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Forget Taxes & Spending: Subsidies Are Where the Action Is

Those thinking government is just about taxes and spending need to broaden their horizons, and think of subsidies and favors as the most substantial problems. Taxes are high, not because government is wasteful. They are high because it consistently gives away the store to a select few. Welfare, not for poor people, but for the wealthiest oligarchs, is draining the civic life from our nation, states, and towns, and draining the pocketbooks of the middle class at an alarming rate.


David Cay Johnston's latest book "Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You With the Bill)," describes some of the public policy misdeeds responsible for the decline of the middle class since 1980, and the rise of the modern robber barons. (You can hear an interview with the author here)

Johnston's case studies include some national policies, but local political decisions figure prominently, too. For example, he describes a sporting goods company (Cabela's) lobbying a small Pennsylvania town so it would forgo roughly $35 million in property and sales taxes. In return, these merchants promised to build one of the largest big-box retail sporting goods centers in the country. The incentive for the city council to consider this was the prospect of expanded business opportunities for the rest of the town from the new shoppers that would come to this mega-store. They stuck to this story, too, even though the $35 million subsidy amounted to $8,000 per capita, and exceeded the town's annual budget.

As it turns out, the entire profit of the company proposing this came from such deals -- the company actually lost money selling sporting goods. Overall, however, it made hundreds of millions of dollars by persuading locals to adopt this so-called "Tax Increment Financing" (TIF). One local store owner who would be put out of business by the Pennsylvania proposal objected. His point: the proposal put government in the position of subsidizing the big-box retailers, concentrating wealth in the hands of a few favored commercial interests at the expense of the existing local merchants who paid their taxes.

Such things happen in the Sacramento region too. The Galleria regional mall got $33 million in subsidies to build at its present location. Not surprisingly, a competing regional mall (Arden Fair) complained. Then Arden Fair got $7.5 million from the City of Sacramento. At the time, the City was trying to figure out how to fund roof repairs for its schools.

Local politicians will balk at ever discussing a tax, but they will wax eloquent when they have some pet project they want to fund. The City has already lent $70 million for the local stadium, and the County recently wanted to raise the sales tax to fund another, nicer half-billion-dollar stadium, even though the team owners are wealthy enough to build it themselves.

Johnston points out that some of the most egregious such TIF deals are connected to public funding for stadiums. For example, the Texas Rangers was a money-losing major league baseball team, until George W. Bush persuaded the locals in Arlington Texas to hold a special election to fund a new stadium for the owners. The small turnout at the stadium-funding election, and W's persuasive powers, got Arlington to build the stadium with taxpayer dollars, even though the team's owners were wealthy enough that they could have afforded to build the stadium themselves. George W turned his (borrowed) initial investment into a tens-of-millions of dollars profit. As an added bonus, he declared the income from this venture as capital gains rather than ordinary wages, and therefore received a discount on his federal income taxes on the multi-million-dollar profit. Johnston reports that roughly two thirds of the president's net worth comes from this deal.

In Sacramento County, such local government favors for a small oligarchy of commercial interests and land speculators has been virtually a way of life for decades now. The ideal subsidy for land speculators is a commonplace here. The "unearned increment" -- the difference between the value of the agricultural land, and land rezoned for development -- is an enormous profit because development land is often hundreds of times more valuable than agricultural land. The gift of rezoning is therefore ideal because it does not appear on the County's books at all. Foregoing taxes for big box merchants does not appear as revenue or expense either. But the subsidies are real, and local governments must eventually bear the costs of providing schools, roads, police protection, etc. for additional development if developers do not pay for it.

And if the land speculators 1031 exchange out of their newly minted development land, the unearned increment is not even taxable at all by the IRS.

So the current political focus on taxes and spending, as important as they are, overlooks these covert subsidies and favors. Subsidies and favors are where the real money is.

Ironically, the response encouraged by the speculators themselves is to slam government. If people believe government can only produce toxic waste, then they are much less likely to pay it any attention -- all the better for those who want to manipulate it. A real solution would be to make government transparent smart, and effective. In other words, the opposite of the current practice.

This phenomenon also explains the public's reluctance to authorize increased taxes, even in the face of chronic deficits. If the benefits of higher taxes accrued to the taxpayers, then perhaps such taxes would get some support. But if the benefits simply line the pockets of the likes of George W. Bush and his partners, then one would expect vigorous opposition, no matter how much W nattered about his support for the "free market."

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And there's a lot of debt to be repaid because of such deals, not the least of which is the estimated two trillion dollars ($2,000,000,000,000) "invested" in the Iraq war, or in Blackwater and Halliburton, depending on your point of view. In Sacramento, approving development of North Natomas -- some awful floodplain -- meant that public agencies would be saddled with the enormous levee costs for the foreseeable future.

Such chronic deficits springing from subsidies to the wealthy mean that we will have, eventually, either a) increased taxes whether people want them or not to repay the borrowed money, or b) defaults by public entities on the enormous debt borrowed to build stadiums and the like. We find ourselves in the awful position of third world people who are saddled with debt previously borrowed by tyrants. Welcome to Northern Haiti!

And that debt does not include all the unfunded liabilities for pensions, health care, decaying infrastructure, and so on. The obvious source of funding for all these liabilities would be taxing the developers, or taxing resources like petroleum. After all, the World Resource Institute ( said, before Gulf War II, that the U.S. subsidized petroleum $300 billion annually.

The problem with the oligarchs treating local government like an ATM machine is not just the corruption of the process, it's in the corruption of the thinking that accompanies it. Sacramento County Supervisors are now considering a resolution to condemn the Iraq war -- something that, in and of itself, is not particularly reprehensible, but not exactly an issue the locals decide, either. The root cause of the Iraq war is in our appetite for petroleum. This prompts attacks, and will continue to encourage resource wars for decades to come. The uncontroversial fact is that the U.S. has experienced an inexorable decline in petroleum production since 1971. This decline will not abate, either, even if we drilled successfully in Alaska and offshore.

The Supervisors do, however, ultimately decide the shape of our cities. They decide whether commutes will be long or short -- and the U.S. burns 70% of petroleum consumed on transportation. So the Supervisors do decide whether shopping and offices will infiltrate residential neighborhoods ("mixed use") so people can walk rather than commute. They can decide whether streets are primarily designed for autos, or whether the "complete streets" that accommodate pedestrians and cyclists are built in Sacramento. Such streets are essential to cut vehicle miles traveled, petroleum consumption, and the causes of war.

But have our Supervisors made a concerted attempt to turn down sprawl development, then? Or have they started enforcing the pedestrian-friendly, mixed-use, transit-oriented development guidelines in the current zoning code (since 1993)?


Only officials deafened by the pleas of land speculators and scam artists who only want to hit the public subsidy jackpot would believe passing a resolution protesting Iraq will do the job, while neglecting the effective action in their power. A real shame.

This is a classic case of straining at a gnat but swallowing a camel.

by Mark Demsey©

Dempsey's Site

Reprinted by Permission