The dirty little secret that nobody seems to want to recognize, or even attempt to uncover, is that EEZ, Tax Increment Financing (TIF), and other subsidies do not work. They do not succeed in growing the local economy. The panoply of subsidies that come into play when a large area is declared blighted can have a number of adverse side effects. They shrink the local tax base, encourage more government planning of the economy, and increase the chances of eminent domain abuse. 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.”

Missouri needs TIF reform. House Bill 914 is an important step in that direction. The combination of a very large number of local governments and the inclusion of sales taxation in Missouri TIF law has been a dangerous mixture. By one measure, Missouri local governments use TIF more than all but two other states.1 Missouri’s many cities have readily engaged TIF in order to increase the sales taxes they collect, while leaving other taxing districts, such as school districts — who depend more on property taxation — holding the empty bag. Originally intended (perhaps farcically) as a treatment for “blight,” TIF has been aggressively used throughout Missouri’s wealthier areas. The constant quest by cities to give away more tax incentives in exchange for new sales tax dollars has had a dramatic impact on Missouri.

The Distressed Area Land Assemblage Tax Credit should expire as planned on August 28, 2013. The only beneficiary of this tax credit has already received a substantial amount in state aid from this tax credit – more than $40 million. He is also likely to receive about $390 million in local incentives. All of this money is a multimillion dollar gamble on a single project that may have no benefit to the state.

When the state spends millions of dollars on one potential development, it is taking a huge risk with taxpayers’ money. The state is risking that one developer will transform North Saint Louis and remove all of its societal problems. This is a gamble on a project that does not even have a concrete plan. How can we trust that the bet will pay off? Who is on the line if this project fails?

Many of you know that a tax credit is a direct reduction in a taxpayer’s tax liability that a government grants for the performance of a government-desired activity. Tax credits are often used as a way to promote activities for the expressed or implied purpose of promoting economic development. In contrast to a tax deduction, which decreases a taxpayer’s taxable income, tax credits are applied against a tax liability dollar for dollar, and although not technically considered spending by Missouri courts, public officials often portray tax credits as the state making “investments” in the economy. One need not look far to find a Missouri Department of Economic Development (DED) press conference or press release announcing, with great fanfare, the “new jobs” being brought to a community as the result of a tax credit.

Unfortunately, the jobs that are promised do not always happen, and part of the reason for this is that governments, by and large, are not very good at picking successful “investments” for their constituents.

Government planners are steadily increasing their use of TOD. However, contrary to one of the central tenets of TOD, surveys indicate that most people do not want to be forced into high-rise apartments in a busy urban environment. Four out of five Americans prefer having a home with a yard to living near shops, transit, or jobs. So what is the rationale for using taxpayer money to support retail and other development along public transit lines? Planners may think it is best for us to live in high-rise apartments and take transit everywhere, even though we do not want to; but individuals should be able to freely decide where to live, how to travel, or where to open a business.

In theory, establishing a TIF district involves serious and impartial deliberation and calculus. A city intends to revitalize a part of its community, but first it must go through a complicated process designed to test whether certain tax incentives are allowed. The city contracts with urban planners who independently determine if the proposal could happen “but for” the taxpayer assistance, and also if the area meets the standards for a designation of “blight,” or “conservation” (or another appropriate designation), making it eligible for subsidies. A developer is then brought into the process and, with the assistance of the government and the taxpayers, produces an economic growth engine that provides jobs, a revitalized community, and (eventually) an expanded tax base.

Meet Norwood Hills Country Club. In 2006, the state issued more than $1.1 million in state Historic Preservation Tax Credits (HPTC) to the facility.

A successful private club in north Saint Louis, it hosted the PGA Championship in 1948. In 2005, the club sought and received designation as an historic landmark, and as an historic landmark, it was eligible for HPTCs from the state.

A major new project proposed for the Central West End will include many new residential options and a new grocery store. According to the St. Louis Post-Dispatch, the developer is asking for $10 million in public assistance. Saint Louis crossed the rubicon of authorizing TIF far too frequently many years ago. (There are currently 124 TIFs within the city.) But this is an excellent opportunity to reconsider that approach. There is nothing about this project that should involve public assistance. The project is proposed for an enviable location in a wealthy part of an economically vibrant area. The idea that a new development at the corner of Euclid and West Pine needs public subsidy is preposterous. Redevelopment can go forward in this area without subsidies. The fact that many new developments have a subsidy is a testament to the ease of getting them, not the necessity of them.

The dirty little secret that nobody seems to want to recognize, or even attempt to uncover, 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. The panoply of subsidies that come into play when a large area is declared blighted can have a number of adverse side effects. They shrink the local tax base, encourage more government planning of the economy, and increase the chances of eminent domain abuse. 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."

In theory, establishing a TIF district involves serious and impartial deliberation and calculus. A city intends to revitalize a part of its community, but first it must go through a complicated process designed to test whether certain tax incentives are allowed. The city contracts with urban planners who independently determine if the proposal could happen “but for” the taxpayer assistance, and also if the area meets the standards for a designation of “blight,” or “conservation” (or another appropriate designation), making it eligible for subsidies. A developer is then brought into the process and, with the assistance of the government and the taxpayers, produces an economic growth engine that provides jobs, a revitalized community, and (eventually) an expanded tax base.

Since the late 1990s, Missouri’s tax credit system has grown into one of the biggest burdens on the state’s annual budgets, expending billions of dollars over the last decade and setting the stage for significant budgetary crises in the near future. In fiscal year 2013, Missouri expects tax credit redemptions to cost the state as much as the state is spending on its correctional and public safety systems — roughly $700 million. Put in another context, the entirety of 2013’s projected deficit is less than the state’s expected tax credit payout by about $200 million. Suffice to say, this is real money that legislators will have to understand and grapple with, given the squeeze tax credits have put on the FY2013 budget and will put on state budgets in future years.

Our testimony today is intended to provide an explanation of House Bill 840, the Aerotropolis Trade Incentive and Tax Credit Act, and the probable damaging effect that it would have on the Missouri economy. This legislation is fraught with hidden costs, no study has been published that quantifies its supposed benefits, and tax credits in general have been a poor strategy for economic growth in Missouri.

Senate Bill 11 proposes rescinding Missouri's ethanol mandate. This entire subject is a perfect example of Thomas Sowell’s famed statement about public policy, “There are no solutions, only trade-offs.” Corn farmers gain from ethanol production, as do investors in ethanol plants. Missouri has a large number of corn farmers, as you well know. The argument has been made that ethanol has resulted in lower visible gas prices at the pump. In immediate terms, that seems to benefit Missouri drivers.