Private Water Company in the News

Posted on by David Stokes

A small, private water company in Southwest Missouri is in the news because one of its pumps failed a few weeks ago. The Joplin Globe has the story (link via Combest). A key pump failed, the company was unable to fix the problem immediately, and for a few days the town — and the fire department — didn’t have a water supply. I did not write this post intending to discuss whether the Public Service Commission (PSC) is correct in its allegations against the company, or whether the company’s defense is true. It’s not that the allegations aren’t serious or important, just that I have no idea who is correct.

Rather, my purpose is to show how the system works with private companies. Private utilities in Missouri are closely regulated by a variety of actors. Water utilities report to the PSC, the Missouri Department of Natural Resources, and local county health departments. (The bulk of the regulations are at the state level — and this does not include the Environmental Protection Agency (EPA), because I believe state agencies enforce EPA guidelines.)

I am not automatically opposed to every aspect of the regulated utility system we use in Missouri. Technological improvements have demonstrated the absurdity of treating telephones and cable television like utilities and/or monopolies, and the legislative environment has properly adapted. I can at least understand the historic purpose behind telephones being regulated as utilities. Treating cable as a utility, though, was always idiotic, and often just a device for corruption. I believe electricity will eventually (in the long run) be deregulated as a utility, too.

As for water and natural gas, infrastructure issues will make it more difficult to move away from monopoly. They may be the best examples of natural monopoly, because the up-front investment costs alone make competition unprofitable. As David Henderson writes:

Economists tend to oppose regulating entry. The reason is as follows: If the industry really is a natural monopoly, then preventing new competitors from entering is unnecessary because no competitor would want to enter anyway. If, on the other hand, the industry is not a natural monopoly, then preventing competition is undesirable. Either way, preventing entry does not make sense.

My paper on privatizing the St. Louis water division dicusses one way to bring competition to the water industry on p. 17. Absent that price competition, I understand the reasons for some types of price regulations.

Back to the original subject. The PSC moved pretty quickly in addressing this potential issue. In fairness, the private company states that it attempted to move quickly, but could not move quickly enough. (The issue here could well be one of utility size, rather than a question of public vs. private.) I hope people don’t read a story like this and think the problem lies with private utilities. The problem in this case has been addressed. Fines may be imposed after the full details emerge. If there was a company failure, the company will be held accountable — the key word here being “if.” Private water, like other private utilities, works just fine under our system in Missouri.

Education Panel Tonight!

Posted on by John Payne

I will be part of a panel discussion of education at Washington University in Saint Louis tonight, from 7:30 to 8:30. The event will be held at the Danforth University Center, in Room 276 at the top of the main staircase. Panelists will also include Robbyn Wahby, Mayor Francis Slay’s education adviser, Terry Harris, director of equity and diversity for the Rockwood School District, and Dr. Janet Duckham, an English teacher at Ladue High School.

The event is open to the public, so come out and join the conversation.

Don’t Hate the Players, Hate the Game

Posted on by Audrey Spalding

The Post-Dispatch has an excellent article that illustrates one reason why government tax incentives for private development almost always fall short. To summarize: Government officials usually fail to make sure that private companies deliver on the promises they make in exchange for taxpayer dollars.

In this case, the city of Saint Louis entered into an agreement with the Cardinals baseball team about eight years ago, when the team decided to build a new stadium. In exchange for tax incentives from the city worth $145 million, the Cardinals agreed to a few obligations, including at least 100,000 free tickets and 486,000 discounted tickets each year. And, if the owners sold the team, the agreement specified that the city would receive a portion of the sales profit.

It appears that city officials did not even attempt to make sure that the team upheld its side of the bargain.

From the article:

The team’s 2002 agreement with the city did not require proof that the team was giving away 100,000 tickets a year, or making 486,000 inexpensive seats available to the public, or giving $100,000 to city recreation programs.

[City officials] said they never asked the Cardinals for documentation, until the Post-Dispatch called recently.

Fortunately, it seems that the team had worked to meet most of its contractual obligations. After the Post-Dispatch inquiry, the team sent the newspaper a spreadsheet showing that it had exceeded the benchmarks.

However, there is some dispute about the profit-sharing clause. In January, as reporter David Hunn recounts, one of the team’s owners sold 13 percent of the team. The Cardinals’ attorney said that the owner did not make a profit on the sale, meaning that no money is owed to the city.

Of course, no city official has bothered to investigate the matter. As Hunn writes, “They trust the Cardinals.”

If city officials aren’t bothering to monitor this agreement, what else aren’t they checking up on? There are certainly many tax incentive deals in both Saint Louis and elsewhere in the state. Governments hand out millions upon millions of targeted tax incentives all the time.

Not only are those handouts bad policy from an economic standpoint, there is the possibility, as in Saint Louis city, that government officials won’t even bother to try to make sure that tax incentive agreements are followed. Not that you needed another one, but this is one more reason we should let free competition, not government favoritism, determine profits.

P.S. — At least Saint Louis isn’t making debt payments on a non-existent stadium.

The Best Job Creation Strategy? Government Non-Intervention

Posted on by Christine Harbin

Last week, I attended a Legislative Action Seminar sponsored by the Missouri Chamber of Commerce here in Saint Louis. Sitting on a legislative leadership panel, Senate President Pro Tem Robert Mayer said that tax credit programs in Missouri are not his top priority, and that they should take a back seat to job creation.

This is a message that he has communicated frequently of late. From an article in the Missouri Watchdog:

New state Sen. President Pro Tem Robert Mayer, a Republican from Dexter, said discussion on tax credits “needs to happen.” But when pressed on how soon that discussion would take place in the upcoming session of the Missouri General Assembly, Mayer demurred.

“First, we need to get to work on job creation and see what we can do there,” Mayer said.

Government programs that are intended to induce job creation and economic activity have negative unintended consequences, such as crowding out private investment. This is a concept that Henry Hazlitt discusses in his classic work Economics in One Lesson, a book that I encourage policymakers in Missouri to read. Even though the book was first published more than 60 years ago, at present the lesson it teaches is no less relevant:

When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only where bridges must be built, the government spenders begin to ask themselves where bridges can be built. Can they think of plausible reasons why an additional bridge should connect Easton and Weston? lt soon becomes absolutely essential. Those who doubt the necessity are dismissed as obstructionists and reactionaries. […]

[The bridge] is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. It is true that a particular group of bridgeworkers may receive more employment than otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $1,000,000 the taxpayers will lose $1,000,000. They will have that much taken away from them which they would otherwise have spent on the things they needed most.

Therefore for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been per­mitted to come into existence. They are the jobs destroyed by the $1,000,000 taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, radio technicians, clothing workers, farmers.

Basic economic forces, not government programs, determine job creation. Only by getting out of the market can the government truly further its goals of job creation and productive economic activity.

In his comments, the senator sets up a false choice between job growth and tax credit reform. Job creation will occur when the overall cost of doing business in the state decreases, and this can be partially accomplished by reining in tax credits and widening the tax base. Once employers don’t have to subsidize other companies or prop up entire industries with their tax monies, they will be able to hire more people and grow their businesses.

Benefits of Tax Credits Concentrated in Urban Regions, Costs Diffused Throughout Missouri

Posted on by Christine Harbin

Last week, I spoke to Roseann Moring at the Springfield News-Leader about the Tax Credit Review Commission‘s recent recommendations. (Here is a link to her article.) Following our conversation, I used the Show-Me Institute’s Show-Me Living: Tax Credits web tool to look at Springfield’s share of the tax credits issued.

As a percentage of the total amount issued, Springfield is issued a smaller amount of tax credits than other urban areas. Most of the recipient projects are located in Saint Louis and Kansas City, so residents of those areas receive more of the benefits of tax credits. However, Springfield residents still have to shoulder the costs of these programs through their state taxes. It’s a case of concentrated benefits and diffused costs. Most of the benefits are concentrated on the residents of Saint Louis and Kansas City, and the costs are diffused on all Missouri taxpayers.

This difference is partly attributable to the fact that Springfield has a smaller population than Saint Louis and Kansas City, but there may be other factors. (Senate districts in Missouri have an average of about 176,000 people, and the Springfield metropolitan area is divided into two senate districts, whereas Kansas City is divided into four and Saint Louis is divided into eight.)

Trend of Percentage of Tax Credits Issued, by Region

Trend of Tax Credits by Region

The chart below shows the same information in terms of total amount issued. For the year 2010 to date, projects in the Springfield region (Dist. 20 & 30) have only been issued $141,875 in tax credits. For comparison, projects in Saint Louis (Dist. 1, 4, 5, 7, 13, 14, 15, 24) have been issued $4,354,456, and projects in Kansas City have been issued $15,962,032.

Trend of Amount of Tax Credits Issued, by Region

trend of tax credits issued in springfield

The Tax Credit Review Commission will deliver its final report to the governor today.

Selective Tax Rates in Advertising

Posted on by Christine Harbin

While driving back to Saint Louis from Wisconsin yesterday, I stopped at the Road Ranger gas station in South Beloit, Ill., which is located about 0.3 miles south of the Wisconsin-Illinois state border.

While I was loitering outside, I noticed the following sign on the front of the building:

This sign is fantastic! It acknowledges and capitalizes on the fact that tax rates affect consumer behavior. As contributors to Show-Me Daily have discussed previously, businesses and individuals tend to vote with their feet. Differences in tax rates across borders encourage individuals to shift their purchases to areas that have lower taxes.

The tax rate on cigarettes in Illinois is $0.98 cents per pack of 20. In Wisconsin, this rate is $2.52 per pack of 20. This means that an individual will pay (2.52-0.98)*10 = $15.40 more in excise taxes on cigarettes in Wisconsin than she would in Illinois. (I’m assuming that state and local sales taxes account for the $0.85 discrepancy between this number and the sign.)

I suspect that at least some number of Wisconsin residents shift their cigarette purchases to Illinois when they can, which results in higher tax revenues and more business activity in Illinois. I also suspect that this Road Ranger has higher cigarette sales than an identical gas station that’s located on the Wisconsin side of the border, as a direct consequence of this difference in tax rates.

In comparison, Missourians enjoy the lowest taxes on cigarettes in the nation, at $0.17 cents per pack. Although there have been frequent calls to increase this rate, the economy in Missouri benefits from the marginal increase in tax revenues as a direct consequence of this policy. Increasing the state tax rate on cigarettes would shift some marginal amount of this activity from Missouri to other locations.

Private Property and the First Thanksgiving

Posted on by John Payne

The popular New England origin story of Thanksgiving (there are other claims to the first American Thanksgiving) might not have been possible if the Pilgrims had continued to pursue their original, nearly communist, economic policies. Gov. William Bradford’s decision to allow the citizens of Plymouth to keep the fruits of their labor essentially saved the entire colony, as is explained (along with mocking Bradford’s English) in this short video from Reason TV:

Sub Shops and Sales Taxes: A Delicious Natural Experiment

Posted on by David Stokes

A couple of weeks ago, I embarked on an audacious experiment. I dreamed an impossible dream that one day, if God were willing and the creek didn’t rise, I could eat at all the delis and sub shops around the Central West End of St. Louis and compare the varying sales tax rates that result from CIDs, TDDs, CBDs, etc. People told me this dream was impossible: the local government sales tax version of the British Navy’s quest for the Northwest Passage. I did not listen to the naysayers. I knew that if I had the dedication and commitment, I could both eat sub sandwiches and — this is where it gets tricky — remember to keep the receipts. Like a bird over the ocean that indicated to a nervous sailor that land was near, this blog post tells you that my impossible dream has become a reality.

My experiment led to two major findings: 1) Wow, there are a lot of sub shops on Euclid; and, 2) criminy, some of these sales taxes are high! I think most people would be surprised to find out that the sales taxes charged by different restaurants in the Central West End varied by as much as 5 percent. That’s 50 cents on a $10 lunch order for restaurants located only a block apart. (Everything I got was “to go,” but it is a good question whether I should be charged the additional extra sales tax on “sit-down restaurants” in the city. Nor should it involve Missouri’s reduced sales tax on food, which does not apply to restaurants.)

Here is a composite of seven receipts from the past few weeks — including one receipt from Starbucks that was obviously from a fellow employee, because I have never had a cup of coffee in my entire life. (Yes, we know it’s not a sub shop.)

The sales tax rates vary from 10.99 percent to less than 6 percent. (Please note that because of rounding, you can’t be sure in some examples whether the tax is 10 percent or 9.99 percent.) When you go to the Jimmy John’s or Planet Sub on Euclid, you pay multiple additional sales taxes that help fund the development districted in which they are located. In this case, it is the Euclid Buckingham Transportation Development District (at least). That leads to a high sales tax of 10.99 percent. If you go across the street to Pickles Deli, you pay 1 percent less. You save a tiny bit more if you go to either of the Subways in the area; both charged 72 cents on a $7.25 bill, or 9.99 percent. (Again, rounding could also make it 9.98 percent or so. I wish they listed the exact rate on the bill, like Starbucks and Jimmy John’s do.)

The Starbucks on Maryland also charges the 10.99-percent sales tax, with a 32-cent tax on a $2.90 bill. Here we see some unfortunate weaknesses in the data. Because Community Improvement Districts, Neighborhood Improvement Districts, etc. can have generic names, you can’t always tell which one a particular address might be located in. The GEO St. Louis parcel address data does list the TIF district that might apply to a property, but it does not list CIDs, etc. Finally, the state TDD list does not list individual properties.

The real shocker, though, is the St. Louis Bread Company on the Forest Park Parkway. (Ignore the word “Panera” on the receipt.) The sales tax there is less than 6 percent! How the heck can restaurants one block apart have a tax difference of 5 percent? The answer is that, somehow, this particular Bread Company has not been included in any of the special taxing districts that add an additional sales tax. (It is most likely the beneficiary of some type of property tax incentive, but property taxes are not the point of this post.) It might be the only restaurant in the CWE that is outside of any special business districts, and not in any CID, TDD, etc. (Here is a good new city database on these issues.) The big question, though, is whether or not some restaurants are improperly charging — or improperly not charging — the extra sit-down sales tax rate of 1.5 percent. (Read section 92.325 of the state statutes for the pertinent laws.)

While I will remain a fan of Jimmy John’s and Planet Sub (especially on $2.50 Turkey Sub Thursdays), the realization that I am voluntarily giving 5 percent more to the government just because I go there will probably have me patronizing the Bread Co. more often. Then again, perhaps this blog post will have the unfortunate effect of leading to the Bread Company collecting the extra restaurant sales tax like the other places appear to do.

Commission Recommends Positive Changes to Missouri’s Tax Credit Programs

Posted on by Christine Harbin

When the Tax Credit Review Commission was created in June, I predicted that it would not call for scaling back tax credit programs in Missouri. I suspected that this would be the case largely because of the composition of the commission, which includes businessmen whose companies have been issued tax credits, along with bureaucrats and politicians who have an incentive to grow the size of government.

The Tax Credit Review Commission is in the process of delivering its final recommendations, and, to my pleasant surprise, it is calling for significant cuts and reforms. Relatively speaking, this is a great time to be a taxpayer in Missouri.

When the government subsidizes select businesses and industries, this serves effectively as an admission by the state government that the cost of doing business is too high in Missouri. As an unfortunate consequence of such policy, the businesses and individuals that remain in the tax base are left to pick up the tab, which makes it even harder for them to compete. This also gives special interests the incentive to petition the government for favors, when they could otherwise spend their efforts engaging in productive work by creating goods or providing services to consumers. If the state government wants to create widespread, lasting economic growth, it should focus on providing a favorable business climate for all individuals, businesses, and industries, rather than just providing aid to a select few with generous incentive packages that distort the playing field.

By limiting tax credit programs, Missouri can assess a tax rate that is lower and more equal for all taxpayers. This low-tax environment would attract new businesses and individuals to Missouri more efficiently than any targeted tax credit program could. More importantly, it would attract a wide variety of businesses. This is crucial, because government officials have no special insight into which targeted industries will be successful — indeed, they often choose industries that perform far below expectations. This influx of business would, in turn, result in a steady stream of more reliable tax revenues, so government in Missouri would not have to struggle to pay for itself.

Missouri’s development tax credit programs have not fulfilled their stated purposes, and spending more on them will not likely result in better outcomes. Money that has previously been devoted to targeted development would be much more effectively spent if left in the hands of individual Missourians, who are much better able to respond to decentralized market signals, satisfying a much wider array of consumer wants and needs than can be met by a few companies on the receiving end of taxpayer enticements.

The ostensible purpose for the Tax Credit Review Commission, as Gov. Jay Nixon outlined in his opening remarks to the commission, was threefold: help the state make wise use of taxpayers’ dollars to create jobs, incite economic development, and build strong communities. Although I wish that the commission had investigated whether tools other than tax credits could better achieve these goals, I’m thrilled that they are recommending considerable reforms.

I applaud the Tax Credit Review Commission for recommending aggressive cuts and limits. The state’s economy and the people of Missouri will benefit if officials follow through on these recommendations.

Christine Harbin is a research analyst for the Show-Me Institute, a Missouri-based think tank.

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