(Gerald Herbert/AP)

Private insurers rarely cover offer flood protection, believing that the risk is far too high in most cases. Instead, the National Flood Insurance Program — created in 1968 and currently run by FEMA — covers about 5.5 million homes across the country, insuring flood-prone communities that take steps to manage their floodplains. Even when private insurers are contracted, “the profits from such flood insurance are private, but the losses are socialized as private insurance companies bear none of the underwriting risk associated with this insurance,” as economist Don Taylor explains. Either way, taxpayers are ultimately on the hook when these flood-prone homes go under water.

The program was originally intended to pay for itself, but since Hurricane Katrina, it’s been heavily in debt. As of March 2011, the NFIP owes $17.8 billion, and Irene will only add to the costs, particularly as New York and New Jersey have heavy concentrations of federal flood protection. The NFIP’s fiscal troubles have prompted the Government Accountability Office to put the program on its “high risk” list, urging reforms to help balance its budget and “limit taxpayers exposure.” Such concerns have motivated fiscal hawks like Taxpayers for Common Sense and the Heartland Institute to go as far as calling for an end to the federal program, which is up for renewal Sept. 30. On the other side of the issue, the National Association of Realtors has lobbied hard for more funding, arguing that it’s vital for development and home ownership.

But the argument over spending and debt obscures a larger concern: Why are we subsidizing the building of homes in flood-prone areas?

A significant chunk of flood insurance is offered at federally subsidized rates in areas vulnerable to natural catastrophes. A quarter of participants pay below “full-risk” rates, many of whom receive a subsidized or “grandfathered” premium, according to the GAO. As a result, more Americans have moved into low-lying, flood-prone areas since the creation of the NFIP. And the taxpayers have had to cover the risks, which often means additional aid to disaster-struck areas.

It would be possible to continue the program without continuing the subsidy: In March, the GAO suggested various changes to the program to put it on better footing. One of them was “charging premium rates that fully reflect risks.” This would probably mean insurance rate hikes. But it might also mean fewer people moving into flood-prone areas, and less taxpayer support for those who do.