As soon as Hurricanes Katrina and Rita cleared out of the Gulf, accusations began flying around Washington that politicians and special interests would use the storm crisis and the current federal budget cycle as an opportunity to advance their own long-standing agendas, whether those agendas had anything to do with hurricane relief or not. Many of those claims are sadly accurate. But the silver lining is that the disasters offer us the best opportunity in decades to fix -- or at least talk about -- some things we've long known needed fixing.
President Bush has promised to "do whatever it takes" to rebuild New Orleans and to take "bold action" to confront poverty in the devastated regions. Congress has already approved about $62 billion to cover immediate relief and recovery costs. But to date, the only substantial relief legislation already enacted that purports to offer direct assistance to hurricane victims is a $6.1 billion tax relief package passed last month. Lawmakers stressed that this is just "phase one" and promised a much larger tax relief effort in "phase two." But what does this tax relief offer and to whom? How effective is it likely to be in easing the Gulf Coast poverty it laid bare? And how does it fit into the federal budget still being negotiated?
Unfortunately, the answer to the first question is that tax relief will probably benefit investors and businesses long before it benefits victims. The biggest piece of "phase one" relief is a Work Opportunity Tax Credit, which provides credits to employers if they hire workers who had been residents of Katrina's core disaster areas. The president has also proposed creating Gulf Opportunity Zones providing tax relief to businesses that invest in them -- a zero percent capital gains tax and rapid write-offs for any investments made, for instance.
The idea behind these zones is hardly bold or new. They've been part of the conservative toolbox for a long time, championed as enterprise zones by former Republican representative Jack Kemp in the 1980s as a free-market approach to urban poverty. The first President Bush proposed federal enterprise zones in response to the 1992 race riots in Los Angeles. It wasn't until President Clinton's watch, though, that the first such zones -- now more appealingly labeled "empowerment" or "opportunity" zones -- were created, largely to assist in creating jobs for high-risk inner-city youth. Similar New York Liberty Zones were created after 9/11.
Enterprise zones are supposed to work their magic through trickle-down economics. Tax breaks supposedly reduce the costs of doing business in specified areas, which inspires businesses to invest there, which results in more jobs. The work opportunity tax credit is more directly tied to jobs, but the rationale behind it, too, is trickle-down -- tax credits reduce costs to employers, who will then create more jobs for targeted individuals. Better still, tax-credit proponents argue, tax breaks to investors and employers will allow the overall economy to grow, tax revenues will increase and we will take care of the deficit, too.
Can we really have it all -- disaster relief, economic growth and increased tax revenues in place of increased government spending? The economic evidence is at best inconclusive. First, it's hard to measure the extent to which new jobs are actually attributable to tax breaks. It's even tougher to measure whether any economic growth resulting in increased tax revenues is directly connected to the special tax provisions. Some economists (often hired by the Democratic/liberal side) say that most of the benefits go to high-income businesses or investors; others (hired by the Republican/ conservative side) say that, over time, these benefits are passed on to the poor through improved job opportunities.
But that "over time" is the problem. Even if enterprise zones and employer credits yield long-term benefits, the relief will flow too slowly to the displaced evacuees who most need rapid relief. The hotel chain benefits from its tax credits right away; but the homeless, out-of-work chambermaid/busboy doesn't get a new job for a year. At best, such programs might be used to supplement more direct relief such as direct-assistance payments and government-sponsored housing. And yet, although the president has proposed some type of provision for $5,000 payments to individual victims, along with a vague, yet-to-be developed urban homesteading proposal, the work opportunity tax credit was the first major legislative relief to come from Congress.
To be fair, some of the original $62 billion relief package went to cover emergency rental assistance and other direct support for victims. Unfortunately, though, most of this initial spending did not go to individuals, but to federal agencies and private contractors to cover the costs of personnel, evacuations and debris removal.
Another problem with geographically targeted economic incentives is that one region's gain may be another's loss. Earmarked tax breaks for businesses and investors in special disaster areas may add nothing to the economy and may not create new jobs overall, but simply move jobs from other areas to the newly designated disaster zones. We should be asking some painful questions here as well. Does it make sense to target major reinvestment in New Orleans, which remains at extremely high risk from future hurricanes? And which areas are likely to be rebuilt? The most likely bet is that reinvestment will focus on sentimental areas such as the French Quarter. Even if new jobs are created there, the poor and homeless may find it difficult to take advantage of the new work opportunities. Where will they live? How will they commute to their jobs? Will the enterprise zone proposal stimulate investment in low-income housing?
Taxes aren't the only vehicle for the trickle-down approach, and they aren't the only way relief efforts benefit business. Some anti-regulatory groups have used the hurricane crisis as an opportunity to repackage old arguments against environmental regulations, arguing that eliminating them will lower costs to business, which will invest more in the region, leading to higher returns, economic growth, a drop in gas prices and ultimate benefits to the poor through lower gasoline prices and new jobs. Legislation has already been introduced to suspend regulations as refineries are reconstructed in the Gulf Coast. Again, business gets immediate profit, benefits to the poor are long delayed and the impact on the environment could last decades or longer. Trickle-down isn't the only approach Congress is taking to disaster relief, of course. There were pieces of the recent $6.1 billion Katrina Emergency Tax Relief Act of 2005 that were designed to provide more direct, immediate assistance. But guess who gets it? Two examples: The law waives the usual 10 percent penalty for hurricane victims who receive early distributions from their retirement plans, and it suspends the caps on maximum amounts that can be deducted as charitable contributions for relief efforts related to Hurricane Katrina. Bets are this relief won't benefit most of the people we saw waiting for rescue on the roofs of their drowned houses.
When legislators vote for tax breaks, they sometimes deceive themselves into thinking they're not spending money. In fact, the lost revenue is federal spending in disguise and should be accounted for in the budget. Our budget process makes only a modest effort to take this into account, requiring an annual report of such "tax expenditures." Unlike other federal spending, however, these tax expenditures aren't subject to any formal "results" or "performance" review. In other words, there's no built-in opportunity to assess the effectiveness of these "spending" programs.
An even broader concern is that we simply expect too much of our tax code. On the one hand, free-market proponents argue that the tax system in general should interfere as little as possible with the natural functions of the marketplace. At the same time, we use special tax breaks deliberately designed to skew the market toward investments in favored activities -- encouraging oil and gas exploration, research and development for new technologies, rebuilding after natural and other disasters, employment opportunities for inner-city youth, relieving the burden of child care expenses for households with two earners. In fact, most of our welfare "programs" are now delivered through "earned income tax credits" to low-income workers. These provisions not only add to the complexity of the tax code, but they also risk distracting us from focusing more closely on the economic and social problems themselves and what we are spending to solve them.
In a sense, Hurricanes Katrina and Rita have not generated new problems. The numbers in the budget that Congress has been grappling with didn't add up in the first place. We simply now have more -- many more -- of the same concerns we've had all along. How can we continue to feed the increasing demands for government spending and also satisfy the continuing pressures to reduce tax burdens?
We find ourselves at a pivotal moment. Katrina and Rita have increased the spotlight on deeper and more fundamental policy questions, and they are endless. What bold action is really needed to fight poverty in America? Is the tax code up to the challenge? How do we balance the need for environmental protection and economic growth? Can we find a way to restore effective fiscal discipline to the budget process? And so on.
The National Weather Service has predicted that hurricane seasons over the next decade are likely to yield increasing numbers of storms of great intensity. Unless we begin the serious conversation and debate over our tax, budget and other fundamental policy objectives now, we're likely to find ourselves caught up in an ever-expanding fiscal and political maelstrom as well.
Author's e-mail: email@example.com
Cheryl Block, a tax specialist who has written extensively on tax and budget policy, is a professor of law at George Washington University Law School.