I disagree about this idea that local news is not profitable. What makes you belief this? Maybe very limited examples can qualify but it all comes down to having enough interested consumers to justify the expense. It has always been this way. With so many people posting stories to the net it likely the real need is an intelligent aggregator. From there a micro transaction system might arise that pays people based on views and such.

as for government, they already are too involved even in the US. Directly by manipulating what can and cannot be said as well using the threat of cutting off reporters who don't report as the politicians want. Indirect as journalist unions will guide donations to politicians who do what they want.

Universal tax rebate? While some may consider journalism part of the common good it does not mean it must exist to serve the smallest of groups. We have more journalism than necessary to get the news to all interested parties and much of it is free on the net.