Recently, a reader and golfer and Coos County property owner has suggested I have been too hard on The Bandon Dunes in a couple of recent posts here and here regarding the resort’s lower than average property tax rate. First, I don’t oppose the The Bandon Dunes or Mike Keiser I am just not as convinced as some the benefits to the area merit the tax breaks given.

Oregon already spends the largest percentage of its general fund, 10% on corrections, than any state in the Union. Despite this investment in corrections, Oregon projects a 13% increase in prison population by 2011, more than triple the expected rise of the general population. Oregon spends more on corrections than higher education despite the proven crime deterring benefits of education.

What these facts say about the State legislators opinion of the citizenry or just as importantly, what the citizens who elected them think of themselves is open to interpretation but tax investment in education returns a positive gain while investment in corrections show a negative return. None of this is Mike Keiser’s fault, he doesn’t live in Oregon he just makes money here but as David Cay Johnston, author of Free Lunch details below, taxing districts are not all designed to favor education and Keiser has obtained enterprise zone tax exemptions despite already being a successful, thriving business.

Perhaps Keiser has passed that tax savings on in the form of lower green fees to his customers or higher wages and salaries to his employees and it eventually trickles down to the local economy. If so the rising unemployment rates don’t yet reflect the trickle. The Dunes does appear to have spurred some housing development and attracted some outside investment dollars from golfers seeking vacation homes near the resort but a strip mining operation in the area threatens to lower the property values gained. By the way, as I pointed out in a recent post when the strip mining came a little too close to a proposed new course, The Dunes flexed its muscle and Oregon Resources backed off one of its planned mining sites. Bandon Dunes has chosen to let the Bandon Woodlands Community Assocation, a group of 200 homeowners in the vicinity of the golf courses and the mining sites fight the 24 hour a day operation that threatens wetlands and the special coastal zone designation in Coos County on their own.

Local media did not cover the tax inequities reported by the Coos County Assessor and analyzed by Johnston but The Oregonian did and has taken a lot of heat suggesting The Bandon Dunes or any successful corporation receives ‘unearned’ assistance from the average taxpayer and a counter to Steve Duin’s Oregonian article was written here.

Johnston wrote a response and has given me permission to post it in its entirety. He raises many important questions relevant to Coos County and our suffering schools and all highlights below are mine.

The Steve Duin column cited here was prompted by my analysis of Coos County property tax burdens, drawing on a report by Adam Colby, the county assessor.

Much of the debate here misses the point.

If an investment requires subsidies then is it market capitalism? When an investment is profitable, as Bandon Dunes is, why would we subsidize it with our tax dollars? (And why would we subsidize a losing private investment?)

Mike Keiser, whose success as a fellow businessman and whose vision for his 18th Century style golf course I admire, was NOT looking for a subsidy, as I reported first in The New York Times in 2007 and later in my bestselling book on hidden subsidies, FREE LUNCH, which opens with the story of Bandon Dunes.

Keiser is perfectly aware that he gets subsidies and says so eloquently and forthrightly in the video a colleague and I made for The New York Times about the economics of Bandon Dunes. The six-minute video is free at:
http://video.nytimes.com/video/2007/05/29/business/1194817116143/who-pays-to-play-.html

A subsidy means others are paying taxes that go to someone else, rather than to public services like police protection and education, or that they get fewer services for their taxes to finance the subsidy.

My bestselling book FREE LUNCH cites Adam Smith, whose book on market capitalism has been in print since 1776, on how subsidies damage the overall economy, among other classic sources. America today is so awash in subsidies for corporations that we have forgotten time-tested, classic thinking about subsidies and their economic impact.

The jet subsidy is also not as simple as John A. Charles Jr. suggests.

There is NO issue with people like Keiser (or two of my neighbors) who own or lease a jet and bear the cost of it themselves, including the normal tax deductions for business use.

The jet subsidy at issue is the personal use of corporate jets by executives of publicly traded companies, who fly free and force shareholders to pick up the hidden expense. The executive only pays income taxes on the value of the flight. If they paid taxes on the full cost of the flight there would be no issue, but they do not.

That value is set so low that a long flight which costs $100,000 all-in will cost the executive about a thousand dollars in higher income taxes. Some companies actually reimburse executives for this and then gross-up the executive’s pay to cover the tax on the tax.

Keiser calculated the subsidy at about half of his full-time, all-in payroll in 2007. I calculate it at the full payroll because I counted all of the hidden features of the subsidy, including positioning flights. The calculations come from published IRS rules, the number of flights to Coos County and then estimates of the average size of the jet and length of the flights.

By either measure, this is a major taxpayer contribution to Keiser’s return on his investment. The subsidy for sure benefits Coos County, but when looked at from a national perspective it is a drag on the American economy, as are most subsidies that benefit specific businesses. These subsidies are massive and growing.

Bandon Dunes is significant because, due to its remote location and records of flights at the airport, the subsidies can be measured and not lost in the myriad of subsidies to many companies, as would be the case were the golf courses located in metro Portland.

Senators Bob Packwood of Oregon and Bob Dole of Kansas were behind this subsidy, which was hidden in a 1985 bill to provide relief from paperwork for middle class taxpayers who use a company car. Technically, the subsidy is not even in the law, but only in a directive to the IRS that accompanied the bill. But that is how tax favors and subsidies get done — in secret and by stealth, which is inimical to a free people.

The debate on the Senate floor, which went unreported in the news at the time, is recounted in Free Lunch. It is a good example of the hard facts about tax policy and corporate subsidies bear little relationship to what most people assume about taxes and subsidies because they do not know the facts.

Even if we eliminated the corporate income tax, free use of corporate jets by executives would impose costs on shareholders that few understand.

Just repealing the corporate income tax is not simple, either. Pure repeal would be a huge redistribution of wealth and income. Without strict rules, it would make a personal income tax virtually unenforceable except on wage earners, violating basic time-tested principles of tax.

I now teach tax law to graduate business and law students at Syracuse University (and am the columnist for the nonprofit journal Tax Notes) so I study these issues deeply. My reporting for The New York Times has resulted in Congress enacting a number of tax laws and rules and has even affected Oregon state tax law, points I cite to make clear that others recognize the value of my knowledge on these subtle and complex issues. I was also awarded the Pulitzer Prize for my coverage of taxes.

The hard truth is that the way our tax system actually works bears little relationship to what politicians and pundits say and, thus, to what most Americans believe. That is the reason I wrote the books PERFECTLY LEGAL and FREE LUNCH — to help people understand how the tax and subsidy systems actually work.

Lowering the property taxes for all to the rate Bandon Dunes pays, as John A. Charles Jr. suggests, would reduce the local component of school funding, police, libraries and other public services on which wealth creation depends by 80 percent. That is because the Bandon Dunes effective property tax rate of 0.29 percent is just one-fifth that of all Coos County property taxes excluding the ten largest property taxpayers, seven of whom pay below average rates. That rate is 1.41%.

How are you going to educate the next generation with 80 percent less property tax revenue? Or do you think this is the end of history and we do not need to invest in the future, as we do when we instill knowledge in young minds.

The argument made by Mr. Charles — that subsidies are ok because the investor took big risks — is an argument for upward wealth redistribution, not competitive markets.

In the case of the Bandon Dunes, the questions should be what rationale exists for taxpayers to subsidize a profitable enterprise? And what is the all-in cost of the subsidies in terms of losses to others who must bear heavier burdens to pay for these subsidies? Those questions are central because there is no free lunch.
#8 David Cay Johnston on 2010-04-05 01:07 (Reply)

P.S. Mike Keiser did seek property tax breaks. The story of just how that was done would be a good one for Mr. Charles to dig into since he raised the issue.

So while I think it is wonderful we have The Bandon Dunes here and certainly, someday down the road, Coos County will be the better for it but with our teachers having to fight tooth and nail to retain benefits and a living wage to teach our children it is hard for me to view the resort as anything more than a place most of the county can’t afford to visit.