Mitigating the Harmful Effects of the ‘Aerotropolis’ Legislation
Show-Me Institute Policy Analyst Audrey Spalding was contacted by Missouri legislators concerned with modifying the “Aerotropolis” bill to mitigate the possible harms of the proposed legislation. What follows is her response.
Legislators are considering moving forward with the so-called “Aerotropolis” legislation, a bill that would create $360 million in tax credits. Of that total, $300 million would go toward subsidizing warehouses, and $60 million would go toward subsidizing cargo flights from Saint Louis to international destinations. The bill’s proponents promise that these tax incentives will increase air cargo traffic to the region and boost the state and local economy.
Policy analysts at the Show-Me Institute have researched this proposal extensively. Based on a thorough review of the legislation, we believe that the proposal is a raw deal for Missouri taxpayers, and that certain provisions are indistinguishable from the cronyism often seen at the federal level.
Furthermore, the use of tax credits to encourage economic development has a poor track record, both in Missouri and nationwide. Our case study detailing the most serious problems with the bill, and with tax credits in general, is available online. We encourage all who are interested in good government to read that paper.
Without endorsing the use of any tax credits in this case, changes to the legislation might mitigate the harmful effects on the state economy and taxpayers. Below are revisions that we believe should be considered if the legislation moves forward despite a lack of substantive empirical support.
Allow all new warehouse owners to compete for the tax credits
All arbitrary limits on Aerotropolis eligibility should be removed.
The Aerotropolis tax credits would subsidize warehouse construction, as well as cargo flights from Saint Louis to international destinations. Up to $300 million in tax credits — more than 80 percent of the bill’s tax breaks — would be made available for the construction of new warehouses around the airport. Those tax credits could be used to pay up to 30 percent of a warehouse owner’s demolition, construction, and equipment costs.
The bill requires that warehouses qualifying for those incentives must be built on 100 contiguous acres of land or in specially designated areas. There does not seem to be any practical reason for the “100 acre” requirement contained within the Aerotropolis tax credit bill. The requirement seems to serve only to restrict who could draw upon such tax credits, narrowing the field to a small pool of large-scale developers.
This restriction should be removed. If the state is determined to subsidize warehouse construction — without any substantive empirical evidence that such subsidy would lead to increased economic growth and international trade — such subsidies should at least be made available as broadly as possible.
Accountability measures
Include clawback provisions and reporting requirements in the legislation.
In its current form, the Aerotropolis legislation does not include any sort of clawback provisions or reporting requirements. Accountability provisions should be added. If claims of job creation and investment are used to sell the creation of $360 million in state tax credits, then those credits should be evaluated objectively on the merits of job creation and investment.
In 2010, Gov. Jay Nixon tasked the Missouri Tax Credit Review Commission with reviewing the state’s tax credit programs. The commission recommended that:
…strict statutory clawbacks to be enforced by the State in cases of non-compliance with program requirements be included in all tax credit programs currently lacking such provisions.
…all applicants for state incentives be required to enter into a contract with the agency administering the tax credit specifying standards of performance, program requirements, and penalties in the issue event of non-compliance.
The commission’s recommendations are sensible, and should be extended to all prospective tax credit programs, including the Aerotropolis legislation.
As written, the legislation requires that new warehouses be built, and little else. If the state subsidizes warehouse construction, but there is no increase in demand for warehouse space, the state will be either subsidizing the construction of vacant warehouses, or helping owners of new warehouses drive owners of older warehouses out of business. Either case is not a desirable outcome for the state or for the area economy.
If legislators move forward with the Aerotropolis bill, a provision that would require an objective evaluation of the tax credit program — that is neither conducted by nor commissioned by an organization receiving any benefit from the Aerotropolis legislation — should be added.
Such an evaluation could be made three years after the inception of the tax credit program. It could include a comparison of the level of international cargo processed at area warehouses, employment numbers at area warehouses, and area warehouse vacancy rates before and after the creation of the tax credit program. If that objective review finds that the Aerotropolis program has not delivered on its promises, then the state should cease authorizing tax credits under the legislation.
In line with the Tax Credit Review Commission’s recommendations, the Aerotropolis legislation should also include clawback provisions. If warehouse owners receive Aerotropolis tax credits, and are found not to be in compliance with its requirements, or are not processing any level of international cargo, then the state should have a mechanism to recover the tax credits awarded to such noncompliant owners.
Furthermore, the Show-Me Institute has highlighted the fact that, despite proponents’ statements to the contrary, the Aerotropolis legislation would allow tax credits to be issued to owners of warehouses that do not process any international cargo. Since the primary argument for the Aerotropolis tax credits is that the incentives would promote international trade, the definitions within the Aerotropolis bill should be revised so that only warehouses processing international cargo may receive the credits.
Grants of Extensive Political Power (135.1503)
Remove the provision that would grant power to the mayor and county executives to determine who could receive the warehouse tax credits.
The Aerotropolis bill gives the authority to the mayor of Saint Louis or the executive officers of nearby counties the power to designate “gateway zones.” While this power sounds innocuous, it has important ramifications.
Those chief executives would become gatekeepers in the distribution of millions of taxpayer dollars. The Aerotropolis legislation would create $300 million in tax credits that would subsidize warehouse construction. That tax credit money may be awarded only to warehouses built in gateway zones.
Even if motives are pure, the ability to pick what areas could be eligible for hundreds of millions in tax credits would be an incredible power. The legislation does not say anything about monitoring such designations. Nothing in the legislation would prevent one of these chief executives from using such power as an indirect way to acquire campaign contributions or other untoward benefits.
A simple way to stop any such potential abuse of power would be to take the city and county chief executives out of the equation. If the state — despite a lack of substantive empirical evidence that these tax credits will do any economic good — really wants to subsidize warehouse construction, then all vacant land owners should be able to compete equally for the tax credits. There is no need to give special power to city and county executives. The language creating this power should be removed.
If this delegation of power is kept in the Aerotropolis legislation, then the Mayor and county executives should be required to make their gateway designations at a public meeting, with any and all applications and correspondence to the mayor or county executives requesting such a designation treated as public information.
Restrict the ability to layer tax credits with other tax incentives
It is fiscally irresponsible for the state to heavily subsidize projects under certain programs.
It is no secret that the state heavily subsidizes some projects through a myriad of its tax incentive programs. The level of subsidy for those projects can reach absurd heights. According to an analysis of state tax credit data, Missouri’s fifth Senate District – which includes downtown Saint Louis – was the recipient of nearly $1 billion in state tax credits between 2000 and 2010. This total does not include local tax subsidies, such as property tax abatement and tax increment financing (TIF), which likely are substantial. The Aerotropolis tax credits, as proposed, could easily be layered on top of existing tax incentives already offered by the state or local government.
In fact, in an internal review of the Aerotropolis legislation, Saint Louis County identified five areas near the airport that would likely be eligible for Aerotropolis tax credits. According to the county’s analysis, those areas had already been authorized to receive or were eligible to receive almost $300 million in state and local tax incentives, including Brownfield and Enhanced Enterprise Zone tax credits, as well as tax increment financing, property tax abatement, sales tax exemption, and state tax increment financing.
Some existing Missouri tax credit programs place restrictions on the layering of tax credits. For example, the Missouri Quality Jobs tax credits explicitly prohibit recipients from also receiving Enterprise Zone or Enhanced Enterprise Zone tax credits, Business Facility Program tax credits, Rebuilding Communities tax credits, or Brownfield Jobs and Investment tax credits.
It would be prudent to add similar restrictions to the Aerotropolis tax credit legislation. Similar tax incentive programs that should not be combined with the proposed Aerotropolis program include: Distressed Areas Land Assemblage tax credits, tax increment financing, state tax increment financing, Enhanced Enterprise Zone tax credits, and Brownfield tax credits. Those tax incentive programs are designed to encourage similar activity – construction – that the Aerotropolis legislation is designed to encourage. The state should not award redundant incentives.
Final thoughts
The proposed Aerotropolis legislation is problematic, especially in light of questionable jobs claims and the expansion of power for local government executives contained within the bill. There appears to be an incredible amount of political pressure attempting to push the tax credit measures forward, despite a lack of substantive empirical study. Moreover, China, the country cited by proponents as the source for increased international cargo traffic, has not stated publicly that warehouse construction tax credits are necessary before it will consider sending more cargo flights to the Lambert Airport.
All of the above facts should give legislators pause. But, if the state legislature is prepared to go forward and pass the Aerotropolis tax credits despite those concerns, then provisions designed to protect Missouri taxpayers should be added to the bill.
