A Primer on the National Debt

Daniel Patrick Moynihan once famously quipped that everyone is entitled to their own opinion, but not their own facts. Moynihan’s head would explode in today’s world of alternate political realities that seek to explain the explosion of the national debt since the early 1980s.

I recently wrote an essay which was published in Texas Monthly [click here to read]which suggested that the recently passed tax bill would likely contribute to an increase to the national debt, which is already on an unsustainable course. There were several hundred on-line comments to the essay. Many of the comments were along the lines of “it is hypocritical for a Democrat to start complaining about the deficit now when Obama increased the debt by more than any other president/doubled the federal debt.”

Well, first, I am not a Democrat. When I ran for mayor in Houston in 2015, I described myself as a Republican-leaning independent. I have consistently voted in the Republican primary for the last 30 years and over 80% of my political contributions have gone to Republicans, a significantly higher percentage than our current Republican President.

Second, this is not the first time I have expressed my concern about the federal debt. While I was writing for the Houston Chronicle, I wrote on the subject many times and on each occasion laid the blame at the door of both parties.  (For example, see CBO Deficit Projections Suggests Two Realities published March 17, 2013.)

Third, just to set the record straight, the national debt rose while Obama was president from $10.6 trillion to $19.9 trillion, a $9.3 trillion or 87% increase. $1.2 trillion of the increase came in the budget that he inherited from the previous administration. It was certainly the largest single increase in the federal debt during any administration, but in inflation-adjusted dollars, it was about the same as during the Bush 43 administration and on a percentage basis Obama comes in a distance third behind Reagan and Bush 43.

If we are going to actually do something about the unsustainable trajectory of our country’s finances, we have to drop the mindless repetition of partisan talking points and take a hard, cold, dispassionate look at the facts about how we got here.

There are several ways to look at the national debt. What you hear most frequently is the total debt in current dollars, but not counting the unfunded liability for future Social Security and Medicare payments. Whether those unfunded liabilities should be included in a calculation of the total debit is a subject for another day. For now, we’ll stick with the Treasury’s numbers on the total “official debt”.

So, let’s start with the actual numbers. The chart is pretty scary.

That is a 77-fold increase since 1950. Particularly alarming is how much steeper the line has become over time.

Many economists argue that the absolute debt is not as important as its percentage of GDP, reasoning that GDP is the best indication of the country’s ability to service the debt (i.e. make payments as they become due). To put debt as a percentage of GDP, we need to go back a little farther to get a better historical perspective.

The big spike to left side of the chart represents the debt the federal government incurred to wage WWII. After gradually reducing the debt as a percentage of GDP post-WWII, the deficit has been growing since the early 1980s, taking particularly large jumps during the Reagan administration, the second term of Bush 43 administration and the first term of the Obama administration. I don’t think that it is a coincidence that these were also the time periods in which we had the lowest tax rates.

What is even more alarming is that the nonpartisan Congressional Budget Office projects that deficits will continue to grow significantly. Before taking the new tax bill into account, the CBO projected that the debt will grow by another $10 trillion over the next decade, with annual deficits exceeding a trillion dollars annually in 2027. Our debt will be about 110% of GDP at that point, a level never reached previously except at the height of WWII. All indications are it will continue to get worse after that.

Most economists are projecting the new tax law will add roughly $1-2 trillion to the CBO’s projection. So, the effect of the new tax law is not the end of the world as Democrats have argued, but it is clearly going in the wrong direction and will likely make a bad situation worse.
No one knows exactly what the effect of this level of debt will be. Is there a point at which the market will decide the federal government is not creditworthy and refuse to purchase it debt, or charge exorbitant rates? Does it mean that economic growth will be hobbled for the indefinite future? One thing we know for sure is that our economy has generally grown slower as the debt has increased.

Coincidence does not necessarily prove causation. But most countries with high debt to GDP ratios also have lower growth rates.  In any case, I think we all can agree that this level of debt is not a good thing.

Who’s to Blame?

Most of the commenters to my Texas Monthly essay were partisans on either side of the aisle blaming the other side for the ballooning debt. So, let’s take a look at the record through that partisan lens.

Frequently people want to attribute the increase in the debt solely to the party in control of the White House. But it is Congress that actually has the power of the purse strings. So, which party has control of Congress should also be a consideration.

Since 1950, the Republicans have controlled the White House for 36 years and Democrats for 31 years. There have been 19 years in which the Democrats controlled the White House and both Houses of Congress, to only 5 for Republicans. For 43 years there has been some combination of divided government. I took the average annaul deficit as a percentage of GDP for a variety of combinations. I shifted the averages back one year since the government’s fiscal year ended either on June 30 or September 30 during this time period and, therefore, the incoming Congress or President inherited its first-year budget from its predecessor. Here are the averages:

While there is some fodder here for each side to make a tortured argument about how their party is most fiscally responsible, the narrowness of the range of outcomes is telling. What the chart really shows is how utterly nonsensical it is to try fashion a partisan explanation for the country’s unsustainable fiscal trajectory.

But we need no contortionistic partisan theory about the cause. The deficits have been gradually getting worse since the early 1980s as a result of our federal government gradually spending more of our national income and collecting less of it in taxes, with the sole exception of 1998-2001.

This is exactly what Alan Simpson and Erskine Bowles concluded when they chaired the National Commission on Fiscal Responsibility and Reform in 2010. While one may quibble with their specific prescriptions, they nonetheless clearly showed that the deficit can only be addressed through both raising revenues and decreasing spending.  They were especially adamant about addressing the coming explosion in the costs of Social Security, Medicare, Medicaid and interest on the national debt. [Click here to read their report.]

Both parties are dedicated to putting more money into the pockets of the special interests they represent and taking money away from the other party’s supporters. Neither has any interest in addressing the country’s unsustainable financial trajectory, because that would force them to say “No” to the special interests that support them. And that is something neither party has the moral courage to do.

Of course, this is exactly what George Washington predicted in his Farewell Address. “[Political parties] are likely, in the course of time and things, to become potent engines, by which cunning, ambitious, and unprincipled men will be enabled to subvert the power of the people and to usurp for themselves the reins of government, destroying afterwards the very engines which have lifted them to unjust dominion.” How prophetic.

As long as the American people continue to allow these two corrupt political parties to carry on this charade and to pay for their thirst for power with public’s credit card, nothing will change. So, here’s my suggestion. Instead of thinking about how much you hate the opposing political partisans, think about how much you love your children and grandchildren. Because they are the ones that will pay the price for the hyper-partisanship which is responsible for the crushing national debt they will inherit and which is likely to lower their standard of living and make their country less secure.

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Believe the Polling

A new NBC/Wall Street Journal poll shows that Americans favor Democratic control of Congress by a margin of 50%-38%.  Ten other polls conducted in the last ten days have found similar results, with the Democrats’ advantage ranging from 9%-18%.  The last time the Democrats had this kind of lead was in the 2006 and 2008 elections.  The Democrats picked up 52 seats in those two elections.

What should be even more chilling to Republicans, as it relates to their long-term prospects, is that millennials preferred the Democratic Party by a margin of 68%-17%.  I have never seen a 51% margin in a party preference poll in any age bracket before. Millennials are now the largest voting bloc in the country, but, like previous generations, have been slow to start voting.  But that may be changing.  The Alabama Senate election results indicate that some of the Republicans’ positions on issues like gay marriage and climate change are beginning to motivate millennials.

Republicans immediately attempted to discredit the polling, citing the 2016 Presidential election poll.  It has become a common retort to any polling unfavorable to Republicans to claim that polls cannot be trusted because they badly missed the 2016 results.  While there is no question that polling is as much an art as a science, it is foolhardy to completely disregard polls that are based on representative samples (as opposed to self-selected internet polls or “push” polls).

The trick in any poll is to try to match up the results from the interviews to a prediction about who will show up to vote by adjusting the actual results to more closely reflect the anticipated turnout.  Frequently the models used for this adjustment are based on historical turnout.  And that is where most polls got it wrong on the 2016 election.

Over the last 20 years or so, whites without a college education have gradually become increasingly alienated from both political parties and as a result their participation has declined.  However, in Trump they found someone who articulated many of their frustrations.  They were energized and turned out in larger numbers than most pollsters predicted.  This is precisely the type of basic change in voting behavior that is the most problematic for pollsters.

However, not all pollsters got it wrong.  One widely reported outlier was the USC/LA Times poll that consistently showed Trump doing better. For a more detailed described of how their methodology differed, [click here].

So, how far off were the 2016 polls?  Turns out, not that much.  Real Clear Politics is a website that aggregates poll results.  It listed 61 polls in the month before the election that included all four candidates.  Here is how the average of those polls stacked up against the actual results.  [Click here to review a list of the polls.]

So, where the pollsters got it wrong was underestimating Trump’s support.  The magnitude of the miss was relatively small, less than 3% outside the margin of error.  But because the election was so close, this relatively small miss was critical to the outcome.  (Note: It is important to remember that a 40,000 vote swing in Michigan, Wisconsin and Pennsylvania would have changed the outcome of the election.)

The 2016 polling results simply do not support the current narrative among Republicans that polling can be disregarded or that it dramatically understates their support.  When the polling shows a 12% spread (or a 51% spread!), trust me, the Republicans have a problem.  Of course, polling is a snapshot in time and it does not necessarily predict the future.  The attitude of the American people may well change by next November.  But if the election were held today, the Republican Party would be in a world of hurt.

I make this observation with no sense of celebration, but rather with great anxiety.  For as disgusted as I am with the child-molester-tolerant, Russian-infatuated, deficit-addicted party the GOP as turned into, the Democrats, who cannot do basic math, are even worse.  Hopefully we will soon have alternatives to these to out-of-touch, fringe-pandering, corrupt parties.  But I fear that may not be as soon as 2018.

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Second Judge Slaps Down the Montrose Management District

For a second time in just two months, a District Court has slammed the Montrose Management District (“MMD”).  In November, the 333rd District Court issued its final judgement that the MMD had illegally imposed over $6.5 million of assessments against property owners.  It ordered the MMD to stop collecting the illegal assessments, refund the illegal assessments and prohibited the MMD from spending any of the illegal assessments that had not already been spent.

Because of the widespread dissatisfaction with the MMD, property owners collected the signatures of 75% of the property owners subject to the assessment to dissolve the MMD.  Incredibly, under state law a management district can be formed by 25 property owners but 75% of all owners must petition to dissolve it.  But, taking a page from the City of Houston, the MMD board ignored the petitions, making bogus challenges regarding the validity of the signatures.  In response, the property owners filed a second suit, this time seeking to force the dissolution of the MMD.

The second suit was filed in the 269th District Court, which last week entered a strongly worded temporary restraining order. [Click here to read TRO.]  The Court found that the property owners are likely to prevail in the action to dissolve the MMD and that the agenda for a meeting to be held on December 11 indicated that the board of the MMD intended to violate the orders of the 333rd District Court by continuing to spend and collect illegal assessments.  It is a startling finding.  But the agenda that was posted for the December 11 meeting seemed oblivious to orders issued in the first suit and gave every indication the MMD intended to continue to operate as normal.  [Click here to read the agenda.]

After the Court issued the TRO, the meeting was cancelled and the agenda has since been removed from the MMD’s website.  A few days later the board chair announced his resignation.   Personally, I cannot imagine why anyone would continue serving on that board.  All of the board members were sued individually, and the Court found in its TRO that they have likely committed ultra vires acts.  That could potentially subject them to personal liability.

I think 2018 is going to be the year of the TIRZs and management districts and not in a good way.  Increasingly, the shadowy dealings of these governmental entities are coming to light.  We are discovering that the salaries and fees being paid to managers are staggering.  Also evidence is emerging of self-dealing and conflicts of interest.  In the past, serving on the boards of these entities has been mostly honorific.  But based on the information coming out, a lot of these board members may soon be wishing they had declined the “honor.”

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Suburbs Sales Tax Collections Outpace City of Houston

For the last several years, I have been occasionally comparing the growth in the City of Houston’s sales taxes to some of its suburban neighbors.  Recently I compiled the sales tax records for seven Houston suburbs (Katy, Woodlands, Baytown, Pasadena, League City, Pearland and Sugar Land) for the last decade.  For most of the last decade the sales tax growth of a sample of suburban cities has significantly outpaced the City of Houston’s growth.

The difference between the suburbs and Houston has varied over time.  The advantage for the suburbs was widening going into the financial crisis.  However, for reasons not clear to me, the City’s sales tax receipts weathered the financial crisis better than the suburbs.  However, coming out of the crisis, the advantage for the suburbs was rapidly widening again, until this year.

It may be that the narrowing of the advantage for the suburbs may come from the special events that Houston hosted this year (Super Bowl, Final Four, World Series) and flood-repair-related purchases.  The City probably enjoyed something on the order of a $10 million windfall in 2017 sales tax collections from those extraordinary events.   But even backing those out, the difference between the City and its suburbs still narrowed significantly this year.

The growth rates for both have been decelerating since 2014, probably reflecting the slowdown in the energy industry.

 

It is dangerous to draw too many conclusions from this data.  But the picture that seems to be emerging is a region whose growth is slowing and in which the suburbs are significantly outperforming the City.  Of course, there are many factors that go into this dynamic and the past does not necessarily predict the future. But my two take-aways would be that (1) the City needs become more competitive vis-à-vis its neighbors and (2) region needs to redouble its efforts to diversify its economy.

In the near future, I will be looking at how Houston compares to some other major cities.

 

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City Gets Sales Tax Boom to End Year

The Texas Comptroller reported yesterday that the City’s sales tax receipts for December (which reflect October sales) skyrocketed by 17.6%  over last December.  This is the third largest monthly year-over-year increase since I started keeping track in 2008.

It is always dangerous to attribute stark changes in economic data like this to any particular cause, but it seems likely that this increase was driven by Harvey repair purchases.  Anecdotally, my local Home Depot was packed every time I went in for weeks after the storm.  There was also probably some boost from three of the World Series games being played here at the end of October.

The December receipts helped the City finish in positive territory for the calendar year, up 1.4% or about $8 million.  However, sales tax collections are still well off their 2015 all-time high ($659 million vs. $638 million).

This year saw many extraordinary events that affected sales taxes.  We had a Super Bowl, a Final Four, a World Series, a 500-year flood and its aftermath and a tepid oil recovery.  All these make it difficult to draw too many conclusions from this year’s sales tax data.  But the overarching theme seems to be that we are mostly trading sideways, which is, of course, similar to oil market.  Notwithstanding our local chamber of commerce boosters’ boast about we have diversified our economy, I suspect that, for better or worse, our fortunes are still inextricably tied to the energy industry.

 

Of course, there are other factors.  The City continues to bleed off growth to its suburban neighbors (more on that soon) and on-line sales are relentlessly chipping away at sales tax collections.   But if there is any conclusion to be drawn from the recent sales tax data, mine would be that we had better hope the OPEC deal holds and that the oil markets remain steady.

 

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Federal Deficits are the Result of Rising Expenditures and Falling Receipts

Contrary to the partisan narratives of our two dissembling political parties, federal deficits have been growing steadily since WWII through every administration, with the sole exception of the Clinton administration.  The growing deficits have been the result of the federal government spending more of our gross national output and collecting less.  Here is what the record looks like for each administration.  I have offset the data by one year to account for the fact that each incoming administration inherits the budget for its first year from the previous administration.[i]

Democrats will tell you that the deficits are the result of Republicans cutting taxes and Republicans that they are the result of out of control spending.  Both are right and both are wrong.

First, I suspect most of you will be surprised to know that the amount that the federal government has spent and collected in taxes since WWII has moved in fairly narrow ranges.  During that period the most the government has ever spent of the country’s GDP was 24.4% in 2009.  The least was 16.6% in 1965.  For tax collections, 20% was the high in 2002 and 14.6% was the low in 2009 and 2010.

But notwithstanding that the expenditures and collections have moved in these narrow ranges, the trendlines are clear. The federal government has been spending more and collecting less in taxes as a percentage of GDP since WWII.

The effect on federal receipts and expenditures from the 2008 financial crisis is a notable outlier to the general trend and is a cautionary tale about making sure we avoid that type of crisis in the future.

While reviewing the historical record is always a useful exercise, especially when debunking partisan propaganda, it is probably less helpful in considering where the federal budget is likely to go from here.  That is because we are about to enter a period where the cost trajectory of three programs, Social Security, Medicare and Medicaid, is about to explode.

In 2007, those programs cost about $1 trillion.  By last year, they had doubled to just under $2 trillion and accounted for nearly 50% of all federal spending.  The Congressional Budget Officer (CBO) projects that they will rise to $3.6 trillion in the next ten years.  Of the three, Medicare rises most, more than doubling.  These increases are, of course, driven primarily by demographics as our population will grow significantly older in the next ten years.

By comparison, the total amount the federal government spent on all welfare programs last year was about $270 billion, or 27% of the big three and 7% of all federal spending.  Welfare expenditures are up by about $110 billion over the last ten years (about a 70% increase).  The CBO projects that, based on current programs, welfare spending will be relatively flat over the next decade, rising only about 15%.

One chilling metric is the CBO’s projection of the federal government’s interest cost.  Because of falling interest rates, there has been almost no increase in the government’s interest cost in the last ten years (2006 – $227 billion vs. 2016 – $240 billion).  But the CBO projects that the interest expense will more than triple by 2027 to over $800 billion because of the exploding deficits they expect in the next decade.

Both political parties promote narratives to explain the structural deficit in the federal budget that resonate with their respective constituencies and have a grain of truth but ignore the elephant in the room.  Welfare queens or greedy corporations may contribute nominally to the federal deficit, but it is principally being driven by an aging population with the enormous medical expenses that demographic change will drive.  That is the real inconvenient truth that neither party wants to address because the solutions are hard, complicated and fraught with political peril.

[i] All of the data in this article is expressed as a percentage of gross national product.  The gross numbers, because of population growth and inflation, would obviously show much more dramatic increases, but economists almost universally agree that the amount that the government spends and collects as a portion of the economy’s national output is the critical metric.

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Will Tax Cuts Spur Economic Growth?

The assertion that tax cuts will spur economic growth is now Republican orthodoxy, incessantly repeated by the party’s leaders and surrogates.  Most often, these proponents cite the Reagan tax cuts in the 1980s as proof that cutting taxes will boost the economy.  But a close look at the historical record shows there is scant correlation between cutting taxes and economic growth.

Immediately after WWII, the highest marginal tax rate on earned income was 91%.  Johnson lowered the rate to 70% in the mid-60s.  It was unchanged until President Reagan lowered the rate three times, to 50% in 1982, then to 38.5% in 1987 and finally to 28% at the end of his term.  The rate stayed at 28% for only three years.  In 1991, Bush 41, faced with a growing deficit, raised the rate to 31%.  Immediately after Clinton was elected, the top rate was raised to 39.6%.  The rate was temporarily cut in the now-famous “Bush tax cuts” to 35%.  That cut expired in 2013 and the rate returned to 39.6%.

When we graph these changes in the marginal tax rate with GDP growth it is apparent that both have been falling since 1960.  If lowering the marginal rates guaranteed higher growth, we should see these moving inversely, i.e., as tax rates came down, GDP growth should have improved.  But the opposite is true.

As for the oft-cited Reagan tax cuts, there was a snapback in GDP growth in 1983 and 1984 from the 1982 recession which occurred just after the reduction in the marginal rate from 70% to 50%.  But after 1984, GDP growth dropped back to historic norms notwithstanding the additional cuts in 1987 and 1988.  By 1991, the country was back in recession.

So, what about cutting the corporate tax rate, which is the centerpiece of the current proposal?  Once again, the effective corporate tax rate has also been trending down since 1960.  So, neither is there any historical correlation between reducing the corporate rate and economic growth.

So, how are we to interpret the lack of any positive correlation between marginal tax rate cuts and economic growth?

First, of course, we should always keep in mind the fundamental rule of statistics that correlation does not equate to causation, and, conversely, a lack of correlation does not disprove a potential causal link.  This is because there are innumerable other economic factors simultaneously at work on outcomes.  For example, at the same time the Reagan tax cuts were enacted in 1982, the Federal Reserve was also dramatically reducing interest rates.  So, it is very difficult to parse out the effect of changes in tax rates from the other background economic activity.

Second, it may be that the marginal rate and corporate rate are not as important as we think.  The Tax Policy Center estimates that the average income tax rate paid by households from 1979-2012 ranged from 17-22%, a much narrower range than the 28%-70% range for the marginal rate during that time.

Also, payroll taxes have been steadily increasing since WWII, both in absolute and relative terms.  That rate has more than doubled, from 6% to 15.3%.[i]  Payroll taxes as a percentage of federal tax receipts have nearly quadrupled from about 10% in 1950 to just under 40% today.

When you add the payroll taxes and income taxes together, the average tax rate since 1960 narrows even more to a range of 29-31%.[ii]  In other words, while the marginal rates have varied widely, the average rate paid by taxpayers has stayed in a pretty narrow range and, as a result, the overall tax burden has changed very little.

Notwithstanding that economists have difficulty quantifying the effects of tax policy on the economy, most nonetheless believe that tax reform, as opposed to just tax cuts, would boost growth.  This is because our tax code is both oppressively complex and creates enormous market inefficiencies.  The real question is whether the proposals now on the table are the kind of tax reform that will lead to growth or whether it is just tax cuts that may benefit some companies and individuals but have little effect on the larger economy.

Whether the tax reductions will spur growth or not is critical because if the growth fails to materialize, the tax cuts will blow an even bigger hole in the federal deficit.  If the tax cuts merely add to the deficit, there may be a short-term sugar high for the economy, but lead to lower growth down the line.

Most economists are skeptical that the proposed tax cuts will even come close to paying for themselves.  Twenty-one of twenty-six top economists surveyed by Bloomberg opined that the cuts would increase deficits.  Even the President’s alma mater, the Wharton School of Business, has released a study which finds the tax bill will add significantly to the deficit.  From what I have read, the consensus among economists seems to be that an increase in growth might pay for about a quarter of the proposed tax cuts.  If that is right, the tax cuts will blow a hole in the deficit and lead to lower growth in the future.

The most persuasive analysis I have seen comes from the Committee for a Responsible Federal Budget (“CRFB”).  It is co-chaired by Mitch Daniels, the former Indiana Republican Governor and director of the Office of Management and Budget under Bush 43, and Leon Panetta, also a former director of the Office of Management and Budget, White Chief of Staff, and Secretary of Defense under Clinton and Obama.    The CRFB disputes that the bill will produce the .4% GDP increase claimed by its backers and projects that the Senate version of the proposed tax bill will add $2.2 trillion to the federal debt over the next ten years.  [Click here and here to read.]  And that is on top of the deficits we are already expecting, largely driven by the acceleration Social Security, Medicare and Medicaid payments as more Baby Boomers retire.

Regardless of the effect of tax policy on GDP, we should always be attempting to minimize the tax burden on the American people.  Every tax dollar collected should be treated as a sacred trust to be spent wisely, efficiently and only for functions for which there is no viable private sector option.  But if we pin our hopes for a dramatic economic upturn from just cutting taxes, history suggests we will likely be disappointed and be passing on an even larger federal debt to our children and grandchildren.


[i] This includes the employer and the employee portions.
[ii] The sole exception to this range was 2011-12 when there was a temporary decrease in the payroll tax rate.
 
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City Comptroller Releases Rebuild Houston Audit: It is a Farce

In the 2015 mayoral election, all of the candidates except Steve Costello agreed that the drainage fee adopted by voters in 2010 had serious problems.  Each of the candidates had various prescriptions.  Turner agreed, expressing his concerns about how the money was being spent and promised a complete review of the program.  Two years later we are still waiting.

In response to some questions from Council, Controller Chris Brown has been promising an “audit” of the Dedicated Drainage and Street Renewal Fund (DDSRF), which was finally released last week.  It is a farce.

The audit examined three projects which totaled about $44 million.  Through the end of this fiscal year, about $1.4 billion will have been deposited into the DDSRF.  So, this audit covers a whopping 3% of the total.  [Click here to read the audit.]

The report includes an appendix which lists 35 projects that it indicates are completed “using the drainage utility fee component” from 2014-2016 at a cost of $246 million.  There is no explanation of that phrase nor are there any supporting schedules.  Presumably, the report is suggesting that these are the projects that were paid for by the drainage fee.  Beyond that, there is no detail other than a general description of the location of these projects and no indication that the audits did any review of them.

Even if we accept that $246 million was spent from the dedicated fund on these projects, that would only be about 76% of the drainage fee collected for those years and only 39% of the total amount deposited into the dedicated fund.  Where was the rest spent?  That was the question we were all hoping an audit would answer.

We used to have a better idea of how the money was spent.  During the Parker Administration, the budget document available to the public had 13 pages of information that included a reasonably detailed description of the expenditures and a list of personnel paid from the fund by position type.  [Click here to read 2015 budget.]  It was from that detail that we were able to determine that most of the positions paid by the fund were office personnel.  But since Turner took office, the budget document has only seven pages and omits most of that detailed information.  [Click here to see 2018 budget.]

The drainage tax was sold to taxpayers on the promise it would be dedicated to alleviate flooding.  Remember this guy telling that us, “The best part is that the politicians cannot divert a single cent.”

 

Since the drainage fund was set up in 2011, Houston taxpayers have paid over $750 million in drainage fees and an additional $650 million has gone into the fund from other taxpayer sources.  Does anyone think we have gotten $1.4 billion worth of value in flood control or street improvement projects?

Judging Administrations by the Stock Market

Since Donald Trump was elected, the stock market has been on a tear.  The S&P 500 Index has soared from 2085 to 2579, a nearly 24% increase.  The president’s supporters point to this increase as evidence of the effectiveness of his administration.  So, I thought it would be interesting to look at the market’s performance under previous administrations to see how the Trump administration compares.  I used Macrotrend’s inflation adjusted historical data to make comparisons [click here].

This is what the chart looks like for the total increase/decrease during each administration since Carter.

The market increases during the Clinton administration dwarfs all others.  I found it interesting that the appreciation during the Reagan administration was only about average, since that period is often heralded by Republican as some kind of golden age of economic growth.

Of course, looking at the aggregate increase for the entirety of each administration is not a fair comparison for the Trump administration, since it has only been one year since his election.  If we look at the average annual increase for each year, the Trump bump looks much more impressive, coming in second only to Clinton (22% vs. 21%).

 

But, if you look at the increase during the first year after the election, Trump takes first place, edging out Bush 41 and Obama (23% vs. 21% vs. 18%).  Note that the index was actually down during the first year of the Reagan administration.

So, what are we to make from this mishmash of data?  The answer is: not much.  While the political backdrop is important for the stock market, there are nearly an infinite number of other factors that also affect the markets, not the least of which is interest rate policy as set by the Federal Reserve.

It is undeniable that there has been a surge in business optimism since Trump’s election -most likely a wave of relief after eight years of the business-unfriendly, regulation-happy, Obama administration. And frequently psychology is as important, if not more so, than economics to the stock market.  But in the long run, economics wins out.

The real reason the market has steadily increased since 1950 is that corporate profits have increased.  In fact, there is nearly a perfect correlation.

 

If corporate profits keep going up, so will the stock market.  Of course, if the Republican tax bill is approved and corporate income taxes are slashed, those savings will immediately go to the bottom line and further support higher stock prices, at least to the extent that this is not already baked into the market.

The bottom line is that while who the president is and what his or her policies are obviously have an effect on the stock market, it is a mistake to credit any president with causing the markets to go up or down.  To believe otherwise, one must credit the Obama administration with causing the largest dollar increase in corporate profits and stock prices in the nation’s history, a proposition many would have a hard time accepting.

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Reform TIRZs, Don’t Repeal Property Tax Cap

My former colleagues at the Houston Chronicle editorial board opined this week that the City’s property tax cap should be repealed and that the tax increment reinvestment zones (TIRZs) need to be reformed.  [Click here to read.]  They are wrong on the first count but right on the second one.

To begin, let’s get some facts straight that were mangled in the editorial.

First, the City does not have a revenue cap; it has a property tax cap.  Property taxes make up about 25% of the City’s total revenue.  That is the only source of revenue that is limited under the City charter amendment that was approved by voters in 2004.  The other 75% of revenue is not restricted.   There is a cap on all revenues in the charter that was also approved by the voters in 2004, but because the property tax cap got more votes, the City only enforces the property tax cap.

Repeal advocates insist on mischaracterizing the limitation as a “revenue” cap to mislead the public into believing that the City’s ability to raise any form of revenue is impaired by the restriction.  But since the charter amendment was enacted, City revenues have increased by a whopping $2 billion (67%), including the enactment of the drainage fee, which was the largest single tax increase in the City’s history.

Second, the increase in taxes is not “constrained by an arbitrary algorithm.”  The limit is the lesser of population growth and inflation or 4.5%.  Limiting Council’s ability to increase property taxes to population growth and inflation is a reasonable limitation and should be a rough estimate of the need to increase taxes.  If the City’s population and inflation were growing by more than 4.5%, I would have to agree that the limitation is arbitrary.  But because the City’s population has been growing at a very slow pace and inflation has been low since 2004, the 4.5% limitation normally does not come into play.

Third, and most importantly, the property tax cap repeal advocates always omit that the charter amendment begins with this clause: “The City Council shall not, without voter approval . . .”  In other words, in any year that the Mayor and Council believe that the City needs more tax revenue than the limitation allows, all they need to do is ask for the voters’ approval.  If they feel handcuffed by the charter amendment it can only be because they believe they cannot make a credible case to the taxpayers to pay more.

My former colleagues are right about the detrimental effect the TIRZs are having on the City’s finances.  Last year, the TIRZs collected $132 million in property taxes, nearly 14% of the City’s total property taxes.  That is more money than the drainage fee brought in last year.

They are also correct that the taxes collected by the TIRZs are excluded from the property tax cap.  As a result, TIRZ tax receipts have soared.  Last year the property taxes collected by all TIRZs increased 13%.  The receipts for the six richest TIRZs went up by an astonishing 27%!

Of course, the City has devised a number of clever ways to claw back more and more of this revenue over time and subvert the voters’ intention as expressed in the cap.  Each TIRZ pays the City an administrative fee and most make other contributions toward “shared” expenses.  But there is no question that if the City had all of this revenue back, it would go a long way toward solving its long-term structural deficit.

One of the challenges in bringing any of this revenue back to the City is that the TIRZs have been on a debt binge in recent years.  They currently owe around half a billion dollars.  So, much of their revenue is committed to repaying that debt.  Of course, voters had no say in the creation of this debt, notwithstanding that property taxes will be used to repay it.

There are certainly some good projects that are undertaken by the TIRZs.  But increasingly they are grasping for projects on which to spend their largess; witness the idiotic $200 million bus lane project in Uptown.

Of course, our benevolent State Legislature has its finger in all of this.  All of the TIRZs were created by state statute.  So, the State will have to be involved in any restructuring.  Given numerous conflicts of interests between our local delegation and the TIRZs and their first cousins, the management districts, good luck with that.

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