DED Awards $8 Million in Tax Credits to Developer Ruled Ineligible by Courts

Posted on by Audrey Spalding

In 2010, it appeared that the Missouri Department of Economic Development (DED) could sink no further. After all, the agency had initially awarded tax credits to a Cape Girardeau businessman who pleaded guilty to passing bad checks, and has been scolded by the State Auditor’s Office for (perhaps accidentally) pulling numbers out of thin air that overstate the economic benefits of tax credit projects.

But the DED has outdone even itself. On Jan. 5, the St. Louis Post-Dispatch reported that the agency had awarded $8 million to a redevelopment project that a court judge has ruled no longer exists.

NorthSide Regeneration LLC, the company behind an enormous and ambitious project slated to occur in north Saint Louis, received the $8 million. However, the tax credits that the DED awarded must be tied, according to state statute, to a “redevelopment agreement.”

State statute specifies that such a redevelopment agreement exists only when a city has selected a developer (in this case, NorthSide), by passing an ordinance to award additional local tax incentives to the company. Unfortunately for the NorthSide company, although city alderman passed such an agreement, it was thrown out by a judge in July — so, according to the statute, NorthSide simply isn’t entitled to the money.

This does not mean that NorthSide’s development should halt. The company has put forward a great deal of money to get the project started, and if the developer believes that the project will be successful without government subsidy, the project will move forward. But the DED should not be in the business of subverting state statute.

The Post-Dispatch article includes a sadly amusing quote from DED spokesman John Fougere: “We have to abide by the statute as it stands and as it stands, there are no safeguards for taxpayers.”

Of course, what Fougere fails to mention is that one easy way of safeguarding Missouri taxpayers is not to award $8 million to a redevelopment agreement that has been thrown out by the court. Instead, the department awarded the tax credits, but with a specification that if a court were to throw out the redevelopment agreement again, the company has to give back the money.

In essence, the DED has awarded NorthSide an interest-free loan, just in case the company manages to prevail in court at some point in the future. Why on earth would the DED do this? Surely, DED employees wouldn’t ignore their statutory obligations?

A possible reason is that because NorthSide is in the process of appealing this ruling, the DED viewed the judge’s ruling as not final — it could be overturned. However, it is strange that the DED, especially in light of recent public scrutiny, would not take the more prudent course of awaiting the result of the appeal before awarding tax credits.

Not only does Missouri desperately need a thorough, critical review of tax credit programs in general, it is clear that the workings of the DED need to be examined. This agency awards hundreds of millions of dollars each year, and is neglecting its duty to safeguard taxpayer money.

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

Celebrate National School Choice Week With Us on January 27!

Posted on by John Payne

Next week is National School Choice Week, when groups around the country will hold events in support of school choice. As our contribution to the dialogue, the Show-Me Institute is sponsoring a showing of The Cartel at the Tivoli Theater (6350 Delmar) in Saint Louis on Thursday, Jan. 27, at 6:30 p.m. (registration starts at 6:00).

The documentary (you can watch the trailer at the film’s website) examines the failures of New Jersey’s public school system, which spends more per student than that of any other state but is still home to a frighteningly large number of failing schools. Director Bob Bowdon traces how money is frequently diverted from classrooms, and flows instead to administrators, union coffers, and political patronage positions. Although Bowdon focuses on New Jersey, the problems he uncovers are often the same as those we find here in Missouri and across America.

The special screening will be followed by a panel discussion featuring two Missouri State representatives at the forefront of the education issue in our state: Rep. Scott Dieckhaus (R), the chairman of the House Committee on Elementary and Secondary Education, and Rep. Tishaura Jones (D), assistant minority floor leader and also a member of the House Committee on Elementary and Secondary Education. They will share their views on the issues that come before this important committee, and on which of those may find their way into legislation during the 2011 session.

The event is free, but if you would like to come, please RSVP to our public relations representative, William Kay.

My Favorite Sandwich Company May Be Leaving Illinois

Posted on by David Stokes

How many more stories like this will we hear? The founder of Jimmy John’s sandwich shops has stated he plans to move his family and his company out of its Champaign, Ill., headquarters because of the state’s recent tax increases. (I ate lunch at Jimmy John’s both yesterday and today — despite the high sales tax — but I won’t tomorrow, because Thursday is $2.50 turkey sub day at Planet Sub, and I never miss that.)

It does not appear from the article that the owner is considering a relocation to Missouri. Perhaps if we did not have an income tax, he would think about hopping across the Mississippi River for his new corporate HQ. Who knows?

I didn’t like this line in the article:

Liautaud said he has been contacted by “multiple pro-business states” that made him feel “wanted and important.”

“I enjoy being courted and the process,” he said.

It is not the role of government to court select individuals. Government should set the tax rate as low as possible, let markets operate as freely as possible, and regulate as little as possible. Then economic opportunities will arise that people actually want, although those opportunities might not be what some economic development officials want. A charming, mixed-use condominium complex and upscale shopping district is not superior to a factory, a strip mall, or a nightclub if these other types of developments better satisfy people’s actual needs and wants.

Cost of a Missouri Inmate

Posted on by Abhi Sivasailam

I recently heard a legislator discuss potential budget savings that Missouri could see with cuts to its corrections system. To put the idea of these cuts into perspective, I looked for spending data and found this interview with Joseph Eddy, budget director for the state corrections department. An edifying excerpt:

The department’s Joseph Eddy says it costs $44.68 a day per inmate. He says $12.14 a day is for medical and mental health services. Another $2.54 pays for three meals a day.

Prisoners also are paid for their work—7-dollars-50 cents a month. If they have their GED, they can earn an extra dollar. That’s about 35 cents a day.

Eddy says the direct costs of each inmate every day is $16.39 a day. The other $28 go for the administrative and prison personnel, utilities, and other costs that go with running a prison.

Per my calculations, that amounts to $16,308.20 per year, which is 26 percent smaller than the federal poverty line of $22,050 — and less than I would have expected. A quick search of the per-inmate expenditures in peer states suggests that Missouri ranks toward the bottom in its per-inmate expenditures.

It is interesting that the direct costs of each inmate amount to only 37 percent of the total cost per each inmate. Even more interesting is that medical care represents a full 74 percent of the direct costs of each inmate. To me, all of this suggests that there is actually not a lot of fat that can or will be trimmed, and that those looking to prioritize significant savings would do well to look elsewhere. That being said, there may still be ways for the state corrections department to operate more efficiently. In a subsequent post, I’ll discuss how Missouri can create markets and design incentives in ways that can save it some of the money it currently spends on corrections.

Florida Deadline Comes and Goes; Missouri’s Attorney General Is Not Yet On Board

Posted on by Christine Harbin

Not only have a majority of Missouri voters signaled that they’re against the health care law, lawmakers in Jeff City have, too. The Missouri Senate recently filed a resolution, SR 27, encouraging Attorney General Chris Koster to join the multistate lawsuit in Florida that challenges the federal health care regulation. This resolution is similar to the one passed recently by the Missouri House, HR 39. Practically the only person who hasn’t demonstrated interest in joining the lawsuit is Koster.

This is an issue that we have been tracking very closely at the Show-Me Institute.

Critics argue that joining the lawsuit will be a waste of time and money for Missouri. This argument is not factually true; Missouri will incur few costs by joining. If Koster decided to join the lawsuit, the only cost for the taxpayers of Missouri would be the time it takes for somebody in the attorney general’s office to write the letter, along with the price of a postage stamp — if that.

Although states are free to help offset the costs of the lawsuit, it is completely voluntary. Furthermore, the maximum amount that they may contribute is $5,000. According to the 2010 U.S. Census, there are 5,988,927 individuals living in Missouri. If they were to split this sum equally, each person would pay less than nine hundredths of one cent to fund Missouri’s contribution to the lawsuit. That’s 9 cents for every 100 residents. Decrying the cost of the lawsuit is a smokescreen argument.

Koster would be wise to free-ride on the Florida lawsuit. Missourians have nothing to lose by joining the lawsuit, but they have much to gain, such as freedom in their health care decisions.

There’s No Such Thing as a Free Food Festival

Posted on by David Stokes

Some aldermen in Chicago are objecting to the bids coming in to operate the city’s famous “Taste of Chicago” event. In a prior blog post, we discussed the proposal by the city of Chicago to privatize its famous festival. Until this year, Chicago has used tax dollars to fund its food festival, just as the city of Clayton has used tax dollars to pay for part of its prior “Taste of Clayton” events. In all honesty, it is hard to think of anything that governments fund that should be more obviously left to the private sector than food festivals.

The Chiacgo aldermatic objections to the privatization bid center on the private operator’s proposed plan to charge an admission fee and (gasp!) sell tickets to the accompanying concerts. Chicago has been a leader in privatizing public services, and you might think that a major food festival should be an obvious choice once you have privatized a highway, parking meters, and (almost) an airport. But apparently some alderman are drawing the line at food and music festivals:

“Is there a cap? What contract are we signing? Is it gonna be another thing where they can increase the rates every year?” [Ald. George] Cardenas said, referring to the deal that privatized Chicago parking meters. “It’s a tragedy that we have to be in this situation where people can’t even enjoy their own city, enjoy their own lakefront. They have to pay for it.”

By “enjoy their own city, enjoy their own lakefront,” he does not mean taking an evening stroll along the beach. Rather, he’s suggesting that attending an enormous food festival with booths, bands, security, sanitary facilities, promotional marketing, street and parking adjustments, and scores of other necesities that all cost money … that should all be free of charge to the people who attend, until they actually buy something. (I will give the alderman the benefit of the doubt that he does not think even the food should be free.)

This relates to issues in Missouri. The city of Clayton recently attempted to pass a hotel tax increase that would have been partly used to fund the Taste of Clayton.  Instead of trying to fund Taste of Clayton with tax dollars, Clayton should allow restaurants (or any private operator) to host it themselves, and charge the private actor for any extra costs incurred by the city, or not host it at all. A food festival is something that private organizations can provide, and is not a core function of local government.

I hope that Clayton follows Chicago’s example and bids out the entire management and operation of the “Taste of Clayton” to private operators, without any taxpayer support.

Students: Apply to Work at the Show-Me Institute This Summer!

Posted on by Eric D. Dixon

The deadline to apply to be a Charles G. Koch Summer Fellow — a program that includes two weeks of seminars about the philosophy of liberty at the Institute for Humane Studies in D.C., and eight weeks working as an intern with the Show-Me Institute here in Missouri — is rapidly approaching. Applications are due on Monday, Jan. 31. If you’d like to work with the Show-Me Institute this summer, the summer fellow program is your best bet.

If you’re debating whether you should apply, take a look at some of the highlights that Caitlin Hartsell, our Koch Fellow from 2009, produced during her time working here for the eight-week program (and later, as a Show-Me Institute research assistant):

Here are more highlights from our 2008 Koch Fellow, Matt Simpson:

This just scratches the surface of all the research that they, and our other interns, helped out with behind the scenes.

So, once again, if you’d like to have the chance to dive into Missouri public policy this summer, be sure to apply to be a Charles G. Koch Summer Fellow. After the Jan. 31 deadline, it may be too late.

Missouri House Passed Resolution Encouraging Koster to Join Lawsuit

Posted on by Christine Harbin

Yesterday, with a vote of 115-46, the Missouri House passed a resolution encouraging Missouri to join the multistate lawsuit in Frorida. This lawsuit challenges the federal health care law and encourages Congress to repeal it.

Encouraging Attorney General Chris Koster to join the lawsuit is a topic that we’ve been tracking closely at the Show-Me Institute. Executive Director Brenda Talent released an open letter to the attorney general on Thursday. I discussed the topic in an editorial that published in the Springfield News-Leader, on the Mike Ferguson show on the Eagle 93.9 FM in Columbia, and in some posts on the blog. The Show-Me Institute also released an “urgent call for action” via email last week.

With the passage of Proposition C, Missouri voters were the first to oppose this attempt by the federal government to take control over health care, and they deserve to have an attorney general that listens to them. The precedent that Missourians set by approving Proposition C could be continued if Koster joins the lawsuit. The fact that the Missouri House has passed a resolution is another signal that Missourians oppose the health care law.

Other states have recently jumped on board, including Wisconsin, Ohio, Wyoming, and Kansas. There’s no compelling reason why Missouri should not be on the list.

Externalities of Private School Competition

Posted on by Abhi Sivasailam

I am writing this post from India, where I have been vacationing the past few weeks. One of the most striking features of the social organization here is the prevalence of private schooling. Selection bias aside, I have yet to meet a student who attends a public school. It is not uncommon for impoverished children and children of slum residents to spurn free public education in favor of private education. Recognizing this, I have been wondering how the increased share of private school students here affects levels of educational innovation, test scores, and other educational outcomes. Fortunately, I’ve just found an interesting new study that evaluates this effect. The authors, Martin West and Ludger Woessmann, purport to measure the treatment effect of the “share of schools that are privately operated” on PISA (Programme for International Student Assessment) scores. Of course, there is a problem here with determining causality. As they write:

Countries where more people choose to invest in private schools may have other attributes, such as higher income levels or a greater commitment to education, that lead to better achievement. If this is the case, any positive correlation between private schooling and student achievement could reflect a country’s income or educational commitment rather than any beneficial effects of competition. Or it may be the case that low-quality public schools increase the demand for private schooling. If so, then it could seem that competition lowered public school quality when in fact the causal connection could be in the opposite direction.

To solve for this, West and Woessmann exploit a technique that economists call an instrumental variables approach. Essentially, they found a new variable — the size of a country’s Catholic population in 1900 — which is a useful predictor for the current share of schools that are private. Because the new variable is a good predictor of the variable they are really interested in (share of schools that are private), but is presumably not influenced by higher income levels or greater commitment to education, using this new variable is more useful for determining causality.

Their results (emphasis added):

Our results indicate that the share of schools that are privately operated has an economically and statistically significant positive effect on student achievement in mathematics, science, and reading, even after controlling for the current levels of Catholics and for the share of funding that privately operated schools receive from the government. Larger historical Catholic shares that translate into a ten percentage point larger private school sector today increase average student achievement on the math test by 9% of an international standard deviation. Science and reading achievement increase by roughly 5% of a standard deviation. These patterns are evident despite the fact that the contemporary share of Catholics in each country is negatively related to student achievement, suggesting that distinctive cultural features of traditionally Catholic countries are unlikely to be driving these results. Importantly, much of the positive effect of private school shares accrues to students in public schools, suggesting that the overall effect is not simply due to privately operated schools being more effective, but rather it reflects benefits of competition.

It’s not clear how applicable these results are to private school competition within only the United States or within individual states such as Missouri. However, if the same pattern holds for educational institutions in Missouri, then policies that encourage private school competition, like vouchers or tuition tax credits, will have spillover benefits for public school students as well — not just the recipients of educational aid.

By the way, those readers who are now beginning to suspect that I spend most of my free time perusing the economics of education literature would be correct in that suspicion.

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