Even the Midwest China Hub Commission Knows “Aerotropolis” Tax Credits Are Flawed

Posted on by Audrey Spalding

You know a policy proposal is bad when its proponents admit internally that the proposed policy is problematic.

It turns out that we weren’t the only ones who had reservations about the $360 million in so-called “Aerotropolis” tax credits that would have subsidized warehouse development and international flights.

The Midwest-China Hub Commission (MCHC), the organization that has been pushing for increased cargo flights between Saint Louis and China, itself raised many of our concerns — and even more of its own — in its analysis.

In response to an information request, the Show-Me Institute received the MCHC’s review of the Aerotropolis tax credits, and it is interesting. So, consider this blog post as having been written with a great deal of assistance by the folks at the MCHC. I think they raise excellent points about the bill, and ones that taxpayers should be concerned about.*

A Lot of Tax Money Has Already Been Spent or Will Likely Be Spent in the Area

Most concerning to me is the MCHC’s analysis showing that much taxpayer money has already been spent on sites that would likely qualify for the Aerotropolis tax credits. Much more will likely be spent in the near future.

From the MCHC’s analysis: “… 192 million in prospective incentives are currently available at the major development sites located at or near Lambert Airport.” According to the analysis, another $93 million has already been authorized or expended at those sites, bringing the total amount of taxpayer money spent, authorized, or available in the future already to more than $285 million.

The Aerotropolis tax credit package would lump another $360 million on top of those tallied in the MCHC’s analysis.

Then, the analysis notes that other existing tax credit programs could be used to subsidize the promised development and resulting warehouse jobs, including Missouri Quality Jobs tax credits.

So, why exactly is more taxpayer money needed? Haven’t these sites received enough subsidy already? Why award an additional $300 million to subsidize warehouse construction on top of the subsidies already available?

How Do We Know That Increased Cargo Flights Will Materialize?

In its review, the MCHC notes that “Many unknowns remain such as: catalysts for increased flights, cargo market share capture, background analysis, etc.”

This is exactly the point that I have raised repeatedly. So far, the Regional Chamber and Growth Association has produced an eight-page “study” that purports to show the benefits of awarding $360 million in tax credits. But the study doesn’t show that increased flights will materialize if tax credits are awarded. In fact, it doesn’t show that increased flights will materialize at all — the RCGA study just assumes that those flights will appear. Out of thin air, as it were.

I think legislators should heed this review and wait for more information that would reveal exactly what could cause more international flights to come to Saint Louis.

Could the Tax Credits Go to Activity That Has Little to Do With International Air Cargo?

The MCHC review raises a fascinating point. Could the Aerotropolis tax credits go to companies for activity that has little to do with international air cargo? The commission’s analysis notes that the Aerotropolis tax credit legislation defines “cargo activity” broadly. From the analysis: “The definition … specifically includes facilities related to truck, rail and water transportation; this may be appropriate, but may incentivize facilities that have only a limited relationship to the Air Cargo facility …”

So, would the proposed tax credits go to new economic activity? Or, given the broad definition of cargo activity, could the tax credits end up subsidizing business as usual at Lambert?

The concerns listed above are ones that I think persist in the bill, despite recent changes to the legislation. I want to point out that although the Show-Me Institute was the only organization publicly raising questions about unlimited costs contained in earlier versions of the Aerotropolis legislation, the MCHC’s analysis raised the concerns internally.

From the review:

Most critically, a close read of [the tax exemptions included in the initial version of the Aerotropolis bill] indicates (by omission) that there is NO cap placed on the total cost to the state of these two programs.

Thankfully, legislators took those uncapped exemptions out. And, luckily for taxpayers, the Aerotropolis subsidies did not pass the Missouri legislature this session. But many legislators are not giving up hope. Some public officials are even suggesting that the governor call a special legislative session in order to pass the subsidies this year.

Maybe instead of pushing to award $360 million in taxpayer money, legislators should address our — and the MCHC’s — concerns. Why throw more money at this area? Where’s the evidence of increased international cargo flights? Why write tax credits into law that could end up subsidizing business as usual?

* For the policy wonks: I know that this review by the commission concerned SB 390, and that the most recent version of the Aerotropolis tax credit proposal was contained in HB 116, which had some changes from the previous version of the bill. The problematic issues listed in this post are still present in the HB 116 version of the Aerotropolis tax credits. I did not include the commission’s concerns about eligible costs or tax exemptions, because those provisions were removed.

Taxpayers Off the Hook for $360 Million

Posted on by Audrey Spalding

Good news: The $360 million in subsidies as part of the so-called “China Hub” or “Aerotropolis” bill did not pass the Missouri Legislature. At the Show-Me Institute, we have worked diligently to point out to lawmakers the folly of awarding hundred of millions of dollars in tax credits to subsidize warehouse construction near the Lambert–St. Louis International Airport.

The idea, legislators said, was to encourage international trade. In reality, though, the proposed legislation would have created $300 million in tax credits to subsidize warehouse construction and $60 million to encourage freight companies to send flights to Saint Louis.

Tax credits are not free money. When the state awards tax credits, it forgoes future revenue. And, unfortunately, legislators are rarely fiscally responsible enough to make corresponding budget cuts when awarding tax credits. Bottom line: Tax credits mean either budget shortages later, or — more likely — increased taxes.

Legislators and subsidy proponents did not bother to explain publicly why the 18 million square feet in existing vacant warehouse space wasn’t enough to satisfy market needs, didn’t produce a feasibility study, and couldn’t show that any international firm was waiting to send flights to Saint Louis until the subsidies were written into law. They just asked Missourians to dream big and ignore the possibility of failure.

It’s good news for Missouri taxpayers that the Aerotropolis subsidies failed to get off the ground, but they are by no means abandoned. Legislators and proponents have said publicly that they want to continue to push for the subsidy package.

I, and my colleagues at the Show-Me Institute, will continue to watch the proposed warehouse subsidies closely. We will continue to ask to see concrete numbers, firm commitments, and an explanation as to why so much new warehouse construction is needed.

Tune In to 98.1 KMBZ FM at 10:00 a.m. on Monday: In-Studio With “Voice of Merrill”

Posted on by Patrick Ishmael

I’ll be visiting KMBZ’s Chris Merrill after the weekend’s out to talk about Kansas City’s plan to build a new convention center hotel downtown. Check that link if you’re unfamiliar with the subject, or check my commentary published today in the Kansas City Business Journal. Then, on Monday morning, click here to listen in!

“An Unspoken Bond”? City Aldermen and Land Patronage

Posted on by Thomas Duda

Recently, Show-Me Institute Executive Director Brenda Talent wrote in an op-ed that “To better serve the public interest, the LRA should stop trying to pick winners and losers in the market for vacant land.” This made me wonder — why does the Saint Louis Land Reutilization Authority (LRA) accept some bids while rejecting others, and what are the costs to taxpayers of its current approach to landholding?

The two high-rises pictured above both entered the LRA’s inventory in the 1990s, vacant, awaiting redevelopment. Only one stands today.

At left is a picture of the Continental Building, located at 3615 Olive St. in the city’s Grand Center neighborhood. A 1978 National Register nomination notes, “Built in 1929 with William B. Ittner as architect, the Continental is the most sophisticated statement of art deco in St. Louis.” At right is a picture of the Regency Nursing Inn, which stood at 4560 West Pine Blvd. Built between 1964 and 1966 at a cost of $2.3 million, the convalescent home and medical office building opened for business in 1966. A leasing guide for the 15-story reinforced concrete building stated, “Because of the imposing character and dignity of the REGENCY, pride of tenancy as well as functional interior design will delight the most discerning.”

Although the Continental Building was “sophisticated” and the Regency Building merely “functional,” both ultimately fell into disuse and were subject to vandalism. The LRA assumed ownership of both buildings in the mid-1990s through the tax foreclosure process authorized by the 1971 Municipal Land Reutilization Law. Today, both properties are back in private hands after sales by the LRA, but only the Continental Building still stands. The Regency Building was demolished in 1998 at the behest of the LRA, at a cost of $263,940.

So, what gives? Does the LRA have a preference for art deco over mid-century modern? Or is there another explanation for the LRA’s decision to save one high-rise and demolish the other?

During the June 25, 1997, meeting of the LRA, the agency rejected a $10,000 offer by Roberts West Pine Development and Associates to purchase the Regency Building for rehabilitation as condominiums, deciding instead — in an executive session — to sell the property for $1 to West Pine Court LLC. Minutes from the meeting indicate that West Pine Court LLC had the support of the alderman, whereas Roberts West Pine Development did not.

Today, the site is home to low-rise, brick-faced townhouse condominiums, funded in part by the city’s first residential tax increment financing (TIF) project. To date, the developer has received more than $400,000 from this subsidy.

The Continental Building, too, stood vacant prior to its rehabilitation in 2001 by Owen Development. The residential conversion project received $5.8 million in state historic preservation tax credits and additional funds from the federal historic preservation tax credit. Minutes of the Jan. 26, 2000, meeting of the LRA reveal that the developer had “the enthusiastic support of the alderman” for the proposed rehabilitation of the building as apartments.

The LRA has wide statutory latitude to do anything it pleases, including rejecting high bidders and accepting low bids from the politically favored. As former Commissioner Howard Hayes said during the Oct. 25, 2000, LRA meeting, the agency has “an unspoken bond with 28 aldermen, because they speak for the people of St. Louis, they have been duly elected.”

Does the LRA’s “unspoken bond” entail listening to aldermen while harming taxpayers?

Consider the timeline of what happened here:

  • The LRA rejects a $10,000 bid for the Regency Building, a mid-century modern skyscraper.

  • The LRA accepts a $1 bid from a developer who simultaneously requested a TIF from the city.

  • The LRA demolishes the building at a cost of $263,940.

  • The LRA retains the art deco Continental Building in its inventory, pending its transfer to a developer for rehabilitation.

  • As of 2010, taxpayers are out at least $400,000 on the West Pine townhouses and more than $5 million on the Continental Building.

At a bare minimum, the LRA should subject its parcels to competitive bidding. The fact that the LRA can raise costs to taxpayers with zero oversight and no accountability is reason enough for today’s Missouri policymakers to revisit and rethink the powers of this ill-conceived agency. In the 21st century, aldermen should not have the powers of land patronage.

“If Someone’s Looking for Space, We Have Space Available”

Posted on by Audrey Spalding

Christine Harbin and I drove around the Lambert–St. Louis International Airport on Tuesday, to see whether there really was a shortage of warehouse space.

Legislators, after all, are in a rush to pass a bill that would award $300 million to subsidize the construction of new warehouses. That collection of subsidies is known as the “Aerotropolis” bill. Proponents of the $300 million in subsidies say that the creation of new warehouses is crucial to getting more international freight traffic to Saint Louis, primarily from China.

There is a lot of space available near the airport.

Vacant Land Available

I spoke with David Randolph, vice president of CB Richard Ellis, the brokerage company looking to lease the 405,000-square-foot building shown below. Randolph said that he hasn’t seen a shortage of warehouse space.

“If someone’s looking for space, we have space available,” he said.

Randolph disagreed with making tax credits available for the developers of new buildings.

“I personally think it would be a disadvantage to current owners of buildings that exist,” Randolph said, “that only new buildings get tax credits but old buildings do not.”

Matt Harrington, marketing manager at CB Richard Ellis, estimates that there is about 200 million square feet in developed warehouse, manufacturing, and flex space in the Saint Louis metro area, excluding Illinois. With a vacancy rate of 9 percent, about 18 million square feet is available, he said.

Half a Million Feet of Vacant Warehouse Space

Here is some more space available for lease:

First Industrial Realty Trust

And some more:

Space Available CB Richard Ellis

This blog post could go on. There were many warehouses available for sale or rent. So, why exactly are legislators looking to award $300 million to subsidize the creation of new warehouses? There certainly seems to be no shortage of space for lease.

Christine and I would be happy to provide a tour to any legislators who are unaware that warehouse space is available. Or they could call David Randolph. His company’s phone number is listed on the “Available” sign above.

Illinois Scrambles as Sears Looks for an Exit

Posted on by Patrick Ishmael

Two weeks ago, I noted that our cross-border friends in Illinois had an economic mess on their hands. Unemployment’s high and the budget is out of whack. But tax increases rather than budget cuts constitute the fiscal front line in Illinois: taxes on Internet sales, and tax hikes on income, on wealth-creating enterprises, and on enterprisers that make Illinois prosper.

The result? A schizophrenic tax and tax-break policy that has business looking for the exits. The latest: Sears.

Sears Holdings Corp.’s confirmation Monday that it is considering leaving Illinois could push the fiscally crippled state to dole out incentives to another major company.

In 1989, Sears leveraged the possibility of moving to North Carolina to earn tax breaks that led it to leave Sears Tower (now Willis Tower) in the Loop for its Hoffman Estates campus, said Hoffman Estates Mayor William McLeod.
[…]
The threat looms large: Sears, a 125-year-old mail-order pioneer and retail institution, is the Chicago area’s fourth-largest publicly traded company by revenue ($43.3 billion in fiscal 2010). The parent of Sears and Kmart employs 280,000 in North America, including 6,200 at its 200-acre Prairie Stone campus.

Tax-credit mania!

The article continues (emphasis added):

The news follows Illinois’ $7 million tax credit to keep U.S. Cellular Corp., a $19 million tax break to Continental Tire, $65 million in tax breaks to keep Navistar and $100 million in tax incentives to retain Motorola Mobility’s Libertyville headquarters. Gov. [Pat] Quinn also scrambled to assure Caterpillar that Illinois is a business-friendly state.

One of the best ways to assure businesses that your state is “business-friendly” is to establish low, stable tax rates that don’t punish hard work or pick winners and losers. Tax increases aren’t the answer, and the list of states to which Sears might move — Georgia, New Jersey, North Carolina, South Carolina, Tennessee, and Texas — are mostly the usual, business-friendly suspects, some of whom may literally be laughing at Illinois’ economic policies all the way to the bank. For example, Illinois now applies a 5-percent income tax rate (formerly 3 percent) against its residents; Tennessee and Texas don’t even have an income tax. Under those conditions, where would you rather live and work?

But, Missourians, do note: Our income tax rate settles in at 6 percent. Missouri’s leaders haven’t written off fiscal discipline entirely, but the state’s income tax probably ought to be revisited sometime soon. Food for thought.

Spotted by the Airport: Lots of Vacant Warehouses

Posted on by Christine Harbin

Supporters of the Aerotropolis proposal say that warehouses are necessary to expand Lambert’s cargo capacity, and that state subsidies are necessary to build the warehouses.

Audrey Spalding, Tom Duda, and I spent yesterday afternoon driving around the area north of Lambert airport. We spotted quite a high number of empty warehouses. 

Lambert-area warehouses

However, given the number of vacant warehouses and “Will build to suit” signs on empty lots, it seems to me that there is already a lot of capacity. I wonder: Where’s the demand for warehouses? If the ones that are currently near the airport are empty, why do legislators want us to spend $300 million on more of them?

It reminded me of downtown Saint Louis, actually — despite all of the “space available” signs on the office buildings, government officials still want to subsidize new construction downtown.

We’ll release a video soon about our trip, where we’ll talk more about this issue. We’ll try to get it edited and uploaded to the blog as soon as possible. Stay tuned to the Show-Me Institute!

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