Why “Developer” Is and Is Not a Dirty Word

Posted on by Graham Renz

In a recent piece at the New York Times, a writer laments:

Real estate developers are indeed fraught characters in city life. . . . And the history of American development certainly includes shady land speculation schemes, racist intentions and bloated egos. . . . But at its best, development has also meant progress in America. And that possibility has been banished from recent debate.

The worry is that “developer” has become a dirty word, and that our mostly negative perception of developers and development is off-base. While urban politics demonizes developers, we ought to be grateful there are people who work to develop and build our cities, the thinking goes.

This assessment is both right and wrong.

It’s right inasmuch as developers shouldn’t be demonized for providing what consumers demand through market forces. People need housing and space for their businesses, and developers provide just that. Just as we shouldn’t lambast farmers and grocers for “profiting off” our hunger, we shouldn’t bemoan developers for profiting off of our need for homes and office towers. (Indeed, we all profit off of someone else’s needs through the exchange of goods and services for money.) As Adam Smith remarked in his Wealth of Nations, it is incredible that, without any sort of orchestration, the market is full of goods and services we need and want. What Smith said about butchers, bakers, and brewers is equally true of developers.

But the Times article also misses the mark in some ways. While there is nothing wrong with providing housing by chasing profits, there is something wrong with advocating that the public subsidize projects for private gain. Developers don’t invest just their own money; they often invest taxpayer money as well. Through subsidy programs like tax-increment financing, abatements, and special taxing districts, developers reduce their private risk. And since policymakers are often generous with these subsidies, for some developers it pays—and pays very well—to chase down subsidies and ensure they continue to flow for years to come.

The economist William Baumol, in his famous paper “Entrepreneurship: Productive, Unproductive, and Destructive,” argues that market agents are after profit, and they will try to get it through productive means or unproductive means. He thought that when governments have the power to pick winners and losers in the economy, entrepreneurs will chase government favor instead of working to meet consumer demand competitively. Many developers, like many market agents, have become infatuated with government handouts, and that is deserving of criticism.    

 

The Myth of Supposed Market Failures

Posted on by Elias Tsapelas

Markets are said to be failing when supply doesn’t respond to demand—like a beachside shop refusing to sell sunscreen. When it comes to public policy, the markets are more complex and the process of diagnosing a failure is often difficult. If policymakers determine that a market is failing, their question then becomes what, if anything, the government should be doing about it. The problem is that poorly targeted government intervention can be more harmful than if nothing had been done at all.

If a market is truly failing, there can be economic justification for government policies in response. Though in practice, government intervention rarely hits the mark. For example, Missouri’s state and local governments would have you believe the housing market is failing. Their argument is that the market is failing to provide a sufficient supply of affordable housing. In 1996, the state’s elected officials decided that they should intervene. But is Missouri’s housing market any better for the state’s low-income residents today than it was 23 years ago?

More than two decades have passed since Missouri implemented the state’s version of the federal low-income housing tax credit (LIHTC). In that time, billions of dollars have been devoted to building new housing with 30-year rent protections, yet the program’s wait list is supposedly longer than ever. If that is really the case, it’s time to question why policymakers would consider continuing a government intervention that is failing to solve the problem it was intended to address.

LIHTC is predicated on the idea that subsidizing the development of housing will increase access to more affordable places to live across the state. But this is only true if there is currently not enough housing because it’s too expensive to build, and if subsidizing new developments will spur further housing investment by private entities. Without both of those conditions being met, the program can’t be effective—which matches the academic research on the subject and more importantly, Missouri’s past experience.

If the market is failing and there is an insufficient supply, policymakers should look into what may be causing the inefficiency. Restrictive regulations and zoning laws add to project costs, which discourage investment in neighborhoods where an increase in housing supply may be needed. Or if there is already enough housing but it is simply unaffordable, demand-side fixes such as housing vouchers or other measures that effectively lower the cost of already existing housing may be more appropriate.

It’s extremely unlikely that the issues plaguing the housing market in St. Louis are identical to those being faced in Pilot Grove. Policymakers shouldn’t expect broad-stroke statewide policy actions to be equally successful in both Missouri’s metropolitan and rural areas.

The fact of the matter is that very little has been done to establish whether Missouri’s supply of housing is actually lacking or why that may be the case. Without that information, it’s nearly impossible for policymakers to successfully intervene. Two things they do know are that many of their constituents would appreciate greater access to less expensive housing, and that developers have told them that issuing tax credits is the only way to make that construction worthwhile.

For some reason, policymakers continue to act as though the LIHTC program is their only tool for “fixing” housing in Missouri, when that couldn’t be further from the truth. Instead of doubling down on an already-failed policy, why don’t Missouri’s elected officials take a closer look at the underlying causes of the supposed market failure to find a new path forward for Missouri; or better yet, step back and let the market take care of itself.

 

Port KC Versus Taxpayers

Posted on by Patrick Tuohey

Steve Vockrodt over at The Kansas City Star has a story about Google wanting to invest $600 million in a data center in Kansas City. If this were the whole story, it would be great news. But the shell game of taxpayer incentives makes this opportunity less than meets the eye. Vockrodt writes:

The Port Authority, or Port KC, ultimately could issue up to $25 billion in bonds over 35 years for the Google data center project, a figure that represents the company’s maximum investment in Kansas City. Think of the $25 billion as a credit limit on a personal credit card. It’s not necessarily an indication of how much Google will invest.

The benefit to Google is that the Port KC can issue Chapter 68 bonds that give Google a property tax exemption for 25 years. Vockrodt goes one step further and makes clear in the story that such subsidies for data centers don’t offer a great return, if any, for taxpayers:

Good Jobs First, a research group often skeptical of corporate incentives, in a 2016 report identified a Google data center project in Oregon from 2006 that received $360 million in subsidies in return for 175 jobs, or $2 million per job. Good Jobs First advised cities and states to treat data center subsidies with caution.

“Internet-based companies have to grow the cloud and they will choose stable areas with cheap electricity,” the report said. “They will barely benefit your local economies because they create so few jobs and often import top-wage labor.”

Once again, Kansas City through its port authority is playing handmaiden to large corporations even when there is so little to gain. (Rest assured, this same story will unfold if/when the USDA considers locations in Missouri.) How is Kansas City supposed to fund infrastructure, education, public safety and all the other basic needs on which we depend if we continually offer exemptions from the taxes needed to provide them?

If taxes are too high for Kansas City to be a competitive place to attract business, then that needs to be addressed fairly for everyone. Offering sweetheart deals to a few while the rest of us pull their weight is no way to operate a city.

Eighty-Three Special Taxing Districts Opted Out of Tax-Free Weekend

Posted on by William Magee

During the season of back-to-school chaos that thousands of Missouri families face each year, the state in recent years has eased the burden by offering tax-free shopping on school supplies during the first weekend of August. But some taxes kept on working through the holiday.

By state law, local taxing jurisdictions can opt out of the annual sales tax holiday. This year, 50 counties, 156 cities, and 90 Special Taxing Districts decided not to give Missouri families a tax break. Of the 90 Special Taxing Districts, 83 were either community improvement districts (CIDs) or transportation development districts (TDDs). But unlike taxes collected by cities and counties, most of these districts’ sales tax revenues help the private interests that set up the districts rather than funding public services. Many of these districts are found in the most popular shopping areas in the state and encompass large retail stores like Walmart and Target. Some examples include the Arnold Retail Corridor, the Delmar Loop, and the Hanley Road Corridor in Maplewood/Brentwood.

These overgrown microgovernments have already taken over a billion dollars in taxes from Missourians to fund the development or redevelopment of commercial districts, with privately owned businesses reaping the benefits. One 3-day weekend without sales tax revenue would hardly put a dent in the millions collected the other 362 days of the year.

Absent any action from a special taxing district’s board of directors, the district, by default, participates in the tax holiday. However, the board of each of these districts—usually elected by a small number of property owners—instead voted to keep charging the district sales tax rather than give Missouri families a break. Unlike state, county, and city sales taxes, the taxes collected from the special taxing districts formed by developers do not contribute to the funding of public services for the average taxpayer. Instead—perhaps due to the lack of accountability and oversight—they go toward subsidies that primarily help big businesses.

So if you found yourself confused by the presence of a tax amount on your receipt this past weekend, thank the misguided laws that govern special taxing districts.

 

Medicaid’s Long-Term Problem

Posted on by Elias Tsapelas

The United States’ population is getting older, and that’s a troubling sign for Missouri’s Medicaid program. Next year’s Medicaid budget is expected to be the largest ever for the state—consuming nearly 40% of all government spending—and the elderly population makes up a significant portion of the expected costs. As life expectancy has increased over the past few decades, so too has the cost of care for elderly individuals. But what does that mean for Missouri, a state already struggling with growing Medicaid costs?

Every day, 10,000 baby boomers in the United States (individuals born between 1944 and 1964) reach retirement age, and a new study estimates that 75% of them will need nursing home care at some point. The majority of Missourians reaching retirement age do not currently qualify for Medicaid, but with nursing home costs in Missouri averaging more than $5,000 per month, the longer individuals reside in such facilities, the more likely they are to become eligible for Medicaid. In fact, Medicaid pays the highest share of nursing facility costs in the country, totaling 65% of all expenditures at Missouri’s nursing facilities in 2016.

So what should Missouri do to prepare? For starters, policymakers should reform the state’s Medicaid program. Medicaid is an enormously expensive program with very little evidence showing it actually improves health outcomes for participants. One way to provide better services at a lower cost would be to change the payment model for various services to ensure it is incentivizing desired outcomes. Reforming the way Missouri pays for long-term care would be a good place to start.

Missouri’s nursing home reimbursement rates are per diems based on each facility’s historic costs, which includes construction expenses, and are not adjusted according to the level of care each resident needs. Rather than base payments off the quality or quantity of care delivered, the size of the per diem nursing homes receive is simply based on the number of patients they have. This discourages nursing homes from moving patients out of their facilities and into more appropriate and less restrictive environments. As a result, Missouri spends a lot of money on nursing home patients who could receive the care they need in a different environment and at a lower cost to taxpayers.

Missouri’s seniors should have access to the best possible care, in the most appropriate setting, and, for those who need government assistance, at the best possible price for the state’s taxpayers. Though there is no magic bullet that could fix Missouri’s Medicaid program, increasing the value received from each provided service would be a welcomed change.

 

Getting Sent Back to School

Posted on by Susan Pendergrass

What a mixed-up world we live in. In order to keep her daughter in the school she has chosen, a school that is working wonderfully for her daughter, Renita Jones has to do the impossible. She has to sell the home she has owned for fifteen years and quickly find an affordable apartment in Ladue, a wealthy suburb of St. Louis. If not, her daughter will be sent back to a failing school in her home district of Normandy.

Jones is part of a student transfer program that was created when the Normandy schools were so low performing that an emergency exit was created that allowed students to enroll in other districts. Now, the “system” that the Missouri Department of Elementary and Secondary Education (DESE) uses to rate the performance of school districts has somehow declared that Normandy, a district in which just three percent of 7th graders were proficient in math last year, is good enough. The transfer program is over, and the exit has been closed.

But let’s look at the bigger picture. Parents (and I can’t believe how often I have to say this) want to have choices when it comes to their child’s education. Of course parents in one of the lowest-performing districts in the state jumped at the chance to leave when it was offered. But guess who else chooses something other than their neighborhood school? Parents of bullied students, parents of students who are assigned to a big school but would do better in a small school, parents of students who want or need a particular curriculum such as fine arts or the classics and parents of students with disabilities who find a program that connects to their child’s needs. This list could go on and on.

So now the media is highlighting the tragedy of Tyler Ratlif Woods, who was on the path to college. Woods just found that he will not be attending high school in Ladue, where he went to elementary and middle schools. Instead he must return to his low-performing and potentially dangerous neighborhood high school in Normandy. One article quotes a transfer student’s father, Paul Davis, who called the transfer program a “gift from God.”

These stories are upsetting. It seems unfair. Forcing these children to return to their crumbling district isn’t going to help that district much, but it is going to hurt those children. In this case it’s obvious. But let’s not forget the less obvious—school-aged children are not the property of a school district by virtue of their address. They are individuals with individual needs who should have options when it comes to their education.

 

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