Auditor Report on Tax Incentives and Exemptions

Posted on by Patrick Tuohey

Missouri State Auditor Nicole Galloway has issued a report on the Cost of Tax Incentives and Exemptions. The auditor calls for more rigorous fiscal impact studies—but inadvertently shows how important such studies are by making some questionable assumptions of her own.

The auditor notes that the fiscal impact of proposed pieces of legislation was not followed up by analysis after the fact. 

State law does not require a post-implementation review of fiscal notes to determine the actual fiscal impact of legislation enacted in comparison to fiscal note estimates. Post-implementation reviews would be especially beneficial for legislation impacting the tax base or for which the fiscal note included an estimated impact on tax revenues.

For example, the auditor finds that the estimated fiscal impact of a particular bill (SB 19 in 2015) was estimated at $15.2 million annually, but she claims the actual cost for the first two years of implementation was about five times greater. To reach that number, the auditor simply examines revenue from before adoption with revenue post-adoption and assigns all the impact to a single bill. Officials from the Department of Revenue make this exact point in the text of the auditor’s report (page 9):

DOR personnel could not identify the actual cause in the reduction in corporate income taxes, but indicated SB 19 (2015) was likely one of the contributing factors along with other potential factors including “other legislative changes” and “changes in the overall economic market.”

The point the auditor is making is valid and laudable: we don’t know the actual cost of the tax laws we’re adopting. Public policy is only as good as the information it relies upon. The Show-Me Institute welcomes any thorough analysis of tax policy—but the auditor’s report may be worse than doing nothing at all as it ascribes all the change in revenue to a single legislative act.

The DOR indicated in the report that such data are often misleading and collecting it can be a burden to businesses, but that the department is implementing a revenue system that may allow for more analysis. Undertaking such an analysis “would require a substantial increase in full-time employees,” which is politically unlikely.  Perhaps allocating more resources to track fiscal impact of legislation is something the legislature should consider—if only to guard against the overly broad assumptions being made in the auditor’s report.

Broadway Economics

Posted on by Joseph Haslag

The Broadway Inn is convenient for all the universities in Columbia, and its owner wants to build a $20 million expansion that would include a second hotel tower. Adding on to the hotel could be good for the area and a worthwhile investment for the owner, but the $2 million in tax-increment financing (TIF) built into the expansion proposal make it a bad deal for Columbia.

Let’s walk through this. The project will add about $20 million to the productive capital in Columbia. Between 2001 and 2016, each dollar of capital added, on average, 17 cents to the value of output—that is, goods and services—produced in Columbia. Based on this historical average, Columbia would produce an additional $3.5 million in output when the project is completed in a couple of years. One more piece of information: Columbia collects about one cent of revenue for every dollar of output produced. Consequently, city coffers would increase by about $35,000 in the first year that the expansion was operating. However, even allowing for this additional output to increase at Columbia’s average annual growth rate, which is 1.8 percent, there is not enough revenue for the city. After discounting future revenues to their present value and summing over the 23-year period, the value of the stream of city revenues comes to about $650 thousand. In other words, the city gives the developer $2 million to get back $650 thousand. Not a good return.

Proponents of the deal contend that without TIF, the expansion (and accompanying economic growth) won’t happen at all—that without an infusion of taxpayer money, development won’t be profitable enough to attract investment. However, data from cities like Chicago, Saint Louis, and Kansas City say otherwise. Comparing employment or income, the evidence indicates that economic outcomes are no better in areas that award TIF than in areas that do not.

The Broadway expansion proposal offers the appearance of certainty. At the very least, we have a good idea of what a new hotel tower will look like, so it’s easy to imagine that it will lead to an increase in economic activity. It can certainly seem riskier to turn down the proposal and wait to see what (if any) productive use the land next to the current hotel is put to. But there is no guarantee that the expanded hotel will be successful, either.

Fundamentally, economies grow when people put labor and machines and capital together in a way that yields more valuable stuff. Growth is the product of creative and innovative people who are trying to earn a profit. The law permits people to ask the city government for a subsidy to make a profit. But city officials must determine if granting the request is the best use of resources collected from citizens. Looking at the numbers, one is hard pressed to show that the Broadway expansion is the best use of city funds.

David French on Free Speech

Posted on by David French

On October 11, National Review Institute Senior Fellow David French was at Washington University in Saint Louis to deliver a lecture titled “War of Words: Free Speech versus Tyranny on Campus.” French discussed the growing threat to First-Amendment rights that is currently most visible on university campuses, but is spreading to all corners of public life.

One More Lap around the Ice Rink

Posted on by Andrew Aubuchon

As our readers might remember, the Chesterfield Hockey Association (CHA) wants to raise $7 million from the Chesterfield Valley Transportation Development District (CVTDD) to help fund the construction costs of its proposed new ice rink. Researchers at the Show-Me Institute have rejected the arguments of proponents of this and similar initiatives, but as the project has now been presented to residents of the CVTDD for consideration, I’d like to reiterate some facts about transportation development districts (TDD) in general, and the CVTDD specifically.

First, if the district is extended, the district and its taxes can continue up to an additional 15 years beyond its originally scheduled termination. Put more simply, that means up to 15 more years of collecting taxes that would not otherwise have been levied. To say that’s not a new tax is like a bank adding over a decade’s worth of payments to your home mortgage and telling you there’s nothing to worry about because the payments aren’t “new.”

Second, TDDs were meant to raise funds for critical infrastructure projects; what they actually raise funds for is often anything but that. A recent report by the Missouri State Auditor exposed TDDs in Missouri as routinely “engaging in questionable practices with little oversight or transparency.” One example has been the CVTDD itself, which used over $500,000 taxpayer dollars to construct a “beautification wall”—a project whose questionable use of tax dollars has been documented before.

Third, the ballot initiative language for extending the CVTDD is hardly reassuring to those interested in good government. The language provides an extensive laundry list of items that revenue from the CVTDD may be used to fund. While a casual reader might assume the list is exhaustive, such an assumption would be incorrect. The list of permissible expenses is preceded with the words, “including without limitation.” The scope of spending could exceed even the problematic spending priorities that are explicitly spelled out to voters. The items articulated on the ballot aren’t limits; they’re examples.

Fourth, if this ballot initiative passes, then anyone who shops in the CVTDD—not only the well-to-do, but also single mothers, poor families, and those of meager means—will be subsidizing the recreation of the CHA through the sales tax that they pay at Walmart and other stores in the district.

Setting aside the deficiencies of the ballot language and even assuming that taxpayers’ money is efficiently used within the explicit scope of the project, the proposal itself remains troubling. It would commit an entire community, through the vote of only a few, to subsidizing significant amenities for members of a narrowly tailored special interest organization—not to mention that there has been no showing of need that cannot be met without a tax that is inherently regressive. That a private group may end up with a public windfall, thanks to the state’s broken TDD laws, should bother us all.

Are Kansas City and Saint Louis Getting Taken?

Posted on by Patrick Tuohey

The deadline for submissions to Amazon to host their new headquarters building has come and gone, and both Kansas City and Saint Louis tendered proposals. Unfortunately, neither city is releasing its proposal to the public, citing a non-disclosure agreement with Amazon.

The Kansas City Star editorial board has been critical of the secrecy, noting in an October 6 column that the agreement is

aimed at keeping a lid on Amazon’s proprietary information — not the cities’ best arguments about why they would be perfect for HQ2. Other contender cities that are playing by the same Amazon-imposed rules have managed to make more information public.

The state of Missouri, without favoring either Kansas City or Saint Louis, issued what can best be called a brochure for doing business in the Cave State. (It’s been called a proposal, but that is a generous description of the 13-page slide show.)

Until we know the details, we’ll just have to sit and wait to see what commitments municipal leaders have made on behalf of taxpayers. If the past is any indication, they will include generous taxpayer subsidies in the form of abatements, tax credits, and tax-exempt freebies wherever possible. Philadelphia is offering ten years of property tax abatement. New Jersey’s bid included $7 billion in tax incentives.

The question for taxpayers will be whether the benefit is worth the investment. Research suggests this is rarely the case. One economist from Mizzou, Saku Aura, put it bluntly:

As a Missouri taxpayer, I really hope Amazon doesn’t come here. The place that most grossly overestimates the benefits from a large company moving is going to be the one who’s going to get it. If they choose to come to Missouri, to me that would almost imply that we ended up being the biggest sucker among the 50 states.

Is Missouri being played for a sucker? Richard Florida, an urban studies theorist focusing on social and economic theory seems to think so. According to the St. Louis Post-Dispatch, Florida said, “the cities I talked (to) all know they are being taken and resent it.” Among those cities would be Kansas City, as Florida was a paid consultant to its effort

Is the Fate of Kansas City’s Airport Terminal In Its Star?

Posted on by Patrick Tuohey

On October 8, The Kansas City Star editorial board urged readers to vote for a new airport terminal in the November 7 election. It wrote:

To us, one of the main selling points of the proposed new terminal is the expectation that airlines would add more direct flights out of here, and maybe even some international flights.

Two days later, Star reporter Steve Vockrodt authored a piece that made clear there was no guarantee of new flights should voters approve a new terminal. Vockrodt clarified:

A new terminal, by itself, won’t lead to more direct flights to more destinations.

“That’s probably fair,” said Steve Sisneros, senior director of airport affairs for Southwest Airlines, the dominant airline flying in and out of KCI.

The editorial board did eventually correct their error, stating on October 15 that, “There are no guarantees that more flights will be added by the airlines if voters agree to construct a new single terminal.” The next day, Vockrodt caught pro-terminal mailers making the same mistake.

In that October 15, the Star editorial board again endorsed a new terminal vote, but seems to have made a second error, stating that, “if nothing is done, the number of flights out of KCI will continue to dwindle.”

Dwindle? According to the Aviation Department’s own statistics, enplaned passengers (those boarding an airplane) are up 4.5% over last year. Likewise, air carrier operations showed an increase in flights of 5%. Southwest Airlines—the biggest carrier at MCI—saw an increase of enplaned passengers of 5.6% over last year. Passengers and flights are increasing, not dwindling.

Two emails obtained by the Show-Me Institute (see links at the bottom of this post) and sent by Mark Nevins of the Dover Strategy Group—the company running the yes vote campaign on the airport—indicate that members of the Star editorial board are apparently committed to supporting the effort with regular editorials. In an October 8 email, Nevins links to a supportive op-ed and writes that single-terminal backers “can expect to see more of these kinds of generally supportive editorials in the weeks ahead.” Then in an October 15 email Nevins reiterates that the Star “will continue to publish editorials supportive [sic] Question 1 on a regular basis through Nov 7.” I hope the editorial board is not simply working as a mouthpiece for the yes campaign. Of course, that could explain why the latter’s misleading claim about increasing the number of direct flights also appeared in a Star editorial. It might also explain why the Star is running editorials pushing the new terminal regularly—so as to make them more a part of the campaign than an expression of editorial board views.

This same editorial board has decried the airport bidding process as “marked by distrust, misinformation, unnecessary secrecy and conflict.” It would be a shame to learn that in its zeal to promote a single terminal, the Star editorial board has contributed to the very atmosphere of distrust that it decries by helping spread misinformation about the airport.

Subsidies Are Cleared for Takeoff as Wow Air Comes to Saint Louis

Posted on by Andrew Aubuchon

In August, many Saint Louisans (myself included) were excited to hear that Iceland’s budget airline Wow Air will begin operating flights to and from Lambert Airport next May. By chance, I happened to be in Europe and had recently flown with Wow Airlines when the news was announced. While I was initially thrilled by the thought of low-cost, transatlantic flights emanating from Saint Louis, it turns out that there was more to the story than initially met the eye.

Wow’s expansion into St. Louis could be more of a curse than a blessing because of the cost to the city’s tax base from taxpayer-funded subsidies. The largest of these will come from the Saint Louis County Port Authority, which will provide $600,000 to advertise Wow’s services over the next two years. However, the fun doesn’t stop there; Lambert Airport (a public entity) will contribute another $200,000, and Wow’s landing fees will be waived for 18 months (a subsidy of nearly $400,000).

Unfortunately, corporate welfare seems to have become standard operating procedure for cities, usually to their own detriment. And while the example of Wow Airlines is not the most dramatic, it does show the pervasiveness of corporate welfare in Missouri. It’s great that a European airline wants to enter the Saint Louis market, but should taxpayers really be subsidizing their neighbors’ travel expenses?

Beware the Perils of Corporate Welfare: An Open Letter to Jeff Bezos

Posted on by Andrew B. Wilson

Amazon is amazing. Just amazing.

In just 20 years as a public company, it has experienced a thousand-fold growth in sales – going from $148 million in 1997 to $138 billion in 2016 and a projected $160 billion in the current year. Adjusted for splits, the price of the stock has gone up 200-fold – from a high of $5 a share in 1997 to $1004 a share today.

To paraphrase the bard, Amazon doth bestride the narrow world of retailing like a colossus. Others quake at its every movement. Back in June, when the company announced the acquisition of Whole Foods, the stocks of other grocery chains plummeted – with Kroger falling 26 percent in the two days following the announcement and SuperValu down 16 percent. Wal-Mart fell 5 percent. Within days, Amazon’s market cap went up nearly as much as the $13.7 billion it agreed to pay for Whole Foods.

In many years of writing about business and economics, I can think of no other enterprise that has come so far so fast. Even so, waxing biblical in your 2016 letter to shareholders, you said it is still “Day 1” (the first day of creation) in the company’s evolution. When someone asked you at a recent “all-hands meeting” what Day 2 would look like, you answered:

Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.

Your words prompt me to warn you that Day 2 may be approaching much more quickly than you think. Surely you don’t want to turn Amazon into a subsidy junkie. If that happens, Day 1 will turn into Day 2 in the blink of an eye.

Right now, cities and states across the country are competing with one another to throw big money – taxpayer money – at Amazon in the hope of being chosen as the site for Amazon’s proposed second headquarters. With one hand, you dangle the promise of up to 50,000 jobs paying an annual average of more than $100,000 per employee. With the other, you rattle a tin cup, stating in your request for proposals:

Incentives offered by the state/province and local communities to offset the initial capital outlay and ongoing operational cost will be significant factors in the decision-making process . . . . Outline the type of incentive (i.e., land, site preparation, tax credits/exemptions, relocation grants, utility incentives/grants, permitting, and fee reductions) and the amount. The initial cost and ongoing cost of doing business are critical decision drivers (emphasis added).

A few years ago, Boeing Commercial Airplanes, your cross-town neighbor in Seattle, initiated a similar nationwide bidding war for production of its latest big new wide-body – the 777X. In the end, Boeing decided to keep production at its massive facility in Everett, Washington – but only after winning nearly $9 billion in tax breaks and subsidies from the state legislature. That worked out to more than $1 million per promised job, or about $50,000 per year per job over a 20-year period (the tax breaks do run out eventually).

Maybe that sounds great to you. From your perspective, it may seem like the equivalent of having local and state governments pick up half of the anticipated HQ 2 payroll for a long time.

But think of the downside of making Amazon and its people deeply dependent upon corporate welfare. Think of the gross unfairness of huge tax carve-outs for Amazon that are denied to other smaller businesses (which have to pay for their initial costs and ongoing costs out of their own hard-earned dollars). How do you want your company and its people to succeed – by winning in the marketplace . . . or by securing a fatter portion of government largesse?

Last but not least, think of the hypocrisy of preaching a gospel of “obsessive customer focus” as the key to maintaining “Day 1 vitality,” while gouging money out of taxpayers. According to Consumer Intelligence Research Partners, there are now about 85 million Amazon Prime members – that’s 68 percent of all U.S. households! As Amazon becomes increasingly ubiquitous, most of every dollar that Amazon takes out of taxpayer pockets will be money stolen (or lifted) from its own customers.

As one of your customers told me, “I am never in favor of using my tax money to build someone else’s business so that it can sell products to me and profit off me a second time.”

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