Ms. Harbin and Ms. Spalding Go to Jeff City

Posted on by Audrey Spalding

Yesterday, Christine Harbin and I testified about the proposed “Aerotropolis” subsidy bill before the Missouri Senate Jobs, Economic Development and Local Government Committee. As readers of Show-Me Daily are aware, Christine and I have a number of questions and concerns about the proposed legislation, which would award $480 million in tax credits primarily to subsidize debt and the construction and operation of warehouses around Lambert–St. Louis International Airport. The idea, proponents say, is that this will enable the airport to build up infrastructure to encourage more international flights to and from Saint Louis. But, as is true with any project, there is the chance of failure. Is the cost of this proposed bundle of subsidies worth the chance of success?

(As you will see in the video of our testimony, which will be posted soon on Show-Me Daily, the committee members seemed aggravated by our presence and offended by the questions that Christine and I raised.)

Our testimony yesterday came down to a single concern: Why award $480 million in tax credits (and more) if tax credit programs in Missouri have a poor track record?

There are some indications that this particular proposal may be at greater risk of failure than other tax credit programs. It was proposed without any sort of study of the costs and benefits associated with this project. A closer read of the legislation also reveals many hidden costs above and beyond $480 million. There isn’t any protection for taxpayers if the hoped-for increase in air traffic does not materialize. Furthermore, part of the proposed legislative language takes care to account for other subsidies awarded in 2006, meaning that, at minimum, the area is already subsidized.

None of the facts Christine and I presented were disputed — the only argument was whether this proposal would cost taxpayers money. But tax credits are an actual cost to taxpaying Missourians, as we have explained before.

So, what safeguards do legislators say are in place for taxpayers? The line repeated during yesterday’s hearing was that the the tax credits won’t be awarded without an extensive review process, and that the award of taxpayer money will be spread out over a period of 15 years.

However, given human ingenuity, it certainly is possible that creative entities might find a way to receive more from the Aerotropolis subsidies than legislators think possible.

Just last week, the St. Louis Post-Dispatch reported that less than six months after Liberty Mutual was scheduled to receive $1.6 million in state tax credits, 45 employees were told that their positions had been eliminated. Those employees were invited to apply for new lower-paying positions.

From the Post-Dispatch:

Under the terms of the Missouri Quality Jobs program, Liberty Mutual will still qualify for the tax credits if, within 24 months of its agreement with the state, the insurer has added 100 “net new jobs” to its payroll at a salary equal to or exceeding the prevailing average wage in St. Louis County — $48,291.

The Liberty Mutual case illustrates that even the best-intentioned legislation can have unintended consequences.

Frankly, I appreciate that the Aerotropolis bill includes an attempt to slow the expenditure of tax credits, and proposes a review process. But hoping for an outcome does not guarantee it. It is almost impossible to account for every last detail. Giving away millions in taxpayer money each year certainly creates an incentive for recipients to meet state-imposed benchmarks with the least amount of effort.

Airport Expansion Failed in the Past; Why Will This Time Be Any Different?

Posted on by Christine Harbin

Lawmakers in Missouri are doing the same thing over and over again and expecting different results. Government officials tried to expand Lambert–St. Louis International Airport not too long ago, and it didn’t work. They spent $1.1 billion in taxpayer money to build another runway at Lambert. It was the largest public works project in the history of Saint Louis, so I’m surprised that nobody is talking about it. The Riverfront Times gave the project the “Best Boondoggle” award twice — once in 2003, and again in 2004.

Here’s the back story: Evidently, government officials decided that two runways weren’t enough for Lambert. Construction on the runway began in 1998, and it continued despite several setbacks. (As the Riverfront Times aptly put it, “Still, the bulldozers rolled on.”) Following the 9/11 terrorist attacks in 2001, Trans World Airlines went bankrupt and American Airlines bought it. In 2003, American Airlines cut its operations in half at Lambert, and revoked the airport’s hub status. In the meantime, people flew far less than projected.

Unfortunately for Missouri taxpayers, this story doesn’t have a happy ending. The new runway did not reduce delays. Plus, with each passing year, Lambert saw fewer takeoffs and landings. Just one year after the new runway was built, only 5 percent of flights used it. Several airlines asked to avoid using the new runway altogether. Because it was built so far away from the terminal, planes had to taxi as many as three miles to the terminal, burning more fuel.

Not only did the project fail to bring the traffic it promised, it tore apart the city of Bridgeton. Government officials used eminent domain to move seven major roads, kick 6,000 people out of their homes, and bulldoze six churches and four schools in order to make room for a third runway.

Government does not have a good track record in steering economic development — particularly in the Saint Louis area. Studies repeatedly show that they fail to produce the results that they promise. Most recently, the East-West Gateway Council of Governments concluded that the Saint Louis government has provided $5.8 billion in subsidies to private development in the city, but doesn’t have much to show for it.

Expanding the airport didn’t work then, and there’s no compelling reason to believe that it will work now. (Remember: No formal agreement has been signed, nor has any study been completed.) Lawmakers are in danger of repeating the same mistakes, so they should take a longer look at this.

We have a shared goal: an economy that is thriving and attractive to new businesses. Lawmakers are sticking the same old policies (tax credits!) — even though they have been shown to fail. If lawmakers in Missouri were serious about growing the economy, they would abandon the failed policies of the past and take a different strategy.

Bruce Caldwell – the Hayek Expert – to Speak in Saint Louis

Posted on by Josh Smith

Coming up this Thursday, there will be two chances for liberty-minded or simply curious folks in Saint Louis to hear speeches from the world’s foremost expert on Friedrich August von Hayek, the Austrian economist, Nobel laureate, and champion of free markets:

  • The afternoon of April 21, from 2:00 to 3:30 p.m. at the University of Missouri–St. Louis, in the James S. McDonnell Conference Room (331 SSB) (building 11 on this map). This lecture is free.
  • The evening of April 21, at the Discussion Club. This lecture includes a dinner beginning at 7:00 p.m., which costs $37.00 for those who are not already Discussion Club members. For those who wish to attend the lecture only, beginning at 8:00 p.m., it costs only $5.00. The Discussion Club has provided more information about the speaker, as well as general club information.

I’m excited about these events. I watched this video a few days ago, and discovered that, as speakers go, Caldwell is a delight. I never wasted an opportunity in school to write about Hayek, so I can’t wait to see this speaker live.

Smoke and Mirrors in Creating Jobs in Missouri

Posted on by Christine Harbin

Steve Giegerich had a great article about tax credits on the front page of the Post Dispatch yesterday. I encourage our blog readers to check it out. The Liberty Mutual project that Giegerich highlighted is one of the many cases in which tax credits are allegedly used to stimulate business, but actually do the opposite.

Here’s the issue: Shortly after the announcement that Liberty Mutual would receive tax credits for creating new jobs, the company gave pink slips to 45 employees. The company told the affected employees that they could apply to lower-paying and lower-level positions.

Despite the layoffs, Liberty Mutual is on track to receive $1.6 million in tax credits through the Missouri Quality Jobs Program, because it can show — at least on paper — that 100 “new” jobs exist at its Safeco service center in Fenton.

Is this the kind of economic development that we want in Missouri?

It is important to note that Quality Jobs is the worst-performing tax credit program in Missouri, yet lawmakers continue to expand it. According an April 2010 report from the state auditor, lawmakers underestimated the cost of the Quality Jobs program by more than $100 million over four years. This didn’t stop them from raising the annual cap from $12 million to $80 million in 2009. That’s an increase of 567 percent!

The Tax Credit Review Commission and the Missouri state auditor have looked at tax credit programs in the Missouri, and they both have called on lawmakers to limit them. However, lawmakers have not taken this advice. Policymakers like to talk tough on tax credits, but their actions and words don’t match up. This is bad news for taxpayers, who have to foot the bill.

Missouri has serious budget problems. If lawmakers were serious about fixing Missouri’s fiscal health, they would implement measures that limit tax credits, like stricter caps and sunset requirements.

Free-Market Field Trip No. 4: Food Trucks – Video Posted!

Posted on by Christine Harbin

I recently hit the streets of the Central West End in Saint Louis to find out what folks think about food trucks and about local efforts to restrict them. As regular readers of will know, this is a topic that I’ve followed closely here on Show-Me Daily.

As promised, we got the video edited and uploaded — check it out!

Big thanks to our communications director, Rick Edlund, and videographer extraordinaire Josh Smith for helping me produce this video. Thanks also to Sarah’s Cake Stop and Cha Cha Chow for letting me interview them about their experiences in facing these local restrictions.

We’ll have another installment soon. Stay tuned to the Show-Me Institute!

A Five-Year Plan for the Earnings Tax

Posted on by David Stokes

Voters in Kansas City and Saint Louis have clearly stated their desire to maintain those cities’ earnings taxes. Macroeconomic municipal tax policy is not something generally discussed around workplace water coolers and family dinners, but during the past few months it has been a major topic of debate in Missouri’s two largest cities. That debate has been healthy and beneficial — no matter the outcome of the vote.

There is general agreement and understanding that the earnings tax hurts jobs and business in the city, although no consensus on the extent of that pain. Organizations that claim the tax does not matter often act differently than their statements might suggest. Peabody Energy donated to the campaign to retain the earnings tax, and the company’s CEO told the Post-Dispatch that the earnings tax was “not a factor” in its commendable decision to remain downtown. However, its decision to stay put involved tax abatements on future earnings and payroll taxes. If the expense of the earnings tax is not a factor, why does the city have to give some of it back to Peabody?

Saint Louis Mayor Francis Slay has said that retaining the tax now is an important step toward changing the way the city funds its services, and the way the region is governed. Other city officials have said similar things, and the Post-Dispatch reported that city officials are planning ways to replace the tax eventually. If city officials in Saint Louis truly want to seek out ways to eliminate the earnings tax — and I believe that many of them, including Mayor Slay, do — the biggest danger lies in continuing to pass millions of dollars of tax increment financing (TIF) and other tax abatements each year. The primary reason that it would require such a large property tax increase to replace the earnings tax is because such an enormous amount of city property is not on the tax rolls. City voters recognized this, and voted accordingly.

According to a 2009 study by the PFM Group, the city of Saint Louis depends on property taxes for less of its general revenue than any other comparable city. The city’s Land Reutilization Authority (LRA) holds 9,000 pieces of property — all off the tax rolls, under city ownership. Another $683 million dollars is off the tax rolls because of TIF and other abatement programs. Finally, 22 percent of the city’s assessed value in real property is held by nonprofit organizations and is, as such, tax exempt.

The city of Saint Louis cannot be blamed for all of the above — particularly the tax exemption of nonprofits. The use of tax credits to lure businesses to relocate from one city or municipality to another within the greater Saint Louis area constitutes a devastating circular firing squad. This is a regional problem, not just a city problem.

Moreover, if the city greatly reduced its use of tax incentives, combined with a more aggressive approach to selling LRA property and an appeal to nonprofits to pick up a share of the burden for the city services they receive, property taxes could be a much more viable alternative to the earnings tax. An expanded tax base would then allow for smaller, and more evenly distributed, tax increases to make up for the loss of earnings tax revenues. If the city truly wants to move away from the earnings tax, it is imperative to grow the potential property tax base by ending policies that restrict its growth.

Many of the other suggestions made by opponents of the earnings tax, such as increasing privatization and shared government services, would work just as well in an environment with the earnings tax as without. Kansas City has had success with its privatized animal shelter — costs are down and adoptions are up. Saint Louis can do the same thing. The “Yellow Pages Test,” the idea that government should not provide the types of services that private companies offer in the Yellow Pages, is ripe for enactment in Saint Louis. We don’t need to get rid of the earnings tax to encourage private incentives in the provision of public goods.

City officials are already fighting the hard, yet necessary, battles to control public pension growth, and they are moving toward a user fee system in trash collection. Choosing to eliminate the earnings tax eventually, even without the legal mandate, may be the best of all possible worlds. It would give Saint Louis the proper time for necessary diligence in making a change that would benefit the city substantially in the long run.

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

Film Tax Credits Featured on “30 Rock”!

Posted on by Christine Harbin

Did any of our readers see last week’s “30 Rock” episode? They talked about state film tax credits! As regular readers would expect, I was thrilled, because film tax credits are my favorite topic to discuss on this blog.

You can watch the full episode here:

In the episode, Jenna stars in a horror film that’s shot in Connecticut. It turns out that Connecticut will only give tax credits to films that promote tourism. So, instead of shutting down the film, the producers change it to be very pro-Connecticut. They decorate the killer’s dungeon with Yale pennants and  posters that say, “Visit Connecticut.” They also write www.IheartConnecticut.com in blood on the wall, and they dress up one of the victims in a UConn Huskies shirt.

They even change the dialogue:

SLAUGHTERFACE: “No one is going to save you. Because we’re deep inside one of Connecticut’s 30 beautiful state forests. Thirty!”

JENNA: “Oh, please don’t kill me! I still haven’t tried the famous seafood pizza at Sally’s in New Haven.”

It’s hilarious. This shows how filmmakers will change the message of their films in order to get film tax credits from a state. This is something that I have discussed before on the blog.

It’s no secret that government officials sometimes deny tax credits to films that don’t send a positive message about the state. It may be possible that this happens in Missouri, too. Consider Up In the Air, which received $4.1 million in tax credits to shoot in Missouri in 2009. One scene sounds like a commercial for Lambert Airport. At one point, George Clooney’s character says:

Are you kidding — Lambert Field? The Wright brothers flew through there. That domed main terminal is the first of its kind; it’s a precursor of everything from JFK to de Gaulle.

This wasn’t the first time that “30 Rock” highlighted the ludicrousness of film tax credit programs — It was also a plot point in an episode last season, in which Jenna starred in a movie about werewolfs that shot in Iceland. They shot the film there because the Icelandic government gave them tax credits, but they could only shoot during the one minute of darkness each day.

In economist-speak, we would say that Iceland does not have a comparative advantage in werewolf films, relative to other locations. (Similarly, Missouri doesn’t have a comparative advantage in filmmaking. We’re better at making other things!)

Where’s the Evidence That the China Hub Makes Financial Sense?

Posted on by Audrey Spalding

In August 2010, Mike Jones, chairman of the Midwest China Hub Commission, told the St. Louis Post-Dispatch that a key study that would make the “business case” for the China Hub idea was halfway done.

I spent some time looking for that study, or any discussion of its results. Finally, about to give up, I emailed the Midwest China Hub Commission to ask whether the study Jones had promised was available.

Here is the response I received:

The study you refer to is still underway but very close to completion. The St. Louis RCGA is spearheading the impact analysis with possible completion and release of findings to come at the end of next month or June. The findings of the analysis will be made public at that time.

So, despite statements from legislators and special interests that subsidizing freight traffic is a good idea for Missouri, no study has been published that backs up those statements.

Right now, state legislators, local politicians, and special interest groups are in a rush to award $480 million in state subsidies that they say would further the China Hub dream. But the legislative session ends in mid-May, so the promised study won’t be done in time for legislators to consider the results before awarding almost half a billion dollars in subsidies.

There’s a lot that I don’t understand about this tangle of subsidies, but this is perhaps the most mystifying. Legislators who say that they want to keep Missouri fiscally responsible are now pushing to award almost half a billion dollars without any formal attempt to weigh the costs and benefits of the proposal.

From Sen. Eric Schmitt:

This is new. This is new investment. This is new economic activity that we just don’t have. When you have zero flights a week and we want to move forward and actually create this kind of international trade hub, which is what it is, that’s activity that we don’t have now.

What evidence is there to substantiate Schmitt’s statements? Has any analysis been done demonstrating that the award of tax credits would result in increased freight traffic to Saint Louis?

From Rhonda Hamm-Niebruegge, director of airports at Lambert-Saint Louis International Airport and Ed Monser, president of Emerson:

[The Aertropolis subsidy bill] has the support of organized labor because of the job impact it would bring to Missouri and support from rural legislators because of the opportunity to export Missouri beef and pork, as well as other agriculture products, to countries not currently buying these commodities.

But what evidence is there to prove that this project and related incentives would result in new jobs? What study has been done that demonstrates that China would import Missouri agricultural products if the state spent $420 million to subsidize the construction and operation of cargo warehouses?

If there were an award for unsubstantiated, overblown commentary, it would go to Rep. Caleb Jones, who told CBS:

It’s going to create demand for all of Missouri and our products and goods. Folks from my district are going to be able to load up cattle and drive it to St. louis and have it in China the next day.

What evidence is there showing that this project and package of incentives will “create demand for all of Missouri”? How do Jones’ constituents know that there’s a market for their cattle in China? Instead, isn’t there a chance the constituents of the 117th district will have to pay roughly $80 each, which is what this bill will cost every Missourian — and then receive no benefit?

The aerotropolis tax credit bill does not have to be passed this year. After all, there’s no firm commitment from China, the legislation contains hidden costs, and no study has been produced demonstrating that this proposal makes financial sense.

What’s the rush?

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