Truth in Tax Credit Advertising?

Posted on by Audrey Spalding

The St. Louis Business Journal reported that Post Holdings Inc. (the cereal company) would get millions in state and local tax incentives. The company could get up to $3.8 million in Missouri Quality Jobs tax credits, and another $20 million from the city of Saint Louis.

Look, we all know that tax credits have a bad track record of success. Quality Jobs tax credits are especially infamous in Saint Louis, because of Liberty Mutual. The company sent pink slips to many of its employees, and told those employees that they could apply for lower-paying jobs.  Surprisingly, the Missouri Department of Economic Development said that Liberty Mutual remained eligible for the tax credits.

Of course, Quality Jobs tax credits are supposed to go toward creating high-paying jobs.

But today, I’d like to commend the creative designer who created the Business Journal graphic below. At first, it may seem like an ordinary cereal box. But, instead of the usual commercial claims, this cereal box proclaims that it is “Packed with $20 million in industrial revenue bonds,” and “INSIDE: $3.8 million in tax credits.”

I only wish that the designer had incorporated some fine print. Perhaps: “Job creation numbers have not been verified. Up to $20 million in bonds may be used for the project, which may not be good for the city of Saint Louis’ financial health.”

Graphic by the St. Louis Business Journal.
Graphic by the St. Louis Business Journal.

Special Interests Inhibiting Joplin’s Recovery?

Posted on by Greg Aubuchon

Remember the May 22 tornado that ripped through Joplin? There were 161 people killed and more than 7,000 residences destroyed.  The Associated Press has reported a 17-fold increase in building permits for the city of Joplin since the tornado:

The city has issued an average of $35.4 million in permits per month since the tornado. Before the tornado, the city averaged just over $2.1 million a month in building permits.

Despite this evidence of a robust private market, the Missouri Housing Development Commission has:

. . . committed about $100 million in tax credits and loans over the coming decade to spark the construction of low-to-moderate income rental units and single-family, owner-occupied homes in the Joplin area.

At least two issues come to mind. First, are taxpayer-funded tax credits necessary to rebuild Joplin? After all, human history proves that individuals and private markets are more than capable of rebuilding housing and infrastructure following natural disasters. Second, even if one were to concede the efficacy of public subsidies, there is no doubt in my mind that public dollars, once committed to disaster relief, must be spent on behalf of the public in an efficient and responsible manner. That leads to the crux of the matter.

The housing commission will require contractors, as a condition of receiving rebuilding tax credits, to pay the federal prevailing wage to their construction workers. And the controlling federal pay scale for occupations has quadrupled in some cases, as the St. Louis Post-Dispatch reported:

[A] Sept. 30 revision of the federal wage rules significantly increased those amounts. For example, the federal prevailing wage for a carpenter in the Joplin area rose from $7.98 an hour to $21.47 an hour plus $12.65 in benefits. The federal prevailing wage for a roofer in the Joplin area rose from $7.25 an hour, which matches the general federal minimum wage, to $21.30 an hour plus $8.08 in benefits.

So what is the purpose of the tax credits? If it is to get the most bang for the buck in providing critical assistance to low- and middle-income residents, efficiency requires waiving the wage standard for this project. The $100 million only goes so far, and artificially elevated wages means fewer homes built under the tax credit program. On the other hand, the tax credits and prevailing wage changes may have mixed purposes, not all of which seek what truly is best for the displaced and less fortunate in Joplin.

Is Missouri Ready For Tolls?

Posted on by David Stokes

This Missouri News Horizon story has some updated information on the Missouri Department of Transportation’s (MoDOT) proposal to institute tolling on I-70. The story has some good information about the plan; a plan that I enthusiastically support. I think this is an excellent plan from MoDOT.

MoDOT officials state that in order to pay to rebuild I-70 using gas taxes (and I have nothing against gas taxes; I just prefer tolls where feasible), they would have to impose a 15-cent per gallon state gas tax hike. I am going to do a follow-up post next week on costs after I have time to work through the numbers, but for now, realize that everyone in Missouri would pay that same extra 15 cents, including people who rarely use highways, particularly I-70. People in Kennett would pay the same as people in Kingdom City. People who drive primarily on local roads (paid for with local property and sales taxes as well as gas taxes) would pay the same as people who drive predominantly on highways (which gas taxes pay for almost entirely).

The Show-Me Institute released a terrific study on private financing of highways back in November 2008. The study was done by “distinguished urban economist” (Freakonomics’ words, not mine) Kenneth Small. It may be my favorite paper that we have released, and it has something important to say about this exchange in the hearing with MoDOT yesterday:

Committee chair, Sen. Bill Stouffer, R-Napton, said he was concerned that motorists may try to avoid I-70 if it became a toll road, pushing traffic onto smaller roads, such as Highway 36 and Highway 50.

Keith said the concern was valid, but it would be up to the toll road operator to make sure tolls aren’t excessive.

The concern about traffic being pushed onto other roads because of high tolls is legitimate. Prof. Small states on page 23 of the study: 

The best results occur when the objective for awarding the franchise takes into account a combination of all three forms of payment by users and taxpayers: their own costs of congestion, toll payments, and the subsidy required. This is a highly stylized model not suited for designing a franchise for a specific road, but it does highlight the importance of considering not only toll payments and subsidies but also congestion costs incurred by users of both roads. 

In the simplest terms, the eventual toll rate need not be 100 percent of cost or 0 percent of cost. It may be desirable to continue some subsidy of I-70 through gas taxes to keep the toll rate low enough to maximize use of I-70 and limit spillover traffic. The fact that I-70 is a major, heavily-traveled road means that such a subsidy would likely be small, and it is entirely possible that a toll rate can be set that covers all costs and return on investment and requires no subsidy. That is my hope, but if a small subsidy going forward means that the new I-70 would reach its uncongested capacity (the toll should be set high enough to discourage congestion), and thereby limit the unnecessary usage of alternate roads and the costs that could be incurred in that situation, then I do not see anything wrong with a limited subsidy of a toll road.

I have one minor critisicm of the proposal. I do not think this should be required:

After the project is complete, the contractors would operate the toll plazas for a period of years until the contractor’s investment has been repaid.

I say just toll it now and forever. After the investment is repaid, there will still be maintenance costs. It may be reasonable to require that the toll be lowered at that point in time (when the debt is gone and MoDOT faces just upkeep), but doing away with toll at that point is not necessary, in my opinion. However, that point is minor, and I think MoDOT deserves great credit for this proposal.

Good Faith – Bad Result

Posted on by Greg Aubuchon

The Missouri Supreme Court recently heard oral arguments in American Federation of Teachers v. Ledbetter. At issue is whether a public school district has a legal “duty” to collectively bargain in “good faith” with a teachers’ union. Currently, districts typically recognize and meet with their teachers’ designated representative, but are under no legal obligation to agree to specific proposals that the union proffers.

In its opinion leading to the supreme court hearing, the intermediate court of appeals noted the following:

. . . no Missouri court has expressly interpreted Article I, section 29 [of the Missouri Constitution] to contain a duty of good faith . . .

If the Court, in a fit of judicial activism, writes a “duty to bargain in good faith” standard into the state constitution, school districts, once vested with substantial discretion from the legislature to manage their affairs, will suffer tremendously. For example, rejections of union proposals will now spawn threats of lawsuits. Districts will hire attorneys to assess the liability risks of decisions once left to the discretion of the districts’ officials. Good faith, in this context, is an invitation to litigate. And litigation diverts scarce resources and money from the districts’ core mission: to educate our children.

Interestingly, the Missouri Legislature has rejected five attempts to statutorily adopt a good faith standard (see footnote 4 in court’s decision). Haven’t the people spoken through their elected representatives? The Court should heed this message and reject a duty to bargain in good faith standard for Missouri’s public school districts.

High-Speed Rail Supporters Are Just Making Things Up

Posted on by David Stokes

Over at the St. Louis Beacon, high-speed spending (and rail) enthusiast Rick Harnish is just flat-out misleading people to get his beloved waste-of-money concept going. Throughout the article, he keeps referring to trips between Saint Louis and Chicago taking 3, or perhaps down to 2, hours.

But the core of it is getting major cities within two or three hours of each other. So, St. Louis to Chicago within three hours — with completely new infrastructure the entire way, it’s possible you get it down under two.

But you know what? The entire project currently underway in Illinois is based on implementing a 4-hour trip each way (at best). We are spending billions to knock a little more than an hour off of the current Amtrak route, and supporters of it are intentionally downplaying that.

Later in the interview, Harnish gives a great little aside downplaying safety of cars and claiming, by insinuation, that trains are safer.

. . . if you believe that our strength and unique identity is tied to the ability to risk your life everyday in a car . . .

OK, so we risk our lives everyday in a car. Would we not risk them in a train? Now, I am not saying passenger trains are unsafe — they are indeed safe. But if you compare them to cars, there are more fatalities on passenger rail than in motor vehicles per passenger mile. According to the latest data, passenger cars have 0.9 fatalities and 83 injuries per 100 million passenger miles. Passenger rail has 2.9 fatalities and 1,226 injuries per 100 million passenger miles. So they are both safe, but let’s not pretend passenger rail is safer.

High-speed rail is to transportation policy what ethanol is to agriculture policy. They are both high-cost jokes designed to please limited constituent groups (corn farmers, unions, Keynesian economists) which would not exist if markets made these choices instead of politicians. (High-speed rail on the eastern seaboard may pass the market test, and thanks to John Combest for the link.)

Whining about Wine

Posted on by Michael Rathbone

I miss October. The weather was nice, the sky was clear, and the St. Louis Cardinals baseball team was on its way to an 11th World Series title. Also during October, many people congregated in various parts of Missouri to celebrate Oktoberfest, a fun and lively event where people enjoyed cultural activities along with certain viticultural products.

I want to make it clear that I do not want to outlaw wine in Missouri. However, it troubles me that taxpayer money is subsidizing the wine industry. Specifically, the Missouri Department of Agriculture spends $1,828,859 (click on HB 6-Agriculture and scroll down to page 133) on something called the Missouri Wine and Grape Board.

According to the Department of Agriculture’s 2012 Budget Request Form (click on HB-6-Agriculture and scroll down to page 134), “The Wine and Grape Board stimulates growth of the grape and wine industry for the economic and social benefit of the citizens of Missouri.” Aspects of the board’s functions include using funds to “develop programs for growing, selling, and marketing of grapes and grape products grown in Missouri.” Indeed, the Missouri Wine and Grape Board does have marketing products, including brochures, videos, and radio advertisements. The Wine and Grape Board also funds the University of Missouri Institute for Continental Climate Viticulture & Enology in order to fund grape research programs.

So, in essence, the board serves somewhat like a chamber of commerce for the Missouri wine and grape industry. However, unlike a chamber of commerce, participation in this program is mandatory, with a charge of a 12-cent excise tax on every gallon of wine sold in the state. Also, in all my searches through the state budget, I have yet to encounter an official appropriation for a private chamber of commerce.

I have to ask, why can’t Stone Hill or Hermannhof promote themselves with their own money? Why can’t there be a private chamber of commerce that promotes the wine industry, or all the wineries of the state? I have no problem with private groups promoting wineries, but do I think the state should be promoting them? No.

Also, there is no evidence that this expenditure actually DOES have a positive impact on the state’s wine industry. In my search, I haven’t seen anything to suggest that the Missouri Wine and Grape Board has a discernible impact on the Missouri wine industry. Even the economic development report on the Missouri Wine and Grape Board website doesn’t really show the spending cause and effect; it just shows that in recent years, Missouri wineries are doing well. However, it doesn’t link the activities of the board to the wine industry’s success.

The key issue here is funding priorities. Why is the state funding this board, at least at its current level, when there are other places in the budget that may require that money? If the choice for appropriators is between potentially laying off teachers, firing firemen, or withholding funds from vital social services, shouldn’t every area of the state budget come under review for potential savings? Just my 2 cents.

We Need TIF Reform, Not Higher Taxes

Posted on by Bruce Stahl

I am happy to report that voters on Tuesday defeated a proposed property tax increase in the Liberty School District. I blogged about the proposal before the vote — it’s important because it highlights the perils of Tax Increment Financing (TIF). TIF allows property taxes which should go to schools to be redirected toward property development, thereby restricting school revenue. Liberty is not an isolated case; it’s happening all across the state.

Tuesday’s vote is a wake-up call: reform TIF.

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