By Dennis Polhill
The recent bankruptcy and closure of Sunset Beach Fitness and Racquet Club in Golden is a reminder that the laws of economics are real and that our political masters persist in ignoring them.
Sunset Beach was a successful and thriving Golden business. The owners participated in all of the right groups, were on city committees and donated willingly to the proper functions. But on May 21, 1991 the city sales tax was increased by 1%. Passage was by 11 votes and the number of spoiled ballots was strangely high, exceeding the margin of victory. Disaffected citizens claimed foul, circulated initiative petitions to bring the matter to a second vote and filed suits.
For a politician spending money is like a cocaine fix to an addict. They were not about to be dissuaded by mere citizens and the city invalidated 84% of the petition signatures to avoid a repeat election.
The sales tax increase yielded a $1,500,000 per year windfall. The revenue stream was quickly committed to bonds. Since this was shortly before the voters enacted the Taxpayers Bill of Rights, which requires voter approval for governments to issue bond, the city of Golden avoided having to ask the voters for permission to go into debt. No expense was be spared for a Taj Mahal Recreation Center. Rec Centers are not bad, but they can cause problems for taxpaying businesses.
When the Rec Center opened in 1994, Sunset Beach monthly gross revenues declined $10,000. At 5% interest, $10,000 represents the monthly return that $2,400,000 would yield. Thus, Sunset Beach’s market value decreased $2,400,000. The investors would not get back their investments.
Golden had conducted a Financial Feasibility Analysis. The analysis stated that because other governments had built expensive Rec Centers, Golden could also. This is political rationalization for keeping up with the Joneses.
The study estimated that a Golden Rec Center would have a cost recovery ratio of 55%.Cost recovery ratio means that users will pay only 55% of operating costs. Non-users would pay all other costs: 45% of the operating costs plus the capital/construction costs. Essentially, through the force of government, Rec Center users make non-users pay over half of the cost of the Rec Center.
The unfairness of non-users having to pay for services of users is compounded by impact on competitive markets. Normal businesses do not have the force of government or the power to redistribute costs to people who don’t want the business’s service. The only revenue source for businesses is voluntary exchange with customers. Under Golden-style collectivism, collapse of competition and market failure are inevitable. Because hidden and redistributed costs are still costs, government monopoly yields less service at higher cost.
Anti-trust laws recognize the importance of fair competition. Corporations are prohibited from engaging in certain types of predatory conduct. Penalties are severe.
Government sponsored market failures are shockingly common. The City of Denver, not content with being in the ski resort, land development, and golf course businesses, unabashedly discusses spending $107,000,000 to build a city-owned hotel. The Foothills Park and Recreation District is seeking $41 million, of which $16 million would build a Rec Center near a competing business. Golden wants its 16,000 people to pay $54 million ($3,400 each) for a golf course.
The absurdity is mind-boggling. Taxpayers who don’t golf or use Rec Centers are forced to pay for millions of dollars in capital assets, yet receive no benefit. How can Golden claim that golf should be subsidized? Subsidized golf courses tax the poor to benefit the rich.
When will politicians learn to resist the seductive false promises of socialism? When one person is unfairly injured so that another can gain, society makes no progress.
Dennis Polhill is a Senior Fellow with the Independence Institute, a free-market think tank in Golden, http://i2i.org. He is co-author of a chapter on unfair government competition with small business, in the book Colorado in the Balance, and also author of a longer Issue Paper on the subject.
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