Secretary Of The United Sates Treasury Donald Thomas Regan
FAIRNESS, SIMPLICITY
&
ECONOMIC GROWTH
AN ADDRESS PRESENTED TO
THE NATIONAL COAL ASSOCIATION SEMINAR
ON THE 99TH CONGRESS AND NATIONAL
TRANSPORTATION POLICIES
BY
JOHN DANIEL BEGG
WITH
JOSEPH FARRELL
PRESIDENT
THE AMERICAN WATERWAYS OPERATORS, INC.
FEBRUARY 25, 1985
HOUSTON, TEXAS
THE AMERICAN WATERWAYS OPERATORS, INC.
1600 Wilson Boulevard
Arlington, Virginia 22209
(703) 841-9300
Recently, Secretary of the Treasury Donald Thomas Regan released for public scrutiny the Treasury Department’s report to the President proposing ‘tax reform for fairness, simplicity and economic growth’.
Surely no right-minded individual would quibble with the objectives set forth in the title of Secretary Regan’s report which examines, in some 700 pages, the present tax system and makes sweeping recommendations for change in that system to further those admirable goals.
Fairness, simplicity and economic growth – indisputably laudable aims. Like the catchy battle cry of the French Revolution – Liberty! Equality! Fraternity! A moniker that still adorns the French franc – the concept of a tax system based upon fairness, simplicity and economic growth would seem to have near universal appeal.
But does it?
What exactly does Secretary Regan mean by this high-minded document? Perhaps more significantly, why has this document not been publicly and ardently embraced by members of Secretary Regan’s own party and administration and particularly by the Secretary’s previously friendly backers in big-business?
My purpose is to examine upcoming legislation in the 99TH Congress affecting improvements to the inland waterway system and the financing of those improvements and to debate the merits of such legislation.
I will address that subject directly. I cite Secretary Regan’s tax reform proposal at the outset to underscore what I believe to be the premier issue regarding the taxation process generally and the issue of proposed higher waterway user fees in particular.
That issue is fairness.
But first, the upcoming battle over increasing user fees to finance necessary improvements to the nation’s waterway system will be fought on much the same turf, will feature pretty much the same principles, And will center on essentially the same issues in the 99th Congress as was the case in the 98th Congress.
The Administration had not provided us with its specific proposals regarding the financing of inland waterway improvement projects as this was written. But it is relatively risk-free conjecture that the Administration will aggressively seek new and higher user fees from the water carriers to fund any improvements when it finally does deliver a budget to the 99th Congress.
In the Congress, bills have already been introduced, or will shortly be introduced, which essentially restate the proposals contained in the initiatives which were considered in the 98th Congress.
I know that the particulars of these bills, which essentially propose once again initiatives which were ultimately unsuccessful in the previous session, are well-known by this audience. The rather more philosophical questions which underlie both the administration’s position of the matter of user fees and the majority congressional position on the subject, which differ markedly, deserve our careful attention.
Here the questions of fairness and intent ought most appropriately to be raised. Specifically, what is the intent of the higher user fee proponents and is the philosophical premise upon which their intentions rest both fair and sound? In order to reach an informed conclusion about the question, it is worthwhile to look at the higher user fee proponents and to examine their arguments.
First, let us look at ourselves, who are the commercial water carriers and what exactly is our mission? Throughout this debate, it is imperative to remember that the commercial water carriers are, collectively, far more than merely a group of business enterprises dedicated solely to generating profits for the principals who control them. It is important to recognize that we serve the nation. At the same time we serve our own commercial interests. That is true of all the transportation modes. We sell service, not a product.
President Ronald Reagan recognized the historic rule our industry has played in building America when, in commemorating the 40th anniversary of the American Waterways operators he wrote:
Since the earliest days of our republic, the men and women who transport bulk freight on American’s inland and coastal waterways have provided a vital link in our country’s transportation network. You and your predecessors have played a fundamental role in the development of our vast agricultural mining, manufacturing and petroleum-producing regions. You have helped to build a stronger, more prosperous America.
Beyond merely commercial prosperity made possible by our work, I would also ask that you consider the vital link the waterway industry has always played in the movement of armament and material in the time of emergency and international conflict.
Our rivers and harbors are national treasures. They need maintenance and repair. The men and women who work the rivers and man the harbors work to enhance this treasure. That fact needs recognition.
Despite all this, there are those that argue that we – the commercial navigation industry – should pay for all needed repair, expansion, improvement and maintenance of the waterway system, regardless of who benefits from the system, regardless of regional economic sustenance, regardless of protection of life and property afforded by this work.
What higher user fee proponents fail to address is that there is direct taxation – flowing from the explicit actions of the government, and there is indirect taxation – flowing from the reactions of industry to government policy. Whether these waterway levies are called a fee or a user charge, they are in reality a tax. Of course, ultimately, these taxes will manifest themselves at the ‘retail level’ in the form of higher prices for vital commodities used by all Americans, from cereal to kilowatts.
I am not opposed to the concept of user fees in the absolute. Our industry has been paying a user tax since 1980. I am, however, against proposed user fees which are excessive, financially crippling or which seek to divorce government from its rightful role in promoting the continuance of a balanced transportation system in the national interest – not merely the interests of commercial agents, political expediency and ideological orthodoxy.
There is no question that the administration will seek much higher user taxes in the present congressional session. All indications are that the primary decision makers in the administration are committed to aggressively pursuing this avenue of revenue rising as a part of the report to reduce the federal deficit.
Therefore, the upcoming debate of capital hill will center on the strength of the positions of those who hold that higher user taxes are an appropriate vehicle of debt retirement as well as a trumped-up safeguard and against pork barrel boondoggles, pitted against those who argue that our industry’s activities are in the national interest with a national beneficiary/constituent base, and that it is appropriate to add further user taxes onto the already overburdened shoulders of such industries as the commercial water carriers.
In justice, this debate should not focus on the administration’s position on this matter at all. The 99TH Congress should not be asked to determine if increasing user taxes on a severely depressed industry will help set the budget right or act as a phony safeguard against alleged pork barrel boondoggles.
Justice aside, who will win this debate, is not certain.
What is quite certain – indeed unequivocal – is that the treatment that the various segments of the transportation community receives and have come to expect, from the federal government is neither fair, simple nor conducive to the promotion of economic growth. There is no debating that fact.
Consider the case of the airline industry. In that industry there is a user tax. But airline user taxes take the form of a direct tax on the real user of airline services – the customer; the airline user tax manifests itself as a tax on individual tickets. It is a tax which is inescapable – all direct, or real, users of the service provided must pay this tax.
The federal government softened the blow greatly in extracting user taxes from the airline industry by insuring that these taxes could be directly passed along to the consumer. Why doesn’t the federal government extend a similar treatment to our industry? The user taxes we now pay in the reality of today’s marketplace cannot be directly passed along to our customers. The reality of overcapacity and under-utilization of the waterway system serve to insure that our carriers must absorb the cost of higher user taxes themselves.
Yet, in considering still higher user taxes on the inland water carrier industry, nobody in government seems the slightest concern with the simple fact that for us these taxes are not recoverable. We must absorb them. We simply can’t afford it.
Consider also the case of the trucking industry. A few years ago members of the administration took a look around for some revenue enhancements – called ‘taxes’ by most folks – and hit upon the idea of levying a huge user tax on the trucking industry. This user tax was to manifest itself in two forms, as a fuel and as a tax on the vehicle itself, the truck. The tax took the form of the Surface Transportation Assistance Act which was passed by the Congress and signed into law in 1982.
Proponents of these taxes, which were exorbitant almost to the point of comedy considering the real as opposed to the mythological financial condition of the trucking industry at that time, initially turned a deaf ear to the screams of outrage which emanated from the organized trucking lobby in response to the proposed tax increase.
After all, proponents of the higher user tax on trucking argued, everybody knows that the trucking industry is pampered, fattened heifer, protected for years by it’s twin, intimate association with the Teamsters Union and friendly Democratic Congressmen. Surely, some fat – indeed quite a bit – could be trimmed from the heifer with no real adverse effect on the animal itself.
After all the applause has died down, somewhat more sober elements in the administration and in congress – where trimming fat from the heifer had originally garnered enough bi-partisan support that ridiculously high truck taxes had actually been passed – began to look at the real condition of the trucking industry as opposed to its outdated reputation as a bloated, protected special interest. These more sober elements rather quickly came to realize – ex post facto – that the fat cut by the truck tax bill was not fat or excess at all, but rather vital flesh and lifeblood, without which the heifer would perish. The heifer, on close inspection, was not as fat and pampered as once supposed. The heifer, in fact, was almost terminal.
There had been same justification in years gone by to look upon the trucking industry as a bloated special interest. By the time the fat-cutters started cutting, much of the bloat was gone, thanks largely to the effects of deregulation.
The trucking companies were being hit at just the wrong time. The Motor Carrier Act of 1980 had deregulated the trucking industry and this deregulation wreaked bloody havoc on the motor carrier community. Whatever one might think about the philosophical efficacy of deregulation, there is no question that an industry, regulated by government from infancy, suddenly thrust into a ‘free market’ environment is going to suffer considerable dislocation in transition. This certainly happened to the truckers. What also happened to the truckers at precisely the same time was a full-blown recession. Products were not moving and as a consequence, trucks were not rolling.
Into this mix marched the happy tax collectors bent on trimming fat from the heifer. Shortly, they discovered their mistake and began to undo the damage. A fair amount of the tax enacted in the fat trimming frenzy of a few years ago has been rescinded. Why? Because responsible people in government looked at their handiwork and realized that they had made a very grievous error.
I ask the question again and do not mean to be tedious, why is a similar courtesy not extended to the inland water carrier industry? Rather than taking a sober, responsible and reasoned look at the economic plight of the water carrier industry in the course of deliberations about the efficacy of user taxes, some elements in government propose still higher taxes on our industry at a time when we are in an economic predicament at least analogous – really far worse – than our brothers in the airline and trucking industries.
I must ask the proponents of higher user taxes on our industry why similar consideration is not given to our economic condition when the government considers higher user fees as was extended to the airline and trucking interests?
If the financial condition of those industries is pertinent to the debate over the advisability of extracting higher user fees from the airlines and truckers, why is it not pertinent to the debate over higher user taxes in our industry?
The point here, of course, is that the government dispenses its largesse selectively and that is not always proper.
While we are on the subject of government largess, let us consider the case of the railroad industry.
Consider specifically, Conrail. In case you have been inattentive to recent developments at Conrail, I am happy to report to you that things are going fine there. Things are going so well in fact that Conrail has emerged from the protective warmth of Mother Governments apron and – with a little push from Mom – has decided to go out into the world and seek his fortune on his own. Blessings on you little man.
The next time someone tells you how much it will cost to send Johnny to college, remember and be thankful that you were not called upon to raise Baby Conrail to his majority. Or perhaps more accurately, try to forget that you actually did help raise the little railroad to manhood – despite the fact that Mother Government – ever protective of her brood – claims full credit for Baby Conrail’s performance. Make no mistake about it, his performance has been remarkable. A straight ‘A’ student, if you will. Certainly Baby Conrail concentrated in one of the more marketable disciplines (clearly not liberal arts) on his way to maturation. So marketable is Baby Conrail that he is now up for sale – at the fire sale price of about 1.2 billion dollars, I should add.
Mother Government is considering only selected bids for baby. At present, there are only three remaining bidders for Baby Conrail: The Marriott Corporation, The Allegany Corporation and The Norfolk and Southern Railroad. The last bidder, The Norfolk and Southern Railroad I should just mention as an aside, is considered by the same Mother Government who is offering Baby Conrail for sale – different branch – as a ‘revenue inadequate’ railroad. More on that issue later.
Not to be mean-spirited about it, or a tattletale, but Mother Government is really pulling a fast one on the American public in the whole Baby Conrail episode. The total federal bailout of the previously strapped railroad cost 7.2 billion dollars – you paid.
What’s more, last year Conrail showed a profit of one half billion dollars. This money was not returned to you in consideration of the 7.2 billion dollars you earlier provided Baby Conrail for his upkeep, maintenance and basic business education.
Despite Baby Conrail’s profitability last year and, again my interest here is the dissemination of information, not idle gossip, Mother Government gave our boy an allowance, pocket-money if you will, of 300 million dollars.
You thought that the Prince of Wales had it easy?
Here is the real kicker: whichever bidder ultimately is successful in obtaining Baby Conrail, there is a bonus that in the supposedly hard ball world of business is really too good to believe. Baby Conrail comes without liability, without debt, without obligations of any kind to the purchaser. Without any program for repayment of your 7.2 billion dollars.
Mother Government can really doles out the goodies when it comes to her favorite son.
When it comes to the inland water carriers, Mom miraculously transforms into Grandpa Rockefeller – dispensing shiny dimes to the transportation industry’s poorer cousins.
Enough of the saga of Baby Conrail. Let’s have a look at some other railroads which also receive a fair amount of consideration, not to say largess, from the federal government.
All four are deemed by the federal government as revenue inadequate. Keep that in mind as we take this journey together. Financial data on these companies is readily available – they are publicly held. What that data reveals makes for a hard case for those who suggest that these railroads are not revenue adequate. The data reveal them to be highly profitable enterprises by any conventional business yardstick.
Witness the financial condition of CXS Corporation in taxable years 1981-1983, CSX Corporation not only paid no federal tax whatsoever, on profits of 1.75 billion dollars, but received rebates of taxes paid in earlier years or sold ‘excess’ tax benefits to the extent that the corporation actually got money back from the federal government.
Bear in mind that CSX is deemed to be not revenue adequate in the opinion of the same government – different branch – which sent CSX a rebate check.
Even more difficult to substantiate in light of the government’s position on the revenue inadequacy of CSX Corporation, is that supposedly strapped corporation’s near magical ability to come up with 1.06 billion dollars to purchase Texas Gas Resources, parent company of one of the nation’s largest independent barge companies with which CSX Corporation directly competes – and acquisition which I believe is in direct contravention of the Panama Canal Act which expressly forbids such monopolistic mergers.
Leaving aside the acquisition and monopoly issue which is now before the courts, where did a revenue inadequate corporation get 1.06 billion bucks to buy another company? Perhaps more pertinent, why does such a company get a rebate check from the federal government? Why does it pay no federal income tax?
Then there is the Santa Fe Southern Pacific Corp., another railroad judged to be revenue inadequate by the government. Despite profits in taxable years 1981-1983 of 1.6 billion dollars on which the company paid absolutely no federal income tax and was sent a very substantial rebate check by that same government – different branch.
Then witness the Burlington Northern – yet another revenue inadequate railroad with tidy profits in the 1981-1983 taxable period amounting to 1.7 billion dollars. Again, no tax. Again, a substantial rebate from the same government – different branch – which holds the company to be revenue inadequate despite billion dollar profits.
Witness also Norfolk Southern Corp. which as mentioned is one of the finalists in the contest to purchase the boy wonder Baby Conrail. Needless to belabor the point – Norfolk Southern is, of course, revenue inadequate. this despite profits in taxable years 1981-1983 of a respectable 574 million dollars.
The question of one unfamiliar with the rarefied practices of government might ask: if I correctly understand the determination of revenue inadequacy to mean an inability to make basic costs, how come these supposedly revenue inadequate companies are at the same time so profitable and flush with cash that they are buying barge lines, bidding on Baby Conrail and generally behaving like a robust, healthy businesses?
A more pertinent question might be: if I correctly understand the ruinous financial condition of the inland barge industry, how come these companies are not, at least for a time, put behind the benevolent apron of Mother Government rather than made subject to still higher user taxes in their time of need?
Above all, where is the fairness in all of this?
The answer is that all three questions are, while legitimate, inherently naïve. Jack Kennedy provided the answer to all three of them at once in a brief quip: ‘life is unfair’.
Actually, it has taken 20 years for another Harvard man – this one a Republican – Donald T. Regan, to use the forum of a cabinet level office to address in a broader, more philosophical sense, the same questions. The Secretary of the Treasury calls for fairness and simplicity across the board in our tax system. This includes the transportation system. That system includes the inland water carriers.
In a fair system, a company can’t be revenue inadequate and flush with cash at the same time. In a fair system, a company should not be on the ropes financially and yet asked to pay still higher user taxes at the same time. It’s just not defensible.
Our national leadership must recognize the severity of our industry’s plight and consider the crucial role we play in the transportation system and the overall economy. Laws and regulations must be directed at protecting the public and nurturing the industry and not in inhibiting it any further. In a study on the financial performance of 15 of the nation’s leading barge companies conducted by Arthur Andersen & Co., the combined revenue declines well in excess of 10 percent between 1980 and 1982. From operating profits of about $125 million in 1980, the companies lost nearly $30 million in 1982. The losses in 1983 were in excess of $40 million and the downward trend continues. This study focused on the major companies and does not address the economic Problems faced by the smaller companies, many of which have been forced to close their doors over the past two years.
How can reasonable people possibly advocate still higher user fees in light of the disastrous data on the financial condition of the water carrier industry borne out in the Arthur Andersen study?
How can serious individuals propose that we can remain a viable and healthy segment of a balanced transportation network when, with our backs literally to the wall, some would ask us to absorb even greater tax burdens?
Secretary Regan probably did not have the water carrier industry in mind when he sent his recent tax reform proposal to the White House perhaps he should have.
Surely, there is no other industry in America today which more desperately needs the sort of tax reform Secretary Regan envisions. Without such reform, the idea of fairness as a necessary component of a sound tax system is little more than a bad joke; simplicity, which is a necessary concomitant of such a system, is impractical; and economic growth in our industry is utterly unattainable.
No one, when conversant with the facts, would seriously suggest the user tax system now employed – never mind the even more intemperate one proposed by some elements in the administration – is fair, simple or consistent with the goal of promoting economic growth.
Therefore, it is up to the higher user fee proponents to explain how their proposals are consistent with the goals of promoting a tax reform system predicated on fairness, founded in simplicity and dedicated to promoting economic growth; a goal which, assuredly, all fair-minded people would agree is both desirable and long neglected.
Fairness, Simplicity and Economic growth.
We agree with Mr. Regan, these should be the watch words.
JOHN DANIEL BEGG 