Witches, Economic Development Promises, and Baseball

Posted on by Audrey Spalding

I had no idea that there were so many witches in Romania. Or that European politicians (including French President Nicolas Sarkozy) often go to witches to seek advice.

This is exactly why I listen to the Freakonomics podcast, which highlights the ways that economics can provide insight to seemingly inexplicable situations. Recently, Freakonomics discussed efforts in Romania to fine witches if their predictions fail to come true. The jail-time punishment being proposed for multiple false predictions could result in six months to up to three years in jail.

I suppose that if you acted on a false prediction, you would want to punish the person who led you astray. But think of all of the people and organizations who make predictions that affect the way our economy runs. We don’t penalize, say, politicians, economic development officials, or coalition groups when the promises they make fail to materialize.

As Steven Dubner, host of the Freakonomics podcast put it, “I don’t care if you’re anti-witch or pro-witch or witch-agnostic. Why should witches be the only people held accountable for bad predictions?”

In Missouri, it isn’t very hard to find evidence of bad economic development predictions. The recent Mamtek scandal is one. The 2006 prediction that the Ballpark Village development in downtown Saint Louis would result in more than $700 million in economic impact looks unlikely, to put it kindly. And, for a recent example, we have the ever-changing job estimates associated with a proposal to dedicate $300 million in state tax credits to construct warehouses and facilities.

Consider also a state audit report that found, among many other problems, that Missouri’s Low Income Housing Tax Credit is much more costly than initially predicted. How about the overly rosy economic growth assumptions used to sell Tax Increment Financing (TIF) projects? An East-West Gateway Council of Government study found that “broad measures of regional economic outcomes strongly suggest that massive tax expenditures to promote development have not resulted in real growth” (emphasis mine).

Of course, I’m not advocating that we throw politicians and economic development officials in jail for making the wrong promises. But I would suggest, for the health of Missouri’s economy, that we start holding these people responsible for their predictions.

As Freakonomics co-host Steve Levitt points out in the podcast, people have every incentive to make absurd predictions:

So, most predictions we remember are ones which were fabulously, wildly, unexpected and then came true. Now, the person who makes that prediction has a strong incentive to remind everyone that they made that crazy prediction which came true. …But if you’re wrong, there’s no person on the other side of the transaction who draws any real benefit from embarrassing you by bringing up the bad prediction over and over.

Levitt’s point reminds me of the St. Louis Regional Chamber and Growth Association’s outlandish predictions. The RCGA frequently issues press releases touting incredible job and investment numbers. Sometimes, the message of one RCGA study (say, that the region needs to build millions more in warehouse space) conflicts with another RCGA press release (that the region has an abundance of cheap warehouse space). The agency clearly isn’t worried about making an unlikely prediction, either.

I also wonder about the Missouri Department of Economic Development, and the state legislature’s propensity to create tax credit programs in the hopes of attracting jobs to the state. Audit reports have shown that these tax credits are more expensive than anticipated, and that the state gets little in return. And yet, in the face of  bad earlier predictions (and even blatant overstatements), state legislators continue to fail to pass substantive tax credit reform.

A solution that Freakonomics proposes is a little unexpected, but elegant. We all are familiar with baseball players’ batting averages. Let’s apply those to people who make economic development predictions.

Consulting organizations should report their track record of success (and failure). What if every estimate of job and investment creation the RCGA publishes had to be accompanied with a percentage showing the accuracy of previous estimates the agency predicted? What if, when contemplating creating new tax credit programs, we considered whether existing programs delivered on the promises used to create them?

If we are considering whether hundreds of millions of taxpayer dollars should be allocated to a particular project, it is not enough to take proponents’ claims for fact, especially if those organizations have a track record of poor prediction. We need to know how frequently those predictions actually become reality.

We wouldn’t throw anyone in jail. We might find that some organizations are really good at making predictions. And, like Romanians burned by a bad prediction from a witch, we could stop relying on organizations and individuals that provide wildly unreliable predictions.

Aerotropolis and the Climate for Substantive Tax Credit Reform

Posted on by Patrick Ishmael

News on the proposed China Hub tax credits has been pretty sparse the past few weeks. Just before the Missouri Senate went out of session for all practical (albeit, not technical) purposes on Sept. 23, it kicked its economic development bill containing Aerotropolis over to the House for that chamber’s consideration. Yesterday, the House passed its version of the tax credit package, which, like the Senate version, left out the China Hub’s $300 million warehouse provision, but it also left out the sunsets — that is, the statutory phaseouts — that the Senate placed elsewhere in the bill on some of the state’s most expensive existing tax credit programs.

The Missouri house has pushed through the China hub bill after putting in nine amendments and leaving out tax credit sunsets.

Senate leadership says a tax bill with no sunsets doesn’t stand a chance, but the House passed China hub anyway. Speaker of the House Steve Tilley says he hopes the Senate is willing to compromise.

[…]

The bill passed the House by a vote of 98 to 48 and heads back to the Senate Tuesday.  The Senate will take the issue up when they resume Tuesday.

As a reference point, the original House tax credit bill passed with a 142-14 vote during the regular session in April. Big change.

Setting aside the political considerations in play — considerations that, granted, are nearly indispensable to understanding the day-to-day dynamic in the chamber — it is mystifying to me that budget hawks in the House aren’t demanding sunsets on most tax credit programs. When an amendment was introduced yesterday that would have phased out the Low Income Housing and Historic Tax Credits, it was resoundingly defeated with a 131-17 vote.

That’s unfortunate. Taken together over the last decade, the LIHTC and HTC have carved out a multi-billion dollar hole in Missouri budgets for a highly questionable return. An 11-cent return for every tax dollar spent on the former? A 23-cent return for every tax dollar spent on the latter? Whether or not you’re inclined to believe those findings, it’s worth keeping in mind how economic development tax credits have been distributed, and in what amounts. If tax credits are the spur to economic growth that proponents in the House say they are, I’d like to know what evidence precisely has brought them to that conclusion.

It would be apropos, however, that a House which initially envisioned an enormous half-billion dollar Aerotropolis tax credit would effectively reduce the program to $0 because it chose not to sunset — and therefore require legislative reauthorization — for a host of tax credits that have had ample time to prove their value to the state, but failed to compellingly do so. Barring a breakthrough between the House and Senate before the constitutionally-required close of the session in early November, that’s precisely where the House will find itself: without a bill passed into law, and therefore, without an Aerotropolis tax credit of any amount. We’ll know more next week.

Collecting fiscal boondoggles is not a credible economic strategy, and setting Missouri’s fiscal ship on a new course does not simply mean stopping bad policy from becoming law; it also means reforming existing law. Until Missouri’s legislators get serious about reforming or ending economic programs that are failing and, simultaneously, reducing the tax burden for all rather than a select few, Missouri will continue to drift into troubling budgetary waters.

Red Harvest

Posted on by Michael Rathbone

The Kansas City Star published an editorial last weekend regarding agricultural budget cuts. The article details a shocking amount of waste that would drive any taxpayer nuts.

The state of Missouri, like most states in the Union, is faced with the difficult task of balancing the budget. The article gives some examples of reforms on the federal level, where the savings to taxpayers wouldn’t be “poultry.” However, I will focus on one particular reform mentioned in the article because it has relevance to state spending. The reform in question is to shuck subsidies for ethanol.

The state also has a long list of its own ethanol incentives and the budget impact of these ethanol incentives is not insubstantial. In fact, ethanol subsidies account for 37% (click on HB 6-Department of Agriculture, page 81) of the fiscal year 2011 Missouri Department of Agriculture budget. In the not-too-distant past (FY 2010), it has amounted to 58% (pages 43 and 55) of the Department of Agriculture budget. Considering the dollar amounts involved and the percentage of the Department of Agriculture’s budget that state ethanol subsidies take up, it would be prudent to ask whether the state is serving the taxpayers well by investing in ethanol subsidies.

The Show-Me Institute has researched the effects of ethanol on Missouri and I would encourage everybody to give the case study a gander. Considering the other negative consequences the Show-Me Institute mentioned in its case study, it would seem that ethanol subsidies should be a ripe target for the budget cutter’s scythe. Before making the really difficult decisions on where to cut the budget (like deciding between laying off teachers or closing down mental health centers), wouldn’t it be great if the state could go after the low-hanging fruit? Just some food for thought.

Nixa Will Have A CID To Kick Around Some More

Posted on by David Stokes

A Community Improvement District (CID) proposal in Nixa, Mo., which had been lying dormant for a few months, resurfaced at a city council meeting this week. That is unfortunate. At the very least, the Nixa City Council should reject the proposed board of directors for the new district, which has three of the five members from the same family (see page 3 of this file). That is not the way to operate public dollars, unless you want to make Nixa, Mo., more like Sauget, Ill.

I also hope city officials will require the businesses to post notification of the extra sales tax at the front door and the check-outs, so that shoppers can make an informed choice. (The state legislature needs to correct the mistake that applies notification rules only to TDDs and not to CIDs.)

Nixa is a very nice town and does not need to start playing the game of subsidizing private businesses with tax dollars. If they choose to start playing it anyway, I hope they make several of these improvements to the proposal. Nixa has some dedicated activists who have brought this matter to our attention, and I wish them the best in fighting this proposal in their community. Just like the proposed Tax Increment Financing (TIF) in Columbia, the worst part of this CID is the path on which it puts Nixa. Once you approve one of these types of programs, every development in the city is going to demand one. There is no end to the game until you have hollowed out your property tax base.

Letter To Editor in the Kansas City Star

Posted on by David Stokes

The Kansas City Star kindly published a letter to the editor from us the other day on the earnings tax. Our letter was in response to one of their editorials. Thanks to John Combest for linking to the letter. Because the letter is so short, it is reprinted below. Enjoy (if reading letters to the editor about taxation on political blogs is the type of thing you enjoy):

The Star’s Sept. 29 editorial, “Voters spoke: Don’t kill e-tax or hike debt levy,” criticized outgoing Kansas City Federal Reserve chairman Tom Hoenig for recommending that Kansas City eliminate its earnings tax. The editorial stated Dr. Hoenig’s comments weren’t backed up with facts.

All the “facts” Dr. Hoenig needs is that as a PhD economist who has spent 38 years with the Kansas City Fed, he knows that Kansas City’s earnings tax harms economic growth in the city. Studies document the harm local earnings taxes have on economic growth, including three relating to Kansas City by Missouri’s Show-Me Institute (which did recommend a way to replace the tax).

Even though a large majority of Kansas City voters chose to keep the tax, that does not prove those studies or Dr. Hoenig wrong. It proves that the people of Kansas City wanted to keep the tax for a variety of reasons, which is entirely their right.

But good economics and popular public policy don’t always go together, which is exactly what Dr. Hoenig has been trying to warn us about at the national level for the last three years as well.

 

What a Difference a Year Makes: Saint Louis City’s Land Bank, the LRA

Posted on by Audrey Spalding

In February of this year, the Show-Me Institute published a study by Policy Analyst Audrey Spalding, detailing the operations and history of the oldest land bank in the 50 states, Saint Louis city’s Land Reutilization Authority, The LRA. In 1971, the LRA was created with the state purpose to return tax defunct or abandoned properties into private, productive hands. What Audrey Spalding’s policy study, “Standstill: Is Saint Louis Hindering Development by Waiting for Large-Scale Miracles?” showed is a history of denying or delaying private citizens’ attempts to purchase land from the LRA. In this video, Spalding reports with relief that the latest LRA meeting represents a sea change in LRA operation, in terms of approving offers to buy property. At the September meeting, not one offer was rejected.

A Race to the Bottom

Posted on by Audrey Spalding

The Kansas City area made big news, but not in a good way. According to the latest data, the Kansas City area lost more than 12,000 jobs during the past year. That’s the second-largest job loss in any metropolitan area in the entire country. Only Atlanta lost more jobs.

There has been a lot of talk from legislators and others about how tax subsidies are an important policy tool that states can use to keep jobs within their boundaries. In recent weeks, both AMC Theaters and Jack Stack Barbeque made news because the companies moved from Kansas City, Mo., to nearby locations in the state of Kansas.

Previously, Missouri’s Department of Economic Development (DED) used the promise of more than $12.5 million in tax credits to lure the corporate headquarters of Applebee’s across state lines into Missouri.

But to what end? Jobs in the region are down, and the loss is nearly the worst in the country.

I was curious to see how the Missouri and Kansas bidding war fit within the job loss news. So, I looked at the Kansas City core metropolitan statistical area (the area that lost more than 12,000 jobs). I then checked the three companies that made news when they moved across state lines to see from where they moved and where they relocated. These three companies’ relocations resulted in elected officials calling for the use of tax incentives to lure companies from one state to another.

Jack Stack Barbeque: The company is located in downtown Kansas City, Mo., and announced plans to move just across the state line to Overland Park, Kan. It is not clear whether tax incentives will be awarded to the company. Both locations are in the Kansas City metro area.

AMC Theaters: The company announced that it was moving from downtown Kansas City, Mo., to Leawood, Kan., also just a short few miles. The state of Kansas reportedly offered about $47 million in tax incentives, or more than $100,000 for each job. Both locations are in the Kansas City metro area.

Applebee’s: The company moved its headquarters from Lenexa, Kan., to Kansas City, Mo., just across state lines. The state of Missouri offered about $12.5 million in tax incentives, or about $35,000 per job. Both locations are in the Kansas City metro area.

In the grand scheme of things, all of the taxpayer money used to lure one company or another a few miles doesn’t really matter when it comes to the health of the region. The Kansas City metro area still lost more than 12,000 jobs, including those jobs that moved across state lines. Moving companies a short distance merely rearranges the deck chairs, it doesn’t accomplish anything productive.

In fact, given the administrative costs of running tax incentive programs, the Kansas City metropolitan area actually loses when the states attempt to lure companies away. We take tax dollars from the private sector to give to bureaucrats in the public sector whose job it is to figure out (i.e., use discredited economic modeling to guess at) which companies to attempt to lure across state lines. The money certainly could be put to better use, especially in light of some of the DED’s recent failures.

It’s time to stop playing petty economic development games and work instead on implementing public policies that have been shown to encourage economic growth, rather than shuffle it around.

I know it’s September, but a good place for us to start would be the list of New Year’s Resolutions for Missouri Public Policy that Policy Analyst Christine Harbin put together last year. Maybe there’s still some time to get started.

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