"Just the fact that a hurricane disaster like this would open the door for a huge new government program is a worry," maintains Alex Van Rensselaer, a retired entrepreneur living in Hobe Sound, Fla., who founded Hay Day, a Connecticut chain of gourmet markets. "So many conservative groups are trying to reduce the size of government and exposure to government programs everywhere, and this is just the opposite."

Indeed, many of those devastated by the worst storm season on record are hoping for a New Deal of sorts to help them recover. Reconstruction costs from Katrina alone have been estimated at $250 billion, and much of that will no doubt be borne by wealthy taxpayers. "Obviously, any huge new spending like this is going to put more pressure on Congress to resist the permanent Bush tax cuts that we’re looking for–pressure to justify increased taxes," Van Rensselaer says. "And our side is constantly looking for ways to lower taxes to drive the economy–and this is just exactly where we don’t want to be."

Nearly 75 years after entering the American political lexicon, the term "New Deal" still stirs many in top tax brackets to shudder reflexively. In the current budgetary climate, where the expenses of the Iraq war coupled with substantial tax cuts have resulted in record-breaking budget deficits, the fear of affluent taxpayers that lawmakers may impose higher taxes on the wealthy, much as they did in the 1930s, may be justified.

"Seventy-plus-billion dollars going to just three states is one of the largest transfers from the federal government to any set of states in the postwar era," observes Robert Litan, a senior fellow with the Washington, D.C.-based Brookings Institution.

But even if the burden of funding reconstruction efforts is distributed among affluent, lower- and middle-class taxpayers in the same proportions as tax levies have been in recent years, it would still be borne disproportionately by the wealthy. Those in the highest tax bracket accounted for 27 percent of individual income tax revenues in 2001 and 2002 (the latest year for which data is available), according to IRS figures. In 2002, only five out of every 100,000 filers reported adjusted gross income of more than $10 million; that group accounted for more than 4 percent of all individual income tax revenues. Only 15 out of every 100,000 filers reported AGI over $5 million that year, but they accounted for 6.6 percent of all individual tax revenues.

Some worry that recent relief efforts–including the federal response to the events of 9/11–have set a dangerous funding precedent that will be financially impossible to maintain when future disasters strike. In fact, some have referred to recent governmental disaster relief as the "New New Deal," and see it as an open-ended wealth redistribution scheme. "There’s going to be a reckoning of what the real role of the federal government should be in response to disasters," says Stephen Slivinski, director of budget studies with the Cato Institute in Washington. "It’s certainly very expensive, and it also sends the signal to any local government: If you are unlucky enough to be hit by a storm that destroys infrastructure, the federal government will swoop in."

Your Money Where His Mouth Is
On September 15, two weeks after Katrina wreaked havoc on the Gulf Coast, President Bush addressed the country from Jackson Square in New Orleans, promising those in the city and in the surrounding region a long-term commitment. "We will do what it takes, we will stay as long as it takes, to help citizens rebuild their communities and their lives," he said.

* In 2005 dollars. Source: United States Senate Budget Committee as of 9/19/05; Insurance Information Institute. (Click image to enlarge)

Despite the president’s promises, Washington viewed initial requests from Louisiana’s congressional delegation for $250 billion in aid as far too high, questioning how the money would be used and who would oversee the spending. In response, Louisiana Gov. Kathleen Blanco created the Louisiana Recovery Authority to organize the reconstruction efforts. Walter Isaacson, the former CEO and chairman of CNN who grew up in New Orleans, is vice chairman of the authority and has become an integral player in bringing focus to the effort, coordinating recommendations made by a commission set up by New Orleans Mayor Ray Nagin. The group plans to rally federal aid in three areas: rebuilding the city’s levees, securing small business administration loan help and funding education.

"We lost some of our credibility," Isaacson says of the original $250 billion request. "That said, we’ve now decided to set our priorities and say we in Louisiana will do most of this ourselves, and that’s the way it should be. We’ll rip out our own wallboard and rebuild our own houses, build up our own businesses–but we have a few things that we need federal partnership on."

TOP VIEW: Some estimate that rebuilding the Gulf Coast damage from Hurricane Katrina will cost as much as $250 billion. Ultimately, U.S. taxpayers will cover much of this, a point that leads some to question the government’s rapidly expanding role as the de facto insurer of last resort against natural disasters. If the government maintains its willingness to make open-ended commitments for disaster relief, will it amount to a large scale transfer of wealth, similar to the New Deal policies of the 1930s? If so, it may have unfortunate consequences for the economy–and for wealthy taxpayers.

While Congress may question various relief bills in the coming months, the requests for federal partnerships similar to Isaacson’s will not go away–in fact, they will only grow in the coming years, on the Gulf Coast and elsewhere. Already, the more than $40 billion that Newark, Calif.-based Risk Management Solutions estimates the industry has paid out to cover property losses in 2005 will make it the most expensive year ever. This does not include the estimated $12 billion price tag for Hurricane Wilma. Climatologists predict that rising global temperatures will increase the frequency of category 4 and 5 hurricanes. In earthquake-prone California, development continues unabated. Cities throughout the West have morphed into sprawling suburbs, pushing into areas where brush and forest fires that once might have just burned out now threaten homes and businesses. Private insurers, restricted by increasingly tough regulations capping what they can charge for insuring in areas likely to face a disaster, are becoming reluctant to extend coverage to these imperiled zones.

"The typical way [the government] approaches disasters and financing them is to provide aid. I call it de facto insurance," Brookings’ Litan says. "There is something of a backlash. A lot of people are standing up and saying we don’t want to write a blank check."

Litan and others are floating an idea to replace the current system with a national insurance plan to cover disaster-prone regions. Premiums would not only provide greater security to insurers, giving them confidence to continue writing policies in areas at risk, but also offer individuals a financial incentive to live in less-risky areas–or if not, to bear some of the cost. Litan suggests "pre-funding" for disasters in a formal federal reinsurance program administered by the Treasury Department, loosely modeled after the federal terrorism reinsurance program established in 2002. Under such a scheme, participants in high-risk areas would pay premiums that would reflect actuarial risk. This plan would include incentives for states and municipalities to encourage better building codes and land use rules. This way, too, individuals and businesses would bear some limited amount of first-dollar losses through insurance policy deductibles.

Legislation along those lines is in the works. Rep. Ginny Brown-Waite (R-Fla.) introduced a bill in November that would authorize the Treasury to sell reinsurance contracts at auction to provide homeowners with disaster coverage. Some insurers, too, have begun to weigh in on this discussion. In November, Allstate became a charter member of an advocacy website, ProtectingAmerica.org, ostensibly to help citizens better prepare for disasters (and thus potentially lower the company’s exposure to damage), but also to push to establish catastrophe funds.

Catastrophic Analogy
This is not the first time flooding has affected the Mississippi River basin and raised questions about the government’s response to disasters, as well exposing the nation’s race and class divisions. In many ways, the 2005 storm parallels a similar flood that took place in 1927, says John M. Barry, who explored these issues in his book, Rising Tide: The Great Mississippi Flood of 1927 and How It Changed America. In 1927, water covered some areas to a depth of more than 30 feet and flooded land inhabited by nearly 1 million people. The flood displaced nearly 325,000 people, the majority of them black, forcing them into refugee camps for months. In the aftermath, the federal response under the leadership of Secretary of Commerce Herbert Hoover, whom President Calvin Coolidge placed in charge of flood relief, became a forerunner to the New Deal.

"For the first time in American history, American citizens of a wide majority came to believe that the federal government had a responsibility for individual citizens’ welfare, and ever since then, a majority of Americans have believed that–although we’ve been arguing over where to draw the line between government and individual responsibility," Barry says.

Such notions of federal responsibility have waned since the days of Roosevelt’s New Deal and Lyndon Johnson’s Great Society, but Katrina may prompt Americans to revisit it, Barry contends. "This is clearly going to drive home the need for government to function and be competent, without a doubt. And there’s a real potential that it will also make Americans rethink what the responsibility of the government is–and that’s a dicier proposition."

While a huge amount of domestic spending may be necessary to rebuild the Gulf Coast, the need comes at a bad time for conservatives who favor tax cuts, points out Peter Wall, chief investment officer with JPMorgan Private Client Services in New York. Fiscal conservatives also fear that these programs set a precedent for funding massive rebuilding projects at a time when some climatologists are warning that the number of huge storms will increase.

Government spending on the war in Iraq, coupled with tax cuts, expanded the federal deficit to $317 billion in 2005, roughly equal to 4 percent of GDP. Should the deficit continue to grow and reach 6 percent of GDP, Wall says, the overall economy may shudder. "As it builds and it becomes more and more of a burden, it becomes corrosive, it can become inflationary," he notes. "It restricts policies–particularly monetary policy–the federal government may want to use. It is just an inefficient way to allocate capital."

Future Imperfect
Of the dozens of pieces of proposed legislation dealing with Katrina recovery, fewer than half have passed. With the government’s fiscal latitude increasingly hemmed in by tax cuts, the war and the deficit, securing recovery money from the federal government will likely become more difficult as time passes, especially in the run up to the 2006 elections. Louisiana’s reputation for political corruption, dating back to Gov. Huey Long in the early part of the 20th century, will do little to help the state’s case.

"Seventy-plus-billion dollars going to just three states is one of the largest transfers from the federal government to any set of states in the postwar era."

While it is unlikely that recent natural disasters such as Katrina will reshape American politics to the extent the New Deal did in the 1930s, the inevitability of future hurricanes, earthquakes and, possibly, terrorist attacks has forced politicians to reconsider the federal government’s current approach to disaster aid. Similarly, private foundations and charities are reevaluating their role. (See "Charitable Challenges").

But the scope of federal aid may ultimately be much smaller than originally envisioned. "The idea that there will be some national funding and a grand scheme to rebuild the city to some level is, I think, slipping away," says Ronald Utt, senior research fellow for the Thomas A. Roe Institute for Economic Policy Studies at the Heritage Foundation in Washington. "There’s a lot of increasing unease on the part of many people that with each disaster we keep raising the bar of what’s expected of somebody, and in turn, this leads victims and those who are harmed to have higher expectations."

Politicians will dismiss such expectations at their peril. The vast scope of the need, as well as the complexity of the accompanying economics and politics, has ignited an uncomfortable debate that could fundamentally alter the expectations Americans hold of government. In the end, the 2005 hurricane season may reshape more than just the Gulf Coast’s landscape. For his part, Van Rensselaer, and others like him, would like to see market forces play a far greater role in current and future disaster recovery operations. "We need to come up with a far better plan than just simply opening the treasury to a complete rebuild," he says.

Elizabeth Harris is a staff writer for Worth.