Want More Housing? Get out of the Way

Posted on by Patrick Tuohey

If there is an affordable housing shortage in Kansas City, why is that so? Could the very housing policies meant to help actually be part of the problem? No less than Bob Langenkamp, the man formerly in charge of handing out economic development subsidies in Kansas City, said these subsidies were necessary to offset the increased costs of city regulation. This stayed with me because I suspect he is exactly right, and it occurs to me again as Kansas City contemplates policies to encourage more affordable housing construction. Rather than increase costs and then offer subsidies, the city ought to be reducing costs and staying out of the way.

Some were quick to argue last year that the greatest threat to affordable housing is the ending of low- income housing tax credits (LIHTC). This is demonstrably wrong. The program was fully funded up through the end of 2017; any current affordable housing shortage in Kansas City has nothing to do with a lack of state tax credits. And the data from the Missouri Housing Development Commission show that the number of housing units in the construction pipeline has not decreased since state funding for LIHTC was zeroed-out.

The simple problem in Kansas City, St. Louis and elsewhere is in part due to the high cost of housing regulations and city bureaucracy; it is simply too expensive to build so-called affordable housing.

A 2018 paper issued by the National Association of Homebuilders (NAHB) and National Multifamily Housing Council (NMHC) concludes that:

Regulation imposed by all levels of government accounts for an average of 32.1 percent of multifamily development costs, according to new research released today by the National Association of Home Builders (NAHB) and the National Multifamily Housing Council (NMHC). In fact, in a quarter of cases, that number can reach as high as 42.6 percent.

The table at the top of this post shows the impact on housing costs of several types of government-imposed costs such as changes in building codes or requirements over and above common standards. The NAHB paper goes on to say: “Over 90 percent of multifamily developers also incur costs of delays caused by sometimes lengthy approval processes.”

A study released in 2016 concluded: “. . . on average, regulations imposed by government at all levels account for 24.3 percent of the final price of a new single-family home built for sale.”

Sometimes, exactly because the government is trying to help solve a problem, the problem becomes worse. Seattle for Growth, née Smart Growth Seattle, published in 2015:

Affordable housing projects have many unique costs, and often cost more because of financing, construction, and labor requirements. Affordable housing projects can be more expensive than market-rate due to some of these unique costs.

Regulations regarding health and safety are necessary, and one does not need to argue that housing construction should go unregulated to suggest that some obstacles are not worth the expense. Some of these obstacles, such as time spent waiting on permits and approvals may simply be due to city offices being overworked and understaffed. Cities ought to understand the barriers to housing construction and the additional costs of regulation before they act to add even more regulation or spend limited tax dollars on subsidies.

 

Does Building Market-Rate Condominiums Help the Affordable Housing Market?

Posted on by Patrick Tuohey

Affordable housing was a big issue in the recent Kansas City mayoral race, and there may be more legislation coming to address the issue. As Kansas City figures out how to increase the stock of affordable housing, many—including this author—have bemoaned the focus Kansas City has placed on subsidizing luxury market-rate high rises downtown. Some recent research, however, suggests that building market-rate units, even luxury ones, helps increase housing stock at all levels.

A new paper by Evan Mast of the W. E. Upjohn Institute for Employment Research concludes:

The short-run effect of new market-rate housing on the market for middle- and low-income housing is crucial to the current policy debate, where government intervention and market-based strategies are often pitted against each other. My results suggest that new market-rate construction loosens the housing market in such areas and, moreover, could do so in less than five years. This implies that market-based strategies can play an important role in improving housing affordability for middle- and low-income households.

In other words, building housing of all types helps those seeking middle- and low-income housing. This is a promising conclusion and largely intuitive. If there is more of a thing available, prices go down. Perhaps Kansas City and St. Louis really need to focus on building housing of all kinds, knowing that this alone will increase the availability of affordable housing.

Still, there will be advocates for more government subsidies to try to direct the housing market to provide for so-called affordable housing, such as a state low-income housing tax credit (LIHTC) to match the federal program of the same name. Despite the lofty intentions, research shows the state version of the program is largely ineffective.

To borrow from a common phrase regarding energy, Missouri governments ought to encourage people to “build, baby, build!” Governments don’t need to offer subsidies, but they ought to review their building codes and permitting processes with an eye towards reducing the burden on builders. Government has demonstrated it cannot solve the housing shortage; it ought to get out of the way and let the private market do what it does best: meet demand.

 

Kansas City Hotel Privately Built?

Posted on by Patrick Tuohey

Several outlets in Kansas City have reported that Choice Hotels International is planning a six-story, 149-room hotel in downtown Kansas City. An official of the Economic Development Corporation of Kansas City (EDCKC) confirmed to me that the company has not sought any economic development incentive from the EDCKC.

This is good news. If the company really is building the hotel on their own, without incentives or tax credits, it represents a real investment in Kansas City. Next time someone argues that without such taxpayer subsidies, “we may as well put up a sign that says Kansas City is once again closed for business,” be aware that they might just be shilling for wealthy developers.

 

CID Transparency in St. Charles County?

Posted on by Corianna Baier

Ever wondered why you pay way more in sales tax at one store than at another store just down the street? St. Charles County shoppers might soon get the answer, as some want increased transparency for Community Improvement Districts (CIDs). CIDs are political subdivisions that were originally intended to fund public improvements through taxes and fees. Unfortunately, CIDs are now often used in ways that primarily benefit private developments. St. Charles County recently announced the introduction of a bill that would inform consumers about the extra sales taxes they pay in those districts and the benefit the owner received from their tax dollars.

This bill would require businesses located in CIDs to display signs at public entrances and point of sale areas that state the rate of the tax imposed or increased at the business by the CID. The signs must also include the direct benefit received by the owner of the property on which the business resides and the expiration date of the tax. 

According to the news release, the bill is intended to:

. . . highlight that often a small number of property owners can authorize sales taxes that are paid by all shoppers in the CID, and that businesses in a CID can be forced to collect a sales tax that does not directly benefit the property on which it is located.  

Analysts at the Show-Me Institute often discuss these very problems with CIDs. Consumers are typically unaware of district locations and voters hardly ever get a say on CID sales taxes.  The information on these signs would provide people the information they need to make informed decisions as consumers.

Increasing transparency for CIDs would be a good thing for the shoppers of St. Charles County, but why are reforms like this confined to one county? Special taxing districts like CIDs will continue to take tax dollars from uninformed citizens until these districts are reformed statewide.

 

Aquarium Project Repeats Familiar Mistakes

Posted on by Scott Tanner

Local media in St. Louis is abuzz over the imminent completion of the Union Station renovation project. The St. Louis Wheel will open later in October, with the St. Louis Aquarium following suit in December. This is all part of a $187 million renovation project for Union Station headed by Lodging Hospitality Management (LHM), a firm that purchased Union Station in 2012. The chairman of LHM said of the mid-December aquarium launch date: “It’s our Christmas gift to St. Louis.”

Typically, a gift doesn’t require a contribution from the person on the receiving end. But St. Louis taxpayers are ponying up for nearly half the cost of the aquarium, as described in a St. Louis Post Dispatch article:

[Twenty] million of the St. Louis Aquarium’s construction costs will come from an existing tax-increment financing agreement and two special tax districts that carry a 1 percent tax on sales at Union Station. Included is LHM’s intent to use $5 million in historic preservation tax credits to help restore the 11-acre shed.

Show-Me Institute analysts have spent years documenting the failures and abuses of tax-increment financing (TIF), special taxing districts, and historic preservation tax credits. These programs take public dollars and shift investment risk to taxpayers, while allowing private investors to reap the benefits.

If the aquarium is a good idea, why aren’t there private investors lining up to fund the project?

Maybe it’s because aquariums are a pretty risky bet financially. A recent article in The Atlantic outlined the financial struggles of aquariums in big cities across the United States:

The stress of acquisition and maintenance often leads to financial struggle . . . In this century, the Denver aquarium, which opened to much fanfare in 1999, declared bankruptcy in 2002 because of defaults on building loans. (It was purchased by Landry’s, a hospitality company, and reopened in 2003.) More recently, the newly opened Shreveport Aquarium has struggled with almost $500,000 in unpaid construction debt. Many of these spaces are subsidized by tax breaks and bonds, to be paid back when an aquarium becomes profitable. But too often, this goal is not realized. As economic-development projects, aquariums are risky.

The South County Times reports that the St. Louis Aquarium expects 1.5 to 2 million visitors per year. That seems like a curiously optimistic projection. The Shedd Aquarium in Chicago gets just over 2 million visitors per year, and it has 5 million gallons in total volume for tanks and exhibits; the St. Louis Aquarium will have just 1.3 million total gallons.

It’s not clear why planners project the St. Louis Aquarium to nearly the match the Shedd Aquarium in total attendance with a much smaller aquarium in a much smaller city. But if visitor numbers don’t match expectations and revenue lags as a result, (the aquarium is not free; a ticket price of around $24 is expected for adults) will taxpayers be asked to chip in again to cover the shortfall?

If all of this sounds familiar, it should. In 1985, Union Station was renovated in a massive $150 million project that included generous tax breaks. And what was the city left with? A mall in Union Station that was largely abandoned after barely more than 20 years. And thus the cycle begins anew: The mall was sold, was bought by a new developer, and is being renovated with the help of taxpayer dollars.

We all want what’s best for St. Louis, and it’s exciting to see big new projects generate enthusiasm. But the definition of insanity is doing the same thing over and over again and expecting different results. That seems to perfectly describe economic development policy in St. Louis.

Thank You to the Urban League of Greater Kansas City

Posted on by Patrick Tuohey

I remain grateful to the Urban League of Greater Kansas City, and to its president Gwen Grant, for including my essay on economic development incentives and efforts to study the costs and benefits in their new publication, 2019 State of Black Kansas City: Urban Education, Still Separate and Unequal. This is the second time the Urban League has published one of my essays of economic development incentives, the first time being in 2015.

Many cities are failing their primary task to provide basic services, and one big reason they are failing is because too much time and money is being spent trying to attract big projects such as airports, convention hotels, stadiums and the like. As a result, money that would go to schools, libraries, roads and police is diverted away. It’s true in Kansas City and St. Louis and most cities across the country.

There is plenty of opportunity to debate how public dollars should be spent to provide better services—and plenty of room to disagree. The Urban League and Show-Me Institute agree on at least this much— public dollars should be used for core services and not diverted away to private developers to do what the research tells us they were going to do anyway.

 

Theoretical Jobs

Posted on by Jakob Puckett

H&R Block once claimed to have created more than 2,000 new jobs by moving employees to a different building, courtesy of tax-increment financing (TIF). This is a perfect example of why Missouri’s TIF reporting is untrustworthy. Counting the number of jobs created is a mystery, as the number is solely dependent on what developers claim with no additional verification. A company with 100 employees could move across the street into a TIF district and claim those as new jobs. This is what H&R Block did when it moved into a new building built with more than $290 million of abated taxes through TIF.

But even if these inflated jobs claims were accurate, would they be worth celebrating?

The state of Missouri publishes an annual report cataloging every existing TIF project. While the job projection numbers are squishy (as mentioned above), we can still compare the promised benefits with reported reality.

The spike in the graph at the top of this post could be attributed to a larger number of projects granted TIF benefits in 2015. The Missouri Department of Revenue has not responded for comment on how the numbers are calculated. However, even without that blip, the highest number of claimed jobs in any of the six years has not reached the lowest number of promised jobs.

Even though some projects meet or exceed projections, most do not. In all, the job shortfall from these six years is over half a million jobs, counting promised new and retained jobs.

Further, taxpayers are on the hook for almost a quarter of the total costs for these projects:

  Projected Reimbursements as Percent of Total Cost  
Year Total Project Costs Total Anticipated TIF Reimbursable Costs
2013 $24,181,041,121 $4,919,658,493
2014 $24,558,363,481 $4,255,772,786
2015 $36,736,538,004 $7,054,673,240
2016 $43,393,299,405 $9,045,087,943
2017 $39,487,575,379 $7,688,364,501
2018 $39,205,508,672 $15,445,602,846
Total $207,562,326,062 $48,409,159,809
TIF % of Total   23.32%

Source: Missouri Department of Revenue Tax Increment Financing in Missouri reports, 2013-2018. Table created by author.

If these projects routinely produce fewer jobs than expected at a large expense to the taxpayer, what is the public benefit? We have reported several cases of companies using TIF for private benefit, and this appears to be a consistent trend. In many cases, for up to 23 years, developers in a TIF district receive a refund of some portion of the local sales taxes, utility taxes, and earnings taxes (if applicable)  generated by the project and only pay property taxes on the value of their property before the improvement was made.

While the public return may be questionable, the private benefit seems clear. TIF-related property values came a little shy of tripling in value between 2013 and 2018. What business would not want its property to increase in value, especially when it has received a 23-year tax abatement?

People with good intentions can differ on economic development policy, but it should be plain to everyone that Missouri’s current TIF policy isn’t working.

 

SMI Podcast with Shoshana Weissmann: License to Regulate

Posted on by Susan Pendergrass

Show-Me Institue analysts have been writing about wrongheaded occupational licensing policies for years. We were thrilled to have Shoshana Weissmann join us for the latest SMI Podcast to discuss how occupational licensing laws serve as barriers to employment, and ideas for reform. Social media regulation was also discussed. Weissmann manages social media and marketing for the R Street Institute, while also working on occuaptional licensing issues. You can listen to the whole podcast here:

https://soundcloud.com/show-me-institute/smi-podcast-shoshana-weissmann-license-to-regulate

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