The End of Aerotropolis Subsidies?
A real spendthrift – even one newly resolved to be thrifty – cannot walk through a shopping center without stopping in a check-out line at least once. He will fasten on some trinket and congratulate himself for not blowing a much larger sum of money.
It is in that spirit that lawmakers in Jefferson City are now looking at the proposed legislation calling for creation of a “Midwest China hub,” or “Aerotropolis,” at Lambert-St. Louis International Airport.
According to newspaper reports, the legislature is prepared to scale back or totally eliminate $300 million in tax credits intended for owners of warehouses and real estate in and around the airport, while retaining $60 million in subsidies to encourage freight forwarders to route international freight through Lambert.
If so, that represents real progress – and a greater responsibility on the part of our lawmakers, including some of the prodigals who call themselves fiscal conservatives. However, while the final numbers are uncertain, talk of finding other means to funnel tax credits to Aerotropolis demonstrates a continuing blind spot on the part of legislators.
The question is: Why should the state of Missouri put up any money for Aerotropolis unless it supports the public good in some clear and identifiable way? Where is the justification for taking $60 million out of the pockets of Missouri taxpayers and giving it to unseen and unknown freight forwarders located in other cities around the world?
No one has advanced the slightest evidence that Missouri farmers or businesses have suffered a loss of exports – to China or anywhere else – because of inadequacies in the current transportation system.
Whether it is in shipping tools, pharmaceuticals, or frozen meat, there are fast and efficient means for Missouri exporters to reach key destinations around the world.
Supporters of Aerotropolis confuse economic incentives and competitive advantage. Yes, we can give taxpayers’ money to freight forwarders – the socalled travel agents of cargo – to offset obvious disadvantages in routing cargo through Lambert, which has no regularly-scheduled passenger or cargo flights to destinations outside North America. But that’s just asking people to take your money for doing something that doesn’t make any sense.
The real irony in the Aerotropolis saga is that our politicians and lawmakers – joined by business lobbying groups in St. Louis and Jefferson City – want to use taxpayers’ money to help Chinese carriers compete against U.S. carriers. In its eight-page economic impact report, the St. Louis Regional Chamber and Growth Association noted that “China has determined to grow their market share in air freight from 15-20% to 50%” in the transport of Chinese-made goods. Do we really want to help the Chinese government reach one of its objectives at the expense of our own carriers?
Our lawmakers may think that they should leave something on the table for the special interests that have lobbied long and hard for the Aerotropolis legislation.
But $60 million is not some trinket that a spendthrift might pick up upon leaving a store. It is taxpayers’ money and it is equal to the median household income in Missouri multiplied 1,300 times. Here’s a novel idea: Why not return the $60 million to Missouri taxpayers?
Andrew B. Wilson is a fellow at the Show-Me Institute, which promotes market solutions for Missouri Public Policy.
Some Facts About Tax Credit Programs in Other States
The St. Louis Post-Dispatch reports that the Missouri Legislature is attempting to create tax credits that could be awarded up front – that is, before the promised economic activity occurs. David Kerr, director of the Missouri Department of Economic Development (DED), the state agency that stands to benefit from this proposal, calls the expanded power “a vital tool that we don’t have today.”
But the idea of awarding tax credits up front should give everyone else pause. We know that tax credits have a dismal track record at delivering on results promised (state audit reports and independent analysis have shown this). So why expand the DED’s power to award tax credits?
The argument is that if Missouri doesn’t award tax credits, other states will, and as a result will encourage companies to leave Missouri and take their jobs and economic impact to other states. Though the argument sounds plausible, we have to consider the facts.
Missouri already issues hundreds of millions in tax credits each year. During fiscal year 2010, Missouri issued more than $400 million in tax credits. To what benefit? According to the state auditor, tax credit programs cost more than predicted, and the DED was frequently overstating job claims and investment estimates related to tax credit awards.
Texas doesn’t award nearly as much as Missouri does in tax credits. The Post-Dispatch reporter, Tim Logan, writes that tax credit programs are “big in Texas.” However, the fund he cites is the Texas Enterprise Fund, which has pledged $439 million in credits to companies since 2003. Though Texas uses tax credits, the program Logan cites pledged over an eight-year period as much as Missouri pledged in a single year.
In fact, according to the state’s “Tax Exemptions & Incidence Report,” Texas tax credit programs offer a relatively small amount in tax credits for job creation. For example, Texas’ “Refund for Job Creation in an Enterprise Zone” awards a maximum of $5,000 for companies that can show that they created at least 10 new jobs. In its report on tax exemptions, Texas notes that the revenue cost of that program is “negligible.” If we look at Missouri, the state issued nearly $15 million in “Quality Jobs” tax credits during fiscal year 2010. Tax credits may be big in Texas, but they are really big in Missouri.
We might be winning the bidding war with Kansas. Legislators point to businesses that move from Kansas City, Mo., to Kansas City, Kan., when tax credits are promised. But, according to Kansas’ recent Tax Expenditure Report, the state’s tax credit expenditures for development and services are about $200 million. Missouri may be giving away about twice as much tax revenue to favored industries and companies than Kansas.
Furthermore, Missouri has a more favorable tax climate than Kansas. The Show-Me Institute collects and posts tax data for all 50 states to help people compare tax burdens among states. According to that data, about 23% of Missourians’ income goes to taxes. However, 26.5 % of Kansans’ income goes to taxes.
In short: When it comes to taxes, Missouri is already competitive, compared to Kansas. We should continue to lower our tax burden for all, in order to entice more businesses and individuals to move to this state.
If tax credits result in growth, Michigan would be an economic powerhouse. It is not. Every time I hear a legislator or reporter question whether tax credits are needed to move industry to a state, I can’t help but think of my home state. Michigan awarded more than $1 billion in tax credits last year to just a few auto companies. In fact, the governor’s report on tax exemptions estimates that more than $33 billion in tax exemptions are awarded each year in the state. And, what exactly does Michigan have to show for that much in tax credits and other awards? Not a lot.
Look, tax credits don’t guarantee growth. What they do guarantee is that many pay a tax rate that is too high so that the favored few can get a tax break.
The Boston Tea Party and . . . Targeted Tax Credits?
I don’t think any American schoolchild escaped this lesson from civics class: On the night of December 16, 1773, in response to Parliament imposing new taxes on tea, a group of colonists from Boston boarded a number of ships in the harbor and threw the newly-taxed tea overboard in protest against “taxation without representation.” This is a great lesson for children to learn, after all — as Daniel Webster and John Marshall agreed — the power to tax involves the power to destroy. It’s also an easy lesson with which to sympathize. If taxes make things we buy more expensive, we lose out. According to Wikipedia:
The protest movement that culminated with the Boston Tea Party was not a dispute about high taxes. The price of legally imported tea was actually reduced by the Tea Act of 1773.
Wait, what?
Let’s go back a bit. For years, the British East India Company enjoyed a monopoly — granted by the British crown — on importing tea to Britain. Because the American colonies were under British rule, this also meant that all their tea had to come from the East India Company — first imported to London, then shipped to America by a third party. At the time, Britain had high import tariffs, which raised the price of all East India Company tea. Colonists could buy Dutch tea smuggled into the colonies much more cheaply because it never touched a port with high tariffs. In 1773, Parliament passed the Tea Act, which allowed the East India Company to import tea to the colonies duty-free. Suddenly, all the people who imported tea to the colonies, legally and illegally, were priced out of the market by a competitor that received special government favors. Some of the people on the boats in Boston Harbor the night of December 16 were concerned about overreaching government authority and a pattern of abuse, but lots of them were smugglers or legal shippers who were rebelling against the loss of their livelihood to a government policy that favored one business at the expense of others.
Here’s another quote from Wikipedia:
In 1772, legally imported Bohea, the most common variety of tea, sold for about 3 shillings (3s) per pound.[33] After the Tea Act, colonial consignees would be able to sell it for 2 shillings per pound (2s), just under the smugglers’ price of 2 shillings and 1 penny (2s 1d).[34]
So the colonists got their tea cheaper than before. Where’s the problem? Well, in addition to the problem of taxation without representation, competing businessmen lost out under the new tariff regime. There were other losers as well — namely every British citizen who paid higher taxes because the East India Company had this duty-free dispensation.
My co-workers at the Show-Me Institute have talked about targeted tax credits before. Targeted tax credits are just one way that governments pick winners and losers in the marketplace. When this happens, the logic of the market is overturned and almost everyone suffers — except those the government selects to receive its largess. It’s easy to point to these people and conclude that the tax credit was a success, but maybe that’s because the injured parties so seldom throw a historic party to make their plight known to the world.
China Law Blog on Mamtek: “[T]here are some lessons to be learned”
Looks like the Mamtek story that Show-Me Institute Policy Analyst Audrey Spalding wrote about on Friday is already getting some play on the West Coast. If you’re unfamiliar with the Mamtek saga, a primer (Emphasis mine):
A company that promised 600 jobs and drew Gov. Jay Nixon to Moberly to announce $17.6 million in state aid is in financial trouble and could potentially stick the city with payments on a $39 million bond deal.
Mamtek International Ltd., a company with Chinese and American ownership, planned to make sucralose, a zero-calorie sweetener at the facility. The $65 million deal, ballyhooed at the start by former Gov. Bob Holden, chairman of the Midwest U.S.-China Association, was put together in 73 days last year and was supposed to include $8 million in private investment.
Moberly issued $39 million in bonds to build the Mamtek factory, buy and install the equipment and take care of other items necessary for the company to begin production. It was supposed to have put 116 people to work — perhaps as early as late last year, according to early reports — and double that employment within 18 months.
China Law Blog is a website operated by Harris & Moure, pllc, a law firm based out of Seattle, Wash., with a China law practice. China Law Blog’s Dan Harris highlighted Mamtek’s troubles on Thursday, telling readers that “[m]any many months ago, I got a quasi-anonymous email from someone in Moberly, Missouri” regarding the Mamtek project. After a series of back-and-forth emails with the tipster, Harris determined “that the odds were that this deal would prove disastrous.”
As it turned out, the deal did prove disastrous. So what happened? According to Harris (Emphasis mine):
First, it appears that got overly excited about the possibility of getting Chinese money. It appears it fell prey to the classic “China is rich. We want money. Therefore this is a good deal” syndrome. Second, it appears nobody conducted adequate due diligence. Were the very valid suspicions of my e-mailer ever checked out? I doubt it. I have no idea if my e-mailer ever raised her/his suspicions with City Hall, but having dealt with governments, I can only imagine how they were treated. Can you say groupthink? Third, the deal was rushed. The Columbia paper noted how it all went through in “73 days, far less than the six months or more usually needed to conclude such a deal.” Rushing a deal does not mean it will fail, but it certainly increases the chances.
Governments are responsible to the people for the public money they spend and the public credit they extend. Especially in a down economy, governments will oftentimes risk a little — or more likely, a lot — of both to get the “jobs, jobs, jobs” flowing. The problem, of course, is that governments have a terrible track record of picking economic winners and losers. Unfortunately for the city of Moberly, that’s a lesson residents now know all too well.
Department of Economic Development Organizational Flow Chart (2011)
SLU and Mizzou Economists Weigh in on Aerotropolis Jobs Estimates
Saint Louis University professor Dr. Jack Strauss and University of Missouri-Columbia professor Dr. Joe Haslag (also Show-Me’s chief economist) have at least two things in common. First, they both are economists, and second, they are very skeptical of Aerotropolis.
Dr. Strauss appears as part of a KMOV report on the status of the “China Hub” proposal in the Missouri Legislature’s Special Session, calling Aerotropolis a “pie in the sky” project. That segment is below:
Meanwhile, Dr. Haslag has written an article for the Columbia Business Times expressing similar concerns on the jobs front, saying that “the models used by DED [to estimate tax credit project success and job creation] have been discredited” predominantly because they fail to incorporate the cost of the government taking money from the private sector to fund the project. Dr. Haslag also tells a brief but useful story about the problem of trying to “count” jobs. (Emphasis mine)
There is a legend about employment and government projects involving Dr. Milton Friedman. During a visit to India, an official was taking Friedman on a tour of a public works project. New machinery was being used, and the official touted the number of jobs that were created by the project. Friedman responded by saying that if you wanted to count new jobs, the project leaders should have provided the workers with spoons instead of state-of-the-art construction equipment. If it is jobs we want, there are lots of silly ways to get those jobs created. A nobler goal is to find a set of rules that promotes opportunity for all, not just gifts graciously handed to a select few.
Our skepticism of the wide array of Aerotropolis job estimates has been well-documented. Dr. Strauss’s and Dr. Haslag’s analyses of the project again confirm the questionable nature of proponents’ jobs assessments.
Missouri’s Ticking Pension Time Bomb? Will the Money be There?
Those who follow this blog are aware of the Show-Me Institute’s interest in Missouri’s 130-plus public pension systems. Tens of thousands of current and retired government employees and their families are depending on their pensions. If these fail, taxpayers will pay one way or another.
Kansas City recently began investigating its pension systems. You may access our previous coverage here and here. Recently, outside consultants to its Pension System Task Force recommended that taxpayers pony up an additional $23 million per year “to make the city’s pension funds more financially stable.” Apparently, the city may now make current and future taxpayers pay for the sins of prior administrations. They are passing the buck onto future generations of taxpayers and their children.
Perhaps greater Missouri should pay heed. According to the Cato Institute’s recent work, Missouri’s public pension plans are grossly under-funded when accounting for reasonable expectations of future economic conditions. Think about the impact this may have on the tens of thousands of state employees and retirees and their families, if and when they are unable to support themselves on their broken pensions. They deserve better. Taxpayers have reason for concern as well. Ultimately, the state loses credibility when it breaks its promises. And under that scenario, everyone is a loser.
Kansas City and Missouri are far from alone. WLBT TV-3 out of Jackson, Mississippi, reports that the state pension fund, the Public Employees Retirement System (PERS), is now guided by a 12-member commission. The commission is empowered to:
…examine the financial, management and investment structures as well as determining the legality of modifying the system. All in an effort to dodge a potential problem in the long run.
Mississippi Gov. Haley Barbour notes that PERS is funded at only 60 percent of where it should be and pays out benefits that exceed its structural limits. Kudos to Mississippi for beginning the discussion on sustainability and reform.
Fortunately, some of our sister states have gone pro-active, confronting the looming crisis. The Center for State & Local Government Excellence has just released a study of five successful pension reforms in Iowa; Oregon; Vermont; Gwinnett County, Georgia; and Houston, Texas. Although not perfect, these reform efforts provide some hope that pension stakeholders can meet and iron out their differences. Here’s hoping that Missouri joins the party before midnight strikes. Better late to the party than dead broke on the outside looking in.
A Bidding War Where Everyone Loses
The Kansas City Star reports today that AMC Entertainment is leaving Missouri for the state of Kansas, in part due to $47 million in tax credits. Some politicians have already begun using the loss of AMC as an excuse to promote the expansion of tax credits in Missouri.
Well, let’s not rush to do something drastic just because Kansas is set to award $47 million to a company.
Tax credits are especially bad public policy because they frequently fail. Just this week, a company in Moberly made news because it looks like the company will default on $39 million in city-backed bonds. You may remember the company, Mamtek, because politicians promised the company would create 600 jobs, the state was set to award millions in tax credits to the company, and because Missouri Gov. Jay Nixon traveled to Moberly to announce the job creation.
Unfortunately, after a newspaper was pressured to close because it was asking too many questions about the tax incentive deals, Mamtek appears to have failed. Clearly, the promise of tax credits isn’t a guarantee of investment and job creation.
If Missouri legislators are so eager to copy Kansas’ policy of awarding tax credits, they might want to look at Michigan. More than $33 billion in tax incentives each year are awarded in Michigan, and yet the state has a dismal job rate and incredibly depressed economy. Just last year, Michigan announced the creation of more than $1 billion in tax credits alone.
Certainly, if tax credits resulted in tremendous economic growth and job creation, Michigan would be on the right track. It is not. In fact, the Mackinac Center for Public Policy, a research institute in Michigan, surveyed Michigan tax credits over a 10-year period and found that in more than 90 percent of cases, tax credits failed to deliver on promises.
It has been shown again and again: Tax credits fail frequently, and in many cases, taxpayers are stuck with the tab.
Remember Liberty Mutual? The company is still eligible to receive “Quality Jobs” tax credits from Missouri, despite the fact that it issued pink slips to many of its employees this year. Those employees were told that they could apply for lower-paying jobs at the company.
Furthermore, the argument that tax credits are just a way of returning one company’s tax dollars to it is incorrect. Tax credits are transferable, meaning that they can be sold. What this means is that a company can receive an enormous tax credit, of say $10 million, even if the company’s tax bill is only $100,000. The company can sell the remainder of the credit to someone else, and use the cash.
Transferable tax credits mean that the taxes that you and I pay subsidize tax credit projects like the “quality jobs” being created at Liberty Mutual.
Look, I understand legislators’ concern: A company is leaving Missouri for Kansas. But should we panic? Kansas has offered AMC $47 million. AMC says it will bring about 400 employees to the state. That comes out to a subsidy of more than $100,000 for each job brought to Kansas.
Maybe those jobs aren’t worth all of us chipping in more than $100,000 for each one, especially given how frequently tax credits fail to deliver on promises. Instead, we should focus on what does work. Let’s lower tax rates for everyone, instead of just the favored few. Lowering the state income tax or Saint Louis’ and Kansas City’s earning taxes would be a great place to start. Let’s get rid of unnecessary regulations and licenses that do no good, like limitations on taxi cabs, removing barriers to becoming a veterinarian, or by allowing dental therapists to provide dental care to rural and low-income Missourians.
It’s easy to call attention to a single company that moved across state lines because it could get a better deal. But let’s not forget all of the individuals and companies that stay in Missouri because of what this state does have to offer.
