I had a great time talking with KMBZ’s “Voice of Merrill” yesterday. If you missed it, you can listen to it here. You can find Chris Merrill’s podcast feed here.
Taxpayers Off the Hook for $360 Million
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”
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
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”
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.
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.
Here is some more space available for lease:
And some more:
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
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
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.
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!
The ‘China Hub’: Another Flight of Fancy?
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
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.
