Rethinking tax benefits for home owners


The attached piece, which appeared in the Spring 2014 issue of National Affairs, was co-written with Ike Brannon and Zackary Hawley.

The individual income-tax code offers a multitude of benefits for home owners. The largest in dollar terms, and the most apparent to taxpayers, is the mortgage-interest deduction, which allows home owners to deduct the interest paid on up to a $1 million mortgage and up to $100,000 in additional debt backed by home equity. But the tax code also tilts the balance toward home owners by allowing a deduction for state and local property taxes and exempting from taxes the capital gains from the sale of a home. These preferences for home ownership fall under the umbrella of “tax expenditures,” or provisions that create special benefits by lowering tax liabilities. Tax expenditures technically reduce the amount of taxes paid, but they resemble direct spending programs more than they do typical tax laws. The tax benefits for home ownership are thus essentially subsidies.

Although tax expenditures for housing are not real line items in a budget the way other spending programs are, they have real effects on the economy by creating incentives, lowering receipts, raising the debt, and causing tax rates to be higher than they otherwise would be. The cost of the tax benefits for owner-occupied housing adds up to about $175 billion annually, with the mortgage-interest deduction alone costing the Treasury roughly $100 billion. The five-year costs of these tax benefits total well over $1 trillion. To put this amount in perspective, one year of tax benefits for owner-occupied housing costs more than the discretionary budgets of the departments of Education, Homeland Security, Energy, and Agriculture combined.

Proponents of these generous tax benefits often justify them by arguing that they encourage home ownership, which in turn is said to offer society all manner of social and civic benefits. In reality, however, it is far from clear whether mass home ownership is inherently beneficial to our society or even to individual home owners. But whatever the merits of owning a home, the data regarding the reach and distribution of the various tax benefits we offer owners show that these benefits do not in fact encourage such ownership in any meaningful way. Most Americans receive no benefit from the preferential tax treatment of home ownership, and those who do see such benefits tend to be high-income earners who own large, expensive homes, and who are therefore unlikely to be on the fence about whether to buy or rent.

In fact, the tax benefits afforded to home owners are highly regressive, extremely expensive, and of little obvious value to society at large. Even if we do want to encourage home ownership through the tax code — and it is by no means obvious that we should — there are far better ways to do so. By considering the flaws in the tax treatment of housing and examining how our housing-related tax benefits are distributed across incomes and across the country, we may come to see how these policies might be transformed to better serve owners, renters, and taxpayers.

Artfully resolving Detroit’s bankruptcy


The attached policy study was co-authored by R Street Midwest Director Alan Smith.

For the first three decades of the 20th Century, Detroit was the second fastest-growing city in the United States, behind only Los Angeles. It was a center of the high-tech industry of the day – automobile manufacturing – as the city saw the creation of what was, in many ways, a predecessor to today’s Silicon Valley. But as spectacular as its rise through the middle of the 20th Century was, its decline and ultimate bankruptcy has been just as precipitous.

As co-author Andrew Moylan wrote in a recent Reason.com piece on Detroit:

More than one million people have headed for the Motor City’s exits since its size peaked in 1950. Even when compared to other Rust Belt cities that have experienced significant population loss, Detroit stands out. The only city that has dropped farther from its mid-20th Century peak is St. Louis, but its population has never been even half as large as Detroit’s. In fact, of the eight U.S. cities that have lost more than 50 percent of their population in recent decades, Detroit is far and away the largest. Even in its shrunken state today of just over 713,000 residents, it is larger than Pittsburgh’s all-time peak of 677,000.

Today, those 713,000 residents receive atrocious public services and labor under extremely high tax burdens, with income taxes levied at the maximum level allowed by state law and property taxes that are higher than every other major American city. The legacy cost of services provided decades ago, as well as the city’s current expenses, continue to rise even while the population has dwindled dramatically. The result is a broken city with sky-high crime rates, rampant unemployment and a very uncertain future now that it has officially filed for Chapter 9 bankruptcy.

With the bankruptcy process underway, state-appointed emergency manager Kevyn Orr and the city’s 170,000 creditors have begun working to resolve many competing claims in order to restructure the city’s operations, retire debt and create a vibrant and sustainable operation for the future. Orr has dubbed this the “Olympics of restructuring,” but even that analogy doesn’t quite capture the high stakes involved in a municipal bankruptcy that’s roughly five times larger than the previous holder of the dubious distinction of the largest in history.

This saga offers a peek at the adversarial relationship that underpins any bankruptcy proceeding. In this case, Orr and other city officials have a strong incentive to undervalue existing assets and pay off as little of the accumulated debt as possible. On the other hand, creditors have an equally strong incentive to push the city to sell off anything that isn’t bolted down, regardless of potential negative impacts on the city’s ability to create a viable entity moving forward.

For no other asset is this fight more clear than the city’s incredible collection of artifacts housed in the Detroit Institute of Arts. In total, the DIA has in its possession some 66,000 art treasures collected over nearly 130 years, including works by Van Gogh, Rembrandt, Matisse and the amazing “Detroit Industry” murals painted in 1932 by Diego Rivera. Monetizing the art, even on a small scale, could prove enormously helpful in minimizing harm done to the interests of employees and creditors.

It is far from clear what the resolution will be, but it will undoubtedly establish precedent for future municipal bankruptcies of significant size. The domino effect on other struggling municipalities in Michigan, like Pontiac or Ecorse, and cities like Chicago with even bigger liabilities, will be a matter of intense interest, as they attempt to fix their finances to avoid Detroit’s fate.

Bringing local knowledge to federal lands


The United States might indeed be one nation, indivisible, but there are huge differences between its eastern and western halves when it comes to federal lands. In the West, nearly half the land is owned and controlled by the federal government, compared with only 4 percent in the East. That difference affects the ability of western states to determine their own destiny.

In March 2012, Utah Gov. Gary Herbert signed H.B. 148, legislation that insists the federal government divest its lands in the state, transferring most of them to state jurisdiction. Utah is not alone in the desire to bring federal acreage under local control. At least four other western states (Idaho, Montana, Nevada and Wyoming) have passed similar legislation and still more are considering similar bills.

Proponents of the measure argue that this sort of decentralization would place control in the hands of those with the most to gain or lose from effective land stewardship. They also point to enabling legislation passed by Congress when each of these states joined the union, noting that they typically have included clauses providing that the federal government would extinguish its title to any unappropriated lands.

Indeed, what were once public lands in eastern states largely have been transferred to the private sector, where they generate revenues for those states. Conversely, in the West, hundreds of millions of acres of federal land remain. The consequences include limited revenue for state coffers, declining recreation access, increased restrictions on commodity production and, in some cases, poor environmental stewardship.

These pieces of state legislation undoubtedly will face constitutional challenges, but regardless of their legal standing, if federal land management was to be reassigned, who would mind the estate? What rules would reign? What sort of arrangements would best steward America’s lands to ensure they are managed to bring recreational and environmental value, while also providing the revenues and resources needed for a productive society?

This paper provides a glimpse of some of the institutional and management problems that face America’s public lands and suggests reforms that policy-makers should consider to improve management of the federal estate.

Has the NSA poisoned the cloud?


The U.S. technology industry enters 2014 facing a backlash to its perceived role as accomplice to a series of National Security Agency surveillance programs, each making extensive use of data mining to parse billions of consumer telephone, Internet and computer records in what now appears to have been an ineffective effort to track international terrorists.

Recent analysis projects the caution and mistrust engendered by the NSA’s programs could cost U.S. technology industry between $35 billion and $180 billion over the next three years. Widespread NSA spying is unsettling because it hits at the current focal point of communications and computer innovation—cloud computing. Effective protection of privacy and security is best managed by regulating the activities of government, as opposed to the utility of Internet services.

Moving to work


The following piece was co-authored by R Street President Eli Lehrer.

Between 1776 and 1890, when the U.S. Census Bureau famously declared the frontier closed, Americans who found themselves dissatisfied with their circumstances frequently loaded their worldly goods into wagons and started new lives as yeoman farmers in the ever-expanding West. These enterprising early Americans were driven by a frontier spirit, as Frederick Jackson Turner first described it, and this spirit has been a defining aspect of the nation and its character.

The American willingness to pull up stakes and seek out a better life did not end after the West was settled. In fact, mobility only accelerated: When crop failures and bigotry drove African-Americans from the South, many migrated, first to Northern industrial cities in the 1910s and 1920s, and later to the West, during and after World War II. Between 1950 and the 1980s, meanwhile, the Sunbelt’s population grew at astounding rates, as Americans driven by opportunity and, thanks to air conditioning, no longer quite so turned off by the heat sought, and often found, new paths to prosperity.

In the last few decades, however, Americans’ willingness to move to a new place in search of a better life has dramatically decreased, despite the fact that travel has never been easier and new technologies have made keeping in touch with friends and family who are far away cheap and simple. Americans — particularly the least affluent — have lost the will to move. The Census Bureau’s yearly American Community Survey demonstrates that low-income people, especially those born into poverty, have a particularly difficult time moving. This is largely due to public policies designed to provide “place-based relief”: programs that aim to help the poor where they already live. This decline in geographic mobility, however, has contributed to a decrease in income mobility, especially for those who benefit from such place-based anti-poverty programs.

Policymakers should see this decline in geographic mobility as a major problem and a key contributor to America’s persistently high unemployment rates. In our woeful labor market, Americans in search of work should be encouraged to pursue it wherever it may be found, and to be willing to move in search of a better life. By understanding why that willingness has waned and what it has meant for our economy, we can perhaps see our way to some concrete policy steps that could encourage Americans once again to follow opportunity and promise where they lead.


Geographic mobility in the United States has bottomed out in the past three decades. In a comprehensive 2011 review of geographic-mobility data, the National Bureau of Economic Research concluded that “[i]nternal migration has fallen noticeably since the 1980s, reversing increases from earlier in the century.” In 2012, the Census Bureau reported that, between 2005 and 2010, internal migration was the lowest since modern record-keeping began in 1940. Current data show that residents of Canada, comparable to the United States in culture and geographic size, are now more likely to have moved recently than their American counterparts.

This decline in Americans’ geographic mobility has correlated with a well-documented 40-year trend of falling income mobility. While this correlation does not, by itself, prove a causal link, the evidence that geographic mobility can mitigate poverty is robust.

Take, for example, the program started as part of a consent decree following the Supreme Court’s decision in the public housing desegregation case Hills v. Gautreaux. The Chicago Housing Authority’s Gautreaux Project conducted a randomized trial in which some poor African-Americans received housing vouchers for private apartments in suburban communities, while others were placed in urban apartments. Those who moved to the suburbs and affluent areas of the city were significantly more likely to find employment and move off the welfare rolls, and their children had better academic records and lower drop-out rates than those who remained near where they started.

On the federal level, the Moving to Opportunity Program, a signature initiative of former Housing and Urban Development secretary Jack Kemp, helped to move families with children from areas with persistent crime and unemployment to more affluent neighborhoods. In 2000, the Brookings Institution found the program offered “striking” results. Those who moved earned more, saw their children do better in school, and enjoyed better quality of life.

More recent research from Raj Chetty and Nathaniel Hendren of Harvard University and Patrick Kline and Emmanuel Saez of the University of California at Berkeley demonstrates just how significant a neighborhood and city can be to income mobility. Examining 741 commuting zones constructed from census data, the researchers found that a child born in the bottom income quintile in Atlanta, a city with a high degree of income segregation, would likely climb no higher than the 35th percentile of income distribution. In Salt Lake City, which has relatively little income segregation, a child born in the bottom quintile could look forward to reaching the 45th income percentile, and even someone born in the bottom percentile in Salt Lake City could expect to reach the 40th percentile.

Of course, a relatively immobile workforce is not the sole cause of declining income mobility. Factors such as the globalization of many industries, growing automation of routine tasks, and growing returns to education and capital have all contributed. But these factors are major economic transformations that are beyond the control of individuals. Location, however, is a factor that people can control for themselves. So what is keeping the poor from moving their families to new places to take advantage of better opportunities?

The answer lies primarily in the structure of poverty-relief programs. For the last 70 years, the social-services agenda has been dominated by what might be called “place-based” poverty relief. The 1940s and 1950s saw bipartisan consensus around abundant construction of public housing projects, coupled with “slum clearance.” The liberal New Frontier and Great Society eras of the 1960s saw “urban renewal” projects (a new name for slum clearance), along with “Model Cities” and a “War on Poverty” centered on community-action agencies, community-development block grants, and other programs intended to revitalize poor neighborhoods.

The conservative ascendency of the 1980s brought a bevy of new tools to try to fix the problems that continued to plague poor communities. These efforts included tax- and regulatory-relief policies implemented in “enterprise zones,” as well as grants to private businesses under the guise of tax relief, to encourage economic growth in impoverished neighborhoods. These new schemes all promised that “free-market” tools and deregulation would succeed where liberal policies had failed. In the 1990s, after Bill Clinton assumed the presidency, the HOPE VI program accelerated efforts to tear down and rebuild the worst public housing projects, with major federal investments in housing for the first time in decades. The George W. Bush administration placed a renewed emphasis on turning the poor into home owners. Similar programs have continued under President Barack Obama.

But decades of bipartisan experience with place-based poverty relief have demonstrated that it simply has not worked. In 1965, the year after Lyndon Johnson declared a War on Poverty, the poverty rate was 17.3%, and since 1967 poverty rates have fluctuated between 11% and 15%. The poverty rate in 2012 was 15.0% for the third year in a row — just two percentage points lower than in 1965, the first full year of the War on Poverty.

While it has become conventional wisdom (best condensed in Charles Murray’s 1984 Losing Ground) that liberal solutions to poverty have not worked, conservative efforts have fared little better. For instance, enterprise zones, championed by Ronald Reagan and Jack Kemp in the 1980s and early 1990s, flowered across the country. And they’ve had a long time to work: By 1995, there were more than 3,000 state-level special tax zones, with 87 participating in the federal enterprise-zone program as of 2000. But in 2010, a comprehensive review of California’s enterprise-zone system — one of the nation’s largest — by researchers at the Public Policy Institute of California and the University of California at Irvine bluntly concluded “that enterprise zones do not increase employment…the program is ineffective in achieving its primary goals.”

Not every aspect of the anti-poverty agenda has failed. Poverty rates are lower than they were in the 1950s. Relative to the broken-down tenements that housed the urban poor prior to the Second World War, the material conditions and housing stock in inner cities have improved a great deal (although many public housing projects remain horrid places to live). Better policing, increased incarceration, and demographic trends since the early 1990s have made poor areas far safer than they were before. Enterprise zones, at their best, have brought commerce to neighborhoods where it was sorely lacking previously.

Despite these successes, poverty-relief programs, even those that don’t focus relief on specific neighborhoods, still serve the function of tying the poor down to their city or region. For example, while Section 8 rental-housing vouchers (which give the poor cash to rent housing) promote mobility within metropolitan areas, the long waiting lists for Section 8 in most areas serve as a strong disincentive against relocating in search of employment. Differing state eligibility requirements for Medicaid and other subsidized health-insurance programs, likewise, mean that some poor individuals will lose health coverage when they move. Even the more-or-less nationally standardized Supplemental Nutrition Assistance Program or SNAP (previously known as “food stamps”) has different eligibility requirements depending on the state one lives in. In any event, moving will always require a new application process and may entail a loss of benefits.

Both the left and right’s versions of place-based relief have failed. In part, this is due to the folly of thinking that the unique combinations of economic, social, cultural, and human factors that go into successful neighborhoods can be gleaned and inculcated by central planners. And the daunting reality is that, even if the planners are truly successful, such neighborhood revivals often end up displacing the very poor they were intended to help.

If the answer to poverty isn’t rebuilding the places where the poor already live, perhaps a better solution would be to help them to move to where such opportunities already exist. Three approaches in particular stand a chance of encouraging such mobility: implementing new tools like mobility grants and migration zones, eliminating impediments to low-cost housing, and replacing today’s place-based poverty relief with more streamlined, portable welfare programs.


As part of a mobility-based approach to alleviating poverty, the most basic and straightforward type of support that government can offer is direct incentives to encourage the poor and unemployed to relocate. The United States has a long history of providing such incentives. The Homestead Act, signed into law by Abraham Lincoln in 1862, famously offered aspiring farmers the opportunity to receive the titles to lands they lived on and improved. Requirements that shippers of freight cross-subsidize railroad passenger tickets likewise made it affordable for Northern factory owners to transport former sharecroppers from the Mississippi Delta to the growing industrial North, from the time that the Interstate Commerce Commission’s regulation of the railroads began in 1887 until long-distance trains were supplanted by airplanes after World War II.

As the current economic recovery slowly continues, some areas of the United States actually struggle with labor shortages that could be addressed by an influx of migrants, which could be spurred by a mobility program. North Dakota’s energy boom has created a shortage of labor of virtually all kinds, Washington state’s agricultural industry is facing a labor shortage, and employers in areas seeing significant manufacturing job growth in both the South and the West have great difficulty filling jobs. Even areas with just above-average job growth sometimes face labor shortages in certain fields. An April 2013 report from the Brookings Institution found that nearly a third of hospitality-industry jobs in Massachusetts — a state with a better-than-average but hardly copacetic employment situation — were filled by foreigners.

In short, even in an economy characterized by high unemployment, there are pockets of job growth. To maximize productive capacity, policymakers could advocate programs that create “mobility grants,” paid for primarily through the unemployment system, and “migration zones,” intended to attract migrants to the places that need them.

Mobility grants would allow a person who is unemployed and lacking significant assets to “cash out” future unemployment benefits to which he would otherwise be entitled in a single lump sum. The funds would then be used to pay for the job-search and relocation costs entailed in moving to another metropolitan area. The lump sum would be discounted to perhaps 70% or 80% of the benefits the grantee would otherwise receive over a year. Such a grant would provide a benefit both to individuals and to communities: It would provide a nest egg to move a household while simultaneously removing a worker from the original area’s unemployment rolls.

In 1976, the Labor Department’s Job Search and Relocation Assistance Program, a major experiment involving 40 different unemployment offices across the South, demonstrated that such grants can work. The experiment tracked the results from different offices offering different levels of relocation assistance. Offices that provided only information on out-of-area jobs and grants had little success, while those that provided full relocation grants helped significant numbers of people find new jobs. A 1981 analysis of the program by Charles Mueller for the Monthly Labor Review found individuals with less education tended to take advantage of relocation assistance more often than those with more education. This less educated subset of the population is the same group of people most likely to be displaced by globalization and lost factory jobs. In addition, young black males, who have the highest long-term unemployment rate among sizeable demographic groups, proved particularly mobile. Finally, wages for those who relocated through the program tended to be higher than those who chose not to relocate or who relocated through their own means.

Evidence also suggests the grants would be affordable, without over-burdening the unemployment system or driving up its costs. Some of those who would qualify for mobility grants likely could have found jobs quickly in other areas even without the assistance. But any additional costs from such cases could be offset, in part, by reducing the time that individuals can spend on unemployment.

While the 99-week unemployment-benefit standard implemented during the recession may have been necessary as temporary relief, it is certainly not a healthy long-term standard. Workers’ skills atrophy during a 99-week jobless stint, and many who take the maximum amount of time on unemployment will find themselves moved into the ranks of the long-term unemployed and unemployable. Now that the extended unemployment-benefit period is being reduced to a level closer to the pre-recession average of six months, many unemployed individuals find themselves dropping out of the labor force even sooner. But a “cash out” of normal unemployment benefits would be more than enough to cover moving costs, and it would reduce the likelihood that individuals would leave the labor force entirely. Well-structured lump-sum mobility grants should, on balance, save money in the unemployment-insurance program, while at the same time adding more individuals to the tax rolls.

Of course, an effective mobility program might need some additional resources that go beyond those available in the current unemployment system. For example, unemployment benefits are tied to individual wages. If grants followed this structure, they would be a windfall for some single people and insufficient for some families, as many workers would want to bring their dependents along when they moved in search of work. To account for this disparity, relocation grants might instead be based directly on family size, with additional benefits for each dependent. Since dependents of the poor often receive relatively expensive benefits, such as Medicaid, states that want to reduce their obligations for such benefits may be eager to contribute to funding relocation grants.

When thinking about the design of such a program, it is useful to look at the one existing federal program that provides significant relocation help: Trade Adjustment Assistance, which was designed to help workers displaced by trade agreements. TAA has not worked very well by any measure, and the program may soon be phased out. Given the causes of the failure of TAA, it is clear that careful attention to design issues is hugely important. TAA does contain a mobility component, for instance, but the thrust of the whole program is to provide augmented unemployment benefits and job retraining where affected workers live. Because of this design, it may have the net consequence of discouraging mobility. Furthermore, unlike the mobility grants we propose, TAA has very specific and complex eligibility requirements that lock out many people who would like to move.

Furthermore, an effective relocation program would need to offer more than just cash. Research published in the Journal of Urban Economics in 2013 affirmed the advice found in the bestselling job-hunter’s bible What Color is Your Parachute?: Most people find jobs through “broader social networks” of casual acquaintances rather than immediate family, job websites, job centers, or other formal means. Individuals with weak social ties outside their immediate network will tend to struggle the most to discover new opportunities. Indeed, the 1976 Department of Labor experiments found the most successful moves, as judged by the migrants themselves, were those to areas where the individual had existing ties, such as extended family or friends.

This feeds a vicious circle. Lower-income people often live in close proximity to one another, and their broader social ties to the world of work suffer as a result. Public programs cannot replicate personal networks, of course, but an investment in helping individuals broaden those networks may be money well spent. An effective relocation program could encourage the employees of job-placement offices to work with unemployment-insurance recipients to determine who is willing and able to move, and then help them navigate the numerous resources available to find new opportunities.

Just as mobility grants would help push individuals to move, migration zones would attempt to pull them in. Unlike enterprise zones and similar tax-advantaged districts, migration zones would be established in areas facing labor shortages to encourage migrants to relocate by providing a raft of programs and policies to ease the way for newcomers. The administration of migration zones could take a variety of forms, but it generally should not be wholly governmental. Many important services these zones would need to provide are things government can’t do — or can’t do well. Instead, dedicated non-profits, existing business-improvement districts, and local chambers of commerce would administer them. Private firms located in migration zones also could and should work together — perhaps under an antitrust exemption, if necessary — to help migrants with everything from discounted rates on moving services to special leasing arrangements that allow short-term contracts.

From a public-policy standpoint, a migration zone should offer special federal or state tax credits (or both) to finance apprenticeship programs, wage subsidies, and other incentives intended to encourage firms to hire non-local people from areas that currently have high rates of unemployment. The benefits would persist only so long as the migration zone continues to face a labor shortage. Government support would also be conditioned on the migration zones’ ensuring that new migrants had places to live. Areas that forbid long-term, pay-by-the-week accommodations or that prevent the construction of new low-cost housing would not be eligible. The program would also require a streamlined process to enroll migrants in any government benefits for which they are still eligible, including health coverage, the SNAP program, and Section 8 vouchers. Depriving individuals of benefits when they move places a huge marginal tax on migrants. While ending dependency on benefits is an appropriate long-term goal, it would in these cases be counter-productive to insist upon slashing such benefits up front.

In some cases, migration zones could go further to ensure new arrivals feel welcome and at home. Dayton, Ohio, for instance, has launched the Welcome Dayton initiative — profiled in the New York Times in 2013 — which coordinates with local non-profits and businesses to effect simple changes intended to attract immigrants. These include adding interpreters to city offices, arranging English classes, and cutting bureaucracy for foreign doctors. Non-profit organizations offer everything from help starting a small business to social events for newcomers. The program has started attracting migrants from other American cities, and the strategy has delivered major dividends for Dayton, as incoming immigrant families clean up abandoned areas of town.

Other Midwestern cities — including Chicago, Columbus, St. Louis, and Lansing — are now pursuing similar strategies. In isolation, such initiatives probably won’t increase mobility much, and, to date, they’ve been tried mostly in places with moribund job markets. But, combined with other policies intended to encourage employment, such migration zones could help solve local labor shortages while simultaneously increasing income mobility, as the unemployed and underemployed find better jobs. Exploring new policies like mobility grants and migration zones could restore mobility by encouraging and helping more Americans who want to move when they face hard times.


Before public policy can help people move, however, newcomers need places to live. Unsurprisingly, many areas with labor shortages also face housing shortages, and what housing there is tends to be very expensive. While local shortages in affordable housing are unlikely to be alleviated by federal or even state policy, there are steps that could be taken to encourage the creation of lower-cost rental housing. Such policies include equalizing the tax treatment of home ownership and home rental, improving the transportation networks of metropolitan areas to benefit those of modest means, and penalizing localities that work to destroy lower-cost housing.

To begin with, we need a national reassessment of policies that encourage home ownership over renting. While these programs have their merits, they tend to discourage geographic mobility. The link between home ownership and geographic immobility is obvious: Leaving an apartment typically requires little more than terminating a lease and perhaps paying a penalty of a month or two of rent. Selling a home in all but the most active housing markets, on the other hand, requires spending huge amounts of time and money to prepare a house for sale. This alone discourages mobility.

Furthermore, for those who are genuinely poor, the prevailing bias for home ownership offers little help. Buying a house requires saving a significant sum for a down payment, as well as consistent employment to make regular mortgage payments. The poor are poor precisely because they have neither assets nor high-wage jobs. As Marquette University economist Andrew Hanson has shown in ongoing research, current housing policies embedded in the tax code benefit primarily those who are already well off and encourage them to buy bigger houses. Those who rent, on the other hand, receive no tax benefits at all. As Hanson’s work makes clear, this policy fails a simple smell test of public utility. Even if one believes the prosperous pay too much in taxes, it makes far more sense to reduce their marginal rates than to offer them implicit subsidies to buy bigger houses.

Policy preferences for home ownership need not be eliminated entirely, but a few changes to the tax code could make it easier for less affluent people to rent. One option would be to limit the reach of the mortgage-interest deduction, perhaps by limiting it to the interest on the first $400,000 (about twice the size of the average mortgage). The revenue gain from limiting the size of the mortgage-interest deduction could be used to make a certain portion of rents deductible without increasing budget deficits. As Hanson has shown, the biggest expected effect from this type of policy would be a tendency for the well off to buy smaller houses than they otherwise would.

Increasing the supply of housing — particularly rental housing — also requires paying attention to transportation networks. If more land is within ready reach of places where jobs are located, more lower-cost housing can be created. Much place-based research on fighting poverty, including William Julius Wilson’s important book When Work Disappears, devotes attention to the ways that better transportation networks might help people from inner-city areas get to jobs that are not near their homes. Nearly all new rail transit systems and highway enhancements in urban areas have connected existing population and job centers. Although such continued enhancements make sense, planners should also pay attention to ways in which new transportation networks could also expand housing opportunities.

As Jonathan Last points out in What to Expect When No One’s Expecting, decent transportation networks are necessary to allow people to build families in the types of neighborhoods where they want to live. While Last focuses mostly on building roads to help the middle class, evidence suggests that efforts to help the poor should focus largely on enhancing bus service. While buses are inferior in many respects to the new rail systems that have sprouted up all over the country in recent years (almost all with federal funding) and will rarely attract riders who have cars available for a trip, they are a near-perfect form of transportation for helping the poor get around. Smart route planning can make them nearly as speedy as trains (and faster, actually, than some new light-rail systems), and, unlike trains, routes can easily be changed based on population shifts. Combined with continued investments in road and rail lines, greatly expanded bus service would make it easier for poor individuals to live farther from their work locations in housing that could cost less. Housing does not need to sit right next to workplaces (although that may be ideal), but the working poor should have a way to get from where they live to where they work. Better transportation networks would mean that there would be more land on which housing could be available and affordable.

As Harvard University’s Ed Glaeser has shown, local policies dictate many factors that determine housing prices, suggesting that federal aid to local governments should partly be tied to local regulations. While penalties should not always be arduous, localities that implement policies that are less than optimal — such as Washington, D.C.’s height limitation, “anti-monotony” ordinances (which forbid low-cost construction of identical homes), or San Francisco’s now largely repealed Proposition M (which placed severe limits on the city’s authority to permit new building) — should result in a reduction in overall federal housing assistance. Likewise, areas that reduce other options for housing — by banning “granny flats” (small detached apartments, often above garages) or single-room occupancy hotels, for instance — should also face reductions in federal aid for housing. Finally, areas that engage in practices that are sure to destroy lower-cost housing options — such as rent controls (which make it economically impossible to build new housing) and very large minimum lot sizes (which can make it impossible to build anything other than mansions) — should be made ineligible for participation in federal programs intended to provide lower-cost housing.

But not all damaging policies are so obviously harmful. There are policies that discourage housing construction without rising to the level of actual governing malpractice, and the federal government cannot be expected to eliminate such policies. Moreover, many of the factors that affect housing most directly relate to brute facts of geography (nobody can create more land) or to local policies the federal government cannot address. A housing policy focused on mobility will, among other things, require cultural and political shifts at the local level. For decades, federal policy has nudged localities toward promoting a specific kind of home ownership; it should now move in the opposite direction to promote more rental and lower-cost housing.


Housing is not the only barrier confronting the unemployed who seek to relocate. For many, means-tested welfare programs are an important source of support. The federal government currently funds roughly 80 means-tested welfare programs that provide food aid, housing assistance, medical assistance, childcare assistance, and other services for low-income individuals and families. In 2012, government at all levels spent $916 billion on these programs.

For an individual or family faced with the stressful prospect of uprooting a household and leaving behind established community support systems, even a temporary loss of welfare benefits can be daunting. Every program requires its own enrollment and qualification process, so every new program created, even if it is effective on its own terms, presents an additional barrier to geographic mobility. The nation’s uneven implementation of Obamacare and the decision of some states not to participate in the Medicaid expansion have added additional layers of complexity that may make relocation increasingly unattractive. America’s decentralized welfare state, in short, presents a major barrier to mobility itself.

Some examples illustrate how this works and how it harms the poor. The federal government, for instance, maintains at least 15 different nutrition programs, from the very broad SNAP program that provides grocery money, to narrowly targeted efforts that do everything from provide at-school breakfasts to distribute surplus milk on Indian reservations. The programs assure that almost no one goes hungry in the long term — death by starvation is virtually unknown in our country — but they are also duplicative, inefficient, and complex. Similar situations exist in programs for housing (there are at least two dozen programs), job training (literally hundreds of federal and state programs), childcare (seven major programs at the federal level and thousands of state and local efforts), and nearly every other area in which federal support exists. And each program for which a person becomes eligible gives that person another reason to stay where he already is.

Promoting geographic mobility would involve streamlining these programs. Although difficult to achieve in practice, policymakers at the federal and state level should strive to have no more than one program for addressing any major need. Doing this would likely offer some modest administrative savings, but the effort should not be seen primarily as a way to reduce the total amount of resources devoted to the poor. Instead, any administrative savings should be reinvested in additional poverty assistance.

Eliminating duplicative programs would also allow resources to be redirected into what is already the largest program to help the poor: the Earned Income Tax Credit. The EITC rebates employer and employee payroll taxes to supplement the incomes of those who work many hours for relatively low wages. Because it benefits only those who work, it is a program with near perfect incentives, and, because it is administered through the federal tax code, it is portable throughout the country.

Despite these advantages, however, the EITC remains decidedly modest. For a typical single worker without children living at home, the EITC refunds less than $490 per year — hardly enough to boost a person into self-sufficiency. Introducing and expanding similar wage supplements, like the short-lived “Making Work Pay” tax credit included in the misbegotten 2009 stimulus package, could have a tremendous impact.

In fact, the structure of the EITC is so good for mobility and its incentives are so positive that a long-term plan to promote mobility could involve trying to expand it even further into a full-fledged “negative income tax” or “basic guaranteed income.” A long-term strategy along these lines would involve replacing all or almost all existing welfare programs with a single grant or income support. The design problems confronting such a program would be significant, of course, as it would be all too easy to provide strong disincentives to work. Test programs, like the basic-income experiment conducted in the Canadian province of Manitoba in the 1970s, have been poorly structured, so it is difficult to deduce a great deal from their designs.

Years of social-science research, however, appear to have yielded solutions to most of these design problems. The most workable proposals might simply provide a support grant, set at the minimum level necessary to maintain a standard of living just above poverty, to every individual above a certain age regardless of location or work status. Part of the funding for this grant could be “recaptured” with a surtax imposed on people whose incomes exceed a certain level. Such a policy could replace nearly all existing support payments — Social Security, Medicare, unemployment insurance, and everything else — and encourage individuals to relocate in search of job opportunities without worrying about losing public benefits where they live.


Restoring the American instinct to pick up and move in pursuit of a better life should be a priority for policymakers across the political spectrum. Unlike other causes of income stagnation, the trend against geographic mobility has resulted from specific public policies and can be reversed by changing those policies.

The arguments against a mobility-oriented agenda are relatively easy to answer. Moving is a serious stressor on a family or individual, but then so is financial distress, which almost inevitably follows long-term unemployment. Relocation may fray some social networks, but being stuck in a failing community rarely helps one find new opportunities or get ahead in life. In any case, there’s little evidence that increased geographic mobility by itself will damage the nation’s level of social capital overall. Indeed, the decline in social cohesion documented by authors such as Robert Putnam and Charles Murray has coincided with the decline in geographic mobility.

There is no strong reason to believe that more mobility does net social harm, even in the areas people abandon to find work elsewhere. Population might fall in some already-depressed areas, but, for those left behind, schools and public services will be less crowded, and less competition will exist for job openings. Whatever the negative psychological effects of moving — and there is no doubt they are significant, particularly for children — encouraging mobility is almost certainly better than the alternative of allowing persistent long-term unemployment to continue. In short, while there are real and important reasons to think that moving is difficult, there’s no reason to think that it will prove any more psychologically difficult than the status quo.

The ability and will to move to a different place and re-invent one’s life has long ranked among the most distinctive aspects of the American character. Furthermore, a strong body of evidence supports the idea that moving can increase economic mobility. Public policies in recent decades, however, have tended to encourage people to stay in one place, which has contributed greatly to income stagnation. While improving struggling neighborhoods may be desirable, it has not served to cure or even to mitigate poverty. Therefore, policymakers should embrace new tools like mobility grants and migration zones, work to increase the supply of rental housing, and streamline welfare programs.

While certainly not a cure-all for America’s current economic malaise, increased geographic mobility could well help many Americans facing economic struggles. Efforts to increase geographic mobility should play a key role in any economic agenda devoted to restoring income mobility and reviving the American dream.

2013 Insurance Regulation Report Card


Welcome to the R Street Institute’s 2013 Insurance Regulation Report Card, our annual examination of which states are doing the best job of regulating the business of insurance. R Street is dedicated to the mantra: “Free markets. Real solutions.” Toward that end, the approach we apply is to test which state regulatory systems best embody the principles of limited, effective and efficient government. In this context, that means states should regulate only those market activities where government is best-positioned to act; that they should do so competently and with measurable results; and that their activities should lay the minimum possible financial burden on policyholders, companies and ultimately, taxpayers.

There are three fundamental questions this report seeks to answer, the same questions we asked last year:

  1. How free are consumers to choose the insurance products they want?
  2. How free are insurers to provide the insurance products consumers want?
  3. How effectively are states discharging their duties to monitor insurer solvency, police fraud and foster competitive, private insurance markets?

For this year’s report, we have adjusted the weightings of some categories and incorporated new data sets into our analysis. In addition to examining market concentrations and residual markets in the private passenger automobile and homeowners insurance lines of business, we have added analysis of the workers’ compensation markets in each of the 50 states. While commercial property/casualty insurance tends to be less stringently regulated than personal lines, workers’ comp is similar to home and auto insurance in that many states exercise explicit rate controls and operate large residual markets. In fact, in four states – North Dakota, Ohio, Washington state and Wyoming – the state government serves as the monopoly source of workers’ comp coverage, completely displacing the private market. Given the role workers’ comp plays in the broader economy, and the potential for workers’ comp costs to impact what has been an excruciatingly slow jobs recovery, we felt it essential to more deeply examine how states are performing in this essential marketplace. We also have added analysis of loss ratio data from each of the 50 states in the three targeted lines of business.

Reviewing the data on insurance in 2013, we see continued modest trends toward greater consumer and business freedom in the personal lines and workers’ comp markets, as well as real efforts in some states to scale back, or otherwise place on more sound financial footing, residual insurance markets and state-run insurance entities.

Why road pricing matters


Road pricing — the use of fees or tolls applied to road usage — is the most promising tool we have to improve the productivity of America’s aging surface transportation infrastructure. But while transportation experts generally are enthusiastic about road pricing, voters are not.

There are exceptions. Successful toll roads have made believers out of at least some skeptical drivers, and voters in regions with particularly high congestion levels have at times been open to road pricing proposals. But political resistance to road pricing has been a huge obstacle to its spread.

That has to change. The potential benefits of road pricing to reduce congestion and air pollution, to boost economic growth and to improve the quality of infrastructure, are so great that we can ill afford to pass them up. Building support for road pricing requires changing how the public thinks about infrastructure. More broadly, it will require revamping the institutions that govern U.S. infrastructure.

In 2009, the National Surface Transportation Infrastructure Commission estimated the federal government would have to devote $59 billion per year to highway and transportation spending to maintain U.S. infrastructure at current levels, and $78 billion per year (in 2008 dollars) to meet the design standards set by transportation planners.

Drawing on data from the National Cooperative Highway Research Program, economists Matthew Kahn of UCLA and David Levinson of the University of Minnesota estimate maintaining and operating existing roads at current levels of performance will require $145 billion per year (in 2007 dollars), an amount that also takes into account spending at the state level.

The costs of actually upgrading U.S. infrastructure to reduce current congestion levels are expected to be higher still. The 2012 Texas Transportation Institute Urban Mobility Report, published by the Texas Transportation Institute at Texas A&M University, finds total congestion costs for urban areas reached approximately $121 billion in lost productivity in 2011, a reflection of, among other things, 5.5 billion hours in travel delays. Congestion costs peaked in 2005, at $128 billion in lost productivity, an amount that likely will be surpassed as the U.S. economy recovers in the coming years.

Government sources of systemic insurable risk


In mid-2013, three years after the Dodd-Frank Act’s passage, American International Group Inc. and Prudential Financial Inc. became the first insurance companies to be designated by the Financial Stability Oversight Council as non-bank financial companies that were nonetheless “systemically important financial institutions.”[1] MetLife Inc., which had been regulated as a bank holding company prior to divesting all of its banking operations, is widely expected to become the third.

FSOC is the “college of regulators” created by Dodd-Frank and granted broad powers under the law to police systemic risk in the financial system, including heightened government scrutiny of designated firms. In conjunction with a similar designation process currently underway internationally by the G-20 countries, in consultation with the International Association of Insurance Supervisors, the move by FSOC made clear that the business of insurance – in the United States, historically regulated at the state level –would be treated as a potential source of risk to the broader financial system.

This sea change has caused considerable consternation among industry leaders, who understandably fear both draconian regulatory oversight and the imposition of bank-centric rules that do not fit the needs and challenges of insurance markets. The property/casualty industry has been particularly adamant that their sector is not a source of systemic risk and that P&C insurers should not come under the rubric of any systemic risk regulatory regime.

While it is true that the business of P&C insurance is not generally systemically risky, there have been notable exceptions where the excessive concentration of insured or insurable P&C risks has threatened the broader economy.  At the same time, regulators continue to pay insufficient attention to some genuine sources of systemic risk: namely, the accumulation of excessive insurable property/casualty risks within some state and federal enterprises.

This paper takes a look at some of those hidden, heretofore unquantified risks, with particular attention to the ways U.S. taxpayers are exposed to risks that should properly be borne by the global insurance industry.

The promise of e-cigarettes for tobacco harm reduction


Nicotine vaporizers, usually referred to as e-cigarettes, show substantial promise as a vehicle for tobacco harm reduction (THR). Skyrocketing sales of e-cigarettes, consumer advocacy for these products, and a flood of new scientific papers relating to these products suggest the possibility that e-cigarettes may be the greatest advance in reducing tobacco-attributable illness and death in decades. Moreover, progress to date has been accomplished at no cost to the taxpayer and with little or no recruitment of teen non-smokers.

This paper makes the case for the Food and Drug Administration (FDA) and other public health authorities to add a THR element to current public health programming, highlighting e-cigarettes as a THR modality under FDA guidance, skillfully crafted to recognize both the potential public health benefits and theoretical harms of a THR initiative.

Optimal FDA regulation will involve strict control of the quality of manufacture and marketing without threatening the removal of e-cigarettes from the market, even on a temporary basis, and without stifling continuing product improvement.

There currently exists strong opposition to THR within the public health community. While those familiar with the scientific literature readily agree that smoke-free tobacco products present far less risk of potentially fatal tobacco-attributable illness than cigarettes, they object to any consideration of THR because of their unsubstantiated belief that a THR initiative would necessarily increase the number of teens initiating tobacco/nicotine use and necessarily decrease quit rates.

Reconsideration of this intense distrust of all non-pharmaceutical tobacco/nicotine products will open major new opportunities to reduce tobacco-related addiction, illness and death. We now know about the huge differences in risk, comparing cigarettes to the smokeless tobacco products available on the U.S. market. We know more about the lack of attractiveness of e-cigarettes to non-smoking teens and non-smoking adults. We also know that, for a large number of mental health patients, self-administered nicotine is highly effective in helping them get through the day.

Experience to date with currently unregulated e-cigarettes strongly suggests they already are securing substantial public health benefits among current smokers without increasing teen initiation of tobacco/nicotine use and without adverse impact on quit rates.

Many in the public health community seem unaware of the research findings demonstrating the potential public health benefits of a THR initiative. They seem unaware of the research findings demonstrating both the relative safety and unattractiveness to non-smokers of e-cigarettes. This paper is intended to help close these gaps.

Restoring the RESTORE Act’s conservative principles


The 2010 Gulf Coast oil spill was the largest offshore oil spill in American history. For 87 days, the Macondo prospect gushed oil into the Gulf of Mexico before engineers were able to successfully seal the well. The effects of the spill on the Gulf region’s economy and environment were significant and continue to be felt today.

In 2012, two years after the spill, Congress passed and the president signed the Resources and Ecosystems Sustainability, Tourist Opportunities, and Revived Economies of the Gulf Coast States Act (RESTORE Act), which sets aside 80 percent of the civil and administrative fines paid pursuant to the 2010 Deepwater Horizon oil spill, as the spill is commonly called. The primary purpose of the RESTORE Act is to channel these fines to mitigation of the impact of the oil spill and increased resilience across the Gulf Coast to future disasters.

While the RESTORE Act is in many ways imperfect, it does reflect a number of important conservative principles. These include privileging local decision-making over federal regulation, maintaining a direct nexus between the actors liable for the disaster and the people and firms adversely impacted, and a commitment to reducing future taxpayer exposure to risk.

Regardless of the specific strengths or weaknesses of the RESTORE Act, the key to ensuring that it ultimately represents a victory for limited, responsible government is careful oversight during implementation. For this reason, it is imperative that the states and intergovernmental bodies with responsibility for implementing the act maintain a laser focus on the act’s original intent and that it not be misused to pursue unrelated goals or policy agendas.

While America’s attention has largely moved away from the Gulf Coast, the effects of the Deepwater Horizon spill are far from over; in October 2013, a 4,100 pound tar mat—a chunk of spilled oil and sand—was found in Louisiana. The Gulf Coast will feel the effects of the Deepwater Horizon spill for some time yet, but appropriate use of RESTORE Act funds can mitigate these effects and build environmental resiliency in ways that benefit the economy and taxpayers.

The economic benefits of protected lands: A government-lite approach

Hood River 2

During the 1966 fight over whether to construct dams within the Grand Canyon, the Sierra Club made their objections known through a full-page advertisement in the New York Times. The U.S. Bureau of Reclamation had been arguing the new reservoirs would be a boon to visitors by allowing powerboats to get closer to the canyon walls. Sierra’s response: “Should We Also Flood the Sistine Chapel So Tourists Can Get Nearer the Ceiling?”

This example is typical of how conservation debates have played out since the birth of the environmental movement in the 1950s and 1960s.

Liberals typically argue that certain places should be protected from development because of their aesthetic merit, because certain endangered species should be protected or because some proposed development would cause pollution. Conservatives retort that the luxury good of conservation is something taxpayers can’t afford and the wilderness must be sacrificed for the sake of economic progress.

The binary nature of this debate – the classic dichotomy of “the environment” versus “the economy” – is woefully incomplete. Environmental problems sometimes quickly become economic or societal problems. A misguided Soviet irrigation scheme contributed greatly to the death of the Aral Sea, turning what was once the fourth-largest lake in the world largely into blasted salt flats. Or consider a recent study of air pollution in China that found it caused 1.2 million premature deaths in 2010, resulting not just in personal tragedy, but colossal expense, especially from chronic disease.

Just as environmental devastation can cause social and economic problems, a small-government approach to environmental preservation can be a source of economic benefits.

“Government-lite” conservation is an approach where places are opened up to visitation consistent with the long-term health of the attractions, founded on a good working relationship with local communities. This approach can create long-term economic benefits in nearby “gateway” communities and the nation as a whole, while preserving America’s natural heritage.

It’s a moderate path between total preservation and totally unrestricted resource exploitation, conserving those places that lure tourists, while still permitting resource extraction and devolving authority to states or the private sector where appropriate.

I visited seven towns and cities across the American West to see these contrasts in action firsthand.

Ten reforms to fix Florida’s property insurance marketplace — without raising rates


Florida’s property insurance system remains broken and need of significant changes. Past studies from the James Madison Institute have demonstrated the challenges that Florida’s unstable property insurance market poses to the state government’s fiscal situation and to the state’s overall economy. The market is plagued by uncertainty, government intrusion, and regulatory overreach. Moreover, the ongoing risk that multiple government agencies might levy assessments on property insurance policies after a major storm or a series of lesser storms poses a meaningful risk to the state’s post-disaster economic recovery.

Over the past few years, legislative action and private sector innovation have somewhat diminished these risks, but more remains to be done. Some of the remaining reforms may be somewhat painful to those who benefit from the status quo, but a failure to act could exacerbate the kinds of pain that would occur following a major storm.

It is not news that Florida has been struck by more hurricanes than any other state. The state is a low-lying tropical peninsula jutting 500 miles into the most hurricane-active waters in the world, just as it was 20 years ago and 100 years ago. It has also experienced some of the most powerful and damaging storms. Indeed, the strongest hurricane to make landfall in the United States was the “Labor Day Hurricane” that struck Florida in 1935.

As of this writing, Florida had enjoyed eight years in which no hurricane made landfall. That was the longest such “drought” on record, but it is no cause for complacency.

Despite its storm risks, Florida has seen its population and its built environment grow dramatically. Indeed, the state’s population has almost tripled since 1970, growing from 6.7 million residents to more than 18 million. Even during the new century’s first decade, when many perceived a slump in Florida, the state still added more than three million residents and grew 17.6 percent.

This growth has increased Florida’s total coastal exposure to $2.9 trillion, the most of any state. Indeed, Florida has more property at risk than all of the other “hurricane alley” states (Virginia, North Carolina, South Carolina, Georgia, Alabama, Mississippi, Louisiana, and Texas) combined. Florida’s geographic location and the concentration of property in the state’s riskiest coastal areas are fundamental realities that can’t be changed. But they also have relatively little to do with the decisions by many major property insurers not to expand their business in Florida, and nothing to do with the instability of the state’s property insurance market. What makes Florida truly unique is not the meteorological risk it faces, but its political, regulatory, tort, and judicial environment.

According to the New York-based Insurance Information Institute, non-catastrophe claims in Florida have increased roughly 17 percent per year over the past decade. The cost passed on to consumers to cover these claims is exacerbated by legal loopholes that have led to unscrupulous claims practices, increased litigation, and fraud.

Moreover, the deliberate, interconnected policies pursued by the Legislature, previous governors, and the Office of Insurance Regulation (OIR) have led to a dysfunctional property insurance system that has distorted pricing, undermined competition, and placed a heavy burden on the state’s taxpayers. This has been accomplished through Florida’s two property insurance mechanisms: the Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund (Cat Fund).

For too long, Florida has bet its public safety and fiscal health on the weather, but the state’s ongoing statistically implausible winning streak cannot continue indefinitely. The risk of collapse is simply too great to put off fundamental changes any longer. This study, published jointly by R Street and the James Madison Institute, outlines pragmatic reforms that would have a meaningful effect on stabilizing the Florida property insurance market without requiring big hikes in primary insurance rates.

A state approach to flood insurance reform in Florida


With various provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 taking effect this year, there is growing concern that scheduled rate increases by the National Flood Insurance Program will have adverse effects on hundreds of thousands of Floridians who must carry flood coverage. Elected officials at the local, state and federal levels already have called for a delay in the implementation of the rate increases, and the Florida Cabinet and Legislature have both convened hearings and workshops to discuss the reforms, their potential effects, and what, if anything the state could do to temper the law’s negative impacts.

These are all valid concerns, but the best solution to this problem is to offer consumers more choices, rather than halting changes to the program, which most agree are necessary. As Florida lawmakers work to find solutions to alleviate the impact on NFIP reforms, they should take the attached principles into consideration.

The value of conservation compliance to hunters and anglers


In recent years, free-market groups and environmental activists have demonstrated they can work together effectively to root out wasteful federal subsidies that benefit environmentally destructive development. As such efforts at collaboration expand and move forward, there is one natural constituency that shares significant political overlap with both groups: sportsmen and sportswomen. Long-known for their advocacy of certain causes associated with the political right, public polling demonstrates hunters and anglers also are among the most committed advocates of conservation, reflected in the high priority given to such issues by so-called “hook and bullet” groups.

With Congress preparing to resume work this month on a long-term Farm Bill, this constituency could prove instrumental in settling a key issue that divides the differing versions passed by the Democratic-controlled U.S. Senate and the Republican-controlled U.S. House: whether to attach so-called “conservation compliance” requirements to federal subsidies for crop insurance. This brief argues that conservation compliance has proven crucial over the past three decades to maintaining various wildlife habitats of value to hunters and anglers. Transitioning to a new paradigm in which crop insurance programs – including new “shallow loss” programs – are the primary means of providing farm supports, as contemplated by the House bill, without enacting a corresponding expansion in conservation compliance, threatens grave harm to hunters and anglers’ priorities.

Opportunities for the expansion of the Coastal Barrier Resources Act of 1982


Current government policy incentivizes behavior that both harms the environment and wastes taxpayer dollars. Rooting out these policies and finding ways to dampen their negative effects offers an opportunity to conserve more while spending less. Congress did just this in 1982, when it passed the Coastal Barrier Resources Act. With the CBRA, Congress created the Coastal Barrier Resources System, an area where the federal government no longer would subsidize development or offer other support, such as federal flood insurance.

It stands to reason that efforts like CBRA should be both strengthened and expanded. However, significant barriers limit the CBRA’s effectiveness. To get serious about realizing savings through CBRA, Congress and the executive branch should take three simple steps: Update and modernize the CBRS maps, increase U.S. Fish and Wildlife Service’s ability to alter and update CBRS maps in keeping with the law’s intent, and expand the CBRS and OPA with new criteria to protect more acres from wasteful subsidy.

Climate change: It’s time for a conservative alternative


President Barack Obama’s climate agenda announced in June 2013 represents the latest of many Democratic Party efforts to address climate change. Although it includes no new legislation, the president’s plan makes unprecedented use of executive branch powers and offers a great many things that appeal to core Democratic constituencies. Implemented in full, power plant carbon rules,
further delays in economically beneficial pipeline projects, and added green energy projects would result in a bigger, more intrusive government that exerts greater control over the economy, rewards perceived “good guys,” and punishes supposed “bad guys.” Not surprisingly, the plan, like all previous Democratic efforts, has earned a suspicious and hostile reaction from conservatives.

It doesn’t have to be this way. Rather than pretend climate change is not a problem, there are ample opportunities for Republicans to point out the obvious flaws in the left’s plans to deal with it and offer alternatives of their own. In short, conservatives can take a page from the liberal playbook and use the climate change issue to push policies that they favor anyway.

The attached policy brief originally appeared in the September 2013 issue of Environmental Law Reporter’s News & Analysis.

Responsible prison reform


Between 1979 and mid-2013, the Bureau of Justice Statistics reports the number of Americans behind bars rose from roughly 314,000 to about 2 million. Today, the United States has roughly 5% of the world’s population and nearly a quarter of its inmates. Evidence shows mass incarceration has performed more or less as advertised. But policies that were appropriate for a nation that had one of the highest crime rates among developed Western countries are not necessarily appropriate for a nation that now has one of the lowest.

Conservatives should lead the way in sensibly shrinking the prison population. An increased emphasis on individual responsibility holds promise for a new conservative agenda for prison reform. Combined with a renewed emphasis on effective punishment, increased attention to circumstances within jailhouse walls, and a different social attitude toward ex-offenders, these sound, time-tested principles can shape the new vision for prison reform that America urgently needs.

Strange bedfellows: SmarterSafer.org and the Biggert-Waters Act of 2012

Strange Bedfellows

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This paper by R Street President Eli Lehrer, which originally appeared in the Spring 2013 issue of the Duke Environmental Law and Policy Forum,  focuses on the SmarterSafer.org coalition and how its success in helping to craft and ultimately enact the Biggert-Waters Flood Insurance Reform Act of 2012 demonstrates how traditionally conservative free-market groups and traditionally progressive environmental groups can find common ground on policy matters.

Defending America, defending taxpayers


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As conservative organizations, the R Street Institute and National Taxpayers Union believe strongly in a robust national defense. However, our groups also believe strongly in exercising fiscal discipline in all areas of the federal budget. As by far the largest portion of discretionary spending, Pentagon expenditures must not escape scrutiny as conservatives examine methods for reducing our staggering debt.

That is why we have joined together to produce this report. By aggregating research from various reliable sources, we hope to demonstrate that the “universe” of programs and processes in need of reform at the Pentagon is more than large enough to allow for compliance with so-called sequestration while maintaining the strongest and most capable military the world has ever known.

What follows is a written report and appendices with 100 specific recommendations that fall into three broad categories, totaling nearly $1.9 trillion.

Spotlight on NC’s auto insurance system: Seven things to understand

Authored by R Street Senior Fellows R.J. Lehmann and Alan Smith, this paper outlines how the North Carolina Rate Bureau works and how it stifles competition and innovation. Among the key facts it highlights:

  • North Carolina’s automobile insurance system guarantees profits to insurers.
  • North Carolina’s current system makes it difficult—and undesirable—for insurers to offer innovative new products in the state.
  • Residents across the Southeast states pay relatively low rates for automobile insurance.
  • North Carolina’s automobile insurance system imposes a special tax on all drivers in order to subsidize coverage for risky drivers.
  • More than a fifth of North Carolina drivers cannot find a private insurer willing to write them liability coverage.
  • State regulation does not keep auto insurance rates in North Carolina lower than those in other states.
  • Currently pending legislation still gives the insurance commissioner authority over most rate requests and would not result in significant short-term rate increases for anybody.

R Street policy statement on crop insurance reform


As Congress returns for a second attempt at crafting fiscally responsible food and farm policy, it should ensure that basic limitations to taxpayer liability are applied to federally subsidized crop insurance.

Though direct payments have symbolized the most absurd aspect of the federal government’s expensive and misguided farm policy, they have historically been tied to smart provisions that shield taxpayers, including transparency and “conservation compliance” requirements. Unfortunately, while last year’s House and Senate farm bills expanded already over-generous crop insurance subsidy schemes, they both failed to include such basic provisions.

As Congress works to achieve savings in agriculture policy this year, it should ensure that five common sense limitations are applied to make federally subsidized crop insurance more accountable to taxpayers.

  • Accountability: A responsible farm bill must tie conservation standards to any agricultural subsidy programs, including crop insurance. These standards reduce current and future costs for taxpayers by ensuring that marginal or environmentally sensitive lands aren’t broken in at taxpayer expense, which would create dependency on handouts and result in more insurance subsidy payouts. An amendment from Sen. Saxby Chambliss, R-Ga., to re-link these so-called “conservation compliance” provisions to crop insurance premium subsidies passed on a bipartisan vote last year.
  • Payment limits: Congress should place a cap on the total amount any individual can receive in crop insurance premium subsidies each year. An amendment from Sens. Pat Toomey, R-Pa., and Jeanne Shaheen, D-N.H., last year suggested a modest cap of $40,000 per individual, which would save $5.2 billion over ten years. Further limiting subsidies to the still-generous levels offered in the Agriculture Risk Protection Act of 2000, as Sen. Jeff Flake, R-Ariz., and Rep. John Duncan,  R-Tenn., have proposed in their Crop Insurance Subsidy Reduction Act (S. 446/H.R. 943), could yield an additional $40 billion in savings.
  • Means testing: Legislators should also restrict premium subsidies for high-income farm owners. Agriculture subsidies are intended to provide a basic safety net, not a handout to the wealthy and successful. Sens. Tom Coburn, R-Okla., and Richard Durbin, D-Ill., passed a modest amendment last year to reduce premium subsidies by 15 percent for farm businesses with adjusted gross incomes above $750,000, which would save taxpayers $1.2 billion over ten years. A more aggressive effort by Sen. Rand Paul, R-Ky., to bar subsidies to those with incomes above $250,000 sadly failed, despite the fact that it would have affected just nine percent of farmers, who combined to receive nearly one-third of crop insurance subsidy benefits.
  • Transparency: Lawmakers should require full transparency, including the names of recipients and amounts received, for all premium subsidy payments. This important information about the program’s outlays already is available for direct payments, but is sadly lacking in the expanded crop insurance provisions expected in the next farm bill. Last year, Rep. Jackie Speier, D-Calif., introduced H.R. 6270, the Crop Insurance Subsidy Transparency Act, to subject crop insurance to the same transparency requirements applied to direct payments today.
  • Elimination of industry subsidies: Congress must also put an end to duplicative subsidies for crop insurance companies that are over and above the incredibly generous supports given to crop insurance policyholders. Agricultural economist Vincent Smith estimated that between 2005 and 2009, insurance providers received an average of $1.44 from the taxpayer for every $1 of subsidy received by farmers. These payments, which averaged nearly $2.7 billion per year over that time period, are wasteful and unnecessary.

Though many other efforts to trim the cost of agriculture programs are necessary, any credible reform to crop insurance must contain these five policies to make the program more limited and accountable.


Cutting the corporate tax rate means cutting corporate taxes

In 1986, the United States cut its corporate tax rate close to the current rate of 35 percent as part of broad, comprehensive tax reform at both the corporate and personal level. The reform gave the country one of the lower corporate tax rates in the developed world. In the 27 years since, we have slowly become a high corporate tax rate country through stasis: literally every single country in the OECD has reduced its corporate tax rate in the past twenty years, with many having done so multiple times. Except for the United States.

Reducing smoking: A guide for state policy makers

cigarette en main, fond vert

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A review of public health literature related to smoking cessation suggests smoking bans and efforts to stop minors from smoking can be very effective. They help in two ways: reducing smoking where banned and de-normalizing cigarette smoking. Tobacco taxes may be reaching the limits of their effectiveness as a public health measure in many jurisdictions. When a state’s tobacco tax is much higher than neighboring jurisdictions, smuggling and cross-border purchasing become major issues. Warnings on tobacco packages raise awareness of hazards, but appear to have little or no effect on initiation of smoking by teens or on smoking cessation. Some initiatives may do more harm than good. Nicotine replacement and other pharmaceutical therapies are remarkably ineffective. They fail about 90 percent of smokers who use them as directed, when results are measured six to twelve months later.

Tobacco harm reduction, defined as encouraging smokers to switch to lower-risk, smoke-free tobacco products or e-cigarettes, is a promising option, but one opposed by public health authorities unwilling to consider use of any non-pharmaceutical tobacco product in the context of a public health initiative. Supported abrupt cessation, defined as promotion of web-based educational materials or 1-6 hours of pre-cessation education or counseling and control of contraband tobacco products, deserves far more attention than it has gotten to date.

These options are not supported by current tobacco-control programs because the definitive research to demonstrate their effectiveness on individual and population bases has not yet been done.

Analysis of the South Carolina coastal property insurance market

t600-Hurricane Hugo

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This paper aims to clarify the debate over property insurance rates and provide a basis for rational discussion of the current situation in South Carolina’s property insurance market. The paper examines how property insurance works, how it functions in coastal South Carolina, the business climate surrounding insurance, how insurers determine rates, and the roles of statistical modeling and reinsurance. The paper also examines post-event “assessments”—special taxes imposed after major disasters—and compares South Carolina’s system to those of other states.

In general, the paper concludes that South Carolina has insurance regulations that are typical of such regulations elsewhere in the nation, rates squarely in the middle of those in other coastal states, and prices that are reasonable, given the risk. If South Carolina wants to improve its insurance market and reduce rates for consumers, it should work to help homeowners protect their residences against nature’s worst and attract more carriers to the state. The bottom line is simple: although it is not perfect, South Carolina’s homeowners insurance system is a rational one that serves consumers well.

Reforming Michigan’s auto insurance market


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Michigan’s unaffordably high auto insurance premiums result in large part from its unique requirement granting all policyholders unlimited lifetime medical benefits. Higher rates of medical utilization and significantly higher reimbursements for common medical claims than those paid by Medicare or private workers compensation insurers show how pervasive the problem has become. Allowing greater consumer choice, instituting a fee schedule for medical claims and making health insurers the default handlers of major medical claims could go a long way toward making insurance rates fairer and, in many cases, lower for Michigan residents.

Coastal preservation through Citizens reform


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The 30-year-old federal Coastal Barrier Resources Act has been successful in promoting conservation of natural resources, fiscal responsibility, and the reduction of inappropriate high-risk coastal development by restricting federal subsidies. Restricting insurance coverage from Florida’s Citizens Property Insurance Corp. for new construction in areas seaward of the Coastal Construction Control Line could yield similar results on the state level by ending subsidies to development that damages Florida’s coastal environment and destroys natural storm barriers.

R Street policy on tobacco harm reduction

Tobacco Harm Reduction (THR) is a policy and process by which smokers who are unable or unwilling to quit smoking are enabled and encouraged to switch to a lower risk tobacco/nicotine product to reduce their future risk of potentially fatal cancer, heart and lung disease.

In this policy statement, R Street lays out its view that current U.S. tobacco control policy has the practical effect of reinforcing the cigarette as the primary means of nicotine delivery by protecting cigarettes against competition by far less hazardous non-prescription alternatives.

Medical cost containment in the Wisconsin workers’ compensation market

State of Wisconsin Icons

Wisconsin’s 20-year-old certified database system, used to resolve disputes about the reasonableness of medical reimbursements paid by workers’ compensation carriers, has failed to control costs and should be replaced with more aggressive cost control mechanisms. The paper finds that, in 2009, the database’s recommended payment levels were nearly double the maximum payment amounts in bordering states, while actual payments made by Wisconsin workers’ comp insurers were 34 percent higher than the medical fee schedules in neighboring states prescribed.

The paper suggests that Wisconsin lawmakers could follow the lead of other states by adopting an explicit fee schedule, which would reduce administrative burdens in validating payment amounts, reduce the need for the state’s Department of Workforce Development to adju­dicate fee disputes and reduce the need for bill audits.

However, author R.J. Lehmann writes that a fee schedule “would not be a panacea,” as data from states with existing fee schedules show that insurers increasingly have opted to take advantage of the discounts offered by managed care networks, thus subjecting a shrinking proportion of workers’ comp cases to the fee schedules. Instead, he suggested that more close­ly aligning the structure of works’ comp benefits with those of group health insurance would allow workers’ comp insurers to institute cost control techniques like deductibles and co-payments.

The ‘dos’ and ‘don’ts’ of the Fiscal Cliff

With the end of the year fast approaching, the conversation about how Congress should address the “fiscal cliff” is heating up. If Washington fails to act, the New Year will bring with it dramatically higher taxes that could threaten a weak economic recovery.

In order to reduce the potential negative impact on the economy, Congress is in negotiations on a slate of tax and spending reforms that most observers consider a “must-pass” piece of legislation before the end of the year. The must-pass nature of the package has attracted dozens of special interests seeking to attach their favorite language to the proverbial last-train-out-of-town. Attaching it to the fiscal cliff bill would ensure that virtually any provision would be shielded from debate on its merits, overshadowed by trillions of dollars in changes to taxes, spending, and future deficits.

Here are five “dos” and five “don’ts” for Congress, starting with the policies they should resist including in any package.

A tax hit list for the 113th Congress

Fountain pen in target

As Congress ponders whether it can reach agreement to avoid the so-called “fiscal cliff,” this paper argues that, in addition to identifying credits, deductions, and exemptions that could be eliminated in order to lower marginal rates, fundamental tax reform should target unwise tax structures that simply shouldn’t exist in a code that promotes growth and job creation.

The current code contains several forms of double-taxation that serve to punish investment while encouraging complicated tax avoidance procedures. No matter how politically convenient as a means of raising revenue, these types of policies should be eliminated – along with other distorting preferences – to put our tax system on a more neutral footing. In that vein, the paper proposes complete elimination of federal tarriffs, the estate tax and the corporate income tax

Conservation Compliance: The obscure environmental provision key to protecting taxpayers and privatizing crop insurance


The overwhelming majority of American farms receive federal subsidies of some sort. These payments are controversial and, in the opinion of many who favor smaller government, ought not to exist at all. This paper frpm R Street President Eli Lehrer discusses some of those subsidies and argues that ongoing efforts to change crop insurance programs should maintain and expand “conservation compliance” policies in order to aid future efforts to privatize the system.

Small business credit still a problem

Greylock Federal Credit Union

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American small businesses create 65 percent of all net new jobs and employ roughly half of all workers in the private sector. According to the Kauffman Foundation, businesses founded between 1970 and 2000 (some of which grew into large businesses during those years) provided all net private sector job growth during that timeframe.

During recovery phases in particular, these new jobs prove essential to American economic growth and prosperity. Increased hiring is the first sure sign of an economic recovery. Given that increased hiring must include hiring by small businesses, any public policy that impedes small businesses’ ability to grow and hire can be considered a problem for the economy as a whole. To create jobs small businesses need dependable access to credit. They often can’t get it.

This paper reviews challenges smaller enterprises face in obtaining credit, and outlines potential benefits that one proposal—a modest change in the regulations governing credit unions—could have in providing much needed access to small business credit. It describes how this proposed legislation would free up $13 billion in capital and create 140,000 jobs at no cost to taxpayers, and then reviews its likely consequences.

Analysis of S. 637, the Earthquake Insurance Affordability Act

5.6 quake in San Jose, California

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S. 637, introduced by Sens. Barbara Boxer and Dianne Feinstein, D-Calif., would displace an existing private market by replacing private reinsurance with a federal government debt guarantee in the capital structure of the California Earthquake Authority. This study evaluates the feasibility of S.637, and considers its expected cost. Objective analysis of the bill demonstrates it cannot meet expectations to radically reduce the cost of or drastically increase the take-up of earthquake insurance. While proponents of the bill project it would produce a 33 percent reduction in premiums and an 85 percent increase in policyholder take-up, this study concludes a best case scenario of an 8 percent decrease in the cost of CEA coverage and a 3.5 percent increase in take-up. In addition, S.637 would shift the cost of California earthquake risk forward in time; increasing post-loss premiums to pay for pre-loss discounts. Finally, the assumed cost neutrality to the U.S. Treasury takes as given that Treasury will charge adequate, risk-based premiums to the CEA for providing a guarantee of post-event capital. Other federal risk transfer programs have made similar promises, but S. 637 would be unique if it actually achieved such an outcome. Policymakers should consider S.637 in light of this analysis.

R Street Shorts – Michigan Catastrophic Claims Association

Under Michigan’s unique personal injury protection auto insurance system, every insured driver in the state must pay a fee to the state-run Michigan Catastrophic Claims Association and, in return, receives unlimited medical coverage for auto accidents.

Michigan auto insurers pay the first $500,000 of PIP claims, while the MCCA pays amounts that exceed that total. A family of four drivers with five cars would pay roughly $900 a year to cover the MCCA fee.

The benefits of the system are that catastrophic accidents can be very expensive and impose a lifelong financial burden that the MCCA relieves. However, on the other hand, the chances of being in a life-altering accident are not high, while the costs to pay for other people’s life-long medical expenses are. Michigan is the only state with this sort of law.

How should insurers treat tobacco use?: A review of the research

Co-published by R Street and the Heartland Institute, this paper explores a growing body of data, including several studies from the U.S. Food and Drug Administration, finding that certain tobacco and nicotine products pose lesser health risks than smoking. Given these findings, lawmakers and regulators should explore whether it would be appropriate to allow life and health insurers to apply different underwriting and ratings criteria to each group.

Green Scissors 2012

Cutting the shadow

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Green Scissors 2012 recommends nearly $700 billion in cuts to wasteful and environmentally harmful federal spending. It is produced by Friends of the Earth, Taxpayers for Common Sense, and R Street. This diverse coalition of environmental, taxpayer and free-market groups has come together to show how the government can save billions of tax dollars and improve our environment.

2012 Insurance Regulation Report Card

Grandmother's 3rd Grade Report Card

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A state-by-state study of the U.S. insurance regulatory system, examining which states are doing the best job of regulating insurance through limited, effective and efficient government. Authored by R Street Public Affairs Director R.J. Lehmann, the report card measures states on 14 objective variables, including the concentration of home and auto insurance markets and relative size of residual markets; the effectiveness of state solvency and fraud regulation; the transparency and politicization of insurance regulation; the tax and fee burden placed on insurance markets and the proportion of fees used to support insurance regulation; and the relative freedom granted to insurers to set risk-based rates, including through the use of credit and territorial information.

Texas’ margins tax: principles for reform

This policy brief, co-authored by R Street President Eli Lehrer and Texas Director Julie Drenner, was issued by the Heartland Institute in February 2012. The pair looked at Texas’ franchise tax,  a 1% levy on businesses’ “taxable margins” that operates much like an income tax. Since its introduction, the tax has fallen far short of lawmakers’ intended revenue targets, while also imposing a wasteful and needlessly complex reporting and filing system on the state’s business community.

Workable solutions for Florida’s challenging insurance problems

Florida page 1046 to 1047

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This paper, co-authored by R Street President Eli Lehrer and Public Affairs Director R.J. Lehmann, was published in January 2012 by the James Madison Institute. It looks at the confluence of problems in Florida’s personal lines property and casualty insurance markets. It recommends changes to the state’s personal injury protection auto insurance system, as well as a plan for scaling back the size and exposure of state-run Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund.

November 2011 comments to Federal Insurance Office

Treasury Department

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These comments were submitted in November 2011 by R Street President Eli Lehrer and Public Affairs Director R.J. Lehmann to the U.S. Treasury Department’s Federal Insurance Office in response to FIO Director Michael McRaith’s call for recommendations to improve the U.S. state-based system of insurance regulation. In the paper, the pair argue that traditional property and casualty insurance is not a source of systemic risk; that the federal government should, however, monitor the potential risks posed by the growth of very large residual market mechanisms; that proposals for federal insurance regulation should be subjected to significant scrutiny; that more measured federal interventions, such as ensuring states permit risk-based pricing, could be viable alternatives, but must be considered on a case-by-case basis; and that the FIO should make freely available to the public non-confidential statutory insurance data reported to it by the states or the National Association of Insurance Commissioners.

The case for creating a Michigan auto insurance fraud prevention agency

Auto accident No. 1042 Bloor Street West near Walmer Road

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This report, authored by R Street President Eli Lehrer, was issued by the Heartland Institute in November 2011. It recommends the State of Michigan, which suffers from rampant fraud in its personal injury protection auto insurance system, form a public-private partnership modeled after a similar program in Pennsylvania to crack down on insurance fraud.

Green Scissors 2011

Neon scissors

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This report, co-authored by R Street President Eli Lehrer, was issued in August 2011 as a joint project of the Heartland Institute, Friends of the Earth, Taxpayers for Common Sense and Public Citizen. It identifies more than $380 billion of wasteful government subsidies that are damaging to the environment and harmful to taxpayers.