Tax Increment Financing and Columbia, Missouri

Posted on by David Stokes

Tax Increment Financing (TIF) is Missouri’s bad idea that keeps coming back and refuses to die. Despite TIF’s documented failures, cities throughout Missouri are expanding their use of it greatly. Cities do this because they can have short-term budget benefits from TIF while other government entities, such as school districts, shoulder the burdens. County leaders from both parties in Missouri, including Saint Charles County Executive Steve Ehlmann, Saint Louis County Executive Charlie Dooley, and (to a lesser extent) Jackson County Executive Mike Sanders have seen the harm that TIF is causing their regions and our state. Columbia should reject the expanded use of TIF in its city.

In 2010, Walmart announced that it would close a store located in both Saint Ann and Bridgeton (two suburbs of Saint Louis), and open another store 2 miles away, located solely in Bridgeton. The move seemed, in part, to be an attempt to capture more than $7 million in public subsidies. Even though the Bridgeton City Council approved the subsidy, the $7 million will come primarily from public schools and other taxing districts.

Of course, the subsidy at fault is TIF, which allows cities like Bridgeton to capture money that would have gone to other taxing entities and use it how the city desires — in this case, to subsidize a Walmart that replaced an existing Walmart. Cities gain sales tax dollars right away, while all the other taxing districts bear the burden of having the tax base of the property held steady — while expenses increase — for the next 23 years. Oftentimes, this results in tax increases on the rest of the community. In Liberty, Mo., earlier this year, the superintendent and school board were forced to campaign (unsuccessfully) for a tax increase that they said was necessary due to the harms that heavy use of TIF caused in that community.

TIF allows local government to reimburse developers for some of the project’s costs. With TIF, if a property generates $50,000 in property taxes before it is developed but generates $75,000 after being constructed, the developer gets to keep the $25,000 difference to pay for certain development costs. Fifty percent of sales and other taxes can be diverted as well.

In theory, TIF encourages developers to undertake projects in areas in dire need of economic growth. In reality, TIF is used to subsidize politically-connected developers, to help cities lure chosen businesses from other cities, and to fund an entire cottage industry of urban planners, lawyers, and bankers. There is so little accountability that even if the TIF commissions that are supposed to govern the process reject a proposal, a city can override that determination and go ahead with the project. That is exactly what happened with the Bridgeton Walmart.

TIF has had numerous negative economic effects in Missouri, and in particular in the Saint Louis area. TIF has increased government involvement in the economy, sparked abuse of eminent domain, shrunk the tax base, and made subsidies a permanent fixture of development. Furthermore, TIF has failed at its main purpose: economic growth. The East-West Gateway Council of Governments (the major government planning organization in Saint Louis) concluded that TIFs and other incentives have created jobs at the rate of one retail job for every $370,000 in taxpayer subsidies. That is not a road to growth — it is a road to ruin.

It is a fact that the use of TIF is often accompanied by the abuse of eminent domain. With Enhanced Enterprise Zones (EEZ), the threat of eminent domain abuse may be small, but with TIF, it is very real. Many — if not most — of the examples of eminent domain abuse in Missouri have involved TIF. This includes instances in Sunset Hills, Arnold, Sugar Creek, Rock Hill, and more.

An Iowa study of TIF usage concluded that, “On net . . . there is no evidence of economy-wide benefits, fiscal benefits, or population gains.” Another study from Illinois found that economic growth in cities that did not use TIF was stronger than in cities that did, because TIF subsidies caused an inefficient allocation of resources.

A recent study by Washburn University Professor Paul Byrne for the Show-Me Institute documents how TIF is used in Missouri. Byrne shows that the ability of cities to implement a TIF unilaterally leads to cities making decisions that benefit the city, at the expense of other public agencies. Cities that are authorized to enact sales taxes might push for TIF projects that will generate new sales tax dollars without caring about the property tax dollars that the local school district will have to do without. As a result, public tax dollars can end up funding economically inefficient projects. This is what has happened in the large urban areas of the state, and what will happen in Columbia and Boone County if the use of local tax incentives keeps increasing.

The dirty little secret that Regional Economic Development, Inc. (REDI), the local media, and Columbia city officials do not want you to know is that EEZ, Tax Increment Financing (TIF), Community Improvement Districts (CID), and other subsidies do not work. They do not succeed in growing the local economy. 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.”

The Columbia supporters of increased use of incentives within the city say that other cities have used these tools with great success (for example, an editorial in the Columbia Daily Tribune, Aug. 13, 2009). In this, they are completely wrong. The City of Saint Louis has been using urban redevelopment tools such as TIF and many others for half a century. How has it worked out? Mapping Decline, a 2008 book by Colin Gordon, documents the decline of the city of Saint Louis. The book’s research is exhaustive. The dominant theme is the use of urban renewal tools and tax subsidies — and their absolute, total failure. From the conclusion:

The overarching irony, in Saint Louis and elsewhere, is that efforts to save the city from such practices and patterns almost always made things worse. In setting after setting, both the diagnosis (blight) and its prescription (urban renewal) were shaped by — and compromised by — the same assumptions and expectations and prejudices that had created the condition in the first place.

I can already hear readers in Columbia saying, “But we’re not Saint Louis.” You are right, you are not; so do not follow a path that will make your city repeat Saint Louis’ mistakes. It is one thing for Saint Louis to try to these projects and have them fail. It would be even worse for a city like Columbia to follow that example with the knowledge that the entire process has failed. At least the trailblazer who takes the wrong path has an excuse.

Missouri should dramatically tighten its TIF laws. At a minimum, TIF should be decided at the county level, and the ability of cities to override rejections from TIF commissions should be eliminated. I hope that Columbia can lead the way to a new realization for our state, where economic development works for everyone when governments do not play favorites and businesses succeed or fail on their own merits.

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

If I Was On The Columbia TIF Panel Tonight . . .

Posted on by David Stokes

. . . I would ask the other panelists for answers to these questions about Tax Increment Financing (TIF) and centralized economic development policy:

1. To the business people on the panel, I would ask: Why, as supposed believers in capitalism and free markets, are you supporting proposals that will increase the use of centralized economic planning in Columbia? Do you believe that central economic planning by governments is desirable, because that is exactly what TIF is? Do you think it is the proper role of government to pick which companies and projects get special tax breaks, while others do not?

2. To the city officials on the panel, I would ask: Why, when Columbia is doing better than most other areas in Missouri, are you attempting to implement policies that are very expensive, have a terrible track record of creating jobs, and have a record of failure throughout the state? Although, frankly, it is probably a waste of time to ask those officials anything. TIF increases the power and involvement of government. If you are a city manager, what is not to like?

3. There are many questions to ask of former Saint Louis Mayor Vince Schoemehl. I would ask about the abject failure of Saint Louis Marketplace as a failure of TIF. I would ask about the failure of Saint Louis Center as a failure of central economic planning. I would ask, who came up with the idea for the disappearing police car? – not for any specific reason but it was a famous ad in Saint Louis political history so I would ask about it. Mostly though, I would ask why he thinks taking money and property from other people to fund things he likes can possibly be good public policy that should be imitated around the state.

TIF has been a total failure in our state, particularly in Saint Louis. Columbia should avoid expanding its use. And, yes, the panel should have included at least one person who is skeptical of the benefits of TIF and local economic planning. Finally, TIF absolutely and regularly involves the abuse of eminent domain. Unlike Enhanced Enterprise Zones, there is a track record of eminent domain abuse associated with TIF usage in Missouri.

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.

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