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Marc Joffe

With tens of thousands of California residents living on the streets and widespread concerns over a housing affordability crisis, we might expect political leaders to build a large volume of new housing as quickly and inexpensively as possible. But, of course, that has not been the case. Thanks to a combination of special interest influence and the phenomenon of “everything bagel liberalism”, under which progressives try to solve a multitude of often-conflicting problems with one policy, California governments and their nonprofit partners have been creating housing very slowly and at a high cost. A better alternative is for governments to get out of the way and allow private entities to build low-cost housing quickly without the overhead of other political objectives.

How Not to Do It

In 2016, a fire originating from a neighboring building seriously damaged 3300 Mission Street, a building that housed 28 single-room occupancy (SRO) hotel units, two stores, and a bar. Although the owner originally planned to fix the building, he sold it to Oak Funds, a local real estate firm the following year. This firm also declared an intention to restore the SRO but never did so. These two owners may have been deterred from fixing the building because they would have been required to offer most of the units to their previous tenants who were covered by the city’s rent control ordinance. The fact that San Francisco obliged the owners to rent out much of the property at below-market prices may have made repairing the building uneconomic, especially given San Francisco’s high construction costs.

Last year Oak Funds sold the still vacant building to affordable housing developer Bernal Heights Housing Corporation (BHHC) for $1 million more than it paid for the property in 2017. Since then, BHHC has been assembling financing to rebuild and expand 3300 Mission, albeit at a high cost to taxpayers.

Under a plan recently approved by San Francisco supervisors, BHHC will spend $41 million (including the already incurred acquisition cost) to produce 35 units: residential units, a community space, and a small retail space. The cost per residential unit works out to be about $1.1 million each, even though all the units will be small studios ranging in size from 267 to 406 square feet.

One reason that the project is so expensive is that San Francisco requires construction workers building the affordable housing projects it funds to be paid so-called prevailing wages determined by the California Department of Labor Relations. This means that construction laborers must receive a salary and benefits package worth $69.41 per hour on weekdays, with large premiums for Saturday and Sunday work.

Although construction costs themselves are high, there are other drivers for the high price of these units. The project budget includes $3.3 million in construction financing costs, $2.6 million in developer fees, $2.2 million in architect fees, and $590,000 in legal fees, so a range of professionals are being well compensated.

BHHC will receive $16.6 million of city funds covering 40 percent of overall project costs. The rest will be privately funded by investors taking advantage of a 9 percent Low Income Housing Tax Credit (LIHTC). This credit allows the investor to exclude 9 percent of project cost annually for each of the ten years after which the building is completed. The credits can also be bought and sold on the secondary market. The Tax Foundation has characterized LIHTC as “an exceptionally complex tax expenditure.”

Occupancy is now expected in late 2026, ten years after the original building became uninhabitable. And the City Attorney has determined that rent-controlled tenants living in the building before the fire will no longer have a right to return.

A More Efficient Option

While government-funded projects typically require on-site construction with laborers receiving prevailing wages, private affordable housing projects can rely on lower-cost prefabricated units. Two miles north of 3300 Mission at 33 Gough Street, nonprofit Dignity Moves created a 70-unit tiny home village. Construction began in January 2022 with occupancy occurring six months later. The cost per unit, including shared amenities, worked out to $32,000.

The homes do not include separate kitchens or bathrooms, but, as Dignity Moves CEO Elizabeth Funk recently told me, sharing dining and washing facilities is not a major issue for most individuals experiencing homelessness. More important to them is having a roof over their heads in a unit that can be locked.

The 33 Gough tiny home village is one of several “interim supportive housing” projects Dignity Moves has completed or is developing in California. These projects provide services such as life coaching and addiction treatment, in addition to the homes themselves. While the lifespan of the tiny homes is likely shorter than permanent supportive housing units, they are less expensive to maintain, insure, and replace.

Some government officials are embracing interim housing, including San Jose Mayor Matt Mahan. His city plans to have about 1,300 interim units available by the end of 2024. The California state legislature has also gotten into the act, recently passing a bill exempting tiny home villages from the California Environmental Quality Act (CEQA) process.

It remains to be seen whether more government involvement in the creation of tiny home villages will slow their completion and increase their costs. Hopefully, tiny homes will not become the schmear on the everything bagels so often baked by California’s public sector.

Thomas A. Berry and Alexander Khoury

Jeffrey Miron

Proposals to adopt a universal basic income (UBI) raise three questions.

The first is whether a UBI should add to or replace the existing safety net. Adding the program is a nonstarter because the current US fiscal path is already unsustainable.

The second question is whether a UBI would be better than the existing safety set, holding expenditure constant. The answer is probably yes: eliminating TANF, SNAP, Social Security, Medicaid, Medicare, disability insurance, energy assistance, housing subsidies, and more would mean a huge reduction in bureaucracy and a less paternalistic system.

Replacing the current system with a UBI also facilitates the repeal of policies that attempt to redistribute by interfering with the price system (minimum wage laws, rent control, anti-price gouging laws, and more). These policies are often poorly targeted and even counterproductive.

The third question is whether a UBI should be a federal program or left to individual states.

Advocates of anti-poverty spending assume it should be federal, believing the state-by-state approach generates a “race to the bottom.”

Government programs, however, almost always expand, so competition between states plausibly promotes a reasonable balance. Many states redistribute beyond what the federal government mandates; California and Washington, for example, have minimum wages higher than the federal requirement.

Eliminating all federal redistribution, while allowing states to operate UBI programs, thus implies a smaller, less distorting safety net that would still protect the most vulnerable. 

This article appeared on Substack on October 18, 2024. Amelia Heller, a student at Harvard University, co-authored the piece.

Jeffrey A. Singer

On October 17, the Centers for Disease Control and Prevention reported that the rate of teen tobacco smoking and vaping continued to decline over the past year. The report states:

From 2023 to 2024, current (previous 30-day) use of any tobacco product declined among high school students from 12.6% to 10.1%, largely driven by the decline in high school e‑cigarette use (from 10.0% to 7.8%). During 2024, e‑cigarettes remained the most commonly used tobacco product among U.S. youths; nicotine pouches were the second most commonly used tobacco product. (My emphasis added.)

The CDC commits the common error of assuming correlation is causation. By noting both the decline in vaping and teen smoking, the CDC implies a causal link without directly acknowledging other potential factors. However, there is evidence that teen vaping, once fueled by public anti-vaping campaigns, has been a passing fad that is now waning.

Researchers at Brown University, analyzing Monitoring the Future 12th grade data from 2009 to 2018 found teens who used e‑cigarettes may have otherwise smoked tobacco:

Youth e‑cigarette use has increased rapidly, with high prevalence among nonsmoking youth. However, the decline in current smoking among 12th graders has accelerated since e‑cigarettes have become available. E‑cigarette use is largely concentrated among youth who share characteristics with smokers of the pre-vaping era, suggesting e‑cigarettes may have replaced cigarette smoking.

In an interview, one of the study’s authors stated, “The decline in youth smoking really accelerated after the availability of e‑cigarettes.”

CDC researchers should consider the counterfactual. The correlation between teen vaping and teen smoking might be due to “common liability.” In this case, youths’ desire to consume nicotine explains why those who use e‑cigarettes either also use or would otherwise use cigarettes.

True, as the CDC report mentions, tobacco and e‑cigarette retailers are strictly enforcing age restrictions, which might help to explain the coinciding decline of teen vaping and teen smoking. But the decline might also be related to their growing use of nicotine pouches, many of which are tobacco-free. And, as I wrote in National Review earlier this year, nicotine is the addictive component of tobacco smoke, but the harmful substances are tar, carbon monoxide, and other toxic chemicals in the tobacco leaf. Nicotine by itself is relatively harmless, “no more harmful to health than caffeine.”

With teen vaping and smoking both declining, policymakers no longer have an excuse to restrict adults from consuming flavored e‑cigarettes and other nicotine delivery systems that make it easier for them to quit tobacco. They should end the war on tobacco harm reduction.

Colleen Hroncich

“It’s the best of both worlds in my opinion,” says Jessica Peterson, director of St. Thomas Aquinas Tutorial (STAT), a part-time homeschool program in Millersville, Maryland. As a former public school teacher, she had first-hand experience with conventional schooling and found it lacking.

“I had taught for about eight years. We moved to where we are now, and I was staying at home,” she recalls. Her daughter was in second grade, and Jessica realized, “She doesn’t really need to be there for seven hours. I’m missing out on time with her, and she’s already getting a lot of homework. And I just saw this kind of hamster wheel that we were starting on even at the age of seven. And I just thought, ‘This can’t be the best thing.’”

Jessica had friends who attended Saint Thomas Aquinas Tutorial, so she looked into it and was impressed with what she saw. She says the children seemed different—free to be themselves. So Jessica and her husband decided, “We’ll try it out, and if it doesn’t work we can always go back to what we were doing.” 

They loved it. Jessica became a third grade Latin tutor, which she describes as “very beginner Latin … the only one that I was willing to do.” Then she served as science tutor for grades 5–8. This year she became the director of the whole tutorial.

STAT was founded in 2011 by homeschoolers who wanted a part-time program for their kids that was rooted in the Catholic faith. It offers in-person classes on Mondays and Wednesdays for students in grades 2–8, and the children work at home the other days. After the in-person days, tutors send parents a summary of what they did in class as well as assignments for the at-home days.

The tutorial started with 26 students and has grown to 82, which is near capacity. It follows a classical approach to education and covers math, science, and the humanities, which includes literature, history, religion, and writing. Each day at STAT begins with a morning assembly and prayers followed by math. “We found that doing math all at the same time in the morning has been very helpful because different students can go to different places for whatever their math needs are,” says Jessica. They also have lunch and recess each day, as well as weekly physical education and alternating music and art classes.

“I love the hybrid model as a parent,” she says. “You get the best of classical education, but you’re also getting formation—your family culture is so much stronger. You’re having this common culture, this emphasis, and time. Not just quality time but quantity time together that you can’t really get if kids are in five-day school.”

Her daughter is now in high school five days a week, which has given Jessica even greater appreciation for the extra time they had because of the hybrid model. “She plays the piano, and that wouldn’t have happened if we were doing five-day school. We wouldn’t have had time for piano lessons. She probably would have read a quarter of the books that she’s read. You know, you just have this time to kind of sit in goodness and truth and beauty that you don’t necessarily get if you’re doing five days.” 

Jessica thinks St. Thomas Aquinas Tutorial has inspired a lot of parents to consider classical education. For example, Divine Mercy Academy is a nearby classical school that was founded by parents who loved what they saw at STAT but needed a full-time option for their children. “I feel like it’s just this groundswell in this area because we see all the things that are not working well,” she says.

For anyone considering creating a hybrid school or other unconventional learning environment, Jessica thinks there are several key factors to consider. On a practical level, she says the STAT model has a low tuition but one that covers all costs so they aren’t always fundraising. Beyond that, she thinks educating people on the value of your model is crucial. For her, that means helping people understand—and appreciate—that St. Thomas Aquinas Tutorial is hybrid, so parents are homeschooling three days a week, and that it’s classical and Catholic, which drives the curricula they use.

St. Thomas Aquinas Tutorial has been a tremendous blessing to Jessica’s family, which is what inspires her to work to keep it going. “I feel like I’ve benefited so much from this and other people sacrificed so much to make it happen,” she says. “I want it to be around for the future, for other families.”

Walter Olson

Voters in six states (Nevada, Arizona, Colorado, Idaho, Alaska, and Montana) will consider versions of far-reaching primary reform next month. Last week, in the first of a series of posts, I examined how the single open-to-all nonpartisan primary at issue in these six states differs from the earlier reform idea of open primaries, which takes the form of a nominee-selecting primary for each party that is open to voters not registered with that party. The universal-primary model, I argued, succeeds in dodging both a philosophical objection to the open party primary, based on the principle of free association, and a cluster of practical problems related to tactical or insincere voting.

In this post I’ll examine two other alternatives to the conventional primary format and why they have not proved popular. One is what you might call the zero option, of simply doing away with the primary in favor of a one-time voter selection among a candidate field. The other is the “top two” system used in California and Washington, in which the state holds a nonpartisan primary from which the leading two finishers, of whatever party, advance to the general.

Doing away with primaries altogether might sound radical. Still, it was the historical norm until the Progressive movement a century ago, and it would have some advantages: taxpayers would save time and money, and voters might get a shorter campaign season if that is what they like. Indeed, many nonpartisan races continue to be handled that way, sometimes with a bare plurality deciding a winner in a crowded field. And that’s the first problem—in a field of two dozen mostly unknown candidates, someone with name recognition or a dedicated campaign team might slip through with 18 percent of the vote despite being sharply disliked by most voters. A runoff would help, but then you’re back to having two rounds, aren’t you?

Where candidates run on party lines, doing away with primaries means handing control of a valuable asset, ballot access in the general election, over to the internal processes of each party. Ballot-line access as a resource is typically guarded jealously, with rules and legal complications that tend to fence out small parties and independent candidates—that being among the chief institutional bulwarks of what some call the party duopoly. Discomfort with the backstage allocation of ballot access by party bosses, of course, was what led most jurisdictions to adopt party primaries in the first place.

Additionally, a winnowing stage does have some real benefit to voters. After the initial scrimmage, it allows them to focus on the few candidates who have a real chance of doing well, giving those candidates a longer time on the stage for the drawing of comparisons.

What about top-two, as practiced in California and Washington? Andrew Craig, writing in this space in 2022 and 2023, notes that the idea’s proponents, including then-California Gov. Arnold Schwarzenegger, “hoped to reduce partisan polarization and encourage moderation and bipartisanship.” Those are admirable aims. This year it’s on the ballot in South Dakota, and would be one of several options available to the legislature in Arizona to implement Proposition 140 should it pass.

In general, however, top-two has had sparse adoption over the past couple of decades, which is one clue that it hasn’t worked out as hoped. In particular, as Craig notes, “California has repeatedly ended up with a scenario where voters are forced to choose from two candidates, neither of whom represent the party preferred by most voters in the district.” That can happen when a crowd of candidates enters the race from the more locally popular party, while the less popular party fields only a couple. Even when a minority party does not come out on top, it’s, unfortunately, a feature of top-two that even large factions of voters may find themselves stranded with no candidate at all in the general reflecting their views, leading many to refuse to vote at that stage. To add one more indignity, top-two is vulnerable to tactical manipulation, seen recently in the California Senate race, in which supporters of a leading candidate maneuver to help a candidate they see as weak move up from third into second place.

In the next post, I’ll address why reform energy has moved on from the misfires of zero and two to higher numbers of finalists, in particular four and five, and where ranked-choice voting comes in.

While on the topic, Caleb Brown interviewed me about these subjects for a new Cato Daily Podcast, which you can listen to here.

For those local to the DC area, next Tuesday, October 22, I’ll be hosting a live screening of Majority Rules, a new documentary about the Alaskan reform experience, at Cato. Washington Post Senior Editor Libby Casey, who has covered Alaska politics, will also be on hand to help me lead a brief discussion afterward. It’s an in-person-only event for which you can register here. 

Michael Chapman

There are so many government regulations placed on businesses that it’s like “a million little strings that tie Gulliver down” and eventually he “can’t move,” said billionaire entrepreneur Elon Musk in an interview with Cato Senior Fellow Johan Norberg. At the governmental level, he added, there needs to be a “regulation removal department.”

Musk, who runs Tesla, SpaceX, X (formerly Twitter), and several other companies, made his remarks at the Buenos Aires conference, “The Rebirth of Liberty in Argentina and Beyond,” which was sponsored by the Cato Institute and Libertad y Progreso. The event’s main speaker was Argentine President Javier Milei.

In the interview with libertarian author and filmmaker Norberg, Musk was asked about the risk-averse culture that regulations create and how entrepreneurs can innovate and grow given those roadblocks. Musk replied that the long period of prosperity following World War II has, ironically, contributed to the problem.

“When things have been prosperous for a long time, you get an accumulation of laws and regulations, naturally,” said Musk. “And these laws and regulations are immortal whereas humans are obviously mortal. So, the longer you have this generation of – this creation by rules and regulations, you sort of get to the point where each law or regulation is not perhaps crippling in and of itself but they’re all like little strings, like a million little strings that tie Gulliver down. So, each little string – eventually the giant can’t move.”

The “regulatory gridlock” in Western societies is so stifling that it effectively makes big projects seem illegal, nearly impossible to get off the ground or complete. As an example, Musk cited a high-speed rail venture in California. “They spent $7 billion dollars and there’s a 1,600-foot section. That’s all they have to show for it. It doesn’t even have rails on it.”

“It’s really too absurd for parody,” said Musk. “Because large projects are essentially illegal in California, and in much of Europe and other countries. There has to be some garbage-collection process for removing rules and regulations in order for society to function and not to get hardening of the arteries to the point where you can’t do anything.”

Norberg then noted that in the classical liberal tradition it is a given that “we don’t know everything – nobody does,” and therefore it takes trial and error, a discovery processs, to find out what works and what doesn’t. And this is risky and costly but necessary. Unfortunately, a risk-averse culture dominates “in many businesses and certainly in government,” said Norberg. “Many are so conservative they wouldn’t let anyone do anything for the first time.”

“So the question is, how do you deal with that kind of risk-averse culture?” Norberg asked Musk. “What changes in culture and regulation would you make to make the world safe for experiments?”

Musk replied, “At a government level I think there should be a regulation removal department. And probably some, when we’re passing laws, they should have some kind of sunset perhaps. … I think what tends to happen is that once regulations are passed, an ecosystem of consultants forms around those regulations that wants to keep them going. Environmental regulations are particularly bad in this regard.”

He continued, “In general, I think government should be actively deleting regulations, questioning whether departments exist. Obviously, [Argentine] President Milei is—I think he seems to be doing a fantastic job on this front, just deleting things, deleting entire departments. Fantastic!”

Since assuming office in December 2023, President Milei has slashed government spending up to 30 percent, fired more than 25,000 federal workers, reduced federal agencies, frozen public works projects, lowered a major import tariff, maintained budget surpluses every month, reduced monthly inflation to 4.2 percent (August 2024) from 25 percent (December 2023), and is pushing for currency competition among the peso, US dollar, and other currencies.

Musk added that there should be no fear in deleting government departments and regulations because “you can always put them back.”

“You can always put them back,” he repeated, “and really this is like taking the brakes off an economy and our civilization. We need to snap those strings that are holding Gulliver down and preventing us from making progress as a civilization.”

To see the entire interview, click here. 

Andrew Gillen

Note, this post updates last month’s post. The biggest changes from last month include:

A new court injunction is blocking any forgiveness under the forthcoming Higher Education Act forgiveness plan.
The latest batch of forgiven loans brings the total to $175 billion for 4.8 million borrowers. 

Mass student loan forgiveness is terrible policy (see this report for a comprehensive list of reasons), but that hasn’t stopped the Biden administration from trying to forge ahead. While the Supreme Court overturned the Biden administration’s student loan forgiveness plan, every few weeks, the Biden administration announces another batch of loans that have been forgiven. In fact, the administration recently celebrated that since taking office, it has succeeded in forgiving $175 billion of student loans for 4.8 million borrowers by transferring the financial burden from the students who took out the loans to taxpayers who did not. And they aren’t going to stop—the administration’s spokeswoman declared that “President Biden has vowed to use every tool available to cancel student debt for as many borrowers as possible, as quickly as possible.” And President Biden himself stated, “I will never stop working to cancel student debt—no matter how many times Republican elected officials try to stop us.”

But if student loan forgiveness lost in the Supreme Court, how are so many student loans still being forgiven? The answer is that there isn’t a student loan forgiveness plan, there are many plans, some of which are already up and running. Previous laws had already left a plethora of methods to forgive student loans, and many of those laws may give the secretary of education the ability to expand those programs. The administration also claims that existing laws give it the authority to create new ways to forgive student loans. So the student loans the Biden administration already has or wants to forgive are a combination of existing programs, existing programs the Biden administration has expanded, and new programs the administration is seeking to implement.

Here’s a rundown of the administration’s student loan forgiveness plans and actions, which I’ll update monthly.

HEROES (New plan—overturned in court)

This was the big plan that got a lot of attention in 2022 and 2023. The plan was to forgive $10,000 for borrowers making less than $125,000 and $20,000 for borrowers who received a Pell grant, at a total cost of $469 billion to $519 billion. The alleged authority for the plan was the 2003 Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act. While designed to alleviate loan-related hardships for soldiers and reservists serving in Iraq and Afghanistan, the law also covered national emergencies, and the Biden administration argued the COVID-19 emergency gave it the authority to forgive virtually everyone’s loans. Most observers were skeptical of this supposed authority, but it was not clear who had standing to sue (standing is the requirement that those filing the suit have a concrete injury from the policy). The companies that service student loans would be the most obvious injured party, but there was a perception that the Biden administration would punish any servicer that challenged the policy in court, a perception that now appears accurate.

Fortunately, the Supreme Court ruled that Missouri had standing to sue (due to a quasi-public student loan servicer that would lose revenue under the plan) and that the plan violated the major questions doctrine (which holds that there needs to be clear congressional authorization for programs of substantial economic or political significance), preventing the policy from being implemented.

Higher Education Act (New plan—forthcoming, paused by courts)

Immediately after losing on the HEROES Act, the Biden administration announced a new effort that would use authority under the Higher Education Act. The administration announced the new plan, which would

waive unpaid interest;
forgive debt for those who have repaid for 20 years (25 years if there is debt for graduate school); 
forgive debt for those who attended a low-financial value program (e.g., programs or colleges that fail the Cohort Default Rate or Gainful Employment); and
release additional regulations soon that will forgive debt for those undergoing financial hardship.

There are several problems with this plan, which the Penn Wharton Budget Model estimates will cost $84 billion. The public comment window on the proposed regulations recently concluded, and the administration is now considering those comments and will issue final regulations, with a goal to start forgiving debt this fall. Once finalized, the courts will likely overturn this plan for two main reasons. First, it is likely to run afoul of the major questions doctrine, just as the HEROES Act did. Second, the Supreme Court recently overturned Chevron deference, which held that courts should defer to executive agencies when a statute was ambiguous. With major questions and no Chevron deference, it is very hard to imagine the courts allowing the administration to stretch vague clauses in old laws into vast new powers authorizing billions of dollars in forgiveness.

However, much of this forgiveness is easy to implement, so a key question was whether a court injunction would come fast enough to prevent the administration from forgiving billions of debt before the courts could determine whether the regulations are legal. The Biden administration was preparing to move quickly to present the plan as a fait accompli the moment the final plan was released by immediately forgiving billions in loans, but fortunately, several state attorney generals saw what was happening and filed lawsuits to stop it. There has been some legal back and forth, but as things stand right now, a court injunction prevents the department from forgiving any loans under the new regulations until the courts have ruled on their legality. 

SAVE (New plan—paused by the courts)

Before diving into this one, it is important to understand the concept of income-driven repayment (IDR). Under traditional-style ((mortgage-style) loan repayment, the amount and length of repayment are fixed (e.g., $200 a month for 10 years). For the past few decades, the federal government has been introducing IDR plans, in which the amount repaid each month varies based on the borrower’s current income, and the length of repayment varies based on how fast they repay their loan. The key features of an IDR plan are:

the share of income owed each month (e.g., 20 percent);
the income exemption that is protected from any repayment obligation (e.g., the poverty line); and
the cap on length of repayment (e.g., 25 years).

IDR is a great idea, providing borrowers with better consumption smoothing across their lifetime and flexible repayment that helps avoid defaults due to short-term liquidity constraints.

But we’ve also botched the implementation. To begin with, a cap on the length of repayment is completely inappropriate. IDR ensures that payments are always affordable, and borrowers who make so little they do not repay will receive de facto forgiveness even without the cap, so there is no justification for a cap on the length of repayment.

The other problem with how we’ve implemented IDR is political—the plans are tailor-made to allow politicians to give constituents big benefits today while sticking future taxpayers with the bill. Therefore, It is no surprise that these plans have become more generous over time. The first IDR plan, introduced in 1994, had an income exemption equal to the poverty line, a share of income owed of 20 percent, and a cap on length of 25 years. Very few borrowers would receive forgiveness under these terms, and of those who did, they really wouldn’t have been able to repay regardless of whether they received forgiveness or not. The Obama administration introduced plans with an income exemption of 150 percent of the poverty line, a share of income owed of 10 percent, and a cap on length of payment of 20 years.

The Biden administration’s Saving on a Valuable Education (SAVE) plan took an existing plan (the Revised Pay As You Earn plan) and made it much more generous. It changes the share of income owed from 10 percent to 5 percent, increases the income exemption from 150 percent of the poverty line to 225 percent, and caps the length of repayment at as little as 10 years for some borrowers. By cranking every possible lever to the most generous settings in history, this plan would impose massive costs on taxpayers, estimated at $475 billion for the next 10 years.

The legal questions facing this plan are the reverse of the HEROES plan. For the HEROES plan, the main obstacle was standing, once that hurdle was cleared, it was fairly obvious that the plan was well beyond what Congress had authorized. But for the SAVE lawsuits, this is reversed. Standing is easily established (for Missouri at least), but the plan does have a much stronger argument of being within the parameters of the law. Mark Kantrowitz thinks SAVE will be upheld, while Michael Brickman did yeoman’s work digging up details on page 18,909 of the 1993 congressional record that may lead to SAVE being scrapped. Jason Delisle also recently released a fascinating report on the legal foundation to SAVE. He argues that “the Biden administration has claimed legal authority far outside what Congress intended when it enacted the law.” In particular, he argues the following:

“Lawmakers assumed that the IDR plan the secretary would create would entail minimal or no budget costs” whereas SAVE may cost up to half a trillion dollars over 10 years.
“Lawmakers assumed that the secretary would set loan forgiveness at 20 or 25 years, but not earlier as SAVE does. Moreover, loan forgiveness was clearly an afterthought in the original debates” whereas it is the central feature of SAVE.
“Lawmakers believed that appropriate monthly payments in an IDR plan should be much higher than those in the SAVE plan.” 

The Supreme Court’s overturning of Chevron deference is also likely to affect these cases in a major way. Now that courts are no longer required to defer to executive agencies when statutory language is ambiguous, it will be much harder to convince courts that the president spending close to half a trillion dollars over the next 10 years on this plan is consistent with congressional intent.

Parts of the SAVE plan have already been implemented, and full implementation was scheduled for July 2024. The plan has already forgiven “$5.5 billion for 414,000 borrowers.” However, there are two lawsuits that seek to overturn the plan: one by Kansas and 10 other states (though a court ruled that only 3 of the states had standing to sue), and another by Missouri and 6 other states. An injunction from the 8th Circuit Court of Appeals (in the Missouri case) has paused implementation of the entire SAVE plan pending resolution of the case.

In sum, the chances of SAVE surviving the court challenges have declined dramatically over the past year. When it was first introduced, many analysts thought it had the best chance of being upheld in court, but the recent injunction, the overturning of Chevron deference, and the work by Brickman and Delisle on congressional intent leave SAVE much more vulnerable legally than most thought would be the case a year ago.

Student Loan Payment Pause (Existing and extended plan—now expired)

When COVID-19 hit in March 2020, student loan payments were paused. The pause was supposed to last two months but ended up lasting three and a half years after Trump extended it once and Biden extended it six times.

The payment pause resulted in two costs to taxpayers.

First, while no interest accrued on student loans (around $208 billion of interest was waived), the government had to borrow more money to make up for the lack of payments (recall that the government is the lender for student loans), and the government paid interest on that extra borrowing. Thus, even if students eventually repay everything, there would still be a cost for taxpayers.

Second, recall that IDR plans (unnecessarily) cap the length of repayment, and the pause counted toward that cap. In other words, for any student that does not fully repay before they hit the length of repayment cap, payments weren’t paused but were waived. We won’t know for many years how many students had their payments forgiven rather than postponed.

New research from Sylvain Catherine, Mark Pérez Clanton, and Constantine Yannelis finds that the substantial inflation and counting the pause toward the cap on repayment reduced the present value of future student repayments by around 25 percent.

There is virtually no chance for this burden on the taxpayer to be reversed. The only good news is that the payment pause ended, with most borrowers restarting payments in October 2023.

Public Service Loan Forgiveness (Existing and extended plan—still active)

The Public Service Loan Forgiveness (PSLF) program was established during the George W. Bush administration and allowed for public and nonprofit workers to receive forgiveness after 10 years of repayment when they used an IDR plan. While I object to PSLF in principle (as a distorting and nontransparent subsidy for the government and nonprofit sectors) and due to the windfalls these borrowers receive (an average of over $70,000 per beneficiary), since PSLF legally exists, it should operate as seamlessly as possible. The Biden administration granted many waivers and other changes to increase the number of borrowers who could benefit under PSLF. For example, the administration introduced a waiver that allowed for payments made under non-IDR plans to count toward the payment limit (previously, only payments made while enrolled in an IDR plan counted). Some of these changes were good in the sense that they more faithfully implemented the law, but the administration crossed some lines too. In particular, it started counting some types of deferment as payments (borrowers can get deferment when they cannot afford to make payments, which generally allows the borrower to temporarily postpone payments though interest continues to accrue). The whole point of deferment is to temporarily avoid making payments, so for the Biden administration to give borrowers credit for making payments when they were in deferment is logically, morally, and potentially legally wrong (Cato was part of lawsuit seeking to end this abuse, but the case was thrown out when a court ruled the policy didn’t directly affect Cato enough to satisfy standing requirements). The administration also waived income requirements, making more people eligible for the program. 

The Biden administration has forgiven $74 billion for one million borrowers under these programs, which is around $73,000 per borrower. By comparison, a formerly homeless student who receives the maximum Pell grant for four years would get less than $30,000 in Pell grants. Some of this would have been forgiven even if the administration hadn’t made any changes to the program, but not all of it. In the future, these burdens on the taxpayer can be reduced by rolling back some of the administrative changes, but eliminating the program entirely would require legislation. 

Borrower Defense to Repayment (Existing and extended plan—still active, though recent changes are paused during a court case)

When a college engages in fraud or severely misleads students, borrowers can have their debt forgiven under borrower defense to repayment. This is reasonable, as victims of fraud should have some recourse. It is also extremely rare, since a college would not just need to dupe a student but would also need to fool a state, an accreditor, and the US Department of Education, as all three are required to sign off on the legitimacy of a college before its students can take out student loans. As the House Committee on Education and the Workforce noted, “for the first 20 years of the rule, there were 59 claims.”

However, the federal government can claw back debt forgiven from the responsible college. This makes borrower defense to repayment an incredibly powerful tool for progressives in their war on for-profit colleges. If a for-profit college can be declared to have substantially misled students, they can be ruined financially by the clawbacks. Indeed, new regulations from the Biden administration would make it much easier to conclude a college engaged in misconduct. As the White House gloated, “Less than $600 million in debt relief had been approved through borrower defense, closed school discharges, and related court settlements from all prior administrations combined, compared to the $22.5 billion approved under the Biden-Harris Administration alone.” Some of this was done outside the law. For example, $5.8 billion of debt for Corinthian Colleges students was forgiven even if students didn’t submit a borrower defense claim. The administration has promised to forgo clawbacks on much of it (likely in part to avoid giving affected colleges standing to oppose the changes in court).

The good news is that any further forgiveness under the new regulation is on hold due to an injunction from the 5th Circuit Court of Appeals (this injunction applies to the closed school discharge plan as well).

Closed School Discharge (Existing and extended plan—still active, though recent changes are paused during a court case)

Borrowers whose school closes while they are still enrolled or shortly after they have withdrawn can have their student loans forgiven. The Biden administration imposed new regulations that loosened the requirements and has used this as an excuse to forgive other loans. For example, Biden forgave $1.5 billion in debt for students from ITT Technical Institute, even if they didn’t qualify for a discharge. The 5th Circuit Court of Appeals has paused further forgiveness under the new regulations until courts determine whether the new regulations are legal. However, the administration can still forgive loans under the previous iteration of these regulations.

Total and Permanent Disability Discharge (Existing and extended plan—active)

Borrowers who are unable to work due to a permanent disability can have their loans forgiven. Historically, this was very rare. And to protect against fraud, the income of borrowers who had their debt forgiven was monitored to ensure that they really couldn’t work. The Biden administration both expanded eligibility and dropped fraud detection efforts. In particular, in 2021, regulations were introduced that “provided automatic forgiveness for borrowers who were identified as eligible for a total and permanent disability discharge through a data match with the Social Security Administration. The department had been using such a match for years to identify eligible borrowers but required them to opt in to receive relief.” Switching to the opt-out model dramatically increased the number of borrowers receiving forgiveness. As a result of these changes, forgiveness under total and permanent disability discharge to spike from negligible amounts to $16.2 billion for 572,000 borrowers.

Waiving Interest

Another method the Biden administration is using to forgive loans is to waive interest. This plan is somewhat unique in that it is usually a component of another forgiveness plan, but the goal and methods are unique enough to warrant its own category.

Waiving interest has been implemented primarily through three mechanisms. The first was the student loan payment pause, which as noted waived interest for three and a half years. The second was regulations that took effect in July 2023 that “ceased capitalizing interest in all situations where it is not required by statute (87 FR 65904). This includes when a borrower enters repayment, exits a forbearance, leaves any IDR plan besides Income-Based Repayment (IBR), and enters default.” And the third is the SAVE repayment plan, which waives any unpaid interest.

Conclusion

In sum, Biden’s has been the most aggressive presidential administration in history regarding student loan forgiveness. Despite many setbacks, the administration has canceled a massive amount of debt ($175 billion and counting), with most of the burden on taxpayers still to come from future repayments that will no longer be made. And while many of its attempts to forgive student loans have been stymied, many active plans are still in play, with more on the horizon. 

Adam N. Michel

A key piece of the 2016 House Republican Tax Reform Blueprint proposed remaking the corporate income tax into a destination-based cash-flow tax (DBCFT). The new tax would have included a border adjustment that raised about $1 trillion in revenue to offset the cost of other tax cuts. Cash-flow taxes are relatively uncontroversial. They allow businesses to fully deduct their costs upfront so that they only pay taxes on their profits when investments are deployed productively. Destination-based income taxes, which require a tax and rebate system to “border adjust” the levy, face numerous theoretical and practical implementation issues.

As Congress readies for the 2025 expiration of the 2017 tax cuts, policymakers will desperately search for ways to offset some or all of the more than $4 trillion price tag to make the reforms permanent.

The desire for additional revenue and former President Trump’s penchant for imposing across-the-board tariffs on all imports has resurfaced the idea of a border-adjusted corporate income tax. Writing for the Heritage Foundation’s Project 2025, Peter Navarro, Trump’s director of the White House National Trade Council, calls the new tax “an innovative alternative to the application of tariffs.”

Whenever a bad idea raises its head after being abandoned, it’s worth reviewing the reasons the idea was abandoned the last time.

Border Adjustments in Theory

Adding a border adjustment to the corporate income tax would allow exporting firms a deduction for the cost of exports and would tax the value of imports at the corporate tax rate (currently 21 percent). This tax effectively raises revenue by taxing the value of the US trade deficit.

Combining an effective export subsidy and a tax on business imports creates a system that only taxes profits earned from consumption in the United States (i.e., the destination of the goods and services). Under certain (unlikely) conditions, the economic burden of the tax may fall on Americans whose investments earn profits, wherever in the world those occur.

In theory, the tax on business imports—like an across-the-board tariff—reduces domestic demand for taxed imports, which reduces the supply of US dollars in foreign markets. This will cause a partial appreciation of the dollar relative to international currencies to offset the reduced supply. The export subsidy reduces the price of US products abroad, increasing demand for both US products and US dollars in which those products are denominated. Proponents of this tax system argue that the combination of decreased supply and increased demand for US dollars leads to a currency appreciation that fully offsets the effect of the border adjustment tax on trade flows.

At a 21 percent tax rate, the US dollar would need to appreciate by just under 27 percent to offset the tax wedge of a border adjustment.[1] For the economic theory to match reality, the border adjustment must be implemented completely and permanently across all imports and exports, and international currency markets need to fully adjust to offset the new tax wedge on domestic consumption. However, with imperfect implementation, real-world frictions, and uncertainty in currency markets, a border adjustment is likely to pose significant economic costs—akin to an across-the-board tariff—to the American economy, creating winners, losers, and broad economic losses.

Currencies Don’t Adjust Quickly or Fully

Imperfect implementation and real-world frictions are likely. Most studies indicate that exchange rate adjustments are often partial and gradual rather than immediate and full. This is due to several factors, including price stickiness, market expectations, and the slow response of trade balances to changes in exchange rates.

Macroeconomists’ understanding of what drives short-run exchange rates is poorly understood and, thus, difficult to predict. In some cases, exchange rates seem responsive to policy changes. For example, the anticipated removal of a US export subsidy in the late 1990s resulted in the standard model’s prediction of offsetting dollar depreciation. However, more broadly, the academic literature shows that exchange rates tend to adjust less than predicted in response to tariffs and other changes in import prices. For example, research by the IMF spanning 50 years and 151 countries shows that a 1 percentage point increase in the tariff rate increases the exchange rate by just 0.19 percent, far less than would be required for a border adjustment to be fully offset.

The reality of imperfect currency adjustments is also reflected in US industry group support and opposition to the border adjustment proposal in 2017. Partial currency appreciation gives the border adjustment a tariff-like effect, creating penalties for importers and subsidies for exporters. This anticipated effect led export-heavy firms to support the border adjustment tax and importers to oppose the new tax, claiming the new tax bill “could be as high as five times their profits.” Private sector analyses informed these lobbying efforts, one of which concluded that “slow real exchange rate adjustments are the historical norm.”

Border Levies Will be Incomplete

In addition to partial and gradual exchange rate adjustments, imperfect implementation of the border taxes will also likely keep theory from matching reality. One summary of the macroeconomic effects of border adjustments concludes it “is unlikely to be neutral at the macroeconomic level, as the conditions required for neutrality are unrealistic.” A survey of economists in 2017 confirmed this conclusion, with the plurality of respondents being “unsure” about the economic effects.

Some of the unrealistic conditions that lead to economic uncertainty include consistent application of the adjustments on all cross-border trade, full removal of the tax from exports, and passive monetary authorities.

Because a border-adjusted corporate income tax would be the first of its kind, the most common analogous policy for studying implementation and currency responses is the similar border adjustment applied to value-added taxes (VATs). In reality, VATs tend to exempt or provide preferential rates for politically sensitive types of consumption, such as food, energy, and health care services. Across the Organisation for Economic Cooperation and Development (OECD), VATs only apply to 56 percent of consumption.

If similar exemptions applied to the border adjustment, so that the tax only applied to about half of the total trade volume, policymakers should expect to only get half of the theoretical currency appreciation. This would leave importers paying what amounts to a 10.5 percent tariff (on a 21 percent total rate), with all the downsides that protectionist tariffs bring. 

A border adjustment in the United States would very likely face similar imperfections. Before any political exemptions are made, it is unlikely that a border tax and exemption system could capture trade where the foreign counterparty is physically in the United States, such as with pleasure tourism, health tourism, and university education, or when trade is difficult to track, such as small-value packages, financial service, and some B‑to‑C internet services. In 2023, travel accounted for 6 percent of US exports and 4 percent of imports.

Despite the theoretical prediction that border-adjusted taxes are trade neutral, Mihir Desai and James Hines find that “10 percent greater VAT revenue is associated with two percent fewer exports.” Similar research confirms these results, showing that border-adjusted VATs distort trade flows. More broadly, the literature reports mixed results, such as a recent study by Youssef Benzarti and Alisa Tazhitdinova, which finds much smaller relative effects of VAT changes on trade, especially compared to tariffs. However, a policy that is less damaging than tariffs is not a ringing endorsement. 

Another practical concern relates to the treatment of net exporters, such as General Electric and Boeing, who would likely have net-negative tax liabilities. Without a direct cash rebate for taxes paid on domestic production, US exporters would face significantly higher effective tax rates, especially if their supply chain includes imports subject to the import levy. A US Treasury Department working paper concludes that about 10 percent of US firms would need direct subsidies to implement the border adjustment fully.

Instead of writing big tax rebate checks to some of America’s largest corporations when they face net-negative tax liabilities, the 2016 Republican Blueprint instead proposed a system of net operating losses (NOLs) that can be inflation-adjusted and carried forward.[2] However, a subset of domestic exporters may never have a positive tax liability to offset their accumulated NOLs, which could add up to hundreds of billions of dollars. Such a system would create incentives for net exporters with negative tax liabilities to merge with net importers to fully realize their tax benefits. 

Lastly, the neutrality of the border adjustment and resulting currency appreciation requires that the monetary authorities in both the implementing country and foreign trade partners do not respond to the currency changes. It is unlikely that such a large depreciation in foreign currencies relative to the dollar would not precipitate some response by central banks around the world to mitigate the sudden currency move. A large currency appreciation could also set off fiscal crises in emerging economies with significant debts denominated in US dollars. 

Currency Appreciation Transfers US Wealth to the Rest of the World

Whether a border adjustment results in a fully offsetting currency appreciation or a partial appreciation, the resulting effects on dollar-denominated cross-border assets would be nonneutral. Emmanuel Farhi, Gita Gopinath, and Oleg Itskhoki estimate that about 85 percent of US foreign liabilities are denominated in dollars, which, upon an appreciation of the dollar, results in an equal increase in the value of future payments to foreign holders of the debt. Only about 30 percent of US foreign assets are denominated in dollars, so the offsetting increase in asset values does not compensate for the losses.

Stan Veuger estimated in 2017 that a full currency appreciation of 25 percent would amount to a $2.5 trillion net loss to Americans or about $8,000 per American (today, those numbers would be larger). Another estimate using slightly different assumptions concludes, “a 15% border adjustment tax results in a transfer from the US to the rest of the world of the order of magnitude of 20% of the US GDP.”

Veuger goes on to note that foreign “assets and liabilities are not distributed evenly, and some individuals and firms will suffer large losses. Many pension funds, for example, own sizable amounts of foreign assets, but their future liabilities are practically all dollar-denominated pension obligations.”

These significant wealth effects will change domestic saving and investment decisions, which means the border adjustment tax will affect trade flows and exchange rates.

A Risk Not Worth Taking

The new coalition of Trump-aligned backers of a border adjustment has assessed the new levy as a protectionist tool that would reduce imports and subsidize exports. While these effects are far from certain, the analysis above suggests their assessment is directionally correct. However, even if the textbook macroeconomic conditions are met, the effects will be far from neutral, creating large and uneven wealth transfers from Americans to the rest of the world.

If other non-protectionist proponents of the reform are correct, and the new tax is a highly efficient source of revenue with few, if any, economic distortions, it could become, as a Mercatus Center analysis describes, “an irresistible source of additional tax revenue for future policymakers.” Others have also worried that the tax could be easily transformed into a VAT by denying businesses the wage deduction. New sources of revenue, like VATs, often fuel an expansion in the size and scope of government. This fact drives an analysis by the left-leaning Center for American Progress, which promotes the border adjustment as a way to preserve the corporate tax as an important source of federal tax revenue by protecting the US from the pressures of tax competition.

Policymakers ultimately can’t have it both ways. The border adjustment is either tariff-like—and currencies do not fully adjust—or it is trade neutral and thus will not meet the policy priorities of mercantilist advocates, leaving them to desire additional tariffs in the future. The new border tax is bad either way. Ultimately, it’s an unnecessary new source of revenue that comes with high economic risks to global trade and American wealth.

When the Tax Cuts and Jobs Act expires at the end of 2025, Congress will face pressures to find novel sources of revenue to offset some or all of the package’s more than $4 trillion revenue reduction. Border taxes are neither necessary economically nor as a source of revenue. If Congress wants to keep taxes low, it can always cut spending to rein in the government’s costs. Congress could also limit more than $14 trillion in tax loopholes and subsidies, which would have positive economic incentives and raise additional revenue, as I’ve detailed in a recent Cato Policy Analysis, “Slashing Tax Rates and Cutting Loopholes.” 

Additional Reading:

Jason J. Fichtner, Veronique de Rugy, and Adam N. Michel, “Border Adjustment Tax: What We Know (Not Much) and What We Don’t (All the Rest),” Mercatus Center.

Adam N. Michel, “Time to Move Past the Proposed Border Adjustment Tax,” Heritage Foundation.

Gary Clyde Hufbauer and Zhiyao (Lucy) Lu, “Border Tax Adjustments: Assessing Risks and Rewards,” Peterson Institute.

Scott Lincicome, “Deductions Could Spell WTO Trouble for the GOP ‘Border Adjustable Tax’ Plan,” Cato Institute.

Stan Veuger, “Adjusting to the Border Adjustment Tax,” Mercatus Center.

Veronique de Rugy and Daniel J. Mitchell, “The Border-Adjustment Sleight of Hand,” Wall Street Journal. 

Marc Joffe

Electric vehicle marker Rivian is struggling to make cars and earn a profit, but it has proven adept at winning subsidy and tax credit packages from governments around the country. If the company cannot reverse its financial fortunes, it could go under before it uses all the incentives it has been offered.

According to Good Jobs First’s Subsidy Tracker, Rivian has gotten incentive packages from four states with an aggregate value of over $2.3 billion since 2016. The company started small, receiving $1.72 million from the Michigan Business Development Program to set up its corporate headquarters in Livonia, Michigan, and hire up to 170 employees. It later moved to the nearby city of Plymouth, Michigan, before transferring its headquarters out of state to Irvine, California.

In California, Rivian tried to obtain a $16.8 million California Competes Grant but was thwarted when two union representatives and a Rivian employee testified against it at a hearing of the committee overseeing the program. The employee complained of long hours, mandatory overtime, and frequent scheduling changes at the company’s Normal, Illinois, plant.

Rivian has also won $4.2 million of grant commitments in the state of Kentucky, where it has promised to “invest $10 million to establish a remanufacturing facility in Bullitt County, creating 218 full-time, quality jobs,” according to a press release from Governor Andy Beshear.

But Rivian obtained far bigger incentive packages from Georgia and Illinois. As discussed in my policy analysis “Reforming State and Local Economic Development Subsidies,” coauthored with Scott Lincicome and Krit Chanwong, Rivian obtained almost $1.5 billion in state and local incentives to build an electric vehicle plant in Stanton Springs, Georgia, that was supposed to open this year.

Hailing the deal at the end of 2021, Georgia Governor Brian Kemp said:

Rivian’s investment—the single largest in state history—represents the future of automotive manufacturing and establishes the leading role the Peach State will play in this booming industry for generations to come. Our Georgia Quick Start workforce training resources, world-class higher education institutions, and statewide logistics infrastructure assets are prepared to meet Rivian’s production and R&D needs. As one of the world’s most dynamic, innovative companies, Rivian’s exciting announcement begins a new chapter for Georgia, and we are honored to welcome them to the Peach State!

Unfortunately, this investment has yet to materialize and may never do so. In March, Rivian announced that it was pausing construction of the Stanton Springs facility and now says that the plant will not begin until 2028. Even that date depends on whether Rivian receives a federal loan under the Department of Energy’s Advanced Technology Vehicles Manufacturing Loan Program.

Although most of the Georgia incentive package kicks in when Rivian goes into production, state and local governments have already incurred soft and hard costs that cannot be recovered. These include a rent-free ground lease the state gave Rivian on the 1978-acre (or roughly three-square-mile) plant site and three access road construction projects the the Georgia Department of Transportation (GDOT) has initiated at a total cost of over $180 million (cost data from three projects come from GDOT).

With the Georgia plant in abeyance, Rivian continues to produce all its vehicles in Normal, Illinois. In 2017, Rivian bought a shuttered Mitsubishi manufacturing facility in the Central Illinois community after receiving $49 million in state tax credits and city property tax abatements worth $4 million over five years. In May of this year, Rivian received an additional $827 million incentive package from the State of Illinois Department of Commerce and Economic Opportunity to significantly expand the facility.

Whether Rivian can complete its Illinois expansion and build its new facility in Georgia rests in part on company performance—and this has not been promising. In the quarter that ended September 30, 2024, Rivian produced only 13,157 vehicles and delivered just 10,018. Production was down from the prior quarter due to a parts shortage. Worse, Rivian loses money on each vehicle it sells, although these losses have narrowed from $124,162 per vehicle at the end of last year to $32,595 in the second quarter of this year.

As a result, investors have soured on the company’s prospects, driving the company’s stock price down by more than 80 percent from its 2021 initial public offering price of $78 per share. Unless the company can increase production and sales while reducing costs per vehicle, it is likely to burn through its cash reserves and be forced into bankruptcy. In that event, the jobs that states expected to create from assisting Rivian will fail to materialize.