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The Perils of Publicly-Subsidized Private Piggy Banks

Opinion Editorial
December 26, 2001

By Linda Gorman

Three separate incidents in the last month have shown that some people have no qualms about using other peoples businesses as their own private piggy banks.

In Denver, officials think that some families of four with an income of $51,000 deserve subsidized housing.  Rather than build subsidized housing with general tax revenues, they plan to tax new homeowners by requiring that developers either include affordable units in their projects or pay a $150,000 fee for every housing unit built.[1]

The subsidized homes would have 20-year deed restrictions designed to let the city participate in any price appreciation.  After five years, homeowners who sell subsidized housing would keep just 35% of any appreciation.  The greedy city would get the rest.  Home equity accounts for roughly 40-45% of wealth for people with incomes between $20,000 and $49,000, and people in Denver currently face a rapidly appreciating housing market.[2]  Since young homeowners typically own their homes for less than 20 years, Denvers subsidy program would virtually ensure that they are always priced out of the market.  In practice, this subsidy program is a financial deathtrap that raises the price of Denver housing.

Denver officialdom could lower housing prices if it had the will.  Reducing Housing Costs Through Regulatory Reform, a 1999 report from the Colorado Division of Housing (CDH) estimates that building codes impact fees, use taxes, etc. contributed approximately $11,000 to $13,000 to the price of new homes in the $150,000 to $160,000 price range in the Denver metro area in 1997.  The CDH report listed hundreds of other regulatory barriers that add to housing costs.  Although regulatory reform can produce cheaper housing, it typically creates vicious interest group infighting.  Advancing new programs is much easier and far more glamorous.

State officials want cheaper loans for politically favored businesses.  Mark P. Couch of the Denver Post reported that State Treasurer Mike Coffman wants to switch $100 million in state employee pension fund money from standard investments to the Colorado Housing and Finance Authority.[3]  The Authority would use the money to buy business loans backed by the Small Business Administration.

According to economist Ralph R. Reiland, the Small Business Administration is inefficient and increasingly political.  The agency is infamous for its unflagging devotion to set-asides for federally-anointed victim groups[,] and has been a magnet for corruption and fake political piety.[4]  In 1994 alone, it managed to lose $56 million due to errors in the liquidation process.[5]

Given that a multitude of private sources of financing already exist in the private sector, why should state pensioners and state taxpayers be expected to endure higher risk to fund politically controlled business loans, particularly when the amounts involved are relatively small?  In the past 12 years the CHFA made 350 loans for a total of $78.4 million.  In the third quarter of 2001 alone, venture capital firms invested $158 million in Colorado.[6]  This type of program expansion is especially bizarre at a time when the state is spending billions to mitigate what we are told are the ill effects of growth stemming from, presumably, too much business expansion.

Raising taxes to fund programs like the CHFA harms business owners by depriving them of an important source of investment capital their own earnings.  According to one study from the National Bureau of Economic Research, cutting a sole proprietors marginal tax rate from 50% to 38% increases the size of his business by 28%.[7]  Loan giveaways may sound good, but they are no substitute for low taxes and flat tax rates.

Bill Lindsay, an insurance broker, is another person who sees nothing wrong with extracting subsidies from private businesses.  In a story about Aetnas exit from Colorados small-business HMO market, Marsha Austin of The Denver Post reported that Mr. Lindsay thought Colorado Insurance Commissioner William Kirven should have denied Aetna permission to exit.  Its one thing for the commissioner to say you dont have the (legal) authority, Mr. Lindsay said, but why didnt you threaten them?

Aetna was losing millions of dollars on small-business HMOs, a market that has had its profits regulated out of existence in the name of consumer protection.  Suppose the state had forced Aetna to continue losing money?  After Aetna had been bankrupted and its stockholders looted, what, exactly, would Mr. Lindsay suggest its surviving customers do?

Colorados health insurance woes are a result of well-meaning but ignorant regulation by the state and federal governments.  Guaranteed issue and community rating increase the probability of being uninsured by an estimated 29%.  They hit small firms and individuals the hardest.[8]  Mandates and deductible limits also substantially raise health insurance costs.  Looting Aetna may be politically attractive, but solving the government-created health care debacle will require painful regulatory reform.

People who propose new government programs that transfer money from private hands to public ones like to see themselves as champions of the people.  Real champions reform existing regulations to reduce costs and let you keep more of your money.

[1]  Housing follies: Why punish those improving property?  December 8, 2001.  Denver Rocky Mountain News, online edition as of December 18, 2001. http://www.rockymountainnews.com/drmn/opinion/article/0,1299,DRMN_38_901365,00.html.
[2] Wendell Cox and Ronald D. Utt.  April 6, 2001.  Smart Growth, Housing Costs, and Homeownership. Backgrounder No. 1426, The Heritage Foundation, Washington, D.C. p. 3.
[3] Mark P. Couch.  December 18, 2001.  Coffman pushes small-business loan plan, Denver Post Online. www.denverpost.com/cda/article/detail/0,1040,33%7E281738%7E36%7E%7E,00.html as of December 18, 2001.
[4] Ralph R. Rieland.  February 23, 2000.  Scamming.  The American Enterprise Online. www.theamericanenterprise.org/hotflash0223.htm as of December 18, 2001.
[5] Mark R. Levin.  October 11, 2000.  Gores Legacy, National Review Online. www.nationoalreview.com/comment/comment101100a.shtml as of December 18, 2001.
[6] Cathy Proctor. November 2, 2001.  Venture capital falls off in state, The Denver Business Journal, online edition.  http://denver.bcentral.com/denver/stories/2001/11/05/story8.html.
[7] Robert Carroll, Douglas Holtz-Eakin, Mark Rider, and Harvey S. Rosen.  October 2000.  Personal Income Taxes and the Growth of Small Firms. Working Paper No. W7980, National Bureau of Economic Research, Cambridge, Massachusetts.  http://papers.nber.org/papers/W7980.
[8] Grace-Marie Arnett. July 20, 1999.  Rising Costs, Reduced Access: How Regulation Harms Health Consumers and the Uninsured. Backgrounder No. 1307, The Heritage Foundation, Washington, D.C. p. 5.

Copyright 2001, Independence Institute
INDEPENDENCE INSTITUTE is a non-profit, non-partisan Colorado think tank. It is governed by a statewide board of trustees and holds a 501(c)(3) tax exemption from the IRS. Its public policy research focuses on economic growth, education reform, local government effectiveness, and Constitutional rights.
JON CALDARA is President of the Institute.
LINDA GORMAN is a Senior Fellow with the Independence Institute and serves as Director of the Rocky Mountain Health Care Policy Center.

ADDITIONAL RESOURCES on this subject can be found at: http://independenceinstitute.org

NOTHING WRITTEN here is to be construed as necessarily representing the views of the Independence Institute or as an attempt to influence any election or legislative action.

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