Authors: David Cay Johnston
Left out of Levine's cold
calculus is how we arrived at these rules and who arranged for them. Left out is the role of campaign contributions in gaining the
hearts and minds of politicians who make the rules and who know, if they want the money to keep flowing, that they must
demonstrate fidelity, if not fealty, to their donors. Also left out of this calculus is any question about whether the rules we have are
right, moral, or even practical.
For the recipients of money taken from others for private benefit,
the rules act as a moral salve, allowing them to feel justified without examining their conduct. After all, they are just following the
rules.
Remember, rules define a civilization. Rules tell us what kind of conduct is acceptable
and what kind of people we choose to be. Policies that work against the general welfare undermine a society.
That Steinbrenner would eagerly stuff hundreds of millions of dollars from taxpayers into his own pockets
with no qualms is not surprising. Steinbrenner has spent a lifetime soliciting subsidies with such gusto that even weakening
national security has not tempered his lust for tax dollars.
During President Reagan's term a
major national security goal, aimed at intimidating the Soviets, was building the Navy up to 600 ships. Projecting more American
military power across the seas required new vessels to refuel other ships at sea. The Navy awarded a contract for two refueling
ships at a cost of almost $100 million each to a Louisiana shipyard. It built them on time and within budget.
Two other oilers were to be built in Philadelphia, but the contractor went broke. Steinbrenner lobbied to get
the hulls towed to his Tampa shipyard to be completed. Capt. Karl M. Klein, the Navy officer overseeing the contract, flew down to
Tampa to check out Steinbrenner's shipyard. “I was shocked,” Klein recalled. “I knew it wouldn't work.
“This shipyard was full of debris,” he said. “It was literally littered with excess and unusable materials, some
of which didn't even belong in a shipyard. There was no indication of any attempt to keep the shipyard clean.” To qualify for the
contract, Steinbrenner was required to own software that scheduled the complex tasks of building a ship to ensure an orderly flow
of work and payments to suppliers. But the captain said, “They had no usable scheduling software.” More amazing was that
Steinbrenner was no newcomer to shipbuilding. He had spent his entire adult life pocketing subsidies under a federal law designed
to make sure that the nation had the infrastructure and skills to build ships, even if it was cheaper to build them
overseas.
Captain Klein started documenting all the violations and failures in Tampa. But his
diligence was nothing compared to what Steinbrenner hadâfriends in high places. Steinbrenner met with Senator Daniel Inouye of
Hawaii, a Democrat. Another Democrat, Representative John Murtha, a former Marine officer and a power on military spending,
came down to Tampa. “Where's the Navy, why are they doing this and causing all these problems” for Steinbrenner? Murtha
demanded. Congress ordered the Navy to keep feeding money to Steinbrenner. Soon a special appropriation, a classic
congressional earmark, sent millions of extra tax dollars to Steinbrenner, despite the fact that the ships were not being completed
and Steinbrenner was not even paying his vendors.
Steinbrenner had his own version of
events, one that goes to Adam Smith's observations about outfitting for the subsidy, not the fish. “When you buy a shipyard,” he
observed repeatedly, “you hire one welder, one fitter, one painter, and 12 lawyers.”
Klein
thought,
That's true because you're not building or fixing ships; you're getting contracts and fighting
not to finish them.
Before long the Navy had paid out more than $450 million.
All it had to show were two useless hulls, which to this day sit rusting in the James River. The Senate Permanent Subcommittee on
Investigations held a hearing in 1995. On a claim of ill health, Steinbrenner escaped appearing. Captain Klein did show up, eager to
tell the truth about Steinbrenner. Just as Klein eased into the witness chair, Steinbrenner's lobbyist called a press conference
outside the Senate hearing room. The reporters hustled out into the hallway to get that story, not Klein's.
Three weeks later Steinbrenner was healthy enough to travel to Washington. The billionaire was allowed to
testify in private, out of the glare of lights, cameras, and microphones. Harold Damelin, the chief investigator, asked Steinbrenner,
“Did you ask Senator Inouye to assist you in connection with the problem you were having with the Navy?”
How Steinbrenner interpreted the question goes to the way that superrich subsidy seekers rationalize
reaching into your pocket. “When I went in, no,” Steinbrenner said. “I said to every single person I went toâall I would like to have
is fair treatment. I would like to be playing on a level field. I never asked them specifically, âDo this, get me the money, do
that.'”
Of course Steinbrenner did not directly ask, any more than the serpent told Eve what
would follow if she tasted the apple. Steinbrenner's denial is on a par with the chairman of Exxon Mobil saying he does not pump
gasoline and mob boss Joseph Bonanno saying he had never seen heroin. But then, could even George Steinbrenner live with
himself if he had to admit that he took from the poor so that he could have even more?
In
building the new Yankee Stadium, Steinbrenner yet again exploited the taxpayers, this time by getting around a law written to
protect them. In 1986, Senator Daniel Patrick Moynihan sponsored a law banning the use of tax-free bonds to finance stadiums,
exactly the financing being used by the Yankees and the Mets. So how did Steinbrenner and the Mets owners get around that law?
How did they manage to benefit from triple tax-free municipal bonds that add to the burdens of federal, state, and city
taxpayers?
First, the Yankees and the Mets will not pay rent on their new stadiums, which the
city will own. If they paid rent, the Moynihan law would prohibit the sale of tax-exempt bonds to finance the stadiums. But since the
stadium bonds must be paid for, where will the money come from?
“These bonds depend
upon an unusual arrangement for repayment,” New York City's Independent Budget Office explained in a report. They sure do.
Instead of paying rent, the Yankees and Mets bond interest and principal will come from PILOTs. That is an acronym for
payments in lieu of taxes.
Just as businesses that move to China have figured out how to
make their tax dollars benefit themselves, so is the concept of private gain from taxes being applied with growing success within
the United States by some of the richest Americans.
What happened next illustrates how
thoroughly our government has been captured by the rich and powerful, how the assumption that favors must be granted to the
rich permeates government today. The Yankees and the Mets went to the Internal Revenue Service for a special dispensation
known as a
private letter ruling.
Anyone who is given such a letter can proceed
knowing his or her tax breaks will be honored. This is true even if the letter is bad policy and even if it contradicts the law. These
letters are issued by the IRS office of chief counsel.
IRS chief counsel Donald Korb, a lawyer
as brilliant as he is contentious, gave the team owners what they wanted. Representative Dennis Kucinich, Democrat of Ohio, who
wanted an explanation, summoned Korb to Capitol Hill.
Prickly as a cactus pear, Korb said that
the law against municipal bond financing of commercial sports arenas was quite clear. It was not allowed. However, during the
Clinton administration, someone had written regulations that created an unintended loophole. Korb adamantly insisted that the IRS
did the right thing, giving the Yankees and the Mets approval under the flawed regulations. He said that once the teams got what
they asked for, he did the right thing by ordering up new regulations to close the loophole.
There was just one problem with Korb's reasoningâthe IRS is under no obligation to issue a private letter
ruling. Indeed, just days before Korb had complained that he did not have enough lawyers to issue all of the private letter rulings
and other guidance sought by taxpayers. His solution was to ask private interests to draft new tax regulations and rulings, which
government lawyers would then review and amend before making them official. Paul C. Light, a New York University scholar who
studies the federal workforce, succinctly described Korb's proposal: “It's not the fox guarding the henhouse; it's the fox designing
the henhouse.”
Korb could have turned the fox away. He could have just deferred the Yankee
and Mets requests, especially given the shortage of lawyers to issue such rulings. Then he could have sought to fix what he
believed was an error in the regulations. Instead, Korb allowed the richest among us to get what they wanted, even though he had
concluded that the law itself did not allow this result.
When it comes to finding ways to mine
the Treasury, Steinbrenner is a master. But he has never pulled off the trick of one Texas man who championed a tax increase that
flowed into his own pocket and then promoted himself as the champion of tax cuts.
M
ANY
COMMERCIAL SPORTS FRANCHISES IN AMERICA HAVE NEVER
earned a profit
from the market. The only increases in value that the teams reported came from the taxpayers. Among them was the Texas Rangers
baseball team during the nine years it was owned by a partnership put together by George W. Bush, a tax-shelter salesman who
went on to become governor of Texas and president of the United States.
When the Rangers
opportunity came along, Bush was a man of modest wealth, though he had a valuable asset in his father, then serving as president
of the United States, as well as a gold-plated Rolodex. Young Bush got on the telephone and raised money from truly wealthy
investors to buy the team. He bought a 2-percent stake for $600,000 using borrowed money.
On the surface the Rangers were not an attractive investment. Their owner had pulled them out of
Washington in 1972 and moved them into an aging minor league stadium that guaranteed they would lose money. A subsequent
owner, oilman Eddie Chiles, tired of his expensive hobby. Chiles was looking to sell the team before his time on Earth ran out. Bush
told potential investors that buying the Rangers was a sweet deal because all the team needed to become valuable was a new
stadium. He brimmed with confidence about solving that problem even though he had no experience in baseball, construction, or
stadiums, and a track record of not paying close attention to the details that make or break oil-and-gas tax-shelter
investments.
What followed was an early indicator of Bush's extraordinary success at
marketing. Bush is arguably the greatest salesman of our time, having sold not just friends but political opponents on a war
costing more than a trillion dollars and thousands of lives with the kind of pay-no-attention-to-that-pool-of-oil-under-the-engine
polish that used car salesmen only dream about.
The Rangers investors had pockets plenty
deep enough to build a new stadium, but that was not what Bush had in mind. Bush planned to have taxpayers pick up the tab.
That would seem to be a hard sell in Texas, where root canals are more popular than taxes. But he succeeded.
One of his first moves was to threaten to move the Rangers out of Arlington, a prosperous suburb midway
between Dallas and Ft. Worth. It was the same tactic Modell has used, the one that the Ohio attorney general described as a kind of
blackmail.
The tactic worked. Bush and his allies arranged for a special referendum, held in
January. Arlington voters were asked to approve a half-cent increase in the sales tax. The proposal emphasized how much of the
money spent at Arlington's amusements parks, car dealerships, and shopping malls came from people who lived outside the city.
That also meant that many of those who would be taxed would not have a vote. The Bush investor group hired professional
campaign consultantsâDemocratsâto manage the election. The opposition, predictably, objected to higher taxes. More than that,
they protested that it was just not right for people rich enough to finance their own stadium to force others to buy it for them. The
campaign pros, with $130,000 to spend, easily rolled over the barely organized local opposition in the special referendum, in which
few people voted.
The new stadium required about 17 acres of land. The Bush partners
wanted more than 200 acres to develop a whole entertainment zone including hotels and restaurants. Not everyone wanted to sell
their land. In a free-enterprise economy, the Bush partners would have had to bid up the price of land until willing owners decided
to sell or, if that failed, move on to another location.
A free market, the kind Adam Smith wrote
about and that Milton Friedman canonized, gives great power to reluctant sellers, especially the last owner, provided the project
cannot succeed without his parcel. By holding on while others sell, the last person can command a premium price, sometimes an
extraordinary price. That high price is also a reward for taking the risk that the proposed project will collapse, leaving the
landowner waiting until another opportunity to cash in comes along.
Bush and his partners
decided to ignore market principles. They were practical businessmen. They simply had the city of Arlington seize all the land they
needed and more, using government's power of eminent domain to get the land they coveted, but were unwilling to buy in the
market.
The Bill of Rights sets the standard for payment of seized property as “just
compensation.” Invoking eminent domain inherently lowers market values. It does this by putting a cloud over continued
ownership, making
just
a synonym for discounted. Eminent domain also creates an
incentive for governments to offer the lowest price they can get away with. Landowners who do not like the price offered by
government can go to court. Such a challenge requires deep pockets to finance litigation, itself a risky enterprise. Most people,
faced with a government determined to seize their property, just take what they can and get out.
When government uses its power of eminent domain for a public purposeâa new military base or a highway
or to preserve a swamp that is nature's nursery for fish and fowlâthe compelling question is whether an alternative piece of real
estate could be used, perhaps land whose owners want to sell.
When government uses this
power to take one man's land to enrich another man, a moral hazard arises. The hazard was well known to America's founders.
Alexander Hamilton, at the Constitutional Convention in 1787, said that protecting “the security of property” was one of the two
“great objects of government.”
The moral hazard is that the powerful and connected will
manipulate the levers of government to redistribute wealth, forcibly taking from someone else so they can grow richer still. The
Texas Republican Party repeatedly recognized this moral hazard in its platform. One year it said, “Public money (including taxes or
bond guarantees) or public powers (such as eminent domain) should not be used to fund or implement so-called private enterprise
projects.” The platform did not mention sports stadiums back then, but they were specifically cited in later years.
The Mathes family, rich but not so well connected as Bush, fought to save their Arlington horse ranch from
condemnation for the new stadium. They were certain that the value of their 13 acres would continue to rise as Dallas and Ft. Worth
grew into a megalopolis. And they liked their horse ranch. The city's best offer of $800,000 was, in their view, beneath contempt.
Because of a fortune made in manufacturing early television sets under the Curtis Mathes brand, the family had the resources to
hire one of the best eminent domain lawyers in the state, a Corsicana attorney fittingly named Glenn Sodd.
Sodd said the case was about “welfare for billionaires,” the abuse of the system by the politically connected
and the morally suspect taking of land, not for a vital public project, but to add to the fortunes of a few rich men. The trial in Ft.
Worth lasted two weeks. It took the jury just 90 minutes to award the Mathes family $5 million. Interest increased that figure by half.
A free market would have resulted in an even higher price, had the Mathes family held out until late in the game and then sold
without government interference. But they did not want to sell at any price. They were forced out.
The sports authority that the city created had already leveled the land. It sold stadium bonds to build a
beautiful old-style brick and granite stadium. It planted cooling trees throughout the extensive parking areas that occupied what
had been the Mathes family horse ranch. The Rangers negotiated a rent-to-own deal. It was nothing like what happens when the
poor rent-to-own appliances. The poor pay exorbitant interest rates, so only a little of their money goes to paying for the purchase.
The Rangers, however, got their deal interest free. Every dollar they paid in rent was counted toward the purchase price. So was
the money they spent maintaining the stadium. On top of this, they had the right to buy the stadium for $60 million, even though the
cost of building it was more than three times that much. What Bush told the investors was right. This was one sweet
deal.
The lawyer who represented the city's sports authority in the financing was Ray
Hutchison, a Republican insider, husband of Senator Kay Bailey Hutchison and, by all accounts, the leading authority on Texas
municipal bond finance. Hutchison said the total value of the subsidy was $202.5 million.
That
figure illustrates how subsidy economics concentrates money in the hands of a few while destroying broader wealth, which is at
the core of the economic malaise felt for so long by a majority of Americans.
The investors
Bush assembled paid $86 million for the Rangers. They sold nine years later for $250 million. The $164 million profit was $38.5
million less than the subsidy.
This shortfall goes to the core issue in subsidy economics:
whether the subsidy produces a greater overall gain than it costs.
Martin Feldstein, a Harvard
University economics professor and former adviser to President Bush, pointed out that some government subsidies benefit
society. “A subsidy for flu vaccines is good because if you are vaccinated I am less likely to get flu by contagion.” But job
subsidies are a drag on the economy, he noted, “unless the local gain exceeds the loss in the rest of the nation.”
Respected economists have intensively studied subsidies for commercial sports teams. Three decades of
published research all points to one conclusion: subsidies for commercial sports teams never produce a net gain for society. They
are just a government-sponsored transfer of wealth from the many to the few.
In Texas, the
numbers reveal that the Bush partnership failed to add any economic value to the Rangers, either. Every dollar that Bush and the
other investors pocketed when they sold the team came from the taxpayers, from that subsidy. And even their $164 million profit is
illusory because it does not take into account inflation. Adjust the purchase price upward for inflation and the profit drops to $134
million. This means that the Bush investors captured less than two-thirds of the money they took from the pockets of
taxpayers.
An alternative way to look at this is that the Bush group captured the whole subsidy
when they sold the team for $250 million. That would mean that the value of the team itself plummeted to less than half what the
investors paid Eddie Chiles. By trading away top players for minor talents and other mismanagement, this argument goes, the team
itself was worth less money.
Either way the result is the same. Bush and his investors made no
economic profit from the market when they sold the team. The only money they received came from the increased sales taxes that
flowed into the stadium deal.
Hutchison told me that the fact that the investors captured only a
portion of the subsidy should surprise no one. Subsidies, he said, are inherently inefficient. Hutchison said that in his experience
no one ever captures the full value of the subsidy, much less adds value to it.
Bush has always
portrayed the Rangers deal as a successful investment. “It has been a win-win for everyone involved,” Bush said in 1998. That is a
curious argument since those taxpayers who never attended a baseball game lost some of their money to higher taxes and
received nothing in return.
When Bush spoke about the Rangers deal he never called it a
subsidy. He last talked about it when he was starting his run for the presidency. His advisers wanted to get the question of
hypocrisy out of the way as early as possible. They did not want nagging questions comparing the candidate's public statements
about limited government and his personal conduct in enriching himself at the public trough. Bush stuck to a few practiced lines.
He said simply that the whole Rangers affair “was a successful business venture for me and my partners.”
From the point of view of those at the receiving end, subsidies are a successful investment. Just as the
lenses and mirrors of telescopes concentrate light from distant galaxies and funnel it to a single point, so did the Rangers
subsidies gather pennies and dollars from children buying crayons and adults buying new cars. These taxes were then funneled
into the pockets of Bush and his partners. Bush has always maintained that, since voters approved the tax hike, there is no issue
worth discussing.
On his 1998 income tax return, which he made public, Bush reported a
long-term capital gain of almost $17 million from the Rangers sale. Based on the stake he bought he would have earned a bit more
than $2 million. Bush got far more because his partners gave him a 10 percent stake as compensation for putting the deal together
and being one of two general partners. That is a common arrangement, with the general partner often getting 20 percent. The other
general partner, who actually ran the organization, got only five percent.
That Bush and the
other general partner together received only 15 percent shows, in economic terms, how risky the venture was. The Rangers
investors got a better deal than the usual 80/20 split; they got 85/15. One risk was that the taxpayers would not pay for a new
stadium or allow the use of government's power to condemn land for it. Another risk was whether Bush could pull off the tax
subsidy deal, even with his father in the White House and many people eager to curry favor with the son. Up until this time, in 1989,
he had never held public office, had a history of collapsing business ventures that had been rescued by friends of his father, and
was known as a hard-drinking party animal, though he said he had given up booze cold turkey in 1986 and has admitted in a
backhanded way that he had given up cocaine by 1974.