Monday, August 12, 2013

Blowing the Budget on Subsidies

The Red Wings want a new stadium and, despite Detroit's bankruptcy, the governor is in favor of a taxpayer subsidy for the $650 million project,
“This is a catalyst project,” Governor Rick Snyder said, according to Crain’s Detroit Business. “This is going to be where the Red Wings are. Who doesn't get fired up in Detroit about the Red Wings? Come on now, the people that are criticizing are people from outside of Michigan. This is something that is important to all of us.”
There are plenty of reasons to criticize massive government subsidies of sporting arenas, including the fact that sports owners tend to be extraordinarily rich people who can afford their own arenas - and if they're not, there's probably a richer person who will be happy to acquire the team. The subsidies have created an unhealthy market in which a team's value can be increased by tens or hundreds of millions of dollars to the owner based upon the taxpayer subsidy for a stadium. From Crain's,
Detroit's Downtown Development Authority intends to use $284.5 million in property taxes captured within its 615-acre downtown district to pay off the bonds issued by the state to build the 18,000-seat arena west of Woodward Avenue and I-75.

The remainder of the district costs, or $365.5 million, will be picked up by Olympia Development of Michigan, the property development arm of Mike and Marian Ilitch's $2 billion Detroit business empire that includes the Red Wings, Detroit Tigers and Little Caesars pizza chain.
Snynder also defends the project on the basis that it will "create 2,900 direct construction jobs" and "another 1,480 [ancillayr] construction jobs." The subsidy works out to $65,000 per job - and recall, we're talking about temporary jobs. Really, you can't justify this probject on "job creation". The American Prospect notes that some shady land deals have already been detected, with people on the inside maneuvering to profiteer.
An obscure new owner took over three low-income apartment buildings in the area targeted for development this spring. This mysterious landlord gave residents 30 days to leave. A Detroit News expose led to an extended eviction deadline, and then no eviction at all—but not until after many residents had already left. Following the press conference on the arena, the newspaper wrote that, “Since 2012, The Detroit News has reported on a series of mysterious land deals in the Cass Corridor—mainly involving blighted properties. Although it was widely speculated that the property was being amassed for an arena project, the deals have been cloaked in secrecy, with sellers signing confidentiality agreements and buyers not revealing themselves through public documents. The buyers in the land deals, (it was) revealed Wednesday, have been ‘a mix’ of city and Ilitch Holdings.” (Illitch Holdings is affiliated with Olympia Development).
Obviously, work needs to be done to keep that sort of thing to a minimum. It's painful to see Ilitch's fingerprints on that deal, through his companies, given that he's already the primary beneficiary of this subsidy of the new sports arena.

This isn't the worst example of government subsidy that I've seen. Detroit needs something to help drive investment and to bring more people to the city. But for the state as a whole, and Detroit's not the only troubled area, the governor's arguments also applies to subsidies to the film industry. The movie subsidies that were initiated toward the end of the Granholm Adminisration brought a lot of money, energy and excitement to local communties, created a number of temporary jobs, had the prospect of creating some permanent jobs, and seemed to be doing at least as good of a job of promoting Michigan's attractions than the much ballyhooed "Pure Michigan" ad campaign. The Governor's cuts of subsidies to the film industry, and subsequent equivocating over how much to extend, have dramatically reduced the interest of the film industry in Michigan while creating a climate of uncertainty that is likely to cause the industry to choose other states with more consistent, reliable approaches to the industry. The larger subsidies of the Granholm era seemed poised to help establish permanent movie facilities and jobs in the state, while Snyder's approach undermined local ventures and thus has resulted in at best temporary jobs with the remaining subsidies largely flowing out of the state. It may have been possible to reduce the Granholm-era subsidies while retaining the local benefit, but that opportunity seems to have passed.

As with sports teams, whether we like it or not, significant subsidies are part of how the movie game is played. I don't mind people taking the philosophical stance that you shouldn't subsidize the entertainment industry - and even less the profitable entertainment ventures that could and would continue to operate without subsidies - or, for that matter, profitable companies that want huge tax breaks and subsidies to open a new factory, server farm, headquarters, or other facility in your state. But once you decide you're going to offer subsidies, it makes sense to try to apply a consistent, predictable approach to those subsidies - both in terms of who will qualify and how much you will budget for subsidies in any given year.

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