Taxpayers to Provide More Corporate Welfare?
Special favors...
[by Jon Coupal] 10/5/05

A decade ago, the City of Los Angeles offered DreamWorks studio heads Steven Spielberg, Jeffrey Katzenberg and David Geffen a deal city officials hoped they couldn't refuse. If the DreamWorks executives would agree to build a studio complex to anchor the development of Playa Vista near Marina del Ray, the city would provide an $85 million package of tax incentives that included reduced business license and utility taxes.

The city justified this "give away" by emphasizing that taxpayers would get their money back through the long-term economic activity and tax revenue the DreamWorks studio would generate.

It is probably better for Los Angeles taxpayers that, after careful consideration, Spielberg and his colleagues declined the offer. After all, excusing the studio from five years of utility taxes would have meant that taxpayers would have been paying to subsidize a private business. As for the argument that the money will come back to the city, the problem is that government officials are notoriously poor prognosticators of economic activity, and they are even worse when it comes to striking a bargain.

One has only to look at the city-owned downtown Convention Center to be convinced of this. In spite of promises that it would revitalize business in downtown, the facility has been a money-loser from year one. Debt service now runs more than $30 million annually and rental discounts that must be offered to attract business are costing the city another $1 million.

Described as a "white elephant" by some, periodically some earnest public official will come forward with a plan to spend more taxpayer dollars on the Convention Center so it will return a profit for the city. It is sort of like the old joke about the widget manufacturer who says, that although he loses money on each unit made, he makes up for it by producing them in volume.

The latest plan, just approved by the City Council, is to provide subsidies and loans amounting to $290 million to developers of a proposed luxury hotel to be built near the Convention Center. The deal would allow the private developers to keep the anticipated $246 million in hotel room taxes that would be generated over the next 25 years. In addition to forcing taxpayers to become investors in a project that could end up as a second white elephant, it may actually result in reduced business activity as other existing downtown hotels, which are not allowed to keep room tax proceeds, are put at a competitive disadvantage.

Offering generous tax breaks to private businesses to lure them to locate to a community or neighborhood is not unique to Los Angeles, or even to the state of California. The U.S. Supreme Court has just agreed to hear a case from Ohio, where state officials offered automaker Daimler-Chrysler $280 million in tax breaks to build a Jeep assembly plant near Toledo. The U.S. 6th Circuit Court of Appeals ruled this preferential treatment interfered with free-flowing interstate commerce. The Supreme Court has agreed to decide the merits.

Regardless of how the Court rules -- and it is unlikely to impact what happens in downtown Los Angeles -- the issue remains: is it good public policy to have government pick winners and losing by doling out tax subsidies? While some favored business or businesses may benefit from such tax breaks and other subsidies, many economic analyses make clear that other businesses and taxpayers get the short end of the stick.

If local government officials really want to generate revenue and improve the local quality of life, they should consider improving the business climate for all, not just for a minority of well-connected business owners. CRO

Jon Coupal is an attorney and President of the Howard Jarvis Taxpayers Association.

copyright 2005 Howard Jarvis Taxpayers association

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