The ‘China Hub’: Another Flight of Fancy?

Posted on by Christine Harbin

Although the state government is strapped for cash, Missouri’s General Assembly is about to place a huge and ill-advised bet on the so-called “Midwest China Hub,” or “Aerotropolis.” The subsidies would authorize $360 million in tax credits — although the details keep changing — primarily for the construction and operation of cargo warehouses near the Lambert–St. Louis International Airport.

At the 11th hour, legislators tacked on this misguided proposal to another bill that would limit tax credit expenditures. The end result is a 330-page bill that would accomplish little other than take benefits from some — in this case, the low-income elderly — and instead award benefits to private developers in Saint Louis.

In a recent state Senate committee hearing on the China Hub subsidies, Sen. Ron Richard opined, “I’ve got business people and friends of mine that live in Saint Louis that are begging for something new and creative. So we take a chance.” Unfortunately, when he advocated trying something new and creative, Richard did not suggest that the state create an environment that encourages all Missourians to be creative and entrepreneurial. His plan entails quite the opposite: gambling hundreds of millions of dollars, and leaving Missouri taxpayers on the hook.

The China Hub subsidies have three critical problems. First, the bill rests on the flawed notion that legislators are all-knowing, and that they have the ability to successfully pick and choose the industries, types of employment, and goods and services that should exist in Missouri. Second, the state government is already short on funds, and it cannot afford to give away hundreds of millions. Revenue lost to tax breaks for favored industries would need to be replaced by increased debt, reduced government spending, or — more likely — imposing a higher tax rate for all of Missouri’s less fortunate taxpayers.

Third, there has been no in-depth study of the costs and benefits of the proposal, nor do we know the level of commitment from foreign firms. The Saint Louis Regional Chamber & Growth Association recently released an eight-page brief about the China Hub subsidies, but it is by no means in-depth. It merely extends the unsupported assumptions that were built into the legislation.

Major questions remain to be answered. In particular: What’s the rush? We don’t know with certainty what the legislation will cost, or what business it may bring. Why should state government pick an economic winner, when it has such a poor track record for doing so? Also, how do we know that cargo warehouses have the ability to boost the Saint Louis area economy?

Legislators like Richard have a hunch, and they want taxpayers to bear the risk. As Harvard economist Edward Glaeser notes: “Too many officials in troubled cities wrongly imagine that they can lead their city back to its former glories with some massive construction project …”

Unfortunately for taxpayers, the strategy taken by state legislators is not a new one — nor is it effective. The China Hub subsidies rely on the same old policies that the legislature has tried before. Why will this time be any different? Within the last decade, we spent $1.1 billion on a new runway at Lambert, and it sits largely unused. Missouri lawmakers say that they want to rein in tax credits, but then turn around and award even more.

If lawmakers were serious about “taking a chance,” they would do something that is actually new and different, such as reducing the state income tax or eliminating tax credits altogether. This would create a more favorable playing field for all businesses — not just a select few. Is there anything creative and new about subsidizing the construction and operation of warehouses?

The best way for Missouri to grow the economy is to provide a business climate that encourages individuals to develop new ideas. If government officials genuinely want to try a new strategy, they should stop attempting to control the state economy from the top down. Creating another layer of bureaucracy — no matter how well-intentioned — will only impede this creativity and stifle growth.

Entrepreneurs in Missouri will seize upon the opportunities around them as soon as the government gets out of their way.

Christine Harbin and Audrey Spalding are policy analysts at the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

“Aerotropolis” Roundup

Posted on by Christine Harbin

What a long, strange three weeks it’s been. My colleague Audrey Spalding and I dropped nearly everything we were doing in order to focus on the “China Hub” proposal. The details keep changing as it moves through the legislature, but we’re staying on top of it. The one thing that doesn’t change is that it will do more harm than good for the Missouri economy. Here’s a roundup of all things “Aerotropolis” — in case you need to catch up.

It began with a flurry of blog posts and some radio gigs, and it grew from there. Late last month, Audrey and I stopped by The McGraw Milhaven Show on The Big 550, KTRS in Saint Louis, and the Mike Ferguson show on 93.9 FM “The Eagle” in Columbia. We talked about how the Aerotropolis proposal would be more of a boondoggle than an investment.

A little more than two weeks ago, Audrey and I both testified about the Aerotropolis proposal before the Missouri Senate Jobs, Economic Development and Local Government Committee. The written version of our testimony is available on our website. You can also watch the video of our testimony here on Show-Me Daily:

Note the part where Sen. Ron Richard said, “I’ve got business people and friends of mine that live in Saint Louis that are begging for something new and creative. So we take a chance.” He has it completely backward. Tax credits aren’t new and creative. Neither is draining more money into Lambert. Aerotropolis is more about subsidizing business as usual than taking a chance.

Audrey and I penned an editorial explaining how Sen. Richard was mistaken. It ran in the Southeast Missourian and the Columbia Missourian this week.

Late last Monday night, lawmakers made many changes to the bill. The amount of tax credits dropped from $480 million to $360 million. We’re still talking about a lot of money, though. State lawmakers combined Aerotropolis with a bill that would otherwise limit tax credits. It’s schizophrenic public policy, and it doesn’t make sense. I’ve called for limiting tax credits for a long time, so I am disappointed that state lawmakers are negating the benefits of limiting tax credits by combining them with a policy that would expand them. It’s like the Dr. Jekyll and Mr. Hyde of tax credit legislation.

Next, we split up to reach more people. Audrey went back on the McGraw Milhaven Show on The Big 550, KTRS on Wednesday. The audio archive of the interview is available here. Audrey reviewed how the bill has changed, and how it will do even less to encourage international trade. Meanwhile, I spoke to KMOX radio about how it’s a bad deal for taxpayers.

Yesterday morning, I was a guest on the Charlie Brennan Show on KMOX. I had a great time. I talked Aerotropolis with: Rhonda Hamm-Niebruegge, director of Lambert–St. Louis International Airport; Rodney Crim, director of the St. Louis Development Corporation (SLDC); and Steve Johnson, executive vice president of economic development for the St. Louis Regional Chamber and Growth Association (RCGA). An archive of the audio is available online. I argued that, if building cargo warehouses next to the airport is such a good idea, private entrepreneurs will pick up their shovels. They would have broken ground already — they wouldn’t be waiting around for tax credits.

Later that day, the Show-Me Institute’s executive director, Brenda Talent, released an open letter to Missouri Speaker of the House Steven Tilley. She encouraged him to remove the Aerotropolis bill from the current legislative agenda. I wonder: What’s the rush? Why are state legislators frantic to get Aerotropolis enacted in the final days of session? What’s the harm in studying the issue a bit longer?

This morning, I enjoyed talking with Steve Helms on “Morningline,” on KWTO AM 560 in Springfield. We discussed the fact that the Lambert airport is already drowning in debt — to the tune of more than $900 million. Much this is left over from the failed $1.1 billion runway expansion from not too long ago. I wonder: Is draining even more money into the airport the best use of taxpayer dollars? Couldn’t Steve’s listeners in Springfield spend their tax monies on things closer to home?

Even though it’s Friday, we’re not taking a break from our media outreach. KWMU Radio ran a commentary of mine a couple times today, and the St. Louis Business Journal ran an editorial written by Audrey Spalding and me.

I wonder what next week will bring for Aerotropolis. Stay tuned to the Show-Me Institute team — we’ll continue to track the issue and provide up-to-date analysis on what it will mean for Missourians.

Article About the Missouri “Fair Tax” in the Columbia Missourian

Posted on by David Stokes

A few days ago, the Columbia Missourian printed a terrific article about the “Fair Tax” proposal in Missouri written by a great friend of the Show-Me Institute, Steve Spellman. Combest linked to it last week, as well, which is where I first saw it. I encourage you all to check out the article — and the enjoyable comments, too.

Be sure to listen it to Steve’s radio show on Tuesday nights, while you are at it. Finally, if you are in Mid-Missouri, think about participating in the Show-Me Institute’s Columbia book club.

An Open Letter to Missouri Speaker of the House Steven Tilley

Posted on by Brenda Talent

Dear Speaker Tilley:

It appears that Missouri legislators are about to place a huge and ill-advised bet on the so-called “Midwest China Hub,” or “Aerotropolis.” In its present form, the pending legislation would give private developers $300 million in tax credits for the construction of warehouses around the Lambert–St. Louis International Airport, and $60 million in tax credits for international flights. The hope is to gain the support of the Chinese government, international airlines, and cargo carriers to develop an international cargo hub at Saint Louis.

The Show-Me Institute has published numerous articles pointing out the folly of handing out tax credits and other subsidies for favored industries. Our policy analysts have also appeared on radio programs around the state alerting Missourians to some of the pertinent facts regarding the China Hub:

  • Private developers would qualify for tax credits for building warehouses that process only a small amount of air cargo. According to the latest version of the bill, a warehouse would be eligible for state subsidy if as little as 10 percent of its operations consisted of sending cargo to international destinations.
  • The state government is already short on funds, and with spending cuts looming, Missouri cannot afford to give away hundreds of millions of dollars. Tax credits are not free money. Every dollar that the state gives away in tax credits is a dollar that won’t be received in the state coffers and that the state won’t be able to spend on elementary and higher education, health care, public safety, and other state programs.
  • Missouri has to balance its budget every year, so every dollar that is given away in tax credits is a dollar that our state government must replace by further increasing taxes on other Missourians or making additional cuts in current programs.
  • As the bill stands now, legislators are poised to take $57 million in tax credits from the low-income elderly all across our state who rent their residences, to pay instead for warehouse construction in Saint Louis.
  • The government should stop trying to pick winners and losers in the economy. The China Hub would be the latest in a long line of unfortunate state-supported enterprises that began with the aim of “stimulating” or “jump-starting” growth by offering guaranteed returns to private developers while shifting real risk and hundreds of millions of dollars of expense, to the backs of our taxpayers.

For all of these reasons, the legislation is deeply flawed and goes against the best interests of the overwhelming majority of Missourians. It is also difficult to understand why there is not even a minimal amount of accountability in the process of applying for and receiving the tax credits. The program is established as an “entitlement,” and similar tax credit programs over the last few years, such as the historic tax credit program, have been severely criticized for being established in such a fashion.

The best way for Missouri to grow the economy is to create a business climate that does not award special handouts to favored industries, and that relies instead on reducing taxes and regulatory constraints on businesses and individuals alike. Entrepreneurs in Missouri will seize upon the opportunities around them as soon as the government gets out of their way.

I urge you to withdraw the “China Hub” or “Aerotropolis” bill from the current legislative agenda.

Most respectfully,

Brenda Talent
Executive Director, Show-Me Institute

Blueprint for a Blunder: Why Kansas City Should Quash Its Convention Hotel Plans

Posted on by Patrick Ishmael

Kansas City wants another hotel for its convention center. Nobody wants to pay to get the project started, except … the city itself.

The last major project that was financed out of Kansas City’s general fund put the city on the hook for the financial shortfalls of the Power & Light District (P&LD). The damage there? Officials project the district will suck $10 million each year from the city’s budget from now until … 2033. Although the cost of the new project has yet to be finalized — the latest estimate puts the overall price tag at around $300 million — you can bet that the bottom-line cost to KC’s taxpayers, should the project actually happen, will be significant.

City officials say that they won’t let the P&LD fiscal disaster repeat itself — that this time, the city won’t borrow against its general fund to get the hotel started — but Kansas City has already dropped more than half a million dollars in consulting and property option fees pursuing the project. Clearly, the ball is rolling. The question is, when did it start rolling, and why?

The Pitch has the rundown of how the city embarked on yet another building odyssey downtown:

Let’s start at January 9, 2007. That was the day when a 62-page report encouraging the city to build a 1,000-room hotel was completed.

The study was produced by a Minnesota-based consulting outfit called Conventions, Sports & Leisure International. The consultants knew the city. They had contributed to a previous proposal that led to a renovation and an expansion of Bartle Hall — the hall’s second expansion in 15 years.
[…]
Two nights later, 800 civic leaders enjoyed a banquet dinner and jazz at Bartle Hall to celebrate its recent $150 million makeover. The pooh-bahs had high hopes for that Bartle Hall update. In 2004, as the construction work was about to began, Rick Hughes, president and CEO of the Kansas City Convention & Visitors Association, had suggested to me that a new ballroom might double the city’s convention business.

The problem is that the expansion of Bartle Hall didn’t actually double KC’s number of conventions. According to the Pitch, Kansas City hosted 32 conventions in 2009 — which is basically the same number of conventions it hosted in 2004 and 2005. The project, judging it on this important metric, simply didn’t work.

Perhaps city officials were simply overly optimistic about the effect a Bartle Hall expansion would have on tourism. But that’s one of the recurring problems that Kansas City’s civic leaders have had these days: They invariably overstate and over-promise to get big-idea projects off the ground, but, in the end, can’t help but under-deliver because the economic bases of the projects aren’t really grounded in reality. If you listen closely, you can sometimes hear them admitting just that (emphasis added):

[President of the Kansas City Convention & Visitors Association Rick] Hughes told the City Council that insufficient hotel space was sending convention planners into the arms of other cities.

Then he dropped this doozy: “It’s really all about what we’re losing now, and just in recent studies, $4 billion in tentative bookings as well as some pretty enormous losses of existing customers.”

Really — 4 billion?

If Kansas City is “losing” $4 billion and action X is being advocated, you’d think that taking action X would net the city about $4 billion. Except … that’s not what it means at all.

Again from the Pitch (emphasis added):

I asked Carr about Hughes’ PowerPoint presentation indicating that Kansas City is “losing” 6.25 million room nights from 2004 to 2014. Carr says this number is based on sales leads that the visitors bureau receives. It reflects “potential” demand.

“We’re not saying, ‘Oh, gosh, we would have landed all these conventions,'” Carr says.

No, because that would be impossible.

Indeed. And yet, for some unknown reason, Kansas City’s political class is slow to learn from its hyperbolic mistakes, and is repeating them as it advocates for this new hotel.

From the Pitch (emphasis added):

One of [Hughes’] PowerPoint slides said Kansas City is “hemorrhaging” convention business.

Interesting word choice. It took me back to an interview I conducted with Hughes five years ago.

“We’ve been hemorrhaging conventions,” Hughes told me as we sat in his office in the fall of 2004.

Of course, back then, Kansas City was losing convention business for reasons other than the lack of a “convention headquarters” hotel.

Same advertising, different project.

The fact is, even if the hotel project weren’t being over-hyped, and even if it didn’t negatively affect the city’s general fund like the P&LD has, that doesn’t change one important economic fact: Taxpayer underwritten developments like the one proposed still ultimately hurt loyal, local businesses without growing the city’s aggregate wealth. It’s bad economics.

Fortunately, at least the president of the city’s steering committee for the project knows it, reports the Star (emphasis added):

[Bill] Lucas said this may [be] a good opportunity for the city to step back and take a fresh look at the hotel proposal. Right now, he’s concerned a new project would only divert business from existing hotels.

“I’m not convinced we can generate that kind of increase in demand,” he said. “We’d about have to double our convention bookings, and I think that’s difficult to do.”

So, to recap what we’ve learned, the convention center expansion was supposed to double the number of conventions the city booked every year, but failed to do it. The P&LD was supposed to revitalize downtown, but is instead draining $10 million a year from the city’s budget. A convention hotel is being proposed because, as Mayor Sly James put it, “To the extent every one of those people stay in the Loop and spend dollars there, it helps offset some of the problems in the Power & Light District and creates more jobs.” But to save the P&LD, the hotel needs the convention center to … double its convention bookings.

And around we go.

If a convention hotel were economically viable in Kansas City, agents in the free market would build it. The absence of a pending private-sector project pretty well indicates the real prospects for such a hotel, with or without taxpayer support. Kansas City isn’t in a fiscal position to take on a risk like this anyway.

Even if Kansas City were in a better fiscal position, though, it shouldn’t take this up. Pushing business around the metropolitan area — whether it’s a hotel or restaurant patrons — with publicly backed incentives is like shoveling sand in a sandbox: It doesn’t make the sandbox bigger or the sand more plentiful. It just raises the probability that, in the end, you’ll have less sand sitting in the box than when you started.

The city should save the taxpayers’ money, by firmly — and finally — declining to back the project financially. Just let the free market work, and if a convention hotel makes sense, somebody will build one to cater to the needs of Kansas City’s visitors.

Good Morning, Springfield!

Posted on by Christine Harbin

Tomorrow morning, I will be talking “Aerotropolis” tax credits with Steve Helms on “Morningline,” on KWTO AM 560 in Springfield. I’ll explain how the proposed “China Hub” will have a much greater impact —with little gain — on the state’s economy than lawmakers seem to think. Quite frankly, I’m surprised that folks who live outside the Saint Louis area aren’t outraged about this. I’ll explain why on the show.

I’ll be on just after 8:15 a.m. Tune your radio to KWTO AM 560, or listen live online.

Watch Live Tonight: What Washington Won’t Tell You About the Next Economic Crisis

Posted on by Rick Edlund

[The embedded video below is the archived copy of the footage that streamed live from Saint Louis University on the evening of May 3. Brian Reidl’s presentation slides are also available as a PDF.]

Click below for live video of the Show-Me Institute’s Speaker Series on Economic Policy, which will begin at about 7:00 p.m. CDT. Tonight’s speaker at this Saint Louis University event is Brian Riedl, the lead budget analyst for the Heritage Foundation. Riedl’s speech, “What Washington Won’t Tell You About the Next Economic Crisis,” focuses on the looming budget and deficit crisis in America.

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