Free-Market Case Study: Who's Entitled to a Tax Subsidy for Big Developers, and Who Benefits?

Neighborhood Improvement Zone Board in Allentown, Pa.

Civic leaders on this Allentown, Pennsylvania, tax-subsidy board decide which developers qualify, and which don’t, when it comes to hundreds of millions of dollars for downtown development.


Well, we’re living here in Allentown.
And they’re tearing all the old buildings down
But a guy who wants to save a hotel
Can’t get the cash from
the taxpayer well.
(with apologies to Billy Joel, and the people of Allentown, Pa.)

When funded by taxpayer money, is a developer entitled to a subsidy if he merely meets the basic requirements of the state program, or are civic leaders on the local subsidy Board compelled to apply extra scrutiny exactly because it’s public money.

That’s the fight in Allentown, Pennsylvania, right now, where a so-called “Neighborhood Improvement Zone” (NIZ) redirects tax dollars into developer projects — a hockey arena, hotels, office, retail and residential space — in the hopes that the investments in downtown will eventually pay off in bigger tax receipts for government, and in a revitalized city. This “local story” has broad implications for your community, state, nation and world. I’ll offer four reasons (below) why such arrangements, and the politicians who push them, deserve extraordinary scrutiny from taxpayers and voters.

It’s a special developer-entitlement zone for Allentown-only set up by the state legislature, thanks to the vigorous efforts of Allentown’s state senator, who counts the major developers among his top campaign donors, and whose wife got a job with a lobbying firm that has clients who benefit from the special tax-subsidy district. (Conflict of interest allegations have been denied all around.) The lead developers have just set up a political action committee to support candidates who support the NIZ, without regard to political party affiliation.*

The latest twist comes from a developer who wants to save an historic hotel. He started spending millions of dollars before the NIZ legislation passed. Now he wants a piece of the taxpayer pie, but the Board has rebuffed him, claiming that he lacks the experience to pull off such a large project, and that he’s not spending nearly enough money on it.


The Neighborhood Improvement Zone is a living laboratory for the issues that arise when politicians intrude in the marketplace, at the behest of deep-pocketed businesspeople with a dream — all, of course, in an effort to “do good.”

Do such incentives demonstrate the triumph of “public-private partnerships,” or do they merely benefit cronies and their pet politicians (or vice versa) to the detriment of the beleaguered taxpayer? A number of factors weigh on this question.

Beyond the potential for influence-peddling and other corruption, there are several problems with these arrangements.

1. Taxation without Representation: It concentrates power to distribute tax dollars into the hands of unelected civic leaders appointed by politicians, and thus not directly accountable to taxpayers. The idea of using an appointed board is to insulate their behavior from politics. Look at the makeup of any such group and that contention becomes laughable.

2. Correlation without Causation: The complicated nature of tax-subsidy arrangements benefits the advocates, who take credit for any good thing that happens within their sphere of influence, and who ignore or disavow contrary evidence. Because they mean to do well, all good that happens is a result of their intentions, regardless of whether a causative relationship can be found. (It usually can’t.) And no negative consequences can be attributed to citizens of such high-minded ideals, even if a causative relationship can be demonstrated between their efforts and the so-called “unintended consequences.”

3. Competition without a Level Playing Field:  The developer who cannot tap that taxpayer funding source is at a clear competitive disadvantage, due to his higher cost of capital. When I served as a Lehigh County Commissioner, we saw a project outside of the NIZ that a developer had to completely rework because he could no longer compete with the office rents available in the tax-subsidy zone. His proposal for a residential development did not meet a market need, but was the best he could do after politicians changed the rules mid-game — changed the rules not only to favor his competitors, but actually to fund them.


4. Decisions without Information: Meddling in the market by wise civic panjandrums, even if their motives were wholly altruistic, cannot keep pace with the millions of decentralized daily decisions in the any given marketplace. That’s why government subsidies inevitably lead to “unintended consequences.” They may be “unintended,” but they’re not unanticipated. Perhaps it would be better to call them “natural consequences ignored (or glossed over) by interested parties.” Each person in town thinks she knows “what this town needs.” However, give her monarchical powers and the Queen would soon find that her town is a complex, adaptive, rebellious, living organism that will turn her glorious solution into a wealth of new problems. Of course, if the solution, nevertheless, benefits the Queen and harms others, this is not a problem for Her Majesty.

The carnival barkers who sell such taxpayer-subsidized incentives typically crow about the triumph of “public-private partnerships.”

More often than not, the benefits of that triumph redound to a close circle of interested parties — leaving the taxpayer holding the now-depleted bag.



*[Full disclosure: The state senator and several of the developers contributed to my campaigns for county office when I lived in Lehigh County, although county government has no influence over the NIZ.]


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