idaho, North Dakota, and Florida, all of which reducedtaxes by over $350 per capita.

North Dakota leads the states in terms of tax cuts per capita in2011. The North Dakota legislature reduced taxes by $100.70 percapita 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 tocut taxes both over the FY2002-FY2011 period and in 2011.

FY2011 net tax increases across the states totaled $6.4 billion, less thanlast year’s $25 billion. However, unabated spending continues to placethe fiscal health of states in jeopardy and paves the way for highertaxes. Most federal grants provided to local and state governmentswork under a matching basis. For example, federal funding may beprovided on a 2:1 basis to state and local spending. As federal grantsare decreased, state and local politicians feel increased pressure tomaintain previously subsidized levels of spending.

A study by economists Russell Sobel and George Crowley foundthat 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 andCrowley estimate an aggregated $80 billion increase in future stateand local taxes because of the federal “stimulus” bill. If the $80billion in increased taxes occurred in 2011, COGD would increaseby another two days due to the “stimulus” – a four percent increasein state and local spending.

For example, for the 2011 tax year, Illinois Governor Quinnincreased state taxes by $7 billion And yet, despite the largest statetax hike as a percentage of GDP since the Great Depression, Illinoiswill 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 politicallyunpopular broad-based tax hikes through the personal income taxor sales tax. Tax increases on particular consumption such astobacco, gambling, and alcohol tend to be more appealing topoliticians. Only a portion of the voting population will pay asubstantially higher share of their income in the form of higherprices. Additionally, politicians claim to assist the poor byrestricting their financial access. In resorting to such “sin tax”increases, the government is placing itself in the contradictoryposition of discouraging certain behavior, while at the samecontinuing to rely on that behavior to finance coffers.

Alternative revenue measures outside of the personal income taxand sales tax are often regressive and/or hamper growth more thana broad-based approach. In 2011, seven states increased theirtobacco tax rates, 17 states had introduced fees (which enactingpoliticians often claim are not taxes), and seven states had increasedthe corporate income tax on job creators.18 Additionally there aretaxes on phones, insurance providers, and even family businessesafter the owner’s death. The narrow nature of these taxes extractssignificant portions of paychecks from low-income families whileother taxes discourage job creation.

More audacious states increased personal or sales taxes, eight andnine respectively. Five states were emboldened to increase both:Arizona, Georgia, Maine, New York, and Virginia. Nationally, salestaxes were increased by $1.9 billion in 2011 and personal incometaxes 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 38Michigan 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 33Wyoming 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 28Washington 587.3 3,962.2 27Colorado 496.5 2,530.0 26Wisconsin 457.1 2,590.9 25New Mexico 418.1 850.4 24Oklahoma 396.9 1,478.1 23Alaska 385.5 273.3 22Kentucky 330.7 1,435.1 21Alabama 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 16Arkansas 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 10Arizona -58.2 -388.5 9Hawaii -70.1 -91.1 8South Carolina -102.4 -470.8 7Pennsylvania -148.9 -1,881.9 6West 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

15

15 out of 18 federal bureaucracies have expanded their payrolls—increasing the number of civilian federal employees by 2.83percent within one year.20,21 Meanwhile, state and localgovernments enacted some austerity measures by reducing payrollsby 179,600 workers.22 This is likely due to state and local workerunionization rates that are five times greater than the privatesector.23 Recently, austerity measures for state and local workersprecipitated by rampant government spending during a recessionwere resisted by Wisconsin unions. Rather than acceptcompensation concessions, unions forced the state and localgovernments to lay off workers. This is one explanation for why

payrolls decreased while spending increased for state and localgovernments.

Given the 2011 federal worker pay freeze at 2010 levels, 53,344new federal workers will cost taxpayers $373 billion.i In 2010, theAmericans for Tax Reform Foundation calculated the cost ofhiring new GS-11 federal employees—the median federal salarylevel.24,25 On average, each newly-hired GS-11 employee coststaxpayers $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 federalsalaries exceeded private sector salaries across 83 percent of industries.26 These federal workers are less educated and less experiencedthan private sector workers in the same level of occupationalresponsibility.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) studyquantified those taxpayer costs for salaries and benefits. AEI foundfederal employees received 63 percent more non-wage compensationin the form of health care, pensions, or other benefits, than in largeprivate 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%

iAssumptions:• 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 area’s 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 federalworkers were paid at private sector levels, COGD would be decreasedtwo days.

The problem of overpaid public workers bleeds into state and localgovernment budgets. The Bureau of Labor Statistics found that:“Total employer compensation costs for private industry workersaveraged $28.10 per hour worked in March 2011. Total employercompensation costs for state and local government workers averaged$40.54 per hour worked in March 2011.”29 53 percent of state and localgovernment workers are in the educational sector.30 If government

employees were paid at average compensation levels for the educationin the private sector, state and local governments would save over $9billion each year.

Whereas the federal government continues to put taxpayers on thehook for more workers, state and local governments have cutemployment while increasing spending. Although state and localgovernment workers have decreased by about one percent since lastyear, spending increased by 4 percent. Many states are facing pensioncrises as prior commitments to unrealistic benefit packages catch upto state coffers.

COGD Absent Overpaid Federal Workers

17

As of March 2011, state and local governments have anoutstanding debt of $2.447 trillion.32 Furthermore, state and localgovernments are facing a $3.1 trillion shortfall in projectedpension spending—a shortfall of $21,500 for every UShousehold.33 These liabilities are government worker pensionpromises that outpace the size of financial assets held by state andlocal governments. State and local governments’ unfundedliabilities comprise a massive 22 percent of GDP. All but 10 stateshave unfunded liabilities above 15 percent of state GDP—fourstates (Alaska, Hawaii, New Jersey, and Ohio) even have unfundedliabilities exceeding 35 percent of state GDP.34

However, the true $3.1 trillion cost of state and local governmentpromises continues to be masked with accounting gimmicks. States aresignificantly overestimating the rate of return on their pension assets.When scoring future net liabilities, discount rates are pegged at 8percent—a nominal interest return which is not realistic. Between 2004and 2008, the nominal return on Treasury Inflation-ProtectedSecurities averaged 4.35 percent.35 Therefore, a significant gap emergesbetween how states and localities plan future liabilities and the assetsavailable to pay for those pensions. Reduction in the number ofgovernment workers and their benefits is essential for responsible fiscalgovernance. With continued misinformation on budget gimmicks, theproblem of unfunded pensions will grow worse over time.

State and Local Employees (thousands)

State Local Total State Local Total

Alabama 111.8 216.8 328.6Alaska 26.4 41.7 68.1Arizona 85.1 280.6 365.7Arkansas 78.1 122.1 200.2California 493.1 1685.0 2178.1Colorado 99.0 244.8 343.8Connecticut 70.0 160.3 230.3Delaware 33.1 26.5 59.6Florida 221.8 775.3 997.1Georgia 152.4 413.7 566.1Hawaii 74.5 18.4 92.9Idaho 28.6 80.0 108.6Illinois 154.4 621.1 775.5Indiana 119.1 283.6 402.7Iowa 68.3 172.0 240.3Kansas 55.4 185.5 240.9Kentucky 103.4 188.6 292Louisiana 112.3 218.1 330.4Maine 28.2 61.8 90Maryland 118.8 249.4 368.2Massachusetts 126.9 268.7 395.6Michigan 185.5 402.0 587.5Minnesota 102.4 288.7 391.1Mississippi 61.6 160.5 222.1Missouri 108.8 286.6 395.4

Montana 25.4 51.0 76.4Nebraska 41.6 111.7 153.3Nevada 38.2 99.8 138.0New Hampshire 26.9 65.9 92.8New Jersey 147.4 429.7 577.1New Mexico 60.5 107.8 168.3New York 254.9 1121 1375.7North Carolina 195.9 446.3 642.2North Dakota 25.3 47.5 72.8Ohio 167.9 540.4 708.3Oklahoma 86.5 204.1 290.6Oregon 82.4 194.1 276.5Pennsylvania 162.2 499.1 661.3Rhode Island 16.2 35.2 51.4South Carolina 95.4 209.9 305.3South Dakota 19.0 48.6 67.6Tennessee 99.2 286.9 386.1Texas 385.3 1304 1689.2Utah 67.2 116.0 183.2Vermont 18.2 31.8 50.0Virginia 160.8 380.5 541.3Washington 151.8 325.0 476.8West Virginia 49.3 80.4 129.7Wisconsin 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”

18

The large jump in regulatory costs between 2008 and 2009 is becauseof an update to the Crain methodology used for calculatingregulatory costs. Crain uses a World Bank index that is morecomprehensive than the OECD index. The index values come from1,751 data points. Significant advantages over the OECD indexinclude: 1) Larger data series, 2) Regulatory Quality Index (RGI)covering international economic regulations in addition to domesticthat newly includes rules and mandates affecting factor markets (forexample, Americans with Disabilities Act), and 3) the World Bankindex covers all business sectors.

Our conservative estimate of total regulatory costs takes into accountonly the cost of complying with regulations: the material resourcesand labor needed to carry out compliance. For example, if aregulation requires new pollution control equipment for powerplants, compliance costs include the costs of manufacturing,installing, operating and maintaining the equipment.

Not counted are the negative economic effects of regulatoryrequirements—the deadweight loss of these policies. Deadweight lossis society’s valuation of goods and services forgone due to governmentrules. These hidden costs stifle the growth of the economy becausethey introduce inefficiencies and distortions, while reducing theeconomic reward left over for productive activity. Regulations mayprevent new firms from entering the market or stop existing onesfrom expanding. They may even force some existing firms out ofbusiness altogether. In fact, regulations place small manufacturers at acompetitive disadvantage relative to large manufacturers sincecompliance costs per worker are twice as high.36 Overbearingregulations could be disastrous for job creation since 64 percent of netjobs in the last 15 years were created by small businesses.37 The endresult of regulation is a reduction in overall output, fewer jobs, lowerwages 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 forthe cost of government regulation, which is estimated to consume

21.2 percent of net national product. This is up a quarter of a dayfrom 2010.

Days Worked for Total Regulatory Burden

19

Each year, government regulators receive more funding to raise thecosts of goods and services that taxpayers buy. In effect, taxpayers paytwice for regulations: Once for agencies to monitor growinggovernment regulations and again when regulations increase pricesthose citizens pay. Although not counted as a part of the COGD forregulation, the budget for regulators was $54.85 billion in 2011 or1.5 days. Regulator budgets have grown by 72.5 percent (2011inflation adjusted dollars); much faster than the decade’s growth inregulatory costs. Former head of the Office of Information andRegulatory Affairs (OIRA), Susan Dudley, projects these costs willgrow nearly $2.5 billion by 2012.

An April 2011 study by the Phoenix Center found that the expansionof federal regulator budgets led to decreased economic growth andprivate sector job losses. The study finds that the regulators’ budgetprovides 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, theeconomy loses 6.2 million jobs over five years.39 The data suggests thatthe macroeconomic benefits of cutting regulations are very large.

Higher regulatory costs will include more expensive bank credit asthe Consumer Financial Protection Bureau (CFPB) publishesregulations that drive up industry costs for consumers. The CFPBwill begin with a budget of over $500 million.

The Reagan Administration attempted to simplify the regulatoryburden on taxpayers and businesses in the face of a slowing economyin the 1980s. These policies made US firms more competitive anddecreased the scope of government. This is reflected by the number ofpages in the federal registrar, the national publication of all federalregulations, which fell from over 85,000 to under 55,000 by the endof Reagan’s presidency.

Regulators’ Budget 38

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

63,55458,494

57,704

50,99853,480

47,41849,654

53,37653,842

53,620

67,716

62,928

69,68868,108

67,51869,368

68,530

72,35673,880

83,294

67,702

80,332

75,795

78,85177,752

78,724

74,408

80,700

69,676

82,590

45,00050,00055,00060,00065,00070,00075,00080,00085,00090,000

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

2010

Pages in the Federal Register

The scope of federal regulations and the size of regulators’ budgetswill grow in the coming years as PPACA is enacted while financialand environmental regulations are developed. The ObamaAdministration’s agenda imposes higher regulatory and tax costs on aselect few: rewarding friends and punishing opponents. Theexemptions currently being granted under the President’s healthcareplan are illustrative: of the nearly 1,400 Obamacare waivers granted,more than 50 percent have been given to firms with unionmembership.40 The problem is that only 12 percent of workers areunionized on a national level. At the beginning of May, over 1,372exemptions had been granted by the administration encompassingmore than 3 million workers.41 Of the 204 insurance mandate

exemptions distributed in April, 20 percent of them went to formerSpeaker of the House Nancy Pelosi’s district.42

The danger of regulatory regimes is that big government chooses thewinners and losers. Not only does the dead hand of government fosterinefficiency, it generates economic uncertainty about who is welcometo journey along the road to recovery.

The case studies section of this report will discuss specific harm causedby overzealous regulatory action under the Obama Administration: Wefocus on both prominent aspects of the Environmental ProtectionAgency Agenda and the economic implications of Dodd-Frank.

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

Ronald Reagan


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 cashholdings.43 CBO only scored TARP at 25 percent of enacted outlaysbecause 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 ineconomic behavior by banks and non-bank financial institutionswhen the government promises bailouts (particularly when you’redefined as “too big to fail” as in the Dodd-Frank bill). A report by theOffice of the Special Inspector General for TARP (SIGTARP) ongovernment assurance of Citigroup said, “It did more than reassuretroubled markets—it encouraged high-risk behavior by insulatingrisk-takers from the consequence of failure.”44

Businesses’ valuation of assets should be reflective of the risk they arewilling to assume. For the strongest economic growth to occur, assetsshould be valued by those willing to pay the highest price in acompetitive market. They should not be held by firms largest enoughto receive the government special on subsidized risk. The true cost ofTARP is not the $19 billion added to debt; it’s the loss of economicproductivity from businesses uncertain of what competition mightlook like because the Administration’s policies select winners andlosers 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 systemicallysignificant organizations—a broad justification that came underscrutiny when political friends and car manufacturers began to receiveaid. Furthermore, some financial institutions were required to takeTARP funds even when they didn’t ask. “We didn’t need the TARPmoney,” said Jamie Dimon, the CEO of JPMorgan Chase. “We tookit because they asked us to.”46

Thomas M. Hoenig, the president of the Federal Reserve Bank ofKansas City, noted that the five largest banks are 20 percent largerthan before the crisis, and now manage $8.6 trillion in assets or nearly60 percent of GDP. “These firms reached their present size throughthe subsidies they received because they were too big to fail.”47 In theaftermath of intervention, the administration increased nationalreliance on the financial institutions of which it is supposedly wary.

The Obama Administration’s hallmark spending spree, the AmericanRecovery and Reinvestment Act (ARRA), has failed to live up to allof its major promises of economic salvation. Obama’s chief economistChristina Romer claimed that the “stimulus” would save millions ofjobs, keep unemployment below eight percent, and that 90 percent ofthe jobs saved would be private sector jobs.48 Instead, federalemployment grew by 75,000 jobs during the Great Recession, whileprivate sector employment fell by 6.6 million.49,50

COGD 2011 Absent Remaining TARP & ARRA Funds

23

Unemployment has consistently remained above 8.8 percent sinceApril 2009. Despite the Administration’s optimistic predictions ofgovernment management over the economy, data shows each job“saved” by the “stimulus” may have cost anywhere between $170,000and $400,000.51 Preceding President Obama’s inauguration, threehundred economists signed a statement warning the President-electagainst 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 areforecasted between 2012-2021.54 If remaining ARRA and TARPfunds were repealed within 2011, COGD would decrease by $242billion or 6.81 days. Despite the Obama Administration’s insistencethat the US industries are recovering, “stimulus” funds remainenacted. As ARRA outlays are currently enacted, CBO estimatesARRA will increase the federal deficit by $821 billion—$34 billionabove the original projection.55

The first seven years of PPACA, known as Obamacare, will seesteadily rising costs to an additional four COGD days by 2021—a$1.16 trillion increase in federal spending for only one program in itsinfant phase.56 Almost 75 percent of costs are back-loaded to the lastfive years of CBO scoring. Additionally, the CBO’s model seems tounderestimate behavioral responses to incentives of governmentsubsidized health care. Despite a system of taxes and penalties for notcovering workers, many companies are planning on droppingemployee coverage because of Obamacare’s rising health care costs. Atleast some of these formerly-covered employees will claim anObamacare federal subsidy.

PPACA: Drops in Employer Provided CoverageAccording to a June 2011 survey by McKinsey Quarterly, 30 percentof companies providing employer-sponsored insurance will definitelyor probably drop coverage.57 Originally, CBO reported only 9-10million workers, or 7 percent of employees, would have to switch tothe subsidized federal exchange program in 2014.58 An increasednumber of participants on the subsidized federal exchange willincrease the cost of government as mandatory federal spending risesabove baseline forecasts.

Although the McKinsey survey suggests that other employee benefitswill rise, it is uncertain whether employers that dropped health carecoverage would provide the same value of benefits. However, theMcKinsey study found that 30 percent of these employers would gaineconomically by dropping coverage even if they completelycompensated employees with alternative benefits.

In contrast to all of the Obama administration’s claims about theimperative nature of employer-sponsored insurance, 85 percent ofemployees said they would continue working at their business ifhealth coverage was dropped. The McKinsey Quarterly Survey revealsthat although health care is important, it is not a necessity in theminds of many Americans. Allowing the employer-employeerelationship to determine the package of benefits and salary is thebedrock to providing the greatest care for American workers.

PPACA: Independent Payment Advisory Board (IPAB)The Patient Protection and Affordable Care Act in 2009 createdIPAB as a mechanism for controlling skyrocketing health care costs.IPAB consists of 15 full-time members appointed by the Presidentand confirmed by the Senate for six-year terms. Their goal is to reduceMedicare spending when the five-year outlook for the average growthrate in Medicare per beneficiary is projected to exceed target growthrates. IPAB is prohibited from “rationing” care, increasing taxes,changing Medicare benefits or eligibility, increasing beneficiarypremiums and cost-sharing requirements, or reducing low-incomesubsidies under Medicare Part D.59 With certain other limitations onspending, the 15-bureaucrat board may pull upon a variety ofMedicare cuts, such as physician reimbursement rates under MedicarePart B.60

CBO scored IPAB to reduce the deficit by $28 billion between 2015and 2019.61 Using the updated CBO baseline for Medicareexpenditures, these savings only amount to .743% of all Medicareexpenditures 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 CBOestimates. These supposed cuts allow for the plan’s proponents to claimfiscal austerity now without any guarantee of cuts later.

Popular idealization of IPAB promotes a future of cost controlcentered upon hiring more bureaucrats without clear and transparentguidelines to find spending cuts, rather than politicians being

personally accountable for fiscal austerity. IPAB reflects thecontinued bureaucratization of health care, rather than holdingelected officials accountable.

PPACA: $480 Billion In New TaxesIn addition to explosive new spending and regulatory uncertainty,Obamacare imposes a litany of new taxes, many of which will affecttaxpayers making less than $250,000 a year. Some of the mostsignificant taxes or reporting burdens include:

These taxes only cover part of the $1.16 trillion spending surge forObamacare’s first seven years, even less as Obamacare costs rise after2021. The Patient Protection and Affordable Care Act increases thecost of government by 3.5-4 days by 2016. CBO estimates forObamacare may be overly optimistic considering how more

employers are dropping employee coverage than previouslyforecasted. Additionally, PPACA will likely add more days toCOGD when the ambitious CBO projected average growth rate of4.71 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)

25

If COGD increases are premised upon an average historical growth of 3.28 percent, even without accounting for the likely increase in federalhealth 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 Day Increases 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 ofavoiding another financial crisis like 2007. The Act constitutes “themost sweeping financial regulatory reform since the GreatDepression.”65 According to the US Chamber of Commerce, Dodd-Frank calls for over 500 regulatory rulemakings, 60 studies, and 93reports. Sarbanes-Oxley, another reactive financial regulatory billpassed in 2002, only required 16 rules and 6 studies.66 Even withoutaddressing the economic effects of the Act, there are an estimated$20 billion in compliance costs. However, $20 billion likelyunderestimates the true costs of Dodd-Frank as many of itsregulations have not been formed.

Dodd-Frank has two primary goals: (1) Limit the risk of bankingand financial institutions and (2) Limit the damage when risk turnsinto failure. The idea of a safer banking system is appealing, but atwhat cost should policies purport to increase safety? Whenregulators control the permissible level of risk for investments,certain economic growth that would have been based on thoseinvestments must be foregone. Regulators presume to know morethan what financial institutions already have the incentive to know:which investments are profitable and which are not. Presumption ofknowledge about markets leads to outcomes such as the DurbinAmendment to place price controls on debit card swipe fees thatwill decrease consumer benefits.

Financial market theories premised upon regulators knowing moreabout a firm’s affairs than the firm itself will lead to dangerousconclusions. Regulators’ dictation of “permissible leverage”decreases liquidity and can encourage increased quantitative easingwhen the Federal Reserve questions why there is a lack of liquidity.

An alternative government justification for regulation is thatfinancial institutions are engaged in a metaphorical race to thebottom of risk. According to this worldview, financial institutionsand their CEOs make decisions on the basis of fearing exclusionfrom the market when high risks pay off for competitors, ratherthan investing on return expectations. Regulators view themselvesas society’s economic saviors by restricting financial investors by justthe right amount so that only the “right” risks are taken. Ironically,for businesses defined as “too big to fail” by regulators, racing to thebottom will continue to be a common phenomenon when entitiesaren’t responsible for paying the costs of their investment failure.

The Dodd-Frank response to the “race to the bottom” does noteliminate the causal factor: government subsidized risk. Instead,Dodd-Frank’s provisions try to (1) foresee crashes and (2) enactbinding rules for a systemic firm’s liquidation. However,unintended consequences of regulations that do not address thecausal problem restrict capital to businesses and banking benefitsfor Americans.

In order to foresee crashes, there are three concerns that regulatorsought to address: (1) Can enough information about the firm andmarket be acquired to accurately foresee a financial crash, (2) Is apolicy prescription available that would lead to a net benefitoutcome, and (3) Would the regulation be implemented in a timelyfashion applicable to the information that was previously collected?In order for a regulation to positively impact the market there mustbe a sizeable staff to collect vast information in a timely manner(assuming regulators even have knowledge of businesses’ riskassessments on their investments), the political and regulatoryprocess must be favorable to the passage of the ideal regulation, andthe regulation must remain applicable to the market despite themarket’s constant adjustments and readjustments. The vastresources and considerations required to examine whether aregulation might be beneficial should not inspire confidence in eventhe best-intentioned regulator.

In order for the Dodd-Frank regulations to take affect, it must gothrough the regulatory process. First, there is a notice of proposedrulemaking in the Federal Register that allows firms and citizens torespond to the analysis and provide their thoughts at least 30 daysbefore the regulation takes effect. Additionally, depending on theregulation, hearings may need to be held. Agencies under theExecutive 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 eitherrevoke 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 notrequired to report major rules to OIRA. This exclusion extends tothe Consumer Financial Protection Bureau created in the Dodd-Frank bill that will serve as an independent agency within theTreasury. OIRA exemption for the Treasury removes a significantlevel of government accountability within the rulemaking process.

27

According to the Act, in the event a systemically significant firm“fails,” the FDIC’s liquidation guidelines are enacted to ensure thatthe firm’s creditors are reimbursed. In theory, each of these systemicfirms submits a “living will” that can be claimed by the FDIC in atime of financial insolvency. In June 2010, Treasury SecretaryGeithner testified that Dodd-Frank would “end ‘too big to fail.’”67

Theoretically, the Treasury’s goal is to maintain a credible monetarypolicy so firms invest with only market expectations, rather thanalso incorporating expectations of government intervention.However, two large problems emerge for Dodd-Frank to make acredible commitment to no more “too big to fail.”

The first is many of these “too big to fail” institutions haveinternational operations that make the concept of FDIC asset seizurea less picturesque reality.68 Defining a $50 billion threshold of “toobig to fail” may only create a safety net for banks. Therefore, itremains to be seen whether the complicated and numerousprovisions set by regulators can be consistently adhered to, ratherthan providing loose guidelines for financial behavior andcontinuing 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 thecredibility of Dodd-Frank claiming that “in the future we may haveto do exceptional things again” and “you don’t know what’s systemicand what’s not.”69

Secretary Geithner’s comments reflect the administration’spropensity for ad-hoc market interventions. Regulatory actionalready has negative costs of compliance, of restricting opportunitiesfor economic growth, and of supporting larger bureaucracy. Theadministration goes one step further by claiming that costly rulesare 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 AmendmentOne of Dodd-Frank’s provisions is Section 1075, known as the “DurbinAmendment.” The Durbin Amendment is a price control on theinterchange fee—the fee a business pays to a card issuer for each consumertransaction. Although the law was only supposed to affect large financialentities with assets over $10 billion, many smaller financial institutionshave stated that the Durbin Amendment could have devastating effects. Aproposed rule issued by the Federal Reserve in December 2010 set upprice 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 asthe Federal Reserve Board may adjust the exchange fee as they see fit.

Testifying on behalf of credit unions and community banks in frontof Congress, one credit union CEO explained the costs of processingdebit card transactions were underestimated by regulators.74 He notedthat the Fed did not account for how interchange fees were used tocharge-off fraud losses. More subtly, the testimony addressed howincreasing the costs of financial activity can restrict consumer benefits.In surveys of NAFCU members, 65 percent of surveyed creditunions are considering eliminating free checking in order to

compensate for higher costs, and 67 percent are considering imposingannual/monthly fees on debit cardholders.75 Survey responses alsoincluded 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 howbusinesses might respond to the final rule. One section articulates abelief that firms will find innovative cost-reduction methods to bringdown interchange fees by 32 cents as a consequence of the regulation.77

This logic begs the question why any responsible businessman wouldnot have sought cost minimization already. A more likely response,entirely overlooked by the final rule, is that consumer benefits will becut. No regulatory impact analysis was conducted for the final rulealthough it will have significant costs. If the Treasury was subject tooversight 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, 17organizations wrote letters to the Secretary of the Board of Governorsof the Federal Reserve System opposing the rule.2 The law offices ofMorrison and Foerster found that the Federal Reserve had failed tomeasure the incremental costs of authorization, clearance, settlement of

2 The Consumer Banker Association, SunTrust Bank, People’s United Bank, Commerce Bancshares, Inc., National Association of Federal Credit Unions, Navy Federal Credit Union, The American BankersAssociation, 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.

electronic debit transactions, and other specific debit transactionstotaling 27 cents per transaction.77 Many of these firms explicitly statedthat costs will be shifted to consumers.78 The Fed has not conductedvital economic analysis examining how business behavior will change inresponse to price controls.

A February 2011 consumer study found that the regulation wouldeliminate $33.4 to $38.6 billion of debit card interchange feerevenues within two years. Much of this would be passed on toconsumers and businesses in form of higher fees or reduced cardrewards and services.79 The study concludes that unbankedindividuals will likely increase by more than 1 million low-incomehouseholds thereby taking away the interest and security of bankingfor the country’s poorest. Additionally, it’s estimated that the costsof $4.2 to $4.8 billion of debit card interchange fees from smallbusiness accounts will be borne by those businesses. As many ofthese small businesses do not accept debit cards, the price controlledinterchange losses will impact businesses in the form of fewerbanking benefits.80

Dodd-Frank: Volcker RuleOne of the other significant financial regulations from Dodd-Frank isthe Volcker Rule. The Volcker rule restricts banks from engaging infinancial activities that are deemed too risky. The rule restrictsfinancial investments in hedge funds and private equity funds by notpermitting a bank to invest more than three percent of its assets.Those particular investments are called proprietary trading. Theuncertainty about the particulars of the Volcker Rule, prior to itsApril 2011 final rule form in the federal register, may have delayedeconomic recovery by dissuading investors from arbitrageopportunities. For example, eleven traders in Goldman Sachsdeparted from proprietary trading to work for different equity orhedge funds after passage of Dodd-Frank.81 This is in addition to $400million Citi Group fund shutdown and Morgan Stanleydisinvestment.82 At a time when all avenues of economic growth areimportant to recovery, regulatory action barring investments deemedtoo risky by bureaucrats does not instill confidence in theAdministration’s commitment to recovery and impinges onimportant growth.

One large expansion of government activity in marketshas been Fannie Mae and Freddie Mac. These

federally supported businesses guarantee access to mortgagemarkets below market rates and taxpayers assume all the risk.A CBO study found Fannie Mae and Freddie Mac’ssubsidization of mortgage interest payments increased thenational debt by $317 billion through March 2011.70 The$317 billion is the difference between the asset values ofacquired mortgages and the costs of mortgage subsidization.During the economic downturn, government-backedsubsidized mortgages increased on the backs of taxpayers asinterest rates rose in the private sector. Over the next 10 years,taxpayer-funding of subprime housing markets is projected toincrease by $41.6 billion.71

Fannie and Freddie own more than 40 percent of all residentialmortgages in the country. Their operations are focused within the“conforming” sector of the mortgage market: mortgages notexceeding $417,700 (in 2009). Both are government-sponsored

enterprises (GSE) with charters from the federal government. Inexchange for following certain regulations and conditions, Fannieand Freddie receive the government’s financial support and aquasi-monopolistic position in the conforming sector of themarket. Because Fannie and Freddie receive such significantgovernment support, market entry is far too costly for possiblecompetitors.72 Using taxpayer subsidized funds against promisingbusinesses enables a Big Business monopoly over theconforming mortgage market.

Competition under equal treatment of the law provides qualityimprovements, sound risk taking, greater customer satisfaction,and higher economic and job growth. Crony capitalism, such asa high degree of cooperation between regulators and BigBusiness, leads to opposite results. Worse, as businesses becomecaptured by political interests, they become symbols ofgovernment performance that politicians try to present as“model” regulatory successes. Rather than umpiring competingfirms, government becomes a player as well.


FANNIE AND FREDDIE

29

Dodd-Frank: Over-the-Counter (OTC) Derivative RegulationsA derivative is a contract between at least two parties where thevalue of the derivative’s underlying assets (stocks, bonds,commodities, etc.) determines its price. OTC derivative swapsoccur among derivative dealers outside of a centralized exchange.OTC derivatives usually emerge from small businesses which do notmeet exchange listing requirements. One of the proposed rulesunder Section VII of Dodd-Frank is to subject OTC derivativetraders to capital and margin requirements.

These requirements would mandate minimum levels of financialbacking to derivative trading. Dodd-Frank reduces markettransactions and increases interest rates through capitalrequirements. Decreased derivative supply and increased interestrates act as a brake on trading and slow economic growth.

In exploring the possible costs of capital requirements, KeybridgeResearch polling found that 61 percent of firms report thatproposed regulations would have a moderate to significant impacton the level of working capital required to operate their businesses.83

A regulatory decrease in working capital would lower financialliquidity for certain firms and cause a decrease in investment andjob creation. Keystone estimated that a three percent backing rulefor S&P 500 firms would require $12.7 billion in aggregatecollateral and eliminate 100,000 to 130,000 jobs.84 Regulation ofOTC derivatives will decrease financial liquidity and decrease fundsavailable for investment. The regulation, when published, shouldshow a clear impact of how consumers are bettered by a rule thatrestricts funds to businesses. However, it is unlikely that theforthcoming rule will examine the lost economic productivity of theregulation.

Dodd-Frank: Consumer Financial Protection Bureau (CFPB)Dodd-Frank established the CFPB for regulators to intervene infinancial market practices. As an independent agency, CFPBalready has 62 regulations on the docket that will not receivebinding review by intergovernmental agencies.85 The CFPB willregulate and punish unfair lending practices, “abusive” loans andloan terms. The differences in these practices have yet to be definedby the agency. The CFPB claims to protect consumer interests, butin practice will harm consumers by limiting credit and inhibitingjob growth in small businesses. Continued uncertainty about theimpact and form of the CFPB regulations hinders economicrecovery.

David Evan, Chairman of Global Economics Group, testifiedbefore Congress that the CFPB could drive up the price of credit anddepress job growth particularly among new small businesses. In fact,Evans reported that the CFPB has a “genetic makeup that may makeit inherently hostile to companies that want to lend money and toconsumers that want to borrow money.”86

Todd Zywicki, Professor at George Mason University FoundationSchool of Law, claims that without a monitor for the CFPB, theorganization will ironically “produce higher levels of fraud and abuse ofAmerican consumers.”87 Aside, from Zywicki’s first recommendationthat the CFPB be liquidated, he suggests that the agency be subjectto oversight and transparency like other bureaucratic agencies inrelation to OIRA. Never before has one independent agency existedas a subdivision of another independent agency (the Treasury).

As the CFPB creates new regulations it is essential that a thoroughcost-benefit analysis be conducted of the proposed rules, particularlyas certain rules hinder marketplace competition. At all times, asystemic problem should be identified that the proposed rule attemptsto avert. Anecdotal justifications for government intervention shouldnot take the place of a comprehensive, well-defined study.

Concluding Remarks on Dodd-FrankThe question remains whether the net benefits of regulatory actioncontained in Dodd-Frank outweigh the net benefits of allowing firms toassume risks of their investments. Whether regulatory regimes are or arenot in place, sound financial behavior must be premised on theexpectation that firms are responsible for the risks that they assume.According to North Carolina Professor Lissa Broome, “Financialinstitutions that do not bear the full costs of their risky activities have noincentive to reduce or alleviate that risk.”88 Otherwise, $50 billion assetholders with “too big to fail” backing receive a competitive advantageover smaller growing businesses. Secretary Geithner’s comments shouldnot 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. Thesecosts still underestimate the economic cost of Dodd-Frank. Theincreased costs of doing business due only to the Durbin Amendmentand restricting OTC derivatives is approximately $48.7 billion inforegone economic growth. Although these costs do not counttoward the cost of government dimension of compliance costs, theyare significant economic burdens borne by citizens experiencingdecreased banking benefits and job availability.


CASE STUDY: ENVIRONMENTAL PROTECTION AGENCY (EPA)

Bureaucracies and government interventionists call for regulation ofair and environment quality as a way of addressing a “race to thebottom” phenomenon where polluters take advantage of societythrough uncontrolled emissions. These parties have long seen theEPA as a necessary source for solving market failure. However, fromthe 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 historicaltrends in the US prior to the 1970 formation of the EPA. Hisempirical data showed a decrease in smoke, total suspendedparticulates (TSP), sulfur dioxide (SO2) air quality, and stationarysource carbon monoxide (CO) emissions prior to the EPA. “It is nota race to the bottom of environmental quality but to the top of thequality of life.”89

In the early stages of economic and technological development, USsociety placed a greater emphasis on improving quality of lifethrough affluence and reduction of diseases such as malnutritionand parasitic diseases; tolerating some environmental degradation.As wealth grew, society placed greater emphasis on environmentalneeds because air quality became a relatively more importantdeterminant for the quality of life.90 Substantial improvementsoccurred 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 airpollutants. However, that is not a sufficient measure of a successfulagency. Golansky wrote that in the absence of federal controls “oneshould expect that there would have been continued improvementsin air quality even in the absence of nationalization.”91 Thefundamental difference between the EPA’s emission regulations andthe decrease in emissions that would have occurred without acommand-and-control system is that only the latter provides acomprehensive account for improving the quality of life.

Human needs and quality of life vary depending upon many variablesthat can change due to outbreaks, shortages, or new technology. Legalrigidity prohibiting society’s valuation of pollutants will necessarilycause the cost of government to rise for Americans. The next twosections highlight two imminent ways in which the EPA continues tocause the quality of life to decrease.

EPA: The Clean Air Transport Rule (CATR) and Utility MaximumAvailable Control Technology (MACT) Energy RegulationsIn 2008, then-Senator Obama claimed as President he would endeavorto make energy prices rise: “Under my plan of a cap and trade systemelectricity rates would necessarily skyrocket. Businesses would have toretrofit their operations. That will cost money. They will pass that costonto consumers.”92 After Obama’s cap-and-tax bill was rejected byRepublicans and Blue Dog Democrats concerned about the economy,

U.S. Electricity Generation by Source 93

20% Nuclear

1% Hydoelectric

24% Natural Gas

44% Coal

5% Other

6%Petroleum

Source: U.S. Energy Information Administration, “Net Generation by Energy Source: Total (All Sectors)”

31

Obama enlisted the EPA to reduce emissions despite the financial cost.Two recent regulations by the Obama Administration, the Clean AirTransport (CATR) Rule and Utility Maximum Available ControlTechnology (MACT) Rule, are estimated to cost Americans $184billion in regulatory compliance costs.94 These two regulations impactcoal and natural gas prices—nearly 70 percent of total US electricityproduction.95 The $184 billion cost does not account for how decreasedcompetitiveness may affect future growth, such as exports to foreignmarkets. ICF International (ICFI) estimated coal exports would doubleby 2018 unless constrained by limited export capacity.96

In the first year of the regulation, overnight capital costs to theindustry would total $72 billion.97 These costs will provide a shockto electricity prices in the United States. Conveniently for Obama’sre-election, electricity prices will not increase dramatically until2015. If the $72 billion in new energy costs fell in 2011, theCOGD would increase by another two days. These EPA rules willbe among the most expensive ever imposed on the coal industry.98

Unable to get Congress to tax businesses during a recession, theObama Administration has turned to regulatory agencies to pushhis environmental agenda.

12-Aug

14-Aug

COGD 2011 with Electricity Regulations

COGD 2020 with Ozone Regulations

11-Aug

29-Aug


According to National Economic Research Associates, Inc., the twoEPA rules would increase electricity costs by 11.5 percent and create anet loss in US jobs of about 1.44 million between 2013 and 2020—losing roughly 4 jobs for every one “clean-energy” job created.99 Theidea that raising costs on an industry spurs net job growth “is not asubject that leading economists have usually taken seriously enough tocriticize in professional journals.”100

The higher costs of coal are estimated to drive up the demand fornatural gas as an energy substitute thereby increasing natural gas pricesby 17 percent. Increased costs do not appear only in home utility bills,but also appear in higher costs of powering warehouses and stores.These costs are passed along to customers in the form of higher prices.US consumers will not bear the costs evenly. Certain regions dependentupon natural gas or coal, such as the Appalachians and parts of theMidwest, are strongly penalized by price fluctuations while other areasexperience minor increases in energy costs, such as California.

The increased electricity costs come from businesses retrofitting theirequipment or from electricity supply decreases as plants close. Forexample, industry leader American Electric Power has announced theywill shut down 5 power plants because of these two EPA rules.101 ICFIestimates that 50 energy plants will close in the next ten years.102

EPA: National Ambient Air Quality Standards (NAAQS)The Clean Air Act, last amended in 1990, requires the EPA to setstandards for pollutants deemed harmful to public health and theenvironment. Primary standards for the NAAQS are set for“sensitive populations” with low immune systems, and thensecondary standards are set for the general population, theenvironment, and buildings. Every five years, the EPA increases thestandards for the NAAQS.

The main problem with NAAQS is that the EPA only uses the criterionof establishing a standard for protecting public health that allows “an adequate margin of safety.”103 The EPA only examines one aspect ofhuman welfare without making regulatory decisions based on possibly significant and far more damaging unintended non-healthimpacts to quality of life. EPA rulemaking can focus on environmentaland health effects, but must be reformed to require incorporation ofcost-benefit analysis.

One of the NAAQS is for SO2 emissions. Prior rules set standardsfor average SO2 concentration levels over a 24-hour period. TheObama EPA’s new rule determined that industrial businesses had tocomply with concentration levels over 1-hour periods. The rule isproblematic for plants because a small error could lead to an

In 2010, the EPA issued a proposed rule to classify coal combustion residuals (CCR) as “hazardous waste.”Currently, over 40 percent of CCR are beneficially reused as building material.107 Even if special exemptions were

made for beneficial CCR, the stigmatization of CCR’s “hazardous waste” level would undermine its usefulness inconstruction; another example of the uncertainty costs produced by aggressive regulatory regimes. While the EPAconducted a cost-benefit analysis for the proposed rule focused on compliance costs, it fails to encapsulate how thecosts of construction would rise as contractors would likely decline to build with materials labeled as hazardous waste.A study by the Electric Power Research Institute found that the compliance costs of a “hazardous waste” classificationranged between $55 and $77 billion over the next twenty years.108 In addition to compliance costs, regulationsconsistently do not account for the behavioral response to laws and cost increases.

COAL ASH REGULATION

33

irreconcilable violation that could have been easily adjusted over a24-hour average. The new rule will require newer technology thatraises the costs of production. Additionally, the new rule utilizescomputer models, rather than air quality monitors at the plant, todetermine if a 1-hour violation occurred. In addition to beinglegally questionable, the computer model requirement takesmonitoring controls away from the businesses that might use avariety of methods to control emissions that a computer model maynot be designed to account for. SO2 regulatory rules areimplemented beginning in 2014.

The Obama EPA tightened NAAQS for nitrogen oxides (NOx) and“particulate matter with a diameter of 2.5 microns or less” (PM2.5NAAQS). Coal-fired plants are required by 2016 to acquireselective catalytic reduction (SCR) units to prevent the formation ofozone when NOx and hydrocarbons are combined. As energyplants install more SCR units, they will also have to comply withPM2.5 NAAQS for SCR units. In a report on ozone reduction, theManufacturers Alliance found that the EPA’s proposed allowableozone emission standard of 60 parts per billion (ppb) would cost$1.01 trillion in 2020 and in subsequent years through 2030.104

These attainment costs are particularly high because the marginalcost of ozone reduction rises quickly as more expensive technologiesare required to meet more stringent standards. Using CBO federal

spending baseline estimates for the next ten years, the Obama ozoneregulations will increase the cost of government by 18 days.

If growth is premised upon historical averages rather than CBOestimates, the ozone regulation will increase the cost of governmentby 21 days in 2020. The Manufacturers Alliance report estimatesjob losses of 7.28 million in 2020.105

In a 2008 study on NAAQS, Patrick McLaughlin from theMercatus Center found a clear upward trend in the cost perstatistical life saved as a result of additional environmentalregulations. As certain low-hanging regulatory fruit was taken in the1980s at a “low cost” of $6.1 million per life saved, some regulationsbecame even less effective until the cost per life saved was in thebillions. McLaughlin concluded: “If the EPA Administratorcontinues to be unable to consider costs in setting NAAQS, thensociety will eventually be made worse off, if that has not occurredalready.”106

Regulatory impact analysis for some of the NAAQS have not beenconducted yet. If the costs of these regulations on the coal industryresemble those of CATR/MACT energy regulations and ozone ppbstandards, electricity costs will see further increases as a result ofObama’s EPA.

States across the country have gradually begun to force new taxliability onto out-of-state, non-residents as a means of collecting moretax revenue and growing the size of government. “Nexus” refers tolaw that defines a threshold of activity in order for a state to claimthat a business or individual is responsible for the collection orpayment of taxes. Historically, nexus was established by a physicalpresence, whereby only individuals or businesses with a directfootprint in a state (e.g., property or employment) would be forcedto comply with tax law. However, states have slowly begun todissolve the “physical” nexus standard in lieu of a nebulous“economic” nexus, codified in varied forms around the country thatexports the tax burden to non-residents.

The gradual shift to economic nexus is an attempt by states to raisetax revenue beyond what their own economies and taxpayers cansustain. Economic nexus poses a direct threat to the principles ofdemocracy and republican governance by the people, shifting the costof government to non-residents. It also violates the “benefitsprinciple” by pushing the tax burden onto those that receive no directbenefit from the state.

Below is an overview of ways in which states have recently sought todissolve the physical nexus standard, and federal bills that wouldstrengthen and weaken it.

Interstate Sales Tax Collection: The Internet NexusThe rise of Internet sales originating from out-of-state online retailershas prompted state lawmakers to target the physical nexus standardfor sales tax collection. In Quill v. North Dakota, the U.S. SupremeCourt ruled states could not force an out-of-state retailer without aphysical presence to collect tax, or it would be a violation of theCommerce Clause.

States have sought to push the boundaries of the Quill decision byattempting to turn retailers’ economic activity into a physicalpresence. The most prominent strategy to undo physical presence hasbeen the “Affiliate Nexus Tax,” which establishes nexus if an out-of-state online retailer advertisers with in-state web advertisers. Thelegislation has prompted retailers to sever contracts with advertisers toavoid the likely unconstitutional law, causing many advertisers to goout-of-business across the country. Another strategy that was recentlyfound to be a violation of the Commerce Clause and First Amendmentwould have required out-of-state retailers to report detailed customerinformation to the Department of Taxation. This would allow the stateto pursue residents for “use tax” collection, which requires residentswith a physical nexus to pay taxes on goods they buy elsewhere, butuse in a state. In California, lawmakers recently passed legislationthat allows the Board of Equalization to establish vague rulesregarding when a company has a “substantial nexus.”


CASE STUDY: INTERSTATE TAXATION

35

On the federal level, Congress has authority over interstate tax lawunder the Commerce Clause and is considering legislation known asthe “Main Street Fairness Act” that would authorize states to enterinto a compact to force residents and businesses in those states tocollect and remit taxes across their borders, raising state taxes by anestimated $23 billion. This legislation would largely dissolve thephysical nexus standard, permitting states for the first time to forceout-of-state, non-residents to collect taxes on Internet, catalogue, andother sales.

Interstate Income Tax Collection: BATSAIn addition to eroding the physical nexus for sales tax collection, stateshave also taken steps to force out-of-state businesses to pay incometax. Roughly half of the states have weakened the physical presencerequirement, thereby greatly enlarging any one state’s ability to claimtax revenue from a business based out-of-state.109

The federal Business Activity Tax Simplification Act (BATSA)rectifies these interstate taxation problems by defining physicalpresence as a necessary condition for income tax obligation andexpanding the prohibition of interstate taxation to intangibleproperty and services. The measure is currently under considerationin the US Congress, which has authority under the CommerceClause of the US Constitution to protect against economicallydestructive interstate tax laws.

BATSA universalizes nexus law by establishing one definition for the50 states whereby a business must have a physical presence to betaxed. Under BATSA, businesses would have clarity and uniformityin the law, and be confident that doing minor business across statelines would not trigger compliance with an importing state’s tax laws.Businesses are hesitant to invest when they are uncertain about beingpursued for tax revenue or slapped with lawsuits over back taxes whenoffering services across a state border.

Additionally, the measure will help to protect the Internet economythat is largely borderless. As “cloud computing” and Internet softwaresales become more commonplace, the cost of compliance withcomplex interstate tax laws will increase within the technologyindustry. Economic nexus poses a particularly costly threat to ITfirms, which offer remote services to customers across many differentstates. These technological innovations offer significantimprovements for businesses, but poor tax policy severely jeopardizesthose gains.

BATSA and physical nexus are models of taxation that reflect goodgovernance and the so-called benefits principle, where citizens of astate pay taxes proportional to the benefits provided by the state. It ispatently unfair for a business in Virginia to pay for governmentservices in the state of Rhode Island.

In 2010, the Post Office employed 673,800 workers at an averagewage of $52,230 per worker, not including pensions or non-monetary benefits. The US Postal Service spends $35.2 billion everyyear on wages alone.110 In FY2010 the Post Office overspent its $67.1billion budget by $8.5 billion, despite cutting over 100,000 jobs.111

Much of the Post Office’s budgeting problems emerge from generousbenefits packages higher than other federal workers. In 2010, theDepartment of Labor found that the actuarial liability of Post Officeworkers’ pensions composed 37.8 percent—$10.6 billion—of totalfederal worker liabilities.112

Using the March 2011 American Enterprise Institute (AEI) study onoverpaid federal workers to calculate the market level compensationfor Post Office workers, this study estimates that taxpayers pay a$19.87 billion premium to federal workers each year. The AEI studyfound that federal workers, excluding postal workers, werecompensated $77 billion above equivalent private sector levels.113

Postal workers receive higher benefits than many federal workers, butthey are paid less than the average federal worker. This report errs onthe conservative side of calculating the overpayment of Post Officeworkers by weighting average wage difference while maintaining AEImeasures of job protection or non-salary benefits.3

CASE STUDY: POST OFFICE REFORM

3Dividing the average postal worker wage by the average GS-11 pay step provides a ratio where Post Office workers are compensated 10 percent less on average than other federal workers. Our assumptions:• There is an even distribution of premium benefits among federal employees.• As a percentage of income, the job security and non-wage benefits of Post-Office workers are similar to the average federal worker. This may significantly underestimate the special retirement compensationoptions that Post Office workers receive

36

In June 2011, Congressman Darrell Issa, Chairman of the HouseCommittee on Oversight and Government Reform, introduced the“Postal Reform Act” to stop these excessive losses. His legislationproposes to 1) Eliminate benefit discrepancies between what postalworkers receive and what other federal workers receive, 2) Pay postalworkers their private sector equivalent wage without the federalpremium, and 3) Change service and contracting policies. Theseservice policies include moving a 5-day delivery of mail and $2 billionof savings in office and facility closings. Once fully implemented, theAct would save the US Postal Service $6 billion per year.114

The Post Office receives unique financial and legal benefits that posesignificant barriers to entry for potential competitors. The PostalReform Act represents an important step forward to reducingprotection against mail competition. However, many cumbersomeregulatory burdens remain that discourage innovation in mail

delivery services while requiring taxpayers to bail out the 219-year-oldmail delivery incumbent. Special government benefits for the PostOffice include exemption from the corporate income tax, exemptionfrom antitrust laws, and unique customer access privileges throughthe right to place collection boxes on public streets. These special legalbenefits stifle competition among businesses that would be promotelower costs and better quality services.

Market level compensation of Post Office workers is estimated todecrease the Cost of Government by $19.87 billion, or half of a dayannually. Privatization of the Post Office would free taxpayers from$67.1 billion of expenses that businesses would compete to reducethrough cost-control incentives and/or quality improvements.Allowing businesses to deliver the mail competitively would reducethe cost of government by nearly 2 days and improve the quality ofmail delivery.


8/9/2011

8/10/2011

8/11/2011

8/12/2011

8/13/2011

COGD 2011 with Post Office Privatization

37

Various pieces of legislation have been proposed since 2005 thatwould introduce a “return free” tax filing scheme for federal returns.Proponents claim benefits of saving people’s time and resources on taxfiling. However, switching away from a “voluntary tax compliance”system could be dangerous on several levels.

First, there is a change in who has the burden of proof fordetermining tax liability. Currently, if the IRS believes the taxpayermisfiled taxes, the burden of proof is on the agency to show the error.However, in countries like France and Sweden that use a “return free”system, it is the taxpayer’s responsibility to prove the governmentincorrectly filed. The taxpayer must go through a politicized processto not defend, but prosecute for a true tax liability. Unless thedifference in taxes is substantial enough to compensate theprosecuting taxpayer for his time and resource expenses, he would berational to allow tax injustices to continue. A “return free” systemsanctions government theft of private taxpayer dollars.

Second, a conflict of interest emerges for the IRS. The IRS has aninterest in maximizing the legal amount of taxes owed while taxpayerswant to minimize the burden owed. Within the U.S.’s current systemof voluntary compliance, there is a healthy friction where citizens arethe defendants of their earnings unless proven to be guilty ofunderpaying taxes.115 Under a “return free” system, the IRS is placedin the position of maximizing tax returns without taxpayer assent.

In 2005, eleven Senators signed letters opposing the use of a “ReturnFree” tax filing system.116 In 2011, Senators Dan Coats (R-Ind.)and Ron Wyden (D-Ore.) proposed S. 727, the “Bipartisan Tax

Fairness and Simplification Act.”117 While the Act does promotetransparency by giving taxpayers an annual record of what portion oftheir taxes went toward major categories of government spending, theAct should be reformed to eliminate the “Easyfile” (a “return free”)system that would insulate the IRS from claims of tax injustice.

“Return free” systems have also been tried on the state level. In 2005,a pilot program was run by California to test the public’s desire for astate-run filing system. Of the 50,000 filled-out tax reforms sent bythe state, 39,000 recipients threw those returns in the trash and filedindividually.118 This suggests distrust of government filing largelyoutweighs whatever barriers proponents of “return free” filingimagine exist for taxpayers.

During the 2010 session, Virginia Governor Bob McDonnell steppedaway from the state government’s involvement in tax preparation bysigning House Bill 1349 which removed the state from the businessof filing taxes. The states’ experience should inform the federal effortto distill taxpayers’ power over their own tax obligations; Americansdesire and deserve an impartial observer to measure tax liabilities.

Federal or state tax filing operations increase the cost of governmentbecause of new spending on administrative and accounting resourcesneeded to support a “return free” system. More significantly, any newrevenues raised by government management of tax filing would likelybe used to increase spending—history shows increasing availability offunds is matched by increased government spending. Allowinggovernment to file taxes for taxpayers is an underhanded attempt toincrease revenues and, correspondingly, outlays.

CASE STUDY: FEDERAL TAKEOVER OF TAX PREPARATION

38

In April, Budget Chairman Paul Ryan (R-Wis.) proposed over $5.8trillion in cuts relative to the CBO baseline in the House 2012Budget, labeled the “Path to Prosperity.” These cuts promised a realchange from the present direction of federal spending. The baseline,not to even speak of the $400 billion increase in the FY2012 ObamaBudget, reduced federal spending Cost of Government Days by only1.1 percent by 2021. These numbers do not highlight the continuedbaseline deficit spending that places federal debt as a percentage ofGDP at 101 by 2021—adding $6.25 trillion to the debt. The Path toProsperity would reduce federal spending Cost of Government Daysby 17.5 percent at the end of the decade—a decrease of 18 Cost ofGovernment Days—returning COGD to July.

This report presents a modified version of the Path to Prosperity thatincorporates regulatory changes. The baseline is increased by theintroduction of Dodd-Frank, CATR/MACT, and ozone regulations.Conversely, the “Toward a Lower Cost of Government Day” planenacts the Ryan spending cuts, while incorporating other marketreforms such as paying government employees at market equivalentlevels, cutting forecasted Fannie Mae and Freddie Mac taxpayersubsidization, and enacting Post Office reform.

The costs of government highlighted do not cover the value ofeconomic transactions foregone through the deadweight effects ofgovernment policies. These transactions are the family car notpurchased, the wheat not grown, the technology not invented, andthe innumerable ways in which government prevents economicgrowth. Neither do the costs presented in this report capture the losteconomic growth due to business uncertainty generated by threats ofincreased taxes or a list of 500 undefined financial regulations.

The Phoenix Center found that decreasing the power of regulators byshrinking their budgets by 5 percent would increase GDP by $376billion and increase employment by 6.2 million over five years. With15 out of 18 bureaucracies increasing employment in 2011 andregulator budgets increasing by $2.95 billion, it’s time to cut the causeof discouraging economic growth.

Of late, the problem has grown to be more complicated thaneconomic growth foregone. High doses of government interventionwithin the auto industry and financial sector subsidize risk-taking andencourage resource mismanagement. Friends of government prosperwhile competitors must compete against the resources of the state—all


CONCLUDING REMARKS: THE PATH TOWARDS AN EARLIER COST OF GOVERNMENT DAY

Forecasted COGD 2012 - 2021

Baseline with New Regulations

Toward a Lower Cost of Government Day

39

within the climate of uncertainty created by a prohibitive taxregimes and consequentially hesitant marketplace. In the PatientProtection and Affordable Care Act, $480 billion of new taxes wereimposed on businesses, workers, savings, and innovation.

For federal legislators looking to cut spending now, two proposalsshould be adopted immediately. First, remaining TARP/ARRA fundsshould be repealed immediately. The bailout is over and government“stimulus” spending has done little to spur economic recovery.Second, enact reforms to compensate federal workers at market sectorequivalent wages. If enacted at the beginning of 2011, these simplereforms would have cut spending by $338.87 billion and decreasedthe cost of government by nine days in only one year.

State legislators face issues of their own. They must continue to stepforward with other states in reforms that promote transparency ofgovernment spending so that citizens know where their tax dollars arespent. According to economists Russell Sobel and George Crowley,states will be facing intense political pressure in the aftermath of“stimulus” funds to increase revenues by $80 billion. Illinois took thispath in their FY2012 by raising taxes.

Cutting spending means fewer services by the public sector, whichallows businesses to compete in these fields. Mortgage businessescan enter the legally prohibitive sector of the conforming mortgagemarket controlled by Fannie Mae and Freddie Mac. Mail deliveryservices can compete with USPS if allowed to compete on an evenground of similar corporate taxes and antitrust laws.

Regulatory and budget spending binges are around the corner withthe advent of “The Patient Protection and Affordable Care Act” in2014 and energy regulations that will increase average electricitycosts on Americans by at least 12 percent. The path to an earlierCost of Government Day requires lasting spending reductions.These reductions must go hand-in-hand with repealing regulatorypolicies and laws that discourage innovation and competition.Whether the government’s hand is in cars or energy production,American economic recovery yearns for independent marketswhere competition provides better, more affordable goods and services.

Immediate COGD 2011 Alternatives


ENDNOTES

1 “Paul Ryan v. the President,” Wall Street Journal, March 4, 2010, http://online.wsj.com/article/SB10001424052748704548604575097602436388116.html

2 Martin Feldstein, “The Economy is Worse than You Think,” Wall Street Journal, June 8, 2011,http://online.wsj.com/article/SB10001424052702303657404576363984173620692.html?mod=WSJ_hp_mostpop_read

3 Congressional Budget Office, “The Budget and Economic Outlook: Fiscals Years 2011 to 2021,” January 2011, pp. 12, box 1-2,http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf

4 Veronique de Rugy, “The Impact of Spending Cuts on the Economy,” National Review, February 25, 2011, http://www.nationalreview.com/corner/260747/impact-spending-cuts-economy-veronique-de-rugy

5 James Feyrer and Bruce Sacerdote, “Did the Stimulus Stimulate? Real Time Estimates of the Effects of the American Recovery Readjustment and Recovery Act,” NBERWorking Paper 16759, February 2011, http://www.nber.org/papers/w16759

6 2009 and 2010 deficit numbers come from BEA Table 3.2, Federal Government Current Receipts and Expenditures, 2011 deficit number is based upon COGDforecasting

7 Office of Management and Budget, “Summary of Receipts, Outlays, and Surpluses or Deficits (-) as Percentages of GDP: 1930-2016,” 2011,http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist01z2.xls

8 Carmen R. Reinhart and Kenneth S. Rogoff, “Growth in a Time of Debt,” American Economic Review, Vol. 100, No. 2, May 2010, pp. 575,http://www.economics.harvard.edu/files/faculty/51_Growth_in_Time_Debt_aer.pdf

9 Congressional Budget Office, “CBO’s 2011 Long-Term Budget Outlook,” June 2011, table 1-2, pp. 8, http://cbo.gov/ftpdocs/122xx/doc12212/06-21-Long-Term_Budget_Outlook.pdf

METHODOLOGY

The Cost of Government is determined by adding the figures forthe government spending (federal, state and local expenditures) andan estimate of the compliance costs of government regulations(both on the federal and state level).

The total cost of government is then divided by estimated netnational product to determine the percentage of national incomeconsumed by government. This percentage is applied to the 365.25weighted calendar year to determine the date of Cost ofGovernment Day.

All spending figures are based on the calendar years and, amongothers, utilize Congressional Budget Office (CBO) reports, Bureauof Economic Analysis’ National Income Product Account (NIPA)data, and the National Governors Association and the NationalAssociation of State Budget Officers (NASBO).

State tax increases are derived from the NASBO data with threeadjustments.

The calculation of Cost of Government Day for each state is basedon the varying government burdens suffered in each state. Federalspending burdens vary because relatively higher burdens are borneby states with relatively higher incomes. Of course, state and localtax and spending burdens vary by state as well.

A 2010 report for the U.S. Small Business Administration Office ofAdvocacy by Nicole Crain and Mark Crain provided the frameworkfor determining the cost of federal regulations.

Data on federal and state workers was provided by the US Bureauof Labor Statistics and the US Office of Personnel Management.

41

ENDNOTES

10 The Economist, “Economic Focus: Botox and Beancounting,” April 30, 2011, http://www.economist.com/node/18618589

11 Office of Management and Budget, “Summary of Receipts, Outlays, and Surpluses or Deficits (-) as Percentages of GDP: 1930-2016,” 2011, and author’s calculations,http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist01z2.xls

12 Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2011 to 2021,” January 2011, pp. 54, author’s calculations,http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf

13 Bureau of Economic Analysis, Tables 3.1 and 1.7.5

14 “Global Debt Crisis: #50 Illinois,” Forbes.com, January 20, 2010, http://www.forbes.com/lists/2010/44/debt-10_Illinois_090044.html

15 Illinois Policy Institute, “Fiscal Follies: Why Illinois’ Budget is Broken and What to Do About It,” April 21, 2010,http://www.illinoispolicy.org/news/article.asp?ArticleSource=2475

16 California Budget Project, “Governor Signs 2011-2012 Spending Plan,” updated July 1, 2011, pp. 2,http://www.cbp.org/documents/110630_201112_Spending_Plan.pdf

17 Russell S. Sobel and George R. Crowley, “Do Intergovernmental Grants Create Ratchets in State and Local Taxes?” Mercatus Working Paper No. 10-51, August 2010,pp. 25, http://mercatus.org/sites/default/files/publication/Do%20Intergovernmental%20Grants%20Create%20Ratchets.WP_.Corrected.10.4.10_0.pdf

18 The National Governors Association and the National Association of State Budget Officers, “The Fiscal Survey of States,” Fall 2010, pp. 46,http://www.nasbo.org/LinkClick.aspx?fileticket=C6q1M3kxaEY%3D&tabid=65

19 Author considers the tax hike of CA motor fuel taxes under sales taxes as categorized by the NASBO. The “sales” deduction is only $9 million less than the “motor fuels”tax hike.

20 US Office of Personnel Management, “Employment – March 2011,” Fedscope.opm.gov, author’s calculations, http://www.fedscope.opm.gov/cognos/cgi-bin/ppdscgi.exe?DC=Q&E=/FSe%20-%20Status/Employment%20-%20March%202011&LA=en&LO=en-us&BACK=/cognos/cgi-bin/ppdscgi.exe?toc=%2FFSe%20-%20Status&LA=en&LO=en-us


22 US Bureau of Labor Statistics, “Employment, Hours, and Earnings – State and Metro Area” (Current Employment Statistics – CES), state and local government datacollected for 3/1/11 and 3/1/10, author’s calculations, http://www.bls.gov/sae/#data

23 US Bureau of Labor Statistics, “Union Members 2009,” January 22, 2010

24 Ryan Ellis, “How Much Does It Cost to Hire One New Federal Employee? $4.7 Million to $13.9 Million Over a Career,” Americans for Tax Reform, January 27, 2010,http://www.atr.org/userfiles/011509pr-costoffederalbureaucrat.pdf


26 Dennis Cauchon, “Federal Pay Ahead of Private Industry,” USA Today, March 8, 2010, http://www.usatoday.com/news/nation/2010-03-04-federal-pay_N.htm

27 Melissa Famulari, “What’s in a Name? Title Inflation in the Federal Government,” August 2002, pp. 2, http://www.econ.ucsd.edu/~mfamular/FederalPrivatepay.pdf

28 Andrew Biggs and Jason Richwine, “Comparing Federal and Private Sector Compensation,” American Enterprise Institute for Public Policy Research, AEI EconomicPolicy Working Paper 2011-02, March 2011, pp. 35-6, http://www.aei.org/docLib/AEI-Working-Paper-on-Federal-Pay-May-2011.pdf

29 US Bureau of Labor Statistics, “Employer Costs for Employee Compensation – March 2011,” USDL-11-0849, June 8, 2011, pp.1,http://www.bls.gov/news.release/pdf/ecec.pdf

30 Taxpayers’ Federation of Illinois, “Illinois Now a High Tax State,” Tax Facts, Vol. 64(2), March/April 2011, pp. 6,http://www.taxpayfedil.org/secure/reveal/admin/uploads/documents/March%20April%202011%20Tax%20Facts.PDF

31 US Bureau of Labor Statistics, “Employment, Hours, and Earnings – State and Metro Area” (Current Employment Statistics – CES), state and local government datacollected for 3/1/11 and 3/1/10, author’s calculations, http://www.bls.gov/sae/#data

32 Federal Reserve Board, “Flow of Funds Accounts of the United States,” June 2011, Table D.3, pp. 9, http://www.federalreserve.gov/releases/z1/Current/z1.pdf

33 Joshua Rauh, Association Professor of Finance at Kellogg School of Management, “The Fiscal Crisis of State and Local Government Pension Systems,” Presentation at theHarvard Kennedy School of Government, April 13, 2001, pp. 6, http://www.hks.harvard.edu/var/ezp_site/storage/fckeditor/file/pdfs/centers-programs/centers/rappaport/powerpoints/rauh_pensions.pdf

34 Courtney A. Collins and Andrew J. Rettenmaier, “Unfunded Liabilities of State and Local Government Employee Retirement Benefit Plans,” National Center for PolicyAnalysis Policy Report No. 329, July 2010, pp. 2, http://www.ncpa.org/pdfs/st329.pdf

35 ibid, pp. 9

42

36 Nicole V. Crain and W. Mark Crain, “The impact of Regulatory Costs on Small Firms,” Small Business Administration Office of Advocacy, September 2010, pp. 10,http://archive.sba.gov/advo/research/rs371tot.pdf

37 Small Business Administration Office of Advocacy, “Frequently Asked Questions,” http://www.sba.gov/advo/stats/sbfaq.pdf

38 Susan Dudley & Melinda Warren, “Fiscal Stalemate Reflect in Regulators’ Budget: An Analysis of the US Budget for Fiscal Years 2011 and 2012,” 2012 Annual Report,Regulators’ Budget Report 33, May 11, 2011, table 1, pp. 5, http://wc.wustl.edu/files/wc/2012_Regulators_Budget.pdf

39 T. Randolph Bear, George S. Ford, Hyeongwoo Kim, Lawrence J. Spiwak, “Regulatory Expenditures, Economic Growth and jobs: An Empirical Study,” Phoenix CenterPolicy Bulletin No. 28, April 2011, pp. 4-5, http://www.phoenix-center.org/PolicyBulletin/PCPB28Final.pdf

40 Dr. Milton Wolf, “WOLF: Obamacare waiver corruption must stop,” The Washington Times, Mary 20, 2011,http://www.washingtontimes.com/news/2011/may/20/obamacare-waiver-corruption-must-stop/

41 Government Accountability Office, “Private Health Insurance: Waivers of Restrictions on Annual Limits on Health Benefits,” June 14, 2011, pp. 2,http://www.gao.gov/new.items/d11725r.pdf

42 Matthew Boyle, “Nearly 20 percent of new obamacare waivers gourmet restaurants, nightclubs, fancy hotels in Nancy Pelosi’s district,” The Daily Caller, May 17, 2011,http://dailycaller.com/2011/05/17/nearly-20-percent-of-new-obamacare-waivers-are-gourmet-restaurants-nightclubs-fancy-hotels-in-nancy-pelosi%E2%80%99s-district/

43 Congressional Budget Office, “Report on the Trouble Asset Relief Program,” March 2011, pp. 2, table 1, http://www.cbo.gov/ftpdocs/121xx/doc12118/03-29-TARP.pdf

44 Office of the Special Inspector General for the Troubled Asset Relief Program, “Extraordinary Financial Assistance Provided to Citigroup, Inc.,” Summary of the Report:SIGTARP-11-002, January 13, 2011, http://www.sigtarp.gov/reports/audit/2011/Extraordinary%20Financial%20Assistance%20Provided%20to%20Citigroup,%20Inc.pdf

45 Office of the Special Inspector General for the Troubled Asset Relief Program, “Quarterly Report to Congress,” January 26, 2011, pp. 23,http://www.sigtarp.gov/reports/congress/2011/January2011_Quarterly_Report_to_Congress.pdf

46 Al Lewis, “Al Lewis: The Name is Dimon, not Demon,” Fox Business, May 25, 2011, http://www.foxbusiness.com/industries/2011/05/25/al-lewis-dimon-demon/

47 Thomas M. Hoeing, “Too Big to Succeed,” New York Times, December 1, 2010, http://www.nytimes.com/2010/12/02/opinion/02hoenig.html?_r=2&ref=opinion

48 “Obama Stresses Plan’s Job Potential,” Washington Post, January 10, 2009, http://www.washingtonpost.com/wp-dyn/content/article/2009/01/10/AR2009011001999.html (accessed 6/1/11)

49 Christopher J. Goodman and Steven M. Mance, “Employment loss and the 2007-09 recession: an overview,” Monthly Labor Review, April 2011, table 1, pp. 6,http://www.bls.gov/opub/mlr/2011/04/art1full.pdf

50 US Bureau of Labor Statistics, “Employment, Hours, and Earnings from the Current Employment Statistics Survey (National),” Not Seasonally Adjusted, Author’scalculations between December 2007 and June 2009.

51 James Feyrer and Bruce Sacerdote, “Did the Stimulus Stimulate? Real Time Estimates of the Effects of the American Readjustment and Recovery Act,” NBER WorkingPaper 16759, February 2011, http://www.nasbo.org/LinkClick.aspx?fileticket=H6sHQ5MhK5o%3D&tabid=81

52 CATO, “With all due respect Mr. President, that is not true.” 2009, http://www.cato.org/special/stimulus09/alternate_version.html

53 Congressional Budget Office, “The Budget and Economic Outlook: Fiscals Years 2011 to 2021,” January 2011, pp. 13, box 1-2,http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf

54 ibid, pg. 58, table 3-3

55 ibid, pg. 13, box 1-2

56 House Committee on the Budget, Chairman Paul Ryan, “The Path to Prosperity: Restoring America’s Promise,” Fiscal Year 2012 Budget Resolution, pp. 65, table S-4,http://budget.house.gov/UploadedFiles/PathToProsperityFY2012.pdf

57 Shubham Singhal, Jeris Stueland, and Drew Ungerman, “How US health care will affect employee benefits,” McKinsey Quarterly, June 2011, pp. 2,https://www.mckinseyquarterly.com/PDFDownload.aspx?ar=2813

58 Shubham Singhal, Jeris Stueland, and Drew Ungerman, “How US health care will affect employee benefits,” McKinsey Quarterly, June 2011,http://www.mckinseyquarterly.com/Health_Care/Strategy_Analysis/How_US_health_care_reform_will_affect_employee_benefits_2813

59 The Henry J. Kaiser Family Foundation, “Explaining Health Reform: Medicare and the New Independent Payment Advisory Board,” Focus on Health Reform, May2010, pp. 2, http://www.kff.org/healthreform/upload/7961-02.pdf

60 Robert Moffit, Ph.D, “Obamacare and the Independent Payment Advisory Board: Falling Short of Real Medicare Reform,” The Heritage Foundation, Webmemo #3102,January 18, 2011, http://www.heritage.org/research/reports/2011/01/obamacare-and-the-independent-payment-advisory-board-falling-short-of-real-medicare-reform#_ftnref7

61 Letter from Congressional Budget Office Director Douglas Elmendorf to Senator Harry Reid, December 19, 2009, pp. 11,http://www.cbo.gov/ftpdocs/108xx/doc10868/12-19-Reid_Letter_Managers_Correction_Noted.pdf.)

62 Congressional Budget Office, “The Budget and Economic Outlook: Fiscals Years 2011 to 2021,” January 2011, pp. 58, table 3-3,http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf

63 Congressional Budget Office, “An Analysis of the President’s Budgetary Proposal for Fiscal Year 2012,” April 2011, pp. 15, table 1-6, author’s calculations,http://www.cbo.gov/ftpdocs/121xx/doc12130/04-15-AnalysisPresidentsBudget.pdf


43

64 Americans for Tax Reform, “Obamacare and Taxes: The Final Tab,” April 5, 2010, http://s3.amazonaws.com/atrfiles/files/files/040510pr-totalhealthtaxes.pdf

65 Bryan J. Noeth, Research Assistant at the Federal Reserve Bank of St. Louis, “Financial Regulation: A Primer on the Dodd-Frank Act,” Liber8 Economic InformationNewsletter, May 2011, pp. 1, http://liber8.stlouisfed.org/newsletter/2011/201105.pdf

66 U.S. Chamber of Commerce, “Financial Regulations,” http://www.uschamber.com/regulations/finance

67 Eric Schurenberg, Quoting Secretary Geithner, “Financial Reform Reneges on Too Big to Fail,” The Fiscal Times, April 12, 2011,http://www.thefiscaltimes.com/Columns/2011/04/12/Financial-Reform-Reneges-on-Too-Big-to-Fail.aspx

68 Joe Adler, Quoting Bradley Sabel, a partner at Shearmann & Sterling LLP, “Did Dodd-Frank Resolve the ‘Too Big to Fail’ Issue or Give It New Life?” InsuranceNetworking News, December 27, 2010, http://www.insurancenetworking.com/news/insurance_FDIC_Shiela_Bair_Dodd_Frank_regulatory_reform-26760-1.html

69 Shira Ovide, “Tim Geithner: Future Bailouts are Possible,” Wall Street Journal, January 13, 2011, http://blogs.wsj.com/deals/2011/01/13/tim-geithner-future-bailouts-are-possible/

70 Deborah Lucas, Assistant Director for Financial Analysis, “The Budgetary Costs of Fannie Mae and Freddie Mac and Options for the Future Federal Role in theSecondary Mortgage Market,” Testimony before the Committee on the Budget, U.S. House of Representatives, June 2, 2011, pp. 11,http://www.cbo.gov/ftpdocs/122xx/doc12213/06-02-GSEs_Testimony.pdf

71 ibid, pp. 12, table 1

72 David Reiss, “Fannie Mae, Freddie Mac, and the Future of Federal Housing Finance Policy: A Study of Regulatory Privilege,” Policy Analysis No. 674, April 18, 2011,pp. 2, http://www.cato.org/pubs/pas/PA674.pdf

73 Blank Rome Government Relations, “Airing on Grievances: Banking Association Heads Continue to Blast Proposed Rule on Interchange Fees,” March 2, 2011,http://www.financialreformwatch.com/tags/durbin-amendment/

74 John P. Buckley, Jr., President and CEO of Gerber Federal Credit Union, Testimony on Behalf of the National Association of Federal Credit Unions, before the HouseFinancial Services Subcommittee on Financial Institutions and Consumer Credit, on “The Effect of Dodd-Frank on Small Financial Institutions and Small Businesses,”House of Representatives, March 2, 2011, pp. 7, http://financialservices.house.gov/media/pdf/030211nafcu.pdf

75 ibid, pg. 9

76 “Debit Card Interchange Fees and Routing,” Federal Register 75:248 (December 28, 2010), pp. 81737, http://www.gpo.gov/fdsys/pkg/FR-2010-12-28/pdf/2010-32061.pdf

77 Morrison & Foerster, LLP, “RE: Docket No. R-1404; RIN No. 7100 AD63; Debit Card Interchange Fees and Routing,” pp. 2,http://www.federalreserve.gov/SECRS/2011/March/20110331/R-1404/R-1404_022211_67818_571439092114_1.pdf

78 MasterCard Worldwide Law Department, “RE: Docket No. R-1404 and RIN No. 7100 AD63,” pp. 2, http://www.federalreserve.gov/SECRS/2011/March/20110303/R-1404/R-1404_022211_67641_571589563753_1.pdf

79 David S. Evans, Robert E. Litan, and Richard Schmalensee, “Economic Analysis of the Effects of the Federal Reserve Board’s Proposed Debit Card Interchange FeeRegulations on Consumers and Small Businesses,” February 22, 2011, pp. 6, http://ssrn.com/abstract=1769887

80 ibid, pg. 51

81 John Maggs, “Big banks brace for curbs,” Politico, January 12, 2011, http://www.politico.com/news/stories/0111/47447.html

82 Trefis Team, “Citi Shuts Another Prop Group as Banks Prepare for Volcker Rule,” NASDAQ.com, June 7, 2011, http://community.nasdaq.com/News/2011-06/citi-shuts-another-prop-group-as-banks-prepare-for-volcker-rule.aspx?storyid=79456

83 Keybridge Research, “An Analysis of the Coalition for the Derivatives End-Users’ Survey on Over-the-Counter Derivatives,” February 11, 2011, pp. 4,http://www.centerforcapitalmarkets.com/wp-content/uploads/2010/04/Coalition-for-Derivatives-End-Users-OTC-Derivatives-Survey_Final-Version-2-11-11.pdf

84 ibid, pg. 2 and 7

85 Center for Capital Markets Competitiveness, “Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010: Regulatory Authority,”http://www.centerforcapitalmarkets.com/resources/dodd-frank-wall-street-reform-and-consumer-protection-act-of-2010-regulatory-authority/

86 Written Testimony of David S. Evans, Chairman of the Global Economics Group and Lecturer at University of Chicago Law School, Hearing on “Who’s Watching theWatchmen? Oversight of Consumer Financial Protection Bureau,” Before the United States House of Representatives Committee on Oversight and Government Reform,Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs, May 24, 2011, pp. 3-4,http://democrats.oversight.house.gov/images/stories/SUBCOS/524%20tarp%20watchmen%20cfpb/Evans%20Testimony.pdf

87 Todd Zywicki, George Mason University Foundation Professor of Law and Mercatus Center Senior Scholar, “Who’s Watching the Watchman? Oversight of theConsumer Financial Protection Bureau,” Before the United States House of Representatives Committee on Oversight and Government Reform, Subcommittee on TARP,Financial Services, and Bailouts of Public and Private Programs, May 24, 2011, pp. 2, http://mercatus.org/sites/default/files/publication/Zywiki-Testimony-5.24.11.pdf

88 Lissa Lamkin Broome, University of North Carolina Wachovia Professor of Banking Law, “The Dodd-Frank Act: TARP Bailout Backlash and Too Big to Fail,” NorthCarolina Banking Institute, Vol. 15, pp. 80, http://www.law.unc.edu/documents/journals/articles/951.pdf

89 Indur Golansky, “Empirical Evidence Regarding the Role of Federalization in Improving U.S. Air Quality,” The Common Law and the Environment, edited by RogerMeiners and Andrew P. Morriss, Lanham, Md.: Rowman & Littlefield, 2000, pp. 48

90 ibid., pp. 41-2

44

91 ibid., pp. 49

92 Interview with the San Francisco Chronicle, http://www.youtube.com/watch?v=ydqg7ThZB04

93 U.S. Energy Information Administration, “Net Generation by Energy Source: Total (All Sectors),” table 1.1, released March 11, 2011, author’s calculations,http://www.eia.gov/cneaf/electricity/epm/table1_1.html

94 NERA Economic Consulting, “Proposed CATR + MACT,” Prepared for the American Coalition for Clean Coal Electricity, 2011, pp. 4,http://www.americaspower.org/NERA_CATR_MACT_29.pdf

95 Scott H. Segal, Co-head of the federal government relations practice at Bracewell & Giuliani LLP, Summary of the Statement of Scott H. Segal for the American EnergyInitiative: Transparency in Regulatory Analysis, April 7, 2011, http://democrats.energycommerce.house.gov/sites/default/files/image_uploads/Testimony_04.07.11_Segal.pdf

96 ICF International, “ICF Q1 2011 Integrated Energy Outlook,” May 9, 2011, at http://www.icfi.com/news/2011/icf-integrated-energy-outlook-sees-possibility-50-gw-coal-plant-retirements


98 Quoting Steve Miller, President and CEO of the American Coalition for Clean Coal Electricity, “New Analysis Finds EPA’s Power Plant Regulations Would IncreaseElectricity Costs; Lose Jobs,” June 8, 2011, http://www.americaspower.org/news/new-analysis-finds-epas-power-plant-regulations-would-increase-electricity-costs-lose-jobs


100 Prepared Testimony of W. David Montgomery, Ph.D. before the Subcommittee on Energy and Power, Committee on Energy and Commerce, United States House ofRepresentatives, Hearing on EPA’s Greenhouse Gas Regulations and Their Effect on American Jobs, March 1, 2011, pp. 3,http://republicans.energycommerce.house.gov/Media/file/Hearings/Energy/030111/Montgomery.pdf

101 Andrew Restuccia, “Utility giant AEP says it will close five coal plants to comply with EPA regs,” The Hill, June 9, 2011, http://thehill.com/blogs/e2-wire/677-e2-wire/165651-aep-epa-regs-will-cost-billions-and-result-in-five-closed-plants

102 ICF International, “ICF Q1 2011 Integrated Energy Outlook,” May 9, 2011, at http://www.icfi.com/news/2011/icf-integrated-energy-outlook-sees-possibility-50-gw-coal-plant-retirements

103 Clean Air Act, §109(b)(1), pp. 31, http://www.scag.ca.gov/tcwg/pdfs/tcm/Federal-Clean-Air-Act-Section108.pdf

104 Donald A. Norman, “Economic Implications of EPA’s Proposed Ozone Standard,” MAPI Manufacturers Alliance, Economic Report ER-707, September 2010, pp. 7,http://www.mapi.net/Filepost/ER-707.pdf

105 ibid, pp. 6

106 Patrick A. McLaughlin, “Not Considering Costs in Setting NAAQS: A Costly Mistake,” Mercatus Working Paper No. 08-42, November 2008, pp. 12-13,http://mercatus.org/sites/default/files/publication/Not%20Considering%20Costs%20in%20Setting%20NAAQS_%20A%20Costly%20Mistake.pdf

107 Testimony of Lonnie N. Carter, President and Chief Executive Officer of Santee Cooper, Before the Subcommittee on Energy and Water of the House, Energy andCommerce Committee, U.S. House of Representatives, February 9, 2011, pp. 11,http://republicans.energycommerce.house.gov/Media/file/Hearings/Energy/020911_Energy_Tax_Prevention_Act/Carter%20Testimony.pdf

108 Comments to EPA from the Electric Power Research Institute, November 18, 2010, pp. 2, http://goo.gl/j63Yi

109 Prepared Statement of Joseph Henchman, Tax Counsel & Director of State Projects, Tax Foundation, Hearing on the Business Activity Tax Simplification Act of 2011,Before the U.S. House Committee on the Judiciary, Subcommittee on Courts, Commercial, and Administrative Law, April 13, 2011, figure 1, pp. 5,http://judiciary.house.gov/hearings/pdf/Henchman04132011.pdf

110 US Bureau of Labor Statistics, “May 2010 National Industry-Specific Occupational Employment and Wage Estimates – NAICS 491000 – Postal Service,”http://www.bls.gov/oes/current/naics3_491000.htm

111 Associated Press, “Post Office Loses $8.5 Billion Last Year,” Fox News, November 12, 2010, http://www.foxnews.com/politics/2010/11/12/post-office-loses-billion-year/

112 Vincent H. Devito Jr., Vice President, Controller, “Subject: Management Advisory – Workers’ Compensation Liability Estimate,” Report Number FT-MA-11-002,December 23, 2010, pp. 14, http://www.uspsoig.gov/foia_files/FT-MA-11-002.pdf

113 Andrew Biggs and Jason Richwine, “Comparing Federal and Private Sector Compensation,” American Enterprise Institute for Public Policy Research, AEI EconomicPolicy Working Paper 2011-02, March 2011, http://www.aei.org/docLib/AEI-Working-Paper-on-Federal-Pay-May-2011.pdf

114 Office of Congressman Darrell Issa, “Issa Introduces Postal Reform Act,” June 23, 2011,http://issa.house.gov/index.php?option=com_content&view=article&id=838:issa-introduces-postal-reform-act&catid=63:2011-press-releases&Itemid=4

115 Ryan Ellis, “Obama Tax Commission: Baby Step Toward IRS Tax Preparation,” Americans for Tax Reform, September 1, 2010, http://www.atr.org/obama-tax-commission-reportbr-baby-step-a5363

116 Americans for Tax Reform, “Senate Conservatives Speak Out Against Return Free Tax Filing Scheme,” October 25, 2005, http://www.atr.org/senate-conservatives-speak-against-return-free-a2362

117 Ryan Ellis, “ATR Letter to Senator Wyden and Coats on IRS Tax Preparation in S. 727,” Americans for Tax Reform, April 11, 2011, http://www.atr.org/atr-letter-senators-wyden-coats-onbr-a6043

118 William Ahern, “‘ReadyReturn’ a Bad Idea That’s Hard to Kill,” Tax Foundation, October 7, 2009, http://www.taxfoundation.org/blog/show/25287.html


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