The Strata Deal Is Built on Misinformation

Posted on by Patrick Tuohey

The Kansas City Star editorial board called for the city council to reject a proposal to use taxpayer money to subsidize the construction of a downtown office tower. They write:

The proposed office building, called Strata, has spurred controversy for months. The combined tower and parking garage would cost $132 million; of that, roughly $63 million would come from public subsidies, including a direct $27 million public investment in the offices.

The editorial board is correct on their call, and while their analysis of market demand and public risk is correct, there are even more reasons to be skeptical of the developers’ claims. Part of the argument for Strata is that Kansas City needs more high-end office space that Strata would provide, but it’s hard to find evidence to support that claim.

In testimony before the Kansas City Finance and Governance Committee on June 26, 2019, a Strata developer asserted that Starbucks recently considered Kansas City for an office location [starts at 9:05]:

Jobs are being lost in Kansas City, opportunities are passing us by because we don’t physically have the space created. So I think that, uh, Starbucks is the example that gets used a lot toward the end of last year where there just was not Class A space on the shelf.

This same argument appeared in a number of outlets. FOX4 in Kansas City reported on June 26 that:

In recent months, a big employer, Starbucks, cited a lack of quality office space downtown as one factor in its decision to take about 1,500 jobs to Atlanta instead of Kansas City.

CitySceneKC, a blog funded by the pro-development subsidies Downtown Council, claimed in December 2018:

But Starbucks needed 100,000 square feet of Class A space relatively quickly, and it would take 18- to 24 months to build it in downtown KC. They went to Atlanta instead where there’s already “four- to five cranes in the air.”

Starbucks did choose Atlanta, Georgia for its new office location. But its operation looked nothing like what advocates for development subsidies claimed the company was seeking in Kansas City. They sought only 85,000 square feet and planned on only 500 new jobs, not the 100,000 square feet and 1,500 jobs alleged by Kansas City developers and their acolytes.

Note: the Atlanta job numbers were reported in August 2018, but developer sources in Kansas City kept using the inflated numbers in their blogs and comments to the media months later.

Furthermore, Kansas City and Atlanta are not in the same league. Atlanta’s metropolitan population is the country’s ninth-largest with just shy of 6 million people—2.5 times the size of Kansas City—and has grown 12.5 percent since 2010. (Kansas City’s metropolitan area is ranked the 31st largest, and has only grown 7 percent since 2010.) Atlanta is growing rapidly and is the headquarters city for 18 of the Fortune 500. (Kansas City has only one.) Atlanta is also home to the busiest airport in the United States, providing executives with direct routes to most places they might want to travel. (Incidentally, the Atlanta Journal Constitution article that detailed Starbucks investment also offered a caveat about the incentives offered to Starbucks.)

It’s also noteworthy that the “most compelling reason” for their decision, according to a July 2018 email from a senior executive at the Kansas City Area Development Council, is Starbucks already had an operation center in Atlanta and the company had a “comfort level in their ability to scale that workforce based on experience.” Also, Starbucks’ Chief Financial Officer had “strong ties” to The Big Peach. Could any of this have been overcome by more readily available office space?

Developers will always seek public handouts to build what they cannot fund through private investment. While it is understandable that Kansas City leaders look toward Denver and Atlanta and New York City, we have a long way to go before we can compete with those places. We won’t get there through subsidies—but through the long arduous work of supporting infrastructure, public safety, and education while being business friendly and an efficient steward of public funds.

 

Should Students Learn Mises?

Posted on by Corianna Baier

Sometimes when universities receive gifts from donors, they come with strings attached. In 2002, the University of Missouri received one of those gifts, with the stipulation that the economics department must hire a few professors to teach the Ludwig von Mises Austrian economics theory. Hillsdale College—my small alma mater in Michigan—was appointed watchdog to ensure Mizzou followed through. These schools are now going to court, with Hillsdale claiming that Mizzou hasn’t fulfilled the Mises requirement, while Mizzou argues that it has.

So, who is Ludwig von Mises and why would a donor believe it so important that students learn about him?

To answer this question, I reached out to Dr. G.P. Manish, a Mises Institute fellow and my Austrian economics professor at Troy University. He is well-versed in all things Mises and he laid out some of the main points.

Ludwig von Mises was an economist who supported free markets and economic liberty. He is most famous for fighting against socialism. He also used economic concepts to explain decision-making in non-market areas like households and government. For example, we think about opportunity cost when we decide to spend money on a sandwich instead of a salad, but we can also use this thinking when deciding whether to spend time cleaning or watching TV.

In general, Austrian economics takes a realistic view of the market. It allows for uncertainty, mistakes, and innovation while other economic theories assume these factors away.

After this mini-lesson, I asked Dr. Manish if he thinks that students should learn about Mises. Here is his response:  

I believe it is vital that students learn about the ideas of Mises. Doing so will give them a window into a different way of thinking about economic phenomena and will make them question the mainstream, Neoclassical tradition.

. . .

The free market, as Mises emphasizes time and again, benefits not only a narrow elite, but all groups in society, including the least well-off. This can be eye-opening in a world where capitalism and free markets are often charged with benefiting the rich while leaving the less fortunate masses behind.

. . .

A market economy is not devoid of error: entrepreneurs earn both profits and losses. But it is the only economic system where the production decisions of entrepreneurs and the resulting allocation of resources can be coordinated with the preferences of consumers. This vital lesson can be learnt only by studying the works of Mises.

As I’ve said before, markets work and Mises clearly understood that. The issue at Mizzou will be decided in the courts, but regardless of the outcome, many students would benefit from learning about this important thinker.

Dr. G.P. Manish is the BB&T Professor of Economic Freedom and a member of the Manuel H. Johnson Center for Political Economy at Troy University. 

 

Up and Up: Sales Taxes Across the State

Posted on by Graham Renz

Making long-term projections can be tricky business, but figuring out where sales taxes across the state are going is straightforward: UP!

Every quarter, the Missouri Department of Revenue releases sales tax rates for all jurisdictions across the state. Because of the growing number of special taxing districts, such as community improvement districts (CID) and transportation development districts (TDD), sales tax rates have been shooting through the roof.

Data for the latest quarter (July-September) pegs Missouri’s average sales tax rate at 7.71%. While that doesn’t sound particularly high, it is important to note two things. First, at this time in 2017, the state average rate was 7.42%. For a statewide average, that is a significant jump for such a short period of time.

Sales tax graph

Source: Missouri Department of Revenue, Sales/Use Tax Rate Tables, numerous years

Second, these figures represent averages: many sales tax jurisdictions have rates higher than even 10% or 11%. For example, in Kansas City where the streetcar TDD overlaps with the Convention Hotel and Performing Arts CIDs, the total sales tax rate is 11.6%. In St. Louis the rates reach 11.68% in places like Ballpark Village and Washington Avenue. What the statewide average does a good job of tracking is the impact of additional special taxes in the hundreds of CIDs and TDDs across the state. If the addition of CIDs and TDDscauses such significant jumps in the tax climate of the state as a whole, that means these taxing districts are not just nickel and diming taxpayers—they are significantly changing Missouri’s tax climate.

In a recent paper, Patrick Tuohey and I discuss reforms to help curb the growth of special taxing districts. Some reforms have proposed a sales tax rate ceiling, and while they would help, they wouldn’t prevent taxpayer abuse in areas with lower sales tax rates than the proposed ceiling. This much is clear: the longer policymakers take to address the state’s out-of-control sales tax problem, the worse it is going to be. The time to act is now. 

A Field of Subsidies

Posted on by William Magee

If at first you don’t succeed, get more government help. That seems to be the mantra of Missouri developers and city officials these days.

Last month, the Hazelwood City Council passed a resolution approving the redevelopment of the failing and deeply indebted St. Louis Outlet Mall. After failing to secure financing for the same project in Chesterfield, the developer, Big Sports Properties (BSP), now plans to convert the mostly vacant mall into a 138-acre youth sports complex called POWERplex, with the help of taxpayer money.

The deal includes nine sources of public financing, which can be divided into four types of incentives:

  • The first type of incentive used is special taxing districts, including a community improvement district (CID) and transportation development district (TDD), and they would together levy a 2% sales tax.
  • Second, the existing tax-increment financing (TIF) district (from the original mall development in 2003) would also collect half of all economic activity taxes paid at the sports complex, and the agreement includes tentative approval of a new TIF, slated to go into effect next January if the project is on schedule.
  • The third type of incentive used involves Hazelwood assisting the developer with debt financing, using economic development loans, Chapter 100 property tax abatement, and property assessed clean energy (PACE) financing.
  • Finally, the fourth source of incentives comes directly from the City of Hazelwood and St. Louis County in the form of $3.6 million to revitalize infrastructure.

If this all sounds too complicated, it’s because it is.

There’s plenty of reason to doubt this project will be a good investment. When the mall was first built in 2003, it received public funds totaling $52.5 million from a TIF and TDD. However, the mall sold for $6 million in 2015, just 6% of its original cost. Earlier this year, it was announced that the mall would be closing, and the TDD was mired in debt. In fact, the TDD’s bondholders agreed to settle the debt for $10.5 million, a reportedly substantial discount, which will be paid by the newly formed CID.

The mall was a taxpayer-subsidized failure, and the city is asking for us to trust them again. Even if BSP manages to see the project through this time (part of the reason the development in Chesterfield failed last year was that BSP missed an important deadline) and the first few years are successful, the long-term risk is substantial. Hazelwood might find itself in a similar situation another 16 years from now.

Besides the risk to taxpayers, government should not be picking winners and losers. Hazelwood pulled out nearly every subsidy in the book to help build a private business with no guarantee of success, and taxpayers got to bear the cost. It’s hard to imagine a time when businesses relied on market forces to decide where to build. Instead, it has become a competition between cities to see who can give away the most taxpayer money, and Hazelwood has done an exemplary job showing us where that leads.

 

Taxes for Thee, But Not for Me (Part 2)

Posted on by Patrick Tuohey

Over two years ago, Show-Me published a piece about how Missouri corporations such as Burns & McDonnell advocate for higher taxes while seeking special dispensation from paying their own. Members of the Greater Kansas City Chamber of Commerce regularly support tax increases despite—or maybe because of—the fact that much of their members’ taxes are returned to them or abated altogether.

Perhaps it shouldn’t be surprising that Burns & McDonnell is at it again, benefitting from a little-debated tax credit expansion passed by the state legislature and signed by the governor that could net them $300 million over 15 years. The Kansas City Star, in a piece worth reading in its entirety, reports that:

Since 2011, Missouri has issued $39 million in tax credits to Burns & McDonnell, according to state records. The company can receive credits for every 25 new jobs it creates and $1 million it invests in its headquarters.

The expanded credit, inserted into the economic development package with almost no debate, will cover not just its physical assets but investment in cloud computing services. It would allow the company to claim 8 times the value of a software license.

Hand-picking which companies have their taxes reduced puts a great deal more power in the legislature, encourages businesses to invest in lobbyists rather than in their core competency, and creates an unjust situation where businesses that don’t receive handouts subsidize their competition through the tax code. If taxes are too high, lower them for everyone—don’t play favorites.

Perhaps most importantly, such tax schemes are so poorly managed that they hardly work. It should not be surprising to learn that the men and women elected to local and statewide office are imbued with no magical forecasting powers to divine the growth industries of tomorrow. It’s a crapshoot.

As a result, Missourians are left holding the tax bill while corporate cronies and their amen chorus in the legislature congratulate themselves. It is unjust, unworthy of the Show-Me State, and an indelible stain on the records of those who would call themselves small-government, free-market conservatives.

 

Opportunity Zones?

Posted on by Patrick Tuohey

A recent Business Journal story examined Opportunity Zones, a new program created in the 2017 Tax Cut and Jobs Act. Opportunity Zones are low-income census tracts where groups or individuals can receive tax breaks for investing in the area. Because the legislation is so new, there aren’t any data available to see how the program will actually be used. Even in the Journal’s write up, they allowed for unintended consequences:

Some economists and policymakers caution that the law’s loose language is ripe to be gamed or at the very least exploited outside the spirit of the program’s intent. Concerns about gentrification and the displacement of poor, minority neighborhoods in the name of economic development are legitimate, they say, and probably will play out in unexpected ways, should the program work as designed.

Later in the piece we learn the Kansas City Opportunity Zone Coalition is being “spearheaded” by the Greater Kansas City Chamber of Commerce. It is not a surprise that the chamber would be involved, but anyone familiar with their role in city and state economic development policy knows this isn’t necessarily a good sign the program won’t be gamed or exploited.

The Heritage Foundation recently published a piece on Opportunity Zones, and they remain skeptical:

Academic and government studies show that past place-based development experiments often failed to yield promised employment gains or advance general economic opportunity for targeted residents. Even in cases where place-based policies induce greater investment within the targeted zone, the favored businesses gain an unfair advantage over competitors elsewhere. Often, new investments simply represent a shift in capital away from other investment opportunities outside the zone’s boundaries. In those instances where place-based policies draw capital away from more productive investments, they can result in net economic losses of jobs and income.

Incentives lavished on downtown Kansas City are a perfect example of the failed promises of place-based development incentives. A great deal of tax dollars have been spent just to redirect investment; little if any new economic activity has occurred citywide. That’s not to say that governments are powerless. But the power they wield is often negative. They can do the most good by simply getting out of the way, as the Heritage piece notes:

The economic literature, however, does offer a positive vision for helping distressed communities access economic opportunity. Lifting government-imposed barriers to work, housing supply, and education choice can expand economic mobility and opportunity. In stark contrast, top-down federal incentives can unintentionally reward failing state and local policies by masking the need for reform. Paired with removing government-imposed barriers to success, broadly applied tax reforms that reduce taxes on investment for everyone can help lift struggling communities out of poverty.

Pundits and policymakers, like former Kansas City Star columnist Steve Rose pictured above, have for too long said they don’t care what the research reveals. That is unfortunate, because good public policy demands that we pay attention to successes and failures here and elsewhere.

A Little Less Conversation, A Little More Action

Posted on by Patrick Tuohey

A little less conversation, a little more action

All this aggravation ain’t satisfactionin’ me

A little more bite and a little less bark

A little less fight and a little more spark

Although Elvis Presley intended these words for a romantic interest, Missourians can be forgiven for thinking they sound an awful lot like a plaintive cry to the state legislature. As an interim committee of the Missouri State Senate considers tax credit reforms, we are reminded of other similar efforts that generated reports and recommendations, media stories, and precious little actual reform.

A 2017 Governor’s Committee on Simple Fair and Low Taxes issued a report offering numerous reforms for all tax credits, and specific additional reforms for the Historic Preservation Tax Credit, the Low-Income Housing Tax Credit (LIHTC) and the Missouri Works program.

In 2010, then Governor Jay Nixon appointed the Missouri Tax Credit Review Commission, which made recommendations on many tax credit programs, including the same three programs singled out in the 2017 report.

Each of these efforts made clear that Missouri’s generous and numerous tax credit programs are a drain on state resources and often fail to produce the desired results. There is plenty of research to support the claim that tax credit programs aren’t worth the cost. Missouri state auditors have been railing against wasteful tax credits for years. And it isn’t a partisan issue; governors and auditors, both Republican and Democrat, have called for substantive reform, yet substantive reform is elusive. Why?

It doesn’t take a cynic to see that the very reason why these tax credit programs are bad for taxpayers—they often offer a very low return on investment for taxpayers, but a very high return on investment for developers—is why they are so popular among developers. My colleague Elias Tsapelas has written recently on the relatively weak reforms considered for LIHTC and how the goal of providing low-income housing can be better achieved without the program. But those who benefit from buying and selling tax credits have every interest in stopping any changes. The claims regarding the necessity of these programs and their economic impact are often overstated—and often backed by no economic analysis or research at all!

The most recent legislative session failed its task of reforming LIHTC, saw overwhelming support for the creation of a new film tax credit program, and gave us self-styled conservatives advocating for tax credits targeted to General Motors. Elvis’s impatience is palpable. Any Missourian can quickly learn which reforms are necessary and why; what is in short supply is the will to actually enact them.

 

Rebecca Roeber, R.I.P

Posted on by Michael Q. McShane

State Representative Rebecca Roeber passed away Monday night after a long and painful recovery from a brutal car accident this spring.

Rep. Roeber was a tireless advocate for Missouri’s children. She was perhaps the greatest champion of school choice in Jefferson City and worked for years to expand the educational options of our state’s children.

She was curious, she listened, and more than anything, she was kind. She modeled for all of us that we can be passionate advocates without demonizing those who disagree with us. Perhaps it was her years as a teacher that instilled these skills in her. Maybe it was just part of who she was.

We experienced a great loss this week, but it is important for all of us who believe in empowering families with choice to continue the work that she began. She would expect nothing less.

May she rest peacefully in the loving arms of the Lord she so loved.

Show-Me . . . Lots of Bad Government?

Posted on by Graham Renz

When you clean the house as things warm up in the spring, you often find things—dust bunnies and other unsavory creatures—hiding under the couch and in the closets.

Things are no different in government. Analysts at the Show-Me Institute spend a lot of time combing through reports and audits, and as I looked through the state auditor’s 50 or so reports for this year, I found a whole lot of dust bunnies—nasty, government failure dust bunnies.

Of the reports that received a judgment (about half of the reports are follow-ups or monthly postings without a judgment), half enjoyed “excellent” and “good” results, while the other half received “fair” and “poor” marks. In short, about 50% of the public entities audited weren’t doing a great job by any stretch of the imagination. 

For context, here is how the SAO defines “Fair” and “Poor”:

Fair: The audit results indicate this entity needs to improve operations in several areas. The report contains several findings, or one or more findings that require management’s immediate attention, and/or the entity has indicated several recommendations will not be implemented. In addition, if applicable, several prior recommendations have not been implemented.

Poor: The audit results indicate this entity needs to significantly improve operations. The report contains numerous findings that require management’s immediate attention, and/or the entity has indicated most recommendations will not be implemented. In addition, if applicable, most prior recommendations have not been implemented.

Now, this all is a little abstract, so let’s consider some examples.

The City of Hamilton, the subject of SAO Report No. 2019-007, received a rating of “Fair.” For what exactly? Well, among other things, for lacking a road maintenance plan, for failing to stop conflicts of interest, for not following basic payment procedures, for not complying with Missouri’s Sunshine Law, for not giving the public library its money on time, and for failing to put its budget together in a proper way. So, while ‘fair’ might not sound so terrible, it is a long shot from being acceptable.

More troubling reports come from places like the City of Miller and Madison County. 

In Miller, west of Springfield, the city raised taxes for water treatment services but still can’t pay its bills, and has violated the state’s Clean Water Act. Basic timesheet procedures weren’t followed, city credit cards were not adequately tracked, the city’s budget wasn’t put together according to the law and was inaccurate, and the city hasn’t complied with the Sunshine Law. Most troubling is that the former police used city credit cards for personal expenses and kept his brother on the city’s payroll while he was working another job.

In Madison County, in southeast Missouri, where an investigation is ongoing, it appears taxpayers would pay their property taxes and then records of the payment would be deleted from county systems. The money from these transactions appears to have never made it to the bank. In short, it looks as if taxpayer money was being flat out stolen. Bad government? I think so.

With 114 counties, nearly 1,000 cities and villages, and thousands of other public entities across the state, bad government is a constant and ubiquitous problem. A liberty-minded skepticism of government seems warranted when reports like these make news. 

 

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