“You Smell a Rat That’s Wrapped in Week-Old Fishpaper”

Posted on by Patrick Ishmael

This morning, KMOX’s Charlie Brennan interviewed air cargo expert Michael Webber, who earlier this week gave a scathing review of the “Aerotropolis” legislation that may go before Missouri’s House and Senate in a special session. Webber said that he was highly skeptical of the current Aerotropolis plan, and that the more he hears about how supporters were promoting the project, “the more [the project] falls apart.”

“As you start stripping away carriers that automatically won’t be part of the Saint Louis equation,” Webber said, “I think any expert that isn’t on the payroll of the proponents of this project would probably come up with a likelihood of [Aerotropolis] being successful at something under 1 percent.”

In response to a question about local cattle farmers flying their herds overseas, Webber told Brennan that a livestock export facility built in Kansas City was used fewer than 10 times after it was constructed two decades ago. Atlanta had constructed a similar facility for transporting horses, used during its 1996 Summer Olympics, but even in that international hub, he said, use for the facility plummeted after the games to levels similar to those of Kansas City’s livestock facility.

And Webber was particularly skeptical of the warehouse component of the legislation, which constitutes the bulk of the tax credits.

“When you see the projections as wildly exaggerated as this is, you don’t only smell a rat. You smell a rat that’s wrapped in week-old fishpaper,” Webber said.

“So, when you start talking about folks going from 100,000 square feet of proven need for warehouse space to asking for 27 million [square feet], you’ve got to think this thing is really rotten.”

Be sure to listen to the full segment.

Trade Promotes Growth, Except When Hijacked by Subsidy-Seeking Special Interests

Posted on by Audrey Spalding

Many cities are pursuing “Aerotropolis”-style development in the hope that establishing a new global air trade hub can help a city grow its economy. In itself, the desire to engage in trade is by no means misguided. In fact, increasing trade among countries is one of the best ways to improve economic welfare. Unfortunately, as with many large government programs, the Aerotropolis idea can be easily hijacked by the politically powerful in order to gain access to a great deal of taxpayer money.

In no place was this clearer than in Saint Louis during the 2011 legislative session. Under the guise of increasing international trade, Saint Louis developers and politicians pushed hard for creating $360 million in state tax credits. Unfortunately, those tax incentives had little to do with realizing the Aerotropolis dream.

Of the $360 million, $300 million would have gone toward subsidizing the construction of warehouses, while the remaining $60 million would have been devoted to encouraging international freight forwarders to send flights to Saint Louis.

Although one sixth of the total package would at least go toward bringing air traffic to Saint Louis, the remaining $300 million in warehouse subsidies was troublesome. Warehouse subsidy proponents excitedly discussed the 27 million square feet of new warehouse space that could be constructed with those millions, without mentioning that more than 18 million square feet in developed warehouse space near the airport was already vacant and available.

“If someone’s looking for space, we have space available,” said David Randolph, vice president of CBRE, an area real estate brokerage firm that managed the sale and lease of many of those vacant warehouses. Randolph said that the subsidies for new construction would be unfair to individuals who had already built warehouses in the area.

The Midwest China Hub Commission (MCHC), the same Missouri organization promoting the creation of an Aerotropolis in Saint Louis, noted in its internal review of the Missouri tax credit legislation that the state money slated for warehouse construction could end up funding activities unrelated to air transportation.

The MCHC worried that the Aerotropolis tax credit legislation defined “cargo activity” too broadly. From its 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 …”

Furthermore, the MCHC noted that the areas most likely to be awarded the warehouse tax credits had already received nearly $100 million in development tax incentives, and had the ability to draw upon nearly $200 million more. Here at the Show-Me Institute, a nonpartisan research organization dedicated to studying Missouri state and local policy, we wondered why there was such a push for the $300 million in new tax credits, given the incredible amount of tax incentives already available to area developers. At some point, the state must stop subsidizing failure.

At no point had the Chinese government or Chinese cargo companies stated publicly that the hundreds of millions in subsidies were a crucial prerequisite to sending more flights to Saint Louis. In fact, the idea of increasing international trade at the Lambert–St. Louis International Airport had been in the works for years. Only at the last minute did a prominent developer’s attorney, who was also involved in the talks with China, propose the subsidies.

Increased trade is important for any economy, and the United States should not wall itself off from other countries. Air cargo is certainly one way to expand trade throughout the world. Unfortunately, though, the best ideas can be co-opted in order to push benefits for the politically powerful.

If Aerotropolis-style development is the right move for a city, private investment and development will blossom without handouts. The Aerotropolis idea should not be used as a back door to push through large-scale subsidies for the select few. Hopefully, other cities can avoid the political posturing and favor-trading that Saint Louis found itself mired in.

Audrey Spalding is a policy analyst with the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

“Make That Two”

Posted on by Bruce Stahl

What would you do with the extra cash if your state tax bill were lower? I’d probably buy an additional vanilla concrete each month. Why do I ask? Because redeemed tax credits have averaged $388 million each year since 1998. That’s almost 6 percent of Missouri’s net general revenue during that same period.

The state is awarding businesses, organizations, and individuals hundreds of millions of dollars in tax credits each year. It’s not as though the Missouri government is handing out these credits evenly across the tax base, either. As I have pointed out before, these credits are awarded to specific entities. Why is the state allocating credits to select groups and businesses?

Missouri Tax Credit Redemptions

The endearing purpose of one tax credit program is to “encourage farmers to acquire breeding livestock.” Sounds great for the cattle, but what about businesses that don’t sell livestock? Why is the state encouraging growth in the livestock industry? What about the myriad industries in the state that do not receive tax credits?

Tax credit redemptions have been on the rise. To rein in the credits, a commission was established last year to review all 61 tax credit programs. They recommended eliminating or not reauthorizing dozens of the programs, and placing caps on others. In all, if their recommendations were enacted, they reasoned, “the State could realize short and long term savings totaling as much as $220 million in tax credit authorizations (based on average authorizations FY07-FY09), eliminate the exponential growth of tax credit authorizations, improve budget forecasting, while at the same time better-positioning the State to compete in the economy of today as well as the economy of the future.”

Since the recession began, tax credit authorizations have fallen. This happened in the last recession, and will probably happen in the next. And, like the last recovery, tax credits will probably increase as the economy improves. We need a better long-term solution.

My solution is simple and doesn’t take 54 pages to detail: Eliminate tax credits and cut state taxes by 6 percent. It will certainly improve budget forecasting and end the growth of tax credit authorizations, as well as better position our state to compete in any economy. Lower taxes tend to do that.

Air Cargo Expert Hammers Aerotropolis Plan in Industry Publication

Posted on by Patrick Ishmael

And doesn’t pull any punches in doing so. Published in Air Cargo News under the headline “St. Louis Air Cargo—An Aerotropolis Too Far?,” airport consultant Michael Webber lays into the very fundamentals of the bill (emphasis added):

St. Louis area business leaders and airport operators propose to divert regional air cargo now dominated by Chicago O’Hare International Airport to what locals call the “Midwest China Hub” and “the Big Idea”. Rather than test the likelihood of the hub’s success, proponents and their enablers simply assume Lambert will attract the required service and then promise benefits based on that success. The proposition’s champions and their consultants performed a meager analysis. Shockingly, the State of Missouri has already directed millions in public money on that basis and the Missouri Legislature almost approved hundreds of millions in additional support without any independent analysis.

Had an independent analysis been conducted, overwhelmingly critical concerns would have been exposed.

Mere context is damning enough. According to Airports Council International – North America, St. Louis ranked 39th among North American airports end of calendar year 2010. By comparison, Kansas City International Airport was ranked 45th and until 2009 had led St. Louis for a decade. In fact, St. Louis not only trailed Kansas City but also Des Moines. During a decade that found the U.S. air cargo industry in collapse, St. Louis’ annual air cargo volume declined 20% comparing 2010 levels with calendar year 2000. St. Louis’ air cargo slide is not atypical of the industry but nothing suggests it is in expansion mode.

Worse, an unprecedented surplus of on-airport air cargo capacity exists after a decade of nationwide contraction that witnessed the disappearance of such formerly common on-airport all-cargo names as Airborne Express and Emery Worldwide, as well as sharp contraction by BAX Global and DHL. Medium-sized U.S. airports are fortunate to still have both UPS and FedEx. The two integrated carriers account for at least 90% of air cargo at most U.S. airports, including St. Louis.

Lots, lots more at the link. Cross-state, Tony’s Kansas City picks up the story under the headline “MUST READ!!! GROUNDBREAKING EXPOSÉ UNCOVERS BIG MONEY STL AIR CARGO FACILITY “FLEECING” AND A SECOND-CLASS KANSAS CITY CONNECTION!!!”:

Just like most development schemes . . . The economic promises and utility of this project are suspect.

But even more importantly for this town, his reporting and analysis reveals. . .

WHILE IT MIGHT BE A BOONDOGGLE, KANSAS CITY WAS COMPLETELY OVERLOOKED IN THIS IMPENDING MISSOURI AIR-CARGO FACILITY HOT MESS!!!
[…]
Local politicos overlook this kind of IMPORTANT INVESTIGATIVE JOURNALISM at their own peril, and it’s troubling that $400 million of taxpayer cash to support a competitor across the state doesn’t arouse any concern from either our local legislators or local business media.

More is coming. Stay tuned.

Kudos, Allegheny County Executive Dan Onorato

Posted on by Patrick Ishmael

When politicians are doing the right thing, it’s appropriate for us to congratulate them and highlight their good decisions. This week, the big blue ribbon goes to a politician from Pennsylvania, Allegheny County Executive Dan Onorato. Onorato, the 2010 Democratic nominee for governor, presides over a jurisdiction that includes Pittsburgh, a city that, like Saint Louis, is looking to expand airport service. Unsurprisingly, the usual consultant suspects are coming out of the woodwork in support of government interference in the private market. From the Pittsburgh Tribune-Review:

“You should do everything, including underwriting flights, to get as many highways in the sky as you can,” said John D. Kasarda, director of the University of North Carolina’s Kenan Institute of Private Enterprise and author of “Aerotropolis: The Way We’ll Live Next.”

Sounds a lot like Saint Louis so far. But (emphasis added):

There doesn’t appear to be support for the idea if it involves public money.

“I don’t agree with subsidizing flights or subsidizing certain airlines. We should work to lower the costs of all of the airlines at the airport,” said Allegheny County Executive Dan Onorato. He said the county doesn’t have money to provide such backing.

Pennsylvania and the Allegheny Conference on Community Development agreed to provide up to $9 million if Delta Air Lines’ flight between Pittsburgh and Paris missed revenue targets. They paid the maximum $5 million after the first year of service, but it’s unknown whether they will owe money for the second, which ended June 1.

Onorato appears to be taking the principled stance of not letting the government pick winners and losers at the airport. As to the airport, at least, Allegheny County taxpayers can be proud of its executive’s fiscal prudence.

It’s Still a Flight of Fancy

Posted on by Patrick Ishmael

Last week, Jeff Rainford, Saint Louis Mayor Francis Slay’s chief of staff, wrote to the St. Louis Business Journal in opposition to the evaulation of the “Aerotropolis” bill that a few Show-Me Institute policy analysts have offered, suggesting that we have been “misstating the legislation and [supporters’] intention.” We have not, and I’d like to take this opportunity to unpack Rainford’s letter for a critical analysis.

Rainford asserts, in contradiction to the “China Hub” proposal’s own experts, that the “Big Idea” (as he calls it) is designed to “sustain 20 to 30 international cargo flights per week.” Thanks to a Sunshine law public records request of email records related to the China Hub, we know that the current $60 million tax credit proposal would require quote “volcanic demand” to reach just the 20-flight level. It’s more likely, documents reveal, that the credits would attract half that number. It is not clear whether Rainford was aware of this March reassessment.

Rainford says that the credits will result in “thousands of new jobs.” He does not justify his claim on any grounds whatsoever. Are these jobs saved and created? And what of the jobs at the warehouses already vacant in Saint Louis, encompassing 18 million square feet of unsubsidized real estate?

Rainford evokes imagined ownership of the Lambert–St. Louis International Airport by “a Wall Street hedge fund, Carl Icahn or the Chinese” as stark warnings against proposed privatization plans. Setting aside for the moment the stunning slam that Rainford levels at the very Chinese trading partners he wants to do business with, the idea that the airport under public management has been a success over the last few decades is a stunning delusion. Lambert’s flights have been reduced to a fraction from their highs only 20 years ago. In the private sector, that would spur a change in management. In the world of government bureaucrats, it apparently means throwing good money after bad, leaving the historic fundamentals unchanged.

Moreover, Rainford tells us that the bill’s supporters “are not gambling” by pushing the Aerotropolis legislation in its current form. He’s right. Gambling suggests that Missouri’s taxpayers might win by fronting the money for this exclusive group of developers. They won’t. The present bill — 85 percent of which is geared toward building unneeded warehouses, not even subsidizing flights, and 100 percent of which is funded by taxpayers — raises a couple of obvious but apparently overlooked questions. If this proposal is so dynamic and rich with potential profits, why haven’t private developers been pushing such a lucrative deal on their own? And why then are tax credits needed at all?

We certainly understand the desire to jump start the Saint Louis and Missouri economies, but we believe that public officials have taken off on a “flight of fancy” when it comes to the Aerotropolis bill.

Excellent Op-Ed About Corporate Welfare in the Kansas City Business Journal

Posted on by David Stokes

Friday’s Kansas City Business Journal had a terrific piece about the problems with corporate welfare and economic development in Missouri, written by Clint Anderson. You need a subscription to read the whole thing, but I wanted to point it out anyway. It hones in on the recent incentives given to Applebee’s to move back to Missouri. Anderson wrote:

Here we are in the spring of 2011, and the Applebee’s division of DineEquity has secured $12 million of tax giveaways from Missouri taxpayers to cross the state line by 500 feet. Being the “Show-Me State,” Missouri has been shown the path for such nonsense by none other than Kansas’ former Secretary of Commerce David Kerr.

Kerr presided over Kansas’ handouts to Applebee’s in Lenexa, and now heads up the Missouri Department of Economic Development. Kerr is experienced at shoveling taxpayers’ money into Applebee’s coffers.

If you can’t read it online, try to get a hard copy of this week’s Business Journal to read it. It is worth your time.

Saint Louis County Sales Tax Pool Should Be Expanded, Not Contracted

Posted on by David Stokes

According to legend, Alexander the Great solved the riddle of the Gordian knot with one swing of his sword. I recommend we take a similar action to resolve an arcane but important debate about the future of sales tax distributions in Saint Louis County.

Cities in Saint Louis County are either “point-of-sale” or “pool” cities. Most “point-of-sale” cities, such as Des Peres, have major shopping centers. They keep most of the sales taxes collected within their boundaries, but submit a portion to the pool. “Pool” cities, by contrast, share all the sales taxes they collect with other members of the pool. Some of the cities that are currently in the pool have joined the hunt for the almighty sales tax dollar, and want to become point-of-sale cities. They are now seeking legislation that would authorize such a change.

The current debate hinges on the choice between preserving the status quo or adding more point-of-sales cities. There is, however, a third — and better — option: Combine all general sales tax collections within the county into a single pool shared by every city, with no exceptions.

In one stroke, the elimination of point-of-sales cities and the move to a fully pooled sales tax system would reduce the use of tax increment financing (TIF), eliminate the primary incentive for eminent domain abuse, encourage regional growth, and limit government planning in our economy. It would end a good deal of the unhealthy competition between municipalities that subverts, rather than supports, private enterprise.

All of the major examples of eminent domain abuse by local governments in Saint Louis County have occurred in point-of-sale cities. Beyond that, the unending search for the almighty sales tax dollar has led to vast public tax subsidies for retail developments across the county. As documented in a report by the East-West Gateway Council of Governments, the prevailing addiction to TIF and other subsidies for retail development has expended billions tax dollars, but, in their words, has “not resulted in economic growth for our region.”

Fenton Mayor Dennis Hancock is among those who have argued that changing — or eliminating — the pool system would encourage pool cities to take charge of their own development. But when you hear local officials talking about “economic development,” they do not envision government stepping back in order to allow market forces and entrepreneurs to determine the best use of commercial property. To the contrary, city planners and officials would seek to subsidize retail developments with tax dollars, in the hope of generating sales taxes that would disproportionately benefit their own cities. This kind of beggar-thy-neighbor practice is only destructive in the long run.

Nobody, including local officials, has any idea what the right amount of retail is for Saint Louis County. However, as long as individual municipalities within the county have a point-of-sale tax option, many cities will use tax incentives to favor retail development over other types of business and industry. As shown repeatedly, this approach fails to grow our regional economy. Arm-in-arm with this planning comes the abuse of eminent domain, wielded to acquire the properties that cities and developers want to take. Moreover, school districts, which depend on property taxes, are harmed when cities give away property tax abatements in favor of sales taxes.

Under a fully pooled sales tax system, people in the county would benefit from all types of economic development, regardless of its location. Retail centers would locate where they are most suited, as determined by best business practices rather than by government subsidies. Cities would benefit as much from office buildings or factories as they would from retail. A pooled sales tax system helps remove government from the real estate development industry, but adding new point-of-sale cities would cement the government’s involvement even further.

Those who support the pool system should do more than fight for the status quo. They should take this opportunity to expand the pool system to include all general sales taxes within the county. In a single stroke, it would be possible to reduce tax subsidies, limit government involvement in our economy, ensure our property rights, and promote more vibrant economic growth for everyone.

David Stokes is a policy analyst with the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

Aerotropolis Tax Credits Are Still a Bad Idea

Posted on by Audrey Spalding

Today, the St. Louis Business Journal published a letter by Jeff Rainford, chief of staff for Saint Louis Mayor Francis Slay. In it, Rainford argues that $300 million in tax credits for warehouse construction near the Saint Louis airport and $60 million in tax credits for international cargo flights are essential to bringing in new economic activity to the region. That bundle of subsidies, which was proposed during the past legislative session, was contained within the so-called “Aerotropolis” bill.

Christine Harbin, Patrick Ishmael, and I all took issue with the form of those tax credits, and with statements made by public officials in favor of the tax credits:

Rainford writes:

[W]e are not gambling. The Aerotropolis credits cannot be used until the facilities are built and are being used for international cargo. If none of that happens, then no one will have used the Aerotropolis credits, and the state will lose nothing.

With all due respect, I find this statement misleading. True, the legislation does specify that some new warehouses must process some level of international cargo. But the devil is in the details.

Owners of warehouses with international cargo consisting of as little as 20 percent of their operations could receive the Aerotropolis tax credits for an overall subsidy of up to 30 percent of their demolition, construction, and equipment costs. Owners of warehouses with international cargo consisting of as little as 10 percent of their operations could receive the Aerotropolis tax credits for an overall subsidy of up to 20 percent of their demolition, construction, and equipment costs.

Most strikingly, owners of warehouses that use two modes of commerce — not necessarily air cargo, but perhaps road and rail transportation — could draw on the tax credits. So could owners of warehouses that are refrigerated for storage of perishable materials. Again, the Aerotropolis legislation doesn’t require those facilities to process international cargo.

My concerns with the proposed subsidies stand. Couldn’t these tax credits be used to pay for business as usual? There’s no protection for taxpayers specifying that, if the international agreements never materialize, the tax credits won’t be awarded.

For readers interested in the gritty details of the tax credit proposal and the flaws behind assumptions and statements made by Aerotropolis supporters, stay tuned. Look for a longer, more detailed publication in the next week or so. In it, we wonder, can Missouri really ship beef to China, as proponents have stated? Are the projected increases in flights realistic? And how have the results of tax credits fared in the past?

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