Where Are the Promised Jobs and Economic Activity?

Posted on by Christine Harbin

Last May, IBM received $28 million in state tax credits and $3 million in incentives from the local government to open a call center in Columbia. According to a recent article in the Columbia Tribune, the project has yet to deliver on the 800 jobs that it promised.

The interior of the Columbia building is primarily open space, with a few conference rooms partitioned away from the main areas. Yesterday, the spacious rooms were filled with row upon row of empty cubicles, furnished with telephones and lime-green desk chairs, but few computers. A handful of employees worked quietly among a sea of empty desks.

This is not an isolated example. Unfortunately, it’s a pervasive problem in Missouri. According to an article from the Associated Press (hat tip: Audrey Spalding):

Missouri has levied more than $1 million of penalties against dozens of tax credit recipients for violating a state reporting law intended to gauge whether their projects actually are producing the promised results.

Records provided to The Associated Press show 56 businesses, nonprofit groups and individuals have failed to meet the mandates of a 2004 state law that requires annual progress reports after receiving tax credits.

The list includes major employers such as Harley-Davidson Motor Co., as well as numerous developers who got historic preservation tax credits to remodel old buildings.

There are two problems here. The first problem is that targeted tax credits are an overhyped tool for economic development and they tend to fail to create the jobs and economic activity that they promise. The second problem, as illustrated in the second article, is a logistical one: Missouri is awarding tax credits at such a high rate, it can’t keep up with the required paperwork. This is bad news for taxpayers in Missouri because it means that they are stuck subsidizing failing projects.

That’s Not Gonna Be Good for Business; That’s Not Gonna Be Good for Anybody

Posted on by John Payne

Daniel Wilson of the San Francisco Federal Reserve has released a new study analyzing the effects of the federal stimulus program, which is helpfully summarized over at e21:

A new study by Daniel Wilson at the San Francisco Fed calls into question the idea that the stimulus legislation as a whole — including the state transfers and direct spending portion — failed to generate the promised improvements in employment.

It is difficult to properly calculate the effects of the 2009 ARRA bill, as it was a nation-wide program. Though employment and growth failed to respond to ARRA as the Administration had suggested, fiscal stimulus advocates have argued that employment levels would have been lower still without the program.

Wilson’s study makes an important contribution to this debate by focusing on state-by-state comparisons. A large portion of stimulus funding at the state level was based on criteria that were entirely independent of the economic situation that states faced. For example, the number of existing highway miles was used to calculate additional transportation spending.

The study uses this resulting variation in state-level stimulus funding to determine what impact ARRA funding had on employment — including both the direct impact of workers hired to complete planned projects, as well as any broader spillover effects resulting from greater government spending. Administration economists have repeatedly emphasized the importance of this indirect employment growth in driving economic recovery.

The results suggest that though the program did result in 2 million jobs “created or saved” by March 2010, net job creation was statistically indistinguishable from zero by August of this year. Taken at face value, this would suggest that the stimulus program (with an overall cost of $814 billion) worked only to generate temporary jobs at a cost of over $400,000 per worker. Even if the stimulus had in fact generated this level of employment as a durable outcome, it would still have been an extremely expensive way to generate employment.

In other words, a few people benefited in the short run, but as a society, we are all poorer for it over time. In February, I argued that stimulus proponents who looked only at the benefits of the federal dollars completely ignored the cost side of the equation, and if this study is accurate, I understand why they might shy away from a balanced look at the program’s effects.

(Link via Hit and Run. Headline reference here.)

Policymakers in Missouri Have a Lot to Learn From Taiwan

Posted on by Christine Harbin

[Note: This blog entry was written on Friday. The governor’s trip to Taiwan has since been canceled.]

Later this month, Gov. Jay Nixon will travel to Taiwan and South Korea in order to lobby to them to buy Missouri agricultural exports. Previously, I discussed how this would lead to the subsidization of foreign consumers by Missouri taxpayers. From an article in the Kansas City Star:

On Wednesday, Nixon announced that a trade mission planned for Dec. 10-16 was expected to produce a letter of intent with Taiwanese businesses that will agree to buy Missouri corn, soybeans and other products during the next five years.

At a rate of about $120 million of exports a year, the new agreement would outpace the $69.1 million worth of exports Missouri sent to Taiwan in 2009.

The governor is traveling to Taiwan with the intention that it will influence their government’s public policy decisions. My fingers are crossed that the direction of this knowledge transfer will be in the reverse. Policymakers in Missouri can learn much from Taiwan.

Hopefully, this trip will serve as an opportunity to learn that Taiwan has developed rapidly and meets the needs of its citizens well because it enforces public policies that embrace the free market. If the state government in Missouri were to remove itself from arbitrarily picking winners and losers in the market, the economy would achieve a greater rate of growth. As I have commented before, centrally planned economies have not worked historically, and there is little reason to believe that they will work any differently in Missouri.

I encourage the governor to watch Free to Choose, a multipart PBS television series by Milton and Rose Friedman from the early 1980s that communicates how the economy benefits from free-market principles. Perhaps it would make for good viewing on the flight to Taiwan. (And he might be further interested to know that Arnold Schwarzenegger, a governor from another mother, provides a commentary to the updated 1990 version of the series.)

The first episode, in which Dr. Friedman visits Hong Kong, is particularly relevant to this trip to Taiwan. Friedman explains that Hong Kong has experienced success because it has established basic economic policies that are rooted in free market principles — principles that would benefit Missouri as well. From Friedman’s narrative:

This thriving, bustling, dynamic city, has been made possible by the free market — indeed the freest market in the world. The free market enables people to go into any industry that they want; to trade with whomever they want; to buy in the cheapest market around the world; to sell in the dearest around the world. But most important of all, if they fail, they bear the cost. If they succeed, they get the benefit and it’s that atmosphere of incentive that has induced them to work, to adjust, to save, to produce a miracle. This miracle hasn’t been achieved by government action — by someone sitting in one of those tall buildings and telling people what to do. It’s been achieved by allowing the market to work. Walk down any street in Hong Kong and you will see the impersonal forces of the market in operation.

By increasing American imports to countries like Taiwan, China, and India, the rising living standards in those regions will continue, and this will lead to the demand for more American goods. This change does not require the lead of the government, however. It happens spontaneously and incrementally in unrestricted markets. Missouri could achieve a higher annual rate of growth if it stopped subsidizing and protecting favored industries and instead let the free market work.

Governor’s New Trade Policy Will Lead to Subsidization of Foreign Consumption

Posted on by Christine Harbin

[Note: This blog entry was written on Friday. The governor’s trip to Taiwan has since been canceled.]

Gov. Jay Nixon is travelling to Taiwan later this month, and a gaggle of subsidized special interests is tagging along. From a news release from the governor’s office:

Joining Gov. Nixon on the trade mission will be First Lady Georganne Nixon; David Kerr, director of the Missouri Department of Economic Development; Jon Hagler, director of the Missouri Department of Agriculture; and senior leaders from the Missouri Chamber of Commerce and Industry; Missouri Soybean Association; Missouri Corn Growers Association; Missouri Rice Council; Missouri Energy Development Association; Missouri Biotechnology Association; Boeing Corporation; Pfizer; Advantage Capital Partners; and other major industry associations and businesses.

All else being equal, increasing the exportation of subsidized Missouri goods will have the negative effect of forcing Missouri taxpayers to subsidize the consumption of their trading partners.

How does this work? Let’s say that the price of a particular good on a store shelf is $5. Let’s also say that that the production of that good received $2 in government subsidy. (The production of agricultural and technological products is subsidized at the federal, state, and local levels.) That means that the total price of the product to the domestic consumer is $7. When the foreign consumer purchases this same good, he pays the $5, but because he does not contribute tax monies to subsidize the production of the good, domestic taxpayers still pay the $2 in subsidy.

Missourians would be able to achieve higher overall levels of productivity and consumption if they focused on profitable non-subsidized economic activity and then engaged in voluntary trade with others. Eliminating agricultural subsidies would have positive consequences because taxpayers would be able to keep more of their earnings. This is because they would not be forced to continue to prop up agricultural industries so that they produce at a level that’s higher than optimal, nor would they be forced to subsidize the consumption of foreign consumers.

If public officials are serious about promoting economic growth in Missouri, they should avoid public policies that remove wealth from the regional economy.

Fake Markets in Everything

Posted on by Audrey Spalding

We already know that tax credits and other targeted tax incentives encourage all sorts of strange economic behavior. In recent cases, easily accessible government money has motivated individuals to fill out onerous forms, steadily increase the weight of their cattle, buy yachts in certain states, continue to produce cars in Michigan, and even film movies in Missouri.

But did you know that there is an entire journal devoted to explaining what tax credits are and how to get them? And, yes, you can subscribe to the print version.

The existence of this journal makes sense. After all, if governments are giving away relatively easy-to-obtain public money, we would expect businesses to crop up in order to make a profit by helping others access taxpayer money. This journal, and all the other companies and websites dedicated to encouraging others to apply for public tax incentives are illustrative of the strange activity that is a byproduct of government-manufactured incentives.

(special thanks to Christine Harbin for suggesting that I shamelessly copy Tyler Cowen.)

Helping the Poor by Denying Them Access to Money

Posted on by John Payne

In yet another case of good intentions gone bad, the bill Congress passed last year to reform the credit card industry is driving up the price of credit and eliminating many consumers from the credit card market altogether. Like millions of other Americans, I was just hit by a nearly $40 annual fee for a credit card I rarely use and have never missed a payment on, which is most likely attributable to the bill. At Reason, Katherine Mangu-Ward details some of the other damage the bill has inflicted so far:

Eight million Americans cut up their credit cards this year, according to new data out from credit bureau TransUnion. Some of those plastic deserters were folks who faced scary economic conditions and decided to voluntarily cut back on debt spending. But for others, it wasn’t a matter of choice.

Millions of customers found themselves unceremoniously ejected from the ranks of the card-worthy thanks to last year’s Credit Card Accountability, Responsibility, and Disclosure Act, or Credit CARD Act. The new rules were supposed to “protect American credit card holders” by stopping “unfair rate increases.” Instead, credit card companies prepared for their new straitened circumstances by booting customers who would no longer be profitable (read: poor people and other risky borrowers), and hiking interest rates for others. American Express even offered $300 bonuses to customers willing to pay off their cards and close their accounts—a deal designed to entice the kind of cash-strapped customers AmEx was soon to find less lucrative.

But as the new rules make it less appealing for credit card companies to offer their services to certain segments of the population, most of those people don’t revert to a cash-only state of nature. The appetite for credit doesn’t vanish when credit cards are harder to get. Instead, customers turn to options like installment plans, layaway, and payday lending for quick credit—and the fees they pay for those options are as high or higher than the credit card costs Congress and the White House found so objectionable. And in an economy that runs on plastic, debit cards replace credit cards for everyday purchases.

Congress has destroyed credit card access for many low income individuals, but many states have already eliminated second- and third-best options like payday loans, and there is pressure for Missouri or its localities to follow suit. For instance, in this editorial from the Springfield News-Leader, Pastor Roger Ray argues that Springfield should ban payday loans because “on a per capita basis, no state takes such reprehensible advantage of the desperate poor, fueling drug and alcohol addiction and gambling addiction with easy-to-get but hard-to-pay-back loans.” The rest of the editorial is packed with evidence-free assertions, overblown rhetoric, and enough fallacies that it would take a book to refute them all, so I will confine myself to the consequences that would follow from such a ban.

As I showed in my op-ed about this subject earlier this year, restricting payday loans leads to more bounced checks, complaints to the Federal Trade Commission about lenders and debt collectors, utility shutdowns, and higher rates of bankruptcy. Payday loans are far from the best form of credit, but, in some cases, they are the best available to people. If Pastor Ray wants to eliminate payday loans in his community, I would encourage him and his congregation to start a fund to lend to low-income individuals at lower interest rates (or for free). If enough people share his sentiment, the payday loan industry can be eliminated without the force of law because very few people will opt for a more expensive loan over a cheaper one.

However, if the city government eliminates the loans by law, debtors will be forced to turn to even worse alternatives. I’m relatively certain Ray believes that a ban on payday loans would improve the lot of the poor, but that is an empirical question that most studies of the issue have answered with a resounding “no.” So, in the famous words of Oliver Cromwell, “I beseech you, in the bowels of Christ, think it possible you may be mistaken.”

Eliminate, Reduce, Discount, or Cap? Considering the Future of Missouri’s Historic Tax Credit

Posted on by Thomas Duda

Missouri’s Tax Credit Review Commission, like the Bowles-Simpson National Commission on Fiscal Responsibility and Reform, is a far-from-perfect mechanism for devising sound public policy recommendations. After all, politics is ever-present in government commissions. That said, I could not be happier about reports that the Tax Credit Review Commission has suggested that Missouri’s Historic Preservation Tax Credit is in desperate need of improvement.

According to a Nov. 18, 2010, St. Louis Post-Dispatch article, “Historic tax credit could face big cut,” the Tax Credit Review Commission has proposed the following changes to the historic tax credit:

Using data from the Show-Me Living tax credit tool, we see that the state of Missouri expended $973 million on historic preservation from 2000 to the present, the highest expenditure for any tax credit program after the low-income housing tax credit. Historic preservation represents 28 percent of the $3.4 billion in total tax credit spending by the state during this period.

AllMoTC2000-Present
Click to enlarge

Of this historic preservation spending, $530 million — or 54 percent of the state’s total expenditure under this program — went to projects located in the Fifth Senate District, which includes downtown St. Louis.

Since the year 2000, 1,734 projects received the state historic preservation tax credit. The median amount received per project was $78,400. Of these projects, 761 — or 44 percent — also received the federal historic preservation tax credit. For these projects, the median Missouri expenditure per project was $157,607. For projects receiving only the Missouri state historic preservation tax credit and no federal historic preservation tax credit, the median Missouri expenditure was $55,690.

Projects in the top 25 percent by cost accounted for $780 million of the $970 million spent by the state on historic preservation. The bottom 75 percent of projects received 20 percent of the funding.

mohptc per project
Click to enlarge

Project Costs

A proposed cap of $50,000 per owner-occupied residence would impact fewer than 500 of the projects represented in the data above, because projects that receive the federal historic preservation tax credit are not owner-occupied.

The following chart considers the impact of a proposed $75 million annual cap on historic preservation spending:

Proposed Cap
Click to enlarge

We see that for the years 2002 through 2007, the cap would have limited the amount of Missouri taxpayer money expended. Over time, we see that the cap could have reduced total Missouri spending by $220 million.

The Tax Credit Review Commission is right to draw attention to tax credit “stacking,” with its recommendation that the historic preservation tax credit should not be combined with the low-income housing tax credit for the same project.

Consider this: Missouri’s various tax credit programs, despite their many names, perform very similar activities. Low income housing tax credits reimburse project costs incurred by “housing professionals, such as architects, appraisers, attorneys, accountants, contractors and property managers.” Historic preservation tax credits reimburse “costs associated with work undertaken on the historic building, as well as architectural and engineering fees, legal expenses, development fees, and other construction-related costs.” In both programs, expenditures of taxpayer dollars accrue to the exact same activities and individuals. Thus, “stacking” of tax credits on a project may yield the holy grail of public subsidy: “zero dollars” in private equity development.

In such a scenario, the stacking of tax credits is likely “crowding out” private investment, while potentially distorting the stated function of the tax expenditures. (Is the “historic credit” building low-income housing, or is the “low-income credit” building historic?)

The Tax Credit Review Commission’s report is only a start. Missouri has much to debate.

To add my two cents, I think that the most efficient way to reduce state expenditures on historic preservation would be to discount the state’s spending on projects that also receive federal reimbursement for the same costs.

Continuing Mixed Messages on Targeted Tax Credits

Posted on by Christine Harbin

I’ve discussed previously that, although Gov. Jay Nixon likes to talk tough about tax credits, he frequently demonstrates support for these programs in his actions.

Over the holiday weekend, while the commission that he appointed was wrapping up its recommendations for targeted tax credit reform, the governor handed out some more. From an article in the Houston Herald:

Nixon was in Mountain Grove to announce Missouri has awarded $305,907 in Enhanced Enterprise Zone (EEZ) tax credits to 3G Processing, the company that will process food waste into animal feed. It is completely renovating a former steel plant and purchasing new equipment for its facility.

I happened to miss this because I was in Wisconsin for the weekend. Thankfully, though, a regular Show-Me Daily reader alerted me to the event by email.

This particular tax credit program has been shown to fail to deliver on promised results. In a report issued in September 2010, the Missouri state auditor studied 19 businesses authorized for Enterprise Zone Tax Credits (EZTC) and Enhanced Enterprise Zone Tax Credits (EEZTC), and found that the actual jobs created were 6.1 percent fewer than proposed in 2007, and actual investment was 29.5 percent less than proposed.

Despite the program’s lack of success in producing the desired outcome, the Tax Credit Review Commission recommended expansions — not limitations — to the Enhanced Enterprise Zone tax credit program in its final report to the governor. It recommends amending the program to include a discretionary option for up-front financing, and it also recommends expanding the definition of distressed communities to expand eligibility. Because this particular program is underperforming, expanding it will make Missourians worse off.

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