NCPA - National Center for Policy Analysis

Taxpayer Subsidies Encourage Building in Flood-Prone Areas

December 29, 2011

If administered effectively, a flood insurance program minimizes the need for large future disaster aid outlays and forces those who own buildings susceptible to flooding to bear the brunt of the costs via insurance prices that reflect the risk of flood damage, say Ike Brannon and Elizabeth Lowell of the American Action Forum.

Unfortunately, that is not the sort of program the United States now has; instead, taxpayer subsidies have encouraged building in flood-prone areas.  The below-market price premiums afforded by the National Flood Insurance Program (NFIP) have encouraged risky behavior and rewarded those who ignore sound building principles.  Necessary changes to the program are broad and significant.

  • Risks associated with geographic locations need to be brought up to date and maintained, moving past the outdated flood data that is currently used for actuarial purposes.
  • Costs assigned to this risk should not be so thoroughly undercut via taxpayer-provided subsidies, as these low costs encourage building in flood plains.

As the program stands now, it undermines many of these valuable principles and causes several quantifiable harms.

  • Current insurance pricing schemes rely on averaged data over years, meaning that the program is woefully unprepared for catastrophic occurrences such as the $17 billion that was needed for repairs after hurricanes Katrina, Rita and Wilma in 2005.
  • According to the Institute for Policy Integrity, the wealthiest counties have historically filed 3.5 times more claims and received over a billion dollars more from claim payments than the poorest counties, lending credence to the argument that flood insurance subsidies are essentially a regressive tax on taxpayers in favor of the nation's wealthiest.

These problems can be ameliorated or avoided entirely if necessary reforms are accepted.  The NFIP must be changed drastically if government-provided flood insurance is to remain feasible.

Source: Ike Brannon and Elizabeth Lowell, "The Flood Insurance Fix," Regulation Magazine, Winter 2011-2012.

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