Subsidies in Saint Louis, Part 3: Where They’re Used

Posted on by Michael Highsmith

Supporters of economic development subsidies justify them on the basis that the subsidies will help boost economically depressed areas by increasing investment. The intention seems good; but in Saint Louis, incentives seem to be going to places where they aren’t needed, and they don’t seem to be going to the places that do need them.

A study commissioned by the Saint Louis Development Corporation (SLDC) looked at geographic distribution of incentive use in the city and found that roughly two-thirds of the total value of credits is concentrated in a handful of neighborhoods. This by itself may not be a problem—maybe those few areas are struggling disproportionately and need the help. But that’s not the case. To the contrary, the study showed that most incentives go toward neighborhoods that already have strong housing markets. In other words, well-off areas are receiving subsidies, while the economically depressed parts of St. Louis are ignored.

One potential cause of this inequitable distribution is the lack of rigor in the approval process for incentives. Tax increment financing (TIF) applications currently require land to be declared as “blighted,” or as “conservation” or “economic development” areas, but the legal definition of blight has become so watered-down that almost any piece of property can be declared blighted.

Additionally, the SLDC report found that some important requirements that other cities use when deciding to award tax abatement aren’t applied in Saint Louis:

As it relates to tax abatement, a significant number of the benchmarked cities require either (or both) a cost benefit analysis prior to award of the abatement and have job creation criteria as part of the decision to award. St. Louis does not require either for tax abatement. (p.3)

It seems that Saint Louis’s method of evaluating and approving tax incentives could stand some improvement, but the issues run deeper than the approval process. Part 4 of “Subsidies in Saint Louis” will discuss accountability measures regarding reporting and job creation.

“But for those willing to recognize the simple lessons of history, slow growth is not hard to diagnose or to cure.”

Posted on by Michael Highsmith

Earlier this week, the Wall Street Journal published an op-ed by John Cochrane, Senior Fellow at the Hoover Institution, that explored our current lackluster GDP growth. The conclusion is not that improvement is impossible, but rather that some deep restructuring is necessary to make it happen.

Cochrane’s growth-oriented policy program outlines the need for more efficient regulations and a simpler tax system that would encourage work instead of undermining it. He says the ideal tax system should be one that raises revenues without drastically distorting economic behaviors, and a pure tax on consumption is “close to that ideal.” The piece goes on to cover a myriad of policies where free-market reforms could boost growth and improve standards of living.

While I highly recommend reading the piece, the Show-Me Institute also had the pleasure of hosting the self-described “Grumpy Economist” last month at Saint Louis University, where he talked in more depth about how these reforms could affect Missouri and the nation. The full presentation is available online here. 

Amendment 3 Falls, Hard

Posted on by Michael Q. McShane

With the unexpected result of the Presidential election and big-ticket statewide races, I don’t blame you if you missed the result of the Amendment 3 initiative petition.

We here at the Show-Me Institute were very interested in Amendment 3 because the issue was so complex and multifaceted. From the funding mechanism (cigarette taxes) to the policy it would support (early childhood education) there was more to the question than met the eye.

Now the people of Missouri have spoken, and by a 60% to 40% margin (as of this moment), they soundly rejected Amendment 3.

There is much parsing of this election to be done, but I do want to offer a couple of quick reactions:

  • Missouri does not like cigarette taxes. Not only did Amendment 3 fail, but so did Proposition A, a much smaller cigarette tax (by a 55% to 45% margin). These initiatives are just two in a long line of cigarette taxes that the state has voted down. At 17 cents, Missouri has one of the lowest cigarette taxes in the nation, and it appears we want to keep it that way.
  • Voters can read between the lines. At first glance, it looked like Amendment 3 would win in a walk. According to Ballotpedia, the first polling on this issue back in July had the issue winning 53% to 29%. As more and more information came out and voters became more informed about the issue, that support eroded and eventually became opposition.
  • Ideas matter.  Not all of the campaign finance numbers are in, but according to Ballotpedia numbers, the “Yes” campaign outspent the “No” campaign by a wide margin, $12.8 million to $5.7 million. But it was to no avail. In the end, the arguments matter more than the spending, and the proposal failed.

I don’t think we need to close the door on pre-K, though my colleague Emily Runge’s piece earlier this week has definitely caused me to temper enthusiasm for it (which I didn’t have a great deal of to begin with). We do need to think long and hard about how we structure it and pay for it.  As we argued in 20 for 2020, a voucher-based system that puts students and parents in charge is the best way to structure pre-K if we’re going to do it, and we should be skeptical of any plan that does otherwise.

Tax Hikes to Fund Tax Cuts?

Posted on by Michael Highsmith

A decade ago business boomed as the Crestwood shopping center annually brought in more than $1 million in sales tax revenue for the city.  Today the mall is closed, and the city says that without a property tax increase it will have to lay off staff, affecting public safety response times and infrastructure maintenance.   Before authorizing a tax hike, voters should consider the totality of Crestwood’s tax policy.

Earlier this year Crestwood officials granted the owner of the former Crestwood Plaza $25 million in tax incentives to redevelop the 47-acre site into a mixed-use project (meaning office, retail, and residential space).  Incentives such as these can hollow out a city’s tax base in cases where development would have taken place anyway, and research shows this is often the case.  If the city is in a hole, why is it diverting its tax revenue to a developer?

This is exactly what Lindbergh School District officials are wondering.  The district’s superintendent has spoken out against the use of public subsidies for the development, because the tax incentives awarded to the Crestwood shopping center project will result in the diversion of public dollars away from the schools. 

Raising the city’s property tax could also have adverse effects down the road.  While not the only consideration, taxes are a variable taken into account when someone is deciding where to live. Crestwood’s residential property tax rate of $0.25 per $100 assessed value is fairly attractive compared to other Saint Louis County municipalities.  This appears to be a competitive advantage for attracting residents that Crestwood would do well to maintain.

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When residents of Crestwood are asked to what degree they would support a tax increase, perhaps they should ask if giving away millions of dollars to a developer—money that might otherwise be spent on fundamental city services—is the wisest use of the city’s funds.

Amendment 3: Politics are Intriguing, but Policy Matters More

Posted on by Michael Q. McShane

Over the last couple of weeks, I’ve had the chance to talk about my paper Amendment 3: The Good, The Bad, and the Ugly on the airwaves and in person all across the state.

Many people have been drawn to the discussion because of the unique political situation surrounding Amendment 3. It is a cigarette tax designed to fund pre-K education that is supported by tobacco companies and opposed by the American Cancer Society Cancer Action Network. How can you not be interested by that?

But let’s cut through the fog. Politics are interesting and might get folks hooked, but ultimately it’s the policy that should concern us.

Backers have some solid reasons to support the proposal. Funds will be made available to both public and private providers, which would, in theory, provide a wider set of options than if funding was restricted solely to traditional public schools. Additionally, the drafters of the Amendment have taken steps to try and insulate the program from the forces of the educational status quo by requiring funds generated by the tax to be kept separate from general revenue and be managed by an independent board.

That said, there are reasons to be concerned about this proposal. While insulating the board from the pressure of interest groups is a laudable objective, it could mean that the board is less accountable to taxpayers. The amendment language also states that the board needs to be “equitable” in its distribution of funds. If you’ve even casually followed discussions of education finance in Missouri and Kansas, decades-long court cases can be fought over exactly what “equitable” means. Is this just opening a similar can of worms?

And all of this dances around the more central question: Even if we think that pre-K is something worth supporting, is a tax on cigarettes an appropriate way to fund it?  Cigarette taxes are extremely regressive. Poor people are far more likely to smoke than their richer peers, meaning that the poor will bear the brunt of the tax increase. Smoking is also on the decline, risking future revenue and raising the possibility that services will be cut or pressure will be put on the legislature to divert general revenue to subsidize the program.

For someone who doesn’t smoke but wants pre-K for their kids, Amendment 3 might seem to offer something for nothing. Unfortunately, nothing is free in this life, and someone is going to have to pick up the tab. Whether or not that “someone” should be a group disproportionately made up of economically disadvantaged people is worth considering.

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