Missouri Can Compete – Despite Recent Poor Performance

Posted on by Joseph Haslag

Consider two teams on divergent paths — the Missouri Tigers and the Missouri Widgets.

Clearly, the football Tigers are on the rise — coming off seven consecutive winning seasons. This fall, they will join the “best football conference on the planet” — namely, the SEC, or Southeastern Conference, which has produced the last six national college champions.

Just as clearly, the other team — to which all of us who live and work in Missouri belong — is in a state of serious and prolonged decline.

The Widgets compete in what we will call the Great Midwestern Conference, consisting of Missouri and the eight neighboring states. As recently as 1995, Missouri ranked third in this conference in per capita income — the best measure of relative prosperity. Now we are down in fifth place — behind Illinois, Kansas, Nebraska, and Iowa. On current trends we are in danger of falling into last place — behind Oklahoma, Tennessee, Kentucky, and Arkansas.

Over the 14-year period from 1997 through 2010, Missouri was the slowest-growing state in the region. It ranked dead last in GDP growth (i.e., growth in annual output of goods and services). It also lagged behind all but one other Midwestern state (Illinois) in growth of employment.

In reality, the Great Midwestern Conference is not all that great in terms of economic performance. Between 1997 and 2010, the growth in output for the U.S. economy as a whole was 33 percent. None of the nine Midwestern states matched or exceeded that, but three (Nebraska, Iowa, and Oklahoma) came close at 32 percent, and another three were not far off the pace, with Arkansas and Kansas both at 29 percent and Tennessee at 25 percent.

The three obvious laggards within the conference in terms of their overall growth over the 14 years were Illinois at 19 percent, Kentucky at 17 percent, and Missouri at 14 percent. How bad was Missouri’s performance from a national perspective? The state ranked 48th out of the 50 states in GDP growth, ahead of only Ohio and Michigan, down at 7 and 1 percent, respectively.

What ails Missouri?

In our judgment, two factors merit close attention and study.

First is the continued allegiance of Missouri lawmakers to a faulty set of policy prescriptions in trying to pick economic winners and losers. Second is the failure to implement serious tax reforms to improve Missouri’s competitiveness.

Show-Me Institute policy analysts and scholars have documented numerous instances of how the generous (or, to be more accurate, the wasteful) use of state tax credits for targeted commercial developments has failed to produce promised results.

In recent years, Missouri has issued hundreds of millions of dollars in new tax credits on an annual basis, and the bill for those tax credits has grown alarmingly. In fiscal year 2013, Missouri expects state tax credit redemptions to cost the state roughly $866 million in lost revenues. That is more money than the state spends from general revenues on prisons and public safety.

With the money that would be saved from eliminating costly and unproductive state tax credits, our state could reduce or eliminate the corporate income tax — benefitting not just a few favored businesses, but companies across the state, along with others that might want to move here.

All the evidence points to the conclusion that businesses migrate to (and continue to invest and flourish within) locations that do not waste taxpayer money in trying pick winners and losers . . . and concentrate instead on maintaining a favorable environment for all businesses.

Andrew B. Wilson is a resident fellow and Joseph Haslag is chief economist at the Show-Me Institute, which promotes market solutions for Missouri public policy.

Please, Columbia, Learn From Saint Louis’ TIF Mistakes

Posted on by Audrey Spalding

On Tuesday, the Columbia City Council will hold a panel discussion about how Tax Increment Financing (TIF) works. Former Saint Louis City Mayor Vincent Schoemehl will be one of the panelists.

Schoemehl is perhaps the best person to educate Columbia residents about the pitfalls of TIF. In the early 1990s, he supported the first TIF in Saint Louis, which city-backed bonds partially financed. The project was (and is) a failure, and resulted in Saint Louis taxpayers having to help foot the bill.

Schoemehl has also been on the receiving end of TIF. He is the president and CEO of Grand Center Inc. In 2002, Saint Louis agreed to provide TIF to Grand Center, and gave the nonprofit, in the words of St. Louis Post-Dispatch reporter Jake Wagman, “broad and almost unilateral powers.” Wagman wrote that Grand Center had the power to “approve or reject building designs, dispense up to $80 million in tax incentives and acquire land by eminent domain.”

Columbia residents should also be aware of Saint Louis’ more recent adventures with TIF. Saint Louis City politicians approve massive public subsidies for large, unwieldy development projects with alarming regularity (search for “tax increment financing”). Discussions about Ballpark Village, the perpetually changing development that has yet to happen, have entailed large amounts of TIF.

Saint Louis is also home to the NorthSide TIF, one of the biggest TIFs in the country. That development would involve $390 million in TIF, if only a court would rule that the TIF agreement between the developer and the city was legitimate. Today, NorthSide property remains largely vacant.

And, do not forget the East-West Gateway Council of Governments study of the use of development subsidies in the Saint Louis region. That study found that retail jobs subsidized with TIF (and some Transportation Development District subsidies) came at a cost of more than $370,000 in public dollars per job.

As my colleague David Stokes would say, I wish someone had written a book about the decades of development subsidy failures of Saint Louis. Oh wait, historian Coin Gordon did. As Gordon wrote:

In practice, blight is less an objective definition than it is a legal pretext for various forms of commercial tax abatement . . . Redevelopment policies originally intended to address unsafe or insufficient urban housing are now more routinely employed to subsidize the building of suburban shopping malls.

For more on the revisionist TIF history that has been spouted in Columbia, click here.

Kansas City Dead Set On Its Dead-End Development Ways

Posted on by Patrick Ishmael

Last week, the Kansas City Star compared the Kansas City region’s race-to-the-bottom tax incentive competition to economic cannibalism. The newspaper cited a series of government-backed deals that have continued the region’s decades-long beggar-thy-neighbor development strategy. While all of the projects noted are cringe-worthy, one deal in particular takes the cake.

In January, Kansas City Mayor Sly James announced that Lockton — a large insurance provider based in the Country Club Plaza — would remain in its current location. Notably:

When Lockton officials announced in January they would remain in their building at 444 W. 47th St. through 2030, city and development agency officials said details of the state aid package were being negotiated. Mayor Sly James also said no city incentives would be involved.

And negotiate they did. The state kicked in almost $12 million in incentives to make sure Lockton did not move. And the city? Contrary to the mayor’s initial claim, the city did throw in an incentive package for the company, giving Lockton a 50 percent personal property tax break. As it turns out, even when we are told at a high-profile press conference “for jobs” that the city will not throw taxpayer money into the pot, the city just might be throwing money into the pot.

Maybe — just maybe — the city’s economic development plan is dysfunctional. Kansas City has one of the worst tax burdens and debt burdens in the Midwest. In the last decade, the city built an entertainment district/fiscal sinkhole to help make its stagnating convention center more marketable, “discovered” that the city also needed a government-backed hotel to better link the district and the convention center, and then decided it needed a government-backed trolley to tie all of its government-backed projects together. Kansas City, in short, is not unlike the state in general — an economic basket case, chasing one “hot industry” after another with tax credits and other incentives, but failing to anchor sustainable growth.

You do not build prosperity as the People’s gambler. You build it as the steward of the People’s tax dollars — fast to save, slow to spend, and eager to facilitate a level playing field for all of its citizens. Kansas City officials should reconsider the trajectory they are setting for the city.

We Are Not The Only Ones Discussing Corporate Taxes

Posted on by Michael Rathbone

It seems that the Show-Me Institute is not alone in its desire to eliminate the corporate income tax. James Pethokoukis, a columnist at the American Enterprise Institute (AEI), lists several reasons eliminating the corporate income tax would be a good thing. Here are a few:

* The corporate income tax hurts workers. AEI economists Kevin Hassett and Aparna Mathur have found that “corporate tax rates affect wage levels across countries. Higher corporate taxes lead to lower wages. A 1 percent increase in corporate tax rates is associated with nearly a 1 percent drop in wage rates.”

* As (Bloomberg View) points out, “The current system often amounts to double taxation, since income earned by a business is subjected to the 35 percent corporate rate, then taxed again when it’s paid out as a dividend.”

* “Corporate income taxes have a highly significant and negative effect on long-term growth,” according to the Tax Foundation.

My colleague Patrick Ishmael and I have proposed eliminating the corporate income tax and making up any lost revenue with the elimination of economic development tax credits, which cost the state about as much as the corporate income tax generates. Not only would this have the positive impact of getting rid of an economically harmful tax, but it would reduce the government’s ability to pick winners and losers, distorting investment decisions and imperiling overall growth. Now is the right time to make this change.

The Missouri Pension Problem

Posted on by Michael Rathbone

My mother and father are both on Missouri public pensions. Thus, it struck close to home when I discovered that state pensions are facing some financial difficulty. According to recent information from the Pew Center for the States, Missouri faces a $60 billion shortfall when it comes to paying for health and pension benefits for retired state workers. The current funding ratio for the pensions is 77 percent (asset value to total liabilities), which is less than the 80 percent level many experts believe is the minimum level required for a pension to be fiscally sustainable.

Unfortunately, in many cases, the financial situation of these pensions is worse than the Pew report indicates. The 77 percent figure comes from an aggregation of several pensions. Individually, many pensions have funding ratios below 77 percent. In 2011, the Missouri State Employees’ Plan (MSEP) had a funding ratio of 79.2 percent, but the Missouri Department of Transportation and Highway Patrol Employees’ Retirement System (MPERS) had a funding ratio of 43.3 percent.

To make matters worse, the state’s monetary contributions to some of these plans is below what is required to keep up with the plans’ new obligations (this includes interest on obligations, which in the case of MSEP, is not fully funded). Thus, in many cases, the financial situation of these pension plans is getting worse, not better.

The Missouri Legislature has taken steps to deal with the pension shortfall. The state raised the retirement age to 67 from 62, along with requiring the workers to contribute 4 percent of their pay toward their pension benefits. Given the current financial situation of some of these pensions, I would suggest an additional common sense change.

The state should index the retirement age to life expectancy. Thus, as life expectancy increases, the retirement age would increase along with it so that the entire plan would be on firmer financial footing. This would not be the only change that could be made, but it would be a rather simple one to accomplish.

Michigan’s Mamtek: Yet Another Reason Missouri Should Abandon Film Tax Credits

Posted on by Audrey Spalding

Apparently Missouri representatives failed to show at the annual Association of Film Commissioners International Show in Los Angeles. Jerry Berger writes that at the show, exhibitors tout state and local film tax incentives in the hopes of luring film production.

“The payoffs can be fantastic,” Berger writes, sounding, not surprisingly, like a former film industry public relations employee.

Well, maybe for film producers. The Show-Me Institute has shown that film production jobs have not increased in Missouri since the state began offering its film production tax credit; that Missouri’s film tax credit has subsidized questionable expenditures; and that state taxpayers have helped fund the production of  saccharine films.

Other studies have found film production tax credits lacking when it comes to job creation, and there have even been instances of outright fraud associated with state film tax credit programs.

If that is not enough to sway those who love the idea of taxpayer-funded film production, consider the case of Allen Park, Mich.

Michigan’s film tax credit program inspired the City of Allen Park to spend nearly $40 million to turn an old building into a film production studio; the state kicked in nearly $3 million.

Today, no films have been made, the promised jobs have not been created, and some estimate that the bonds the city sold to support the project will take 28 years to pay off – costing taxpayers $100 million. The city also has experienced a severe downgrade in its credit rating.

Sadly, Allen Park sounds a lot like the City of Moberly, Mo., and its failed development bet with tax credits and local subsidies. The latest news is that the CEO of Mamtek paid himself $30,000 each month with bonds taken on by the city.

State and local officials have better things to do than to fly to Los Angeles to lure film production teams to Missouri with taxpayer dollars. Why not consider Missouri Gov. Jay Nixon’s Tax Credit Review Commission’s recommendations for tax credit reform? The commission recommended that many of  Missouri’s tax credits be capped or eliminated, including the film tax credit.

Kansas City Trolley Proposal Will Likely Have to Do Without Federal Grant

Posted on by Patrick Ishmael

The Kansas City Star reports that federal grant money which city officials hoped would subsidize part of the city’s streetcar proposal probably will not be coming after all. Higher property and sales taxes along the train’s corridor will likely remain as the primary sources of funding for the city’s $100 million rail project. However, with the federal government’s denial of funds, city officials will have to find another $25 million elsewhere. From the Star:

Mayor Sly James said today that he had not received confirmation of the denial, but strong indications are that Kansas City will not get the grant.

“They loved our application,” James said, but he added that other cities are farther along with their streetcar plans and have their local funding in place.

Kansas City is still trying to get that local funding set up. In fact, ballots go out today asking local voters to create a downtown taxing district for streetcars.

This is — and always has been — a vanity project for city officials, and the vanity continues. Not only are there plans in the works to extend the trolley to the south and east, but all signs point to the city charging ahead with the current proposal despite the apparent funding shortfall. That should put Kansas City and Jackson County taxpayers on high alert as the city starts getting creative with how it funds the project.

As I have argued, if there is a real market demand or need for a streetcar, the private sector should do it. Public buses already serve that route. With the denial of federal funding, Kansas City should take this as an opportunity to rethink whether it really needs a streetcar, or whether it would be better off saving its money for something more important.

Kansas City Eminent Domain Will Harm Residents

Posted on by Brett Gall

According to KSHB, Kansas City Councilman Jermaine Reed has delayed a vote to proceed with the eminent domain condemnation process for holdout landowners on the site of a planned $57 million East Patrol Division/Crime Lab police campus. Hopefully, the two-week delay will help the soon-to-be-displaced property owners better voice their concerns.

The Show-Me Institute has repeatedly highlighted the harms of eminent domain. For example, the exercise of eminent domain power disproportionately affects the poor, destroying struggling neighborhoods. As one affected resident told me via e-mail, “You don’t destroy the neighborhood to make it safer.”

Additionally, while displaced residents are owed “fair market value” for their property, government often inadequately compensates property owners for their losses. This is especially pronounced in a time of depressed housing prices when, as eminent domain professional Rick Rayl observes, “Condemnees are penalized because they are forced to sell at a time when no reasonable seller would do so.”

Kansas City resident Ameena Powell protests the new police campus location. (Photo Credit: Michael Mahoney)
Kansas City resident Ameena Powell
protests the new police campus location.
(Photo Credit: Michael Mahoney)

The police campus project appears to follow the usual patterns of driving out low-income residents for public investment. Ameena Powell, a property owner in the project area, told me via phone that the city provided three property appraisals ranging from $23,000 to $55,000. That is a $32,000 margin of error in a ZIP code where the annual per capita income is less than $20,000.

This $32,000 difference highlights the problems that arise when cities, not markets, price property for sale. While the city often adopts the highest of several appraisals, appraised values can vary wildly. Because appraisals determine the city’s offer, this may force some property owners to sell their property on the cheap following unusually low appraisals. Worst of all, the appraisals ignore personal reasons for valuing a property.

This might dramatically impact individuals’ lives. In the KSHB story, Teri Merriweather, a resident of the soon-to-be-demolished neighborhood, said that “some people still have mortgages, and what the city is offering isn’t enough or is just enough to pay off their mortgage . . . So they have nothing to go buy a new home with.”

The consolidation of police resources to save taxpayer dollars is a praiseworthy objective. However, alternative sites (or possibly even a one-block move, as some residents have suggested) deserved more consideration than the city granted.

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