What Can Starbucks Tell Us About Kansas City?

Posted on by Alex Schroeder

Starbucks is one of the most ubiquitous brands on the planet: Since its founding in 1971, the upscale coffee chain has expanded rapidly to more than 20,000 stores worldwide. Many American urbanites have probably grown accustomed to passing one regularly, if not frequently dropping in themselves. The company has arguably saturated the U.S. market, making its weak presence in Kansas City proper a curious anomaly. This prompted me to delve deeper into potential reasons for Starbucks’ tepid growth in Missouri’s largest city.

A book co-authored by Arthur Rubinfeld, known as the “architect behind Starbucks’ expansion,” outlines the logic underlying the company’s growth strategy. With a target market comprised of “urban professionals, high-income individuals from the age of 18 to 45,” Starbucks sought to conquer the country’s major metropolitan areas. Demographic considerations, the intensity of competition, city-specific macroeconomic conditions, and a number of other factors, determined the pattern of expansion.

The areas surrounding Kansas City are home to a multitude of Starbucks coffee shops, which form something of a ring around the city itself. This same distribution is not evident in other Midwestern cities such as Saint Louis, Oklahoma City, Omaha, and Indianapolis. We can learn a lot about certain areas from the behavior of private enterprise.

My colleague Patrick Ishmael and I intend to explore this phenomenon in greater detail. We wish to better understand why Starbucks has chosen to focus disproportionately on Kansas City’s peripheral markets. As Rubinfeld’s volume makes clear, a substantial amount of research goes into determining how capital can be most profitably distributed. Accordingly, there is almost certainly a strong rationale under-girding Starbucks’ behavior in Kansas City. Perhaps further investigation can teach us some important lessons about the business climate in the City of Fountains.

Note: The green circles with white numbers simply represent areas with such a high density of Starbucks stores that individual emblems cannot be displayed. A circle with a number, n, corresponds to an area with a concentration of n stores.
Note: The green circles with white numbers simply represent areas with such a high density of Starbucks stores that individual emblems cannot be displayed. A circle with a number, n, corresponds to an area with a concentration of n stores.

TIF Reform Stalled In State Legislature

Posted on by David Stokes

There are definitely some good things happening in the Missouri Legislature. There are, as always, plenty of bad ideas, too. Unfortunately, this session appears to be missing an opportunity (again) to reform the rampant abuse of Tax Increment Financing (TIF) in Missouri. There are several very good bills in the Missouri House that appear to be stalled. I would love to be wrong. I would be delighted to eat crow on this, but everything I see and hear tells me TIF reform is not getting out of the House of Representatives despite substantial support for reform from the rank-and-file of both parties.

TIF reform can be accomplished if voting from all taxing districts that the TIF affects is required, as the above linked bills propose, or if the ability for cities to override a county TIF commission is eliminated. Both would be excellent. Neither plan would eliminate TIF in Missouri, though both would heavily reduce its use, in my opinion. The overuse of TIF is empowering local governments to plan our economy, pitting city against city (willingly, too often) in a property tax base race to the bottom, increasing the use of eminent domain, and is violating tax fairness because it allows cities to decide on tax exemptions that affect all levels of government.

Of course, there are many good aspects of TIF, but our word count limit will not allow me to go into them. That is a joke. There is absolutely nothing worthwhile about how we administer TIF in Missouri. (Other states use it more wisely, mostly because they focus TIF only on property taxes and do not include sales or income/earnings taxes.)

The focus for TIF reform is on the House because it pretty clearly will pass the Senate. (Last year, a major reform bill passed 34-0 in the Senate.) I think the governor would sign a good reform bill if it makes it to his desk. I am fairly certain that a substantial majority of House members would vote in favor of reform if it makes it to the floor. I think it is imperative that key House leaders allow TIF reform to get on that floor for a vote. Otherwise, this would be a tremendous lost opportunity for important changes in Missouri.

Ray County Does Not Need Enhanced Enterprise Zones

Posted on by David Stokes

Let the citizens of Ray County beware: You may think that a nice little sprinkling of government subsidies — done through something called an Enhanced Enterprise Zone (EEZ) — will be a painless and effective way of promoting economic growth and prosperity in your county. However, EEZs and other similar mechanisms have a long and sorry history of producing poor results. This lack of success has not discouraged the Missouri Department of Economic Development (DED) and the Mid-American Regional Council (MARC) from actively promoting them around the state. The DED and MARC’s goal is to start as many programs as possible: whether they work is beside the point. Like gunslingers in old-fashioned Westerns, all they care about is putting more notches on their belts.

Ray County is in the process of establishing eight different EEZ districts under one county umbrella. This is a massive bet government planners make that they know what, where, and how economic growth will occur in the county over the next two decades. I have studied the results of Enterprise Zones (EZs, the very similar precursors to EEZs in Missouri) in counties that adopted large EZs in the 1980s in Missouri. The economic data shows that the counties that adopted these zones did no better than neighboring counties that did not. Government planners cannot see the future, and they should not be empowered to use tax dollars to bet on it.

The dirty little secret that the DED, MARC, and the Ray County EEZ proponents do not want you to know is that EEZ, Tax Increment Financing (TIF), Transportation Development Districts (TDD), and other similar subsidies do not work. They do not succeed in growing the local economy. All this myriad of subsidies does is shrink the local tax base, encourage more government planning of the economy, and increase the chances of eminent domain abuse. As a famous Swedish economist once said, “It is not by planting trees or subsidizing tree planting in a desert created by politicians that the government can promote . . . industry, but by refraining from measures that create a desert environment.”

If you ask a DED or MARC official how effective EEZs are, they will tell you how much investment has occurred within EEZs over the past decade. Their hope is that you will assume all the investment is because of the EEZ. Their lie-by-omission is that they have no idea how much the EEZ aided that investment and how much would have occurred anyway. The consensus among economists is that special tax incentives such as EEZs matter little, and only a very small portion, if any, of investments within a zone can be credited to the subsidies. Yet government planners will happily let people assume the incentives make all the difference while hoping nobody asks any follow-up questions.

Most people would claim to oppose corporate welfare, but that is exactly what is being hoisted upon us in Missouri; one special taxing district at a time. This is all being done under the cover of fixing blight, without any real definition of what that means. But the word “blight” is not empty talk. It means many things. One thing it means is that Ray County is taking a major step toward much heavier use of taxpayer subsidies for all types of commercial activity. Once you have blighted a major portion of the county, it is but a short walk to the point where almost every development in the area has some type of subsidy. That is not a “maybe.” That is the current reality in Kansas City and Saint Louis.

Tools such as EEZs fail because politicians cannot see the future better than markets can. Ray County should focus on low taxes for all businesses, not special incentives for a few. It already has the lowest commercial property tax surcharge in the region. Ray County should trumpet that loudly. It does not need a massive implementation of Enhanced Enterprise Zones.

David Stokes is a policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.

Public Pension Panic

Posted on by Michael Rathbone

Missouri’s public pensions are in trouble. However, you might not have known that if you just reviewed official reports. Andrew Biggs’ new policy study for the Show-Me Institute illustrates just how much the state’s public pensions are truly in the hole. According to Biggs, Missouri’s total unfunded liabilities for its five largest public pensions is nearly $54 billion. This amount is close to five times higher than the officially reported sum of $11.1 billion.

The reason for the large discrepancy between Biggs’ numbers and those of the state’s pensions is the discount rate. A discount rate is basically compound interest working in reverse. If, for instance, I owed someone $10,000 five years from now, the discount rate tells me how much I would need to invest to ensure I can make that payment. The higher the rate, the lower the amount I need to invest.

The state’s public pension plans use discount rates between 7.25-8.25 percent. This enables them to assume their current assets will be worth more in order to pay off their liabilities. Biggs uses a lower rate that better accounts for the risks inherent in a portfolio with risky assets and guaranteed liabilities.

We, as taxpayers, are responsible for these obligations. If the state does not have enough money in these pensions to make the necessary payments to beneficiaries, it will have to resort to massive tax increases and/or deep cuts to services. The first thing the state should do to prevent this from happening is shift our public pensions to a defined contribution plan. This would prevent any new liabilities from accruing and give the state breathing room so that it can deal with its existing liabilities.

Missouri’s public pensions might appear to be relatively healthy to the casual observer. However, there is something rotten in the state of Missouri. Its public pensions are seriously underfunded and changes need to be made today. We cannot afford to wait.

You Are Now Free To Move About The Country Without Subsidies

Posted on by Kacie Barnes (Galbraith)

When I hear “Branson” and “airport,” I typically think of Richard Branson (of Virgin Atlantic Airways) and how I will never be as cool as him. Not only does he frequently make all sorts of world record attempts, but more importantly, he got to appear on an episode of Friends.

But today we are talking about a different Branson. You may have heard that Saturday marked the beginning of Southwest Airlines service to Branson, Mo. There will now be daily flights to Chicago, Dallas, and Houston, and one flight a week to Orlando. This news comes on the heels of a decrease in flights to Columbia, Mo.

There is obviously a lot that contributes to the decision for an airline to begin or increase service. But it is worth noting two things. One, Branson is the only privately owned and operated commercial airport in the country. Many were skeptical that it would succeed. Industry expert Mike Boyd predicted when the airport opened that “the local population is too small, and the region’s attractions aren’t sufficient to consistently generate sufficient traffic for profitable air service.” Branson may be small, but the area has generated enough demand to keep air service over the past few years.

And, they have done it without major subsidization. This airport does not rely on taxpayers to operate (but it does receive $8 from the city for each arriving visitor). Nor does it rely on taxpayer money to attract business. Columbia ran into trouble when it offered subsidies to one airline but not the others; the others are now gone. Subsidies may help attract an airline in the short term. But Delta official Trebor Banstetter reinforced that subsidies such as revenue guarantees will not keep an airline around if the flight does not prove to be successful without that guarantee.

Opting-In, Opting-Out – And Burdens On Free Speech

Posted on by Patrick Ishmael

Last year, I wrote at Hot Air about an important free speech case that the U.S. Supreme Court had just handed down. Knox v. Service Employees International Union dealt with the manner in which unions could automatically deduct dues from public employee salaries and apply those dollars toward the union’s political purposes. Knox dealt with a narrow fact pattern, so extrapolations of the Court’s findings to future fact patterns will not be perfect, especially given the status of the case law.

The substantive question addressed in the Court’s opinion really boils down to this: should the burden be on a public employee to opt-out of an automatic salary deduction program whose proceeds could fund a union’s political activities? Or should the burden be on the union to get employees to opt-in? Are these “free speech dollars” taken from the employee’s paycheck presumptively the employee’s, or presumptively the union’s?

It appears the Court sees those dollars as presumptively the employee’s. Justice Samuel Alito, writing for a 7-2 majority, articulated the problem inherent in these opt-out arrangements very clearly:

Unless it is possible to determine in advance with some degree of accuracy the percentage of union funds that will be used during an upcoming year for chargeable purposes — and the SEIU argues that this is not possible—there is at least a risk that, at the end of the year, unconsenting nonmembers will have paid either too much or too little. Which side should bear this risk?

The answer is obvious: the side whose constitutional rights are not at stake.

Protecting the First Amendment rights of all of Missouri’s citizens is an issue that should always be of great import to the legislature. Allowing public employees to specifically opt-in, rather than opt-out, to support a union’s political activities would reaffirm this purpose.

More generally, public-sector unions pose a different set of fiscal and philosophical problems that private-sector unions do not, and those problems are related to the speech issues in play here. Public-sector unions can oftentimes choose, in fact or in practice, who will be across the table when they negotiate their contracts. Their political activism and power allows them to negotiate sweetheart deals that private-sector employees could never obtain, and taxpayers end up picking up the bills for those deals.

That is one of the reasons Missouri’s pension obligations are so foreboding (see the study we released addressing the issue). Private-sector unions are (usually) circumscribed in their negotiating power by the health of the companies with which they work. Public-sector unions are not as constrained and can simply work to vote in representatives — on school boards, in fire districts, and elsewhere — that will generously spend other peoples’ money on them. That power is in no small part underwritten by the unions’ ability to directly draw money from employee salaries and, I believe, in violation of the free speech rights of many public employees.

Thus, on both free speech and fiscal grounds, it is eminently appropriate that the Missouri Legislature would step in and reassert that public-sector union power has limits. High among those limits is the First Amendment rights of those the state employs. Employees who want to donate to the union’s political activities should be able to donate to them as they would choose to donate to any other organization, but the state should presume that those speech dollars are the employee’s first, not the union’s.

A Knox-informed reform that would reassert the rights of public employees would be a modest one, but it would effectively hit at the larger problem of the special deals that public-sector unions get which private-sector unions and the non-unionized could never leverage. Such a change would be a positive step for the state and its employees, both fiscally and constitutionally.

Charter Schools Are Giving Families Options

Posted on by James V. Shuls

When my wife and I found out we were having a baby, we began looking for pediatricians. We wanted the best doctor and because we had choices, we were able to find a pediatrician we loved. In almost every area of our lives, we have choices, but many families do not have options regarding where their children are educated.

The typical public education model restricts most families from having much say in the type of education their child receives because children are sorted by attendance catchment areas. The traditional model does have school choice; but those choices are, for the most part, limited to moving to a better neighborhood or paying for private school tuition. Many families do not have these options. In Saint Louis, this is changing. Charter schools are giving more and more families educational opportunities for their children.

I recently took a tour of six of the 22 charter schools in Saint Louis and was amazed at the differences among the schools. Gateway Science Academy students are focused on developing their expertise in math and the sciences through innovative programs. Preclarus Mastery Academy students are learning Latin and preparing for college success while students at Saint Louis Language Immersion Schools are immersed in Spanish, French, or Chinese. Grand Center Arts Academy students in one class were acting out scenes they had written, while students in the next room were learning a dance routine. Students at City Garden Montessori were spread out, working on self-directed learning projects as teachers provided guidance.

Each school focuses on academics, but each also has a unique niche, offering something distinctive to students.

The conversation about schools often focuses on standardized test performance. We ask how charter schools are doing compared to the district, or how the district is doing compared to the state. Those are worthwhile questions, but schools are doing more than preparing students for tests. The schools I visited offer students something very unique that may or may not translate to gains on a standardized test, such as learning a new language or developing creative skills. When we focus solely on a school’s performance on standardized tests, we miss a big part of the picture. We miss the variety and options that these schools provide to families.

Critics of school choice often argue that families will not know how to make good choices or that students who remain behind will somehow be hurt by other students leaving. Both of these claims are unfounded. First, parents are very savvy and are capable of making choices for their children. I know nothing about the medical profession, but we were able to choose a great pediatrician. If anything, parents lack experience, but experience comes from having the opportunity to make those decisions.

Secondly, most of the scholarly evidence suggests that the traditional public schools are no worse off, and in some cases, are better when they face competition. As school choice has accelerated in Saint Louis, the St. Louis Public School District has also been improving. The district appears to be responding to the increased competition, opening innovative magnet schools, focusing on teacher quality, and exploring opportunities to improve. As they do, the portfolio of quality educational options in Saint Louis will continue to grow.

Robbyn Wahby, deputy chief of staff for Saint Louis Mayor Francis Slay, says three more charter schools are slated to open next year, and she expects that trend to continue in the foreseeable future. With more schools comes more opportunity; more opportunity means finally being able to ask, ”Which school would best meet the needs of my child and my family?” That is what school choice is really about, giving families options.

If you have not had the opportunity to visit any of these unique schools, I highly recommend you do so.

James V. Shuls is the education policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.

Property Tax Exemptions Are Too Easy To Get In Missouri

Posted on by David Stokes

Would you be surprised if I told you that there is no clear rule about what qualifies for property tax exemption in Missouri? You can qualify for property tax exemption if you have a religious, charitable, or educational institution, but that simple list leaves plenty of room. What about for-profit schools such as the University of Phoenix? Should they be tax-exempt? How about the personal homes of part-time pastors of small independent churches? Should they be tax-exempt? (Many are.) How about Scientology? Should that be a tax-exempt church? For years it was not because it did not worship a God (see bottom note in link).

Some of the hardest debates come from retirement communities and daycare centers. Many organizations operate these businesses on a for-profit basis, but hold some spots for charity. They attempt to claim tax exemption from that small percent of charity cases. There can be a significant difference in the types of services these businesses provide. Many truly cater to the needy (Head Start, etc.) and likely deserve tax exemption. Others cater to the well-off and absolutely do not deserve it. Daycare centers have mostly been unsuccessful in obtaining tax-exempt status. However, the senior-care industry has much more money at stake and has been more successful.

A new senior community in Kirkwood is attempting to qualify for tax exemption. The amount of money at stake is almost $1 million per year. The Saint Louis County assessor is fighting back, and good for him. Tax exemptions should be given out very carefully, because other taxpayers have to make up the difference when properties are removed from the tax rolls. This is one of the reasons the city of Saint Louis is dependent on the earnings tax. There are so many tax-exempt organizations within the city that the property tax base is too small to depend on it. Think Barnes Hospital, SLU, etc. The city then makes the problem worse by generously giving out TIF and operating the LRA poorly, but I understand their line of thinking.

I do not think a private organization operating a for-profit senior center deserves tax exemption. I hope Saint Louis County Assessor Jake Zimmerman is successful in his efforts to fight it. I think he is dead-on correct in his opposition.

The final decision is up to the Saint Louis County Council, though. Ultimately, they will probably base their decision on whether the business is unionized or not.

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