There’s No Such Thing As a Free Lunch China Hub

Posted on by Christine Harbin

Supporters of tax credit programs argue that they won’t cost taxpayers a dime, but this is far from the truth. Tax credits are real money, and they do not appear of thin air — they come from the pockets of taxpayers. Even though the recipients of tax credits will pay less in taxes, everybody else will have to pay higher taxes.

Think of it this way: When the state gives a company tax credits, that company won’t be paying those taxes. This means that less revenues will flow to the state Treasury. The government therefore has fewer dollars to pay for schools, fix roads, and build bridges. Unless every tax credit is offset by real spending cuts of the same amount, every dollar that the government spends on tax credits has to be raised through higher taxes or debt. It means that everybody other than the tax credit recipient is getting less and paying more.

I’ve said it before, and I will say it again: There is no such thing as a free lunch. It’s a basic economic principle that’s too often overlooked. Nothing is ever free. Somebody has to pay it. And, in tax credit programs, that somebody is taxpayers.

One way in which Missouri would pay for this program is through lost activity in the private sector. This is a concept that economists refer to as crowding out. If the China Hub proposal passes, then the average Missourian would pay $80 more in taxes, which means that he has $80 less to spend on himself. On average, a family of four in Missouri would pay $320 (that’s a car payment!). If Missourians were able to keep more of their earnings, they would eat at more restaurants, spend more nights in hotels, buy a newer car, make upgrades to their home, etc. When their taxes increase, they inevitably scale back their spending and this economic activity is lost.

If tax credits generate economic activity, they do so only at the expense of other forms of economic activity.

[Earlier this morning, Audrey Spalding and I talked about the proposed China Hub with McGraw Milhaven on The Big 550, KTRS. I encourage our blog readers to check out the audio archive of the interview.]

Funny Violation (Possibly) of the Sunshine Law in Greenwood

Posted on by David Stokes

Greenwood, Mo is a suburb of Kansas City with an amusing example of a legal disclaimer run amok on its website. Please carefully read the top of the “Taxes and Fees” page of their website: http://greenwoodmo.com/taxesfees.aspx 

“Below is the latest rates for the taxes listed. These rates are subject to change without notice.

  • Greenwood Sales Tax Rate is 7.350%

  • Mill Levy is $1.0173 per $100.00 of assessed valuation”

I like how this standard legal disclaimer for a million different claims (“These rates are subject to change without notice”) is so totally wrong here. In fact, in order to change “these rates,” you need a fair amount of notice. You need a properly scheduled and publicized meeting, a legislative bill that is introduced and given time for public comment or debate, and a duly elected board to cast a recorded vote following the rules of state law and the city charter. This does not even take into account Hancock Amendment requirements, which, in many cases, would require a vote of the public at an election in order for the rates to be increased.

So, in fact, I’d say that “these rates” are absolutely NOT subject to change without notice, and changing them WITHOUT notice is quite illegal.

Audrey Spalding and Christine Harbin Talk China Hub Tomorrow Morning

Posted on by Christine Harbin

Tune into the McGraw Milhaven radio show on The Big 550, KTRS, tomorrow at 9 a.m. to hear Audrey Spalding and me discuss the proposed China Hub. We will talk about how this project will do more harm than good for the Missouri economy. This is a topic we’ve highlighted recently on the blog.

Please tune in to AM 550 in St. Louis or listen live online!

Benefits of China Hub Focused on Saint Louis; All Missouri Taxpayers Forced to Pick Up $480 Million Tab

Posted on by Christine Harbin

Tax credit programs like the proposed China hub are a form of wealth redistribution: Only the favored few benefit, and everybody else bears the cost. Because the China hub project will be located in Saint Louis, Saint Louis residents will receive more of the benefits of the policy than Missourians that live elsewhere. Even though the majority of Missourians (64.8 percent) do not live in the Saint Louis region, they will still have to shoulder the costs of this program through their tax monies. It’s yet another example of concentrated benefits and diffused costs — an important concept that lawmakers too often overlook.

Consider that, according to the 2010 U.S. Census, 3,879,695 Missourians currently live outside of Saint Louis. Consider further that, as my colleague Audrey Spalding recently calculated, the proposal would cost at least $80 for each person living in Missouri. This means that Missourians living outside of Saint Louis will be forced to spend $310.4 million on the project. In other words, this policy would remove $310.4 million from the economy in the rest of the state, and funnel it into Saint Louis.

The editorial board at the St. Louis Business Journal certainly seems to get it:

That this is essentially a St. Louis-only measure is an insult to the rest of the state, making us look like the greedy urban jerks the outstate legislators love to hate. Not to mention our colleagues in Kansas City.

Speaking of our friends in Kansas City, they in particular will see more costs than benefits. Kansas City residents will collectively pay $36.8 million for this policy. However, they are unlikely to receive direct benefits from the policy because they live 235 miles away from Lambert Airport. Is sending $36.8 million to Saint Louis the best use for their money? Could it perhaps be better spent on projects in Kansas City (e.g., education, transportation), or returned to Kansas City residents to spend, save, and invest in the private sector?

Supporters of large publicly funded projects tend to argue that they generate lots of economic activity that resonate across the economy. These, however, are mere conjectures; I am aware of no study that proves it. On the contrary, the evidence suggests that few, if any, spillovers or multipliers arise from targeted tax credit programs. I will elaborate on this point in a future post. (Stay tuned to the blog!)

The money that is spent in this program could otherwise benefit Missourians through a tax reduction or another form of state spending. If the China hub project doesn’t happen, taxpayers will be able to keep a greater percentage of their earnings, which they can then spend on additional goods and services. Much of this economic activity (e.g., hotel stays, restaurant meals) would be generated by individuals in the private sector. However, if the government takes half a billion dollars out of the economy, Missourians won’t be able to spend and invest it themselves, and this economic activity will be lost.

How China Hub Costs Are Diffused, by Region

China Hub Diffused Costs By Region

Region 2010 Population Percent of MO Total Share of Est. Total Cost
Total Missouri 5,988,927 100% $479,114,160
Saint Louis MSA* (Missouri Side) 2,109,232 35% $168,738,560
Total Missouri, Less Saint Louis MSA* 3,879,695 65% $310,375,600
Kansas City, Mo. 459,787 8% $36,782,960

* Metropolitan Statistical Area, defined by U.S. Census

Saint Louis Public Schools Special Administrative Board Names New LRA Commissioner

Posted on by Thomas Duda

When St. Louis Public Schools (SLPS) last appointed a member of the Land Reutilization Authority (LRA) Commission, Bill Clinton was president. Howard Hayes went on to serve 12 years, as the LRA continued to amass property.

In a letter obtained by the Show-Me Institute yesterday, we learned the identity of the district’s next appointee to LRA — Roger CayCe, executive director of operations for SLPS. Rick Sullivan, president and CEO of the school district, wrote, “We are sure Mr. CayCe will depict the same labor as a board member as he does in his position with SLPS.”

June 30, 2010, LRA Commission Meeting
June 30, 2010, LRA Commission Meeting

We look forward to presenting our ongoing research about the agency to CayCe in the hope that the LRA will continue its recent positive momentum.

CayCe’s first regular meeting as a member of the LRA Commission will take place at 8:30 a.m. on April 27, 2011, in Suite 1200 at 1015 Locust St. in downtown St. Louis. Mark your calendars; we will be there to keep you up-to-date.

China Hub Tax Incentives More Expensive Than Advertised

Posted on by Audrey Spalding

Saint Louis politicians, media, and bloggers have enthusiastically embraced proposed legislation that would create a package of tax credits and other incentives to establish Lambert International Airport as a “China Hub.” The idea is that increased trade between Missouri and China could give both the state and city economies a boost.

The St. Louis Post-Dispatch editorial board wrote that, when it comes to the China Hub project, “Doing nothing is not an option.” City Mayor Francis Slay tweeted that the project is “the most important economic development bill the state Senate will consider this year.”

Legislators from rural areas of the state are excited too. Sen. Brian Munzlinger (R-Williamstown) told the Saint Louis Beacon that the project could serve to help the agricultural industry. From the Beacon:

Agriculture’s one of the largest industries we’ve got in this state,” said Munzlinger, whose district encompasses much of northeast Missouri. “And I see this as a major, major export enhancement that we can offer to ag producers in this state.

Many dreams are attached to the incentives that would be created under the “aerotropolis” bill. Let’s set aside the argument of whether those dreams are warranted. Today, I want to focus just on the cost of this legislation. After all, it is impossible to determine whether a proposed policy is a good idea without first knowing how much that policy will cost.

This legislation, if passed, will affect all Missourians. Because state legislators have a track record of approving tax credits and other related subsidies without a corresponding reduction in government expenses, the burden of paying for these incentives will likely fall on state taxpayers. At a minimum, the cost will amount to about $80 for every man, woman, and child in Missouri. The hidden costs of this bill will likely add a great deal more to that total.

Lawmakers and media bill it as a $480 million incentive package. However, after closely reading the proposed legislation, it becomes apparent that a number of costs are not part of that tally. Citing the $480 million figure ignores those costs entirely. Let’s try to break them down here.

  • $60 million: The aerotropolis bill would award $60 million in tax credits to freight companies for shipping cargo out of the state. The state will give more money to companies shipping perishable freight.
  • $120 million: The bill would award $120 million in tax credits to help pay off interest costs. This is important. Proponents say that the only way the state would hand out this money is if warehouses are in operation. But this amount is tied only to interest, loan fees, and closing costs. It is conceivable that the state, through this provision, could end up paying the interest costs associated with a failed vacant warehouse.
  • $300 million: The bill would award $300 million in tax credits to the owners of cargo warehouses. The money is tied to the amount that the owners would pay in income, corporation franchise, and bank taxes.

All of the above adds up to the $480 million cost cited. But wait, there’s more.

  • Double-dipping: In addition to the tax credits awarded above, cargo warehouse operators would be exempt from the state income tax and the state corporation franchise tax. The legislation doesn’t include a limit on these costs. Furthermore, the state fiscal note, which is supposed to estimate costs associated with this legislation, doesn’t attempt to estimate these costs either.
     
    I know, you may be thinking, but doesn’t the aerotropolis legislation also award $300 million in tax credits to cargo warehouse owners in part for income and corporation franchise taxes already? The answer is yes. This legislation will effectively let some double dip. They will be exempt from those taxes and get to claim tax credits against those taxes, despite not paying them.
  • Keeping employee-paid taxes: Not only will cargo warehouse operators be exempt from the state income tax, but they could also keep half of the income taxes withheld from their employees. Again, the proposed legislation doesn’t limit this cost, and the state fiscal note doesn’t bother estimating how much tax revenue this could cost Missouri.
     
    It also seems strange that this bill would let employers keep taxes that have been withheld from employee paychecks, because those taxes are technically part of an employee’s compensation. Chalk that up as just one more oddity in the aerotroplis legislation’s tangle of handouts.

The bottom line is that no one, not even the state committee tasked with determining the cost of the aerotropolis legislation, knows how much it will cost. The only thing we know is that the cost will likely be much higher than advertised.

I don’t understand why the legislators who sponsored this bill didn’t bother to impose limits on the additional incentives. Such limits would make the costs of the bill containable, and would help everyone understand how much Missouri will be giving up in order to heavily subsidize the building and operation of some warehouses.

I think state legislators owe Missourians the courtesy of at least knowing whether they will each be paying $80, $100, or even more for this project.

Attorney General Chris Koster’s Amicus Brief Only Goes Halfway

Posted on by Christine Harbin

The Show-Me Institute has been one of the leaders in urging Missouri’s attorney general, Chris Koster, to join the lawsuit against the health care reform bill, so we are pleased to note that he finally took action this morning. Better late than never. But regrettably, the amicus brief that Koster filed in the multistate lawsuit only goes halfway.

Although Koster says that the individual mandate is unconstitutional, he also says that it’s severable from the rest of the law. In other words, Koster believes that the federal health care law can remain in place even though the individual insurance mandate can be struck down.

Judge George Vinson went further in his ruling. He ruled that Congress does not have the power to force people to buy something that they don’t want, and therefore the entire law must be declared void.

I understand that many people object to the regulation because of the individual mandate. However, there are additional reasons to oppose this law in Missouri. With or without the individual mandate, the PPACA will raise the cost of health care in Missouri by increasing mandates to cover specific conditions and expanding the eligibility requirements for Medicaid. This component of policy will burden state budgets and threaten state sovereignty. In order to come up with the cash, Missouri will have to raise taxes, cut services, or both.

Koster’s decision to file an amicus brief may be partly due to the Show-Me Intitute’s prodding. Encouraging him to join the lawsuit is a topic that we’ve tracked closely. Show-Me Institute staff have released an open letter, an editorial, an “urgent call for action” via email, and several blog posts on the subject.

More Good News for People Who Want to Buy Vacant City Property

Posted on by Audrey Spalding

After hearing about Show-Me Institute research finding that the city of Saint Louis was turning down almost one out of every two offers to purchase vacant city property, nextSTL blogger Alex Ihnen recently asked why the city wouldn’t sell a side lot in the Forest Park Southeast neighborhood.

The LRA side lot. Photo by Alex Ihnen of nextSTL.com
The LRA side lot. Photo by Alex Ihnen of nextSTL.com

The lot, owned by the city’s largest landholder, the Land Reutilization Authority (LRA), is a small one: It measures 27 feet wide, which, according to LRA policy at the time, made it just a bit too large to sell it as a side lot. Side lots are just that — lots that are combined with an adjacent building in order to create a garden or yard.

The would-be buyer, Ihnen writes, is an exceptional developer with a history of quality renovations in the neighborhood:

The possible purchaser today is Grove Properties, LLC. Grove Properties has been completing high-quality gut renovations in FPSE for several years. Some properties have sold pre-completion and sales have continued to raise the ceiling on home prices in the neighborhood.

However, under the LRA’s policy at the time, the agency wouldn’t sell this lot to Grove Properties because it was two feet wider than the 25-foot maximum that the LRA had imposed.

This is not uncommon. A good example of this policy in action is that of Landy Cauley. Cauley, who owned property adjacent to 4233 West Belle Pl., attempted to purchase the lot in July 2006. The LRA turned him down, according to the agency’s minutes, “because the parcel does not meet the side lot policy of 25 front feet or less. The parcel is being held for infill development.”

Today, the property is still vacant and owned by the LRA. The lot, to the right-hand side of the building below, looks like it would be a great addition to Cauley’s current property (but I’m no city planner).

4233 West Belle Place. Image by Google Maps.
4233 West Belle Place. Image by Google Maps.

All that being said, it seems as though the LRA may be once again changing its side lot policy, slightly, for the better. Otis Williams, deputy director of the Saint Louis Development Corporation (SLDC) told Ihnen that the agency has now changed its side lot limit from 25 feet to 30 feet. This, combined with the LRA’s recent vote to reduce side lot prices, certainly could free up more of Saint Louis’ vacant city property for purchase.

Even better news is the possibility that the LRA will lessen its restrictions on who is allowed to purchase side lots. Under current policy, the LRA will sell side lots only to residential owner-occupants. As Ihnen reports, the LRA may vote to allow more people, such as apartment building owners and developers, to purchase side lots.

We shall see. If you are interested in seeing the LRA in action — perhaps in the process of making another policy change, in the direction of freeing up vacant city property for purchase — I encourage you to attend the agency’s next public meeting on April 27.

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