Tax Increment Financing and Columbia, Missouri

Tax Increment Financing (TIF) is Missouri’s bad idea that keeps coming back and refuses to die. Despite TIF’s documented failures, cities throughout Missouri are expanding their use of it greatly. Cities do this because they can have short-term budget benefits from TIF while other government entities, such as school districts, shoulder the burdens. County leaders from both parties in Missouri, including Saint Charles County Executive Steve Ehlmann, Saint Louis County Executive Charlie Dooley, and (to a lesser extent) Jackson County Executive Mike Sanders have seen the harm that TIF is causing their regions and our state. Columbia should reject the expanded use of TIF in its city.

In 2010, Walmart announced that it would close a store located in both Saint Ann and Bridgeton (two suburbs of Saint Louis), and open another store 2 miles away, located solely in Bridgeton. The move seemed, in part, to be an attempt to capture more than $7 million in public subsidies. Even though the Bridgeton City Council approved the subsidy, the $7 million will come primarily from public schools and other taxing districts.

Of course, the subsidy at fault is TIF, which allows cities like Bridgeton to capture money that would have gone to other taxing entities and use it how the city desires — in this case, to subsidize a Walmart that replaced an existing Walmart. Cities gain sales tax dollars right away, while all the other taxing districts bear the burden of having the tax base of the property held steady — while expenses increase — for the next 23 years. Oftentimes, this results in tax increases on the rest of the community. In Liberty, Mo., earlier this year, the superintendent and school board were forced to campaign (unsuccessfully) for a tax increase that they said was necessary due to the harms that heavy use of TIF caused in that community.

TIF allows local government to reimburse developers for some of the project’s costs. With TIF, if a property generates $50,000 in property taxes before it is developed but generates $75,000 after being constructed, the developer gets to keep the $25,000 difference to pay for certain development costs. Fifty percent of sales and other taxes can be diverted as well.

In theory, TIF encourages developers to undertake projects in areas in dire need of economic growth. In reality, TIF is used to subsidize politically-connected developers, to help cities lure chosen businesses from other cities, and to fund an entire cottage industry of urban planners, lawyers, and bankers. There is so little accountability that even if the TIF commissions that are supposed to govern the process reject a proposal, a city can override that determination and go ahead with the project. That is exactly what happened with the Bridgeton Walmart.

TIF has had numerous negative economic effects in Missouri, and in particular in the Saint Louis area. TIF has increased government involvement in the economy, sparked abuse of eminent domain, shrunk the tax base, and made subsidies a permanent fixture of development. Furthermore, TIF has failed at its main purpose: economic growth. The East-West Gateway Council of Governments (the major government planning organization in Saint Louis) concluded that TIFs and other incentives have created jobs at the rate of one retail job for every $370,000 in taxpayer subsidies. That is not a road to growth — it is a road to ruin.

It is a fact that the use of TIF is often accompanied by the abuse of eminent domain. With Enhanced Enterprise Zones (EEZ), the threat of eminent domain abuse may be small, but with TIF, it is very real. Many — if not most — of the examples of eminent domain abuse in Missouri have involved TIF. This includes instances in Sunset Hills, Arnold, Sugar Creek, Rock Hill, and more.

An Iowa study of TIF usage concluded that, “On net . . . there is no evidence of economy-wide benefits, fiscal benefits, or population gains.” Another study from Illinois found that economic growth in cities that did not use TIF was stronger than in cities that did, because TIF subsidies caused an inefficient allocation of resources.

A recent study by Washburn University Professor Paul Byrne for the Show-Me Institute documents how TIF is used in Missouri. Byrne shows that the ability of cities to implement a TIF unilaterally leads to cities making decisions that benefit the city, at the expense of other public agencies. Cities that are authorized to enact sales taxes might push for TIF projects that will generate new sales tax dollars without caring about the property tax dollars that the local school district will have to do without. As a result, public tax dollars can end up funding economically inefficient projects. This is what has happened in the large urban areas of the state, and what will happen in Columbia and Boone County if the use of local tax incentives keeps increasing.

The dirty little secret that Regional Economic Development, Inc. (REDI), the local media, and Columbia city officials do not want you to know is that EEZ, Tax Increment Financing (TIF), Community Improvement Districts (CID), and other subsidies do not work. They do not succeed in growing the local economy. As a famous Swedish economist once said, “It is not by planting trees or subsidizing tree planting in a desert created by politicians that the government can promote . . . industry, but by refraining from measures that create a desert environment.”

The Columbia supporters of increased use of incentives within the city say that other cities have used these tools with great success (for example, an editorial in the Columbia Daily Tribune, Aug. 13, 2009). In this, they are completely wrong. The City of Saint Louis has been using urban redevelopment tools such as TIF and many others for half a century. How has it worked out? Mapping Decline, a 2008 book by Colin Gordon, documents the decline of the city of Saint Louis. The book’s research is exhaustive. The dominant theme is the use of urban renewal tools and tax subsidies — and their absolute, total failure. From the conclusion:

The overarching irony, in Saint Louis and elsewhere, is that efforts to save the city from such practices and patterns almost always made things worse. In setting after setting, both the diagnosis (blight) and its prescription (urban renewal) were shaped by — and compromised by — the same assumptions and expectations and prejudices that had created the condition in the first place.

I can already hear readers in Columbia saying, “But we’re not Saint Louis.” You are right, you are not; so do not follow a path that will make your city repeat Saint Louis’ mistakes. It is one thing for Saint Louis to try to these projects and have them fail. It would be even worse for a city like Columbia to follow that example with the knowledge that the entire process has failed. At least the trailblazer who takes the wrong path has an excuse.

Missouri should dramatically tighten its TIF laws. At a minimum, TIF should be decided at the county level, and the ability of cities to override rejections from TIF commissions should be eliminated. I hope that Columbia can lead the way to a new realization for our state, where economic development works for everyone when governments do not play favorites and businesses succeed or fail on their own merits.

David Stokes is a policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.