The federal government will roll out a new tax-credit program in 2027 to expand school choice. Taxpayers will be able to receive a dollar-for-dollar federal tax credit for donations of up to $1,700 annually to a scholarship-granting organization (SGO) in Missouri—or any other participating state. The SGO then distributes scholarships to families seeking alternatives to their residentially assigned public schools.

In a previous post I wrote about the new program, focusing on the challenge of deciding which educational expenses should qualify for scholarship funding.

Over at Education Next, Rick Hess has a thoughtful piece on other aspects of the program. As both a school choice advocate and an advocate of fiscal responsibility, he opens with a concession, acknowledging the potential loss of tax revenue the program could create at a time when the federal debt is growing rapidly.

He then makes what I think is the right point: While it is unfortunate that the federal budget is off the rails, it is hard to get too worked up about this program when (a) it is a drop in the bucket compared to our broader fiscal problems, and (b) so much of our debt-financed spending benefits older Americans. If we’re going to keep borrowing, why not direct at least a small share toward expanding opportunities for children?

I share Hess’s bottom-line sentiment. I wish the federal government managed its finances more responsibly. But since that does not appear likely anytime soon, investing a bit more in the children who will ultimately inherit—and help repay—that debt seems sensible to me.

Turning to the program itself, Hess raises an important practical concern. Even though this is a dollar-for-dollar tax credit, which means it is effectively costless for taxpayers to participate, we should not assume it will be widely used. Many taxpayers may be unaware the credit exists. Others may doubt they’ll actually receive it or may not know how to make a qualifying donation to an SGO. Even modest uncertainty or inconvenience can discourage participation.

These are legitimate concerns. The new scholarship tax credit has the potential to generate substantial resources to expand school choice, but realizing that potential is not automatic. As Hess puts it, “I don’t put a lot of stock in the casual assurance that taxpayers will jump through hoops to give money away simply because, as one very prominent champion explained to me, ‘It’s a good thing to do.’”

Hess’s piece points to one of the program’s biggest implementation challenges. Helping taxpayers understand the credit—and making participation as simple as possible—could make an enormous difference. Show-Me Institute analysts will certainly be doing our part, and I hope many others will as well.

The post How Much Will the New Federal Scholarship Tax Credit Boost School Choice Funding? appeared first on Show-Me Institute.

Susan Pendergrass speaks with Andrew G. Biggs, senior fellow at the American Enterprise Institute, about the Social Security trustees’ latest report and what it means for the program’s future. They discuss the projected 2032 insolvency of the retirement trust fund, why the trustees’ birth rate assumptions may be too optimistic, the proposed Moreno-Warren plan to eliminate the payroll tax ceiling, the Cassidy-Kaine plan, and why pension experts oppose it, what would actually happen if the trust fund ran out, and more.

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Episode Transcript

Susan Pendergrass (00:00):
I feel fortunate to have grabbed some of your time. Andrew Biggs from the American Enterprise Institute, I appreciate you coming on to talk to us. Social security has been nothing but in the news recently, and you know more than anyone else. So thank you for taking the time.

Andrew Biggs (00:14):
That’s why I’m so cheerful. The more you know about Social Security, the happier you are. But thanks for having me, Susan. It has been busy. I’m really happy to be with you today.

Susan Pendergrass (00:16):
I’m in my sixties. I see something about Social Security running out of money and I pay attention. So just to bring us all up to speed: in the last week, there was a news flash that Social Security is going to run out of money sooner. What does it really mean?

Andrew Biggs (00:39):
Every year the Social Security trustees, which is mostly members of the cabinet, the Secretary of the Treasury, the Social Security Commissioner, and so on, come out with a report projecting the program’s financial health, both in the short term and the long term. That happens every year, and it’s been getting worse every year. In this year’s report, they projected that the retirement trust fund will go insolvent, or run out of money, in 2032. They also projected a significantly larger long-term funding gap in the years thereafter, and this is worth explaining.

When the trust fund runs out, it doesn’t mean there’s zero money to pay benefits. As long as we’re paying a trillion dollars a year in payroll taxes, there will be money to pay benefits. But when the trust fund runs out, it means benefits will be cut, and their projection is somewhere around 22%. The size of that long-term funding gap dictates how big the cuts are going to be in the years thereafter. The trustees lowered their projections for birth rates, and they found that the One Big Beautiful Bill has worsened Social Security’s finances. A variety of things made this long-term funding gap worse. It’s really hard to paint a happy picture. The trust fund can be running out in about six years, and the funding gap and the benefit cuts in years thereafter are going to be larger. It’s a sobering picture.

Susan Pendergrass (02:16):
I’m not trying to pile on, but I think I saw that they extended the time when they expect birth rates to bounce back. Is that true? Because I have not seen anything anywhere, and I’ve spoken to some demographers, to suggest birth rates are ever going to bounce back.

Andrew Biggs (02:35):
Here’s the interesting thing. If you look at the Congressional Budget Office or the US Census Bureau, right now the fertility rate is about 1.6 children per woman on average, and both the CBO and the Census project that’s going to remain pretty much steady, declining a little bit over coming decades. Social Security had a very different picture. As of last year, they thought the birth rate, which is 1.6 now, was going to immediately start rising and go back up to 1.9 children per woman in the next several decades. That makes Social Security’s finances better. More kids being born means more people paying into the system. What they did in this year’s report is moderate a bit on fertility. They said, okay, it’s not going to rise back to 1.9, it’ll rise back to 1.75. So they are still over-optimistic. I’ve talked to some demographers and economists who’ve really focused on the birth rate, and they described the trustees’ assumptions as, quote, fanciful, meaning they just weren’t plausible. Now they’re somewhat more plausible, but they still tend

Susan Pendergrass (03:32):
Okay.

Andrew Biggs (03:48):
to be more optimistic than other agencies. And to me, frankly, this is a concern. You really want the people who are the scorekeepers, the umpires, to be playing it as straight as they possibly can. We know that these guesses are going to be wrong because this stuff is impossible to predict with certainty, but most demographers think the best guess is we’ll stay around 1.6 going forward. You’ve seen a decline, and a good predictor of birth rates is religiosity, the level of religious belief in a country. The US has typically been much more religious than Western Europe, and that’s played into fertility. There has been a big decline in religious belief, particularly among younger Americans, along with all the other pessimism you see among younger people. When people are pessimistic, they tend not to have a lot of kids. So the best guess is we’re going to stay about where we are.

I wrote something the other day saying the bad news in this trustees report is even worse than last year’s, but it could have been even worse. They project a long-term funding gap above 4.4 percent of payroll. What that means is if you took the 12.4% payroll tax today and raised it immediately and permanently by 4.4 percentage points, from 12.4 to 16.8, that would in theory keep the trust fund solvent for 75 years. But a better guess would be a funding gap of around 4.8 to 5 percent. This is real money. For years, people on the left have said, well, okay, we know Social Security has a solvency problem, but it’s a manageable issue. They were saying that when the funding gap was 2% of payroll. Now you’re looking at four to five percent. That’s a lot of money, at a time when a lot of other things are making claims on the budget. We have some difficult choices to make and we really have to start thinking hard about this.

Susan Pendergrass (06:09):
Okay, so what about this idea that’s been floated in the last week of getting rid of the payroll cap? First of all, explain the payroll cap, and then this idea of getting rid of it.

Andrew Biggs (06:17):
Sure. Social Security has a 12.4% payroll tax, half paid by you and half paid by your employer. That applies only to wages up to $184,500. That’s called the payroll tax ceiling, or the tax max. That dollar figure goes up every year, but this year it’s $184,000. You only pay taxes on those wages, and you also earn benefits only on those wages. People say, well, Bill Gates doesn’t pay more taxes than that. But he doesn’t earn any benefits either. So you’re capping both the taxes and the benefits.

To fast forward a little bit: there’s an op-ed in the Washington Post this week from Senator Bernie Moreno, a Republican from Ohio, and Elizabeth Warren, a Democrat from Massachusetts. They say it’s just common sense to eliminate that cap and tax all earnings for Social Security. The interesting thing is how uncommon that would actually be. Our payroll tax ceiling is $184,000. Almost every other country has a ceiling on their payroll taxes for their pension system, and in almost every other country that ceiling is lower. In Canada, you only pay taxes and earn benefits up to around $60,000 in earnings. In the UK it’s about $70,000. In Germany it’s about $70,000. We are already an outlier for how high up the income ladder we tax people. To eliminate the cap entirely is a big deal. It’s effectively a 12 percentage point increase in the top marginal tax rate. I pulled an example of somebody living in New York City. A high-income person already pays 37% in federal income taxes, plus regular Medicare taxes, the additional Medicare tax, state taxes, and city taxes. If you add another 12 percentage points on top of that, their marginal tax rate would be in the mid-60s. And that’s before we’ve fixed Medicare or done anything else. The federal budget is still broke, and you’ve taxed these people as high as you possibly can. So these things that look like common sense, why don’t we just tax everybody,

Susan Pendergrass (08:37):
Right, right.

Andrew Biggs (08:46):
look, there are reasons for that.

Susan Pendergrass (08:49):
And were they suggesting that if I make $300,000 and I pay my 6.2 percent, totaling 12.4 with my employer, on my entire salary, that my Social Security benefit one day would be higher? Are they talking about capping the benefit or just getting rid of the cap on contributions?

Andrew Biggs (09:06):
They haven’t been very specific. They say Social Security would continue to be an earned benefit, which kind of implies you would continue to earn benefits on the additional taxes you would pay. Let’s say if we uncap the payroll tax and base your taxes on your total earnings, you’d also base your benefits on your total earnings. What you get then is, okay, you’re getting all this money from people in the short term, but you have to pay them higher benefits in the long term. That offsets some of the savings. And this morning I was running some numbers looking back to the 1970s. We had a huge run-up in benefit levels from Social Security in the 1970s. The benefit formula we have today is not the one FDR invented. It really happened in the 1970s, where they jacked up benefits in a really foolish way, and then to help pay for it, they increased the payroll tax ceiling. Right now you pay taxes on earnings up to $180,000. If we had just kept the tax max from 1970 and indexed it to wages, it would have been only $95,000. So they essentially doubled the wages on which you pay Social Security taxes. But what happens is they also doubled the wages on which people earn benefits. I’ve highlighted the point that if you have a high-income

Susan Pendergrass (10:38):
Mm-hmm.

Andrew Biggs (10:43):
couple retiring today, they could get almost $100,000 in total benefits, which is absurd. There’s no reason a government program should be paying anybody that amount. If you want that kind of income in retirement, you save more in your 401k. It’s better for you, better for the economy. But it was a result of this short-term step they took in the 70s. They said, hey, we raised benefits too high, let’s jack up the tax max. And they didn’t worry about the fact that in the future you’d have to pay benefits on that. Well, the future is today.

Susan Pendergrass (11:05):
Okay.

Andrew Biggs (11:13):
Now we’re broke again, we need extra money again, and these guys say, well let’s just jack up the tax max. But then you’ll pay extra benefits in the future. It becomes this chasing-your-tail kind of thing.

Susan Pendergrass (11:16):
Yeah. Yeah.

Andrew Biggs (11:25):
And the problem when you do it is there’s no country on earth paying $100,000 a year from a social insurance program, except for us. And the reason we do is these stupid historical decisions. If you’ve got this high-income couple in the US retiring today, they can get almost $100,000 from Social Security. If they lived in Canada, they’d get like $35,000. And that’s perfectly fine. Nobody’s starving to death in Canada in retirement. They just save more on their own.

Susan Pendergrass (11:35):
I’ll say.

Andrew Biggs (11:55):
The irony is that we think of ourselves as a free-market, small-government country, and our Social Security program is enormous, primarily because we’re paying benefits to people that other countries say, yeah, we don’t need to pay benefits to these guys.

Susan Pendergrass (12:11):
And yet people say, I put my money in, I get my money out.

Andrew Biggs (12:14):
Yeah, and I understand it. When I say we shouldn’t be paying $100,000 a year to a high-income couple, you get the email saying, well, I paid in. And if you paid in, you feel you have this moral claim on benefits. The problem is Social Security is still broke. We still need higher taxes or lower benefits. The idea that you’re just going to get your full benefits with the taxes you paid doesn’t work because the system can’t afford to do it. So you have to make the choice: do I want to pay higher taxes or get lower benefits? I’ve got to pick my poison. Most high-income people would prefer to get lower benefits. They care more about their taxes than their benefits. But people are still living in this dream world where this system, which is $30 trillion in the hole, is somehow going to pay them everything they’ve been promised and just screw somebody else. Everybody thinks they’re the guy who’s going to get everything and somebody else is going to get screwed.

Susan Pendergrass (13:14):
Yeah. I definitely hear people saying today, maybe I should go ahead and take it early and then I’ll get grandfathered in and my benefits won’t get lowered.

Andrew Biggs (13:26):
It probably won’t make a difference. In general, the Social Security benefit formula works based on your birth cohort, the year in which you’re born, not really the year in which you claim benefits. And people who are going to do Social Security reform understand the incentives. They don’t want to make it easy for people to game the system. So Social Security reform will probably work itself out in such a way that

Susan Pendergrass (13:42):
Right.

Andrew Biggs (14:03):
you can’t get some big advantage by claiming early. I could think of some conceivable possibilities, but I still would not encourage people to claim early.

Susan Pendergrass (14:14):
Okay, I want to talk about two more things I read in the last week. One was a letter from Tim Kaine about his idea with Senator Cassidy. What’s that idea for fixing it?

Andrew Biggs (14:24):
The interesting thing is people say Social Security reform has to be bipartisan. So we have two bipartisan ideas. We have Moreno and Elizabeth Warren, a Republican and a Democrat. They’ve got one idea, eliminating the payroll tax ceiling.

Susan Pendergrass (14:39):
Third rail.

Andrew Biggs (14:49):
Cassidy, a Republican from Louisiana, and Tim Kaine, a Democrat from Virginia, they’ve got a bipartisan plan. And guess what? Their plan is also terrible. If there’s any lesson from this, it’s that bipartisan doesn’t mean good.

Susan Pendergrass (15:00):
Bipartisanly terrible.

Andrew Biggs (15:04):
Yeah. Look, ultimately Social Security reform is going to have to be bipartisan, given the way the political system works. On the other hand, there is some lesson that if both Republicans and Democrats can agree on something, it might be a terrible idea. With Cassidy and Kaine, they are explicitly, and Cassidy said this, solving a political problem. The political problem is that neither Republicans nor Democrats want to vote for either tax increases or benefit cuts. You’d think Democrats want to raise your taxes and Republicans want to cut your benefits. The reality is they don’t want to do either of those things because they realize both are politically unpopular, which is why we’ve gone 40 years literally doing nothing. So their solution is that we don’t have to make these difficult votes. Instead, the federal government will borrow about $2 trillion, invest that money

Susan Pendergrass (16:02):
Tough.

Andrew Biggs (16:04):
in stocks and private equity, high-risk, high-return stuff. Then they claim they’re going to hold this fund for 75 years so it can build up value. In the meantime, when Social Security’s trust fund runs out in 2032, the federal government will borrow against the assumed gains on this investment fund.

Susan Pendergrass (16:06):
Right. Mm-hmm.

Andrew Biggs (16:29):
They say the borrowing will be at a lower rate because it’s the federal government. And they say after 75 years, all the gains in this investment fund will pay back all the borrowing and we’re all good. And let me count the ways there are problems with that. If you work at the state level,

Susan Pendergrass (16:45):
It’s just kicking the can.

Andrew Biggs (16:52):
state-based think tanks almost know more about this than federal people. A lot of underfunded state pension systems do things called pension obligation bonds. Their pension system is underfunded, they don’t want to raise contributions or cut benefits, so they borrow and invest in the stock market and hope it works. The pension obligation bond is the hallmark of a poorly funded, poorly run pension system. Think New Jersey, Illinois, things like that.

Susan Pendergrass (17:21):
Yeah.

Andrew Biggs (17:23):
There’s a national group of state budget officers that has come out and basically said as an institution, don’t do this. Borrowing for your pension is a bad idea. So it really is fitting for the times that the Cassidy-Kaine plan says, let’s take this worst idea from state and local government

Susan Pendergrass (17:45):
Yeah.

Andrew Biggs (17:47):
employee pensions, which has been condemned as bad practice, and put it on steroids and do that for Social Security. And what it really gets to is they just don’t understand the finances of it. And to be frank, they won’t listen. They have talked to every pension expert I know, and this Social Security world is pretty small. We all know each other on both sides. We may not agree on everything. Literally every pension expert I know says this is a terrible idea.

Susan Pendergrass (17:54):
Yeah.

Andrew Biggs (18:17):
But their political considerations are more important than policy, and that’s the problem with all of them.

Susan Pendergrass (18:24):
I mean, it feels free. They’re basically saying it’s like a timeshare. It just feels free right now. We just borrow the money. Okay, so

Andrew Biggs (18:31):
It’s been pointed out to them that if you can fund Social Security this way, you could fund the entire federal government this way and never collect any taxes. At one point Senator Cassidy was quoted in a newspaper article saying, well, yeah, sure, in theory you could. And I’m like, if something implies there’s a free money machine, maybe you need to question your assumptions.

Susan Pendergrass (18:38):
Sure. Okay.

Andrew Biggs (18:54):
I could give you a whole variety of reasons why this doesn’t work, but one macro point that’s come to me: I’ve been doing Social Security for a long time. I worked in the Bush administration in 2005 when they tried and failed to do Social Security reform. One of the problems we face today is that your elected officials understand Social Security policy much less well than they did 20 years ago. They just don’t understand how the system works. Going back to the Moreno-Warren idea of applying the payroll tax to all earnings,

Susan Pendergrass (19:22):
Yeah.

Andrew Biggs (19:37):
okay, you’re adding 12 percentage points to your top tax rate. There’s a reason Sweden and France and others don’t do this anymore. They used to have incredibly high tax rates. They don’t now. We would end up in many cases with a higher tax rate than most European countries. We have some philosophical dedication to small government and things like that. They don’t. And so if they’re not doing it,

Susan Pendergrass (19:43):
Yes. Yeah, yeah.

Andrew Biggs (20:02):
it’s because there’s a practical reason this isn’t a good idea. The same applies to wealth taxes. That’s been tried in Europe. They’re like, yeah, we’re not doing that anymore because it doesn’t work. But your average senator now

Susan Pendergrass (20:14):
It is happening around the country, the billionaire tax. What happens in 2032 if no one is either brave enough or smart enough to take this on in the next six years?

Andrew Biggs (20:17):
They’re just not aware of these policy issues, and that’s a real problem. It’s like having a guy fix your car who doesn’t know how to fix cars. 2032 is the date. If you have a recession, it might be 2031. It’s not certain, but it is certain it’s happening soon.

Susan Pendergrass (20:47):
Yeah. Okay.

Andrew Biggs (20:53):
There’s a literal reading of the law, which is that Social Security can’t pay out benefits it doesn’t have dedicated resources for. Once the trust fund runs out, the only dedicated resources are mostly the payroll tax, plus a little bit of money from income taxes levied on retirement benefits. And those were cut as part of the One Big Beautiful Bill. So if the trust fund runs out, they’d have to rely on the money they have on hand, which implies around a 22% benefit cut.

A lot of times people assume that benefit cut has to be across the board. If you did it that way, you’d throw a lot of people into poverty. I did some work a year or so ago with a lawyer in DC named Kristen Shapiro, and what we found is that the legal precedent shows the executive branch, meaning the president working through the Social Security Commissioner, would have some discretion. What we found is you could maintain full benefits for about 50% of people, the poorest 50% of seniors, and then cap benefits above that. If you cap the maximum benefit at about $24,000 per year for a single person or $48,000 for a couple, that is enough to make Social Security solid without raising taxes. So the point is simply you have some discretion.

The reality is Congress isn’t going to allow big benefit cuts, for political reasons. On the other hand, are they willing to have the size of tax increases needed, all in one go, to keep Social Security paying full benefits? I don’t think they want that either. So the reality is probably they’re going to borrow a lot of the money. And that’s where you get to the issue of how much more borrowing the financial markets will swallow. We effectively borrow from the public to repay the Social Security Trust Fund, but there’s an end to that. You say, okay, 2032, we have to do something. We have to raise taxes or cut benefits. If in 2032 the stated policy of the federal government is, well, we’re just going to keep borrowing to pay Social Security even though we have no prospect of paying it back, you wouldn’t blame some big market players for saying, yeah, I’m out, because you don’t want to lend money at low interest rates to someone who says they can’t pay it back. Then you start getting a couple of things. One is more federal borrowing squeezes out capital in the rest of the economy, and so interest rates naturally rise.

Susan Pendergrass (23:18):
Right.

Andrew Biggs (23:31):
But then there’s a second element: if you’re afraid the federal government can’t pay you back, over and above that natural increase in the interest rate, you’d apply a risk premium to treasury debt. You’d say, look, Treasury is not this rock-solid investment anymore. It’s more like a junk bond, or like borrowing from Illinois, and you make them pay a premium. That’s going to drive up

Susan Pendergrass (23:43):
US government borrowing. Yeah, yeah, yeah.

Andrew Biggs (24:01):
interest rates, and that makes it tougher not just for the federal government but for everybody. If you want to buy a car or a house, all your interest rates rise. There’s also going to be real temptation to inflate away the debt. The federal government doesn’t want to default on its debt, but

Susan Pendergrass (24:24):
Yeah, yeah.

Andrew Biggs (24:25):
historically the way you deal with this is inflation. Think about all the debt we took on during COVID, shoveling money out the door to everybody, and then we had massive inflation after it. A lot of those people who bought treasury debt didn’t get a good deal, because if you get 20% inflation on

Susan Pendergrass (24:34):
Absolutely. Yeah.

Andrew Biggs (24:47):
a treasury bond with a nominal fixed interest rate, that’s a real problem. So inflation becomes increasingly tempting. You look at this scenario and you’re like, can’t anybody here play this game? Every other country is not going bankrupt. We just have to do what they do.

Susan Pendergrass (24:51):
Yeah, yeah. So could we, if we really got our heads around it and started today or next year, incrementally raise the 12.4%, or incrementally get people used to lower benefits after a certain income or wealth level?

Andrew Biggs (25:18):
Sure. Yes. The way I think about it, there are two ways people think about it: the wrong way and my way. The wrong way is, let’s just pick from this menu of options to make Social Security solvent. We can raise the payroll tax a bit, raise the retirement age a bit, cut cost-of-living adjustments a bit, raise the tax cap a bit, and do these things until the system is solvent.

Susan Pendergrass (25:34):
Yes. Yeah.

Andrew Biggs (25:54):
That’ll get you a solvent program, but it won’t be a program that particularly works very well or is good for the economy. A more effective way is to ask, what do we want this system to do? If you talk about Social Security reform, what you hear is that it’s a social insurance program, a safety net, an anti-poverty program. Okay, it has to do that. And that part is really very cheap, because we don’t literally have that many poor seniors, their benefits aren’t very high, and it’s not a problem to maintain benefits for low-income seniors. When you ask what Social Security should do, nobody is saying we need to be paying high-income seniors $100,000 a year. There’s no public purpose for it. Nobody thought it out in advance. It was simply an unintended consequence. So if you’ve got things that are really costing a lot of money and have no public purpose, and those people can save for retirement on their own, you start scaling that back. The distinction I’m making is between policy changes simply for the purposes of keeping Social Security solvent, and policy changes for the purpose of making Social Security do what it needs to do, the real public purpose, and not doing things that serve no public purpose. My point is the things I’m talking about are things you should do whether Social Security is insolvent or not.

I’ll give you an example: Australia’s retirement system. Australia is a lot like us, not particularly more conservative or liberal, just sort of normal. Their Social Security program essentially is targeted at eliminating poverty in old age. It’s actually a better safety net than Social Security provides, but the benefits decline down to zero once you get above the poverty level. And to help people above that level save for retirement, everybody is enrolled in a 401k-type account. What that says is, if everybody’s participating in retirement plans as they should, the government’s job becomes easier. Their Social Security system costs about two percent of GDP. Ours costs about six percent. It’s a third as costly, provides a better safety net, and it comes because they’re actually thinking about what they’re doing.

Susan Pendergrass (28:18):
Mm-hmm.

Andrew Biggs (28:26):
We’re literally not thinking about what we’re doing. There’s a saying in business: the worst reason to do something is because we’re already doing it. That is literally how Social Security policymaking works. Nobody knows why our benefit formula is what it is or why the tax max is what it is. It’s all just stuff we inherited from the 1970s from people who were not in any way thinking clearly about what they were doing. It was people in the 70s trying to win elections, and we end up with the bag.

Susan Pendergrass (28:52):
Speaking of 2005, there was an attempt to offload a small portion of people’s contributions into the market, right? That failed.

Andrew Biggs (29:09):
That was the Bush proposal. I was in the White House then, kind of in a number-cruncher role, so I knew that stuff pretty well. I did a lot of events with President Bush around the country. When we came up on the 20th anniversary of Bush’s proposal in 2025, I started thinking to myself, what if his plan had passed? What would have happened? So I built a model. Back then they were saying, okay, you’re going to have some reductions in traditional Social Security benefits for middle and high-income people, and then you’re going to have a personal account where you can invest part of your existing payroll tax in stocks and bonds. The total benefit you get at retirement is a combination of those two. People were speculating. Well, we don’t know what the stock market’s going to do. But 20 years later, we’ve got some data, so let’s just see what happened. The results were that for people

Susan Pendergrass (30:01):
Now we do.

Andrew Biggs (30:07):
retiring today, low and middle-income people would have had higher total benefits by a little bit. The very highest-income people, their benefits would be down by a couple percent because the cuts to their traditional benefits would be larger than the gains from their personal account. But even they would be fine; it’s not a big deal. Going forward, it looked like people would do a little bit better with the Bush plan than with the traditional system. But here’s the important thing: the traditional system is broke. We just talked about how it goes broke in 2032, with huge deficits. The Bush proposal wouldn’t have made Social Security totally solvent, but it would have addressed half or two-thirds of the long-term funding gap. So you’d get a system that would have paid you benefits around the same as, or maybe a little bit better than, Social Security, but would be in much more solid financial shape. Today the times are different, and I don’t think personal accounts are really viable. But the point is, if they had done something back then, everything could be easier today. But members of

Congress were just too afraid. Republicans were afraid of taking the political hit. For Democrats, it was too tempting to give the political hit. They knew they had to do something, but they couldn’t swallow hard and say, look, let’s just go in on this thing together. They didn’t want to give Bush the win because by that point Iraq was going badly and they really didn’t like him. So they beat him up. But the problem is Bush served his term and is happily retired in Texas. The people who really got screwed were the ones who depend on Social Security, because we didn’t fix it. And you just hope that’s not what we do again.

Susan Pendergrass (31:42):
Yeah. Somebody not us in 2045 could be having the same conversation, right? Like, if only in 2025 or 2026 we’d gotten serious. And I do think people mix up the trust fund with the whole program. A lot of people think all of Social Security is going to be bankrupt in six years, versus the reality that we’re still taking in a trillion dollars, we just need about 22% more than what we’re taking in.

Andrew Biggs (32:14):
Yeah. If you go back 20 or 25 years, there were all these arguments about whether the trust fund is real or fair or whatever. The trust fund is essentially IOUs written from one side of the government to the other. I thought at the time the trust fund is not real in an economic sense. It doesn’t make it easier for the government to pay Social Security benefits. It is a pledge that we will pay them, but it doesn’t make it easier to pay them. But here’s the interesting thing:

Susan Pendergrass (32:25):
Right. Al Gore. The lock box.

Andrew Biggs (32:50):
if having a trust fund doesn’t make it easier to pay benefits, then not having a trust fund doesn’t make it harder. The trust fund runs out, we still have taxes coming in, we can still pay 80% of what is owed. If we retarget that, you can maintain the safety net. It’s not like you’re totally insolvent or broke. All those long debates over whether the trust fund is real get resolved because the trust fund itself is gone in six years. So that doesn’t matter very much anymore. But I do hope that, as you said, we’re not in 2045 looking back on a solution of just borrowing $500 billion a year or whatever it’s going to be. People in 2045, when the federal government is bankrupt, the dollar is dropping, and all these financial crisis things we think only happen to other countries are happening to us, they would look back and say, I wish those people were more responsible. The Social Security problem, in a sense, if we went back 25 or 30 years ago, was a manageable problem. The real issue is not the demographics or the benefit growth or whatever. The real issue is just poor stewardship of this program by Congress and respective presidents. It is absolutely a governance problem. It is not a problem of economic or demographic fundamentals. All of that can be handled.

Susan Pendergrass (34:19):
Everyone wants to be Santa Claus, right? No one wants to be the Grinch.

Andrew Biggs (34:22):
It’s very true, but leadership is about giving people bad news. Good news kind of tells itself. Bad news has to be told and people have to be convinced that this is going to hurt, but we’ve got to do it. And we just didn’t have the willingness. President Clinton in the late nineties tried to do some stuff, but he didn’t deliver much bad news because we had surpluses. President Bush was willing to tell people, okay, look, you’re not going to get every penny you’ve been promised. Beyond that, the level of leadership has been very poor.

Susan Pendergrass (35:01):
Hasn’t been good. All right, well, next year when the trustees report comes out, come back and give us more bad news.

Andrew Biggs (35:09):
Yeah, until then, things are looking up. But no, it’s something people want to be aware of, and I think that’s the key thing.

Susan Pendergrass (35:13):
Well, I think one of the more important things you said is that no one understands it. People are upset and arguing over something they don’t understand the mechanics of. I do know people who think they have an account with their name on it that their Social Security taxes went into, and they’re just going to start taking the money out.

Andrew Biggs (35:23):
I have some bad news for that. Your taxes go into Social Security and go straight out the door to pay for your grandmother’s benefits. If you want to know where your taxes are, they’re in your grandmother’s bank account. So go ask her.

Susan Pendergrass (35:45):
That’s right. That’s right. All right, thank you so much. I really appreciate the time.

Andrew Biggs (35:51):
Thank you, Susan. It’s a pleasure to be with you.

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The post The Social Security Crisis Is Worse Than You Think with Andrew G. Biggs appeared first on Show-Me Institute.

Dave Helling recently responded to my Show-Me Institute colleagues’ piece on what Missouri should learn from Kansas’s tax changes a decade ago. He questions whether Missouri’s current discussion is meaningfully different from what happened under former Kansas Gov. Sam Brownback.

I respect Dave and welcome the debate. Kansas belongs in this conversation. But if we are going to invoke it, we should be clear about what it demonstrates.

Kansas did not experience instability simply because it lowered tax rates. It ran into trouble because revenue fell precipitously and the state did not appropriately adjust its fiscal structure. Lawmakers enacted sharp tax reductions, created a large pass-through exemption, and left spending commitments largely intact. The result was a structural imbalance.

That is the lesson.

Dave suggests that state tax policy has only a marginal relationship to economic growth. It is true that no state controls the national business cycle. But it does not follow that tax structure is economically irrelevant.

Growth reflects millions of individual decisions—where to work, invest, expand, or relocate. Tax policy influences those decisions at the margin. And marginal decisions, aggregated across an economy, shape long-run performance.

If tax policy does not meaningfully affect behavior, it becomes difficult to explain why businesses restructured to qualify for Kansas’s pass-through exemption, why cities such as Kansas City offer tax abatements and other tax incentives to attract employers, or why area policymakers worry about the Border War. Incentives matter. They always have.

Both Kansas City and St. Louis are about to vote on retaining their 1% earnings taxes. Does anyone doubt the tax is one more incentive to live and work outside city limits?

None of this means that tax cuts guarantee prosperity. Lower rates increase the after-tax return to work and investment; they do not override broader economic conditions. But acknowledging limits is not the same as declaring irrelevance.

Kansas was not a clean test of “supply-side theory.” It did not eliminate its income tax. It reduced rates quickly, carved out a significant exemption, and failed to align revenue reductions with sustainable fiscal adjustments. When revenues declined more than expected, the state lacked sufficient buffers.

That was a structural failure, not proof that tax policy is immaterial.

Missouri’s debate, then, should center on structure and discipline. Any serious reform would require conservative revenue estimates, a modernized and stable tax base, adequate reserves, and spending aligned with realistic collections. Without those elements, skepticism is warranted. With them, instability is not inevitable.

There is also a tension in arguing that tax policy has little influence on economic outcomes while simultaneously warning that changing it risks serious harm. If tax structure truly operates only at the margins, its effects—positive or negative—cannot be dismissed when convenient and amplified when politically useful.

The more accurate position lies between extremes. Tax structure is neither a magic lever nor a null variable. It is one component of competitiveness, and like any component, it must be designed responsibly.

Kansas offers a caution about execution. But the Kansas story does not settle the broader question of how Missouri should structure its tax system going forward.

That question deserves a debate grounded in fiscal mechanics and economic incentives instead of caricatures.

The post The Lesson from Kansas—and the Question for Missouri appeared first on Show-Me Institute.

Susan Pendergrass is joined again by Elias Tsapelas, director of state budget and fiscal policy at the Show-Me Institute, for Part II of their conversation on the sweeping federal legislation known as the “One Big Beautiful Bill.” They unpack what the bill means for Missouri taxpayers, including changes to the standard deduction, tips and overtime, education savings accounts, and higher education policy. They also dig into the bill’s broader fiscal impact, from the growing federal deficit to the implementation challenges facing state governments.

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Timestamps

00:00 Exploring the One Big Beautiful Bill
04:58 Tax Implications for Missourians
10:20 New Savings Accounts for Children
12:07 Changes in Higher Education
18:09 Federal Deficit and Debt Concerns

Listen to Part I Here

Episode Transcript: One Big Beautiful Bill Breakdown, Part II with Elias Tsapelas 

(Download Here)

Susan Pendergrass (00:00)
So I guess it turns out that the One Big Beautiful Bill was too big for us to talk about in one podcast. Elias, thanks for coming back. I realized after we stopped recording that there’s so much in there we didn’t even discuss. We barely even really got into it. So let’s talk about more of the One Big Beautiful Bill because it’s huge—hundreds, at least hundreds of pages long. And I can’t believe the people who voted on it read it through carefully. Now, as you’re going through it and learning things, I’d love for you to explain some of it to me.

Starting with—how does the no tax on tips and overtime work? I’ve heard a lot about this. I know it was a campaign promise. So is it true that if you’re waiting tables now and you get a few hundred bucks a night in tips, you don’t have to pay tax on it now?

Elias Tsapelas (00:51)
In theory, yes. Now, it’s not clear if it’s going to be something that impacts Missouri tax liability. It sort of impacts the federal tax code a little differently than the increased standard deduction and some of the other changes. So it might change some federal tax liability, but unless Missouri’s legislature changes some stuff, it’s not going to immediately impact Missouri taxes.

Susan Pendergrass (01:16)
But why—do you have to itemize to do it?

Elias Tsapelas (01:19)
No. Basically, Missouri has rolling conformity with the federal government. Missouri takes its gross income from the federal government, and the tax on tips and overtime piece isn’t going to impact the gross income calculation. So it may or may not become an issue in Missouri.

There’s also a big open question here about how much income tip workers are actually claiming, and how much that will change if you say it’s not taxed—because if they weren’t declaring it before, we don’t really know what the change will be.

Susan Pendergrass (02:05)
Yeah, so if you walk home with a wad of cash, you’re not necessarily going to add it up and write it down and claim it.

Elias Tsapelas (02:09)
It still might not be worth declaring all of it. But if Missouri brings it into the state income tax code, it could cost quite a bit of money. There are quite a few tax provisions here—especially on corporate tax—where we really don’t know how much it’s going to cost, but it’s probably going to be significant. There’s full expensing, depreciation, all kinds of things that are going to change both federal and Missouri tax liability. And then there was the standard deduction change we mentioned last time.

Susan Pendergrass (02:47)
Okay. So one thing that does impact Missourians is our tax credit scholarship program, where you can donate to a scholarship-granting organization like the Archdiocese of St. Louis, and they give out scholarships. Right now, you can get a Missouri state income tax credit for that—up to half of how much you owe the state. And now there’s a new program where you can take a federal credit of up to $1,700 for donating to these organizations.

You can’t get credits for both on the same donation, but you could donate up to half your tax liability and get the Missouri credit, and then separately donate $1,700 and get the federal credit. I know there’s a lot of rulemaking still to come, and I also know this program doesn’t start until January 2027. So it won’t affect people’s returns until April 2028. But—how do you think that’s going to work? Do you have any idea based on what you’ve read?

Elias Tsapelas (03:54)
Well, Missouri has to opt in first, right? I think the first step is getting the rules out and seeing which states opt in. I would assume Missouri will. The hope is that this becomes something more people understand and take advantage of.

In Missouri, even though we have tons of tax credits that people do use, it takes a while to build it into tax preparation tools like TurboTax. So you kind of have to know what’s going on. Maybe once the federal piece is in place—and there are also changes to the child tax credit—that’ll help.

Susan Pendergrass (04:24)
Spread the word. How’s that changing?

Elias Tsapelas (04:51)
Some of the temporary provisions from the 2017 bill are now made permanent. One of the things the One Big Beautiful Bill does is take temporary changes and make them permanent. We’ll see in a few years how many of these stay.

Susan Pendergrass (05:10)
So the child tax credit is now permanent?

Elias Tsapelas (05:13)
Yes. The changes made in 2017 are now permanent. It’s higher now, and there’s more of it that’s refundable. There’s still an income threshold to get the maximum amount. I think there are going to be a lot of tax credit changes. The bill also got rid of a lot of renewable tax credits. So there are a lot of changes to tax policy for both businesses and individuals. I think people will need to start thinking about their Missouri taxes a little differently, at least for the next few years.

Susan Pendergrass (05:59)
Another piece is the savings accounts for children—kind of like IRAs for kids. I’ve read that anyone born after January 1, 2024, or maybe anyone currently under age 18, is eligible. The IRS has to open the accounts, and you need a Social Security number. For kids born between January 1, 2024, and 2026, the government deposits the first $1,000.

Elias Tsapelas (06:52)
Yeah. What I was trying to figure out is how these differ from 529 plans. I think these will be harder to withdraw from. They do come with tax benefits for employers and others contributing, but taxes will have to be paid when the money comes out.

Susan Pendergrass (07:25)
Yes—capital gains. With 529s, the money goes in pre-tax and comes out tax-free if used for education. These accounts are less flexible. You can take money out for education, a house, or a business, but otherwise there’s an early withdrawal penalty plus capital gains. It feels gimmicky, since the government only deposits $1,000 until 2028 when the program expires.

But for many low-income kids, this could be their only savings. It’s meant to help those who wouldn’t have a 529. They were originally going to be called “Invest in America Accounts,” but they’re now called “Trump Accounts.”

Elias Tsapelas (08:50)
I’m curious to see if the $1,000 is the only money ever deposited into these accounts for most people. It may not be worth putting in more, but even with tax obligations, it’s still free money.

Susan Pendergrass (09:27)
Right. You turn 18 and have $10,000—it’s not nothing. But some worry that a future Democratic president with control of Congress could expand the program—like depositing $500 annually for anyone under 18. It starts to look like a form of universal basic income. But I suspect it’ll go away—it feels gimmicky.

Elias Tsapelas (10:16)
I’m curious if the government will make it easier to use for college or similar expenses. There are a lot of higher education changes in the bill too. As someone with student loans, I’m getting emails every day about them.

Susan Pendergrass (10:33)
Yeah. So tell me—what are the changes to higher ed?

Elias Tsapelas (10:43)
Well…

Susan Pendergrass (10:46)
I’ve heard it might hurt community colleges, but I don’t know why. Do you?

Elias Tsapelas (10:49)
There are new caps on loan amounts and some income-based repayment plans are being eliminated. For example, the SAVE repayment plan created by the Biden administration has been tied up in court. Interest collection is resuming, but payments aren’t due yet. Borrowers need to switch plans, but the old ones are gone. The new plan tries to prevent negative amortization, but it’s still unclear how well that will work.

Grad students will be able to borrow less. The government wants loans repaid more quickly. After five years of paused payments, there’s a huge administrative burden now to unwind all of this.

Susan Pendergrass (12:11)
I know—since the pandemic.

Elias Tsapelas (12:17)
Exactly. There’s going to be a big process for certifying income and re-establishing payments. Colleges are nervous—lower borrowing limits could change students’ decisions. And I don’t know if the federal government is prepared to roll all of this out smoothly. I still need to re-set my auto-withdrawal.

Susan Pendergrass (12:56)
Yeah. It feels like we have to wait six months or a year to see what actually happens. Even the work requirements for SNAP and Medicaid were pushed out beyond the midterms. So while people are celebrating or panicking, a lot of this is still TBD.

Elias Tsapelas (13:26)
Yeah. And when people talk about “cuts,” especially to Medicaid, they’re mostly referring to ten-year projections. But a lot of the actual cuts are back-loaded. The benefits hit first—then the cuts. And some of those cuts may never happen. There’s also a big expansion of health savings accounts. People with bronze marketplace plans or direct primary care arrangements could use them, but rules still need to be written.

Susan Pendergrass (14:38)
I read there might be fewer subsidies, maybe higher premiums?

Elias Tsapelas (14:44)
Depends. There’s going to be a bill later this year to debate extending the enhanced COVID-era subsidies. But those subsidies created a kind of shadow market—shady dealers signing people up for plans they didn’t even know they had. About 2 million people were enrolled in multiple subsidized marketplace plans last year. So now there’s a push to reintroduce some “skin in the game.” But we’ll see what ends up mattering or going into effect.

Susan Pendergrass (16:04)
And our senator is already trying to undo parts of the bill he voted for.

Elias Tsapelas (16:08)
Yeah, especially the provider tax piece. That would help rein in spending, but the cuts don’t go into effect for several years—giving time for backtracking. If none of the pay-fors happen and only the expensive parts do, this bill just becomes even more costly.

Susan Pendergrass (17:08)
What does this bill, even optimistically, do to the federal deficit?

Elias Tsapelas (17:15)
I still need to see estimates, but we’re looking at adding at least $4 trillion to the deficit. Possibly more, depending on what’s made permanent.

Susan Pendergrass (17:53)
I thought Republicans cared about balanced budgets. This feels irresponsible. What do you think?

Elias Tsapelas (18:08)
It’s a lot easier to say you’re for fiscal responsibility than to actually do it. With Medicaid, people say cut waste—but cutting funding means cutting payments to hospitals, doctors, and nurses. And those tax cuts were always going to be extended. Every person taking the standard deduction is getting a bigger deduction. That costs money.

The real long-term budget problems are in Medicare, Medicaid, and Social Security—none of which were addressed. So someone will have to get back to those eventually.

Susan Pendergrass (19:48)
Yeah. Social Security’s trust fund is going to run dry soon—maybe within 10 years. The numbers are so big, it starts to feel imaginary. People can’t wrap their heads around what it would take to have a balanced budget. Both parties just keep giving stuff away, so you’d be foolish to sit on the sidelines.

Elias Tsapelas (20:24)
Yeah—it’s just different groups they’re giving to. This bill was very expensive. And I think future efforts will make it even more so by eliminating what little cost savings exist.

Susan Pendergrass (21:03)
The SALT deduction, for example—capped at $10,000 in 2017, now up to $40,000. That’s a $30,000 swing. For Californians, that’s huge.

Elias Tsapelas (21:27)
Yeah, and the benefit mostly goes to higher-income people. Even in Missouri, some homeowners might benefit—but it mostly helps the coasts. And it gives high-tax states more room to raise taxes, since the federal deduction cushions the blow.

Susan Pendergrass (22:19)
Exactly. Crazy stuff. Well, I think we’ve covered a lot. I won’t make you come back again, but there’s so much detail—it’s not really what either side thinks it is.

Elias Tsapelas (22:45)
I agree. Especially with Medicaid and SNAP. And states will carry a big burden implementing this. Some will do it well, some will fight every piece. There’s going to be a lot of news as this all rolls out.

Susan Pendergrass (23:46)
Totally. Not directly related, but recently I’ve met people surprised by the real ID requirement. It’s been around for 10–15 years, and Missouri resisted it. Some states just don’t want to jump into federal programs.

Elias Tsapelas (24:04)
Yeah—I’ve seen signs about it at TSA forever. Always “effective in 3 months,” then postponed. But it finally happened.

Susan Pendergrass (24:11)
Right. And this summer, people are finally getting real IDs. Missouri was one of the last to implement it. So I don’t expect the state to jump on many of these changes either. But there’s still plenty of time to talk about it all again.

Elias Tsapelas (24:28)
Yes.

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The post One Big Beautiful Bill Breakdown, Part II with Elias Tsapelas appeared first on Show-Me Institute.

Susan Pendergrass and Dominic Pino, the Thomas L. Rhodes Fellow at the National Review Institute, discuss the current state of U.S. tariffs and trade policy, tariffs as a hidden form of taxation, common misconceptions about trade deficits, provide historical context for America’s protectionist tendencies, and more.

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Timestamps:

00:00 Understanding Tariffs and Economic Perspectives
02:51 The Impact of Trade Deficits
06:05 The Role of Government in Trade Policies
08:59 The Consequences of Protectionism
12:02 Future Economic Predictions
15:05 Historical Context of Tariffs
18:03 The Confusion Surrounding Current Policies

Episode Transcript 

Download a Transcript of this Episode

Susan Pendergrass (00:00) Well, this is going to be interesting. Dominic Pino, thank you for joining us from National Review. Every day feels like a month now, but it was a couple of weeks ago that this all started, and since then so much has happened in our economy. This is a great opportunity for me as a non-economist. I have seen, as many people have, Thomas Sowell out talking about what’s happening in the economy right now and our current economic approach. And it doesn’t seem like he thinks it’s great. What’s your opinion? And can you explain what the potential upside is of how we are approaching tariffs right now?

Dominic Pino (00:34) Yeah, thanks so much for having me on. First thing — I’m not really an economist. I do have a master’s degree in economics from George Mason, but I’m a journalist. I write about economics. Thomas Sowell most certainly is an economist and he is someone we should be taking seriously. His book, Basic Economics, lays out some of the best arguments for free trade that anyone has ever put to paper. He was recently talking, as you mentioned, with the Hoover Institution at Stanford, where he is still located. He was talking about how these tariffs from Trump are not an exception to the rule — they are not a good idea. What the U.S. has been doing is unilaterally, through just the president acting alone under supposed national emergencies that quite frankly don’t exist, imposing tariff rates that are higher than any country in the developed world on basically every other country in the world, for the mere existence of a trade deficit. That is what they think is the problem. The formula they use to calculate those tariff rates is not based at all on other countries’ tariff rates. They try to say it’s a reciprocal thing based on other countries’ tariffs, but that’s not at all what they did. All they did was look at other countries’ trade deficits and say, based on that, there’s a national emergency that we need to solve with unilateral action from the president to raise taxes on Americans. And it’s probably the largest peacetime tax hike in U.S. history.

Susan Pendergrass (02:00) Yeah, so the Show-Me Institute — we’re firmly on the books as being a free market policy think tank. That’s what we do. We talk about free market state policy for the most part, and we are pretty anti-tax and limited government. The idea that tariffs are taxes — why is it such a leap these days? Why are tariffs now seen as not taxes but as a skilled negotiating tool? How did that come to be, do you think?

Dominic Pino (02:22) Mostly because Donald Trump just believes it to be true. And he’s believed it to be true since the 1980s. You can look back — this is a pre-political thing for him. He just thinks that tariffs are a good idea. And he thinks that foreign countries pay them. It sort of sounds that way when you describe it as, say, a United States tariff on Japan — that makes it sound like Japan is the one paying it. But it’s really a tariff on Japanese goods, and that tariff is paid by Americans who buy Japanese goods. The fact that these are a tax increase is not in dispute. And you know it’s not in dispute because even the White House says it’s going to raise a ton of new revenue from these taxes. Where’s that revenue coming from if it’s not a tax? And why are American businesses upset about having to pay this tax if the tax is actually paid by foreigners? It doesn’t make a lot of sense.

Susan Pendergrass (03:13) So then why the trade deficit as the boogeyman? The way I see it — and again, we’re free trade, free market — trade deficits exist because we have a comparative advantage in some industries and other countries have a comparative advantage in others. I want to be able to buy all of it. I want to buy my vanilla from Madagascar. What is the problem with a trade deficit, or how did it become such a boogeyman?

Dominic Pino (03:37) Donald Trump seems to believe that a trade deficit means you’re getting poorer. And I just don’t know how you can get there. The United States is the richest country in the world. We have the world’s largest economy. We have that despite increased competition from China, and China has been slowing down while the United States has continued to plug along. We’ve seen countries that adopted free trade after being protectionist become very rich in a very short amount of time — places like Hong Kong, Singapore, or even those supposedly socialist Nordic countries like Sweden and Denmark. They have very liberal trade regimes, and they do that because they know it makes them richer. For the United States, we should absolutely be embracing free trade. We have actually embraced free trade less than a lot of other countries have, if you look at the proportion of our economy that is due to international trade. We’re in the low 20s as a percentage of GDP when you add up imports and exports. The world average is 63%. Most other countries are much more exposed to trade than the United States is. And we could be even better off if we reduced a lot of our own trade barriers, which there doesn’t seem to be any appetite for the president to do.

Susan Pendergrass (04:54) So walk me through what would be, from what you can understand of whatever the plan is — let’s say this is a plan — what would be the optimum outcome that the administration gets out of the approach they’ve taken?

Dominic Pino (05:07) Well, from my perspective, the optimum outcome would be that other countries remove their tariffs and we remove ours and we all get along. I think that would be great. There is a case to be made that you can use the threat or imposition of tariffs in this way to do that. That is a thing that we have in law and it makes sense in theory. It’s just not what the administration is actually doing. For example, Israel, in anticipation of these tariffs, removed all of their tariffs on U.S. goods. Now, they basically didn’t have any to begin with because we’ve had a free trade deal with Israel since 1985, but the few that were left — a couple of stragglers on some agricultural products — they got rid of them before Trump made his announcement. Trump comes out and puts 17% tariffs on goods from Israel. So why are we doing 17% if they’re doing zero? That’s not reciprocal at all. And it’s not being used to get a new free trade deal because we already have a free trade deal with Israel. If the administration had exempted the 12 countries with which the United States already has bilateral free trade deals, and the other countries that are part of multilateral trade deals, and said that’s what we want, then you could bring other countries to the negotiating table and say, hey, we want a free trade deal with you too. But if countries are learning the lesson that even having a free trade deal with the United States doesn’t protect you from U.S. tariffs, then what incentive do they have to come to the table in the first place?

Susan Pendergrass (06:38) You may have seen the news today about a potential extra 50% tariff on China, which seems a little impulsive. I’m just going to read what Thomas Sowell said in the last couple of days. He said, “It’s not a bad idea if you’re doing this within a system of rules. If you are the one who’s making the rules, then all the other people have no idea what you’re going to do next. And that’s a formula for having people hang on to their money until they figure out what you’re going to do. And when a whole lot of people hang on to their money, you get the results you got during the Great Depression of the 1930s.” I would say more than anything, we don’t know what’s going to happen next. Wednesday, supposedly the tariffs go into effect unless there’s a pause or some minds get changed. Don’t you think that’s what’s really driving the chaos right now — how unpredictable it is? You open the news and it’s like, maybe 50% more on China. What do you think?

Dominic Pino (07:33) For sure, I think that’s a big part of it, absolutely. This is why the founding fathers put the tariff power in Congress. They didn’t want one president, one guy by himself, to be able to do this kind of thing. They wanted tariffs to have a democratic legitimacy coming from the legislature that’s elected by the people. They wanted it to involve other voices from around the country so that certain regions aren’t left out. And they wanted it to go through two branches of government so that it’s more difficult to change. Congress over the past several decades has given away large portions of its power over trade. There were some good reasons to do that because it was done under the assumption that the president was going to use that power to liberalize trade — there were lots of public choice problems when Congress had control over the trade agenda by itself. And so for several decades, presidents of both parties did use that power to reduce U.S. barriers to trade and to negotiate lower barriers for other countries. That process played out and worked very nicely. Now we’ve had the last two presidents — both Trump and Biden — use a lot of those powers to increase trade barriers. And they’re doing so at a time when polling shows that trade is actually more popular than ever. The Gallup survey has been asking this question for many years: do you believe that international trade is more of an opportunity for the United States, or more of a threat? The number of people saying opportunity is at an all-time high right now, at about 80%. And yet politicians have convinced themselves that Americans are demanding protectionism. Really, it’s good for politicians because when they have the power to determine which exemptions get made, which tariffs apply to which industries, that creates lots of opportunities for lobbyists to come in and say, hey, you should give me that exemption. We’re already seeing that happening. Tim Carney at the Washington Examiner wrote a piece today saying there are about 160 new lobbying organizations that have spawned so far this year to lobby about international trade, and that’s only the tip of the iceberg.

Susan Pendergrass (09:44) So they’re coming in and saying, we want you to exempt our industry, our country, our region. They’re being paid millions of dollars to get the carve-outs. Have any carve-outs happened?

Dominic Pino (09:58) For the Canada tariffs, they put a lower rate on energy and on fertilizer than on other things. For some of the auto parts stuff, it’s not entirely clear exactly what’s going on at the moment, but there does seem to be some exemptions made there. But yeah, the exemptions are going to get made, and they’re going to get made not based on what’s best for the country in general — they’re going to get made based on who’s the most politically connected, because that’s how politicians work. That’s their job. That’s what they do. It’s in the name: politics. And so when there’s all this high talk of the national interest and national security — we’re going to bring back defense industry and things like that — it’s all cover for what they’re really doing, which is redistributing profits from companies they don’t like to companies they do like, and destroying a lot of wealth along the way from all the inefficiency that comes about.

Susan Pendergrass (10:48) So where do you see this headed? If you could fast forward to summer, where do you see this going? A lot of experts — Jamie Dimon and others — are talking about what they’re seeing in the tea leaves right now around the economy. What do you think?

Dominic Pino (11:01) I don’t think the stock market is done going down yet. I think traders are still holding out hope that the president is going to see the mistake here and reverse course. I’m not really optimistic that’s going to happen because during the first term there were a lot of voices saying contrary things, a lot of discussion and debate going on. And you also had a vice president in Mike Pence who was much more free market and much more traditionally conservative, and his team did a lot to run the policy decisions that were being made. This time around, JD Vance is an unabashed protectionist — he’s not making any secrets about that. And the people who are close to the president on this are people like Peter Navarro, who just really believes in protectionism. He finally has a chance to achieve his lifelong dream of raising taxes on Americans for having the nerve to buy stuff from other countries. Trump has other advisors who do know better, but they’re not going to be super likely to speak up because quite frankly, a lot of Republicans are just afraid of Trump and afraid of the consequences of speaking out against him. They would really be helping Trump to speak out. Republicans in Congress hopefully will realize this eventually, because these policies are going to be damaging for the American worker and the American consumer, and Trump shouldn’t want his name associated with that. Republicans shouldn’t want their party’s name associated with that. So Republican members of Congress should man up and be willing to override a presidential veto if they need to, to get rid of these damaging policies.

Susan Pendergrass (12:32) They tried somewhat, right? They tried with the Canadian tariffs. Rand Paul did, but it didn’t really make a difference.

Dominic Pino (12:39) Yep, they tried. Four Republicans voted with the Democrats to overturn the national emergency declaration on Canada. That’s a real thing that our federal government has right now. And it’s still in place because the president says so.

Susan Pendergrass (12:53) Yeah, I don’t know why I’m laughing because it’s not funny — a national emergency with Canada. What about this idea that we’re going to quickly move all production of autos back to the United States? During COVID, we were able to quickly ramp up production of masks and PPE. Can we do the same with cars?

Dominic Pino (13:20) It’s a whole lot easier to make a fabric mask than it is to make an automobile. That’s the first difference. The second is, you can look at the investment decisions that car companies make — they always take many years. That’s true of foreign automakers that build plants in the United States, which lots of them have done, and it’s supposed to be the point of this tariff policy. But they’ve done it without the tariff policy, so that should lead you to ask, well, if they were already doing that, why are we trying to make it harder? Those decisions take a long time. They’re reliant on the existence of a skilled workforce, and those skilled workers absolutely exist in the United States, but a lot of them are already employed doing other things. You have to pull them off of those other things to move them into car factories, which in many cases are going to be less productive than the jobs they were doing before, because the jobs they were doing before existed without the government taxing people in order to make them possible. It’s not that the United States doesn’t have a skilled labor force — we have an amazing labor force. They’re just already doing stuff. The unemployment rate continues to be very low, and that’s something we should be happy about. But we’re acting as though we’re in the middle of a depression and need the economy to rebound, when really we just need to build on some successes we already have.

Susan Pendergrass (14:35) Yeah, it’s so perplexing to me because at the Show-Me Institute, we talk a lot about governments trying to use levers to induce people to behave in certain ways — tax increment financing and things like that. If the government just pulled back and stayed out of the way, these things would happen organically. Baseball stadiums would go where the owners think they’re going to make the most money. These things will happen on their own rather than having the government step in and try to make them happen the way it wants. We talk about that all the time. And then this policy to me seems so counterintuitive — the idea that you hurt something so badly that giving a little relief becomes leverage. As a human being that just doesn’t make intuitive sense to me. We’re going to beat this dog, and when we give it a little water it’s going to be so grateful — it won’t be. That dog will hate me if that’s how I treat it. And I feel like that’s what we’re doing. We’re not bringing Canada around to our side.

Dominic Pino (15:38) No, not at all. And Canada was already on our side. They’re a NATO ally, they are our number one trading partner, and we basically have the world’s largest unguarded border with them. And it works fine — it’s great. There’s really no issue. The trade deficit issue there is also crazy. Even if you think trade deficits are bad — which, to be clear, they aren’t — but even if you do, the only reason the United States has a trade deficit with Canada is because of cheap imported Canadian energy. Canada has the thick tar sand oil out in Alberta, and it’s very difficult to refine because of its chemical makeup. The United States — the richest country in the world — has the best petroleum engineers and the best refineries in the world. We have some of the only refineries on the planet that can refine that type of oil. Canada is willing to sell it to American refiners at a discounted rate below the global price because that’s the only way they can get it out of the country. Then the United States refines that oil and turns it into a valuable product, because crude oil by itself is not very useful — you can’t run a car with it, you can’t make plastic with it. You have to refine it. And then we export the refined products out of the Gulf of Mexico, out of Louisiana, and it creates all sorts of economic value for the United States the entire way. And for some reason, that’s the reason for our trade deficit with Canada. How is the United States losing there? How is Canada losing there, for that matter? Both countries are better off. Canada can sell their oil, we can sell the refined products, everybody’s better off.

Susan Pendergrass (17:06) Yeah. I know there are some smart people around the president, and I think I must be missing something. I must have a blind spot. To me, this mostly seems crazy and damaging. So when I read Thomas Sowell and I listen to you and others, maybe I’m not crazy. I just assume there’s some big master plan that I’m not privy to. And all of this is starting to make sense of why I had to give up 15% of my retirement savings when I’m really close to retirement age. Maybe there’s some big plan, but I feel like I hear you saying there may not be a plan.

Dominic Pino (17:50) I’m not seeing one, unfortunately. And it’s not an encouraging sign when you can’t even get the administration to be on the same page with itself when talking about these things.

Susan Pendergrass (17:59) Yeah. What is the base rate? They’re all over the map. I think there was a leak today that there was going to be a pause, and then the White House said there’s not going to be a pause. They don’t even seem to know what page they’re on. Do you think we are heading towards a recession?

Dominic Pino (18:18) I don’t know that, but it’s certainly not going to help our GDP growth. We still have decently strong GDP growth — we have since COVID, and we had before COVID too. COVID was sort of an aberration. We’ve been growing at around two and a half percent a year since about 2018, give or take, which is pretty solid for a developed country as advanced as the United States is. So we still have some room before we get into recession territory. But it’s not going to make GDP growth do better, that’s for sure. And once people start to lose jobs from this, once people start paying more at the store, you’re going to see a lot more backlash. Quite frankly, if you have a recession that you can pretty clearly attribute to one person — which is Donald Trump, because again, he’s doing this unilaterally — it’s going to be hard to argue to voters that it wasn’t his fault.

Susan Pendergrass (19:11) Yeah, and I think it’s interesting that people used to use gas prices as a gauge because you just drive by them and see them every day. But now we all have our bank accounts and our 401ks on our phones, and we’re not waiting for a quarterly statement to find out. We see it going up and down like gas prices. And I believe that’s causing more of the backlash, the anxiety, the angst — we can just see it in real time.

Dominic Pino (19:35) Yeah, for sure. The guys from Americans for Tax Reform talk about how market research shows that people who are actively engaged in the stock market are much more likely to be Republicans. And that’s not just true of rich people — that’s true across the board. Even casual retail investors are more likely to be Republicans than Democrats. So in more ways than one, this is hurting Trump’s own voters.

Susan Pendergrass (20:01) Yeah, that’s perplexing. I know you’re probably in high demand now because people want information about what’s going on. Tariffs — it’s just not a word I ever thought I’d be saying so much. I think of them as very much a thing of the past. Anyone who knows about Smoot-Hawley knows that’s a long time ago. Just give us a little refresher course on what happened in the 30s.

Dominic Pino (20:24) Sure. In the 1930s, there was a big stock market sell-off that spurred a recession that then became the Great Depression over time. In large part it became that way because of government policies — including the Federal Reserve making some terrible decisions on monetary policy that guys like Milton Friedman and Anna Schwartz have written entire books about. The federal government made some bad decisions, including New Deal programs that were basically make-work jobs that were drags on productivity. But also the Smoot-Hawley Tariff Act didn’t help things either. The theory at the time was: we need high tariffs to protect America from unfair foreign competition, and once we rebuild our domestic economy we can go out and engage with the world again. It was completely wrong. Not only was it completely wrong for the United States, but it spurred a global wave of retaliatory tariffs that really helped to wreck free trade that had been growing as a global norm. This happened right between World War I and World War II — obviously not a happy time in world history and not a time we should look back on fondly. It was really bad.

Susan Pendergrass (21:35) It was 100 years ago too. We should have learned from it.

Dominic Pino (21:40) Yeah. But the average tariff rate under Trump’s plan is now higher than the average tariff rate under Smoot-Hawley. So if the tariffs stay in place for any extended period of time, you can expect — and I’m not promising another Great Depression — but it’s certainly not going to be good.

Susan Pendergrass (21:54) Yeah. I think one thing I can say confidently is that people’s impatience is escalating. The “don’t worry, we have a plan” response is wearing very thin. This idea that it’s going to work and you just have to take your medicine — when you haven’t really asked people to step up and sacrifice for a policy that most people don’t even really understand or want to get behind, that’s starting to really wear down. Republicans and — well, Democrats clearly don’t like it — but even some Republicans are coming around. If we were in a war and we all had to get blackout curtains, that’s one thing. But asking everyone to sacrifice their savings for something that no one has explained very well is not going to last. I think there’s going to be backlash.

Dominic Pino (22:50) And that style of argumentation is one that Democrats use all the time. They use it when they talk about clean energy and the transition to green energy. They say, yeah, there’ll be higher energy prices for now as we transition, but it’ll be better in the long term because we’ll have zero emissions and it’ll all be domestically made. They say it’ll help us get off foreign oil, and so on. Now, when Democrats make that argument, Republican voters recoil — and they vote for Republicans. But now Republicans are in office making the same kind of argument. It’s not about the environment, it’s about the global trade system, but the structure is identical: sure, in the short term there’ll be some higher costs, but don’t worry, the government has a plan. That’s just a Democrat style of argument. This is a situation where I actually wish there were a little bit more partisanship — Republicans just having the instinct to say, wait a minute, that sounds like what Democrats say when they’re talking about green energy.

Susan Pendergrass (23:48) Yeah, and another thing I wonder: people I know who are defending this approach — at what point is somebody going to say the emperor has no clothes? I’m a little bit dialed in, but I think most people are seeing it and wondering why people are going on the news every night and defending this approach. It’s confusing. It’s just confusing.

Dominic Pino (24:11) Yeah, absolutely. It’s confusing to all of us. And it’s confusing too because the justifications that get trotted out by different supporters can’t be true at the same time — and this is really the giveaway that it’s nonsense. For example, if the point of the tariffs is to bring back manufacturing jobs, to benefit domestic producers by allowing them to charge higher prices because they don’t face foreign competition, then the tariffs need to stay in place permanently. They can’t go away after negotiation. Similarly, if the purpose of the tariffs is to raise revenue to pay for other tax cuts — which is something the president has been talking about — that means the tariffs have to stay in place not just for now, but for 10 years, because that’s the budget window. So that would mean it’s not a negotiating tool. Now, if it is a negotiating tool, then you need to be willing to remove them. But if we’ve already made a commitment based on projected revenue over 10 years, we can’t remove them now because that would blow up that part of the plan. And if it’s a negotiating tool, it can’t protect domestic industry either, because if we remove the tariffs and foreign goods keep coming in, domestic industry will be right back where it started. The fact that these justifications can’t all be true at the same time should help you understand that there’s actually not a plan here. What’s unfortunate is that I think the administration is taking the keep-them-in-place-for-a-long-time strategy, because they’ve been talking much more recently about how it’s not a negotiation, how it’s going to raise revenue, and how the purpose is to restructure global trade. Those are their words.

Susan Pendergrass (25:47) Yeah, so it’s going to raise $6 trillion over 10 years — the amount they need to extend the Tax Cuts and Jobs Act, basically.

Dominic Pino (25:55) Yeah, $6 trillion. So we’re going to do the largest tax increase in American history to pay for keeping the tax rates the same. Because again, extending the TCJA just means keeping the rates what they are right now.

Susan Pendergrass (26:09) So to do that, we have to raise taxes. That’s incredible. Well, Dominic, thank you so much for coming on and talking to us. I do understand it better now. I’m still perplexed, but I wake up every morning, look at the headlines, and think, now what’s happened? The chaos factor is getting on my nerves, but I appreciate you coming and explaining it in such a concise and clear way.

Dominic Pino (26:32) Good, I hope it helped. And if it makes you feel any better, I’m probably just as confused as you are.

Produced by Show-Me Opportunity

The post Tariffs, Trade, and Economic Risk with Dominic Pino appeared first on Show-Me Institute.

What is the debt ceiling, and what would have happened had we not raised it?

The debt ceiling (or debt limit) is a legal limit on how much money the U.S. government is authorized to borrow. Once the country reaches this limit, the Treasury is not permitted to issue more debt.

Can we simply not raise the debt limit?

The Congressional Budget Office (CBO) projects that the federal government will run a deficit of more than $1.5 trillion in 2023 alone, with spending amounting to $6.4 trillion and revenue coming in at $4.8 trillion. Of the $6.4 trillion in spending, $4 trillion is for mandatory programs that operate without Congress needing to regularly reauthorize them (e.g., Social Security and Medicare), $1.7 trillion is discretionary spending, and $660 billion goes to interest payments. Balancing the budget and eliminating the deficit in one fell swoop would require essentially zeroing out discretionary spending or making instant, draconian cuts to mandatory programs. Given the deep fiscal hole that the federal government has put the country in, there was no real alternative to raising the debt ceiling.

If both sides agreed that the debt ceiling had to be raised, what were the negotiations about?

Historically, occasions when the government has reached the debt ceiling have produced negotiated agreements that both raise the ceiling and limit spending, as was the case with the Budget Control Act of 2011 during the Obama-Biden Administration. However, this time around, the White House insisted for months that it would not negotiate on any spending reforms as part of raising the debt ceiling.

Given the unsustainable fiscal path that the United States is on, the White House was essentially sending the message that the only way to avert a debt crisis now (by raising the debt ceiling) was to cement the current spending trajectory in place—and thereby increase the chance of a debt crisis down the road. The House of Representatives disagreed with this false choice between a debt crisis today and a debt crisis later and instead passed the Limit, Save, and Grow Act, which simultaneously raised the debt ceiling and slowed the trajectory of spending, among other reforms. Passage of this bill forced the White House to the table, abandoning its no-negotiations stance on spending reforms.

What is contained in the debt ceiling deal?

The debt ceiling deal contains a number of elements. First, it raises the debt ceiling through the end of 2024 and it establishes spending caps for fiscal years 2024 and 2025 that limit the growth of spending to 1% with tough enforcement provisions during the appropriations process, which is when Congress formally makes detailed, program-level spending decisions. In addition, the bill prescribes a 1% cap on spending growth through 2029. By way of comparison, the CBO projected an 8.1% jump in discretionary spending between 2024 and 2025, followed by average annual increases of 2.8% through 2033.

Besides affecting topline spending, the debt ceiling bill rescinds certain COVID-19 and IRS funds, expands work requirements for food stamps and welfare, and implements energy-permitting reforms to reduce delays from excessive and unresponsive bureaucracy.

What is the overall effect?

The CBO projects $1.5 trillion lower spending growth (or in Washington, DC parlance: cuts) because of the deal. Without the deal, discretionary spending would have risen from $1.7 trillion in 2023 to $2.4 trillion in 2033, whereas now the projection is for $2.2 trillion in discretionary spending in 2033.

To give further perspective, the figure below plots three different projections for the path of discretionary spending as a percentage of the country’s annual economic output. The blue dots are CBO projections made in fall 2019 under the previous administration and before COVID-19. The orange dots are CBO projections from this May, but before the debt ceiling deal. The red arrow showing the upward shift from the blue dots to the orange dots represents the persistent increase in discretionary spending under the current administration’s policy plans. The gray set of dots represent discretionary spending under the debt ceiling deal, with the green arrow showing the reduction relative to what was slated to occur before the deal.

As the figure makes clear, the debt ceiling deal essentially takes discretionary spending halfway back to the path it was set to follow before COVID-19 and the change in administration.

Figure 1: Discretionary spending as a percentage of GDP. Source: Congressional Budget Office, Show-Me Institute calculations.

How should Missourians view this deal?

The United States faces a profound and troubling fiscal situation with its unsustainable spending levels, not to mention slow economic growth, declining productivity, and inflation that remains much too high. It is important to recognize that the country has a spending problem, not a revenue problem. Federal revenues are currently above historical average, but the reason deficits are so large is that spending as a share of GDP is higher than it has ever been over the past century except during peak COVID-19 and World War II. The debt ceiling bill does not fully reverse the spending increases of the past two years, but it represents a step in the right direction, especially compared to the White House’s previous no-negotiations spending stance.

Taking a step back, whereas the debt ceiling debate focused on discretionary spending, the vast majority of federal spending goes to mandatory programs, chiefly entitlements. The CBO projects that, absent reforms, federal spending will rise from 23.7% of GDP in 2023 to over 30% by 2053, annual deficits will more than double to over 11% of GDP, and the national debt will balloon to almost 200% of GDP. In this scenario, interest payments on the debt would triple as a share of the economy and would represent the single largest spending item for the U.S. government. Even this scenario is rosy in that it assumes an infinite willingness among investors to buy U.S. debt regardless of how dire the fiscal picture becomes—a rather implausible assumption that America would be wise not to test.

Going forward, much work remains to be done to right-size government and revitalize economic growth so that Americans can enjoy a more prosperous future free from the risk of steep tax hikes, crippling inflation, debt crises, and adversarial foreign governments buying up large quantities of government debt. The debt ceiling deal is by no means a cure to the country’s current fiscal ills, but it’s one step in the right direction, and the starting point for a much-needed national conversation.

The post Debt Ceiling Deal Q&A appeared first on Show-Me Institute.

The reason that the president of a teachers union is joining forces with the bipartisan SALT caucus is that taxpayers are more willing to raise state tax rates if they can at least deduct what they pay to the state from their federal taxes. If they can’t deduct state taxes, then they prefer to keep them at a minimum, thank you very much. Same goes for local property taxes. And why does the teachers union want higher state and local taxes? So that more resources can be directed at teacher pay and teacher pensions. The education establishment is taking time to throw support at having everyone pay more out of their pockets to support and grow the education establishment.

Teacher pay, teacher recruitment, and teacher retention are also on the list of legislative priorities for the Missouri State Board of Education. The board would like to see legislatively mandated minimum starting salaries of $35,000 for teachers by 2024. In addition, $50 million in federal stimulus funds have been directed at recruitment and retention.

It’s true that having a high-quality teacher in every classroom is one of the few things that can have a positive impact on academic achievement. But do we get there by protesting for higher state taxes for everyone? Do we get there by paying every teacher more, regardless of their effectiveness? Do we get there by perpetuating a costly and outdated system of retirement that often pays teachers for more years of retirement than working years?

Stuck In the middle of all this are the 65 percent of Missouri students who were not at grade level on the state math assessment last year. Also in the middle are students with disabilities who did not receive any services when their schools shut down, along with the parents who desperately want tutoring for children who have fallen behind these last two years. It’s a sad state of affairs when public education starts to look like a battle between those who support teachers and those who support families.

The post Is SALT Really a Priority for Schools Right Now? appeared first on Show-Me Institute.

Truth in Accounting’s report ranks the country’s 75 most populous cities by their taxpayer burden (or surplus for a few cities), a number calculated by dividing the money needed to pay the city’s bills by the estimated number of city taxpayers. A larger taxpayer burden means a larger rank number.

According to the report, Kansas City went into the pandemic in poor fiscal health, with a $1.7 billion debt burden. This equates to a taxpayer burden of $11,300 per person and lands Kansas City at 57th in the country. St. Louis City is in even worse shape. Financial decisions have left St. Louis with a debt burden of $1.3 billion and a taxpayer burden of $14,600 per person. St. Louis ranks 63rd out of the 75 cities in the report. Missouri’s two largest cities both received a D grade for fiscal health.

All the cities on this list, including Kansas City and St. Louis, have balanced budget requirements, meant to “prevent elected officials from shifting the burden of paying for current-year services to future-year taxpayers.” As explained in the report, “if a city has a balanced budget requirement, then spending should not exceed earned revenue brought in during a specific year. Unfortunately, in the world of government accounting, things are often not as they appear.” Cities can do things such as keeping pension and other employment compensation costs out of the budget to give the illusion of a balanced budget. For example, Kansas City has $870 million and St. Louis has $380 million in underfunded pension benefits for city employees, so they each clearly need to be contributing more each year to the city pension funds to achieve true financial stability (as well as moving forward, not backward, with pension reforms).

Times are tough for individuals, businesses, and governments, but we shouldn’t forget the importance of accountability and balancing the budget. Truth in Accounting has released this report in previous years, and St. Louis and Kansas City have continuously ranked in the bottom third of cities. Show-Me Institute researcher Patrick Tuohey wrote this years ago and it still holds true: Instead of chasing shiny new projects and schemes, policymakers “should focus on the less glamorous but more important task of regaining sound fiscal footing.”

The post Kansas City and St. Louis Receive D’s in Fiscal Health appeared first on Show-Me Institute.

Nearly 9 in 10 cities surveyed — from smaller hubs with populations of fewer than 50,000 to the largest metropolitan areas in the country — signaled they expect a revenue shortfall. Among them, more than 1,100 cities are preparing to scale back their public services, the survey found. Almost 600 cities predicted they may have to lay off some government workers amid the crunch. And local leaders in 1,000 cities said the reductions probably would affect their local police departments and other public safety agencies.

Amid this crisis, cities such as Kansas City and St. Louis need to start picking and choosing their priorities. In the face of revenue shortfalls, are convention and visitors’ bureaus really as important as police departments? Are we really going to continue diverting funds away from schools and libraries in order to fund stadiums, entertainment districts, and luxury accommodations? Do existing municipal contracts include force majeure clauses to help cities reorient priorities in a time of unprecedented crisis?

The sponsors of the survey have called for generous federal support for cities, and the Inquirer story goes on to state:

Lawmakers authorized $150 billion in coronavirus aid for states and large cities as part of the broader $2 trillion package that Trump signed into law in March. But that assistance — half of which, Treasury Secretary Steven Mnuchin announced Monday, is now available — comes with restrictions. Even when combined with additional help offered by the U.S. government, many leaders outside the nation’s capital also see it as insufficient to keep their cities afloat financially.

While such support may be necessary, it should not allow cities to escape the consequences of their own bad behavior. Kansas City and St. Louis are high tax cities that also have high per capita public debt. They divert an ever-growing amount of money to private developers to build things that in some cases are clearly not needed.

If cities are to receive federal aid, one hopes that cities with good financial track records are prioritized. Perhaps aid should be tied to ratings of fiscal responsibility before the pandemic such as debt and deferred maintenance. Public funds should not be used to hide, or even reward, previous bad behavior.

The post Should All Cities Automatically Get Federal Help? appeared first on Show-Me Institute.

How do STLDI plans save their members money? For starters, short-term plans are not ACA-compliant. They do not offer all ACA required benefits, cover preexisting conditions, prohibit dollar limits on benefits, or insure dependents to the age of 26—some of the very provisions that drive up the cost of insurance. But because coverage is less comprehensive, individual monthly premiums for STLDI plans cost substantially less than unsubsidized ACA plans (see chart below). For many Missourians, these affordable plans are a welcomed option.

The rise of these STLDI plans will likely affect the ACA insurance markets. The departure of low-cost, younger and healthier customers could increase the volatility of ACA risk pools and stoke spiraling premiums further. And for those who choose an STLDI plan? Those customers may have made a bad bet if they get really sick, given STLDI’s comparatively skinnier benefits relative to the more expensive ACA plans. But considering that almost half of Missouri’s population is under the age of 34 and that many are being crushed by exorbitant premiums, a number of Missourians could benefit from an STLDI expansion.

Missouri currently limits its STLDI plans to six months, requires plans to cover some state-mandated benefits, and necessitates that customers have a 63-day gap in coverage before purchasing short-term plans. These regulations impede customers’ access to these plans, creating significant barriers to affordable insurance.

In the 2018 legislative session, Missouri considered House Bill 1685, which would have extended the six-month limit on plans to a full year. Though the measure did not pass before the session ended, it received support in both chambers, and a similar bill could appear in 2019. In light of the change in federal rules, isn’t it time for policymakers to consider expanding short-term plans for the sake of Missourians’ health—both physical and financial?

The post Not Bronze, or Silver, or Gold, or Platinum-Just Affordable appeared first on Show-Me Institute.

On the other hand, the state’s track record on good tax policy is not nearly as strong, which is why a proposal to exempt Olympic winnings from state taxation is both unsurprising and disappointing. 

I should reiterate once again that Missouri needs to move away from growth-destroying income taxes, but special tax carveouts like the ones currently being debated for Olympic athletes make it ever more difficult to provide much-needed relief to all Missourians. Creating a tax incentive for excellence in one profession disadvantages high achieving Missourians in other fields who are not afforded similar deference by the state.

On what basis is it wrong to tax Olympians for their achievements and yet right to tax others for theirs? If it is wrong to tax Olympians’ income, what does that say about a tax system that relies heavily on income taxes?

I reject the idea that any tax incentive that reduces an individual’s tax burden is a net benefit to taxpayers or is even preferable as a matter of policy, in much the same way that I don’t see “pro-business” legislation as necessarily “pro-market.” Exempting Olympians’ winnings from taxes is certainly pro-Olympian, but it isn’t “pro-taxpayer,” nor is it good policy.

All the while, I understand the sentiment. We all want to be supportive of our high achievers, especially those achieving in a public way on the international stage. But legislators should focus on reforming taxes for everyone—athletes included, but not specially preferred.

The post Gold Medal for Sentiment, But a Wipeout on Policy appeared first on Show-Me Institute.

The parents eventually settled on Citizens of the World, a network that started in California and focuses on purposely building a diverse student body and preparing children for both academic success and engaged citizenship.  If it ends up working as they hope it will, it will be the stuff of charter schooling dreams.

To date, one key detail is missing—a building. 

Unfortunately, Citizens of the World is not alone. All across the state, charter schools have struggled to find facilities, and particularly facilities they can get at a reasonable cost. Charter schools do not get a budgetary line item for facilities like traditional public schools do, and because they are only authorized for 5 years at a time, their borrowing rates are often quite high as lending institutions see them as risky investments.

But it doesn’t have to stay that way.  In fact, the Local Initiatives Support Corporation has identified strategies that states have used to help schools find facilities. 

According to LISC’s report:

1.       Eleven states make district facilities available to charter schools by requiring districts to provide space to charter schools, requiring districts to publish a list of unused facilities for charter schools to access, or by offering right of first refusal to charter schools to lease or purchase district buildings. Missouri is not one of those states, even though, as SMI has highlighted in the past, the state is rife with empty school buildings.

2.       Thirteen states currently fund a per-pupil line item similar to the one that public schools get specifically for facilities. Missouri is not one of those states.

3.       Eleven states currently appropriate funds for some form of capital grant funding for charter school facilities. Missouri is not one of those states.

4.       Four states allow charter schools to tap into local taxing authority through mill levy (a type of property tax) provisions. Missouri is not one of those states.

5.       Ten states have authorized and active publicly-funded loan programs. Missouri is not one of those states.

6.       Nine states offer some form of credit enhancement program, including moral obligation provisions or statewide credit enhancement programs. Missouri is not one of those states.

On the other hand, Missouri does offer two forms of support that LISC recognizes as helpful for schools seeking facilities funding.

1.       Thirty-six states allow charter schools to access tax exempt debt through conduit issuers. Missouri is one of those states.  But, to date, only three schools have taken advantage of this.

2.       Thirty-nine states allow charter schools to participate in one of their Q-Bond Programs (bond programs run through the federal Treasury Department). Missouri is one of those states. However, to date, only one charter school has taken advantage of it.

If we want more charter schools, and charter schools that are community-driven, we have to make it easier for them to access facilities.  The six policies above that Missouri does not utilize are a great place to start.

The post Helping Charter Schools Get Buildings appeared first on Show-Me Institute.

The Obama administration will delay a crucial provision of its signature health-care law, giving businesses an extra year to comply with a requirement that they provide their workers with insurance.

The government will postpone enforcement of the so-called employer mandate until 2015, after the congressional elections, the administration said yesterday. Under the provision, companies with 50 or more workers face a fine of as much as $3,000 per employee if they don’t offer affordable insurance.

We already know that the Affordable Care Act incentivizes small, growing businesses to send new jobs overseas, but it also has affected whether companies hire new employees . . . and whether they fire them.

Forty-one percent of the businesses surveyed [by Gallup] have frozen hiring because of the health-care law known as Obamacare. And almost one-fifth—19 percent— answered “yes” when asked if they had “reduced the number of employees you have in your business as a specific result of the Affordable Care Act.”

The poll was taken by 603 owners whose businesses have under $20 million in annual sales.

Particularly in that light, it’s no wonder the administration delayed the provision. Economically, the law is a fiasco: diverting hiring, delaying hiring, and causing employment cutbacks. Awful. It’s no wonder businesses and unions are mad about the law. Isn’t it clear that the financial well-being of our nation demands that Obamacare be reopened and reconsidered?

The post Obama Administration Delays Employer Insurance Mandate Penalties Until 2015 appeared first on Show-Me Institute.

Unfortunately, the governor is selling the idea that Missouri and other states should take all the help they can get from Uncle Sam. Nixon treats the offer of billions of dollars from the U.S. Treasury as “free money” — even though it is one more instance of expanding an entitlement today out of debt imposed upon our children and grandchildren tomorrow.

In his Jan. 28 State of the State address, Nixon spoke to the fear that Missouri would lose $5.7 billion in federal grants over the next three years if it does not step forward to claim the prize.

But that is hardly the worst thing that could happen — given widespread dissatisfaction with the rapid growth in spending that has already occurred in this program. We do not have to expand Medicaid. This would not put existing benefits at risk.

The far greater danger is that Missouri (and other states) will fail to stop their spendthrift uncle in Washington, D.C., from bankrupting the nation — and slamming the door on job and wealth creation for years to come.

It is time to reform Medicaid — not to expand it.

Even more than that, this is a time for the states to come to the aid of their country — in saying “no” to an overreaching federal government that is seemingly determined to spend not just to the absolute limit of its taxing power, but also to the absolute limit of its borrowing power.
Over the past four years, the federal debt has increased from $10.6 trillion to more than $16 trillion. Federal indebtedness now amounts to more than $50,000 for every man, woman, and child.
Anyone who does not think Medicaid is part of the problem should look at the numbers.

For more than a decade, Medicaid has been the fastest-growing part of state budgets across the nation. In Missouri, Medicaid expenditures increased from $3.4 billion in fiscal year 2000 to $8.2 billion in fiscal year 2012. Despite the increased outlays, which now amount to more than a third of the state’s total expenditures, it is increasingly difficult for patients to find doctors. And doctors say they have little incentive to stay in the program because of reduced reimbursement rates and administrative headaches.

Medicaid showcases the many problems that grow out of greater and greater reliance on government-mandated and government-controlled health care — in limiting competition and freedom of choice and undermining the bond between patient and doctor.

In his address to the legislature, Nixon glossed over such problems, suggesting that the Medicaid expansion (as a critical part of the Affordable Care Act) is a done deal — passed by Congress, signed by the president, and upheld by the Supreme Court.

“The question before us is a narrow one,” Nixon claimed. “Will we bring the tax dollars that Missourians send to Washington back home to strengthen our Medicaid system here in Missouri? Or will we let the tax dollars Missourians send to Washington be spent in other states instead?”
There are two substantial problems with this line of reasoning.

First, the Supreme Court did not endorse the law in its entirety. As originally written, the law would have required each of the states to support the planned expansion of Medicaid . . . or face the loss of all federal matching funds. The Supreme Court struck down that part of the law — calling it “a gun to the head.” The Court ruled that the states must be free to opt out of the Medicaid expansion program if they wish.

Second, the real issue is not tax dollars that are (in Nixon’s word) being sent to Washington from Missouri and other states. It is the use of borrowed money (much of it coming from China, Saudi Arabia, and other such countries) that will pass the bill for today’s higher (and heedlessly wasteful) levels of government spending to our children and grandchildren.

Even without holding a “gun to the head” of each of the states, the federal government continues to dangle a large carrot in front of their noses — offering to pay more than 90 percent of new Medicaid costs through 2022. That compares with the usual split between the federal government and the states of about 60-to-40 in Medicaid funding.

It will take real courage for lawmakers in Missouri and other states to turn aside the poisoned chalice. But that is exactly what they must do.

Andrew B. Wilson is a resident fellow and senior writer at the Show-Me Institute, which promotes free-market solutions for Missouri public policy issues.

The post Jay Nixon Makes The Wrong Call On Medicaid appeared first on Show-Me Institute.

A. take the money and run,
B. say thanks, but no thanks, or
C. call the police.

Confronted with the question of whether to accept a multi-billion dollar offer of “free money” from Uncle Sam to expand the state’s Medicaid program, Missouri Gov. Jay Nixon, a Democrat, has advocated the take-the-money-and-run approach. He called it “the smart thing to do,” and “the right thing to do.”

According to Nixon, it would be “dumb” for Missouri, or any other state, to turn down a use-it-or-lose-it infusion of federal cash, and it would be “wrong” for state officials to wave aside money for extending health insurance to the uninsured. On the first point, the Obama administration has agreed to pay a very high share (90-plus percent) of new Medicaid costs in all states. And on the second, it acts as if cost were no object.

This is an unsound argument — and bad public policy. Let’s hope that most states reject it — as Missouri, with large Republican majorities in both houses of the state legislature, almost certainly will.

It is astounding that the administration is contemplating a major expansion in a troubled entitlement program when the nation faces the threat (with the so-called fiscal cliff) of a financial panic and another deep recession.

According to a new study from the Kaiser Commission on Medicaid and the Uninsured, the loosened eligibility for Medicaid under the Affordable Care Act (a.k.a. ObamaCare) will cost in the neighborhood of $1 trillion over the next decade.

For the past several years, the federal government has been borrowing about 40 cents out of every dollar it spends. That is like adding $400 of credit card debt for every $1,000 you spend. So where is the new money coming from to expand Medicaid coverage to a projected 17 million people?

Like a spendthrift who refuses to mend his ways, the Obama administration wants to go on spending money it does not have: If necessary, taking out new credit cards to pay off the old. This is the same tactic that has brought Greece and several other European nations to the brink of bankruptcy.

Instead of acting as enablers of fiscal profligacy, Missouri and other states should say “no” to the Medicaid expansion. They should also say “no” to the creation of state health insurance exchanges to implement ObamaCare. These exchanges would require the states to accept costly mandates and complicated rules restricting competition and choice in health care.

Finally, Medicaid should be reformed, not expanded.

Medicaid costs have been the fastest-growing part of state budgets for more than a decade. In Missouri, Medicaid expenditures jumped from $3.4 billion, or 22 percent, of the state’s total expenditures in fiscal 2000, to 36 percent, or $8.2 billion, in fiscal 2012. Despite the increased outlays, complaints are growing on the part of patients and doctors. Poor patients often have a hard time finding doctors. And doctors say they have little incentive to stay in the program because of reduced reimbursement rates and administrative headaches.

The states should explore better ways of providing catastrophic health insurance for those without coverage. And they should be smart enough to know that the offer of “free money” usually means a one-way ticket to financial ruin.

Andrew B. Wilson is a resident fellow and senior writer at the Show-Me Institute, which promotes market solutions for Missouri public policy.

The post It Is Time to Reform Medicaid, Not Expand It appeared first on Show-Me Institute.

In fact, the Missouri Department of Conservation announced last week that hunters had eclipsed the mark set in 2011 for deer harvested during the annual youth hunting season — over 19,000 deer, and a more-than three-fold increase above the state’s first youth hunt, instituted in 2001. Growing awareness of the hunt has no doubt increased participation in it over the years, but permit fees imposed by the state could easily have tamped down the season’s growth, if the costs were fixed high enough. Fortunately, Missouri’s hunting permit costs are generally quite low — and that’s a fact the Department of Conservation readily promotes on its website.

Low permit cost is another reason Missouri is a great place to hunt. Missouri’s $17 Resident Firearms Any-Deer Permit is a bargain compared to the average of $46.63 for equivalent privileges in surrounding states. Missouri charges only $8.50 for a resident any-deer permit for kids under age 16. Resident youths pay just $3.50 for antlerless-deer permits.

Missouri has kept the state-imposed costs of joining the hunt relatively minimal, and it’s reasonable to believe that participation in the youth hunt has risen at least partially because the barriers to engaging in it are so low.

Shouldn’t the state apply this lesson to other areas of policy? The lower the fees and taxes, the more likely it is that you’ll get more of an activity — here, hunting, but the idea applies elsewhere, too. Imagine: What would happen to Missouri’s economy from the perspectives of growth and competitiveness if the state got rid of its taxes on corporations and pass-through income?

Kansas opened the season for economic innovations earlier this year by dumping its tax on pass-throughs and reducing its income tax, but there’s no telling which state in the region is going to take down the big, long-term economic prizes in this highly competitive tax environment. Suffice to say, Missouri should join that hunt, and very, very soon.

The post What Missouri Could Learn From Its Deer Hunters appeared first on Show-Me Institute.

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The number of jobs shrunk and we have an economy that barely grew last year. Considering the other issues that face these tax credit programs, does anybody really think that the taxpayers are getting a good bang for their bucks?

Economic development tax credits interfere with the markets by trying to determine what the future of Missouri’s economy will look like. Monkeys throwing darts have a better chance of determining the future economic needs of Missouri than bureaucrats in Jefferson City.

Meanwhile, Kansas just took a chainsaw to its personal income tax. Starting in January, 191,000 small Kansas businesses will not be paying taxes on their income. How is Missouri going to stop the avalanche of small businesses (especially those in Kansas City) from stampeding across State Line Road, with more tax credits?

The state can carry on with the same game they have been playing (and losing) for years. Or it can try something new. Patrick Ishmael and I continue to express our view that eliminating the state’s corporate income tax would help the state catch up. Eliminating the state’s corporate income tax would benefit all Missouri corporations, not just those who happen to be politically favored. It would give Missouri a leg up on Kansas (which still taxes its C-corporations) and coupled with a phase-out of some state tax credits, would not harm state revenue.

Missouri faces a critical choice. It will either keep playing the development game or it will try something new. Ditching the corporate income tax is not the cure-all, but it would be a positive first step.

The post The Tax Credit Problem Is Still A Problem appeared first on Show-Me Institute.

On June 28, U.S. Supreme Court Chief Justice John Roberts
rendered the majority opinion in a 5-4 vote upholding the
constitutionality of the Affordable Care Act. However, with a 7-2
margin, the Court struck down a key part of the law that would have
stopped the flow of all federal funds for Medicaid to states that did
not expand access to this program, as the law intended.

“The financial ‘inducement’ Congress has chosen is much
more than ‘relatively mild encouragement’ to expand Medicaid,”
Roberts wrote. “It is a gun to the head.”

Because the federal government originally could have
withheld all of the state’s Medicaid funding if it did not expand its
program, Missouri would have faced a massive and essentially
mandatory increase in its Medicaid costs if this part of the law had
been upheld in its original form.

Unable to coerce state governments to spend more of their tax
money on Medicaid, the federal government is offering a grace
period of several years in which it will pick up essentially all of the
cost of the Medicaid expansion, scheduled to begin in 2014, if
individual states commit to spending money of their own in years to
follow.

Over a 10-year period, Missouri would need to commit to
spending about $430 million in order to qualify for $8.4 billion in
additional Medicaid grants from the federal government.

If that looks and sounds almost too good to be true, it is
because it literally is too good to be true.

Where is the money supposed to come from to pay for a huge
increase in this entitlement program? Do we just pretend that the
money is there when we know very well that it is not?

Our state government is already over-leveraged. And the
federal government – with a string of trillion-dollar deficits – is now
borrowing about 40 cents for every dollar it spends. Imagine adding
$400 of credit card debt for every $1,000 you spend. How long do you
think that would work?

As Show-Me Institute Executive Director Brenda Talent
explained in a recent appearance on public television, the federal
government is engaged in a Bernie Madoff kind of scheme. Our state is
already in arrears in trying to meet its current commitments. As Brenda
stated on Donnybrook on KETC-Channel 9 in Saint Louis on July 5,
Missouri will have to spend money, which it does not have, in order to
receive money from the federal government, which it does not have,
while making promises to people that it will not be able to keep.

Nebraska Gov. Dave Heineman and Iowa Gov. Terry Branstad
are already on record opposing the Medicaid expansion. Let us hope
that Missouri joins them in opting out of this part of the federal health
care plan.

It is easy to write IOUs. As Bernie Madoff did, you can – for a
while anyway – write new IOUs to replace old IOUs. But it is morally
as well as fiscally reprehensible to make promises that you cannot keep.
That is why Missouri should say “No” to the Medicaid expansion plan.

Andrew B. Wilson is a resident fellow and senior writer at the Show-Me
Institute, which promotes market solutions for Missouri public policy.

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