Controlling the
Demand for Taxes

May 1996 . Number 8

Adapted from a presentation by Wendell Cox & Jean Love to a state legislator's orientation conference.
This has been published in verying forms by the Fraser Institute (British Columbia), The Cascade Policy Institute (Oregon),
the Yankee Institute (Connecticut), the Heartland Institute (Illinois), the Public Service Research Council (Virginia)
and the American Legislative Exchange Council (District of Columbia).


"The American people want public services, but they don't want to pay for them." This is the common refrain of inside-the-beltway commentators. A different reality exists beyond the beltway, which is that the American people perceive that taxes are high enough and government is spending more than is needed to provide public services. More than three-quarters of the American people believe that governments waste much of their tax money.

State legislators and other elected officials are faced with difficult choices. The demand for public services is great. That much the Washington commentators have understood. At the same time, the supply of taxes is limited. The conventional wisdom is that there are but two approaches to balance government budgets when spending exceeds taxation: reduce services or increase taxes. There is a third way: use tax money more efficiently. This is a simple strategy known by every household and every business: when you can't increase income, you decrease expenses.

More efficient government has been discussed for years. But despite growing public indignation at government waste, despite genuine intentions by many elected officials, little real progress has been made. Attempts at removing government inefficiency and waste have failed not because there is little potential to make government more efficient, but because the incentives that face public managers and employees are skewed toward higher spending.

What follows is an analysis of the incentives that drives higher public spending, and proposals to redesign spending incentives to favor lower levels of taxation. This analysis does not propose that government do less (that is a different debate) --- indeed implementation of the proposed strategies could permit government to do more. Finally, it is important to understand that the analysis is not a criticism of government, of public managers, of public employees, or of public employee unions; it is a criticism of the incentives that drive the decisions and activities of government.


State legislators are integral to the process of making government more efficient. All governments in the United States except for the federal government are creations of the states. Each municipally, county or parish, school district and special district operates subject the powers and responsibilities conferred upon it by the corresponding state government. The ability of state and local government units to tax and spend is under the control of state legislators.

State legislators often express the view that they should provide maximum flexibility for local governments and exercise little control over the spending decisions of local governments. And while the level of government closest to the people should have great latitude to respond to the interests of its taxpayers, there is also an appropriate oversight role for state legislatures. When local governments get into financial trouble, they have one place to go --- to the state legislature. The present situation in Pennsylvania is a case in point, with the city of Philadelphia seeking a state bail out to avoid insolvency. The inability of Philadelphia to live within its means has become an issue in the state capital. There has even been the specter of federalizing state tax policy with a federal attempt to coerce the Pennsylvania legislature into establishing a new tax for a particular public service.

State legislators have an important interest in efficient spending at both the state and local level, then because in the final analysis it will be the states that will pay. And the stakes have been raised considerably by the attempted federalization of state tax policy referred to above. If state legislatures do not ensure that local spending is kept under control, state bail outs and even federal mandates may follow.

The incentives that drive state and local spending higher are getting stronger. The fundamental question for state legislators may be stated two ways:

1. Shall state and local governments be permitted to spend more than necessary to delivery any public service?

2. Shall state and local governments be permitted to ignore alternatives for providing the same level and quality of public services for less?


Taxes Are Not a Panacea

Strong special interest groups that seek greater public revenues for themselves and their constituents have concentrated the political debate on ways to raise new taxes. Focusing on issues of fairness and compassion, they have diverted attention from the performance and cost-effectiveness of public programs. If the proponents of higher government spending are to be believed, then taxes are a panacea. The answer to every problem is more money.

But taxes are not a panacea. All taxes are paid by households and businesses, so economic growth depends upon the strength of the private sector. As taxes consume a higher percentage of income, society becomes weaker economically. This lesson has been painful to Argentina and Eastern Europe where the high percentage of income consumed by government has sapped

initiative and reduced living standards. Taxes always reduce the amount of money that would be used in the private sector to increase production and to boost the Gross National Product. Taxes always reduce the size of the economic pie. Therefore, there is no justification for higher than necessary public expenditures. There is no valid reason for U.S. competitiveness in world markets to be impaired or for Americans to have lower standards of living because of government inefficiency.

The stronger the private sector, the greater is the ability of government to provide public services. The taxation issue is not only about what government should do or should not do. It is also about whether the functions of government should be performed at the lowest possible cost. As presently structured in the United States, governments routinely spend more than necessary to perform their functions. It should be clear by now that not even the most generous state legislatures can match the ability of the public sector to spend money.

Government's fundamental problem is not funding, it is spending. The fundamental issue is not about finding new taxes for government, it is about controlling the demand for taxes through the efficient use of public resources. It is time to cast the public debate in these terms.

The Fallacy of Judging Results by Spending

Seeking higher subsidies, public agencies compare their level of public subsidies to that of more highly subsidized agencies to demonstrate the short-sightedness of their elected officials and the selfishness of the taxpayers in their catchment area. Spending interests fund or publish studies that compare spending levels of various public programs, taxing districts, states, and countries to determine the effectiveness and performance of public programs. Following the logic of these arguments, that higher government spending is equivalent to superior output, we could determine that students in Salt Lake City are not as knowledgeable as students in the inner city of Detroit or that Japanese students receive an education that is inferior to that of students in Egypt. Likewise, we might surmise that Americans have an inadequate diet while Ethiopians are over-fed or that the streets of Stockholm are less safe than the streets of Newark.

Obviously, there is no reliable correlation between higher spending and superior results. Nor can we infer from the data that the citizens or elected officials of Salt Lake City or Japan are less compassionate, more selfish, or care less for the education of their children than citizens of Detroit or Egypt.

The Public Spending Corollary to "Parkinson's Law"

Growing evidence demonstrates that there need be little if any correlation between the amount of tax money spent on a public service and the amount or quality of that public service.

These points are illustrated by an analysis of costs at 109 U.S. public transit agencies. The analysis showed that unit costs (costs per mile) vary significantly between public transit agencies. (Chart: "Variation in Unit Costs for a Public Service") The most expensive public transit agencies spend more than double that of the most efficient public transit agencies in cost per mile. Further, the analysis shows that cost increases vary greatly (costs per mile increased in a range of from 35 percent to more than 100 percent --- inflation was 54 percent). These differences cannot be explained by geographical differences or by differences in service quality.

There was, however, a relationship between new revenue available to the public transit agency and the extent of the cost increase. Generally, from 1979 to 1988 the higher the increase in revenues, the greater the cost increases. (Chart: "Public Unit Cost Increases Compared to Increases in Funding")

-Of the 82 agencies that received an increase in funding (inflation adjusted), only six kept their costs within inflation.

-Of the 27 agencies that received a decrease in funding, nine kept their costs within inflation. Seven of the nine had revenue increases of less than ten percent.

Two conclusions are drawn from this analysis.

1. That public agency costs are not fixed --- that some governments perform the same services as others for less.

2. That unit cost increases tend to be higher where the increase in funding is higher.

In 1955, C. Northcote Parkinson proposed "Parkinson's Law" --- that work in a bureaucracy tend to expand to fill the available time. Parkinson noted that, even when public service levels remained stable, the size of the bureaucracy increased. The research on public transit suggests that even where service does not increase, unit costs tend to increase. The cost behavior of public agencies implies a public spending Corollary to Parkinson's law:

"Unit costs of public services tend to increase to consume the available funding."

Higher Taxes Generate Higher Unit Costs

Studies in education and elsewhere echo the dynamic identified in public transit. New public funding does not necessarily result in higher levels of public service. A large percentage of the rising costs of public services is consumed by greater than inflationary cost increases. Even in the absence of new government services, there is an increasing demand for taxes, because the costs of existing services tend to rise inordinately.

The amount of money spent by a jurisdiction on a public service may be more a reflection of the political strength of spending interests than it is a reflection of the commitment and compassion of the citizens and their elected officials. The test of a public service is the quantity and quality of the service provided, not the amount spent on the service.

The American consumer does not believe that the "Excedrin" purchased at the airport gift shop is a more effective pain reliever than the "Excedrin" purchased at "K-Mart." And an increasing majority of the American taxpayers no longer believes that higher taxes necessarily result in more or better services. We must change the political debate from an emphasis on input --- what is spent --- to an emphasis on outcome --- what return is obtained for the tax funding. It is time to wean ourselves from the myth that public spending equates to public results.


Having dismissed the proposition public spending is a reliable standard for evaluating public services, it is appropriate to review the incentives facing the public sector --- incentives that reward higher spending.

Competition, Monopoly, and Performance

The fundamental flaw in public sector incentives is that the cost control induced by competition is absent.

Competition in the marketplace improves performance and keeps costs down. This economic principle is based upon human nature. On the other hand, monopoly is characterized by higher prices and limited production. As a result, government has routinely limited the creation or the effect of monopoly in the private sector.

Once upon a time, some economic theorists believed that the problems of monopoly were problems of ownership --- that only private monopolies were harmful, while public monopolies were virtuous, because they would replace the profit motive with a public service motive. Experience has shown this view to be near-sighted. As a group, the people who manage and operate public services are no more virtuous than the people who manage and operate private businesses.

Some functions of public agencies are subjected to the competitive market. Nearly all governments require that goods and services purchased from outside the public agency be done so in a competitive process. But competition does not routinely extend to the largest element of public expenditure, labor costs (wages and benefits), and costs are rising rapidly. Higher labor costs are occurring in three ways:

1. Higher employee compensation (wages and benefits).

2. Larger staffs.

3. Diminishing productivity, often due to overly restrictive work rules.

Incentives in the Public Sector

Public services are managed and produced by people. Just like all of us, government workers want higher standards of living. Accordingly, government employees gear their work toward incentives and away from penalties. Human nature operates as surely in government as it does outside government.

Incentives, however, are different in government than they are outside government.

For example an individual, family, or company must make economic choices and live within its income. Efficient spending produces a better life, because more can be purchased with available income. In the short-term, the economic situation can be improved only by efficient allocation of financial resources. Except in the most protected industries, the losses that result from wasteful, inefficient spending are not borne by others. The rewards in the private sector are tied to obtaining the most value for the amount of available money.

A government manager, however, faces a different set of incentives. Government management salaries are highly correlated to the size of the manager's staff and budget. If a public manager under spends the budget or utilizes workers more productively, the manager will be penalized with a smaller budget and staff (in relative terms) in following years, and the manager's salary and career progression will be hampered. Alternatively, the economic losses that result from wasteful, inefficient spending can be passed on to others --- the taxpayers. In the public sector, then, managers are rewarded for inefficiency with higher funding, increased staffing, and enhanced career prospects. The rewards in government are tied to higher spending and the search for higher revenue.

The Incentives Facing Management

The interests of public managers and employees are consistent with greater spending and the growth of government. The direct and concentrated interests of public managers and employees have been very effective against the far more diffuse interests of the taxpayers. A public manager or employee can experience an immediate and substantial increase in compensation merely from responding to the incentives of government. And because public employees have greater knowledge of and greater access to government, the cost of manipulating the political process is less and the reward is far greater for public employees than for the taxpayer. The more numerous taxpayers rarely notice the increased tax that occurs from a single increase in public expenditures. But taxpayers have begun to notice the accumulation of such increases, and the present public concern with taxation is such an effect. The declining trust of government by taxpayers has been illustrated in surveys and in the most recent elections.

Public sector decision making is much different than competitive decision making.

In the competitive market, companies make decisions based upon consumer preferences. Consumers know the price per unit of the company's products, and consumers have the freedom to purchase from the competition or not at all if price exceeds the value of the product. A good decision on the part of the company will improve the firm financially, while a bad decision will lose it money or even cause it to fail. The company cannot extract funding from customers who have not purchased its products. No amount of rationalization or excuses can eliminate the judgement of consumers with respect to the company's products. As a result, administrative staff size tends to be lean, with the greatest effort committed to developing and marketing the products of the company. Armies of administrative staff would only burden a company in a competitive market and hasten its failure.

In the public sector, taxpayers do not know the price per unit of an agency's individual products. Because government services are produced by monopolies, taxpayers do not have the freedom to purchase from the competition, and they have no meaningful comparisons by which to judge value. As a result, taxpayers have little power to exert meaningful influence over government efficiency. The resulting lack of market discipline and the right of government to tax combines to encourage larger administrative staffs. The inability of taxpayers and their elected officials to measure value allows the public sector to rationalize or excuse any perceived inefficiencies and to pass the cost of these and other failings on to the taxpayer. As a result, public sector decision making is administrative. Public administrators prepare administrative justifications for their proposals at the expense of the taxpayers. If the approved programs fail or require more funding than was anticipated, rationalizations and justifications are provided to demonstrate how the shortcomings resulted form circumstances that could not have been foreseen or --- more often --- from inadequate funding. Thus, in the public sector, armies of administrators assist the public agency in increasing its budget still further. Too much of taxpayers' money is used to lobby state legislatures and the U.S. Congress to provide even more funding. And, in many states, the administrative staff and resources of the state legislature are modest in comparison to the publicly funded spending advocates employed by large public agencies.

The Incentives Facing Public Employees

The incentives facing public employee unions also encourage higher than necessary spending. This is not a criticism of public employee unions, it is rather a criticism of the spending incentives. These incentives have permitted public employee unions to increase costs through bloated staffing and steadily growing budgets.

The effect of labor unions on unit cost differs between competitive or monopoly providers. Labor unions can increase employee income in concentrated industries --- industries that are oligopolistic or monopolistic --- but unions are unable to increase employee compensation above the market rate in competitive industries. It should be noted that collective bargaining processes may impose monopoly conditions on competitive industries where government has intervened and where employers and unions have engaged in "pattern bargaining."

Labor unions can increase employee compensation to above the market rate in monopolies and concentrated industries, because there is no competition for labor rates, and because costs can always be passed on to the consumer. The higher income won by labor unions in monopolies is not taken from owners or managers, it is taken from the consumers, who are denied the lower prices that would occur in a competitive industry. Since most of the wages in this country are set by the competitive market, the effect of unions in a monopoly are unfair to the majority of US consumers.

In competitive industries, however, firms must ensure that their costs do not rise above those of their competitors, or they will lose their customers to less costly producers. As a result, competitive industries must keep their labor costs under control. Labor unions are incapable of taking more than they can get. Excessive increases in pay in competitive industries comes from the share of the owner and will eventually result in the failure of the firm.

Labor union officials talk of "living wages," inferring that wages set in a competitive society are unfair. They infer that union labor is somehow virtuous compared to non-union labor. But this is a simplistic, discriminatory, and dangerous view. The real wages (inflation adjusted) of employees in a society are set by the competitive market. To the extent that some employees are paid more, because their particular employment market is noncompetitive, employees in competitive firms --- the vast majority of Americans --- will be paid less. Would-be employees will not be paid at all, because funds that would have created economic growth and employment are being diverted to pay for higher than market wages to those in the monopoly industries.

Some societies have attempted to negate the principles of economics by intervening in the market to increase the wages of all. Those societies have invariably failed, because government is incapable of raising real wages for all employees. Government can raise all wages only by creating the hyper-inflation that destroys both domestic and export markets. This is the story of the failures of interventionist policies --- from the Soviet Union to Eastern Europe to Brazil and Argentina.

Government services are monopolies. And public employee unions predictably and rightly seek the greatest benefit for their members. Public employee unions seek whatever portion of new tax funding they can obtain and make large political contributions in an effort to influence higher spending on labor. Without a competitive environment, there is little to constrain public employee unions from obtaining extraordinary increases in wages and fringe benefits. And, as public employee unions have become stronger, they have been able to obtain exceptional increases.

The compensation of public employees has been rising at a faster rate than compensation of non-government employees. In 1965, the average private employee was paid slightly more than the average public employee. In 1988, the average public employee was paid more than 10 percent more than the average private employee. (Chart: "Change In Annual Employee Compensation") In some cases, public employees are paid up to double that received by unionized workers doing the same work in the private sector. The growing strength of the public employee unions is likely to result in the creation of more "monopoly wage premiums."

Should public employees be paid more than the employees doing the same or similar work in the competitive market? Obviously, the answer is "no" --- government should do no more for public employees than it its prepared to do for private employees. Bank clerks, nurses, and other private employees should not be relegated to second class citizenship by virtue of government policies that favor public employees. Government cannot increase the real earnings of public employees without taking from private employees. And government cannot raise the wages of all without destroying the economy in the process. Equal opportunity and fairness requires that public employees be no more favored by government than private employees. The compensation of employees performing public functions should be subject to the competitive market as it is with

private employees. The net effect of unions in monopolies including government has been higher compensation for their workers in exchange for a lower standard of living for the majority of other Americans.

In the competitive market, labor unions have incentives to seek economic gains for their members, but that incentive is tempered by the necessity for the firm to remain profitable in a competitive market, otherwise the members will be without income. In government, where there is no competition, there is no effective limitation to the incentive of unions except the limitation of public budgets. Even the countervailing force exerted by management is absent in government as more expensive labor settlements lead to higher compensation for managers (in some cases the managers themselves are union members). And the accessibility of complete financial information (an important safeguard in a free society) gives the public employee unions more reliable monetary targets for collective bargaining --- a practice some have called "treasure hunting."

The Never Ending Funding Crisis

So the incentives in government are structured such that the demand for higher taxes is self perpetuating. Managers are rewarded for spending more, and public employee unions are able to obtain inordinately increased compensation.

No amount of internal reform will solve the problem. Prior attempts to solve the problem have spawned innumerable committees, citizen review boards, endless meetings, countless hours spent on zero-based budgeting, management-by-objectives, and five year plans, and all the while there is a mad dash at the end of the fiscal year to spend funds to ensure funding increases for the following year. Efforts at reform and accountability have only increased the size of government. The problem is not management, nor can the problem be solved by management. Efficient management cannot be legislated, nor can legislation eliminate regulatory or bureaucratic capture --- bureaucratic behavior is driven by incentives. Laws may dissuade outright fraud, but they are ineffective against steadily rising unit costs.

Higher taxes can themselves fuel the demand for even higher taxes. Clearly, until the incentives change, the demand for new taxes will only increase.

There are alternatives --- tax limitation and subjecting public services to competitive incentives.

Limiting Taxation

Tax limitations have been imposed in some states, and rejected in others. Certainly, tax limitations are an important ingredient of any strategy to control taxation. But if taxes are limited while leaving the perverse incentives in place, there will be constant pressure for their defeat or reversal.

-The spending interests will portray even the most modest tax limitation in "doomsday" terms. This will often attract even business and other interests that usually oppose higher taxes.

-If passed, public agencies will often respond with the tactic of "firemen first" --- in which the most essential, the most compassionate, the most visible services are cut first in an effort to obtain additional public revenues and to convince the electorate of its imprudence and selfishness in passing the measure.

-The spending interests, and bureaucratic interests will work unceasingly to negate the intention of tax limits or even to repeal them, and will do so with the aid of tax funding in their regular work routine.

The effectiveness of tax limitations can be improved by stemming the demand for taxes at the source, by subjecting public services to competitive incentives. This approach, called competitive contracting, reduces the demand for taxation by bringing spending under control. It can be used as an alternative to tax limitation or as a supplement. Competitive contracting makes tax limitation more effective. Because it is cost efficient, it allows for higher levels of public service even in the presence of a tax limitation measure.


Competitive contracting has been used for decades by private and public organizations to ensure that goods and services of a defined quantity and quality are produced for the lowest possible cost. Each good or service made or consumed by the organization is studied to determine if the same quality of good or service can be purchased from the outside less expensively than it can be produced internally.

Competitive contracting is the provision of a public service through a competitively awarded contract. The public agency chooses what services to competitively contract and chooses the private providers from which it purchases the services. Competitive contracting involves a synthesis of public and private roles. The public sector decides what services should be competitively contracted and what specifications should apply to the service. The competitive market responds to the invitation of the public agency, and one or more producer is selected to provide a specific service for a period of time. The public sector retains policy control over the service, while the competitive market produces the service under public scrutiny.

How Competitive Contracting Works

Under competitive contracting the public agency produces service itself when it is less expensive to do so; when service produced by the public agency is more expensive, the service is "bought" from contractors. There are five basic steps in the process:

1. The public agency seeks competitive proposals to deliver a specific quality and quantity of service for a defined period of time.

2. The public agency may submit its own cost proposal, capturing all attributable costs, and subject to the same terms and conditions that apply to private proposals.

3. A contract is awarded to the lowest responsible and responsive public or private proposer who demonstrates an ability to provide the same quality and quantity of public service at a cost lower than that of the public agency.

4. Contractors, public or private, that fail to provide the service as specified are financially penalized or replaced.

5. New competitive proposals are sought in sufficient time to award a new contract for service commencing at the expiration of the contract. New competitive proposals are sought regardless of whether the incumbent contractor is a private company or the public agency itself.

Competitive contracting does not necessarily result in private operation of public services. It merely requires that the public service be provided according to the specifications of the public agency for the lowest possible cost. Competitive contracting removes the present bias toward in-house public service provision and replaces it with a results oriented approach in which the lowest cost qualifying proposer, public or private, operates the service.

Public Agencies May Participate

The public agency can submit a proposal to continue to operate the service. There is, however, a potential for the public agency treating itself more favorably in such a procurement than it does the private proposers. Both in the U.S. and Great Britain public agencies have submitted "low-ball" bids that are below their actual cost with the result that costs are made up ("cross-subsidized") from other public services so that the total cost to users and taxpayers is the same as before, or higher. Other public agencies have compiled internal costs for comparison after opening the private proposals. It is not surprising that public agencies have typically won such skewed procurements.

Because of these abuses, some public agencies have taken important steps to ensure the objectivity of the procurement process --- requiring the submittal of the public proposal at the same time and according to the same terms that apply to private proposers. They have also required that the evaluation of proposals exclude any personnel who have been involved in preparing the public proposal, or who would stand to gain by providing the service in-house (conflict of interest).

Competitive Contracting Saves Money

Competitive contracting reduces public costs in three ways:

1. Lower costs through provision of service at no more than the competitive rate (the "going" rate).

2. Lower costs through the "ripple effect" as public agencies improve their cost performance in response to the competitive environment.

3. Lower net costs as a result of tax revenues paid by private contractors on the public services they operate.

Lower Costs: Competitive contracting lowers public costs. Cost savings of 15 to 30 percent are frequent, with occasional savings of up to 50 percent. Touche Ross reports cost savings in 98 percent of cases with savings more than 40 percent in some cases. Net cost savings are higher still, because these figures do not include the taxes and government fees paid by private companies and from which public agencies are exempt. The taxes paid by private contractors may be as much as 15 percent of the contract value.

The Ripple Effect: Competitive contracting not only results in lower costs for the public services competitively contracted, it also induces improved internal public cost performance. This "ripple effect" has been identified in various public services, including solid waste collection, public transit, fire protection, and other services. Public employee unions have negotiated competitive wage and benefit packages in response to competitive contracting. As a city of Phoenix public administrator put it:

"Our people are in a competitive mode. We have cut our costs way back because we have learned from the experience of private contractors. We have the unions convinced about the need to improve productivity."

Principles of Competitive Contracting

There are two fundamental principles of competitive contracting of public services:

1. The public agency should retain full policy control, determining which services are purchased, establishing quality and safety standards, administering contracts, and monitoring service performance.

2. The public agency should foster a competitive market.

The maintenance of a competitive market is crucial to the success of competitive contracting. Private monopoly should not be tolerated any more than public monopoly. Fostering a competitive market requires:

-Wide participation and full disclosure of information, so that all potential interested proposers have sufficient information to submit a proposal if they desire.

-Limitation of contract duration (usually no more than five years including renewal options).

-Limitation of contract size, so that smaller companies have an opportunity to participate.

-Cost control through a requirement for fixed price proposals, and prohibition of price negotiation after contract execution.

-No public agency specification of labor arrangements except compliance with state and federal law.

-The public agency should compete in the process under the same terms as the private proposers and should include all attributable costs.

Competitive contracting saves money not because the private sector is superior to the public sector; competitive contracting saves money because competition induces lower costs than monopoly. Services provided by private contractors are as fully public services as the same services provided by public agencies themselves, because the public agency remains in complete control.

The Extent of Competitive Contracting

Competitive contracting is being used by governments of various ideological persuasions around the world. The Conservative government of Great Britain requires that certain public services be competitively contracted. Socialist governments in Sweden and New Zealand have implemented competitive contracting programs. A wide range of municipal services are competitively contracted in Canada.

Competitive contracting is expanding in the United States. An overwhelming percentage of municipal governments competitively contract for some services --- more than 90 percent according to one study. The extent of competitive contracting by type of public service is illustrated in the Table "Extent of Competitive Contracting by Local Governments." Despite its broad use, there is potential for a substantial increase in the use of competitive contracting.

Supplier Markets for Public Services

Private supplier markets are ready, willing and able to provide public services under contract. And if government were to commit to competitively contract for other services, the supplier markets would develop.

Some functions, of course, should not be contracted. The fundamental function of government is legislation and policy. These functions can only be performed appropriately by government itself.

Opposition with a Vested Interest

Opposition to competitive contracting can be expected from those profiting from the present monopoly incentives. These are the public administrators (though not all) and public employee unions. The strongest opposition comes from the public employee unions, which fully understand that they can obtain more lucrative contracts with government in a non-competitive environment than they would if they were subject to the same restraints as the majority of Americans, who work in the private sector. Public employee unions are so convinced of the cost reducing potential of competitive contracting that they have opposed legislation that would require comparison of public and competitive costs just as adamantly as they have opposed mandatory competitive contracting legislation.

Public employee unions have attempted to portray competitive contracting as being anti-union. But contractor employees have the same rights to organize as other employees. And a large percentage of private contractors have already been organized by unions.

Public employees can be protected by phasing in competitive contracting through the use of attrition and special voluntary separation incentive programs (early retirement incentives, voluntary separation bonuses, etc.). In addition, successful contractors can be encouraged to offer employment to qualified personnel (though the private contractor will probably require fewer employees). Some displacement of public employees might occur --- and every individual case is regrettable from a personal standpoint. But the same thing happens to private employees everyday, and there is nothing that government can do to prevent it without bankrupting the economy. Employee considerations must not interfere with government's stewardship over the funds entrusted to it. A government that puts its employees before the taxpayers is a government that should not be an employer.

Implementing Competitive Contracting

Various legislative approaches have already been implemented, with success. The most direct approach is to require that government agencies within the state subject some of their public services to competitive contracting.

Colorado: The first mandatory competitive contracting legislation in the United States was authored by Senator Terry Considine (1988). This legislation required the Denver public transit agency to competitively contract 20 percent of its services over a two year period. The legislatively required performance reported the following results:

-Short term cost savings of 27 percent --- even after paying idled employees for not working (the Act contained a layoff prohibition).

-Long term sustainable savings of 35 percent.

-A 1996 study projected 10 years savings at $88 million.

Great Britain: Parliament requires local governments and school districts to competitively contract for refuse collection, custodial services, food services, grounds maintenance vehicle maintenance, public transit and school bus service. The local governments may compete for the services themselves, but their proposals must meet the requirements imposed upon the private proposers. The results have been:

-Cost savings of 22 percent when contracts are awarded to the private sector.

-Cost reductions of 17 percent when contracts are awarded to in-house departments.

There have been other important initiatives:

Arizona: A bill that would have required competitive contracting of virtually any public service was passed by the Arizona legislature in 1990, but was vetoed by the Governor. The bill, authored by ALEC member Representative Robert Burns would have required a competitive contracting process initiated by a bona fide expression of interest by a capable company. The private company would file a "petition of interest," demonstrating its ability to provide the service and expressing its interest. The public agency would issue a request for proposals to all interest organizations after certification of the "petition of interest." The "petition of interest" approach is unique, in that it would require competitive contracting only where the competitive market demonstrates both sufficient capability and interest in a particular public service.

Model legislation: The American Legislative Exchange Council has published model legislation requiring competitive contracting of school bus service and public transit service.

Additional legislative initiatives such as these will be required if the demand for taxation is to be controlled. Competitive contracting replaces the monopoly incentives of the public sector with competitive incentives. This will permit taxpayers and their elected officials will be able to determine value (benefit v. cost) and allow allocation of scarce tax dollars. The U.S. cannot be competitive on world markets, cannot maintain the present high standards of living, and cannot continue to provide quality public services in the presence of government programs that cost more than necessary.


Americans want public services, but they do not want to pay for wasteful government.

Taxes always reduce the amount of money that would have been used by the private sector to increase production, which fuels the Gross National Product and increases overall standards of living.

While many government services are needed, there is no justification for government to waste money through inefficiency.

Government has a spending problem, not a funding problem.

The problem will not be solved by better people, better management, better systems or more money, because the problem is structural --- the incentives in government are skewed against the public interest.

Incentives for public sector management and employees fuel higher government spending, so real (inflation-adjusted) costs rise even in the absence of new public programs.

To solve the spending problem, government must change the monopoly incentives that cause the problem.

Monopoly incentives cannot be changed in the absence of the competitive market where cost is clearly stated and where choice of producers enables the taxpayers and their elected officials to determine value.

Where the same services can be provided by the competitive market at a lower cost than government provision, services should be competitively contracted.

Obtaining public services for the going rate through competitive contracting will:

Increase what government can do with present tax dollars

Avoid future tax increases

Create more jobs

Raise the standard of living of taxpayers.

Competitive contracting keeps the costs of government under control while permitting government to maintain and improve public services.

"If government cannot provide services at least of a quality and at a cost commensurate with similar services provided by private enterprise, it is, by definition, unreasonable to utilize tax dollars for that purpose." (Supreme Court of Pennsylvania)

Competitive incentives must replace monopoly incentives, if the demand for taxes is to be controlled.

The fundamental choice is this:

Do the people exist to serve government, or Does government exist to serve the people.

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