Benefits of China Hub Focused on Saint Louis; All Missouri Taxpayers Forced to Pick Up $480 Million Tab

Tax credit programs like the proposed China hub are a form of wealth redistribution: Only the favored few benefit, and everybody else bears the cost. Because the China hub project will be located in Saint Louis, Saint Louis residents will receive more of the benefits of the policy than Missourians that live elsewhere. Even though the majority of Missourians (64.8 percent) do not live in the Saint Louis region, they will still have to shoulder the costs of this program through their tax monies. It’s yet another example of concentrated benefits and diffused costs — an important concept that lawmakers too often overlook.

Consider that, according to the 2010 U.S. Census, 3,879,695 Missourians currently live outside of Saint Louis. Consider further that, as my colleague Audrey Spalding recently calculated, the proposal would cost at least $80 for each person living in Missouri. This means that Missourians living outside of Saint Louis will be forced to spend $310.4 million on the project. In other words, this policy would remove $310.4 million from the economy in the rest of the state, and funnel it into Saint Louis.

The editorial board at the St. Louis Business Journal certainly seems to get it:

That this is essentially a St. Louis-only measure is an insult to the rest of the state, making us look like the greedy urban jerks the outstate legislators love to hate. Not to mention our colleagues in Kansas City.

Speaking of our friends in Kansas City, they in particular will see more costs than benefits. Kansas City residents will collectively pay $36.8 million for this policy. However, they are unlikely to receive direct benefits from the policy because they live 235 miles away from Lambert Airport. Is sending $36.8 million to Saint Louis the best use for their money? Could it perhaps be better spent on projects in Kansas City (e.g., education, transportation), or returned to Kansas City residents to spend, save, and invest in the private sector?

Supporters of large publicly funded projects tend to argue that they generate lots of economic activity that resonate across the economy. These, however, are mere conjectures; I am aware of no study that proves it. On the contrary, the evidence suggests that few, if any, spillovers or multipliers arise from targeted tax credit programs. I will elaborate on this point in a future post. (Stay tuned to the blog!)

The money that is spent in this program could otherwise benefit Missourians through a tax reduction or another form of state spending. If the China hub project doesn’t happen, taxpayers will be able to keep a greater percentage of their earnings, which they can then spend on additional goods and services. Much of this economic activity (e.g., hotel stays, restaurant meals) would be generated by individuals in the private sector. However, if the government takes half a billion dollars out of the economy, Missourians won’t be able to spend and invest it themselves, and this economic activity will be lost.

How China Hub Costs Are Diffused, by Region

* Metropolitan Statistical Area, defined by U.S. Census