Less for More

Have you ever heard of a property developer spending more to rehab a building than he expects to make from its sale? Thanks to Missouri tax credits, some developers are doing just that. These developers are only able make an after-tax profit because of the tax credits awarded to them. At a board meeting of the Land Clearance for Redevelopment Authority (LCRA) on Tuesday, one applicant said that he planned to spend $340,000 to redevelop a property that he expected to sell for $140,000. He told the LCRA that he would make up for the difference with tax credits. I couldn’t discern the amount by which a second developer expected to sell his property below redevelopment costs, but he too said that tax credits would make up the difference.

The LCRA reviews applications to designate properties “blighted.” This designation allows property taxes to be frozen at some base level, while development increases the property value. Many of the projects reviewed Tuesday were for development activities costing millions of dollars. Who is to say whether such projects are more worthy than smaller projects of receiving tax abatement? Why don’t people receive tax abatement for marginal projects, such as maintaining their lawn or washing their windows? Surely, the property would not be as developed if property owners never engaged in these routine activities. I can only imagine how blighted my house would be with an unkempt lawn, dirt-covered glass, and a broken fence. What about all the times I spent hedging the bushes and vacuuming the floor? Why doesn’t everyone receive abatements?

Tax credits and abatements have two types of effects: the observed and the unobserved. We all see the developer who builds a beautiful house using the tax incentives. We see the lumber producers selling more wood and the tool manufacturers selling equipment. We see the businesses and the jobs created and maintained from the endeavor. But we don’t see what does not happen because the tax incentives were awarded. We don’t see the local school that would have received additional revenue, the relatively lower taxes that would have been levied for everyone else, or the forgone purchases these taxpayers would have made. We don’t the additional teachers that could have been hired in school classrooms, or the taxpayers who could have purchased another gallon of gas. We don’t see all the jobs that would have been created and new purchases that would have been made if the money to fund those tax incentives had not been taken away from the people who would have otherwise used it. We are only able to observe the activities that have been granted official approval by the state and the LCRA.

The unobserved effects of the tax credits are that the people paying taxes are less able to purchase what they like most. Instead, they pay relatively higher taxes in order to fund incentives that generate undesirable products, such as subsidized homes costing $340,000 that will fetch only a $140,000 price.

Tax credits and abatements award businesses with revenue disproportionate to the value that consumers would place on their product. These are poor government policies, and ought to be abandoned.