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Formula One subsidies in Texas total $25 million a year. (AP Photo Photo/Max Nash)

Texas as a model for gutting government programs

COMMENTARY | June 06, 2011

It will be hard to destroy Medicare and Social Security because they are funded by what are called “dedicated taxes,” the most stable revenue stream. Hard but not impossible, as David Cay Johnston shows, using the example of Texas’s moves to put teachers out of work and diverting dedicated taxes to Formula 1 racing in Austin.

By David Cay Johnston

One of the most curious themes in tax policy is the steady attack on the best-funded and most stable government programs while taxpayer funds are diverted to risky commercial ventures unlikely to succeed.

These troubling developments are related. They reveal how we have lost faith in the future and are mining the present rather than investing. These policies mean a future that is poorer.

Recent events in Texas show how we are literally running off the road in spending imagined incremental tax revenues that cannot possibly materialize, stealing from public purposes to enrich a British monopolist and a Texas billionaire.

The government spending under heavy attack is financed with dedicated taxes, which makes those taxes inherently stable. The new welfare-for-the-rich programs are also being embedded in the tax system through dedicated funding streams that, at least in Texas, are growing like sagebrush on Miracle-Gro.

When a source of funding has a dedicated tax stream, it is hard to kill, as House Budget Committee Chair Paul Ryan, R-Wis., and the Republicans who backed his plan discovered. They are now trying to hide their vote to turn Medicare into a severely underfinanced voucher plan after a setback in a May special election for a traditionally Republican congressional seat.

Clearly, those among the rich who want to enlarge their fortunes with taxpayer dollars are learning valuable lessons about getting dedicated streams of tax dollars flowing in their direction, no matter how frivolous the project.

Attacking the best-funded mass programs may seem odd, but unless the enemies of those programs gut them they cannot divert significant sums to the already rich through a combination of tax cuts and subsidies.

On the federal level, that means going after Social Security, which has a more than $2 trillion surplus, and Medicare, using misleading numbers. Opponents of universal old-age benefits claim, as they have for decades, that both programs are unsustainable and will go broke. That is utter nonsense in the case of Social Security and costly utter nonsense in the case of Medicare, which has large, but solvable, financing problems.

Minor tweaks would solve the long-term funding problems in Social Security. The $5 trillion shortfall that scares so many people is the net present value of projected revenues and costs until 2084, when everyone reading this column will be long in the grave. It works out to a tiny fraction of 1 percent of the economy. And except for the surge in disability payments, brought on by an economy that has thrown millions out of work, Social Security will have more than enough to pay promised benefits for years to come.

Raising the FICA tax so it again applies to 90 percent of wages, as President Reagan did, would solve the problem. Today only about 83 percent of wages are covered.

An even better solution would be adopting policies that get median annual real wage growth back to historic levels, not the flat growth of the past decade. Ending job-destroying faux free trade agreements, adopting universal healthcare, and reestablishing private sector unions (which our competitors have in abundance) would do that. And more and better-paying jobs would mean higher tax revenues generally and less spending on tax eaters.

On the state and local level, it is public education and its dedicated taxes that are under attack. All politicians fear they might get turned out if they do not put a lid on property taxes in an era when housing values are down and will stay down for a long time.
This is a real problem for those who foolishly took Grover Norquist's pledge not to raise taxes anywhere, anytime, for any reason. Not thinking things through often forces people to paint themselves into a corner. Because we want politicians who think about how their actions affect the future, it would be wise of voters to eject those who signed Norquist's status quo tax pledge so we can get back to creating a future, not preserving the past.

Annual Texas Event Subsidies
(in thousands of dollars)

Source: Author's calculations.

All state constitutions have a provision declaring a duty to educate the young. The Texas Constitution, for example, states:

A general diffusion of knowledge being essential to the preservation of the liberties and rights of the people, it shall be the duty of the Legislature of the State to establish and make suitable provision for the support and maintenance of an efficient system of public free schools.

That is actually one of the weakest provisions in state constitutions, although New York's requires only that "the legislature shall provide for the maintenance and support of a system of free common schools, wherein all the children of this state may be educated."

But when it comes to taxes and education, the states with the clearest tax policies have language like that in California, which gives education first call on state revenues.

In all three of those states, as in the rest of the country, teachers are being fired because the politicians say we just cannot afford them, first call or not. The teachers unions tell us that 300,000 will get the ax; others offer a figure one-third that size. Time will tell, but without a doubt, many young teachers and more than a few older ones at the top of the pay scale are going to get laid off regardless of the quality of their work. This is not a tax savings measure, but a policy to hinder future economic growth.

That we are firing teachers at all is remarkable, given the dedicated funding sources. Property taxes and lotteries (among other programs) are supposed to support education. Oops, forgot the public finance sleight-of-ledger trick. Those lottery winnings let the state legislatures cut tax spending on education and replace the money with lottery profits, which in turn keeps pressure on property taxes. Lotteries are nothing more than a deceitful levy on the poor who hope to strike it rich by the grace of the numbered ping-pong balls.

Social Security, Medicare, and education are all common programs that serve everyone who is alive between ages 5 and 18 and after age 62 or 65. They fit one of the six purposes of our Constitution by promoting the general welfare.
But nowhere in our federal Constitution, or the Texas Constitution, can I find as a purpose giving tax dollars to monopolists and billionaires. Indeed, the Texas Constitution states that "monopolies are contrary to the genius of a free government, and shall never be allowed."

So how is it that the Texas Legislature appropriated $25 million to give to British monopolist Bernie Ecclestone as an annual fee to allow an annual Formula One race in Austin? He controls Formula One racing, purportedly the globe's largest spectator sport after soccer. The plan is to pay Ecclestone every year for a decade, which amounts to a cool quarter of a billion dollars transferred from Texas taxpayers to the head of Formula One.

Texas cannot afford its current roster of teachers, but it can afford Ecclestone's monopoly fee to license an automobile race? It can afford a subsidy of $41.66 for each of an estimated 300,000 fans, supposedly nearly all from outside Texas, to attend an annual road race? And yet it cannot afford the 300 or so teachers whose pay and benefits come to $25 million per year?

The race fee is part of a growing list of Texas subsidies to major entertainment events. Since 2004 those subsidies have ballooned as the controls have become weaker.

The Formula One subsidy gives up all pretense of promoting actual economic development, no matter how much the beneficiaries claim otherwise. Statements by Texas billionaire Red McCombs and his associates that the Formula One race will generate a pot of added tax revenues paid by people coming into Texas for the event are, to be polite, pure fantasy.

McCombs and crew claim they are building more than a racetrack. They promise rock concerts, motorcycle races, and a sprawling research center – the last for sure an invitation for public funding.

They also claim that on race day, 130,000 people will be in attendance and that 97,500 of them will come from outside Texas. McCombs, who knows numbers well enough to have earned his way onto the Forbes 400 list, states as fact that these fans spend on average $220 each day on food and beverages. Wow! Double wow! The top-end Austin restaurants must be salivating at the prospect of that kind of spending.

There is just one little, teensy-weensy problem with this. People who spend $220 a day on eating and drinking tend to like nice hotels, what the lodging industry calls "amenity-filled" hotel rooms. Austin has only 6,000 such rooms, according to the Austin Convention and Visitors Bureau. So even if every one of those rooms is occupied by a couple, where will the other 85,500 out-of-town guests sleep?

Austin does have another 24,000 less elegant hotel rooms, from budget inns to fleabags, but even at two to a room that leaves about 35,000 fans sleeping in their SUVs and sports cars or driving an hour to San Antonio to find a room for the night.

And have I mentioned the traffic congestion from tens of thousands of imagined cars getting to the racetrack just south of Austin's airport? And the screaming whines of Formula One engines scaring the horses and children on neighboring parcels all race weekend long? And the need for taxpayer-financed water and sewer mains?

But that is hardly the worst of it. Robert Woods, the state comptroller's official in charge of the event giveaway money, told me that the state does not actually try to measure whether an event brings in extra tax dollars from visitors. "Basically we just skim off the money," he said when I asked how the state established a baseline.

Skimming a quarter of a billion in one American city, population less than 660,000, is quite a trick. That is nearly $1,000 per Austin household going to the British monopolist, with no evidence that it is anything but taking from existing revenues.

Other numbers used to justify the Circuit of the Americas project also show McCombs and crew are just making things up. Figures provided by Christian Sylt, who publishes Formula Money, a global newsletter on Formula One finances, indicate that the track will cost $14 million to $22 million per mile. Arkansas, Florida, and other southern states say building a road of comparable width costs no more than $6 million per mile in rural areas like the undeveloped brush land near Austin where the racetrack is planned.

And while the three-mile track has special surface materials, it is not built to carry the load of, say, tractor-trailer rigs with a gross weight of 90,000 pounds. Formula One racers weigh about 1,500 pounds. How about a referendum on taxpayer subsidies for a road that will get less annual traffic than a suburban cul-de-sac at a cost of as much as $22 million per mile?

And the claim that the majority of race fans will come from outside Texas, bringing in the dollars they spend? The British Formula One race draws an audience that is 95 percent British.

And then there is the economic problem. Americans have yet to show much of an interest in Formula One, no matter how well it plays in Monte Carlo. Formula One has been a disaster for taxpayers everywhere it has been tried in America. Long Beach, Calif.; Detroit; Indianapolis; and even Watkins Glen in the Finger Lakes region of New York, where a dedicated racetrack was built, all failed to attract an audience big enough to sustain the enterprise. Formula One just has not interested many Americans.

But if McCombs and Ecclestone can get a dedicated funding source, they can expect the money to just keep flowing. As difficult to stop as Medicare, Social Security, and school property taxes are, they involve big dollars and gets lots of public scrutiny. But a dedicated source of Texas taxes to give to a British monopolist? That is likely to receive much less attention from those obsessed with cutting spending.

Creating a dedicated tax for anything makes it hard to kill or even cut. For society that can be a universal good. For Ecclestone and McCombs, it is just another way for the rich to avoid the rigors of market competition.

This column was first published by Tax Analysts in Tax Notes on June 6th. © Tax Analysts 2011. All rights reserved.

Texas Taxpayer
Posted by Steve
06/07/2011, 01:46 PM

This article is so completely wrong.

The $25 million per year is paid for out of the increased tax income generated entirely by the event itself. It must be renewed on a yearly basis, and is only paid if the event generates enough increased tax revenue. The major events fund in Texas has an ROI of over 1000%, so you could say it has been a fantastic investment.

Also, even though you confuse the two, NO funds will be taken from Texas teachers. However the increased taxes generated by the racetrack could be used to hire 1000 teachers!

Texas Taxpayer
Posted by Texas Taxpayer
06/07/2011, 02:19 PM

"And the claim that the majority of race fans will come from outside Texas, bringing in the dollars they spend? The British Formula One race draws an audience that is 95 percent British."

Texas is only ONE state. Great Britain encompasses MANY COUNTRIES. I could say that my big toe uses a fair amount of the space at the end of my shoe, while the Empire State building barely uses any of the space in Manhattan. Wow! My big toe must be enormous!

The author of this tripe is like a child, slanting and skewing every possible argument and statistic for maximum effect, regardless of the actual truth, as long as it makes his "side" look good and the other side look bad.

Same old stuff we have to endure from the politicians. Don't buy it from them and don't buy it from him.

Texas Taxpayer
Posted by Texas Taxpayer
06/07/2011, 02:39 PM

"They also claim that on race day, 130,000 people will be in attendance".

That is a conservative number. Some USGP events have had over 200,000 attendees. Also, there is pent up demand from the lack of a USGP for several years.

BTW, Watkins Glen, which you tried to pass off as a failure, had a remarkable 20 year run as the home of the USGP.

Texas Taxpayer
Posted by Texas Taxpayer
06/07/2011, 03:37 PM

$220 per person for food and beverages is not "wow" material at all. That is an AVERAGE. The incredibly wealthy people who travel around the globe to watch F1 races think nothing of dropping a few thousand dollars for one bottle of wine. And any average person can run up a huge tab easy enough at a pro football game, so imagine the food and beverage tab from being at a hot racetrack all day. For four straight days. Now go out and eat a nice dinner and have a couple of drinks. Now go party on sixth street and listen to a few bands. Remember, this is not a day at home eating hamburger helper. This is your vacation and you want to get the most out of it. "Another round, please!" Cha ching.

Your TOVOkian math
Posted by Vfacundo
06/08/2011, 12:25 AM

Dude, pull your head out! It's so far up Tovo's rear end, I can barely see the bottom of your flip flops! Another lopsided mathematician, who paints by numbers, wrong numbers.

Posted by David Cay Johnston
06/08/2011, 06:21 PM

@ Texas Taxpayer, I suggest you re-read my column with a pocket calculator at hand.

The $25 million is not, cannot be and will not be from any increased tax revenue because there will not be and cannot be such increased revenue.

You ignore the basic fact that 97,500 out-of-state fans requires roughly ten times the number of amenity hotel rooms Austin has. The wealthy you right about are not going to stay at the Red Roof Inn, as my column points out but you somehow failed to notice.

As for food and beverage, there are not enough fine dining establishments in Austin to serve 130,000 fans spending an average of $220 a day each.

That is the wow -- the idea that anyone would be taken in by these made-up numbers. Restaurateurs would be delighted with that business, but there is no market to support that many expensive meals and bottles of wine in Austin.

Wealthy people spend that and much more, but doing so requires high-end restaurants to do it and Austin does not have enough (just as it doe snot have hotels rooms enough) to satisfy but a tiny portion of this imagined demand.

No tax dollars at Indy USGP
Posted by IndyF1fan
06/09/2011, 08:59 AM

One correction. No public dollars were used for the USGP while it ran in Indianapolis. The upgrades to the Speedway, as well as all sanctioning fees to F1 and Bernie, were entirely funded using the private dollars of the Hulman-George family, who own the Speedway.

For what its worth, I am a big fan of F1 racing but dispise Bernie Ecclestone. I attended every USGP while it ran at Indy. I enjoyed the event very much and was sad to see it go. But I could, also, understand that at some point it did not make financial sense for the Speedway to pay F1's (Bernie's) outragious sanctioning fees. To their credit, the Hulman-George family never requested any public dollars to keep the race in Indianapolis.

I do plan to attend the USGP n Austin next year with a number of freinds. The statistics you site regarding hotel availability has me a little concerned, though. We will spend at least the $220 per person, per day to be there. But based our experience with Bernie here is Indy, I am certainly glad none of my tax dollars went to support him while the race was here.

If holding an F1 race is such a great business deal, I would suggest Red McCombs cover that $25m sanctioning fee himself.

Posted by Ben Thair
06/09/2011, 10:08 AM

Nice to see that someone is awake in Austin and aware of what's happening there. I've spent more than four decades in the sports-marketing business and most of that involved in motorsports.

I know Bernie Ecclestone and have great admiration for what he's done for the business of F1 racing. But to be blunt, you folks in Texas are getting the full "Music Man" treatment here. (I can almost hear the band tuning up for "76 Trombones.")

The real facts are that Bernie could care less whether the GP of the Americas breaks even financially or not, it's about that $25M annual sanctioning fee.

The USGP at Watkins Glen was successful for nearly two decades, but it ended in 1980 with the track on a steep trajectory to an eventual bankruptcy. And the world has completely changed in the past 30 years and not in a way that favors organizers of F1 races.

I wouldn't worry about the lack of hotel rooms in Austin, the only place there will be 100,000 fans for the first (or subsequent if there are any) GPoA is in the promoters' fevered dreams. Fans from overseas? Indianapolis is a motorsports brand known world-wide. Ask the folks who run the Speedway. Somehow those jumbo-jets full of rich Europeans, Asians and South Americans they were counting on to fill the grandstands never arrived. And there was never a crowd of 200,000 at Indy (or anywhere else in North America) for an F1 race. There might have been half that the first year in Indy. Long Beach never had 100,000 paid on race day, and all the other failed U.S. venues far less. If you can find the organizers of those races and they showed you the books, you'd find that paid race-day crowds were all less than 50,000. Dallas had less than half that and poor Phoenix -- the best estimates for their one-time GP was 7,000 on race day.

Several hundred journalists from overseas who will cover the race. But the weekend paid attendance at GPoA will be far less than 100,000 and at best 20% will come from outside Texas. This ain't the Super Bowl folks. Even in the unlikely circumstance that there are 20,000 attendees from outside Texas, the subsidy for each one will be about $1,250. And the following year the attendance will drop -- ask the folks at Indy, they never again got half the first-year crowd -- so that subsidy may quickly rise to as much as $4,000 per out-of-state attendee.

So ask yourselves citizens of the great state of Texas, does subsidizing this endeavor with public money make a lick of sense?

Posted by csavage
06/12/2011, 01:13 PM

I refer the Superbowl in Houston. Whatever financial benefit Houston had from hosting the event was lost with the need to pay cops overtime to cover the crowds and sanitation workers to clean up after the tourists. I feel certain that Austin will feel the same pinch. Second observation, remember the Grand Prix of Houston? No? My dad is an avid race fan but prefers closed loop racing to a GP format. The reason, you see only about 100 yards of a race at a GP event. I cannot imagine British tourists sitting in 90+ degree temps to watch 100 yards of a GP event in Austin. To think that our tax dollars are again going to corporate welfare is infuriating. Proof that corporatism is not free enterprise. Free enterprise is expected to succeed without governmental help. If we'd have a political system dominated by advocates of free enterprise rather than corporate welfare, we'd wouldn't be in half the mess we're in.

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