Missouri’s Development Tax Credits Cost Too Much, Deliver Too Little

Posted on by Christine Harbin

In a recent Post-Dispatch op-ed (“Tax credits work for Missouri,” June 17), Donald Rosemann argues that tax credits create jobs and promote economic development, and also suggests that historic preservation tax credits in particular have been very successful. Unfortunately, he overlooks everything that Missourians lose when the state hands out billions to favored industries.

Rosemann claims that tax credit programs are “too important for St. Louis and Missouri to scale back — especially in difficult economic times.” To the contrary, difficult economic times are exactly when the state can least afford to give tax credits to select firms and businesses. Tax credit programs place an additional burden on taxpayers who are already hurting. A particular tax credit may provide some benefits, but the state has to weigh these against the costs of the program, which are much more difficult to anticipate fully.

Additionally, because many credits do not have to be redeemed in the year that they were issued, tax credits represent a future liability for the state. This negatively affects Missouri’s ability to recover from difficult economic times, because officials will have to dole out money at unexpected intervals in the future.

Targeted tax credits discourage economic development in the state by hurting businesses in non-favored industries. Legislators don’t have a special ability to predict which company or industry will maximize revenue or economic growth, so the cost of such credits for taxpayers will almost certainly exceed the benefits. By shifting the tax burden from one favored party to others, targeted tax credits force everyone else in the market to compete at a disadvantage, and an uneven playing field is not an optimal economic climate for fostering development. By reducing the tax burden of a single targeted industry or company, the marginal tax rate for everybody else necessarily increases if overall government spending is not also reduced.

A recent report from Missouri’s state auditor found that tax credits have less of an impact than predicted and cost more than anticipated. The report reviewed 15 major tax credit programs in Missouri, and found that the total cost of the programs had been underestimated by $1.1 billion over a five-year period. Furthermore, many of these tax credit projects include property tax abatements, so those developments won’t bring additional tax revenue for state and local governments to fund schools and other essential services.

Proponents of tax credits fail to consider the many other types of economic activity that could have come into existence had the taxpayers of Missouri been allowed to keep and invest their billions. A factory and a renovated historical building are easily seen effects of tax credits; however, the unseen negative effects include those products and services that were never purchased or consumed in the private sector, because public officials spent the money that would have paid for them.

When the state carves out sections of its tax base in order to reduce the burdens for a select few, everybody else has to pick up the difference. Broad tax cuts are preferable to tax credits because they bring growth to the entire economy, rather than only to those lucky or connected enough to be singled out for special treatment. A lower-tax environment for everybody would attract new businesses and individuals to Missouri more efficiently and effectively. Missouri’s tax credit programs have not fulfilled their stated purposes, and spending more on them will not likely result in better outcomes.

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

 

Saint Louis Streetcars Making a Comeback?

Posted on by John Payne

In the first half of the 20th century, Saint Louis boasted an extensive system of streetcars, which were slowly wiped out by the private automobile in the later 1940s and 1950s. One of the last profitable streetcar lines in the area served the Delmar Loop (so named because it was where the streetcar looped around), and it may be making a return:

[A] federal grant […] could finally make a long-sought streetcar route a reality.

The U.S. Department of Transportation announced today a $293 million investment in transportation projects around the country, including $24 million for a two-mile trolley line that would run between Forest Park and the University City Loop. […]

Supporters of the Loop trolley have said it could cost between $45 million and $55 million, with private donations covering the portion not covered by public funds.

I think it’s laudable that a great deal of the trolley’s expenses will be paid for with private funds, but I’m still suspicious of anything that requires federal funds. If it’s such a great idea for everyone involved, why can’t all the money be raised from Loop merchants and other donations — or, if a government entity has to be involved, University City? Costs aside, I have a number of other reservations about the project.

Driving on Delmar between Skinker and Kingsland is already a nightmare, and I’m pretty sure a slow-moving trolley would make matters even worse. If the trolley only ran in the Loop itself, that wouldn’t be such a huge issue because people wishing to bypass the area already know how, but it will also be running up Delmar to DeBaliviere and from there to the art museum. Those are both pretty major thoroughfares, so the trolley could cause traffic to pile up, which will cut into any environmental benefit it might have.

Furthermore, this area is already overserved by rail. Anyone wishing to travel from Forest Park to the Loop can do so quite easily by hopping on the MetroLink, as the Loop Trolley Project’s own website shows.  Granted, MetroLink can’t drop you off every block, but the entire Loop is only about seven blocks long, which is hardly a long walk from one end to another.

Finally, if trolley riders aren’t brought to the area by other forms of mass transit, they will have to park and ride. The Loop has a large parking lot, which is often near capacity as it is, but I am not sure where people wishing to ride from Forest Park are supposed to park their cars. Without more parking capacity, I don’t see how the line can attract enough riders to make it worthwhile, but I don’t know where they will put more parking.

I don’t think any of these points show definitively that the Loop Trolley is a bad idea, but they are questions that should be addressed before we start lavishing tax dollars on the plan.

Assessing Legal Prospects for Lawsuit Over Federal Health Care Reform

Posted on by Dave Roland

Yesterday morning, Missouri’s lieutenant governor filed suit against the recently passed federal health care reform. It’s difficult to know exactly what to make of certain aspects of this lawsuit, because it assumes the manner in which the federal health care law will function — and it is not clear that the lawsuit’s assumptions are correct. Even if they are correct, however, there are a few issues that may prevent this lawsuit from proceeding. The first is the question of standing. Before a court will consider and rule on a legal issue, plaintiffs must establish that there is a current case or controversy between themselves and any defendants. Where the government is the defendant, this usually means that the government must have taken some act that has caused a harm or detriment to the person filing the lawsuit. It is not usually sufficient simply for a law to be on the books; courts usually (although not always) require that there must have been some implementation of the law before they will address its validity. Also, it is important to remember that plaintiffs cannot generally bring claims on behalf of others.

This lawsuit has eight counts. Several of these assert rights properly belonging to the state of Missouri. The lieutenant governor suggests that because a state statute gives his office the responsibility to be an advocate for the state’s elderly citizens, he has authority to seek relief on behalf of the state government. Similarly, the lawsuit claims that the citizen plaintiffs, as taxpayers, have a right to raise these claims on behalf of the state government. It is possible that courts have previously found citizen taxpayers to have standing to sue on behalf of their state government, but I cannot think of any examples and I do think it unlikely. Thus, I don’t think a court is likely to agree to consider counts one, three, and four. And, even if the court did address them, I question the viability of several of the lawsuit’s assertions in these counts. It may be correct that the federal government has no proper authority to require the state government to adopt certain programs (count one), no authority to compel the state government to make a payment to the federal Department of the Treasury (count three), and no authority to force the state government to increase state taxes in violation of the Missouri Constitution (count four) — but it is not particularly clear that the federal health care law would actually do any of these things. As I have pointed out, the lawsuit assumes that the law will be implemented in a particular way, but we cannot be sure that its assumptions are accurate. This has an enormous bearing on the validity of these claims.

Count two deals with the compensation provided to state officials, so it is at least arguable that the lieutenant governor could have standing to assert the claims of that count. The substance of the claim, however, is dubious. It seems highly unlikely that the federal government is not permitted to impose certain limitations on how the state of Missouri is permitted to compensate its employees. For example, would the state argue that it is not required to pay minimum wage or to comply with anti-discrimination laws? The principles of state sovereignty expressed in count two are, I believe, well made, but they do not necessarily demand a conclusion that the targeted provision of the federal health care law is unconstitutional.

Counts five and six address the individual insurance mandate, which does not even go into effect until 2014. I think the legal arguments in these counts are well-founded, but the claims are premature and will continue to be so until the mandate is actually implemented.

Count seven may actually have some legs. It addresses the provision of special treatment for citizens of certain states, which was incorporated into the health care law in order to secure the votes of certain congressional representatives. The count points out that these exemptions, or “grandfather” provisions, require that the law be applied differently to similarly situated citizens based on nothing other than their geography. That’s a powerful claim, assuming that the law will be implemented in the way that the lawsuit envisions. Those aspects of the statute go into force on Jan. 1, 2011, so it’s possible that the court will be willing to address them.

Count eight attacks the infamous “panels” that are expected to be established to evaluate the appropriate levels of treatment for various health care situations. The lawsuit assumes that these panels will have the power to forbid doctors to provide services to citizens willing to pay for them. If that assumption is correct, this count may have life — if and when the panels are ever constituted and actually issue the anticipated prohibitions. I do not, however, think that a court is likely to assess this claim until those things have taken place.

So, taken as a whole, I think it likely that the court will ultimately dismiss at least half of the claims raised in this lawsuit (and probably three quarters of them) as lacking either standing or ripeness. It is possible that the court will address the merits of counts two and seven. It is difficult to predict how the court will come out on count two, although I think it unlikely that the court will find a constitutional violation. If, however, the federal statute implements the provision targeted by count seven in the manner that the lawsuit anticipates, I think there is a very strong chance that it will be struck down as unconstitutional.

Try, Try, Try Again? Not Always a Good Idea

Posted on by Caitlin Hartsell

The Kansas City School District, in another effort to reform lagging schools, plans to move students into an ungraded primary system,  where students progress based on skill level, rather than age, once a subject has been mastered. From USA Today (emphasis added):

Now, in the latest effort to transform the bedraggled Kansas City, Mo. schools, the district is about to become what reform experts say is the largest one to try the approach. Starting this fall officials will begin switching 17,000 students to the new system to turnaround trailing schools and increase abysmal tests scores.

Richard Innes at the Bluegrass Institute in Kentucky points out that this was, in fact, tried in Kentucky during the 1990s, in a school district five times the size of Kansas City’s district. He reports that it was generally unsuccessful, with only 25 percent of Kentucky schools still in “ungraded primaries” — although it is still on the books:

Even KERA’s most enthusiastic cheer leader, the Prichard Committee for Academic Excellence, now admits that Primary just didn’t work out.

The fact that the education “reform experts” were unaware that this had been tried before, on a large scale, does not bode well. It didn’t work in Kentucky. Can it work in Missouri?

Lessons can be learned from these failed attempts. After all, the reform itself could have some merit when implemented on a small scale, and some states like Alaska and Colorado have had success with the program. Theoretically, it makes sense: A student may have advanced math skills, but need extra time to practice reading. If implemented appropriately, that student could devote more time to skills that need improvement.

Kentucky’s problems may have fallen upon the difficulty of implementation. Innes suggested, in a phone call yesterday, that the teachers would have needed “Solomonic wisdom” to successfully implement the program. Indeed, a skill progression is a difficult thing for a teacher to assess for a few dozen students in multiple subject areas. A 2002 study by CREDE found that the primary program had varied implementation, which might explain some of Kentucky’s problems:

“The study of the implementation and effects of the nongraded primary program in Kentucky revealed that when teachers fully implemented the program, they were also practicing the CREDE standards fully. Teachers across the state, however, implemented the program in a variety of ways, some of which were not philosophically aligned with the original intent.”

Perhaps the advent of more advanced technology will provide the piece that was missing in Kentucky. Some virtual school courses have a modular structure that allow students to progress at their own pace, which might create an easier way to assess a student’s skill progression and readiness to move on to the next subject.

Whatever the case may be, I hope that Kansas City looks at all the research — the successes and failures — before they attempt such a large transformation.

In the Game of Picking Winners and Losers, the Government Picks Losers

Posted on by Christine Harbin

Google Alerts recently sent me this editorial about the debate surrounding the Ford Claycomo incentive package, by Samuel Lipari on OpEdNews. The following statement resonated with me:

The jobs were lost when healthcare costs of cars built in American plants like Claycomo became uncompetitive with those of Toyota and Honda.

This statement illustrates how, in the game of picking winners and losers, the government almost always picks losers. This is because the government chooses to protect companies and industries that the market has already rejected to some degree. If they were successful and viable on their own, they wouldn’t need to seek the favor of the government.

A knowledge problem exists. When the government picks winners and losers, it asserts that it knows the optimal level of something. In practice, such a level is impossible to determine. I do not know the socially optimal mix of any set of products and services, and neither do government officials. No one has access to perfect information. It would be beneficial if the state government stayed out of playing favorites in the market and instead let individuals determine their own optimal levels by engaging in unrestricted trade.

In the profit-loss system of our economy, the prospect of profits encourages individuals and firms to take risks and to innovate, and the losses weed out failure. By picking losers to subsidize, the government penalizes success and rewards failure, reversing to some degree the incentive structure that the profit-loss system would otherwise provide.

Instead of competing in the market on an even playing field, groups that are short-sighted and self-serving petition the government to tilt the field in their favor. We witness this behavior all too frequently in Missouri (in the form of targeted tax credits, rebates, sales tax exemptions, property tax abatements, occupational licensing requirements, and mandates, etc.). As a negative consequence of performing favors for a few losers, the government places winners at a disadvantage by making it harder to compete in the marketplace.

Government should cease offering incentives to losers in the market, and instead return the money to taxpayers to spend in the private sector on the goods and services that they desire.

State’s New Road Plan Involves Fewer Roads

Posted on by David Stokes

Today’s Joplin Globe (one of our favorite papers here at the Show-Me Institute) featured a story about the new MoDOT five-year plan, which involves much less money for new projects than in prior years. I have no issues with MoDOT’s plan. I am a transportation enthusiast, not a civil engineer, but from everything I can tell, MoDOT does an excellent job with our money. However, before I get to the meat of the matter, I do have a quibble with the way the agency expressed this funding decline in its press release:

Only one-third the size of the 2009 program, it barely has enough funds to take care of the existing system.

Is it possible that an extraordinary set of circumstances in 2009 — perhaps a massive stimulus proposal intended to get the economy moving — might be why the 2009 program was so large, and why future programs look small by comparison? Why, we had the American Recovery and Reinvestment Act that year, of course. I realize that this is a minor quibble, but comparing government funding in other years to 2009 will always be unfair. It’s like talking about Major League Baseball piching stats from 1968, or hitting stats from 1930 — you have to give some allowance for context.

But onto the bigger question: How will these upcoming annual appropriations affect Missourians? I, for one, am underwhelmed by the risks. For starters, it is only logical that at some point in a state not experiencing much population growth, expansion of the transportation system will level off. Eventually, an adequate system has been built, and if the population is no longer growing, it does not need much expansion. However, I do agree with the central point of this statement by the MoDOT chairman:

“It’s not just jobs that are related to the construction of the highways. Economic development follows transportation.”

The key for me is that I’d like to see as many of those transportation improvements as possible be private, rather than public. (Note: This observation in itself does not entail a critique of MoDOT, which is also pursuing expanded opportunities for public-private partnerships and tolling, in some instances.)

I could (emphasis on the could, not would) support a gas tax increase if it were used to fund necessary transportation improvements and system upkeep that the upcoming levels might fail to meet. I see no way in which I’d support a general sales tax increase for something like our transportation system that can be paid for in a much more targeted and efficient manner — be that tolling, gax taxes, or property taxes for local roads.

Thanks to Combest for the link.

In Which I Am Compared to the Devil

Posted on by John Payne

One legislative sponsor of legislation to cap interest rates on Missouri’s payday loans, responded to my op-ed on the subject in this Sunday’s edition of the Joplin Globe. The end of the response quotes a line from The Merchant of Venice about the devil’s ability to use scripture for his own purposes, as a way of criticizing my use of fairly basic statistics provided by the payday loan industry. I’m not entirely certain whether this is meant to imply that I am the devil, or that payday lenders are, but I find it oddly flattering. No one has ever written about me as though I possess superhuman powers.

Hyperbole aside, the piece does make some good points about the lack of transparency in the hearing. Only representatives of the industry were allowed to speak, and the chairman of the committee does own a payday lending business — a clear conflict of interest. Although I happen to agree with the industry in this instance, the political process should be an open one. In the long run, legislative stalling and one-sided presentations will not preserve a healthy democracy or the free market. (It is worth pointing out, however, that town hall meetings on the issue also presented only the opposing side of the debate. Admittedly, those were not official government hearings, but the principle remains the same.) An open market produces better outcomes than a monopoly, and I believe that rule applies just as much to ideas as to physical goods and services.

Finally, I think this phrase shows a misunderstanding of my argument: “Mr. Payne’s point that usury today is not as bad as it was in Shakespeare’s time provides little comfort to the working poor and to those trapped in a spiral of debt.” My point is that if payday lending is regulated out of existence, people who currently rely on those loans for short-term credit will be forced to seek out loan sharks every bit as brutal as Shylock, who will demand a pound of flesh from those who cannot pay up.

Emphasizing Homeownership Is Questionable Policy

Posted on by Christine Harbin

According to a Post-Dispatch article, the housing market in Missouri is very weak, to the surprise of probably no one. Housing groups propose the following solution:

[T]hey would like to see more state money directed to counseling and prevention, to help keep more people […] out of foreclosure. But with the tight state budget, they said a good first step would be a task force, to better organize and coordinate anti-foreclosure efforts, and to raise awareness of the problem.

It would be preferable if government stopped intervening in the housing market because then housing prices would return to their equilibrium level. The high foreclosure rate is yet another example of a government-created problem that would be better solved with less government, not more.

Throwing more state money at the problem is more likely to incite people to buy more expensive houses than they can afford than to reduce the rate of foreclosure. Programs that encourage homeownership already exist at practically every level in the government, but despite these programs, the rate of homeownership has remained steady over time. The $8,000 federal first-time home buyer tax incentive was recently extended, and there are additional ways in which Missouri homeowners can obtain financial assistance, such as a $1,250 tax incentive under the Missouri Homeowners Purchase Enhancement Program and additional incentives for energy-efficient home purchases or upgrades.

Is a task force really necessary “to raise awareness of the problem [of foreclosure?]” Last time I checked, everybody was well aware that the housing bubble burst.

When the government nudges individuals and families into homes that they may not want or be able to afford, the consequences are overwhelmingly negative. Missourians and Americans are better off when individuals live within their means, because fewer people will lose their homes, and fewer people will have to pay to keep others in theirs.

Owning a home may be preferable for some, but homeownership is not suited for all. There are financial and lifestyle factors to consider, and the government does not have enough information to know what is best for each individual and family. I know that homeownership is not for me. Although I am missing out on lucrative tax incentives from the state and federal governments, I choose to rent because it suits my lifestyle and budget better than owning. I have no desire to spend my time doing yard work, fixing things that break around the house, or cleaning guest bathrooms. Similarly, I don’t want to pay to repave a driveway, install new rain gutters, or have an insurance umbrella. I get much more utility from a new iPad than a new patio set. These are my preferences, which would be inappropriate to impose on others; similarly, it’s inappropriate for the government to set artificial incentives that encourage homeownership by individuals like me.

Additionally, encouraging homeownership over renting is poor policy. It could negatively affect the economic recovery, because it prevents workers from moving where the jobs are. Owning a home increases the cost of relocation because it ties an individual and his or her family to a geographic location. It is easier for a renter to relocate for a new job than for a homeowner to do so. Renters can relocate at the end of their lease or find a subletter, but homeowners have to sell their homes — a process that can take years.

Real estate is not a risk-free investment. I am reminded of an article that appeared last year in the Washington Post, “5 myths about home sweet homeownership,” in which Joseph Gyourko, chairman of the real estate department at the University of Pennsylvania, argues against the commonly held idea that homeownership is a investment with good returns and no risks.

Between 1975 and 2008, the price for houses of comparable quality and size appreciated an average of about 1 percent per year after inflation. You would have earned well over 2 percent per year after inflation had you invested in Treasury bills over the same period.

When a person invests her money, she assumes risk. Higher returns are supposed to be the payoff for accepting larger amounts of risk. With the possible exception of Treasury bonds, there is no such thing as a riskless investment. Unfortunately, real estate is all too often viewed as one. Buying a house is just like any other investment — there is a possibility that the purchaser will lose money. In some aspects, real estate is riskier than stocks because houses are not diversified (i.e., in the event of a natural disaster, a person’s entire investment is wiped out). Thorough research and cost-benefit analysis are crucial before potential home buyers make what will be one of the largest financial decisions of their lives.

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