President Obama's Good Ideas | Eastern North Carolina Now

   Publisher's note: The article below appeared in John Hood's daily column in his publication, the Carolina Journal, which, because of Author / Publisher Hood, is inextricably linked to the John Locke Foundation.

    RALEIGH     President Barack Obama's 2013-14 budget plan may be dead on arrival in Congress. Given its unwise tax hikes and unsustainable spending levels, I won't be sad to see last rites administered to the proposal. But there are at least two provisions of the Obama budget that deserve to outlive their host body. One involves public housing. The other involves the tax code.

    Let's start with housing. In its budget, the Obama administration is proposing a broad expansion of a pilot program that allows public housing authorities to impose time limits (typically five years), work requirements, and other incentives on non-disabled beneficiaries who receive housing vouchers and, in some cases, live in public units. Since the pilot began in the mid-1990s, only 39 out of 3,200 housing authorities have received the authority to use these tools to encourage self-sufficiency. The administration and a bipartisan group of lawmakers want to see the program go national.

    While the 1996 federal welfare reform imposed time limits and work requirements on cash assistance, it did not apply similar rules to other welfare programs such as Medicaid, Food Stamps, or public housing. Conceptually, the idea of placing such limits on able-bodied recipients makes just as much sense for in-kind benefits as it does for cash benefits. While government-provided medical care, food, or housing might act as a safety net for people down on their luck, it should not become a way of life. Recipients capable of rebuilding their finances, forming stable families, and retraining for better jobs ought to do so. It is in the long-term interest of both the recipients and the taxpayers who are subsidizing them. Human nature being what it is, government should set expiration dates on benefits, and impose work requirements in the meantime, so that recipients will get the right signals and respond accordingly.

    This isn't a theoretical point anymore. Time limits and work requirements have proven their effectiveness in cash welfare. Moreover, the few housing authorities already empowered to use these tools have had success. Tulare County, California has used a five-year time limit for public housing since 1999. Most recipients exiting the system never go back on the waiting list for assistance. The limit spurs them to become more self-sufficient.

    The other good idea from the Obama budget is to impose a cap on the federal tax deduction for interest earnings from state and local bonds. While it might look as though tax-free municipal bonds are a boon for investors, they really only benefit those with very high incomes who gain more from the tax break than they lose in lower interest rates. What the policy really does is subsidize the issuance of state and local debt, something that the federal government has no business doing, at least through the tax code.

    I wrote about this issue at some length in a 2011 article for National Affairs:

    The main justification for exempting state and local bonds from income taxation is that the federal subsidy helps governments afford important capital projects such as schools and roads. Because the return on the bonds is not taxed, governments can offer lower interest rates to investors and still remain competitive with the private bond market. And since this allows governments to borrow at lower rates of interest, governments theoretically save money that can then be passed along to taxpayers.

    But in reality, because government bonds have artificially low interest rates, state and local governments end up borrowing more than they otherwise would in order to finance more infrastructure projects than they would otherwise build. In this sense, governments behave like many prospective home buyers: If mortgage rates go down, thereby allowing a person to buy a bigger house with the same monthly payment, he has certainly gained an advantage -- but he has also purchased a bigger house, and can't pretend that he has pocketed a savings. State and local officials already have enough perverse incentives to build themselves bigger houses; they do not need additional enticement to spend every last dime they can get their hands on.

    An additional danger of the tax exemption for state and local bond interest is that it can crowd private-sector vendors -- and, with them, private-sector cost efficiencies -- out of large economic ventures. Again and again in debates about building city-owned convention halls, arenas, ballparks, and corporate centers, the case is made that government, not the private sector, should take the lead -- because government can do the job cheaper, as its debt costs less to finance. A similar problem emerges with regard to public-private partnerships. In many instances, it would make fiscal sense for private firms to build, maintain, and lease back to public authorities facilities such as schools and toll roads. But opponents often argue that the potential savings -- in the form of speedier construction, more economical designs, and better maintenance -- are outweighed by the higher cost of servicing taxable private debt. Worse yet, when politicians do recognize this problem, they end up finding ways to give private firms access to the proceeds of taxpayer-backed debt -- a "cure" that is often far worse than the disease. There are private companies whose business models consist wholly of cultivating enough political pull in statehouses or city halls to get a piece of the "economic development" pie -- an open invitation to influence-peddling and corruption.

    I'd rather abolish the muni-bond tax break altogether, and give all public-housing authorities nationwide the option of imposing time limits and work requirements. The Obama budget doesn't go that far in either case, but it's a start. Congress ought to junk the rest of it but keep these two ideas alive.

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