On April 21, NYU Law’s Institute for Policy Integrity released "Flooding the Market: The Distributional Consequences of the NFIP.” The report, authored by Policy Integrity Economics Fellow J. Scott Holladay and Research Scholar Jason A. Schwartz ‘06, details the financial and ecological costs of the National Flood Insurance Program (NFIP), which may be using Federal dollars to subsidize the development of expensive homes in flood-prone areas.

The NFIP, created over 40 years ago, was intended to reduce damage and provide protection for property owners located in areas with high risks of flooding, such as the Gulf Coast. As “Flooding the Market” reports, the results of the NFIP may not have been exactly as intended. “The current price of flood insurance both subsidizes new development in flood zones and subsidizes risk for those who already built in flood zones. These twin subsidies have left the NFIP with a gaping fiscal hole,” the report says. “The costs of the subsidies will likely be borne generally by taxpayers. But where there is a subsidy, there is a benefit. The benefits of the NFIP appear to accrue largely to wealthy households concentrated in a few highly-exposed states.”

The authors report that the NFIP is currently facing a $19 billion debt, and will not be able to repay that money without restructuring. The effects of the NFIP also reach the environment. For example, the subsidies encourage private development in places like river basins and coastal zones, which, the reports says, “provide natural purification of water and wastewater; erosion control and weather mitigation; and habitat for fish and wildlife.”

“As lawmakers consider the future of the National Flood Insurance Program, they should be aware that the policy redistributes wealth across income groups and state borders in ways that they may not expect,” the authors conclude. “An understanding of the distribution of costs and benefits is crucial for considering what should become of the NFIP.”

Posted April 27, 2010