By state law, local taxing jurisdictions can opt out of the annual sales tax holiday. This year, 50 counties, 156 cities, and 90 Special Taxing Districts decided not to give Missouri families a tax break. Of the 90 Special Taxing Districts, 83 were either community improvement districts (CIDs) or transportation development districts (TDDs). But unlike taxes collected by cities and counties, most of these districts’ sales tax revenues help the private interests that set up the districts rather than funding public services. Many of these districts are found in the most popular shopping areas in the state and encompass large retail stores like Walmart and Target. Some examples include the Arnold Retail Corridor, the Delmar Loop, and the Hanley Road Corridor in Maplewood/Brentwood.

These overgrown microgovernments have already taken over a billion dollars in taxes from Missourians to fund the development or redevelopment of commercial districts, with privately owned businesses reaping the benefits. One 3-day weekend without sales tax revenue would hardly put a dent in the millions collected the other 362 days of the year.

Absent any action from a special taxing district’s board of directors, the district, by default, participates in the tax holiday. However, the board of each of these districts—usually elected by a small number of property owners—instead voted to keep charging the district sales tax rather than give Missouri families a break. Unlike state, county, and city sales taxes, the taxes collected from the special taxing districts formed by developers do not contribute to the funding of public services for the average taxpayer. Instead—perhaps due to the lack of accountability and oversight—they go toward subsidies that primarily help big businesses.

So if you found yourself confused by the presence of a tax amount on your receipt this past weekend, thank the misguided laws that govern special taxing districts.

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Each year, Missourians pay millions of dollars in sales taxes they often don’t know exist. My colleagues have written often about the problems with these special taxing districts. Many are created without a public vote, the projects often have questionable public benefits, and they usually lack oversight. It was welcome news that consumers were going to have a resource that illustrates whether a special sales tax will be collected any place they wish to shop. The bad news is the map is incapable of showing the cumulative sales tax rate for those locations.

To find the total sales tax burden for a specific address, you’ll need to go to another website. Missouri has more than 2,000 sales tax jurisdictions, and at least 1,400 of those are considered “special.” The remaining jurisdictions are made up of Missouri’s cities and counties who have their own sales and use taxes, but none of those are included on the map.

The map, as a whole, does paint a picture of just how overgrown the state’s special taxing districts have become. Nonetheless, you would think the Show-Me State could create a map that allows taxpayers to accurately determine their cumulative sales tax burden no matter where they are making purchases in the state without having to input a specific address.

See the Department of Revenue’s new map here.

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In our new paper, “Overgrown and Noxious, the Abuse of Special Taxing Districts in Missouri,” Graham Renz and I detail the hundreds of micro taxing districts that have collected over a billion dollars from Missourians. Some of these, such as fire protection districts and sewer districts, may be familiar to readers. But explosive proliferation of two other types of district—community improvement districts (CIDs) and transportation development districts (TDDs)—is driving the increase.

Since they were created in the 1990s, the number of CIDs and TDDs in the state has grown to more than 600. Many were created without any public vote and too many lack basic mechanisms of oversight. After a recent report, the Missouri state auditor stated,

There need to be protections in place to ensure public dollars are being utilized efficiently, effectively and for the good of the public. It is simply unacceptable that state law allows for self-dealing and conflicts of interest within these taxpayer-supported projects.

Our paper examines the history and growth of these special taxing districts and suggests some simple reforms that could help increase public accountability and reduce the likelihood that private developers will be allowed to pass on their own private costs to taxpayers.

Listen to our podcast on special taxing districts in Missouri: https://soundcloud.com/show-me-institute/the-hidden-costs-of-living-in-missouri

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Over the past eight or so years, the number of distinct sales tax jurisdictions in Missouri has grown by more than 9 percent—a total of 199 new jurisdictions created. This growth is caused by several factors, but mostly by new and overlapping special taxing districts, such as ambulance districts, levee districts, and, most prominently, transportation development districts (TDDs) and community improvement districts (CIDs). These districts are formed to collect sales and other taxes to fund various improvements and services. Unfortunately, TDDs and CIDs usually just help pad developers’ bottom lines.

Source: Missouri Department of Revenue, Sales/Use Tax Rate Tables, numerous years.

As the figure above shows, with the increase in sales tax jurisdictions comes an increase in the average sales tax rate. This means that as more and more jurisdictions come on the scene, taxpayers cough up more and more money.

However, just because the average sales tax rate has been on the rise, it doesn’t necessarily mean all Missourians are paying more in sales taxes. As noted above, the driving force behind the rate increases has been the creation and overlapping of special taxing districts, which usually encompass relatively limited geographic areas. And although the TDDs and CIDs that are driving the rate growth are all over the state, about two-thirds are in the St. Louis and Kansas City metro areas, where much of the state’s population lives. So, overall, even if some Missourians are not significantly affected by the recent rate increases, many are.

Unfortunately, as things stand there is little taxpayers can do to curb the state’s sales tax rate growth. That’s because many if not most TDD and CID taxes can be established without the approval of the general public. These districts can be formed by property owners—often developers—meaning the taxpaying public has no say in whether the rate hikes become law. Real reform would have to come in the form of significant changes to the laws governing TDDs and CIDs. So, as the new year gets going and the legislature meets in Jefferson City, lawmakers keen on lowering (regressive) taxes should take some time to think about redesigning the laws that allow these districts to be established.

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Thankfully, reforms are being passed and Missouri’s shadowy sales tax mosaic may soon come into view. HB 1858 was signed into law this past Friday. The law will require all political subdivisions (such as counties, cities, TDDs, and CIDs) to submit maps of their boundaries to the state Department of Revenue. The result will be a clear and concise presentation of the myriad sales tax jurisdictions littering our state. The map should be available by July 2019.

A map of all the jurisdictions collecting sales taxes may not sound like a big deal, but it is. While it’s easy to know what county or town you’re in, it hasn’t been so easy to figure out whether you’re shopping in one or more TDDs or CIDs. These districts are required to present maps of their boundaries only when petitioning to form, and so it is often nearly impossible to figure where they are exactly later down the road. They can also be as small as a single shopping center or district! In short, you could have been paying an extra two percent in sales taxes and had no way to find out where to shop to avoid it (other than an expensive sort of trial and error).

While HB 1858 is a win for taxpayers and transparency advocates, there is still a lot of work ahead of us. TDDs and CIDs continue to be used for projects with questionable public benefits, have poor reporting standards, and operate with little to no public scrutiny. Missouri taxpayers deserve accountable, transparent government for the public good, and it’s time to give it to them.

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None of this is to say that taxes are unnecessary or even bad. Taxes are necessary to fund the basic services we all agree are the responsibility of government. But Missouri can do better. A report from the Tax Foundation released last week underscores the point. According to the Tax Foundation’s count, Missouri has 1,393 sales tax jurisdictions, second only to Texas.

This staggering number is due to special taxing districts such as community improvement districts, transportation development districts, and the like. These districts are easily established and are often not open and transparent. Many were established without a public vote. Yet each has the power to tax us on each purchase.

One effort to cap the sales tax rate in Missouri at 14 percent is making its way through the legislature. But if the proliferation of special taxing districts itself is not addressed, the general assembly risks ceding its influence over tax policy to an ever-growing number of tiny fiefdoms.

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First, these districts allow narrow special interests to tax the public for their own private gain. For example, a luxurious hotel in Kansas City instituted a CID in order to charge a 1 percent sales tax that it will use to refurbish rooms and replace carpeting.

Second, the districts are often drawn tightly around businesses, such as shopping malls, so that no local residents have to vote for the tax increase. The ability to draw district boundaries gives business owners a great deal of power to charge local taxes without public oversight. Without that oversight, SD boards can extend the length of their tax increases well past the initial project need.

Lastly, the Missouri State Auditor has pointed out that SDs are not transparent and that taxpayers are often not consulted in their creation and have no idea of their existence. For example, customers often choose hotels based on room rates, but rarely by tax rate—in fact, many customers do not even know they are paying these additional sales taxes.

The number of SDs is growing rapidly, and the combined impact of these small districts is adding to the tax burden of Missourians across the state.

THE SOLUTION: Stricter requirements for the creation of SDs and stronger reporting requirements to ensure accountability.

Reforms that will provide greater taxpayer protection include (1) requiring that a minimum number of residential voters live in districts; (2) requiring that the State Auditor or Director of Revenue compile an annual report that details statewide SD spending, revenue, and debt; (3) requiring all SDs sunset unless explicitly approved by district voters, and (4) requiring more transparent public bodies, such as city or county councils or commissions, approve all SD bids. To truly curb abuse, the sales taxing authority of SDs could be revoked so that only property tax revenue could support district projects.

THE OPPORTUNITY: Reforming these districts could increase transparency and provide protection for taxpayers. It would also result in lower taxes in Missouri’s largest markets by making sure that special taxing districts only act with the informed consent of voters.

KEY POINTS:

• In 2014 and 2015 alone, TDDs in Missouri collected more than $176 million in tax revenue—yet only 6% of those TDDs had residents within their boundaries. According to the State Auditor’s report, $125 million of that revenue was collected without residential voter approval.
• Of the 34 TDD audits the State Auditor’s office has completed over the past 10 years, one-third concluded the TDDs under consideration were in bad financial shape. And nearly all audits indicated other issues, ranging from conflicts of interest and uncompetitive bidding practices to a failure to comply with basic accounting standards.
• Requiring SDs to demonstrate they are meeting their job creation and tax revenue goals would keep them accountable to taxpayers.
• SD board members voting for and approving contracts for themselves is a potential conflict of interest. Requiring that contracts be put out for bid would ensure a competitive process.

SHOW-ME INSTITUTE RESOURCES

Missouri State Auditor’s Report: Transportation Development Districts (Report No. 2017-20)

Blog Post: Auditor’s Report Sheds Light on Special Taxing Districts

Blog Post: Missouri’s Troubling Sales Tax Mosaic

For a printable version of this article, click on the link below. You can also view the entire 2018 Missouri Blueprint online.

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Who preys upon the sightless with such cruel impunity? More often than not, it is leading citizens and business organizations, taking advantage of poorly conceived laws with the stated purpose of promoting economic development.

Under Missouri laws established in the 1990s, transportation development districts (TDDs) and community improvement districts (CIDs) operate as micro-governments that direct tax revenues to private interests to use for the supposed benefit of their local communities. A primary benefit of a TDD – from the viewpoint of a single property owner or a group of owners banding together to form a district – is the ability to impose a tax on people with no vote in the matter.

Over the past two decades, more than 200 TDDs and nearly 300 CIDs have sprouted up in big cities, small towns, and suburban enclaves across the state. In 2014 and 2015, TDDs collected more than $175 million in tax revenue, according to the Missouri State Auditor’s Office. “Given that TDDs have been operating this way for nearly 20 years,” Show-Me Institute Policy Analyst Graham Renz has observed, “their collective impact is in the billions.”

Before becoming a city councilman and later mayor of Neosho (pop. 12,000), south of Joplin, Richard Davidson served on the town’s school board from 2004 to 2008. He was shocked when supporters of a TDD sought an $800,000 contribution from the school district to support the building of new roads. “We educate kids,” he told the TDD proponents. “We don’t build roads.” Later he wrote a column for the Neosho Daily News titled, “TDD Spells Trouble for Our Schools.”

The Neosho TDD was set up in 2009 to fund $6.9 million in transportation projects, with a projected $4.5 million coming from a half-cent sales tax from businesses within the district and another $2.4 million from the Missouri Department of Transportation. Like many TDDs, this is a special taxing district with no residents. Within its boundaries, the 550-acre district includes the city’s golf course, wooded areas, and mostly uncropped farmland, along with a small commercial strip with a Wal-Mart, a Lowe’s, and some other shops and restaurants. Through the half-cent sales tax, customers of those businesses have paid in excess of $500,000 a year to support the TDD’s activities.

So far, those efforts have not stimulated any new business development. But who is to say that the millions of dollars spent by the TDD on roads and transportation won’t at some point turn woods and idle farmland into valuable commercial property?

Davidson, who served as mayor of Neosho from 2010 to 2016, regards the TDD as a clear case in which the end (not so much economic development as the enrichment of a small number of private property owners) does not justify the means (taxing unseeing and unsuspecting consumers).

Community improvement districts work in a similar way. Examples include the luxurious Intercontinental Hotel on Country Club Plaza in Kansas City and the Cardinals’ Ballpark Village in downtown Saint Louis. CIDs allow both of these commercial ventures to collect a one-percent sales “tax” from patrons, which is really just an artfully disguised part of the selling price.

It is time to jettison two-decade-old Missouri laws that promote taxation without representation and provide a textbook example of what the 19th-century economist Frederic Bastiat called “legal plunder.”

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Stanford economist Russ Roberts summarized the phenomenon thusly: “If you’re paying, I’ll have top sirloin.”

But in Chesterfield, it’s more like: “If you’re paying, I’ll have an ice rink.”

News of the Hardee’s Iceplex closure in Chesterfield was quickly followed by calls to find a new home for the Chesterfield Hockey Association. Quicker than a winger can flank the defense, a proposal for a new, $22.6 million facility came forward. The only catch? Taxpayers would have to cough up $7 million.

Those funds could come from a special taxing district, better known as a transportation development district (TDD), which levies an extra sales tax in the Chesterfield Valley retail area. If voters in the district—which encompasses less than a single percent of Chesterfield households—approve the tax, shoppers in the valley will help buy and improve land for a narrow special interest, adding yet another chapter to what’s become Missouri’s never-ending-story of public-cost/private-benefit development.

The problems with this deal are obvious and myriad.

For one, there’s the issue of “investing” in an ice facility when one just went out of business. The developer’s own market analyses show there is a glut of ice facilities in the region, which has “resulted in creating a ‘buyer’s market’.” If an ice rink isn’t a good use of private resources, what reason is there to think it’s a good use of the public’s resources?

Second, despite tax dollars being used to buy and improve land for the developer, there will be no public ownership of the facility. In fact, there isn’t even an agreement in place to let the public use the facility! If the facility changes hands or goes under, the city could end up owning the associated parking lot, but the last time I checked, there was no dearth of parking in the valley. 

Then there’s the white elephant just up the road: the $45 million complex proposed by the Blues for Creve Coeur Lake Park. The duly-subsidized complex will undoubtedly compete with the Chesterfield facility, but—incredibly—proponents claim their project is insulated from economic pressures.

And the (unreported) cherry on top? Last month it was announced that a private investment group acquired a new facility for the Chesterfield Hockey Association to use as an ice rink. So even though the group has a new “home,” they still want you to build them an ice palace.

All in all, this project makes little economic sense. So why is it moving forward? Because Missouri’s loose TDD laws sanction (or rather, encourage) special interests to tax the pubic for private gain. And when you’re spending other people’s money, you’ll “invest” in just about anything.

TDD reform is long overdue. Until things change, I suggest we update Roberts’ adage so it reads: “If taxpayers are paying, I’ll have whatever I darn please.”

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The number of special taxing districts, such as transportation development districts (TDDs) and community improvement districts (CIDs), has grown over the past 20 years at a rate rabbits would envy. These districts are formed through petition processes and levy a tax or fee (often sales and/or property taxes) to fund various improvements, ranging from roadway interchanges to streetcars to “great suburban walls.” As I’ve written before, the governance structures of these districts predictably lead to accountability and transparency issues.

But a report on TDDs recently released by the Missouri State Auditor’s office shows just how severe a problem these districts have become.

TDDs were intended to help fund public improvements through a tax similar to a user fee in order to avoid burdening the general public with the costs of these projects. For example, if a development required a new intersection with a traffic light, a tax could be levied on just that development to help pay for construction of the intersection. But TDDs have now morphed into a mechanism for private developers to tax the public for private gain.

The law that originally authorized the creation of TDDs (RSMO 238.200-238.275) allows for them to be established by residents or property owners. If a proposed district has no residents within its boundaries, property owners alone decide whether a tax is to be levied, and if so, how its revenues are spent. Often, TDDs are established by a single retail developer. This means that a single developer can (1) form a district, (2) impose a tax in that district, and (3) spend tax revenues nearly any way it sees fit. Unsurprisingly, TDD revenues often go right back to the developer in the form of a direct subsidy, and taxpayers are forced to the sidelines with no say in how their money is spent.  

So how bad is the problem? In 2014 and 2015 alone, TDDs in Missouri collected more than $176 million in tax revenue—yet, only 6% of those TDDs had residents within their boundaries. According to the Auditor’s report, $125 million of that revenue was collected without residential voter approval. Given that TDDs have been operating this way for nearly 20 years, their collective public impact is in the billions.

The Auditor’s report has shed much needed light on the abuse of special taxing districts. Now that we have a diagnosis, Missouri needs to develop a cure. Show-Me Institute researchers have proposed several special taxing district reforms, including requiring a minimum number of residents in a district and tightening reporting standards. Taking advantage of unsuspecting taxpayers is wrong, so why do Missouri’s laws allow it?

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