Why Not Sell City-Owned Vacant Property?

Posted on by Audrey Spalding

I appeared on the McGraw Milhaven show on KTRS AM this morning, discussing my research on the city of Saint Louis’ Land Reutilization Authority (LRA). The LRA owns more than 9,000 parcels, and its purpose, according to state statute, is to get that vacant land back into private hands so that it can be developed into new homes and businesses. Yet the city’s largest landholder isn’t selling much of its property. According to my research, the LRA has rejected offers to purchase more than 2,250 different properties from 2003 through 2010.

KMOV reporter Craig Cheatham has also looked into this issue and you can watch his investigation tonight at 10 p.m.

Ultimately, this research leads to the question of whether holding property is really the best development policy for Saint Louis. It isn’t the case that all of the LRA’s rejections involve people who try to buy properties without sufficient funds — only about a quarter of the LRA’s rejections cite “insufficient financial resources” as the reason for rejection. Instead, the most frequent reason for rejection is that the property in question is “being held for future development.” Yet, in its rejection letters to would-be buyers, and in its minutes, the LRA does not state what that future development is or when it will take place.

From 2003 through 2010, the LRA has rejected roughly one out of every two offers it has considered. This doesn’t mean that the agency has accepted the other offers. In fact, the LRA has accepted fewer than 25 percent of the offers it has considered, meaning that the agency rejects two offers for every offer it accepts. The rest are counter-offers, which frequently do not result in a sale.

LRA Offer Pie Chart

So, why not let more people who are trying to buy LRA property purchase it?

Moving properties off of the LRA’s rolls will, at minimum, mean that the city will spend less in taxpayer funds maintaining these properties, and can collect more property tax revenue. Furthermore, rejecting an offer today in favor of a hoped-for offer in the future entails taking on a great deal of risk. It is likely that the hoped-for development will take years, if not decades, to materialize … or may never come about at all.

Otis Williams, deputy director of development at the Saint Louis Development Corporation (which oversees the LRA), made a revealing comment when talking to Milhaven today (after my appearance). Milhaven asked what was so bad about selling LRA property, even if it isn’t developed. After all, LRA properties are vacant. In the case of a privately held vacant property, at least the city would no longer be paying to maintain it (cutting the grass on these properties alone costs about $1 million per year). Williams responded:

When we sell it, it is a real estate transaction, at that point, and they own it. Unless they don’t pay the taxes, or we pursue them in court through right of reentry … once you sell it, you’ve pretty much lost control.

If the city were to focus on encouraging all development, not just development that matched its overarching plan, there wouldn’t be concern about losing control of a particular property. However, Williams’ statement makes sense in light of the fact that the city focuses on encouraging only its notion of the right kinds of development.

Does this top-down development approach work? It doesn’t seem to. The LRA owns more property today than it has in the past, and is still trying to control exactly who can buy property and what they can do with it. Perhaps it is time to take a different approach.

Let the Free Market Turn Missouri Green!

Posted on by Christine Harbin

Gov. Jay Nixon wants to make Missouri a green state. According to an article in the Missouri Watchdog, the governor sent a letter to the leaders of the Missouri General Assembly encouraging them to pass legislation that supports the development of energy alternatives. From the letter (emphasis in the original):

My administration looks forward to working with the General Assembly to determine where those sources of renewable energy must be located in order to carry out the will of the people and promote a renewable energy economy in Missouri.

Sounds good, huh? Greener energy is a good thing for Missouri, right? Unfortunately, this is a problematic way to get to that goal. I strongly support the development of renewable energy, but I do not want the state to subsidize it!

The free market and basic economic forces, not government programs, will determine the development of alternative fuels. When the government enacts policies that impose higher mandates for alternative energy, such as the 2008 Missouri Renewable Energy Initiative referenced in the letter, it imposes high hidden costs and defeats its ostensible goal of helping the environment.

Just as government officials don’t know the socially optimal mix of any set of products and services, they do not have special predictive power, nor do they have access to perfect information. Politicians can’t identify new technologies and business opportunities as well as the unrestricted market can, because they are too far removed from the science of energy technologies to know the optimal state of the market. Plus, government is slow to react to changes in the economic environment because it is bogged down in bureaucracy.

Furthermore, when lawmakers in Jeff City roll out proposals for encouraging the development of alternative energies, Missourians would be wise to question whose interests their elected officials actually have in mind. Policymakers often bend the truth to promote their own political agenda, under the guise of helping the environment. Corn ethanol, which we discuss frequently on Show-Me Daily, is a classic example. Al Gore touted the corn ethanol industry with the ostensible goal of helping the environment. Last November, he changed his position on ethanol, admitting that he had previously supported ethanol as a means of pandering to Iowa voters. Gore had the interests of his political career—not the environment—in mind.

I’ll Have a Cheeseburger With Fries – Hold the Lawsuit

Posted on by Christine Harbin

Because most of the nation is focused on recent union issues in the Badger State, many people might overlook the fact that the Gopher State is also engaged in a healthy debate. State lawmakers in Minnesota are discussing a proposal to prevent people from suing food companies — including fast-food chains — for making them fat. According to an Associated Press article:

The bill would prevent consumers from suing the food industry for weight gain, obesity and health problems caused by long-term consumption of fattening foods and non-alcoholic drinks such as soda.

In general, I believe that the less government does, the better. However, encouraging tort reform is not inconsistent with a free-market philosophy (we discuss the issue often on Show-Me Daily), and interpreting this policy as simply another government restriction is an oversimplification. Reducing frivolous lawsuits will have positive consequences for companies and their consumers.

One possible benefit of this policy is that it will encourage people to take ownership over their own health, encouraging personal responsibility and limiting government dependence — things that Free Marketeers like me support (e.g., health savings accounts, limiting the welfare state, etc). Americans tend to blame their weight problems on everyone except themselves, but this policy would limit their ability to blame food companies. As I always say, personal responsibility is the best medicine. As one state legislator puts it:

“Let’s say I choose to eat 100 bananas and my stomach ruptures,” said Rep. Glenn Gruenhagen, a Glencoe Republican. “That’s not the banana growers’ fault.”

It’s also possible that more businesses will locate to the state because they will no longer fear a barrage of frivolous lawsuits. Frivolous lawsuits increase the cost of doing business in the state, which discourages companies from locating there.

Additionally, perhaps this policy would result in lower food costs, much like medical malpractice reform leads to lower health costs. In the health care industry, medical providers practice defensive medicine; I wonder if an equivalent practice exists in the fast food industry?

Lawmakers in Missouri would be wise to watch how Minnesota fares under this policy, if and when it is enacted. As long as the measure doesn’t restrict consumers from suing food companies when they incur actual harm (e.g., health code violations), it will likely benefit the state.

Paper Questions City Landholding Policy

Posted on by Audrey Spalding

Why does the city of Saint Louis hold so many vacant homes and properties without selling most of them? How can a financially strapped city afford to hold onto thousands of properties when there are potential buyers? Show-Me Institute Policy Analyst Audrey Spalding spent nearly a year researching the issue and will soon publish a policy study that raises some interesting questions. Here’s a video preview.

Full Study, Policy Brief, and Supporting Research

How Much Will Pujols Pay in Taxes?

Posted on by John Payne

I appeared on “McGraw in the Morning” on KTRS today to discuss my recent commentary about Albert Pujols’ economic value (you can listen to the interview here). We got into a discussion of how much Pujols would pay in taxes on his new salary, assuming he eventually negotiates a contract with the Cardinals that is to his liking. If Pujols’ contract is for $30 million annually, he will pay in the neighborhood of $12,450,000 on his salary.

Pujols falls into the top federal tax bracket with a 35 percent marginal rate, so his federal tax bill will come in a little below $10.5 million. (It’s lower than that because of the lower rates he pays for the first few hundred thousand dollars and his ability to write off his Missouri income tax on his federal tax return.) The state of Missouri’s take is easy to determine because it is a flat 6 percent, clocking in at $1.8 million. The Saint Louis earnings tax is for 1 percent of income, but it only applies to games he plays in Saint Louis, so it will be half of 1 percent in his case, or $150,000. (He will have to pay earnings taxes in other cities that have them, like New York City and Kansas City, for the games he plays there, but if I were to try to tabulate his tax bill exactly, it would be absurdly complex, and I’d demand to be paid like his accountant.)

In short, it’s a bit of an exaggeration to say that Pujols might make $30 million a year, because after paying the various taxmen, he will end up with closer to $17 million — or less than 60 percent of his gross income.

Swings, Hits, and Misses

Posted on by David Stokes

I was out on vacation last week, so here is a quick round up of recent goings on in Missouri that relate to my work here. And I use the term “work” loosely, recognizing that research and writing on subjects I love at a think tank ain’t exactly mining coal, smelting steel, or loading a barge. (That last part is a shout-out to one of our regular commenters; you know who you are.)

Last week, Jefferson City voters passed a hotel tax increase. This is one tax increase for a city that will be paid by all the people of Missouri, because so much hotel business in Jeff City is state-related. I guess, from the perspective of a Jeffersonian (or is it Jeff Citian?), it makes sense to raise this tax. But that does not mean it is good policy to raise taxes on other people to pay for something (a conference center) that is not a core responsibility of government. So that one counts as an out. …

Nuclear power is being hotly debated in the state capitol, as well. It would be excellent for our state to increase our use of nuclear power, and that depends on changes to existing CWIP financing regulations currently being debating in the legislature. This would be a home run (and this post is quickly running the risk of analogy overuse).

A bill to decrease the number of state representatives is being discussed in a House hearing tomorrow. This is a terrific idea that we have discussed before, and I hope it gets a fair hearing and due consideration. This would be about a double. …

Just because it (almost) fits with the title.

Subsidies to Private Industries Equal 3 Percent of the Missouri State Budget

Posted on by Christine Harbin

Yesterday, I highlighted how the state government spends billions in subsidies to private industries in Missouri — $6.476 billion since 1997, to be precise. My colleague Audrey Spalding wonders:

$500 million may be only 0.27 percent of GSP, but how does it compare to Missouri’s budget? If this is all money the state spends, I would think a better comparison would be to the state budget. My guess is that’s a higher percentage…

Her suspicion is correct. During the period between 2002 and 2008, the amount of subsidies to private industries equals 3 percent of the state government’s total expenditures on governmental activities.

Year Total Subsidies Total Expenses —
Governmental Activities		 Percentage
2002 $409,000,000 $17,690,103,000 2.31%
2003 $610,000,000 $17,436,504,000 3.50%
2004 $559,000,000 $18,594,078,000 3.01%
2005 $755,000,000 $19,626,984,000 3.85%
2006 $590,000,000 $19,669,008,000 3.00%
2007 $534,000,000 $19,711,347,000 2.71%
2008 $557,000,000 $20,901,172,000 2.66%
Sum $4,014,000,000 $133,629,196,000 3.00%

The subsidy data come from the Gross Domestic Product by State data from the Bureau of Economic Analysis (BEA). The total expenses for government activities data come from the Comprehensive Annual Financial Reports from the Missouri Office of Administration.

Another commenter requests a breakdown of this data to understand where these subsidies go. Here it is:

From 1997 to 2008
Industry Amount
(In Millions)		 Percentage
Agriculture, forestry, fishing, and hunting $3,437
Crop and animal production (Farms) $3,437 100%
Forestry, fishing, and related activities $0 0%
Finance and insurance $7
Federal Reserve banks, credit intermediation and related services $7 100%
Real estate and rental and leasing $2,602
Real estate $2,602 100%
Rental and leasing services and lessors of intangible assets $0 0%
Transportation and warehousing, excluding Postal Service $429
Air transportation $226 53%
Rail transportation $165 38%
Water transportation $33 8%
Truck transportation $5 1%
Warehousing and storage $0 0%
Other transportation and support activities $0 0%
Pipeline transportation $0 0%
Transit and ground passenger transportation $0 0%

Pujols Is Worth Every Penny (All 3 Billion of Them)

Posted on by John Payne

We are rapidly approaching the deadline imposed by Albert Pujols and the Cardinals’ front office to secure a new contract for Saint Louis’ franchise player. Both sides claim that if an agreement is not reached by Feb. 18, when position players report to spring training, discussion of the matter will be shut down until the end of the season. This would make it far more likely for Pujols to enter free agency in November, undoubtedly driving up the price of his contract. Regardless of whether he wears the “Birds on the Bat” beyond 2011, Pujols is widely expected to earn more than the $25 million per year that Saint Louis native son Ryan Howard signed for last year, as first baseman for the Philadelphia Phillies. Although people frequently denounce such salaries as obscenely high, the practice makes perfect economic sense.

For most of baseball’s history, even the best professional players did not make salaries hundreds of times greater than the average American. In large part, this was attributable to the reserve clause attached to player contracts that forced them to bargain solely with the team that signed them — even after the contract expired. In 1975, an arbitrator allowed two players to become free agents, effectively striking down the reserve clause. From that point forward, general managers have been forced to compete against each other for free agents, driving player salaries skyward.

In most cases, these multimillion-dollar salaries benefit everyone involved. Most obviously, the players benefit because they earn more money. And, although ownership would undoubtedly like to return to the days of the reserve clause and cheap labor, they still generally prefer paying stratospheric salaries instead of fielding a third-rate team. Most importantly, baseball fans enjoy watching their highly paid stars play up to their potential, as shown by our willingness to spend money on the sport. Until the recession hit in 2008, Major League Baseball (MLB) set attendance records on an almost annual basis, peaking in 2007 with more than 79.5 million tickets sold — an average of 32,785 fans per game. Attendance has declined about 7 percent since then, down to (still healthy) 2003 levels. The reason that superb athletes like Pujols can command millions or even tens of millions of dollars per year is because people willingly give their hard-earned money to watch them perform.

Seen from the perspective of the value he brings to fans, Pujols is a bargain at $25 or even $30 million a year. The Cardinals had the fourth-highest MLB attendance in 2010, with 3,301,218 fans attending 81 home games, according to ESPN. If each of those fans contributed only nine dollars — just once — it would net Pujols $30 million for the year. Of course, this dramatically understates how dearly Cardinals fans value his skills, because it ignores attendance at away games and the much larger audiences listening on the radio and watching on television. J.C. Bradbury, an economist at Kennesaw State University and author of The Baseball Economist, estimates that an eight-year contact with Pujols is worth $350 million, based upon similar deals to other superstars and current revenue growth. That’s $43.75 million per year. Another examination, using the statistic Wins Above Replacement (WAR), pegs the dollar value of an average season for Pujols at $32.3 million.

This analysis is complicated by subsidies that the Cardinals have received from the government — mostly in the form of deferential tax treatment and government-secured loans for the construction of the new Busch Stadium. Some area taxpayers do not care for baseball or the Cardinals, so they lose out on that deal. Such subsidies, however, are not an argument against high salaries per se, but rather against government favoritism toward certain businesses.

In 1960, Stan Musial came off a substandard season and requested a pay cut from $100,000 to $75,000. It was an honorable move from a man who demanded nothing short of perfection from himself. But nothing suggests that Pujols’ success as a player will decline any time soon. The value that Pujols has added to his fans’ lives far outstrips even the eight-digit figure on his current contract — so go ahead and pay the man what he deserves.

John Payne is a research assistant for the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

Support Us

The work of the Show-Me Institute would not be possible without the generous support of people who are inspired by the vision of liberty and free enterprise. We hope you will join our efforts and become a Show-Me Institute sponsor.

Donate
Man on Horse Charging