Commission for Strategery

Posted on by Christine Harbin

Missouri’s Department of Economic Development recently released a list of the members of the statewide Steering Committee for 2010 Strategic Initiative for Economic Growth (hat tip: Missouri Watchdog).

Because it has more business leaders than bureaucrats, hopefully this committee will propose solutions that are more market-driven than government-driven. Unfortunately, I can’t say the same for the new Tax Credit Review Commission.

Additionally, I am pleasantly surprised to see that only a small minority of the committee members work for companies that have been issued state tax credits since 2000. Of the 40 individuals listed, I could only find four that received any. According to the “Show-Me: Tax Credits” application:

Hopefully, this means that they will be more willing to reduce or eliminate expensive targeted tax credit programs in Missouri.

Indeterminacy in Public Expenditure: What Is a “Historic Preservation” Tax Credit?

Posted on by Thomas Duda

I bristle when public policy advocates contend that persons who oppose a favored policy simply lack an understanding of “how well the program works.” Instead of wasting breath on patronizing dismissals of those who offer alternative perspectives, perhaps a policy advocate’s time would be best spent providing the public with valuable, unbiased information with which we can form our own opinions.

It is in this spirit that I present one of my works in progress from my summer here at the Show-Me Institute.

Backers of the 25-percent Missouri Historic Preservation Tax Credit often cite the statistic that our state is “first in the nation” for “federal historic rehab tax credit projects,” so I thought that it could prove valuable to see exactly where said federal projects occurred.

Click here to view a draft map of Missouri rehabilitation projects that received the 20-percent Federal Historic Preservation Tax Credit. Data comes from a June 2010 information request to the National Park Service, and includes projects dating from 1996 to mid-June 2010.

I see no need to editorialize about the map at this stage in my research, but I think that those who proudly support historic tax credit programs would do well by the public to explain why spending millions on certain construction activities is an appropriate use of public funds.

However, given that “historic preservation” is a catchall for education, place-making, job creation, and aesthetics, defining the precise function of public expenditures made in the name of preservation is an impossible task. Our positions as taxpayers, historians, developers, contractors, homeowners, tenants, policymakers, and tourists necessarily inform our differing and potentially divergent perceptions of these policies and expenditures. Our propensity toward repeated engagement in the same argument about the relative worth of a tax dollar spent on historic preservation as opposed to one spent on public education, while refusing to acknowledge some basic facts about the program in question, often leaves us blowing hot air.

At present in Missouri, recipients of historic preservation tax credits need not acknowledge the receipt of public funds in any format on the project site. In fact, recipients of historic preservation tax credits need not even acknowledge the historic significance of their taxpayer-supported property on site, such as in the form of a plaque. If we are to have a truly informed debate about the worth of the historic preservation tax credit, I would hope that we can all agree that disclosure is a good place to start.

Without good information, our state will never make good policy.

In my mind, the verdict is still out on whether the historic preservation tax credit really does what its backers aver.

My Next Career Move: Professional Rent-Seeker

Posted on by Christine Harbin

It may be time for a career change for me. Although I enjoy working at the Show-Me Institute very much, I am beginning to think that I would be better off if I became CEO of a mega-corporation and tilted the playing field to my favor with the help of my friends in Jefferson City. I will attempt to have more benefits concentrated on me, and more costs diffused away from me.

As the first part of my strategy, I would hire a team of lobbyists in order to enact rules and regulations that discriminate against products from other states that compete with mine. If I could keep firms from other states from entering Missouri, I would not have to work as hard to compete with them. I would try to get the state government to impose strict licensing requirements in order to keep others from entering the industry and trying to compete with me. In doing so, I could charge a higher price to consumers living within the state because this protectionist policy would reduce supply, thereby raising my profits.

Protectionist policies may have high cost to society, but as a self-interested CEO, the profitability of my firm is my only concern. Of all business activities, lobbying has one of the highest rates of return. The Washington Post reported in April 2009 on a study finding that a single tax break in 2004 earned companies $220 for every $1 that they spent on the issue. That is a 22,000-percent rate of return!

I could invest a lot of money in research and development in an attempt to improve my product, only to have my efficiency copied and replicated by my competitors. On the other hand, I could contract with a lobbying firm to convince the Missouri state government to give me financial incentives, and then enjoy an artificial competitive advantage for a long period of time. I wouldn’t have to worry about competing with smaller companies that do not have my lobbying power. As an added benefit, by keeping these firms out of the market, Missouri workers can ensure the security of their jobs. Consumers will have the satisfaction that they are consuming products that were made by a worker in Missouri, not in another state — even if they have to pay more for their products in order to subsidize those jobs.

If this strategy doesn’t work, I could use a different one: pitting states against each other to see which will give me the most money. I’ll tell each state government that other states are offering me huge incentives to invest there, and that they must meet or exceed these offers in order for me to stay. Ford is an expert at this, and I’d definitely follow its example.

All of the large companies in Missouri engage in lobbying activities, so my firm would be at a disadvantage if I didn’t. It doesn’t matter how big or profitable the company is — they’re all doing this! Just in my recent memory, Scottrade secured $2.6 million, Ford secured $150 million, IBM secured $31 million, Mamtek got $17 million, and other, large, private developers secured TIF and tax credits.

Regarding Missouri’s New Tax Credit Review Commission

Posted on by Christine Harbin

Now that the $150 million incentive package for Ford has passed, it’s apparently time to reverse positions and talk tough on tax credits again. On Wednesday, the governor created a commission that is supposed to evaluate the effectiveness and return on investment for each of Missouri’s tax credit programs.

Unsurprisingly, rent seekers tax credit supporters are critical of the new committee. According to an article in the St. Louis Post-Dispatch (emphasis added):

While the commission does include several prominent tax credit advocates, […] it lacks any representatives from small town Main Street groups, community development organizations or historic preservation groups, “all of whom have firsthand experience in how well the program works for the average citizen,” the [Coalition for Historic Preservation and Economic Development’s] press release reads.

Judging from the list of people on the committee, I don’t foresee many calls for scaling back these programs. Not only does the committee include bureaucrats and politicians, who have an incentive to grow the size of government, it includes businessmen whose companies have been issued tax credits. The committee includes a member from Hallmark, in Kansas City, which has received $8,657,730 in tax credits from the state government since 2000, according to the “Show-Me: Tax Credits” application. There is also a member from Commerce Bank in Saint Louis, which received $5,401,975 in historic tax credits in 2002. Legacy group investments received $183,586 in historic preservation credits in 2003. In addition, many other members come from the real estate industry, which would likely benefit from increased construction activity.

As I communicated to the Missouri Watchdog, I applaud the effort to review these programs, but I am skeptical that this commission will accomplish anything, given that the governor continues to dole out tax credits to his favored few (e.g., Ford, IBM, sugar substitute producers, data centers, filmmakers, etc.).

We live in a world of second-best options, and a review process is more desirable than nothing. The optimal solution would be to cut these incentive programs altogether, because they distort the playing field.

If the governor were serious about stimulating productive economic growth in Missouri, he would eliminate the programs entirely and return the money to taxpayers to spend on their own. People tend to spend their own money better than they do other people’s money, after all.

Kansas City Zoo Tax for Kids Who Can’t Read Good and Wanna Learn to Do Other Stuff Good Too

Posted on by David Stokes

Last week, the Kansas City Star ran a story about a recent debate among local politicians in the Kansas portion of the metro area. They were asked whether they supported a regional sales tax to support the zoo, in both Missouri and Kansas counties, and they all said “no”.

This will be played in some circles as a lack of regionalism in the community, with Kansas residents unwilling to support an institution on the Missouri side of the river. I don’t think it is a big deal, because Kansas residents support the zoo every time they attend by paying an admission fee.

This is a more complicated question in St. Louis, where residents of both St. Louis city and county pay a tax for the zoo, and everyone gets in for free. I think that residents of the surrounding counties should be given an option whether to tax themselves to support the zoo or instead have to pay an admission fee. But I don’t think certain people should pay a tax to support a free zoo so that everyone else can also enjoy it for free. (And, yes, I realize you pay for the parking lots, and the train, and the food and drink sales, and the children’s zoo, so you probably spend plenty of money when you attend no matter where you come from.)

I’d like to see St. Charles, Franklin, and Jefferson counties institute a property tax (in the long run, hopefully just a land tax) for support of the zoo. Then the rate could be lowered even further — and it is already a pretty low tax. I also think the other counties should get a representative on the governing board of the zoo if they opt in.

Again though, it’s perfectly fine with me if the residents of those counties choose not to tax themselves for the zoo. In that case, they should pay an admission fee — simple as that. I’d love to hear someone from a surrounding county argue that they should pay neither taxes nor an admission charge to come to the St. Louis Zoo. All aboard the free rider train!

Woe Is Ford! Boo Hoo!

Posted on by Christine Harbin

From an editorial on Missourinet (link via John Combest):

So if Ford develops an all-new vehicle, it’s investing about $3 billion before it even builds the production line and hires and trains the workers to put the vehicle together.

Woe is Ford! It has a high cost of production! Boo hoo!

I have no sympathy for the company and its high cost of production, given that it made $2.6 billion in profit in the second quarter alone and forecasts even more growth in the immediate future. (By comparison, the $150 million in tax credits that the Missouri legislature decided to give Ford is just a drop in the bucket!) Cars and trucks may be costly to produce, but they are also associated with high marginal revenues that cover this cost.

The debate on subsidizing Ford could benefit from a refresher on the theory of the firm.

This $3 billion investment for a new vehicle is a one-time upfront cost, and because Ford produces vehicles in very large quantities, that cost is diffused. Ford is making billions of dollars in profit, so we know that the marginal cost of producing a car is lower than the marginal revenue. Ford is a firm that operates in (what is supposed to be) a competitive industry; the perfect competition ideal is illustrated in the following graph:

Ford in the Short Run

Perfect_competition_in_the_short_run

If, perhaps, Ford finds that the marginal cost of producing a vehicle is lower than the price it can charge, it will lose money and will eventually choose to leave the market. Other firms that are able to produce the good at a lower average cost will enter the market instead because they can realize profit. This is how the competitive environment is supposed to work.

It would be beneficial if, instead of providing subsidies to profitable companies like Ford, the Missouri state government took a laissez-faire approach. Consumers would benefit, because they would be able to purchase goods at a lower cost instead of subsidizing private firms with their tax dollars. Producers in other industries would also benefit, because they would not be forced to compete at an artificial competitive disadvantage.

Grant’s Farm a National Park?

Posted on by Vince Smith

An article in the Post-Dispatch reports that the National Park Service is considering converting the St. Louis treasure that is Grant’s Farm into a national park. One of the great things about Grant’s Farm is that it is run privately by Anheuser-Busch, Inc., and the Busch family, at no cost to taxpayers. The park has been run for 55 years without charging an entrance fee, all while losing $3.5 to $4 million annually.

It is not clear who approached whom with the proposition to make Grant’s Farm a national park, but one can only hope it was not the National Park Service. The budget for our national parks is already strapped, and the lack of funds is evidenced by deteriorating infrastructure. The last thing needed is to add one more park to be maintained with public funds. Furthermore, the growing national debt makes it unlikely that the NPS will be receiving a significant increase in funding in the near future.

I believe Grant’s Farm has the potential to become sustainable if it were to charge an entrance fee. The 273-acre animal preserve is visited by 550,000 people a year, more than enough demand to allow the parks owners to cover costs — or even turn a profit, if management operates the park efficiently.

I hope the Busch family and Anheuser-Busch continue to run Grant’s Farm, even if that means charging an entrance fee. Grant’s Farm provides a unique experience that will be lost if it falls under government control.

Low-Income Housing Tax Credit Mathematics

Posted on by Christine Harbin

Earlier this week, the Kansas City Star published a fantastic editorial that illustrates the math behind low-income housing tax credits (emphasis mine):

Here’s how it works. Assume that you are a developer. You plan to build a low-income housing project with a total cost of $11 million. Of that, assume $10 million is eligible for the credits (land costs are excluded). The credits are limited to 90 percent of that figure, so assume that you get $9 million in credits.

The credits then are sold to investors. Assume that the investors, after discounting the net present value of the credits over 10 years, buy them for 60 percent of their face value — or about $5.4 million. Assume also that you get a regular mortgage loan equal to 70 percent of the $11 million total cost of the project — about $7.7 million. These are conservative estimates.

So the developer now has funding of approximately $13 million ($5.4 million plus $7.7 million) for a project that costs $11 million. The developer will receive a $2 million check at the closing, less any escrows.

Later in the editorial, the author demonstrates how these programs can be further manipulated to benefit the developer above all others. Then, he concludes:

At a time when government at every level is becoming insolvent, all of these programs should be subjected to a top-to-bottom review.

If tax credits programs in Missouri were continuously scrutinized, Missourians would be better off. This is particularly important because the Missouri state government doles out a tremendous amount of money through this program, which is a tab that taxpayers have to pick up. Using the “Show-Me: Tax Credits” application at Show-Me Living, I isolated the trend of tax credits issued under the Low-Income Housing program. Since 2000, there have been 437 credits issued in Missouri for a total amount of $1,360,900,251. The average amount awarded to a single recipient is $3,114,188. The smallest amount awarded to a single recipient is $14,230, and the largest awarded is $13,320,000.

The only positive thing that I can say about the following graph is that it illustrates a downward trend after 2006. However, I wonder if the decrease in the amount of credits issued and redeemed is simply indicative of a general decrease in construction projects because of the recession. It may be that fewer people build or renovate during periods of recession, regardless of state tax incentives.

Trend of Total Low-Income Housing Tax Credits Issued in Missouri

Trend of Low Income Housing

Pitting States Against Each Other: Ford’s Expensive Game

Posted on by Christine Harbin

While it lobbied for $150 million in tax incentives from Missouri, Ford also courted Kentucky, Michigan, Ohio, and Illinois for financial assistance, communicating the message that it would locate within the borders of the highest bidder.

Pitting states against each other is one of the more significant negative consequences of offering generous incentive packages to single companies. It encourages states to offer incentive packages in ever-increasing amounts, in a desperate attempt to entice these companies to locate within the state. Then, the company tells each state government that other states are offering huge incentives for it to invest there, and that they must meet or exceed these offers in order for the company to stay.

In the case of Ford, it’s a confusing mess. After Ohio gave Ford $83 million in incentives during 2002 to expand in the state, Ford moved its production to Missouri. Because Illinois gave Ford an undisclosed amount of incentives in January 2010 to open an assembly plant in Chicago, the company moved its production of Explorers from Kentucky to Illinois. Just last month, the state government in Michigan awarded $10 million in Brownfield tax credits to Ford to redevelop a section of the Michigan Assembly Plant complex in Wayne. Meanwhile, Ford told the Missouri state government that it needs $150 million over 10 years to keep its Claycomo plant open, or else it would move production of its Ford Escape and Mercury Mariner to Louisville. At the same time, Ford seeks tax incentives from the Kentucky state government. They say that, in order to remain in Kentucky, they need financial assistance. Ford secured up to $180 million in incentives from Kentucky in 2008, and $66 million in 2007.

Now that Ford has secured $150 million from the Missouri state government, will the company ask for still more, or will it pack up and leave the state? How do we know that Ford won’t demonstrate the same behavior in Missouri?

When a large company like Ford pits states against each other, other groups are negatively affected. For example, it causes taxpayers to face a higher tax burden because the state has to pay for these incentive packages. It also forces small businesses that lack lobbying power to compete at a competitive disadvantage.

It’s a very expensive game, and taxpayers everywhere would be better off if their state governments stopped playing.

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