The notion that some businesses are too big to fail, the rationale behind the federal takeover of much of the financial industry and the nationalization of car makers, has trickled down to the local level.  From USA Today, Localities aid developers, but critics cry ‘bailouts’

The federal government has committed $2 trillion in financial help to Citibank, AIG, General Motors, Fannie Mae, Freddie Mac and other large corporations and financial institutions. Now, the same thing is happening locally. Prominent businesses are seeking — and in some cases getting — cash, tax forgiveness, loans, loan guarantees and other types of aid to help survive the recession.

Supporters call the deals crucial economic development programs that will create jobs and generate taxes.

…Critics call the deals bailouts. “It’s developer welfare,” says Kevin O’Connor, an activist in Evanston, Ill., who opposed that city’s decision to rebate $4.1 million in taxes to a developer. “How can you not call it a bailout?”

What constituencies are the favored ones?

Developers of luxury real estate projects started during the real estate boom are the most aggressive at seeking help, which puts governments in the uncomfortable position of directing taxes to businesses that cater to the wealthy…

One such luxury project is Terranea, in Rancho Palos Verdes, which offers hotel suites for $3400 a night and “casitas” going for $2 to $4 million.

Terranea could generate $8 million a year in taxes for the city if the resort is successful and the homes sell. “It’s a spectacular asset for our city,” says Mayor Larry Clark, who favors the loan.

The proposal calls for the city to give most hotel tax revenue — up to $8 million — from the resort back to the developer for 34 months. The developer would use that tax money as collateral to get a bigger, private loan to finance the cost of opening the resort. The developer would later pay back the city with interest, according to the agreement.

Taxpayers are at risk because other creditors get paid first if the developer defaults on its debts. The developer declined to personally guarantee the loan.

Did you notice all those “ifs?” If it’s successful, if the homes sell?  What if they don’t?

Bexley, Ohio, an affluent Columbus suburb, has a similar “too-big-to-fail” dilemma: the Gateway Residences, a luxury condo and townhouse development located at the city’s entrance. Today, there’s little demand for $1.6 million penthouses, leaving the buildings largely vacant.

The developer wants the City Council to increase his property tax exemption on the homes from 50% to 100%. The change will reduce taxes by an additional $2.2 million over 15 years. Mayor John Brennan supports the deal: “Any time someone wants to invest $38 million in our city, I’ll bail them out,” he says.

There is opposition:

“Developers are wise to the fact that they can get subsidies pretty easily,” says Clint Bolick, litigation director at the conservative Goldwater Institute in Phoenix. The institute won a ruling against Phoenix’s $97 million subsidy to the developer of CityNorth, a multibillion dollar residential and retail development.

An appeals court ruled that the subsidy — returning sales tax revenues to the developer — was an illegal gift to a private company. The city is appealing to the Arizona Supreme Court. “The government shouldn’t use tax policy to pick winners and losers,” Bolick says. “The small guy never gets a subsidy. How are they supposed to compete?”

Small businesses and taxpayers in Kansas City have paid a steep price for local politicians’ largesse:

Kansas City, Mo., Mayor Mark Funkhouser says elected officials get blinded by promoters talking about grand projects and fail to understand the harm subsidies inflict on businesses that don’t get tax breaks.

He cites his city’s popular Power & Light District, a new retail area that benefited from large subsidies, including $295 million in city-issued bonds for development costs. The subsidized district contributed to the demise of 30 traditional restaurants outside the zone, the mayor says.

Kansas City taxpayers are on the hook this year for $14 million in loan payments because developers didn’t generate enough cash to repay their city-guaranteed debt.

Come one, come all:

Former Milwaukee mayor John Norquist says once a city starts offering subsidies, developers come to expect it. “You’ll have one or two connected developers with their hands out doing all the deals,” he says. “The little guy — the plumber who builds five houses — can’t afford lawyers and lobbyists.”

Rancho Palos Verdes is quickly learning that lesson. As soon as Terranea asked for financial help, the mayor got a phone call from another developer. It was Donald Trump, who built what he calls the world’s most expensive golf course near Terranea.

“Trump said he wants the same deal or he’ll add this complaint to a $100 million lawsuit he has against us,” says Clark, the mayor. Trump sued the city in December over planning rules that govern his 580-acre oceanfront development. “We want equal treatment,” says Scott Wellman, Trump’s lawyer. “It’s fundamental fairness.”

No, it’s a system that favors the politically-connected, at the expense of everybody else.  Nothing fair about that.

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