Follow the Money- If You Can

It is always a well-received bit of news that a grant involving state or “federal” money has been landed for the county. I would like to present some information as to the background of where this “government money” originates, and the process involved. I’ll also make some suggestions as to how the system could be improved.

Collection

As citizens, we are subject to numerous taxes and fees. Most commonly known is the Internal Revenue Code of 1986, which is extracted from most people’s paycheck with each check they receive. There is a complex formula for determining this amount, but for the sake of simplicity, let’s say 10% is withheld, so if you are paid $500 each week, $50 is deducted from your earnings by your employer before it gets to you. Then there is the Federal Insurance Contributions Act, commonly known as FICA. This extraction was to fund Social Security. It is currently a rate of 6.2% on the first $106,800 of income from both the employer and employee. Finally, a Medicare extraction is 1.45% (again from both employer and employee) and is supposed to fund the Medicare program for senior and certain other citizens. Note that the self-employed pay double these amounts since the employer does not “contribute.” By the time these deductions are made, an employee earning $500/week nets $411.75, or commonly known as “take home” pay.

It is interesting to note that due to the complexity of the Internal Revenue Code of 1986 that as of 2009, approximately 47% of American pay no income tax, and over half of the income taxes are paid by 5% of Americans. There are certain people that pay no income taxes and yet receive a refund.

In Florida, there is no state income tax, so this is one level we fortunately skip.

Florida has a 6% statewide sales tax, with localities able to tack on beyond that. Many counties add 1% for a total of 7% on most items you purchase. Some cities and others add on percentages beyond the 7%.

Do you talk on a telephone? If it is a landline, be aware there are several taxes and “fees” that the phone company goes to some length to say are not taxes, yet when you read into your bill, you’ll find these “fees” are “cost recovery” due to government regulation or mandate. I’ll go into some detail here:

My phone bill seems to creep up a few cents each month. This month, it was more like $2, so I did some digging (as with bills in Congress, this information is there, you just have to find it). The most amazing thing about a phone bill to me is the percentage of it that is comprised of taxes and fees. On mine, the long distance taxes and fees were the only part that increased. They made up 26.9% of the total this month, up from 25.6% last month.

The first thing I found was a rather voluminous document that CenturyTel (formerly Embarq) uses to explain the various taxes on our accounts.

Here's where my bill increased:

The undefined "Carrier Cost Recovery Char" went from $1.99 to $2.99, a 66% increase.

The state tax was up 3 cents, a 7% increase.

The local tax was up 2 cents, a 7% increase.

The federal "universal service charge" was up 16 cents or 8%. The USF is defined in the attached document as:

The Universal Service Fund helps keep local service rates affordable to all and provides discounts to low-income families.

What is interesting is I'm not paying more tax due to more usage. I'm paying more tax due to higher fees, since that is the only part that increased. Good work if you can get it.

Cell phone users are not exempt; you’ll also pay the communication tax.

Drive a car or anything that burns gas (electric car owners keep reading)? You’ll pay several cents per gallon at the pump to both the state and federal government. The feds currently get 18.4 cents per gallon. For Florida, consider the following:

The statewide excise tax is 14.5 cents per gallon for gasoline and 27.2 cpg for diesel. The 14.5 cents represents 10.5 cpg sales tax plus 4 cpg excise tax. Gasoline tax rate increased .2 cpg on 1/1/05. Tax rate changes annually based on CPI. Does not include 2.2-cpg tax/fee for environmental inspection purposes (5 cents per barrel tax for the Water Quality Assurance Trust Fund, 80 cents per barrel for the Inland Protection Trust Fund, 2 cents per barrel for the Coastal Protection Trust Fund and 1/8 cents per gallon for weights and measures inspection fee). Gasoline rate also does not include additional minimum 9.9 to 17.8 cent per gallon local option tax portion with the weighted average of 14.6 cents per gallon. Therefore, depending on where you live in Florida, your overall gasoline tax can vary from an average of 52.9 cents per gallon to 45 cents per gallon.

Diesel, which costs less to refine, is taxed nearly twice as much as regular gas. The common thought is that this money has always been for road repair and construction. Somewhat late to the game are Florida counties, who discovered they could add the local tax option per gallon. If you’ve ever wondered why gas was 12 cents or more per gallon cheaper in Georgia, now you know why. No free ride though as they have an income tax.

Do you use electricity (such as to recharge that electric car)? You’re taxed at about 2.5%. It’s called a gross receipts tax.

If you own property, you pay an annual tax to the county. It goes to education on two levels (state and local board) and general revenue, plus any other assessments you may have such as a fire or water district or garbage collection.

No taxes?

Is there an alternative? Yes. One state has no income or sales tax. It is Alaska, and in addition to this lack of taxing, the state returns excess revenues to each citizen on an annual basis. In 2010, this was over $1,280 per person, so a family of four would get over $400 each month. How do they do it? By managing their natural resources to provide for the income needed for government operations.

Distribution

Now that we have some of the collection methods identified, what happens to all of this money? For most, the last they’ll see of it is the check they write to the treasury (unless you get a refund, see below) or to the county tax collector. Merchants pay the sales and other taxes they collect directly to the government. Florida allows merchants to keep a small portion of sales tax collected to offset administrative costs.

Grants

The various governments collect this money and then allocate it based on budgeting (see Budgets below). Florida has dozens of “trust funds” that money is put into for specific purposes. The process for a county to get funds often involves the use of “grants” or tax money that has been set aside by a government for a specific purpose. The chain for getting a grant often follows this model, and involves many people:

State grants-

In summary, a local grant writer asks department for money. Forms are filed and ultimately a decision is made.

Let’s look at the actual grant process for a park grant:

1) Go to the application preparation process page

2) Download the application guide (43 pages)

3) Download the FCT-5 application (24 pages)

4) Download or view the application training workshop (41 pages)

5) Complete the project self-score worksheet (5 pages)

6) Complete the application process completion check sheet (3 pages)

There are 24 listed steps in total on the process page! I’ll not go into the remainder in the interest of not boring you to sleep.

Federal grants-

For a good overview, read this page.

In summary, you shop the Catalog of Federal Domestic Assistance or CFDA.

For our federal example, we’ll visit our friends at the Federal Department of Education (DOE), who had a budget of $46 billion in 2010 and are asking for an almost $5 billion (for those with a recent public education, that is about 10% in one year during a recession) increase for 2011. Here is their grant page.

1) Go to their e-grants page and accept the terms.

2) Uh-oh: SYSTEM UNAVAILABILITY – MARCH 4-14, 2011

3) That’s as far as I got, since you must be a registered user beyond that point.

I did find a package page listing several of their grant areas, as well as a lengthy user guide to figure out some of this stuff. The DOE is more streamlined than the Park grant program. Only nine steps to prepare an e-application.

Two grant analogies

When thinking about the grant process, keep the following analogies in mind:

You want to get $10 from Adam. To do so, you go through Beverly, Charles, and Debra. Each charges $1 to process the grant. You end up with $7 or 70%. Now what if you could deal with Adam directly or maybe just Adam and Beverly? You’d end up with at least 90% of your money.

Another thing to consider is if Adam grants you $6 of your own money (after you have paid $10 via Beverly, Charles, and Debra) and you only spend $3, you can give him $3 back, reducing the $10 you give next time to perhaps only $8. Alternatively, you spend the $3 on something else so next time you have to pay $11 instead of $10. Which makes more sense? Of course, if Adam threatens to give the $6 to Edward if you don’t take it, human nature will usually prevail and you’ll take the money, perpetuating the cycle.

The point here is the more hands that tax money goes through, the less is returned to the end user- the taxpayer. If unspent money were returned, there would be less need for it in the future, reducing operating costs and the tax burden of the citizens.

If all grants were handled at the state level (and by the way, we have a State Department of Education), you would reduce the loss of tax dollars by keeping the money in state. Put another way, that $46 billion the DOE got in 2010 split 50 ways is almost $1 billion per state that could be put to use for educational purposes.

As another example of this concept, the FairTax plan does away with the federal IRS and uses existing state departments of revenue or taxing authorities to operate the plan.

Speaking of the IRS, did you know that according to the IRS the average income-tax refund in America is around $2,900? Divided by 12 months, this means the average American has lent the use of over $240 of their money each month interest-free to the government. While we’re at it, what if this money was used to put towards retirement or to pay off debt? This example speaks volumes as to why many Americans are in bad personal financial shape.

Budgets

At the federal level, Congress spends the money. At the state level, it is the Legislature, and at city & county levels it is the local commissions. Usually someone along the line will make a revenue prediction based on numerous items, and the legislative body will arrive at a budget.

In Florida, we are constitutionally mandated to have a balanced budget. This means we cannot spend more than we take in. Seems basic, right? Well not at the federal level, where we have an annual deficit of over a trillion (that’s one with 12 zeros). This is not the same thing as our national debt, which is a compilation of the annual deficits, and is currently right around $14 trillion. Looked at another way, if you have your $500/week income (actually $411.75 after 17.65% in federal deductions) and are spending $411.75/week, you’ll have an annual deficit of zero, or a balanced budget. If you are spending $750/week, then you’ll have an annual deficit of $17,589. If this goes on for 10 years, you now have a debt of $175,890.

Government agencies can spend lots of money near the end of the fiscal year. The thinking is that if less is spent than the year before, the budget for next year will be less than this year (the federal government calls this “baseline budgeting,” and using their math you can actually budget more than last year and call it a cut). This takes place within the state when an agency buys items for their employees that are not really needed. Management tells the employees the money was “leftover” in the budget, and if not spent, the agency would lose it. In my personal experience, I saw aluminum handcuffs and small flashlights for Florida Highway Patrol (FHP) investigators in two different years- both of these were purchased under the above end of year budget circumstances.

Other people’s money

While on the subject of state government and the FHP, I recall a supervisor telling me to put tires on patrol cars every 10,000 miles whether they needed them or not, since “You’re not paying for them.” Even though this took place circa 1999, I politely explained to my supervisor how the FHP was funded via general revenue, and as taxpayers, how we both paid into this fund, so we both were paying for them. I declined his suggestion and bought tires when they were needed.

So for what does Congress spend our money? This is rather difficult to track. There are websites that provide a good bit of information. Here’s an overall summary for 2010’s $3.6 trillion budget (as a side note, it is estimated there will be $2.2 trillion in tax and other revenues, which means we will have to borrow $1.4 trillion which in turn adds to the national debt):

Item	Amount (percent of total- rounded)
Defense and security	715 billion (20%)
Social Security	708 billion (19%)
Medicare, Medicaid, and CHIP	753 billion (21%)
Safety net programs- earned income tax credit, supplemental security income, unemployment insurance, food stamps, etc.	482 billion (14%)
Interest on the national debt (nobody rides for free)	209 billion (6%)
Other- health care and other benefits to veterans and retirement benefits to retired federal employees, assuring safe food and drugs, protecting the environment, and investing in education, scientific and medical research, and basic infrastructure such as roads, bridges, and airports.	733 billion (20%)
Total expenses	3.6 trillion
Taxes & revenue raised	2.2 trillion
Net surplus or (deficit)	(1.4 trillion)

How does one go about balancing a budget that is so far out of balance? At the federal level, we’re fortunate to have an owner’s manual of sorts called a Constitution. If you read Article 1 Section 8, you’ll see exactly where the Congress can spend money. For example:

National defense? Yes (…provide for the common Defense, To raise and support Armies, To provide and maintain a Navy;).

Social Security? Not really, but it has been done using the “provide for the general welfare” clause in the Constitution. This interpretation means the general welfare is the welfare of the individual above that of the nation, i.e. if the United States is a lifeboat designed to hold 12 people, taking on three more for a total of 15 while possibly providing for the welfare of the three additional people for a short time will ultimately doom all 15.

Medicare, Medicaid, and CHIP (a children’s medical insurance program)? Again, not really, but see the “provide for the general welfare” argument above.

Interest on the debt? Yes (“To borrow money on the credit of the United States;”)

Other? Yes and no. The list of these is lengthy, but as an example of “Yes” it is incumbent to pay for the costs of federal employees in those limited constitutionally-mandated functions such as our military and postal employees. As an example of “No”, the Federal Department of Education is a redundant function and not authorized in the Constitution- it is duplicated at the state and local level.

What happens if we only spent money that was constitutionally authorized? Realistically, this will never happen, BUT it’s an interesting exercise:

Item	Amount (percent of total- rounded)
Defense and security	715 billion
Interest on the national debt (nobody rides for free)	209 billion
Other- Above $733 billion cut in half for the purpose of this exercise.	366 billion
Total expenses	1.29 trillion
Taxes & revenue raised	2.2 trillion
Net surplus or (deficit)	910 billion

If nothing else changed, the 910 billion could be used to pay down the national debt of $14 trillion in a little over 15 years (actually less since when dealing with interest, the more you pay off the less you pay in interest). We’d then have this:

Item	Amount (percent of total- rounded)
Defense and security	715 billion
Other- Above $733 billion cut in half for the purpose of this exercise.	366 billion
Total expenses	1.08 trillion
Taxes & revenue raised	2.2 trillion
Net surplus or (deficit)	1.1 trillion

With a 50% surplus rate, we could cut ALL taxes and fees in half and still have enough to constitutionally operate the federal government. Remember that $411.75 “take home” pay? You just got a $44/week (more than 10%) raise!

But wait a minute… what about all of the Social Security and Medical entitlement programs? I’ll suggest we maintain them if a majority decides to do so, and that they be administered by the states with ZERO money going to the federal government. What we’ll do by taking the federal government out of the picture is to cut out a middleman (notice I did not say THE middleman). Remember the grant process above? We can do the same thing with these non-constitutionally authorized areas. If we reduce overhead, we get more bang for the buck. Letting the states administer their own Social Security and medical programs is more efficient than the federal government trying to do so. A system in Texas called the Galveston Plan has outperformed Social Security since it’s inception in 1980. In a perfect world, our young people would receive sufficient financial instruction to become self-reliant and as such reduce the demand for these programs.

So how do we accomplish this monumental task? There must be an incentive to do so. In an entrenched entitlement mentality people no longer want to do for themselves things their parents and grandparents did. They instead allow (or often demand) the government does this for them. The following quote from 1770 sums it up fairly well:

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over lousy fiscal policy, always followed by a dictatorship. The average of the world’s great civilizations before they decline has been 200 years. These nations have progressed in this sequence: From bondage to spiritual faith; from faith to great courage; from courage to liberty; from liberty to abundance; from abundance to selfishness; from selfishness to Complacency; from complacency to apathy; from apathy to dependency; from dependency back again to bondage.

Alexander Fraser Tyler, Cycle of Democracy (1770)

The point of this exercise was to show how things are and how they could be. The choice is up to you- for now.