It Could Be Worse. Not Much Worse, but It Could Be Worse.

Posted on by Joseph Haslag

The Bureau of Economic Analysis recently released data on real GDP for all 50 states. Since Missouri’s growth in recent years has been nothing short of dismal—it was the 49th-fastest-growing state for the period 1997 through 2014—I thought it would be worthwhile to review the most up-to-date data for clues about what’s going wrong, and how it might be fixed.

The chart below plots the average annual growth rate for each of the 50 states and for the United States as whole for the period 1997 through 2015. The good news is that Missouri’s average annual growth rate increased from 0.93 percent when computed over the 1997 through 2014 period to 1.02 percent when computed over the 1997 through 2015 period. Missouri reported a 1.29 percent growth rate in its real GDP between 2014 and 2015. No one really jumps for joy when growth rates are reported at 1.3 percent for a year; however, Missouri did manage to stagger its way one rung up the ladder, from 49th-fastest to 48th-fastest growing state economy over the period from 1997 through 2015.

Overall, the story for Missouri is little changed compared to a year ago. Since the late 1990s, Missouri’s economy has increased at half the rate of that of the United States as a whole. Eighteen years is not a terribly long time, and we all hope that Missouri’s future will be brighter. But the question remains: Why has the Missouri economy reported such slow growth over the past eighteen years?

The answer is not simple. Note that the ten fastest growing states are: North Dakota, Texas, South Dakota, Oregon, Utah, Colorado, California, Idaho, Arizona, and Oklahoma. There is no one clear feature shared by these ten states that can account for their economic success. Some of them do have natural resources and have benefitted from being able to dig a hole in the ground and extract things that are valuable to the rest of the world. But that is not the only explanation. For example, Arizona, Idaho, Oregon, and Utah (at least) do not fit the oil/natural gas story. Alternatively, the ten states with the lowest growth rates are Michigan, Louisiana, Missouri, Mississippi, West Virginia, Maine, Ohio, Kentucky, Illinois, and New Jersey. No single attribute these states might have in common would account for their struggles, either.

Income tax rates cannot, alone, explain the differences in growth rates. The nine states with no earned income taxes (followed by rankings) are: Alaska (40), Florida (20), Nevada (16), New Hampshire (25), South Dakota (3), Tennessee (30), Texas (2), Washington (13), and Wyoming (11). The nine states with the highest marginal income tax rates (followed by rankings) are: California (7), Hawaii (37), Oregon (4), Minnesota (17), Iowa (23), New Jersey (42), Vermont (26), New York (29), and Maine (46). The mean rank for the nine states with no income taxes is 17.8 while the mean rank for the nine states with the highest income tax rates is 25.7.

Overall, the evidence does not prove, but does suggest, that income tax rates do matter for economic growth. Of course, a host of other factors matter as well. In order to assess the role of income tax rates on growth, the ideal test would involve holding everything else constant. In other words, you would want to examine a parallel version of New Jersey, for example, but one with a lower income tax rate. Holding everything else constant, economic theory suggests that New Jersey would grow faster.

The broader message is that lots of factors that influence a state’s economic growth rate. Each state is an experiment in which tax rates, school quality, and various government services are provided endogenously by state policymakers. The bundle of policies and regulations is too large and complicated for us to identify how each one matters. And on top of the political attributes, there are the things that lie underground, or on the ground itself (or the ocean front—or lack thereof), that people living in each state can consume. All policymakers can do is to try and manage the factors they can influence in a way that will help their state grow faster.

In case you are wondering, Kansas ranked as the 29th-fastest-growing state over this period. So, why can’t Missouri grow at least as fast as its neighbor? It’s a frustrating question, because we have a Gordian knot of regulations, laws, and policies that make it difficult to determine specific causes of our stagnation. Not only have policymakers failed to move Missouri in the right direction in the 21st century, but the complexity of our state’s problems prevents us from understanding why various initiatives have failed to produce their intended results. In my view, it seems like a good time for Missouri to review its entire spectrum of policies. For instance, we have not had a constitutional convention in this state since 1947. Maybe it is time for an institutional overhaul.

Kansas City Losing Downtown Millennials

Posted on by Patrick Tuohey

All the money Kansas City is pouring into downtown doesn’t seem to be working. At least, when it comes to attracting young, tech-savvy millennials, there appears to be no appreciable success.

The city spends (or diverts) millions each year on streetcars, apartment buildings and luxury condos, and entertainment districts in a breathless effort to attract millennials. Initially there was some evidence to suggest this was working. Data from 2000 and 2012 showed that although city-wide Kansas City was not attracting those aged 25 to 34 on pace with national average, the downtown area was doing okay.

But that may be changing. A new report from CBRE Research, “2016 Scoring Tech Talent,” shows that from 2009 through 2014, Kansas City’s population of millennials ages 20 to 29 living downtown dropped 5.3%. St. Louis saw a drop of 3.5%; the national average was an increase of 3.1%. This is despite findings that Kansas City is very competitive on wage and rent obligations for tech firms, rents per square foot for offices and apartments, and the rent-to-wage ratio.

Add this to our recent finding that market values along the streetcar Transportation Development District are lower today than they were in 2012, and the city’s downtown policies aren’t looking so smart. What makes this worse is that the dollars being spent to lure millennials are coming at the cost of money to schools, libraries, basic services, and infrastructure.

Fall Internships

Posted on by Show-Me Institute Staff

The Show-Me Institute is pleased to offer internship opportunities for Fall 2016.

  • Internships are open to current undergraduate and graduate students, as well as recent graduates.
  • Internships last approximately four to five months. The exact starting and ending dates are flexible, but we anticipate that each internship will run from September 6 until December 16.
  • Fall interns will work a part- or full-time schedule (9 a.m. to 5 p.m.).
  • Interns will be involved in many aspects of the Institute’s operations and will work closely with senior staff on a wide variety of projects. They can expect greater responsibility and personal attention than they would receive at larger organizations.
  • Interns will assist staff members with a range of tasks that may include researching public policy topics, organizing events, and writing and editing op-eds, newsletters, studies, and other documents. Some administrative and clerical work also will be required.
  • Policy internships as well as communications and development internships are available.
  • A Show-Me Institute internship is an excellent opportunity to improve your research and writing skills. Each intern will produce regular blog posts and an op-ed on a public policy topic of interest to him or her. Each intern will receive feedback and assistance from SMI staff members throughout the process.
  • Internships are available at the office in St. Louis or Kansas City.
  • Interns will be paid on an hourly basis.

Those wishing to be considered for an internship should submit an application and the requested supporting materials. The deadline for applications is August 12, 2016. However, we will begin conducting interviews as applications are received. Applicants can expect a decision in mid- to late August.

Rolla Considers TIF Plan

Posted on by Michael Highsmith

In January, the Phelps County TIF Commission began a series of public hearings to foster discussion about bringing the Westside Marketplace Redevelopment Project to life in Rolla—with $22 million in public tax incentives, of course. In May the TIF Commission approved the proposal despite public opposition. The proposal will next go to the Phelps County Commission for final approval.

Proponents say the development will raise property values and increase sales tax revenue in Rolla through the construction of a Menards and four smaller retail stores yet to be named. But while new shopping options could be exciting for local residents, the financial impacts might not be.

Missouri law requires any developer asking for TIF to show that the project wouldn’t be undertaken without financial assistance. In the case of the Westside Marketplace proposal, justifications for the subsidies include inadequate street access, an old barn that may be unsanitary, and (here’s the real kicker) a portion of the TIF area being classified as a Special Flood Hazard Area with a 26% chance of flooding in the next 30 years.

Flood risks aside, the location is ideal from a commercial standpoint with Kings Highway steering in plenty of traffic. Still, if the potential for flooding is enough to make the developer reluctant, maybe it should make taxpayers think twice as well.

In addition to depriving the county of tax revenue, subsidizing a Menards that will compete with other home improvement stores is unfair. Stores such as Lowe’s and Meek’s that already operate in Rolla without subsidies will lose business to Menards, and the local community will lose tax revenue from any reallocated spending. This selection of winners and losers shouldn’t fall under government jurisdiction—something the Phelps County Commission should take into account when deciding if this TIF is worth the risks that come with it.

Progress on TIF Reform

Posted on by Michael Highsmith

Last Wednesday, Governor Jay Nixon signed into law HB 1434, a measure that—effective August 28—could deal a blow to Missouri’s game of corporate welfare.  History shows that in the Show-Me State, subsidies such as tax increment financing (TIF) are granted to just about anyone who asks. This is thanks to the choice currently facing city councils regarding subsidization:

1.       Offer TIF in order to attract a business into your municipality and grow, or

2.       Say no to subsidizing a business, watch a neighboring municipality say yes, and then suffer as your economic growth is shifted into a neighboring city

This race to the bottom among neighboring communities has created an environment where municipalities feel obliged to hand over corporate subsidies, but the grass is looking greener around St. Louis.

In the past, even if a county government determined that a TIF development might be damaging to the region, an individual municipality within the county could easily override the veto with a two-thirds vote, essentially leaving the county voiceless on developments that impacted it.  Under the new law, if a municipality chooses to override, it will only be allowed to use tax incentives to finance the costs of demolition and clearing land.  Starting in August, affected counties will be able to significantly limit funds going toward developments that aren’t in the wider region’s best interest. 

TIF was originally developed to assist areas that were struggling economically—areas that would otherwise have difficulty attracting investment.  Sadly, this has not been the trend in recent years.  With the threat of big businesses relocating to tax-friendly municipalities, TIF has instead been used to attract well-connected businesses to areas where development might well have occurred without any subsidies.  The new TIF law will not restrict development subsidies unless the overarching county determines that a project will be damaging to the region as a whole.  It’s a much healthier approach to decision making than pitting one municipality against another. 

TIF reform has been discussed for many years at the Show-Me Institute, and the new law  is a win for Missouri’s economic well-being.  There are other reforms that should be discussed, such as applying checks and balances to the rest of Missouri (the override limitation only pertains to Saint Louis, Saint Charles, and  Jefferson counties), but limiting the powers that municipalities abuse to the detriment of their counties is a step in the right direction.

A New School and Governance Model for the New School Year in Kansas City

Posted on by Michael Q. McShane

In just a few weeks, a new public charter school is opening in Kansas City. The Kansas City Neighborhood Academy will be the first of its kind, operating as a partnership between a non-profit organization (the Urban Neighborhood Initiative, or UNI) and the Kansas City Public Schools. UNI will operate the school and KCPS will be the sponsor, overseeing the progress of the school and holding its leadership accountable for performance.

The effort has not been without controversy. Some have argued that a school district that struggles so mightily to provide a basic level of education to its students should not expand its portfolio or take on new initiatives until it has its core functions under control. I am certainly sympathetic to that argument.

However, ultimately I think KCNA is an interesting experiment in educational governance that is worth giving a shot. My colleagues and I here at the Show-Me Institute have argued for years that schools are more likely to succeed when school districts take a step back from trying to fund, regulate, and operate schools and leave the day-to-day education of children to independent, autonomous organizations.  By focusing simply on funding and regulating schools, school districts can limit themselves to what they are able to do well. That is what KCPS appears to be trying here.

Should KCNA be a success, it will offer an alternative to the traditional district–school relationship, one that can provide more autonomy for educators and more choices and better options for students.  It has the opportunity to be a win–win.

I’ll be following KCNA’s progress and will report back when we learn more!

Privatization: Still a Good Thing in Education

Posted on by James V. Shuls

About two years ago, I wrote a piece titled “Privatization in Education—Not as Scary as Some Think,” in which I explained how public schools regularly outsource services to private entities. This use of privatization helps improve services for students and reduces costs for taxpayers. For example,

Nixa Public Schools outsourced maintenance to Sodexo, based out of Paris, France. St. Louis Public Schools contract with First Student, “the largest bus company in North America,” for transportation services. More than 100 public school districts contract with Chesterfield, Mo.-based Opaa! to provide food service for public school students.

I was reminded of this piece last week when I read an interesting story by Dale Singer of St. Louis Public Radio, “Outsourcing substitute teachers deemed a success.” Singer shares how several Saint Louis area school districts, including Parkway, Normandy, and Maplewood Richmond Heights, now use Kelly Educational Staffing to find substitutes. 

This arrangement of privatized substitute services has been beneficial for everyone. In Normandy, for example, a district that has had its fair share of trouble over the past few years, the district has struggled to fill classrooms when the teacher is absent. According to Singer, “the rate of filling classrooms with substitutes had been in the 55-60 percent range; that figure rose to around 90 percent” with Kelly Educational Staffing.  The arrangement also means school districts can cut down on administrative costs in the central office.

The system is even great for retired public school teachers who wish to teach. In Missouri, a retired teacher can only work 550 hours for a school district while collecting their pension benefits. When substitute teachers are outsourced to Kelly, they no longer work for the school district. They work for Kelly Educational Staffing. This means they can work more and still draw their pension.

This is just another example of how privatization can be a good thing. As I wrote in my piece two years ago,

Opponents of school choice like to throw out the word privatization as if it was a bad thing. Yet, public schools contract with private providers in nearly every aspect of our K-12 education system.

If the goal is to provide a world-class education to students, policymakers need to avoid the knee-jerk reaction against school choice and recognize that the private sector can help deliver on the promise that every child should have access to great schools.

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