Tax reform, government spending and the economy.

Weary taxpayers are looking to President George W. Bush and Congress to reduce the tax burden and set a course toward a balanced budget. The President has already proposed a bold plan to reduce the high tax rates currently weighing down the economy, and an overhaul of the 44,000-page U.S. federal tax code may also be proposed. Lower tax rates will reduce barriers to working, saving, and investing, and therefore promote long-term economic growth.

Taxing Americans less also means that Washington must learn to spend less. Lawmakers courageously restrained spending in the mid-1990s but have since abandoned fiscal responsibility in favor of bloated budgets that assume there is no problem bigger government cannot solve. For example:

Washington will spend $782 billion more from 2000 to 2003 than it did between 1996 and 1999--an increase of $5,000 per household. (See Charts 1 and 2.)

At more than $73,000 per household, 2000-2003 will become the highest-spending four-year period in American history, with the exception of World War II. (See Table 1.)

Contrary to popular opinion, new defense spending comprises just 21 percent of the $782 billion spending increase. Massive spending increases for farm subsidies, education, health research, unemployment benefits, and dozens of small, lower-priority programs are collectively adding more new spending than defense.

For the first time since the earliest days of the Great Society in the 1960s, discretionary spending is growing even faster than entitlement programs.

These record spending increases have taken place even though the government's net interest payments on the national debt in 2000-2003 will cost $247 billion less than they did between 1996 and 1999.

All government spending--even that financed by borrowing--must eventually be paid for with taxes. The real cost of government therefore is how much it spends, not how much it taxes. The lesson is clear: Over the long run, low taxes are possible only with low spending.

Tax reduction is not the only reason to take a fresh look at federal spending. Many government programs harm the economy because they centralize authority with politicians and bureaucrats in Washington at the expense of entrepreneurs and families. Non-deserving interests use government to secure benefits and perks that private individuals and businesses would not otherwise provide them.

Time to Be Bold

Congress's last serious attempt to reduce wasteful spending occurred in 1995 and 1996, when the 104th Congress terminated several programs whose irrelevance was proven by how quickly they were forgotten. But Congress then committed several strategic errors, such as overreaching and shutting down the federal government in 1995. After President Bill Clinton deftly exploited theses mistakes, budget cutters overreacted to Clinton's tactics by completely abandoning the mission of smaller government. Federal spending subsequently skyrocketed as a paralyzed Congress decided that budget confrontations with the Clinton White House could never be won and should be avoided at all costs.

In 2003, reducing wasteful spending is more important than ever. Defense, homeland security, and expensive entitlements are stretching the federal government thin while a high tax burden is weighing down the economy. Yet, although President Clinton is no longer in office and budget-cutting strategies have improved, Congress and (albeit to a lesser extent) President Bush still maintain a reflexive fear of attacking wasteful spending.

It is time to step back and think about the role of government, the obligations of the private sector, and the delineation between federal and state responsibilities. For those interested in lean, effective government with low taxes, here are 10 guidelines to eliminate wasteful spending:

2. Turn local programs back to the states

Only the federal government can handle national defense, international relations, and the administration of federal laws. But why should politicians in Washington decide what roads are built in Appleton, Wisconsin? Or what community development projects are undertaken in St. Louis, Missouri? Or how education dollars are spent in Cheyenne, Wyoming?

The federal government taxes families, subtracts a hefty administrative cost, and then sends the remaining tax revenues back to the state and local governments--with specific rules dictating how they may and may not spend the money. In that sense, the federal government is merely an expensive middleman, contributing little more than meddling mandates that constrain the flexibility that state and local governments need to address their own issues creatively.

No distant bureaucrat in Washington, D.C., can know what policies are best for every state and locality. One-size-fits-all federal mandates rarely succeed as well as flexible programs designed by state and local officials who are closer to the people affected. Moreover, legislators have little incentive to design programs that work beyond their home constituencies.

State and local governments, which often consider federal grants "free money," also lack sufficient incentives to spend this money well because they did not have to extract the taxes themselves (many seem to forget the high federal taxes that local residents paid for this "free money"). Consequently, local officials rarely object to federal grants for unnecessary projects.

Few local governments, for example, would consider taxing their own residents to fund the following pork-barrel projects found in the 2003 federal budget:3

• $82,500 for Hawaiian Monk Seals;
• $489,000 for swine waste management in North Carolina;
• $661,000 for Alaskan Groundfish Surveys;
• $225,000 for hoop barns in Iowa;
• $750,000 for Walla Walla basin habitat; and
• $400,000 to create an urban village at the Asian Pacific Community Center in St. Paul, Minnesota.
• These projects merely build on the $20 billion spent on more than 8,000 similar programs in fiscal year 2002, including:
• $273,000 to help Blue Springs, Missouri, combat teenage "Goth culture";
• $1,500,000 for a statue of the Roman god Vulcan in Birmingham, Alabama;
• $1,000,000 for an "Intelligent Transportation" grant for Moscow, Idaho--population 22,000;
• $50,000 to fund a tattoo removal program in San Luis Obispo County, California;
• $26,000 to study how thoroughly Americans rinse their dishes; and
• $4,572 to Las Vegas Helicopters (LVH), which performs airborne weddings officiated by Elvis Presley impersonators, as part of the post-September 11 package of aid to airlines.

The federal government can promote accountability, flexibility, and local control by eliminating many of the mandates on how state and local governments address their own issues, and by letting them raise their own revenues and create their own programs without meddling from Washington, D.C. Specifically, Congress should:

• Turn back the federal gas tax, as well as all federal highway and mass transit spending, to the states;
• Devolve federal housing programs to state and local governments and cut federal strings on how the programs are operated;
• Transfer economic development programs, such as Community Development Block Grants, Appalachian Regional Commission, Denali Commission, and Tennessee Valley Authority, back to the regions that best know how to address their local economies;
• Send job training programs back to the states;
• Devolve Bureau of Reclamation and Army Corps of Engineers projects to state and regional authorities;
• Allow states flexibility and control over their own education programs;
• Send the Superfund program to the states and allow local flexibility in deciding how to clean contaminated sites;
• Turn back law enforcement grant programs to the states;
• Devolve the Natural Resources Conservation Service to the states;
• Transfer the Institute of Museum Services and Library Sciences to the states;
• Send the Neighborhood Reinvestment Corporation to the cities it affects; and
• Eliminate the practice of earmarking federal funds for local projects.

Over the past two decades, nations across the globe have reaped the benefits of privatization, which empowers the private sector to carry out functions that had been performed by the government. In the 1980s, British Prime Minister Margaret Thatcher saved taxpayers billions of dollars and improved the British economy by privatizing utilities, telecommunications, and airports. More recently, the former Soviet Union and China have seen the promise of privatization. The United States, however, has been uncharacteristically timid in recent years.

There is little economic justification for the government's running businesses that the private sector can run itself. Even when there is a compelling reason for government to regulate or subsidize businesses, it can do so without seizing ownership of them. Government failures are often larger than market failures; and anyone who has dealt with the post office, lived in public housing, or visited the local Department of Motor Vehicles understands how wasteful, inefficient, and unresponsive government can be.

Furthermore, government ownership crowds out private companies and encourages protected entities to take unnecessary risks. After promising profits, government-owned businesses frequently lose billions of dollars--and leave the taxpayers to foot the bill.

Entrenched opposition to privatization, which comes mostly from interest groups representing government monopolies, has been overcome elsewhere by (1) working with government unions and relevant interest groups to design privatization proposals; (2) offering low-cost stock options to current employees; and (3) assuring a transparent, open bidding process.

Candidates for privatization are numerous. Congress should:4

• Sell the remaining Power Marketing Administrations through a stock offering;
• Privatize-commercialize Air Traffic Control operations and fund with user fees;
• Terminate airport grants and privatize airports;
• Shift energy conservation research and development to the private sector;
• Require that the Corporation for Public Broadcasting fully fund itself as all other television networks do;
• Privatize the Saint Lawrence Seaway Development Corporation;
• Allow government agencies to accept bids on government printing jobs instead of having to use the Government Printing Office (GPO);
• Privatize the debt-ridden United States Postal Service through an employee stock option plan;
• Shift the National Agricultural Statistics Service to the private sector;
• Sell Amtrak through a stock offering;
• Privatize Aerospace Technology Research and Development;
• Sell many of the federal government's 1,200 civilian aircraft and 380,000 non-tactical, non-postal vehicles;
• Shift the Energy Information Agency's duties to the private sector; and
• Privatize the Architect of the Capitol.