The first of a series.
Gas, Booze, and Cigs: How Lower Tax Rates Make Money for Missouri
In this video, David Stokes takes a first-hand look at commuters buying their gasoline, alcohol and tobacco in Missouri, motivated by the Show-Me State’s lower excise taxes — and therefore lower prices. This shifting of purchases across state lines mean higher tax revenues for the state of Missouri, precisely because our tax rates are lower.
Every day, Missouri has approximately 195,000 commuters that come into the state to work. That is the fifth highest total for any state. It is 55,000 more than leave the state to work each day. That ratio (+ 55,000) is the third highest number for any state. In both cases, Missouri trails only states along the eastern seaboard. (Our source for this is the 2000 Census, and we will update these numbers as soon as they are released from the 2010 Census.)
Missouri has low excise taxes. We have the lowest cigarette tax, the sixth lowest gasoline tax, the lowest beer tax, the ninth lowest wine tax, and the third lowest tax on spirits (liquor). What do excise rates and commuter totals have to do with each other?
Low excise taxes serve as an inducement for the 195,000 commuters to Missouri to voluntarily choose to purchase these goods while in Missouri. Missouri gains the tax revenue, and those commuters then bring many of the costs of the externalities of these items back to their home states. Low taxation levels on items that are often bought as part of a special trip serve as an incentive for commuters into Missouri to make those special trips when in Missouri. (This is opposed to, say, lowering the tax on lettuce, which is generally purchased as part of a comprehensive trip to the grocery store.)
These goods (gas, alcohol, tobacco) have other properties that make them a target for purchasing by commuter consumers. They can be purchased very quickly. This is a function of the standard quantity the goods are bought in, and the lack of search costs for most of the products. The reduced search costs are themselves a function of either no brand loyalty (gas) or extreme band loyalty (cigarettes). Among these three goods, only alcohol will generally see comparison shopping, but even there brand loyalty is very strong. These goods also do not spoil. (Cold beer is an exception.) Commuter consumers are not going to buy groceries on their lunch break, or before a long commute home in traffic. Finally, all of these items are more difficult to purchase online than other goods, for fairly obvious reasons and certain legal restrictions.
Missouri’s low excise taxes don’t just benefit Missourians who use these goods. They benefit the entire state by encouraging 195,000 daily commuter consumers to make these purchases while in Missouri. On the other side, they encourage the 140,000 Missourians who leave the state each workday to hold off on these purchases until they return to Missouri. This maximizes the tax revenues received by Missouri, while the costs of the externalities are spread among many states.
NB: As a matter of internal policy, the Show-Me Institute does not hold opinions. All opinions expressed in Show-Me Institute publications and video are those of the respective authors or speakers.
Grandview Passes Hotel Tax
Residents in the Kansas City suburb of Grandview have just voted in favor of levying a 5 percent tax on hotel stays beginning in 2012. The city expects to net about $120,000 annually and plans to spend the increased revenue to attract tourists.
Although the vote has already taken place, Grandview residents should be aware of the potential effects of the tax on the city’s hotel industry.
In the suburbs of Kansas City, people have plenty of options to choose between competing hotels. Because its neighboring municipalities levy the tax while Grandview does not, Grandview will be forfeiting its own competitive advantage when attracting potential guests.
This hotel tax could potentially lead to less people choosing to stay in Grandview as the city will no longer have its tax advantage. That in turn could mean less revenue and less business for the city’s hotels.
We’ve previously covered the potential effects of hotel taxes in Jefferson City and Saint Louis County.
South of the Border
Imagine that driving your pet to the veterinarian required a certified medical card, a detailed car maintenance log, and a commercial license. Would you think you were having a nightmare? Unfortunately for Missouri farmers, the USDOT is considering big-brother style rules reclassifying agricultural transportation as commercial transport. The Southeast Missourian reports:
If approved, the guidelines would require even a pickup truck driver hauling a single cow to a local sale barn to have a federal medical card certified by a physician, to keep a detailed maintenance log book and possibly to have a commercial driver’s license.
The only major difference I can see between you taking your pet to a check-up and a farmer taking his cow to a sales barn is the farmer intends to sell the cow. Why is the government considering such stringent regulations? From the same article:
Federal regulators argue that because the grain or livestock that farmers are hauling could eventually end up across state lines, the farmer’s intent is interstate commerce and therefore, for uniformity, they should be subject to commercial transit regulations.
The federal government wants to bring agricultural transport into the category of commercial transportation on the odd chance that agricultural products will cross state lines. Yet history has demonstrated that agricultural transport works quite fine as is.
This is a case of government growth with no benefit to the citizens. Missouri would be better off without it.
Aerotropolis Kingmaker “Fix” Isn’t Much of One
I’ve pointed out that the so-called “Aerotropolis” legislation could result in the Mayor of Saint Louis and area county executives becoming gatekeepers to as much as $300 million in tax credits. That portion of the legislation became affectionately known as the “kingmaker provision” at the Show-Me Institute.
We wondered what practical reason there was to transfer this sort of unbridled power to these local chief executives? And why wasn’t there anything in the legislation that would prevent them from using the power to pick winners and losers using questionable criteria of their choosing?
When legislators requested feedback from us about how to change the bill for the better, we suggested that the kingmaker provision be removed or, if not removed, that the process of determining what areas could be eligible for Aerotropolis tax credits be done publicly.
The Missouri Watchdog has just posted an updated version of the special session legislation. The kingmaker portion of the bill has been changed and, instead of cutting out the kingmaker portion altogether, it appears that the bill’s drafters have wrapped a bureaucratic maze around the provision in an effort to tamp down untoward use of executive power.
But will it do the job? The new “kingmaker compromise” system would proceed as follows:
- The Mayor of Saint Louis or a county executive would have to hold a public hearing to determine whether an area could be eligible for the Aerotropolis warehouse construction tax credits.
- The Mayor of Saint Louis or a county executive would then notify the Missouri Department of Economic Development (DED) if he or she determines that an area is eligible for the warehouse construction tax credits. They would also provide details about the area to the DED.
- The DED would then review the details about the area to make sure that it does fit within the restrictions detailed in the Aerotropolis legislation.
- If the DED denies the application to make an area eligible for warehouse construction tax credits, the Mayor of Saint Louis or a county executive may resubmit the application.
I applaud the bill’s drafters for their attempt to add some transparency to the process of awarding warehouse construction tax credits. However, the new language doesn’t actually address the fundamental problem: The Mayor of Saint Louis and county executives would still be gatekeepers to up to $300 million in state tax incentives.
Warehouse owners and developers would have to petition those elected officials to call such a public meeting and to find that their area is eligible for state subsidy. There is no other way for warehouse owners and developers to qualify for the Aerotropolis warehouse construction tax credits without the blessing of these officials.
I must admit that when I first read through the new legislation I thought that the DED might be able to exert some oversight. However, if you read carefully, the DED can only “verify” that the local chief executive has identified an area that fits with the restrictions in the Aerotropolis bill. Those restrictions are merely that the area be within 50 miles of Lambert International Airport and at least as large as 100 contiguous acres, in a special economic zone, within the boundaries of Lambert airport, or owned or managed by a port authority. That’s it.
In the end, warehouse developers and owners would still need the Mayor of Saint Louis’ or a county executive’s good favor to be eligible to receive the Aerotropolis tax credits. Which leaves me wondering, why are state legislators concerned with expanding the power of local elected officials? How does granting new authority to local politicians and power brokers advance the cause of good governance and fundamentally change the failing status quo?
Light Rail Heavy on Taxpayers’ Wallets
I’ve lived in St. Louis for 19 years now and I’ve used the area’s light rail system ten times … if that. Some residents and tourists probably benefit from Metrolink, but it seems to essentially serve two purposes for most residents: subsidized transportation from a few suburbs to Cardinals games and from the airport to downtown.
That’s what it will do in Kansas City, too, at an estimated taxpayer burden of $2.5 billion.
The Kansas City Star reported that voters once again will have the opportunity to give their opinion on a taxpayer-funded light rail system this fall. The plan calls for a three-eighth-cent sales tax that would generate roughly $1 billion over 25 years.
Combined with $1.5 billion from the state and federal government, the plan would create a network extending from KCI to the Waldo neighborhood. It would also add commuter rail lines and streetcar lines downtown.
We’ve reviewed Kansas City Transit Plans in the past and determined that this sort of project would not lead to many net benefits for the city. A taxpayer-funded light rail network would serve very few citizens and draw funding away from other, more effective methods of public transit.
And it won’t even run to the Chiefs’ and Royals’ games under the proposed plan.
A better idea would be furthering developing existing transit systems in Kansas City. From a previous Show-Me Policy Study:
This study recommends that the Kansas City Area Transportation Authority contract out bus operations to private companies, which is likely to save 30 to 40 percent of costs. This, in turn, will allow a 50- to 60-percent increase in bus services, including several new bus–rapid transit routes. These improvements should result in far more new riders using public transit than would be gained from light rail — without increasing the cost to taxpayers.
Here is a link to our full policy study on Kansas City transit and some previous thoughts on light rail in Missouri.
Paging Doctor Meth
Imagine you wake early one morning with severe sinus congestion and a throbbing headache. You wobble down to the local Walgreens for some medicinal relief, only to be denied your Sudafed by the pharmacist for lack of a doctor’s prescription. What do you do? Lug your bloated, throbbing head to the next county where prescriptions are not required? Or schedule a doctor’s appointment for next week? That is hardly timely relief. What will St. Charles County residents do?
The St. Charles County Council voted on July 25 to require a doctor’s prescription when purchasing cold and allergy medications that contain pseudophedrine. Unfortunately, the ordinance imprudently inserts doctors into meth makers’ raw material supply chains. It is difficult to imagine, much less believe, that this ordinance will effectively diminish meth production in Missouri. With a sufficient profit motive, meth makers will seek out alternative arrangements for the procurement of pseudophedrine, perhaps by recruiting doctors as critical prescription suppliers.
In essence, the ordinance will turn otherwise law-abiding doctors into accessories to crime, unwittingly or not. Some will no doubt embrace the temptation to write fraudulent prescriptions, thereby corrupting the practice of medicine.
But this is only the tip of the iceberg. With the resulting increase in the demand for prescriptions, the ordinance further taxes an already over-burdened medical reimbursement insurance system. In an era when concerns for healthcare costs predominate, why should St. Charles County compound the problem by dumping a multitude of cold and allergy sufferers onto the bloated calendars of busy doctors?
And what about consumers? Certainly, the monetary and inconvenience costs of traveling to — and paying for — doctor’s visits and the time exhausted circumventing the ordinance by purchasing medications in non-regulated jurisdictions are substantial. The St. Charles County Council has voted, in effect, to shift meth-related law enforcement costs onto the backs of innocent cold and allergy sufferers.
This cost shift acts much like a tax on the purchase and consumption of cold and allergy medications. As with a tax, the “effective” price for these medications rises for consumers. Similar to a tax, the result is a deadweight loss as consumers ultimately consume less than the optimal amount of medications.
Seriously, is the real purpose of the “prescription mandate” to engineer a local law enforcement database to better monitor the activities of private citizens? If so, shouldn’t someone conduct a detailed cost-benefit analysis comparing the expected benefits with the known costs? After all, pharmacists are already required to request and to enter personal information into a database tracking consumers of pseudophedrine-based medications.
And what can be done to alleviate the competitive disadvantages and inherent inequities dogging those pharmacies who happen to be located wholly within a prescription mandate jurisdiction? They will certainly lose business to competitors fortunate enough to be situated in non-mandate counties and municipalities. Although a statewide mandate would address this latter concern, it nevertheless would still give rise to the corruption of medicine and tax-imposed deadweight losses, as discussed above.
The war against meth is not a free task. The costs associated must ultimately be borne by taxpayers. The issue is whether the selected means for conducting that war are wise and efficient, implying that all costs and benefits have been carefully weighed and compared.
Grandview to Vote on Hotel Tax Tomorrow
Residents in the Kansas City suburb of Grandview will vote tomorrow on imposing a hotel tax of five percent in order to promote tourism. The city estimates that the vote will net an additional $120,000 in revenue from those staying overnight in the town.
Take a moment to check out the two commentaries my colleague David Stokes has published on hotel taxes: here and here.
The Mayor, the County Executive, and the RCGA All Likely Have Vested Interests in the ‘Aerotropolis’ Legislation: It Could Enhance Their Power
If the Missouri legislature calls a special session and passes the so-called “Aerotropolis” legislation, it will award a great deal of power to the Saint Louis mayor and the nearby county executives. It should come as small surprise that some of the strongest voices arguing for the Aerotropolis legislation come from the very individuals who stand to benefit from it.
The Aerotropolis bill (as written during the 2011 legislative session — we’re still waiting on updated text for the special session) would give the authority to the mayor of St. Louis or the executive officers of nearby counties the power to designate “gateway zones.” While this power sounds innocuous, it has important ramifications.
First, those chief executives would become gatekeepers in the distribution of millions of taxpayer dollars. The Aerotropolis legislation would create $300 million in tax credits that would subsidize warehouse construction. That tax credit money could only be awarded only to warehouses built in gateway zones.
Even if motives are pure, the ability to determine which areas are eligible for hundreds of millions in tax credits would be an incredible power. The legislation does not say anything about monitoring such designations. Nothing in the legislation would prevent one of these chief executives from using such power as an indirect way to acquire campaign contributions or other untoward benefits.
A simple way to stop any such abuse of power would be to take the city and county chief executives out of the equation. If legislators — despite a lack of substantive empirical evidence that these tax credits will do any economic good — really want to subsidize warehouse construction, at least let all owners of vacant land compete equally for tax credits. There is no need to give special powers to city and county executives to achieve this (questionable) goal.
Second, this legislation would allow city and county executives appoint a three-person board to oversee millions in special tax revenues. That board could impose a special tax on the warehouses receiving the Aerotropolis subsidies, and then would oversee how those tax revenues are spent. Of those special tax revenues, 50 percent would go to the St. Louis airport. But the other 50 percent would be given to a “tax-exempt regional economic development association or associations…” The three-person board would select which association(s) would receive the money.
This, too, represents increased political power. The chief executives of Saint Louis and nearby counties will be in a position to appoint the people who determine what agency gets part of those special tax revenues. Nothing in the Aerotropolis legislation would prevent them from appointing individuals who have a vested interest in where those special tax revenues go.
Interestingly, it seems that the St. Louis Regional Chamber and Growth Association (RCGA), the organization that pushed hard for the Aerotropolis tax credits, is a “tax-exempt regional economic development association.” There are others, such as the St. Louis County Economic Council. It appears that these organizations could qualify for the Aerotropolis special tax revenues. Awarding a steady stream of tax revenue to organizations that argued for the legislation that created that tax revenue is exceptionally poor public policy.
There’s a simple answer to all of these problems. Remove the possibility, however remote, of using the Aerotropolis subsidies and tax revenue as a political tool. There doesn’t seem to be a practical reason to include these mechanisms in the Aerotropolis legislation. They do, however, invite corruption into the process. The economic merits of the Aerotropolis tax credits are questionable as it is, but if the legislature insists on enacting them, they should not allow that money to be controlled by political figures.
