“Wouldn’t You Fight It if the Taxpayer Pays for Your Development Instead of You?”
Last month, the Post-Dispatch published an article by Tim Logan illustrating the significant lobbying power of the individuals and companies that make a living off of administering tax credits in Missouri. I didn’t see the article when it ran initially, but it contains an important point that I want to highlight on Show-Me Daily. From the article:
When incentives enter the picture, so do an army of specialists, from consultants who help the projects qualify to brokers who turn the incentives into cash. A whole new layer of lawyers and bankers help work out the complicated financing of it all.
Taken together, these people form an industry, one that has flourished in St. Louis over the last decade. Thousands of skilled professionals have made good livings off the $3.5 billion in public money that cities and the state have poured into private real estate deals. And they regularly — and loudly — make themselves heard anytime someone tries to crimp the tap.
The businesses and individuals that directly profit from tax credit programs have a very strong incentive to maintain the status quo. For this reason, they are unlikely to approach tax credit reform measures seriously or substantively. Instead of implementing changes that limit the size of these programs, they will tend to support measures that expand and cement them.
They constitute quite a powerful lobby. This fact was quite obvious to me when I testified before the Tax Credit Review Commission in September at a regional meeting in Saint Louis. Except for me, every other person in who testified at that meeting spoke in support for a program that benefits them.
Again, from the Post-Dispatch:
The lobbying isn’t unusual. Every industry fights for its interests. But the real estate industry has more local clout than most — its bosses and workers all live here — and that, coupled with developers’ promises of jobs and investment, gives them a huge influence in city halls and the Missouri Capitol.
“Developers, bond counsels, retailers, consultants — they have got a powerful lobby between them,” said Les Sterman, former head of the East-West Gateway Council of Governments.
“The developers will fight you every chance they get,” [Sen. Tim Green] said. “Wouldn’t you fight it if the taxpayer pays for your development instead of you?”
In a sense, the proliferation of this army of specialists is a market response to government intervention. It can be amazing to see how markets evolve to address new economic niches, whatever their source.
As a negative consequence, however, this large administrative cost reduces the ability of the program to produce the intended activity efficiently. The Low-Income Housing Tax Credit is an egregious example of this. From a report issued in April 2008 by the Missouri state auditor’s office:
For every $1 in LIHTC authorized and issued, the current tax credit model provides only about $.35 towards the development of housing. The remaining $.65 goes to investors, syndication firms, and to the federal government in the form of increased taxes resulting from the use of state tax credits.
Supporters of tax credit programs might argue that this represents another form of job creation. However, these jobs are not permanent; they will disappear as soon as the subsidy ends. Additionally, these jobs specialize in unproductive activities. They exist largely because of government-created market inefficiency. If tax credit programs were reduced or eliminated, then the individuals currently working in these positions could put their knowledge, skills, and abilities to more productive uses. The economy would be better off if those resources were allocated instead to strong, profitable businesses that exist independent of subsidy.