Local Government Subsidies: Worse Than We Thought

I have written several times about the convention hotel the City of Phoenix built downtown.  At the time of that last article, it looked like the city would lose about $150 million total between the operating losses and the loss on the sale.   But incredibly, it is worse:

Last week, City Manager Ed Zuercher released an economic-impact report that revealed more details of the deal. Along with that, he also released a memo that contends the tax break wouldn't add to the city's losses.

According to Applied Economics, an outside consultant hired to do the report, the tax incentive would spare the buyer from paying an estimated $97 million in property taxes to the city, county, school districts and other taxing jurisdictions over 20 years.

  • Bistro

    You know, the mind kind of boggles at the idea that the price of bringing in tourists and industry, jobs and wages, costs a business owner roughly $5million/year in taxes alone. I think I might decline to do business or share my business in such a place. I mean, I've been to Phoenix. I don't see any need to ever go there again.

  • embutler

    unless you take the attitude ,all your money belong to us(the gov),there
    is no 97 million dollar loss..

  • MikeBruner

    This is run of the mill sort of crazy, unfortunately.

    In Cleveland we temporarily raised the sales tax to collect $500M to build a convention center and a "Medical Mart" with the idea that it would host a sort of an ongoing medical device showcase. The idea failed before the doors even opened, and medical companies who had leased space are using it as "auxiliary meeting space" until their leases expire. But the struggles of the Medical Mart convinced the county that we also needed to extend the tax to build a 300 million dollar public-owned hotel so now we have a hotel too. And that temporary tax rate increase is now freed up to pay for renovations to 3 sports venues around downtown.

  • irandom419

    Actually, the consulting economists are interesting too. They have to say yes a lot, but need an occasional no to maintain credibility. It would be funny to see an audit of their accuracy.

  • esoxlucius

    Yep. My old town thought they were property developers too. Needed that hotel next to a conference center that nobody ever wanted to convene at...

    http://chicago.suntimes.com/news/lombard-westin-filing-bankruptcy-to-restructure-246-million-debt/

  • herdgadfly

    So it is true that taxes required to run the government will be collected in an amount sufficient to cover all government commitments including profits pledged for ongoing hotel operations. The redistribution of wealth in this case is likely to be reverse Robin Hood. And the strangest thing happens when you follow the money. As likely as not it is always the same group of financiers, working in conjunction with city politicians, who rake in cash as well.

  • mlhouse

    I in general oppose most government corporate welfare. Spending money to overbuild these massive public buildings and statdiums just wastes money.

    However, I think that in some cases if you use tax credits as the incentive it makes sense for the government. For example, the FoxxCon project in Wisconsin subsidized them $3 billion. But that is split between income and capital gains tax credits, and a much smaller sales tax credit. It can be argued that this project is truly incremental. Any revenues lost would never have existed without the tax credits. Now, I do not know if the any of the credits are refundable, but because they are tied to actual employment levels my guess is for the most part they are not.

    So, even if because of the subsidies there are no net revenues for the state, the employment opportunities are well worth it. If you do not believe this, go to my home state of Minnesota and drive around rural north central MN where I grew up. There is nothing there, the little towns look like the only inhabitants are meth heads. THen go to western and southern parts of the state were there are production plants and high end agriculture. Those areas are booming.

  • marque2

    Some of these "losses" aren't real. I have been following Foxconn in Wisconsin, and the naysayers say, because of all the breaks the state would lose mega millions. But these are all paper losses. lets look, 200 acres of farmland might, just might bring 80K a year in taxes. Foxconn will buy it and improve the property, so it is now worth at least 100x as much, which would result in 8 million in tax revenue. If Wisconsin says - OK lets only charge you only 2 million a year property taxes- the naysayers will tell you that the state is losing 60 million over 10 years - but if you look, the state would actually gain 12 million in property taxes - even with the discount for the improvements. Plus the company is bringing in jobs which means underemployed people getting more money, or new citizens getting more money which gets taxed by the state at 7%. 100 million in salary per year times 7% - looks like a good deal for the state.

    Now I don't actually approve of this deal making, the state should just lower taxes for all business equally and let entrepreneurs and companies figure it out on their own. - and also in many cases when states chase sexy industries, like Solar, they lose out (Look at New York which lost several billion to Solar City). But I certainly wouldn't wave around paper losses and pretend that the deal sucked.

    So basically, I need more info about the hotel. Was direct money spent, like with the Glendale Ice Hockey, or are they just reducing taxes for a few years and generating a "paper loss"

  • marque2

    I used fake numbers in my example above - but right - the money they are "losing" on Foxconn was money that the state never had. It is a rebate of a portion of the property and income tax - but in the end the state will actually get more money - but do to bizarre accounting, it looks like a loss.

    Government is weird, they call it a cut when the reduce beyond the planned increase, and they call it a loss, when 100% of tax revenue is not realized, even when tax revenue is going up in the deal.

    Though I agree with your sentiment. Wisconsin should have just dropped the corporate income tax from 7% to 3% for everybody, and let all businesses participate in the joy, vs selecting a few favored groups. Though I do think Wisconsin will do better with Foxconn than New York did with Solar City.

  • MJ

    The losses are real. State and local governments will still need to provide services to FoxConn, and if they aren't collecting revenue from them then it is surely a loss. Further, any revenue they do receive once the abatements/exemptions expire will need to be discounted to reflect the fact that they occur well into the future.

    The biggest issue with offering tax breaks however is the distortion of the firm's location decision. Coincidentally, this is the hardest part to quantify. But it's fair to say that in the absence of any package of goodies offered by the state of Wisconsin, FoxConn wouldn't be considering locating there. It would choose another lower-cost location, which would be more socially optimal though not directly beneficial to Wisconsin's government or its governor's PR campaign.

  • MJ

    They generally have a bad track record. Econ consulting firms are usually just hired guns. They build macro models for use in a variety of applications (including convention centers), but rarely if ever validate them. Most people have neither the time nor the expertise to evaluate their forecasts, and even if they did these projects usually are approved before anyone can thoroughly vet them.

    There is one fairly well-known researcher who has made a hobby out of investigating the opportunistic forecasts of economic activity surrounding convention center projects and expansions. His name is Heywood Sanders and he is currently at UT-San Antonio. He recently published a book summarizing much of his previous work on the subject.

  • McG

    I have written several times about the convention hotel the City of Phoenix built downtown. At the time of that last article, it looked like the city would lose about $150 million total between the operating losses and the loss on the sale. But incredibly, it is worse...

    Nothing is incredible where the ability of government to waste taxpayers' money is concerned.

  • marque2

    Total BS Wisconsin will take in more than enough to cover additional costs. Basic Infrastructure costs are usually born by the developer.

    It is interesting to see libertarians becoming tax and spend types. Not surprised since Carpe Diem has espoused communism now several times in the past few weeks.

  • cc

    In business there is a constant winnowing out of people bad at math. In government, it is just the opposite. When someone proposes a private deal that sounds stupid, maybe no one puts up any money, and if they do it is their own risk. In gov, taxpayers eat the mistakes.