Playing Favorites With Tax Credits

Posted on by Vince Smith

Last Thursday, the governor cut $47 million from the state’s annual $600 million tax credit program. This program grants incentives to businesses that officials deem as providing some benefit to the community. The cut was made in an effort to balance the state budget in the face of decreasing revenues from Missouri’s slow economy.

Only two weeks ago, though, the governor advocated an incentive package for Ford Motor Co. worth $15 million per year for the next decade, aiming to keep Ford in Missouri. Ford’s Claycomo plant employs 3,700 Missourians, jobs that no politician wants to lose to another state, especially when Missouri is facing unemployment between 9 and 10 percent. The governor said he may call the legislature into a special session to pass the the package, even before receiving assurance from Ford that the plant will stay if the bill passes.

Tax credits generally entail some amount of dead-weight economic loss, as has been extensively discussed on this blog before. By subsidizing those industries or companies that state officials view as most important, tax credits will tend to distort natural aggregations of supply and demand. And no matter how carefully they choose which companies or industries should be the recipients of tax credit policy, public officials have no special ability to choose the right mix of industries or predict which one might maximize economic growth.

Many companies have come to rely on maintaining their profits through use of those tax credits that have been subject to recent cuts. Telling them to tighten their belts while at the same time handing out $150 million in incentives to Ford just isn’t fair. Tax credit cuts are necessary, and more cuts are needed, but simultaneously crafting a piece of legislation full of tax incentives for Ford makes it look like the state is just playing favorites.

The Smoke-Free Cigar Bar and the Fully Clothed Revue

Posted on by Martha King

The Wall Street Journal recently highlighted some of the possible effects, including increased unemployment, of a bill on the governor’s desk concerning strip club regulation in Missouri. Similarly, Christine Harbin’s post earlier this month highlights some further potential economic ramifications of S.B. 586. Among other restrictions, included in the bill is a requirement that clubs close by midnight. There are further problems beyond the economic impact on those Missouri employees affected, though.

Tightening restrictions in Missouri gives an automatic boost to the strip club industries along Missouri’s borders, which in some cases may be even more unsavory. Closing the Missouri clubs earlier than in other states will also unwittingly create more post-midnight (including cross-river) traffic — a public safety concern that effects more people than the clubs’ patrons.

Well-intentioned measures frequently have unintended consequences.

Consider Springfield’s proposal to ban smoking in workplaces. Most workplaces are smoke-free by choice, but some businesses — like cigar bars and hookah lounges — are built around smoking customers. Although it’s likely that the ordinance will make some exceptions, those exceptions themselves create a tilted playing field for competition.

If you don’t like strip clubs and smoking (and I certainly do not), the simplest solution is not to smoke and not to patronize strip clubs or smoky bars. This an example of how the over-regulation of an industry potentially creates conditions favorable to further problems — while solving none of those it was intended to solve — and, in the process, harming the livelihoods of people who have elected to work in affected industries (after all, erotic dancers need to eat, too).

The fairest (and most effective) way to kill an unsavory business remains not to patronize it.

A Rose by Any Other Name …

Posted on by Joseph Steelman

Let’s call it what it is: a handout, a freebie, a bailout.

By rejecting automotive bailout funds in 2008 and 2009, Ford managed to shield itself from the political hit that was sure to result. As an article in the Columbia Missourian points out, now Missouri politicians are looking to find room in the budget for a $15 million per annum tax incentive program to provide the Claycomo Ford Plant with income tax breaks to reinvest in the plant. This time, the remuneration coming under the guise of tax incentives. As Show-Me Institute scholars have pointed out in the past, when the tax burden is reduced for one targeted business or industry, but overall government spending does not simultaneously decrease, the marginal tax rate for other taxpayers necessarily increases. In this way, Ford would be the beneficiary of taxpayer money.

This illustrates another flaw of the tax credit system, adding to an already long list of inadequacies. Public disapproval of the auto industry bailout in December of 2008 was well documented. This disapproval most likely stemmed from the general public’s disdain of using taxpayer funds to shore up profits for big business. The tax credit system does much the same, except that politicians and recipients of the tax incentives have figured out how to have their cake and eat it too. Missouri’s tax credit system effectively funnels money to a business or group of the government’s choosing while at the same time serving as a buffer to shield the politicians involved from losing political capital.

I understand the importance of keeping jobs at home in a competitive nationwide market, but empowering the government to play favorites through the use of tax credits and incentives is not the most effective way to accomplish this goal (if it’s a successful strategy at all). There are many other potential solutions that would not only help the Ford Claycomo plant stay afloat, but would also help in attracting other businesses to the state. Earlier this year, Show-Me Institute policy analyst David Stokes suggested that lowering the large commercial property tax surcharge in Clay County would help Missouri businesses located in that county retain more of their profits for reinvestment. Policies like this allow all businesses in an area to benefit, spurring reinvestment, stimulating growth, and widening the tax base. By improving the economic climate in general, benefits accrue to far more than just those lucky few businesses that government officials deem worthy.

Police Power and Public Finance: How A Proposed Local Government Mandate Will Trash St. Louisans’ Pocketbooks

Posted on by Thomas Duda

The city of St. Louis is debating a local legislative proposal that will, for the first time, impose a mandatory monthly fee for its residents’ garbage collection.

At present, the city supports its Refuse Division with an approximately $15 million annual appropriation, of which almost 90 percent comes from General Fund revenues. The controversial earnings tax is the largest component revenue stream of the General Fund, accompanied by property, sales, payroll, franchise, and license taxes, in addition to departmental fines and fees, intergovernmental revenues, and other fund sources.

If approved by the St. Louis Board of Aldermen, Board Bill 99 will institute a reported $11 monthly fee per dwelling unit for the provision of “Solid Waste Services.” Current spending on the Refuse Division totals $42.38 annually per resident, while the proposed fee should yield a comparable amount in revenue, considering our estimated number of occupied dwelling units.

Although I am confident that nearly all of my colleagues here would prefer that local government discontinue its direct delivery of service by perhaps privatizing the Refuse Division, I am personally more sympathetic to the notion that a public agency can operate according to market forces through a financing mechanism of user fees, passed through an independent enterprise fund.

This is precisely what Board Bill 99 attempts to do, which should make me and other free-market advocates happier than the status quo. That said, I believe that the proposed legislation presents many problems for those who support intelligent and limited allocations of public resources and deployments of governmental power.

The bill opens by obliquely identifying a fiscal problem:

[…] the City is no longer able to bear the entire cost of providing [solid waste collection and disposal services for residential dwelling units] from its general revenue […]

It then proceeds to claim authority to impose a trash fee under Section 260.215 of the Revised Statutes of Missouri. (Incidentally, this is a heavy-handed mechanism to foist the fee upon St. Louisans, because the Missouri Supreme Court held in Craig v. City of Macon, 543 S.W.2d 772 (1976) that “the accumulation of garbage is a serious threat to public health” and, as such, a municipally-legislated “mandatory service charge” to facilitate “solid waste disposal” and enabling legislation are “valid as reasonable exercises of the police power.”)

Board Bill 99 then begins a series of legislative contortions to target those who shall pay the proposed “service charge for solid waste collection and disposal services.” From the bill’s text, it appears that both a “Customer” — or recipient of a city water bill — and an “Owner” — the person on file at the assessor’s office recorded as owning a parcel on which a “Dwelling Unit” sits — share responsibility for payment of the fee.

Collection of the charge will be the responsibility of the city’s collector of revenue, who must consult with the assessor to “determine the number of Dwelling Units for which each Customer receives water service […]” The customer will receive a bill for the monthly charge.

If a customer fails to pay the assessed fee, then the collector, under Section 99.700 of the Revised Statutes of Missouri, “may proceed to file a lien upon the Property […] for the amount of delinquent Solid Waste Services Fee payments,” and also “shall have power to sue any Customer […] in a civil action to recover any sums due for Solid Waste Services Fees, plus a reasonable attorney’s fee to be fixed by the court.” (In other words, the bill conflates responsibility for payment of the fee with the source of refuse and the site of its disposal.)

Enforcement of the ordinance falls on the Building Division, which must verify that the solid waste services fees for a dwelling unit are paid prior to issuing a certificate of inspection for the property. A failure to pay the fee or a failure to seek exemption from the fee is an ordinance violation, punishable by a $500 fine for each day that the owner of the property does not have “appropriate and adequate” solid waste service.

The bill offers a fluid mechanism for exemption from the fee. In an intelligent move, the bill seems to envision that certain properties may not actually produce solid waste and, therefore, not be subject to the fine for violation (page 8, line 16). In a questionable and dubious infringement on the market for private waste disposal services, the bill unfortunately affords the refuse commissioner discretion to grant exemptions from the disposal fee for housing units if the units receive “adequate Solid Waste Services from a Private Solid Waste Contractor pursuant to a binding contract […]” (the St. Louis City Revised Code outlines regulations for private solid waste contractors). The city’s director of streets grants both “hauling” and “vehicle” permits to private trash haulers, who otherwise are ineligible to dispose of refuse in the city.

Legislative language is too often confounding at worst and annoying at best, but a close reading of Board Bill 99 elicits both reactions.

Firstly, how many city departments does it take to assess and collect a trash fee?

  • At least five, but probably more. (Confounding.)

Secondly, why is the city instituting a mandatory charge for trash service?

Wait, doesn’t this mean that the proposed “service charge for solid waste collection and disposal services” is nothing more than a subsidy to backfill unfunded grants of public money from the city’s General Fund?

  • Yes. (Confounding and annoying.)

Consider this: Board Bill 99 proposes to use the city’s police power to take additional funds from its residents in order to provide continued funding for the city’s Refuse Division, whose present operating funds derive from taxation and grant funding. St. Louis’ decade of legislation that pretended there was no cost associated with special interest tax forgiveness is hitting home hard — and at the worst possible time. We simply do not have the funds to continue throwing money into public systems and agencies that stand unaccountable to the vicissitudes of the marketplace.

Board Bill 99 displays an unwillingness to account transparently for the forces and the decisions that have led us to the point of its economic coercion. Furthermore, the bill fixes service fees according to current levels of Refuse Division spending, not the true costs of service delivery in a free market. In addition, the bill appears to authorize a mechanism through which the city could very well attempt to profit from the sale of recyclable materials that its residents dispose of (page 2, lines 3–5, 18).

I would prefer to continue receiving trash service than to pay for an unneeded performing arts facility. Money is fungible, however, and government mandates are inherently oppressive, so city residents will soon begin paying for Kiel in monthly $11 installments. No wonder so many “developers” choose to reside outside the city limits. They aren’t chumps.

My only question to St. Louis city government is whether it will honor the spirit of Hancock Amendment by allowing a public vote on this fee. Tax forgiveness requires no vote, but the last time I checked, the addition of user fees and new taxes does.

States Can Entice Businesses and Industries Without Tax Credits

Posted on by Christine Harbin

Supporters for incentive programs, such as tax credits and tax increment financing (TIF), claim that businesses would not locate in a particular state without them. However, many examples to the contrary exist.

The Wisconsin State Journal published an article that the film industry is thriving in Wisconsin, my home state, despite the fact that the governor reduced the cap for film tax credits in Wisconsin from $1.5 million to $500,000.

Why did Chicago writer and director Terry Green film in Wisconsin rather than some other state with more generous tax breaks for movies?

It wasn’t because of a fat state subsidy. According to the film’s Web site, Milwaukee was Green’s “first choice location” because of “the city’s rich history, vintage architecture and Lake Michigan’s horizon,” which made a “perfect backdrop for the 1919 period locations which simulate old world New York City.”

What’s more, Wisconsin is able to attract major blockbuster films without providing a cent of subsidy. According to an article in the Milwaukee Journal Sentinal, many scenes of Transformers 3 will be filmed in Milwaukee this summer:

Visit Milwaukee spokesman Dave Fantle says “Transformers 3” doesn’t qualify for that particular [tax credit] program, and that no public money is going to the production in Milwaukee.

”They are here because director Michael Bay fell in love with the Art Museum (the Calatrava addition) and wants to feature it in the film,” Fantle said, in an e-mail.

Wisconsin sets a great example for Missouri in this regard. Both states have many positive attributes (e.g., the river, the architecture, the skilled human capital, the history, etc.) which can attract business on their own merit. Firms will locate here for these reasons; they don’t need to be bribed with generous incentive packages.

As an example, the True/False documentary film festival in Columbia illustrates that the Show-Me State doesn’t require production incentives from the government in order to have a thriving film industry. My colleague, Audrey Spalding, is a fan of the festival. In the comment section of a previous post, she writes (emphasis mine):

Just last weekend, I attended the True/False Film Festival in Columbia, watched at least 13 documentaries, and spent all sorts money to eat out. And, I loved it, not because it was subsidized activity that otherwise wouldn’t occur in this state, but because it was central Missouri doing something central Missouri does well: Hosting an intimate film festival to screen documentaries about such disparate subjects as tween NASCAR, the war in Afghanistan, and the inventor of the floppy disk.

And, for clarification, I called Paul Sturtz, one of the founders of the festival. True/False, which is run by a nonprofit organization, does not receive any state tax credits or local tax incentives.

This is true for industries other than film, as well. For example, American Express decided to locate a new $600 million data center in Greensboro, N.C., without receiving a cent of assistance from the state or local government. This is a stark contrast from Missouri, whose state legislature proposes offering generous incentives to data centers as a means to lure them to the state, and also gave $28 million in state tax credits to IBM for locating a service center in Columbia.

Furthermore, when officials don’t offer tax credits, the state benefits because new businesses contribute revenues from sales and property taxes, none of which has to be reimbursed or abated by the state.

The optimal way to attract business to Missouri is to eliminate the uneven playing field that exists in the status quo and reduce marginal tax rates for all individuals and businesses — not just some.

Tax Credits Are an Undesirable Strategy for Missouri

Posted on by Christine Harbin

There was some classic rent-seeking behavior in the editorial section of the Post-Dispatch yesterday: An architect touts historic preservation tax credits. (Thanks to John Combest for the link.) According to his tagline, the author “has worked on many renovation projects on Washington Avenue,” a location that has received many of these tax credits. We witness this type of behavior all too frequently in Missouri — in the film industry, in the local agriculture industry, in the dental industry, etc. Although the actors may change, the plot remains the same: One group asks the government to adopt policies (e.g., tax credits, occupational licenses) that would benefit that group only, and at the expense of all other groups.

I want to take this opportunity to present arguments against the claims that the author made, and also to explain how tax credits are undesirable policy for Missouri. The author of the editorial states:

The tax-credit program may need fine tuning, but it is too important for St. Louis and Missouri to scale back — especially in difficult economic times.

The state can least afford giving tax credits to select firms and businesses during difficult economic times. Tax credit programs place an additional burden on taxpayers who are already hurting in difficult economic times. I don’t know whether the author has heard, but Missouri is out of money! Many other programs compete for these funds, so the government and taxpayers face an opportunity cost equal to the amount of the tax credit. Additionally, because unredeemed tax credits represent a future liability, they will negatively affect a state’s ability to recover from difficult economic times when it has to dole out money at unexpected intervals in the future.

Tax credits are used as a powerful tool for economic development all across the state, not only creating a considerable number of jobs but also providing many social benefits.

According to a study of tax credit cost controls recently released by Missouri State Auditor Susan Montee, 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 fiscal notes underestimated the total cost of the programs by $1.1 billion over a five-year period. For the historic preservation tax credit — the one for which the author specifically lobbies — the redemptions far exceed the estimated fiscal impact. From the audit report (emphasis mine):

[T]he fiscal notes accompanying Senate Bill 1 of the 1997 2nd Extraordinary Session, that established the historic preservation tax credit, estimated an annual fiscal impact of $14.3 million. The only other legislation impacting this credit through the 2008 legislative session was Senate Bill 827 in 1998 and the fiscal note for that bill indicated the impact of the statutory change was unknown. Based upon our methodology, the projected fiscal impact was $14.3 million annually and $71.5 million over the 5 year period, while redemptions totaled over $637 million.

This trend is not specific to tax credits for historic preservation; many other tax credit programs also fail to live up to their hype. For example, Missouri subsidizes the film industry with tax credits, but there have been fewer people employed in the industry since the tax credit program began.

Furthermore, targeted tax credits discourage economic development in the state by hurting businesses in non-favored industries. By providing special advantages to a select industry, targeted tax credits force everyone else in the market to compete at a disadvantage. An uneven playing field is not an optimal economic climate for fostering development.

A particular program may provide some social benefits, but the state has to weigh this against the marginal cost of devoting money to a particular project. The state needs to consider those competing needs carefully, because resources are scarce.

Quoting again from the Post-Dispatch editorial:

The ability of tax credits to create jobs and generate economic activity has been recognized by some of our neighboring states. Kansas has removed its cap on tax credits, and Nebraska increased its cap by $30 million.

If all of the other states jump off a bridge, should Missouri jump, too?

The great thing about the state system is that they function as living laboratories. Policymakers can observe the effects of policies in other states, determine whether they are successful, and decide whether these policies should be incorporated into their own states. Observing the effects of tax credit programs reveals that they do not result in their stated purposes, and spending more on them is unlikely to result in better outcomes.

Tangentially, a big downside to the editorial is the author’s lack of focus; he talks about tax credits for historic preservation in places, then talks about general tax credit programs in others. In the above quotation, the author seems to speak of tax credits in general, although this is unclear. In reality, Missouri issues more tax credits for historic buildings than any other state in the nation. Virginia issues the second most, but spends only half as much on them as Missouri.

But many of these developments would not be feasible without tax credits. […] The Washington Avenue loft district would not have happened without the tax credit program. […] The renovation of the Chase Park Plaza complex would never have taken place without the historic preservation tax credits. Tens of millions of dollars were invested in the project. […] Without the credits, significant private investment [in the Forest Park Southeast neighborhood] would not have been made.

Here, the author fails to consider the direct and indirect consequences that may have come into existence had the taxpayers of Missouri been allowed to keep their millions. The Chase Park Plaza and a renovated historical building are easily seen effects; however, the products and services that would have otherwise been consumed in the private sector represent the unseen effects. The tens of millions of dollars that were invested in the Chase Park Plaza were taken away from taxpayers who would otherwise have spent it on the products and services that they needed and wanted most. As Henry Hazlitt explains in Economics in One Lesson, for every public job created by the Chase Park Plaza (or historic preservation on Washington Avenue), a job has been destroyed in the private sector. Development is easy to see, but the unseen includes the jobs that were destroyed because the money that would have funded them was appropriated for other uses.

At a news conference, Gov. Nixon acknowledged that the state tax credit program is used “for good and solid purposes.” Last year, he was even promoting the expansion of tax credits for businesses, claiming it was essential for Missouri’s economy.

Yes, but the governor has also called for tax credit cuts. As an illustration of his support for cutting tax credits, the Associated Pressed dubbed him “cutter-in-chief.” In this regard, the governor sends a mixed message.

[T]hey are not giveaways.

Tax credits operate by reducing the recipient’s individual or corporate income tax bills. By reducing the tax burden of a single targeted industry or company, if overall government spending is not also reduced by the amount of that credit, the marginal tax rate for everybody else increases. This shifting of the tax burden from one party to others is certainly a type of giveaway. In addition, the fact that many of these tax credits are transferable means that they can be sold on a secondary market. Consequently, tax credits can ultimately benefit individuals who have nothing to do with the rationale for their issuance.

Much has been made of the tax credits costing the state $585 million last year — up 57 percent since 2001. This only indicates the program is working well.

If the Missouri Department of Economic Development were successful in developing the economy, it would eliminate the need for its own existence. That obviously hasn’t happened. However, if by “working well” the author means creating a system of corporate welfare, then I agree.

But lost revenue can be made up many times more by economic activity not otherwise generated. This means additional tax dollars for schools and essential services.

Tax credit programs are growing at a much faster rate than the state’s revenues, as communicated in the Missouri state auditor’s report on tax credits. This is not a sustainable trend, because continuing at this rate would eventually lead to the state issuing more money in tax credits than it takes in as revenue. From fiscal year 2001 to fiscal year 2009 in the state of Missouri, tax credit redemptions increased by 57 percent, while net general revenue fund collections increased by only 15.7 percent.

Additionally, many of these tax credits include property tax abatements, which means that the local and state government will receive no tax revenue from the new business. The new IBM service center in Columbia is a recent example.

Police Need Better Protocol for Dealing With Pets

Posted on by John Payne

As I noted in my discussions of the Columbia SWAT raid, police often shoot domestic animals in the course of serving warrants or even day-to-day police work. I blame this on the lack of clear police protocol for dealing with domestic animals, and a recent incident in La Grange provides us with another piece of evidence that we need more exact rules for these situations. A video of the incident is available online, but I must warn you that it shows a police officer shoot a restrained dog at the distance of about five feet. If you lack the stomach for that, here is a description from WGEM:

The video shows a LaGrange police officer shooting and killing a mixed-breed pit bull. According to police reports, the dog acted aggressive toward officers and a young child. But the owner is telling a different story.

“She was a big dog, she was playful, she liked to jump around. But she’s never acted aggressively toward anybody,” says the dog’s owner Marcus Mays.

Mary Coleman says the dog attacked her six-year-old daughter.

“I hear a big dog growling and I turn around and it was running towards us. I shut my daughter behind me and I started to yell and kick at it,” Coleman said.

It was late March when Coleman and her daughter were waiting for the bus. A dog wrestled out of its leash and came running at Coleman’s daughter. Coleman was able to fight off the dog and go back to her trailer to call police.

“It followed me down here and it started acting real calm again. I got the chain around it and fed it some dog food. That might have been the trick, feeding it dog food,” Coleman said.

According to the video, the dog looks calm as officers put a collar around its neck and only gets agitated when police use an animal restraint pole.

The video certainly does not give any indication that this is a vicious dog. At the beginning, it is leashed to a truck and when the officers try to collar it, the dog retreats instead of attacking. It’s at least possible that the dog was a danger to public safety, but given that the dog was restrained at the time, this seems like something that could be determined after a judicial hearing of some kind. Furthermore, the video does show that the police were having some difficulty taking the dog into custody, but they could have presumably tranquilized the dog instead of killing it.

This case once again highlights the importance of recording devices in holding government accountable. The proliferation of cell phone cameras and audio recorders cannot help but shine a light on unpleasant occurrences that previously would have been swept under the rug. However, unless we change the way that police deal with domestic animals, nothing will change in the long run. If we want to prevent the unnecessary shootings of family pets, localities need to start defining more precisely which conditions are necessary and sufficient for police to use lethal force against pets.

Washington Examiner on Governments Lobbying Governments

Posted on by David Stokes

The Washington Examiner has an excellent column by Timothy Carney about a subject that just drives me nuts: government using tax dollars to lobby other governments for more tax dollars. We have written about the issue of government lobbying before here at the Show-Me Institute, but I can honestly say that few things make me angrier. (Be sure to check out the comments from the last link!) From the Examiner piece:

State governments have overspent, largely on salaries that far exceed those in the private sector and benefits packages that dwarf what most Americans get. So now those governments are spending their money on powerful high-dollar lobbyists, with the paramount goal of getting access to more federal money. But the federal government is hopelessly in deficit.

The result is this: Local government officials are using your money to hire former government officials to ask current federal officials to give local governments more federal money — and future taxpayers will foot the bill for this whole racket.

Fueling the Fire

Posted on by Joseph Steelman

I guess the news has finally reached Washington. In a recent post on the Political Fix blog, Bill Lambrecht pointed out that the political heat around subsidies is increasing, and this time it is fueled by ethanol. Almost two years to the date after the Show-Me Institute’s release of its case study of the E-10 ethanol mandate in Missouri, another nonprofit research organization has published a study about the inefficiencies of federal ethanol subsidies. The Environmental Working Group‘s analysis of the ethanol subsidies concluded:

Americans have spent $17 billion since 2005 to achieve reductions in gasoline consumption that could have been achieved for free.

Today, proponents of ethanol are attempting to piggyback on the recent oil crisis in the Gulf of Mexico in order to gain support for their most recent push to increase the amount of ethanol in the U.S. gasoline supply and keep their subsidies. In a Post-Dispatch article yesterday, Jeffrey Tomich pointed out:

The ethanol industry is also lobbying Congress to extend a tax credit for blending ethanol with gasoline and maintain a tariff on imported ethanol — measures implemented years ago to help a fledgling industry grow. Both the tax credit and tariff are set to expire at the end of the year.

Letting the tax credits and tariffs expire wouldn’t be such a bad thing. Who knows, besides saving the American taxpayers $17 billion dollars, we might actually come up with an alternative energy idea that works.

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