In what now appears to be standard operating procedure, Missouri Gov. Jay Nixon visited Kirksville to announce the loan and to tout the promised jobs. His office also issued a press release, stating that “with Action Fund loans, high-tech companies like Wi-Fi Sensors can create quality jobs and help jump-start our economy.”

Furthermore, according to the governor’s press release:

The loan will allow Wi-Fi Sensors to expand its operation in Missouri. Under the terms of the loan, the company guarantees the creation of 40 new jobs and new investment of $4,069,000. While guaranteeing a minimum of 40 new jobs, Wi-Fi Sensors representatives believe they may create as many as 100 new jobs through this expansion.

Sadly, the TV station visited the Wi-Fi property on Monday, and found nobody. According to its report, Wi-Fi missed its first payment to the state in November 2010.

This sounds similar to the situation in Moberly. As you’ve read on our blog, the sucralose production company, Mamtek, promised more than 600 jobs and millions in investment to the city. The state promised millions in tax credits, and the city of Moberly backed $39 million in bonds for the projects.

And yet, Mamtek recently failed to make a debt payment, leaving the city on the hook for the money, and had not created the promised jobs.

Missouri senators are planning to investigate Mamtek, according to the Associated Press. Specifically, they want to investigate the DED’s role in the project.

But our state senators shouldn’t assume that Mamtek is an isolated failure. Tax incentives frequently fail to produce the jobs promised, and there have been many state audits and incidents suggesting that all is not right at the DED. Wi-Fi Sensors looks like the latest example.

We don’t have to look too far into the past to see other failures and near failures. Late last year, a company in Cape Girardeau promised 135 new jobs — if the state would kick in about $2 million in tax credits. It turns out that the head of that company was convicted of passing more than $90,000 in bad checks.

Policy Analyst Christine Harbin wondered at the time whether she should spend her time at the Show-Me Institute running tax credit recipients’ names through the Missouri courts database to see if she found any other matches.

Then, of course, earlier this year the DED awarded millions to a company for a development project that the courts had ruled as ineligible.

Don’t even get me started on the state auditor findings that the DED was inflating business creation and investment numbers reported for certain tax credit programs.

Like Chrissy, the Wi-Fi Sensors case has me tempted to go through the governor’s press releases touting job creation to see which projects are currently operational. Sadly, for Missouri taxpayers, the Mamtek and Wi-Fi failures suggest several others may have failed.

The post Just How Many Mamteks Are There? appeared first on Show-Me Institute.

At the 11th hour, legislators tacked on this misguided proposal to another bill that would limit tax credit expenditures. The end result is a 330-page bill that would accomplish little other than take benefits from some — in this case, the low-income elderly — and instead award benefits to private developers in Saint Louis.

In a recent state Senate committee hearing on the China Hub subsidies, Sen. Ron Richard opined, “I’ve got business people and friends of mine that live in Saint Louis that are begging for something new and creative. So we take a chance.” Unfortunately, when he advocated trying something new and creative, Richard did not suggest that the state create an environment that encourages all Missourians to be creative and entrepreneurial. His plan entails quite the opposite: gambling hundreds of millions of dollars, and leaving Missouri taxpayers on the hook.

The China Hub subsidies have three critical problems. First, the bill rests on the flawed notion that legislators are all-knowing, and that they have the ability to successfully pick and choose the industries, types of employment, and goods and services that should exist in Missouri. Second, the state government is already short on funds, and it cannot afford to give away hundreds of millions. Revenue lost to tax breaks for favored industries would need to be replaced by increased debt, reduced government spending, or — more likely — imposing a higher tax rate for all of Missouri’s less fortunate taxpayers.

Third, there has been no in-depth study of the costs and benefits of the proposal, nor do we know the level of commitment from foreign firms. The Saint Louis Regional Chamber & Growth Association recently released an eight-page brief about the China Hub subsidies, but it is by no means in-depth. It merely extends the unsupported assumptions that were built into the legislation.

Major questions remain to be answered. In particular: What’s the rush? We don’t know with certainty what the legislation will cost, or what business it may bring. Why should state government pick an economic winner, when it has such a poor track record for doing so? Also, how do we know that cargo warehouses have the ability to boost the Saint Louis area economy?

Legislators like Richard have a hunch, and they want taxpayers to bear the risk. As Harvard economist Edward Glaeser notes: “Too many officials in troubled cities wrongly imagine that they can lead their city back to its former glories with some massive construction project …”

Unfortunately for taxpayers, the strategy taken by state legislators is not a new one — nor is it effective. The China Hub subsidies rely on the same old policies that the legislature has tried before. Why will this time be any different? Within the last decade, we spent $1.1 billion on a new runway at Lambert, and it sits largely unused. Missouri lawmakers say that they want to rein in tax credits, but then turn around and award even more.

If lawmakers were serious about “taking a chance,” they would do something that is actually new and different, such as reducing the state income tax or eliminating tax credits altogether. This would create a more favorable playing field for all businesses — not just a select few. Is there anything creative and new about subsidizing the construction and operation of warehouses?

The best way for Missouri to grow the economy is to provide a business climate that encourages individuals to develop new ideas. If government officials genuinely want to try a new strategy, they should stop attempting to control the state economy from the top down. Creating another layer of bureaucracy — no matter how well-intentioned — will only impede this creativity and stifle growth.

Entrepreneurs in Missouri will seize upon the opportunities around them as soon as the government gets out of their way.

Christine Harbin and Audrey Spalding are policy analysts at the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

The post The ‘China Hub’: Another Flight of Fancy? appeared first on Show-Me Institute.

Transcript

Audrey Spalding: [testimony]

John Lamping: The name of your organization again?

Audrey Spalding: The Show-Me Institute

Bob Dixon: I was just curious in listening to your testimony there about the cost … if you did any sort of analysis with respect to the opportunity cost of — let's say we don't do it, and it goes somewhere else.

Audrey Spalding: I have not done that study. We haven't had time to do that study given that the ”Aerotropolis” tax credits, the amounts in particular, were recently agree upon. I think, I would assume: 1) that the tax credits are necessary to the creation of an international hub; and, 2) that such an international hub would be successful. Regardless, I think anyone can agree upon the fact that there is at least a possibility that this is not successful.

Eric Schmitt: I have a follow-up. Mr. Dixon?

Bob Dixon: I would be interested to, if you're going to present a study like that, I'd be interested to see some sort of analysis on that. Because a lot of times we do things, recently we sent to the governor's desk a phase-out of the corporate franchise tax, but I don't think that your organization was here to testify against that because of the cost. I realize it's a different issue, but it seems to be an opportunity that, if it's lost, we could certainly lose out, and I'd like to see us calculate that cost. Thanks, Mr. Chairman.

Eric Schmitt: Thank you. And I want to, first of all I want to thank you for coming up here and testifying. I totally disagree with your analysis. You made reference to the $480 million. Are you aware of how long it would take for the $480 million, if everything hit, how long that would take?

Audrey Spalding: Yes, I realize that would not hit immediately.

Eric Schmitt: Do you know how long of a period of time it is?

Audrey Spalding: I believe that it's more than a decade.

Eric Schmitt: Fifteen years. So, if everything hits, if we hit the freight-forward piece, if we're building facilities, if we have industry that we don't have in our state right now, and the only way that they get any of the credit is: they invest in a $20–25 million building, they're operating, they've created jobs, we have the kind of economic activity that we were seeking with the legislation that we don't have, I do not understand how an organization that seems to at least state that they're for economic growth cannot get behind an idea of incentivizing people to come and do things that we just don't have. So, my question is, if this is a real possibility, is it worth doing? If China, which is first-in, is gonna move, and wanna have the ground, which they don't have in Chicago, is that worth having in our state?

Audrey Spalding: Well, I think perhaps we approach this from a different, each from different standpoints, obviously. Now, we're talking here about this proposed international hub, and of course there have been talks of a China hub in other countries, so this would be a wonderful idea. Given that those talks are occurring, isn't it also at least possible that Saint Louis–area developers and other such entrepreneurs would be entrepreneurial enough to seize upon such an opportunity without state help?

Eric Schmitt: But if you don't have, my question to you is, if it doesn't happen, and I know you're seeking some sort of letter of, memorandum of understanding or something. If it doesn't happen, none of this revenue that we would be foregoing — because that's what it is, we're foregoing revenue — which I find it interesting, actually, as a Republican, I hear a lot … really, what we're doing here is we are reducing the tax liability to create and to have an industry in our state that we don't have. I don't find that offensive in any way. People campaign a lot about this, about job growth, about opportunities, about having and creating an economic environment in our state that's conducive to the creation of quality jobs — well, here it is. And being critical of a new idea that's bold isn't anything new or isn't anything unique. I'm sure the steamboat captains of the late 1800s thought that the railroads were something that threatened their interest, or that people would be inconvenienced as their homes or property might be bought out to make way for the new mode of transportation. But guess what? One city got it right. Chicago got it right and Saint Louis was standing on the sidelines. I don't want to be remembered … there's a mural in the Senate, I spoke of this last time, of the first senator, Sen. Benton, who was talking about having that westward expansion of the railroad from Saint Louis to the west coast, and we missed it, OK? What I'm saying this session is: This is important enough that I think we need to stand up for growing the pie. And I know there's going to be plenty of people that poke holes and have criticism, but that's what critics do, OK? It's our job, up here, to seize on an opportunity to grow our economy, and there couldn't be anything more real or more immediate than being in the center of an international trade hub. Any great civilization, any great city has been at the confluence of routes, of commerce, of industry. That's what we have an opportunity for, here. And just because we want to live in an ivory tower and we want to give great speeches about what things might look like if we lived in some utopian world — we don't live in that world. We don't live in that world. So we can choose to compete, or we can be economic isolationists and we can build a great wall around our state. I think it's our job in this committee and in this Senate in this session to break down those walls, to open up trade routes, to create opportunity for Missouri businesses, the ag community. We heard from the pork producers today. This is an opportunity that we haven't seen in this state. So I appreciate, I really do appreciate you coming up here. I appreciate your different point of view. I've seen some of your articles. I haven't had a chance to visit with you; we haven't had a chance to talk about the legislation. I'd be happy to do that with you more. I know that you were probably coming in to a room where there's a lot of support, so I do appreciate that, but I respectfully disagree. Thank you. Any other questions?

Victor Callahan: Railroads were federal stimulus.

Eric Schmitt: Any other witnesses in opposition?

Christine Harbin: [testimony]

Eric Schmitt: Before I go, I just want to make note that it sounds like you're advocating more money for social spending, and, if I recall correctly, the Show-Me Institute was against the autism bill last year.

Christine Harbin: I'm sorry?

Eric Schmitt: The autism bill. I believe the Show-Me Institute had an editorial piece against the autism legislation last year, so I'm glad to see that the Show-Me Institute is advocating more money being spent on social programs now.

Christine Harbin: That wasn't my implication and I didn't work on that particular thing.

Eric Schmitt: Any questions? Sen. Dixon.

Bob Dixon: Earlier in your testimony, you referenced my question of the previous witness, and then in your reference to the St. Louis Business Journal, I believe in their editorial, before I ask you a question I'll just mention: I probably take greater offense at being called "out-state." I'm from Springfield, and I don't have … you know, I'm not in the Saint Louis area, and I support this legislation wholeheartedly because I think it's good for the entire state. But that, I'm more concerned about that mentality that we're not in-state, we're out-state, than I am anything else, because we don't need those kind of divides in Missouri, and that's part of what has hampered progress in the past. But my question specifically is, going back to what I asked of the previous witness, if you would please clarify what you said pointed to that question, because I still don't see anything where we're talking about the lost opportunity, and where that cost has been calculated. And then, specifically what services — and you used the word "services" — would be. That also is a concern, but I won't go into a big statement about that, because I don't believe the state provides "services," or if that fits. But if you could enumerate on what services you think we need to be funding with those "opportunity dollars," if you will, and then, also, how that testimony would have addressed my previous concern.

Christine Harbin: Sure. When I say "services," I just mean other government programs. I'm speaking in very general terms. I'm talking about education …

Bob Dixon: Bureaucracy.

Christine Harbin: Yeah, building roads, fixing potholes, stuff like that.

Bob Dixon: Those basic things I can agree with are functions, but if we're talking about "services," there's a lot of people roaming these halls talking about benefits for this that and the other, which, in my opinion, are not a function of state government. To that point, that answers that question. Specifically to the lost opportunity cost, if you could address that.

Christine Harbin: Certainly. Well, I would say that it's impossible to calculate with certainty what could have been in the absence of this policy. However, what I described in my testimony is … When you have a large public works program like this, when you have a large tax credit program like this, people are forced to, taxpayers contribute more of their earnings, a greater percentage of their earnings towards the program. And so, as a result, it means that they have less money to spend in the private sector.

Bob Dixon: Potentially.

Christine Harbin: Potentially. Because otherwise, they could see a reduction in services, too. It's some combination.

Bob Dixon: Some of that, though, I would have to say, and I'll yield back to the chair, but some of that also comes from the concept that any money not collected by government is actually just tax money that we didn't collect, which I fundamentally disagree with that whole mindset. A tax credit is not, and the courts even have ruled on that in various cases, one in particular, but those are not state dollars.

Christine Harbin: Agreed. I agree that it's not state dollars. I'm just saying that, as a consequence of programs like this, Missourians, taxpayers, have less money to spend themselves.

Bob Dixon: Potentially.

Christine Harbin: Potentially. It's difficult to calculate with certainty how much is taken out, but they're going to eat at fewer restaurants, they're going to spend fewer nights in hotels …

Bob Dixon: The very strong likelihood also exists that, in the long term, because of the economic growth, we could see substantially — and perhaps exponentially — more.

Christine Harbin: Agreed.

Bob Dixon: OK. I just wanted to make sure that, and again, I would like to emphasize that I would love to see some sort of a more exhaustive study on that end. Thank you. Thank you, Mr. Chairman.

Eric Schmitt: Sen. Richard.

Ron Richard: Mr. Chairman, just briefly, as someone who's done in Joplin, the lady mentioned my city, who's done most of the economic development for the Saint Louis region, us poor people that are barefoot and corncob pipes have done more to back up Saint Louis and the community in Kansas City than frankly some of the Saint Louis–elected people. And the reason we have is because we understand what's at the other end of the highway, which is Saint Louis. And as they progress and do well, the rest of us will, too. Everything that the Show-Me Institute is for, I'm against, and everything they're against, I'm for — and we're both conservatives, I don't understand that. I mean, we fought for organization on the Bombardier in Kansas City, and it was a stretch, didn't work. This may be a stretch, but I've been to Saint Louis somewhere almost twice a month, as in Kansas City, and I've got business people and friends of mine that live in Saint Louis that are begging for something new and creative. So we take a chance. And I think the chairman has a great opportunity here to take a chance on something. If it doesn't happen, nothing is given away — no tax credit. Granted, the lady's right, tax credits may be a little overwrought, and I think there's a mechanism to address that, and the chairman has a plan for that. But I will say that, until Missouri is ready to take a chance on something new, we'll just be a lackluster state. We will have all our kids move away, our universities will disintegrate, our highways will disintegrate, our schools don't have to worry about opening ‘cause there'll be no one going to school, ‘cause there won't be tax money one of these days. So, I respect the lady's opinion, again I think we take a chance, I think we move forward, and I support the chairman and I will support Saint Louis every time I get a chance.

Eric Schmitt: Thank you. Any other questions? Sen. Lamping.

John Lamping: I'm curious about a couple things, actually. First of all, you were kind enough to quote the St. Louis Business Journal, and I'm curious to know what the Show-Me Institute's opinion would be on their proposed outcome, which is, we simply offer $60 million tax credit to freight forwarders. So what's your opinion of that idea?

Christine Harbin: I didn't study that particular proposal.

John Lamping: Well, that was the second half of the editorial you just quoted.

Christine Harbin: Yeah, sorry. Similar to how you said earlier in response to the question and answer session with Audrey: You're either for it or you're against it. I testified in front of the Tax Credit Review Commission last September. And I have been a very vocal supporter of the total elimination of targeted tax credits in Missouri. And that holds true here, too. I think that Missourians would be better off if they were able to keep their earnings and spend it themselves in the private sector. So, I do not support kind of a halfway …

John Lamping: So you like the idea of suggesting that some of the Business Journal editorial is correct in pointing out the fact, in your opinion, that the rest of the state subsidizes it, but you disagree with the conclusion they come to — you don't support.

Christine Harbin: I agree with their criticisms of the project. I don't fully support their policy recommendation.

John Lamping: Second thing, probably unlike most of the members of this board, I appreciate you coming forward today. As someone for who economics is kind of a hobby, I study … I'm a member of the Show-Me Institute, as well as many other think tanks, as I like to stay abreast and current of different thoughts and ideas. But one of my favorite economic terms that all my teachers used over and over again, and us in business and finance always laughed when we think about this, is this concept of all things being equal. And that's something that, your study of economics sounds like from school. And that's where the theoretical world comes in and they say, "Well, all things being equal, then, well, here's our supply line, here's our demand line, we're going to now go forward with our great discourse and our great study, assuming all things are equal." I think what the chairman spoke to today is the reality that the world, all things are not equal. There's the theoretical and there's the reality. And as much as I enjoy sitting down and going through the theoretical. I think that it helps for, and again, maybe that's your role. Maybe that's your role in the discourse: It's to be the theoretical go-to. Unfortunately, in this capitol building, it's all about the reality and the real, and all things are not equal. And when it comes to economic development in and around this region, clearly all things are not theoretically perfect. So, I appreciate you coming forward, it's a really interesting part of the testimony, and I look forward to your next publications.

Christine Harbin: Can I respond to that?

Eric Schmitt: Sure.

Christine Harbin: To that last point, I agree that economics is separate from natural sciences because it can't really be studied in a laboratory, we're kinda going through it, you know, as we are. However, I think that my focus here is very reality-based. I think that the idea of this particular policy awarding close to half a billion dollars in tax incentives to a small group that is … The hope is that it will encourage trade, but I think the reality is that it won't.

Eric Schmitt: OK, let me follow up on that. If it doesn't, do we expend any tax credits?

Christine Harbin: If it doesn't encourage trade?

Eric Schmitt: Correct.

Christine Harbin: You mean after we go through the policy? After we enact it?

Eric Schmitt: Look, I do want to — and I do appreciate you coming out — I just want to make, I want to understand, know that you understand the bill …

Christine Harbin: Oh, I read it.

Eric Schmitt: So what is your understanding of how the tax credits are awarded for facilities?

Christine Harbin: It was what Audrey outlined. We offer tax credits to support the subsidization of these warehouses.

Eric Schmitt: But how does that work? How does that work?

Christine Harbin: I don't have the text of the legislation in front of me.

Eric Schmitt: Well, you're testifying against the bill. OK? And I'll just explain how it works, which is, you build a building. It's a $25 million building, you operate it, you get a portion, it's screened over five years, each year you have to prove that you're getting the economic activity and the jobs. So, if those buildings never get built, my point is, if the buildings never get built, and we don't have the trade, there's never any tax credit. So, it's a very different reality from what you're explaining, which is, we're spending 500 million and hoping that people come. The reality is, if they come, at that point we have the infrastructure because of the trade. So it's just a, it's different, it's a different sequence of logic here.

John Lamping: Mr. Chairman, my guess is, what she really means to say is that she's against the Business Journal's recommendation to just do the freight-forward piece. ‘Cause that would then show no evidence of successful …

Ron Richard: [Sen. Richard's microphone was turned off, so this portion is inaudible]

John Lamping: Maybe we'll find out in Friday's edition.

Christine Harbin: Well, my response is: If it's such a great idea, then there's a lot of entrepreneurs in Saint Louis with great ideas, with multiple skills — let them take risks and bear the burden.

Eric Schmitt: So, it'll just happen?

Christine Harbin: Yeah, incremental change.

Eric Schmitt: Sen. Dixon.

Bob Dixon: Yeah, I just want to follow up on the comments from earlier, I wanna make it very clear. I failed to thank you for coming. I want to make it very clear that I really do appreciate you coming, as several others have said, and I appreciate the Show-Me Institute for the stands they've taken on several things, principled stands. We'll just have to agree to disagree on this one, but it takes a lot of courage to come and testify in a room full of people that are in favor of something, testify against it. And I do appreciate it.

Christine Harbin: Thank you.

Eric Schmitt: Any other questions? Thank you again. And I really, I do appreciate it. Obviously I have … I believe in it. You're passionate; I'm passionate; that's what this process is all about. So, I do appreciate you taking the time to come up to Jeff City; it's not easy to come in and express at one of these.

Christine Harbin: Thank you.

The post Testimony on the ‘Aerotropolis’ Bill appeared first on Show-Me Institute.

Show-Me Institute Policy Analysts Audrey Spalding and Christine Harbin will be on the Mike Ferguson show on Columbia’s 93.9 FM “The Eagle” around 4:30 p.m. today. We will talk about the testimony that we delivered before the Missouri Senate Jobs, Economic Development and Local Government Committee on Wednesday, about the Aerotropolis proposal.

The written version of our testimony is available on our website. This is a topic that we have discussed frequently lately here on the blog.

The post Audrey Spalding and Christine Harbin Talk Aerotropolis With Mike Ferguson on the Eagle 93.3 FM This Afternoon appeared first on Show-Me Institute.

The post Food Trucks and the Free Market: What are People Saying? appeared first on Show-Me Institute.

Many attorneys general have provided direction in their own states, but this group does not include Missouri Attorney General Chris Koster. By keeping quiet on the issue of enforcing the federal health care law, Koster increases the uncertainty in Missouri to a level above that in other states, which hurts business development.

When the government enacts policies that extend its authority to new areas, such as the impending health care regulation, it creates an unknown environment. Economists call this, “regime uncertainty,” a concept developed by the economic historian Robert Higgs. Because the health care regulation is so complex and convoluted, members of the business community are left scratching their heads. Instead of growing their businesses, they will spend time and resources figuring out how to comply.

Regime uncertainty has real, immediate effects for economic activity. It leads businesses and individuals in the private sector to hesitate to make investments or hire additional people. Koster’s silence also makes it difficult for government agencies in Missouri to plan for the future. As officials develop budgets, they need to know whether and how to allocate resources to comply with the health care regulation. The operations of multiple state agencies in Missouri would be impacted by the potential invalidation of the health care law.

Many experts expect that the question of whether the health care regulation is constitutional will go all the way to the Supreme Court. In the meantime, Missouri is in a state of limbo. Regardless of whether a higher court overturns the law in the future, businesses, lawmakers, and individuals in Missouri need to know how to act in the present. Do they need to adhere to the federal health care regulation, or don’t they? As the Republican leadership recently posited, “Must state officials follow its unconstitutional dictates, or should we ignore them as we see the top officials of other states doing?”

Koster didn’t sign onto the multistate lawsuit in Florida, despite having ample opportunity, along with resolutions from the state legislature, the will of the electorate, and his fiduciary duty to consider. The 26 attorneys general who signed onto the lawsuit in Florida have demonstrated that they find the federal takeover of health care to be unconstitutional. Missourians are left to wonder, what does Koster’s hesitation indicate? Does he support the lawsuit or oppose it?

What do we do now, Mr. Koster?

Christine Harbin is a policy analyst for the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

The post Missouri: A State of Uncertainty on Health Care Regulation appeared first on Show-Me Institute.

I credit lawmakers in Missouri for being forthcoming about the fact that the purpose of this tax hike is to generate tax revenue, not to discourage bad behavior. Lawmakers often attempt to discourage smoking on moral, ethical, or public health grounds with higher taxes, but that’s not the issue here — money is. No matter the reason for higher cigarette taxes, though, this policy won’t solve the state’s money problems. The tax hike will cause smokers to buy fewer cigarettes. Some will smoke less as a result, and others will quit entirely. Their personal health may benefit, but they won’t contribute any cigarette tax revenue.

Those who do continue to smoke will buy fewer cigarettes in Missouri because they will no longer be getting a comparative price break. By keeping its tax rate low relative to other states, Missouri encourages those who do smoke to buy their cigarettes within the state, and it motivates non-residents living close to the border to shop here, as well. After a rate increase, smokers living near the border would be much less likely to buy their cigarettes in Missouri when they come here to work and to attend sporting events downtown, instead buying their cigarettes in their home states and generating tax revenue there.

The eight states that border Missouri have an average tax rate of $0.90. If lawmakers hike the tax rate by $1, which is what they propose, the tax rate in Missouri will exceed the tax rate in all but one of its border states. Individuals will tend to vote with their feet and buy cigarettes elsewhere, and the state will see less tax revenue as a result.

Missouri residents and businesses would be better off if the state government tried other strategies to close the budget deficit instead. State officials should reform spending and operate within their means, looking for ways to lower tax rates across the board rather than raise them. Missouri would attract more business activity and, consequently, more tax revenue if policymakers fostered a low-tax environment.

Christine Harbin is a policy analyst for the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

The post ‘Sinful’ Tax Collections Won’t Fix Budget Woes in Missouri appeared first on Show-Me Institute.

I credit lawmakers in Missouri for being forthcoming about the fact that the purpose of this tax increase is to generate tax revenue, not to discourage bad behavior. Lawmakers often attempt to discourage smoking on moral, ethical or public health grounds with higher taxes, but that’s not the issue here — money is. No matter the reason for higher cigarette taxes, though, this policy won’t solve the state’s money problems. The tax increase will cause smokers to buy fewer cigarettes. Some will smoke less as a result, and others will quit entirely. Their personal health may benefit, but they won’t contribute any cigarette tax revenue.

Visit the Southeast Missourian’s site to read the rest. And, if you’d like to read more on the subject, check out an earlier commentary about cigarette taxes by former Show-Me Institute editor Tim Lee.

The post Cigarette Taxes Won’t Solve Missouri’s Budget Problems appeared first on Show-Me Institute.

When Missourians passed Proposition C last August with more than 71 percent of the vote, they signaled opposition to the individual health insurance mandate that is central to the federal health care reform law adopted by Congress earlier this year. Policymakers in Missouri should take steps to represent their constituency’s resounding opposition to the measure. Missouri’s attorney general, Chris Koster, has the opportunity to do just that by joining 20 other states in a Florida lawsuit against Obamacare. Governors and attorneys general who decide to participate have until January 10 to join the suit.

There are many reasons why Missouri should join the health care reform lawsuit. The individual mandate requiring Americans to carry insurance overreaches the federal government’s authority under the Constitution’s commerce clause. Health care is just one among the many goods and services that individuals in Missouri consume, and courts have never interpreted the commerce clause as giving lawmakers the authority to require individuals to purchase a product.

The case that’s being heard in Florida is one of the few among the two dozen pending challenges to the new health care reform law that also contests the law’s expansion of eligibility requirements for Medicaid, the joint federal-state health insurance program for the poor. Expanding Medicaid would burden the state budget, and may exacerbate the existing deficit. Lawmakers in Missouri have already made cuts to education and public safety, and other cuts to essential services — or increased taxes — could be necessary if the Medicaid program were expanded.

Medicaid is already one of the largest expenses in Missouri’s budget, and the new health care law depends on an expansion of Medicaid for its projected increase in insurance coverage. In fiscal year 2008, Medicaid spending in Missouri totaled more than $7.09 billion. The federal government pays for the majority of the expenditures, but Missouri taxpayers covered $2.66 billion, or more than 12.5 percent, of the state’s total $21.2 billion budget. Although the law initially requires the federal government to absorb the full cost of the expansion, states could eventually pay 10 percent.

The states that are party to the health care reform lawsuit argue that the law impinges on state sovereignty by requiring the use of state funds to cover a much larger share of low-income people through Medicaid. Not only does it undermine state autonomy, it is also unnecessary.

There are alternative ways to provide health care to uninsured and low-income populations without restricting individual liberties and freedom of choice. When the government allows more competition and choice in insurance markets, people can better choose how to balance cost with their own relative tolerance for risk. One successful strategy would be to eliminate the way in which insurance is tied to employment, and instead encourage health savings accounts (HSAs), which would allow individuals to purchase portable, cost-effective policies, save for foreseeable health-related expenses, and hedging against unknown future risk.

Top-down, centralized plans can’t take into account the many varied needs and preferences of the hundreds of millions of people such plans will inevitably affect. By signing on to this Florida lawsuit, Attorney General Koster can help signal that Missourians are capable of making their own health insurance decisions without an intrusive federal mandate.

Christine Harbin is a policy analyst for the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

The post Missouri’s Attorney General Should Join Health Care Reform Lawsuit appeared first on Show-Me Institute.

Year end is a time to reflect — and to think ahead. In the holiday spirit, the Show-Me Institute has compiled a list of five New Year’s resolutions for state officials, to promote better government for 2011 and beyond. Taken together, these policy changes have the potential to propel Missouri’s income and job growth into the front ranks.

First, lose weight. The Nov. 2 election showed that the overwhelming majority of Missourians (and Americans generally) want smaller, less intrusive government and reduced taxes. Missouri legislators should therefore unite to kill pork barrel spending projects and make major spending cuts.

Municipalities need to rein in runaway pension costs for city employees, including firefighters and police. They should also consider privatizing the provision of water, electrical power, and other services. The Show-Me Institute has produced a wealth of research demonstrating the benefits of privatization, which creates much-needed cash through the sale of public-owned assets and contributes to municipal revenues through the addition of new taxpaying entities in the private sector. Research shows that privately owned utilities consistently provide more efficient services than their public-sector counterparts.

Second, stop meddling in other people’s business. The Show-Me Institute has spotlighted the proliferation of needless licensing requirements that do nothing to promote public safety in businesses as different as home heating and air conditioning work (HVAC) and African hair-braiding. Such requirements are often promoted by established businesses as a means of inhibiting competition and choice.

Third, give families real school choice. Our research has consistently shown that education is improved when parents and students are given more choices and traditional public schools face greater competition from charter and virtual schools. Adjusted for inflation, we spend four times as much for education in urban areas today as in 1960, but educational achievement is no higher. Today, the Saint Louis and Kansas City school districts spend more than $15,000 per pupil — more than all but the most expensive private schools. Charter schools provide a real opportunity for poor students stuck in failing schools. They also enable teachers and administrators to innovate more freely, and force other public schools to improve their performance in order to compete successfully.

Fourth, halt the silly business of awarding specialized tax credits to favored enterprises. In one of my op-eds about the inanity of tax credits for favored industries, I pointed out that government policy should not prefer filmmaking over, say, hog farming, “simply because one is considered to be more glamorous.” Most of the local jobs created by Missouri film productions like Up In the Air were both low-wage and temporary — many lasting only a single day. Missouri should do away with its development tax credit programs, which have a record of failing to boost either income or employment — even if you do like George Clooney.

Last but not least, repeal the state income tax and replace it with a broader sales tax. The adoption of such a plan in 2011 would be the single most important step that Missouri could take to move Missouri to the front of the pack in terms of growth. The noted economist Arthur Laffer, who spoke at the Show-Me Institute in October, observed that during the past decade, the nine states without a personal income tax have “outperformed those states with the highest personal income tax rates by 26.5 percent, and have outperformed the U.S. average by 20 percent.” Even more impressive, those nine states “outperformed Missouri by a whopping 41.5 percent.” Eliminating the income tax would encourage people to work and save more, crucial factors for economic growth. A broader sales tax can also be balanced with mechanisms that would compensate those with lower incomes for any potentially regressive effects.

In the past, it has often seemed that major changes originate on the coasts and slowly make their way to the heartland. I think that flow has been reversed during the past year and a half. I believe that Missouri — and the heartland — will play a leading role in our nation’s economic recovery. We will do so through a renewed commitment to free enterprise.

Christine Harbin is a policy analyst for the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

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In an article on the Missouri Watchdog, Brian Hook links to a new study from Tax Foundation. It concludes that letting the Bush tax cuts expire would negatively affect revenues for states that allow residents to deduct the amount that they pay in federal income taxes — which includes Missouri. This is because if the tax cuts expire, a high-earning individual living in Missouri would pay more in federal taxes. He or she could therefore deduct more from state income taxes, and Missouri would receive less revenue.

I want to highlight my statements in the article regarding the marginal effects of this policy in Missouri, because it’s a concept fit for Show-Me Daily. From the article:

If the tax cuts are allowed to expire, taxpayers in Missouri will experience higher tax rates, said Christine Harbin, an analyst with the Show-Me Institute, a free market think tank. The top marginal effective tax rates on income would increase to 46.69 percent under the Democrat’s plan, or 41.13 percent under the Republican’s plan.

“Because they will experience reductions in their take-home income, it’s likely that fewer individuals and businesses will decide to come to Missouri to conduct business,” Harbin told Missouri Watchdog.

“People tend to think on the margin, and a marginal number of individuals and businesses will elect to go to other states where the cost of doing business is lower. For those individuals and businesses that do remain in Missouri, this reduction in net income will mean that they will have less money to save or spend.”

The tax policy will also likely have negative consequences for the state budget as well, Harbin said.

“A reduction in general revenue collections will mean that the state will have to raise tax rates further, cut expenditures or borrow more to cover the shortfall,” she said, adding changes in tax policy could further discourage individuals and companies from remaining in Missouri or relocating to the state.

It’s additionally notable that the expiration would negatively affect all taxpayers, not just those in the highest marginal income bracket, because the Bush tax cuts reduced marginal income tax rates for all earners. The Bush tax cuts introduced a new 10-percent bracket; previous to this, the lowest rate was 15 percent. If the Bush tax cuts expire, low- and middle-income earners would also experience a tax increase.

I hope that this reduction in state tax revenues doesn’t lead to the unfortunate consequence of eliminating federal deductibility in Missouri. Contributors to Show-Me Daily have discussed the negative consequences of income taxation before.

If the tax cuts were extended, individuals living in Missouri would be better off because they could keep a greater share of their income, and the state government in Missouri wouldn’t experience a consequent reduction of revenue.

The post Letting the Federal Bush Tax Cuts Expire May Have Negative Revenue Consequences in Missouri appeared first on Show-Me Institute.

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.

The post Commission Recommends Positive Changes to Missouri’s Tax Credit Programs appeared first on Show-Me Institute.

As has been discussed on this blog before, tax credits are not free money. A tax credit is a dollar-for-dollar reduction in an individual’s or company’s tax bill. In short, if a state awards you a $1 tax credit, that credit reduces your tax bill by $1, and the state’s revenue by $1, all else being equal. Looking at yesterday’s tax credit bonanza, Michigan has promised away more $2 billion of its future revenue. This strikes me as less than prudent, especially because the AP has recently reported that Michigan is already facing a budget deficit of more than $1 billion. It will also have negative fiscal consequences for the state’s other residents, because when targeted industries are exempted from paying taxes, the marginal tax rate for everybody else will rise if government spending doesn’t decrease by the amount of the credit issued.

This is terrible news for current Michigan residents. The governor justifies the $2 billion in credits by promising, in her press release, a great deal of new economic activity that will be spurred by the public subsidy. Michigan officials anticipate more than 6,000 new jobs, and a retention of more than 216,000 jobs.

They should know better than to make such lofty promises of job creation. The Mackinac Center for Public Policy, a nonpartisan research and educational institute, showed in an extensive study that the award of tax credits rarely creates the economic activity it promises. According to the Mackinac study of tax credits awarded in Michigan during a 10-year period, 127 projects were approved (just like the projects announced by the governor’s office yesterday), but only 10 projects had created the number of jobs promised. Michigan’s tax credit program success rate is a minuscule 7.87 percent.

Michigan’s tax credit failure rate fits with Show-Me Institute Research Analyst Christine Harbin’s recent observation, in her testimony before the Missouri Tax Credit Review Commission, that when it comes to subsidizing economic activity, governments frequently end up supporting industries in decline:

The government has no special ability to predict which businesses and industries will succeed. Yet tax credits are an attempt to identify and subsidize future successes. Unfortunately, in the game of picking winners and losers, the government almost always picks losers. This is because tax credits are an attempt to protect companies and industries that the market has already rejected to some degree. If they were successful and viable on their own, these companies and industries wouldn’t need to seek the favor of the government.

In the context of Harbin’s analysis, the following statement from the press release is downright depressing: The tax credits awarded to Chrysler and Ford will “[guarantee] the auto industry’s long-term future in Michigan.”

But there is good news for Missouri residents. The Michigan release specifically notes that two of the companies awarded tax credits were considering locating in Missouri.

Michigan awarded one company $1.5 million in order to “convince the company to expand in Michigan over competing sites in Missouri and Illinois.” Michigan awarded another company $1.1 million “to expand in Michigan over a competing site in Missouri.”

If we consider only the promised economic activity, it may appear that Missouri has lost out on some opportunities for job creation. However, now that these companies will locate in Michigan and receive subsidies from Michigan taxpayers, Missouri residents will not have to pay the millions it would have taken to persuade the companies to move here (assuming the state doesn’t decrease spending elsewhere in its budget to make up for the resulting revenue loss).

Furthermore, we have to keep the tax credit failure rate in mind. Tax credit awards, according to the Mackinac study, rarely result in the promised economic activity. More likely, Missouri would end up with the cost of the tax credit, but without promised resulting job creation and growth.

I am more excited and optimistic about the economic growth that has, and will, come about in Missouri as a result of widespread individual enterprise.

P.S. — I hope that none of these Michigan tax credits will be awarded to convicted embezzlers, although that has happened in the past.

The post BILLIONS: Bad News for Michigan, Great News for Missouri appeared first on Show-Me Institute.

Not surprisingly, every person who has testified before the Missouri Tax Credit Commission during its regional meetings has spoken in favor of tax credit programs — primarily because those people, who work in industries subsidized by state tax credits, directly benefit from the programs.

Tax credit programs defeat the purposes that supporters usually cite in their favor: encouraging employment and helping Missouri compete. In short, tax credits are a form of wealth redistribution — we all bear the cost, but only special interests and favored industries benefit.

Tax credit programs are not as effective as advertised. The state auditor recently found that fiscal notes underestimated the total cost of the programs by $1.1 billion over a five-year period. Tax credit programs have failed to deliver on their promises in other states, too. The Mackinac Center for Public Policy in Michigan released a study in which it compared job estimates made by Michigan’s economic development agency accompanying tax credit awards to the actual outcomes of those programs. Mackinac found that only 7.9 percent of projects were completed on time and produced the number of jobs promised. Missouri cannot afford this failure rate.

A particular program may provide some social benefits, but the state has to weigh this against its cost. Dollar signs are missing too frequently from these discussions. Whenever the state of Missouri awards a tax credit, that credit comes at the expense of other activities. A dollar spent on tax credits is a dollar that the state must cut from another program. The state should consider whether the social benefits of, say, increased wine production, film production, or vacant land assemblage are worth cutting the budget of another state program.

In addition, another recent audit by the state auditor found that the Department of Economic Development (DED) had a 43-percent error rate just when recording estimated jobs and investment figures from businesses receiving enterprise zone tax credits. In one instance, the DED inflated a business’ investment estimate by 333 percent.
Given this amount of misinformation, how can the state possibly have a chance at encouraging the right businesses and industries? The government has no special ability to predict which businesses and industries will succeed, yet tax credits are an attempt to identify and subsidize future successes.

Tax credits often don’t create economic activity, but instead merely shift it to another location. When states compete over companies by offering increasingly generous incentive packages, taxpayers lose because they have to foot the bill. As a recent example, while Ford 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. This is a very expensive game, and taxpayers everywhere would be better off if their state governments stopped playing.

Even if other nations, states, or localities offer tax incentives to lure businesses, Missouri would be better off if we don’t do the same — because we benefit from the lower prices that those subsidies create, without it costing Missouri’s taxpayers a dime. It would be better for everyone if all states stopped providing these subsidies, but Missouri will still experience better economic growth if it unilaterally removes itself from the tax incentive bidding wars.

Missourians would benefit if the state government took a hands-off approach to economic development instead of providing subsidies to private companies. Missouri’s tax credit programs have not fulfilled their stated purposes, and spending more on them will not likely result in better outcomes. Missouri’s tax dollars would be much better spent in the hands of individual Missourians than on enticements for companies like IBM and Ford.

If Missouri’s state government officials are serious about promoting economic development, they will stop attempting to pick and choose the economic activities that occur within its borders. Centrally planned economies have never worked, and that strategy won’t work for Missouri, either.

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

The post Tax Credits: A Poor Strategy for Economic Development in Missouri appeared first on Show-Me Institute.

Editor:

The editorial board recently oversimplified our views on rural broadband access (“It’s a wired world, after all,” Aug. 20 issue). We do not oppose the proliferation of broadband into rural areas, merely the government subsidization of such expansion. Greater broadband penetration in rural areas indeed provides social benefits, but we remain skeptical that those benefits will outweigh cost of millions in taxpayer dollars.

Solutions for extending broadband exist in the private sector. I-Land Internet Services, for example, is expanding broadband into rural western Missouri at no cost to taxpayers. Fifty percent of people living in rural areas already have home broadband Internet service, according to a Pew Internet study released earlier this month. Furthermore, of the people who do not have high-speed Internet, only 6 percent cited a lack of access as the primary reason for not subscribing, compared with 48 percent who find the Internet irrelevant and 18 percent who have usability issues. Eighty million dollars is a very high cost to benefit such a small subset of people.

Christine Harbin, research analyst, Show-Me Institute
John Payne, research assistant, Show-Me Institute

Of additional note, contributors to Show-Me Daily have discussed this issue before.

The post Letter to the Editor: Government Subsidy Too High for Broadband Extension appeared first on Show-Me Institute.

Some will argue the money could be better spent on education, health care, you name it. Indeed, there are many needs but these federal funds were designated for broadband. The state’s in-kind contribution does not impact the dire budgetary situation or projected $600 million shortfall.

Only the Show-Me Institute, the ultraconservative think tank, finds a reason to object. Research analyst Christine Harbin commented: “If an individual desires faster Internet service, he or she can either pay the market rate for the service or relocate to a larger town in order to access a broadband connection that’s less expensive.”

Of course, we received Ms. Harbin’s remarks via a high-speed Internet connection, and we certainly would not have wanted to miss sharing them with you.

The Business Journal could not have illustrated Christine’s point more succinctly. She, and the Business Journal, have both chosen to locate in the city of St. Louis. This decision entails extra costs, like the earnings tax and a higher cost of living, but it also has some cost-saving benefits, like less-expensive broadband access.

It is more expensive to provide Internet access to rural areas. This does not mean that rural areas should not have Internet access, only that they should shoulder the steeper costs of this service if they want to use it. When Internet access is subsidized, it distorts the market because the lower price leads people to consume more without seeing the true cost. If someone opts for the lower general cost of living in a rural town, she should accept that urban amenities may not be available at as low of a price as they are in more populated urban areas. In the same way that rural areas may be loathe to subsidize an urban area’s mass transit, it is reasonable for urban areas to be loathe to subsidize a rural area’s broadband Internet.

People should be allowed to live where they choose, but that doesn’t mean that everyone else should subsidize them.

The post Sent to You From My High-Speed Internet Connection appeared first on Show-Me Institute.

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.

The post Missouri’s Development Tax Credits Cost Too Much, Deliver Too Little appeared first on Show-Me Institute.

Economic development tax incentives, no matter how they are packaged, are not effective. They allow government officials, who have no special knowledge of how to maximize growth, to pick winners and losers in the market. As Show-Me Institute Executive Vice President Joseph Haslag has written before, lowering broad tax rates is a much more efficient method of stimulating the economy than targeted tax credits. This allows everyone to benefit, rather than a few select industries chosen by the state.

Empirically, studies analyzing the benefits that development tax credits deliver in comparison to their costs show that such tax credits have not worked. A recent Missouri state audit report found that tax credits are less effective (and more expensive) than their proponents claim. Yesterday, St. Louis Public Radio broadcast a segment featuring a study that examined another form of tax incentives in Missouri, tax increment financing (TIF). Kenneth Thomas, a political science professor at the University of Missouri–St. Louis, recently coauthored a study that found the use of TIF is not effective in most cases. He noted that the St. Louis area uses TIF more than nearly every other area in the nation. In the interview with St. Louis Public Radio’s Matt Sepic:

Sepic: That’s one longstanding criticism, is that TIF pits communities against one another. A prime example is that tussle between Bridgeton and St. Anne over a Walmart. Is that a bigger problem in the St. Louis area than elsewhere, with this panoply of municipalities that we have here?

Thomas: Oh, yes, certainly having more municipalities makes the competition more intense.

The study argues that, although many economists have found TIF to be ineffective, this method of funding continues to be used because of the competitive nature of tax incentives. When one area offers a tax incentive, other areas nearby often try to “win” a company’s business by offering competitive tax incentives. The result is a bidding war in which the taxpayers lose. This can be seen in the Claycomo Ford tax credit situation, as well — other states, like Kentucky, have offered tax incentives to Ford in an effort to persuade them to relocate their plant. In order to compete, Missouri would have to offer a better deal, while recognizing that this game will be played again the next time the credits run out.

Later in the interview, Thomas notes an important misunderstanding — the idea that tax incentives like TIF “create” jobs:

Thomas: [T]hose estimates never take into account the fact that, well, yes, we are going to create 200 jobs here, but what’s going to happen is we’re going to knock out 180 in the next mall over.

Tax credits and TIF tend to shift economic activity from one area to another, without creating wealth. Missouri’s tax dollars would be much better spent in the hands of individual Missourians than on enticements for companies like Walmart or Ford.

As Milton Friedman pointed out on his PBS TV series “Free to Choose,” even if other nations, states, or localities offer tax incentives to lure businesses, we’re better off if we don’t do the same — because we benefit from the lower prices their subsidy creates. Missouri will experience better economic growth if it unilaterally removes itself from the tax incentive bidding wars.

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So far, the arguments for and against capping tax credits has circled around the issue of whether tax credits encourage economic development, job growth, and other activities that are in the best interest of the state. Proponents argue that tax credits are beneficial: The state gets more than what it pays out (because of the so-called economic multiplier), they say, and so capping tax credits would hurt the state as a whole. Those who oppose targeted tax credits argue that the loss of revenue given away by the state to a few recipients — but collected from the rest of the state’s taxpayers — far outweighs any benefit accrued from the activities that such credits encourage. Furthermore, as Show-Me Institute Research Analyst Christine Harbin has written, when state legislators create targeted tax credits, they are favoring one industry over another, frequently because of political pressure.

Yet another argument against state tax credits is the fact that state governments have demonstrated that they are often incapable of a substantive review of tax credit applications. As a negative consequence of this lack of oversight, these programs invite fraudulent activity. In Iowa, three film production companies have been charged with inflating the values claimed on tax credit applications, and the director running the state’s film tax credit program was fired because of the lack of oversight. From the Quad-City Times:

The invoices also included various sizes of step ladders that ranged from $900 each up to $1,125, and a 24-foot extension ladder reported to have been rented for $1,350.

There are many additional examples of fraudulent activity resulting from a lack of oversight. In March, the state of Michigan awarded a $9 million business tax credit to a convicted embezzler who promised to create 765 jobs in Flint. He did this all while living rent-free at a friend’s mobile home. Earlier this year in Louisiana, a man was charged with selling nearly $2 million in Louisiana film tax credits to members of the New Orleans Saints. He never filed for them.

I suspect that Missouri’s Department of Economic Development may also occasionally miss tax credit application discrepancies. Based on a cursory review of the recently approved application for $19 million in Distressed Areas Land Assemblage (DALA) tax credits submitted by a Saint Louis–area development company, NorthSide Regeneration, LLC, it appears that the company overstated its costs for at least five properties (third column of DALA tax credit application PDF documents contain the property’s reported purchase price):

These problems are inherent in a bureaucratic program tasked with awarding benefits, and operating with limited information. The paperwork accompanying a tax credit application is usually substantial, and even if the agency charged with administering a state’s tax credit program does due diligence, the information available can be limited to what the tax credit applicant supplies.

The tax credit fraud cases that do make the news are egregious. I am sure there are instances of companies padding their reported costs on tax credit applications that the state and general public have missed. Instead of using public dollars to attempt to pick winners and losers, while running the risk that the state may not have all the available information even to weed out tax credit fraud and application discrepancies, the state should let consumers and investors decide which businesses, developments, and films succeed.

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