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Community Corner

NEWPARK / ROUSE SUBSIDIES, PART 2

FAULTY  ANALYSIS  OF NEWPARK / ROUSE  SUBSIDY

PART  2

 

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By:  Fed Up in 94560

 

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This is the second part of the legal and economic analysis of the tax rebates that the City of Newark recently agreed to give to the owners of Newpark Mall.  Part one was posted on Newark Patch on May 28.  Part two is additional information.  It describes market saturation and why retail sales may simply shift from Newark’s existing full-tax revenue generating retailers to the newly created reduced-tax revenue generators at Newpark Mall. 

PART 1: 

Newark’s city officials are promoting a faulty economic and legal analysis of tax subsidies the people are expected to give to a developer.  The people of Newark are set to give an estimated $30 million in sales tax rebates to Manhattan-based, for-profit corporation Rouse Properties to pay for improvements to Newpark Mall.  This plan to pay Rouse government subsidies with the intended benefit of increasing tax revenues relies on the presumption that Newark’s retail sector will expand.

At any given time, any given market is saturated.  This holds true for Newark’s retail sector.  As of now consumers (C) spend retail dollars ($) and are charged sales tax (T) when they make purchases.  Those retail transactions can be described as (C $ T).

 

C = benefit to consumers when they make purchases

 

$ =  revenue benefit to retailers when they make sales

 

T =  tax revenue generated for the City of Newark when retail

       transactions take place

      

If and when Rouse is allowed to build this retail development that is funded primarily through sales tax (T) rebates, this new retail development will draw

(C $ T) away from existing retail due to market saturation.  The belief that the new development would expand retail sales and therefore would not draw sales away from existing retailers is speculation.  It is not the role of government to fund speculative ventures.  Wall Street has far better financial analysts than the City of Newark.  Private capital would have funded this venture if a market opportunity had been identified.  Research demonstrates that government funded speculative ventures such as sports arenas and conference centers usually fail.

Because Rouse would receive an 80% sales tax rebate, the new retail development will generate only (0.20T) for the next 18 years or until Rouse is repaid 75% of the development costs.  The total cost of the development is estimated to be $40 million.  Therefore the total value of the government subsidy is estimated to be $30 million.  This $30 million subsidy will be paid from the City of Newark’s treasury over a period of 18 years.

If the development is completed, existing full-tax-revenue-generating retail transactions (C $ T) will SHIFT to Rouse retail transactions (C $ 0.20T).  Notice that the Rouse retail transactions would generate only a fraction of the tax revenue compared to existing retail transactions:  (0.20 T) for Rouse retail transactions verses (1.0 T) for transactions made at existing Newark retailers. 

All of Newark’s retail transactions do not take place at Newpark Mall.  More importantly according to section 5.3.1 of the agreement, the $657,000 sales tax revenue baseline or hurdle that must be crossed before the subsidies are paid only involves, ‘Core Tenants’ and not, ‘Anchor Tenants.’  Anchor tenants are the large stores at Newpark such as Sears and Penny’s.  This means that if sales shift from Anchor Tenants to the new development, less sales tax revenue will be generated due to the tax rebates.  This means that the City of Newark could expect to generate as much as $30 million less in tax revenue over the next 18 years. Under any circumstances Rouse will be the $30 million beneficiary.

Because of market saturation there will be a SHIFT from full-tax-revenue-generating retail transactions to reduced-tax-revenue-generating retail transactions.  Again, the idea that the development will expand an existing retail sector is speculation.

The information in the following paragraphs describes why the tax rebate for Rouse is essentially a tax increase for the people of Newark.  Therefore the sales tax rebate is illegal because California State law requires that the voters approve any tax increase.

Because of Newark’s odd-year municipal election cycle that has since been replaced with even-year elections, there were no municipal elections in Newark in 2010.  Without a municipal election in 2010, city officials were first required to vote to declare a fiscal emergency to have Measure U, the utility tax placed on the ballot.  City officials voted unanimously to declare this fiscal emergency.  Next, city officials, namely the city attorney created deceptive ballot language for Measure U and then voters approved Measure U.  The City of Newark now collects about $3.5 million in utility tax revenue each year as a result of Measure U.  The subsidy for Rouse means that the tax burden will be shifted from a for-profit corporation to utility users, which are mostly ordinary residents.

Because the utility tax was promoted as a remedy for a fiscal emergency, and, because residents are still paying utility taxes, the City of Newark continues to operate in a state of fiscal emergency.  Giving an estimated $30 million tax subsidy to a for-profit developer is not consistent with a state of fiscal emergency.  This is another reason why the tax subsidy that city officials voted to give Rouse is illegal.

PART  2:

As stated in the first section, at any given time, any given market is saturated.  Newark’s retail sector hasn’t experienced any cataclysmic events that would be required to move a market out of equilibrium.  Therefore, no government intervention, namely subsidies are required to expand Newpark Mall or any other part of Newark’s retail sector.  Examples of sudden changes that will move a market out of equilibrium follow:

1)   In 1848 gold was discovered in California.  Because of this, a large number of prospectors moved to California’s gold fields before the market had a chance to adjust.  The increased demand for groceries and mining equipment in the gold fields outstripped supply.  The result is that suppliers benefited by charging gold miners unusually high prices for things such as groceries and hand tools.  In this example, government intervention would not be desirable because gold mining is not a basic service.

2)   Imagine that a destructive earthquake instantly caused significant regional damage to private property and public infrastructure.   There would be significantly reduced supplies of nearly everything including basic necessities.  Dramatic price increases and turmoil would follow.  Therefore, government intervention to subsidize the supply of things such as food and drinking water would be desirable until improved conditions would allow the market to return to equilibrium.

Unlike examples #1 and #2 above,

A)   Newark’s retail mall sector has not experienced a sudden event that has or will move the market out of equilibrium. 

B)   Further, mall retailers do not provide necessities. 

This means that for reasons A and/or B described above, government intervention would not be desirable because the people will not benefit if the City of Newark subsidizes Rouse Properties. If for some verifiable reason Newark’s retail mall sector were suddenly moved out of equilibrium, government subsidies would not be a responsible use of government money.

The tax incentives for Rouse Properties, Inc. will compel Rouse to add retail capacity to a saturated market.  No analysis is needed to determine that Newark’s retail sector is saturated.  The market is saturated by definition or due to basic economic principles.

This added retail capacity will only generate 20% (0.20 T) of the tax revenue compared to existing (1.0 T) retail.  According to the agreement, all existing non-anchor stores at Newpark Mall will also be converted to 20% tax revenue-generators.  In order for the tax rebates to take effect, the existing non-anchor mall stores and the added capacity will need to cross a $657,000 annual tax revenue baseline or hurdle.  It has been determined that this $657,000 is the existing annual tax revenue collected by the city for all non-anchor operations at the mall.

Due to market saturation, the same number of retail dollars are expected to be spread among full tax revenue-generators (1.0 T) and the added and converted reduced tax revenue-generators (0.20 T).  If the (0.20 T) retailers cross the $657,000 annual tax revenue hurdle specified in the agreement, they may be doing so by drawing sales away from (1.0 T) retailers.

If retail capacity is artificially added to this saturated market, shoppers will have more opportunities to spend money at (0.20 T) retailers.  There is no way to predict if these new shopping habits will expand the retail market or if the dollars spent at the new (0.20 T) retail operation will simply draw sales away from (1.0 T) retailers.  Most importantly, it is not the role of government to make these predictions or worse yet, subsidize private interests based on such predictions.

As previously stated, the entire tax rebate scheme relies on the assumption that adding capacity will draw more retail dollars to Newark’s retailers. The best possible scenario is that Newark generates additional tax revenue at a rate of only 20% of normal as the result of expansion.  The worst-case scenario is that the City of Newark loses $30,000,000 over the next 18 years.  Five elected officials made the decision to gamble $30 million dollars of public money over the course of the next 18 years in an effort to gain tax revenue at a significantly reduced rate.

If the private sector identified an opportunity, private capital would have added retail capacity.  If and when this retail expansion fails, the Newark public officials that supported and approved this plan may be long gone.  Also, remember the saying:  “Success has many friends but failure is an orphan.”  If the plan fails, the multitude of blame that can be assigned is only limited to that of the imagination.

A public interest lawyer needs to ask the court to enjoin the City of Newark from giving these tax rebates to Rouse Properties. 

“The only thing necessary for the triumph of evil is for good people to do nothing.”

 

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