Tax Incentives Are Not Necessary for Economic Development: An Example

Posted on by Christine Harbin

I spend a lot of time arguing against strategies for economic development that have more costs than benefits. Something that I have been meaning to do is highlight examples of economic development occurring successfully in the absence of tax credits.

After reading my editorial about tax credits that ran yesterday in the Springfield News-Leader, a software entrepreneur based in Springfield emailed me. He wrote the following, which I particularly like:

I have directly created 320 new jobs over a 27 year period and none of these jobs were created because of tax credits. With or without tax credits we would still have created the jobs. The jobs were created because of the much larger business opportunity and return realized and expected, not because of tax credits.

If the state and local government facilitated a tax environment that was low and broadly based (i.e., didn’t favor certain parties over others), then more businesses would be able to achieve this same kind of success. As a positive consequence of such policy, businesses wouldn’t need to seek the favor of the government because they would be successful and viable on their own merits, not because they were propped up by government incentives.

There are several reasons why the government can’t identify business opportunities and future successes as reliably as the unrestricted free market. In particular, the government is slow to react to changes in the economic environment because it is so bogged down in bureaucracy. Additionally, the government is influenced by special interests that have an incentive to maintain the status quo and to tilt the playing field in their favor. Plus, the government does not have special access to perfect information. Just as government officials do not know the socially optimal mix of any set of products and services, they do not have special predictive power.

Examples like this demonstrate that incentives like tax credits are not a necessary criterion for economic development. Quite the contrary — true economic development occurs independent of subsidy.

“Government Should Be Operated Like a Business,” Part Two of Two

Posted on by Christine Harbin

In my last post, I argued that inherent differences between government and business prevent government from operating like a business. In this post, I will argue that the examples the author provided do not actually support his argument. Instead, they illustrate how government action restricts businesses.

First, the author villainized businesses:

Businesses, unlike government, like to make profits and many of them are not reluctant to increase their rates or their retail prices.

In the private sector, the act of raising prices is not malicious. Companies incur costs that they have to cover, and they have customers whose willingnesses to pay is largely dependent on price. If a company raises its price too high, then individuals will stop voluntarily buying its product or service. As a consequence, the company will not be able to cover its costs, and then it will go out of business.

Next, the author provided several examples of companies that tend to go out of business when they raise their prices:

Detroit says the new model of car will cost $200 more; the dealer doesn’t like to hold his sales price at last year’s level. More uninsured people show up in hospital emergency rooms; hospitals increase costs to those with insurance. Utilities have to pay more for natural gas and coal to keep the generators spinning; they get a fuel adjustment rate increase and pass along the costs to consumers.

The problem with these examples, however, is that the government has already intervened in these particular markets to an enormous extent. As a consequence of this government intervention, private businesses have much less control over the price they charge to consumers, or the costs of their materials and labor, which causes them to go out of business. These particular examples showcase government-created problems, and the solution is less government — not more.

The auto industry is a prime example of high government intervention. Remember last year’s auto bailout? We don’t refer to GM as “Government Motors” for no reason.

The health care industry is another example of how government intervention has impeded private business. That’s because the government has mandated that hospitals treat everybody who walks through the emergency room doors, regardless of their ability to pay. This level of intervention doesn’t occur in most other industries. If a person shows up at a restaurant and is unable to pay, the government doesn’t mandate that he is served a meal. If a person walks into a clothing store and can’t afford to buy anything, the government doesn’t mandate that she walk out with a new jacket. Quite on the contrary, somebody who tried to walk out with a product without paying for it would get thrown in jail for shoplifting.

Furthermore, the fact that hospitals increase costs to those with insurance is a consequence of this government intervention — and the solution is less government, not more. As I have discussed previously on Show-Me Daily, in order to stay in business, hospitals have to make up for those patients who cannot afford to pay more than the government-mandated price.

The author’s gas station example provides a third illustration of how government intervention can restrict a business. He wrote:

When wholesale prices go up, business often pass on those higher prices to the consumers. We don’t know of many gas stations that are paying higher wholesale prices for fuel this year than last year that are still selling gas at last year’s prices, or the year before. We’ve seen old prices on some pumps in a few gas stations. But weeds are growing around those pumps and the sign doesn’t light up anymore, and the convenience store is empty.

He leaves out the fact that the government levies taxes on gasoline that can greatly affect the price at the pump, and also limit the control that a gas station owner would otherwise have to set a price that will cover his costs and that consumers will be willing to pay.

The gasoline tax in Missouri is 35.7 cents per gallon (including the federal tax of 18.4 cents per gallon). Because the tax rate applies per gallon, rather than as a percentage of the price, it means that the amount of taxes paid as a percentage of price is higher when the price at the pump is low. For example, if the price at the pump were $1.75, the percentage paid to the government would be 20.4 percent. If the price at the pump were $3.35, then the percentage paid to the government would be 10.7 percent. The price at the pump in Saint Louis is $2.65 right now, which means that more than 13 percent of that price constitutes taxes paid to the government.

“Government Should Be Operated Like a Business,” Part One of Two

Posted on by Christine Harbin

In an editorial on Missourinet, Bob Priddy critiques the statement “Government should be operated like a business.”

On a high level, running government like a business is a good principle. Government should be as efficient, accountable, and transparent as possible because taxpayer monies are at stake. However, the statement “Government should be operated like a business” is a gross oversimplification. I agree with the author that there are many differences between businesses and government that make it nearly impossible for the government to operate like a business — but they are not the differences that the author describes.

He writes:

Here’s one big, really big, difference. When income slows, or when expenses rise, businesses can and often do increase their prices. Businesses, unlike government, like to make profits and many of them are not reluctant to increase their rates or their retail prices.

I think that the converse statement has more truthiness: Governments, unlike businesses, like to run a deficit and are not reluctant to increase taxes.

Here’s a different difference that the author overlooks: In the private sector, consumers decide to patronize businesses voluntarily, whereas they are required by law to pay money to government. If a person thinks that a price of a good or service is too high in the private sector, then she will choose not to pay. If a person thinks that taxes are too high, well, too bad, she has to keep paying them or get thrown in prison.

Here’s another difference: Because businesses face competitive pressures, they have an incentive to innovate their products, improve their services, drive down prices, become more efficient, etc. Government doesn’t experience this kind of competitive pressure, so it does not have an incentive to do those things.

Urban Planners Give Award to St. Louis, Part 2

Posted on by David Stokes

A few days ago, the American Planning Association (APA) named Wydown Boulevard, which runs through Clayton and the city of St. Louis, as one of the great streets in America.

This post I wrote three years ago is part one of the series on urban planning that I’m continuing today. The theme of this post is different from the first, because although planners had almost nothing to do with the success of the Delmar Loop, they certainly did with Wydown Boulevard. But the planning that shaped Wydown was the work of private industry and individuals, not the government. I want to make that clear.

“Planning” today is intimately linked in most people’s minds with government oversight and regulation. At the APA’s website, both the “What is planning?” and “What do planners do?” questions immediately begin with a reference to government.

Many of the subdivisions that were built along the St. Louis central corridor (Wydown is in the heart of that corridor) were built in a unique, intensely private style found throughout St. Louis. That includes private roads, sewers, and other infrastructure paid for by internal assessments and fees from property owners, not by general taxes for government provision of those services. I don’t think Wydown was ever a private road, but many of the neighborhood streets along it were (some still are), and I believe the streetcar that served Wydown was likely a private company, too, although I have been unable to find conclusive information about that particular streetcar that reveals whether or not it was actually private.

As the APA itself says:

  • Subdivisions along trolley line originally developed as “private places,” characterized by large 1- to 3-acre lots with traditionally designed single-family estates, mature trees, and native plants

Yes, some of the more recent cited reasons for issuing this award involve government planning — the bike lanes, for example. But the neighborhoods of St. Louis’ central corridor have historically been some of the most privately operated urban subdivisions in the country. Wydown is a beautiful street that I have enjoyed traveling many times. It deserves an award for planning. But it’s important to remember that it was private planning, not government planning, that made Wydown what it is.

Film Tax Credit Programs: Lessons Learned From Iowa

Posted on by Christine Harbin

In response to recent scandals in Iowa’s film tax credit program, the state auditor’s office released a report about the program. From the Tax Update Blog (via the Tax Foundation’s Tax Policy Blog):

Before the Iowa Film Tax Credit program exploded in scandal in September 2009, the state had granted $31,967,641 in transferable tax credits to filmmakers. Yesterday the State Auditor reported that $25,576,301 were issued improperly — a full 80% of the credits granted.

According to the report, excess tax credit certificates were issued because the recipients did not verify expenditures:

[T]he unqualified expenditures identified included deferred payments, in-kind expenditures, expenditures for which no proof of payment was provided, expenditures which did not directly relate to production, payments to out-of-state vendors/residents and expenditures which were paid but were not supported by documentation.

An additional reason for the improper issuance is that the production companies claimed the credits in a manner that did not meet the requirements of the Code of Iowa:

The Code of Iowa states, in part, the “tax credit shall equal twenty-five percent of the investment in the project, except that the tax credit shall not exceed twenty-five percent of the qualified expenditures on the project.” In addition, the Code of Iowa states, in part, “a taxpayer shall not claim a tax credit…for qualified expenditures for which a tax credit is claimed…” [Film Office manager Tom] Wheeler did not to [sic] reduce the amount claimed for an investment tax credit by the qualified expenditures included in the expenditure tax credit. In addition, Mr. Wheeler did not ensure the investment tax credit did not exceed the project’s total expenditure credit. Instead, Mr. Wheeler calculated the investment tax credit by multiplying the total expenditures by 25%.

This is a teachable moment for Missouri. While officials here are reviewing our state’s targeted tax credit programs, they should study and learn from the successes and failures in other states. A problem with many tax credit programs, including many in Missouri, is that the expenditures are self-reported by the applicants and regularly unaudited. The state government should have the proper controls in place to ensure that taxpayer money is spent as it is intended. Missouri should establish procedures that increase accountability and prevent reporting errors and irregularities, as the report recommends.

IJ Video: “Why Can’t Chuck Get His Business Off the Ground?”

Posted on by Christine Harbin

Yesterday, the Institute for Justice posted a video that illustrates the kinds of obstacles that entrepreneurs face when starting new businesses: “Why can’t Chuck get his business off the ground?” I encourage our readers to check it out.

These kinds of red tape are unfortunately omnipresent in Missouri, and they increase the cost of doing business in this state. If the state and local government in Missouri reduced these restrictions (e.g., professional licensing, industry regulation), its economic health would improve as a consequence.

Project Unicorn: Fireworks, Whistles, Details to Follow

Posted on by Christine Harbin

From a recent article in the Columbia Missourian:

An incentive plan designed to lure a $1 billion data center to Columbia got a thumbs-up this week from the Boone County Fire Protection District, which is one of the taxing entities that could be affected by the ambitious economic development effort dubbed “Project Unicorn.”

Rich Miller writes about Project Unicorn in an article on Data Center Knowledge. He expresses the following concerns, which I share:

Is it really a $1 billion project? Or are numbers being inflated to try and sway legislators and local officials whose support [is] essential in assembling tax breaks? So long as the “Unicorn” prospect is cloaked in secrecy, these huge numbers are difficult to substantiate or debunk.

A unicorn, by definition, is an imaginary creature. Are we to believe that this project is imaginary as well?

I ask the same questions that I asked last week: Is this level of subsidy the best use of taxpayer monies, particularly at a time when the state government has decided to make cuts to other services? How much subsidy is the state and local government going to provide to the technology industry in the region?

This part particularly puzzles me:

Even with 50 percent real estate tax abatement, [chairman of Regional Economic Development Inc. Dave] Griggs said that one property that currently pays $503 annually in tax would pay more than $2 million with the development being by Project Unicorn. “When you’re dealing with billions of dollars, a little bit of tax comes out to be a lot,” Griggs said.

Why would schools be excited for Project Unicorn? It abates 100 percent of personal property taxes and up to 50 percent of real estate taxes. They will probably have to provide services to more people, with no increase in revenue. If the project weren’t abated, or if a different project moved in, they would receive all of the revenues. Using the numbers quoted in the article, Project Unicorn would contribute $4 million in estate taxes. Why wouldn’t they be angry that they are missing out on $2 million?

Additionally, from the article:

Griggs said Project Unicorn is focusing on a data center that would create up to 70 jobs that pay an average salary of $70,000. He said that new sales taxes, home purchases and other economic activity — including data center vendors that might set up shop in the same area — would benefit the community.

According to the U.S. Census, the median household income in Columbia was only $33,729 in 1999 (which is the most recent year available). The median household income in the state of Missouri was $37,934. Because they will be stuck subsidizing the employment of people who earn twice as much as they do, individuals and families in Columbia will have less money to spend in the private sector. For this reason, a subsidy of this magnitude could well reduce economic activity in the region.

University City Considers Its Trash Options

Posted on by David Stokes

There is a detailed story in this week’s West End Word about University City considering privatizing its trash services. As a University City resident (and a proud one) who works at a free-market think tank covering privatization issues, I am in a unique position to comment here. University City already funds its trash services by user fees instead of taxes, so that should minimize any changes that the residents see with privatization. That has not prevented some residents from vocally voicing their opposition. From the story:

“I am totally not in favor of privatizing if that is an option,” [Marva] Miller said. “We will not be able to ask the private company for help, they will only be obligated to do what is written in the contract. The constituents, especially the elderly, will be underserved. We need to be a revenue-generating city. We have a few assets and we need to maximize what we have and not outsource these people who have worked so hard.”

Where to begin? Of course we would be able to ask for help (whatever that means) from the private company, which would be no more or less obligated to “help” than are the current government employees. (Important note: I think the trash service employees in U. City have always been terrific.) Why the elderly would be “underserved” by a private company is beyond me. They will get their trash picked up, same as always. U. City does not need to be a “revenue generating” city. It needs either to perform or see to the provision of agreed-upon public services as efficiently as possible. That is all.

University City has dealt with its budget issues during the past few years by making tough decisions. City officials have enacted budget cuts and laid off employees, while some other suburbs in the mid–St. Louis County area have focused more on tax increases. University City’s leadership over the past couple of years deserves a great deal of credit for this. I hope the privatization idea gets the serious consideration it deserves.

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