Friday Post: Simpson-Bowles Report

The Simpson-Bowles report: I don't know what to make of it. Would it be better used for toilet paper or for firewood kindling?

Alan Simpson and Erskine Bowles are co-heads of a bipartisan commission set up by President Barack Obama to find some unpopular ideas to reduce the federal deficit, and the draft report they released is actually intended for debate with the other members of the commission; in other words, the report isn't yet a policy idea. The reason for convening this fiscal commission, if I recall, was so that the commission would develop a plan to deal with an unpopular problem, and so that legislators could then merely "sign on" to the plan, rather than having to "debate the merits" of action or, even worse, be forced to "grow a pair" and make a plan themselves. In order for the Simpson-Bowles plan to have worked, it would have had to make cuts in spending AND raise tax rates in roughly equal proportions in order to be bipartisan. But bipartisan it most certainly is not.

The draft report makes a lot of cuts in spending, and even tinkers with social security. But it fails to make tax increases. In fact, as Paul Krugman points out, the goals of tax reform according to the report are primarily to lower tax rates across the board. Deficit reduction, what I thought was the whole purpose of this commission, is relegated to an afterthought. While it lowers the tax rate for the poor from 10% to 8%, it lowers the tax rate for the rich from 35% to 23%. That's two percent for the poor and 12% for the rich.

The commission, ostensibly all about deficit reduction, also fails to talk seriously about the rise in the cost of health care, which is the reason that Medicare and Medicaid expenditures will rise sharply in the future. Kevin Drum of Mother Jones makes the point that any deficit reducing commission without a proposal to deal with Medicare and Medicaid cannot be taken seriously, becuase it isn't federal employee salaries or admission prices to the National Zoo that's causing our future debt problem.

I would like the full commission to keep one key tax increase in the proposal: the gas tax. It is a tax that is badly in need of not only an increase, but also to be indexed to the actual price of gas so that it can do what it was intended to do: pay for highways without an expenditure from the general treasury. It's an idea whose time, I hope, has finally come, for more than just personal reasons.

The Federal Gas Tax and How It's Ruining My Livelihood

We as a nation received some pretty harsh financial news in a statement from a secretary of Bush's cabinet to the media released over the weekend (when bad economic news is always released) that will drastically affect our already-slumping economy. I'm not talking about the government's takeover of Fannie Mae and Freddie Mac. I speak of course about the highway trust fund. Transportation secretary Mary Peters announced on Friday that the government will run out of money this month to pay for highway projects all around the nation, and states like Oklahoma are scrambling to defer payments for projects already bid, postponing upcoming bids, and basically grinding existing construction to a halt. So a disaster, right?

Well, from my own selfish perspective, absolutely! One of my company's projects was scheduled to bid this month, and now it won't. But the reason for the shortage in federal monies is because revenue from the federal gas tax has decreased, but the need for road projects has not. In other words, people are driving more miles while buying less gas. This is an effect of good fuel efficiency! We've been wanting it for years, and we're finally seeing what the effects are on our economy.

So, should anything be done? Of course! The federal gas tax, unlike a sales tax, stays at a constant rate of 18.4 cents per gallon no matter how much that gallon of fuel costs. When gas was at about $1.30 per gallon, it resulted in a 14% de-facto sales tax. Now that gas costs somewhere around $3.40 per gallon, the de-facto sales tax has decreased to around 5%. Having a gas tax that stays at a constant rate makes sense in a very narrow and theoretical way: the physical damage to highways comes from the number of user-miles driven on them, and not by the price of the gas burned to drive on them. But with improving fuel economy, more user-miles can be driven on highways for the same cost. Plus the cost of materials for construction has risen dramatically, partially because the cost of fuel has gone up so much. It would make much more sense for the road-building business if the revenue from the gas tax could be tied to the cost of the fuel since the cost of new construction of roads is going to rise right along with the cost of fuel anyways. The way things work right now is that the government runs out of money, large numbers of private contractors run out of work, people lose construction jobs, and drivers are stuck in more traffic.

Now, the trouble is getting a politician to agree to an increase in the gas tax. It will never happen. But like so many things, what's best for our economy is also just about the least popular idea ever. As it happens, most economists see the gas tax as way too low and think the gas tax should raise dramatically (at least a dollar per gallon). But politicians want to suspend the gas tax because lowering taxes is always a popular idea. Unfortunately, popular ideas always trump smart ideas.

P.S. Expect to see more earmarks because of this too.