New York Yankees superstar Alex Rodriguez is in the news again, this time for reasons having nothing to do with Cameron Diaz or baseball.
It seems A-Rod has purchased a spiffy condo in a building newly constructed in Manhattan. The building’s developers took advantage of New York’s 421a program, which is designed to both encourage new construction and provide affordable housing. In exchange for constructing a new building on vacant or under-used land and creating affordable housing in the outer boroughs, developers get their real estate taxes on the improvements phased in over a period of years—in this case, ten.
So a developer who paid $1 million for a vacant lot and then spent $10 million on construction would initially pay the same taxes as if the lot remained vacant. A-Rod’s new digs, which were on the market for $6 million and would probably pay at least $60,000 a year in real estate taxes normally, will initially pay only about $1,200 a year in taxes under the program.
The fact that a rich guy like A-Rod will get the benefit of this tax reduction has caused outrage in the media, from the New York Daily News to Britain’s Daily Mail. The gist of the criticism is either that rich guys like A-Rod should pay more in taxes or that the whole program, which currently reduces real estate taxes by about $900 million a year, is too expensive or unnecessary.
Whatever the utility of the program, Rodriguez is certainly getting a bum rap. He didn’t seek a tax break—the developer did—and Rodriguez couldn’t change his taxes if he wanted to. Obviously if he feels like making a donation to the government, nothing stops him, and, since he’s a celebrity, maybe it would even behoove him to do so.
Whatever A-Rod’s individual situation, this incident points to the importance of making sure the budgets used by government at all levels reflect all that government really does and all it really spends. Otherwise the effect of the Tea Party’s fomenting scrutiny of public budgets throughout the land could be to move more expenditures off budget and make it even harder to get a handle on bloated government.
Three quick lessons from the media focus on A-Rod’s condo that the Tea Party should help bring to the fore:
• Incentives and exceptions enable bad public policies. The media coverage of the A-Rod controversy is filled with comparisons between A-Rod’s taxes and those of someone across the street not covered by the 421a tax abatement program, and they show, of course, that A-Rod is getting a deal.
Politicians always need to demonstrate that they are attracting new business and development to their city or state. There are two ways to make this happen: Either operate in such a way that the overall business climate is attractive or try to trick the voters into not realizing how unattractive the business climate is by offering subsidies and exemptions to favored players so the politicians can forever be announcing they’ve attracted a new factory or participating in the groundbreaking for a new building.
This could be a high-profile company headquarters, a manufacturing plant, or an entire industry. On the federal level, the process can be observed as the White House doles out exemptions from the health care law to favored parties.
Exemptions enable bad laws and are often a form of corruption. A focus of Tea Party effort should be to end exemptions and exceptions to laws and taxes. This would encourage both business and labor to divert their lobbying from seeking special exemptions to seeking better laws.
If politicians lose the flexibility to get what they want through abatements, they are more likely to work on developing sound laws and policies in the first place.
• Move expenditures on budget so they can be tallied. Under normal circumstances if a government, at any level, wants to have affordable housing units built, the cost of building those units should be reflected in the budget.
In the A-Rod saga, the government’s policy goals—accelerating development and building affordable housing—were funded without explicit debate and authorization.
Politicians writing budgets should have to ask, openly and continually: Is the priority this year affordable housing or better schools? Does the city need more snow plows or a new library or more inexpensive apartments in the Bronx? Should available funds be used to pay down debt?
Forcing legislators to go through the process of allocating funds is the essence of governing. Removing massive expenditures from the budget and enshrining them in laws that lead private parties to assume the expenditures makes it difficult for government to be effective, much less intelligible to citizens.
Keeping these expenditures off budget has the effect of dramatically understating the percentage of the economy being spent by government. Whether those affordable apartments in the outer boroughs are subsidized via government check or a tax abatement on a different property, the whole enterprise is a governmental drain on the economy.
The Tea Party will be more effective in its push for fiscal sanity if all governmental expenditures are moved onto the budget and are recognized as such.
• Make taxes explicit so that people don’t incorrectly believe that the corporations and the rich are getting off easy. One big problem with the A-Rod scenario is that it invites the facile charge of tax breaks for millionaires. A-Rod’s taxes are lower because the developer of his building is also supporting subsidized housing elsewhere in the city—though this won’t show up in any statistics.
To the extent the 421a program really is a tax bargain, it almost surely is not going to benefit Alex Rodriguez. After all, A-Rod or any buyer would gladly pay more for a condo with a tax abatement than for an identical unit next door without a tax abatement. So perhaps the benefit of the tax abatement went to the developer. In all probability, however, the developer paid more for the land than he would have had the abatement program not existed. So it may have been some previous land owner who got the benefit of the abatement program.
It is all very complicated, and a big price is paid in public respect for institutions when the statistics on taxes get warped. The public will find it hard to discern the truth about who is paying what in taxes and will easily be induced to think the system unfair.
The long and short of it is that if the government wants to build subsidized housing, it is much better for the country if the government explicitly taxes people, including Alex Rodriguez, for that purpose. Then, instead of the statistics’ suggesting that multi-millionaires pay no tax, the numbers will reflect reality—and dealing with reality is to no small extent what the Tea Party is all about.
Jim Prevor is the founder and CEO of Phoenix Media Network, Inc.