The proposed office building, called Strata, has spurred controversy for months. The combined tower and parking garage would cost $132 million; of that, roughly $63 million would come from public subsidies, including a direct $27 million public investment in the offices.

The editorial board is correct on their call, and while their analysis of market demand and public risk is correct, there are even more reasons to be skeptical of the developers’ claims. Part of the argument for Strata is that Kansas City needs more high-end office space that Strata would provide, but it’s hard to find evidence to support that claim.

In testimony before the Kansas City Finance and Governance Committee on June 26, 2019, a Strata developer asserted that Starbucks recently considered Kansas City for an office location [starts at 9:05]:

Jobs are being lost in Kansas City, opportunities are passing us by because we don’t physically have the space created. So I think that, uh, Starbucks is the example that gets used a lot toward the end of last year where there just was not Class A space on the shelf.

This same argument appeared in a number of outlets. FOX4 in Kansas City reported on June 26 that:

In recent months, a big employer, Starbucks, cited a lack of quality office space downtown as one factor in its decision to take about 1,500 jobs to Atlanta instead of Kansas City.

CitySceneKC, a blog funded by the pro-development subsidies Downtown Council, claimed in December 2018:

But Starbucks needed 100,000 square feet of Class A space relatively quickly, and it would take 18- to 24 months to build it in downtown KC. They went to Atlanta instead where there’s already “four- to five cranes in the air.”

Starbucks did choose Atlanta, Georgia for its new office location. But its operation looked nothing like what advocates for development subsidies claimed the company was seeking in Kansas City. They sought only 85,000 square feet and planned on only 500 new jobs, not the 100,000 square feet and 1,500 jobs alleged by Kansas City developers and their acolytes.

Note: the Atlanta job numbers were reported in August 2018, but developer sources in Kansas City kept using the inflated numbers in their blogs and comments to the media months later.

Furthermore, Kansas City and Atlanta are not in the same league. Atlanta’s metropolitan population is the country’s ninth-largest with just shy of 6 million people—2.5 times the size of Kansas City—and has grown 12.5 percent since 2010. (Kansas City’s metropolitan area is ranked the 31^st largest, and has only grown 7 percent since 2010.) Atlanta is growing rapidly and is the headquarters city for 18 of the Fortune 500. (Kansas City has only one.) Atlanta is also home to the busiest airport in the United States, providing executives with direct routes to most places they might want to travel. (Incidentally, the Atlanta Journal Constitution article that detailed Starbucks investment also offered a caveat about the incentives offered to Starbucks.)

It’s also noteworthy that the “most compelling reason” for their decision, according to a July 2018 email from a senior executive at the Kansas City Area Development Council, is Starbucks already had an operation center in Atlanta and the company had a “comfort level in their ability to scale that workforce based on experience.” Also, Starbucks’ Chief Financial Officer had “strong ties” to The Big Peach. Could any of this have been overcome by more readily available office space?

Developers will always seek public handouts to build what they cannot fund through private investment. While it is understandable that Kansas City leaders look toward Denver and Atlanta and New York City, we have a long way to go before we can compete with those places. We won’t get there through subsidies—but through the long arduous work of supporting infrastructure, public safety, and education while being business friendly and an efficient steward of public funds.

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“Incentives are kind of a funny thing to get your head around…we don’t get a check, we actually get a small increment, a small discount on the overall taxes that we pay.”

The small discount mentioned is quoted at $78 million from property tax abatement and another $35 million off of income tax bills.  There may not be a check in the mail, but public funds would go towards the development’s costs all the same.

“Centene has shareholders; they have a responsibility to be responsible with their dollars and with their investment.”

I absolutely agree, and it seems that the company is doing an excellent job of growing and increasing revenue, but the City of Clayton also has “shareholders” (aka taxpayers) and a responsibility to be responsible with public dollars.  If an expansion might take place anyways, then does it make sense to spend tax dollars on attracting it to an already successful business environment?

“This is a company that is growing really, really rapidly, and so in the long term it’s highly likely and most possible that Centene will occupy these buildings completely”

In 2015 Centene was named the 4^th fastest growing corporation in America, and it’s great to hear that the company is interested in such an extensive expansion in the Clayton community.  However if the plan is to occupy their buildings completely, then why is there a proposed expansion on the table while the current headquarters still leases out about half of its office space?

“There’s very, very low vacancy in the market right now, the market has done extremely well.”

Clayton has been a very successful city when it comes to attracting developments.  The area has recently been referred to as the St. Louis region’s new downtown.  Still the question is posed that if the area is successful and is experiencing a low vacancy rate, is spending millions to subsidize a large development really the healthiest use of taxpayer dollars?

The post CEO Defends Centene Clayton Expansion appeared first on Show-Me Institute.

A similar story has been taking place in the St. Louis area during recent years.   After threatening to locate its headquarters in downtown St. Louis back in 2008, Centene was given a $22 million cookie from Clayton.  Now it’s back for a $100 million glass of milk.

Currently headquartered in downtown Clayton, the healthcare giant is proposing a $772 million expansion along Forsyth Blvd.  Construction would include office space that Centene could use for its own employees or lease out to other businesses.   The expansion may benefit the city, but between Centene’s success, their reasons for expanding, and Clayton’s thriving downtown, it’s hard to justify asking taxpayers to contribute.

Centene is a rapidly growing enterprise.  In 2015 the company added 4,800 jobs nationwide and revenue grew 35% from $15.7 billion to $21.3 billion.  This fact alone shouldn’t deter incentives, but when we combine this fact with Clayton’s developmental success there isn’t much of an argument for the proposed property tax abatement.  Supporters of tax breaks argue they should be used if an area would otherwise lack investment, but in an area as affluent as Clayton potential investors have not been hard to come by. 

But if subsidies aren’t offered to the Fortune 500 company, isn’t it possible that it will pack its bags and move somewhere else?  It’s possible, but not probable.  Centene has spent millions acquiring land parcels along Forsyth over the past four years, so expansion has been on the horizon for a while.  What is much more likely is that without subsidies the expansion will not be quite as large, and perhaps it shouldn’t be.

Centene houses around 1,000 employees in Clayton and leases roughly half its office space to other companies.  The new plan is modeled on the same structure and would be large enough for 2,000 Centene employees and office space that the company could then lease out to increase its revenue.  There’s nothing wrong with a business diversifying its income portfolio, but the red flag should go up when this opportunity is only available with the help of taxpayer money. 

Tax breaks have become ingrained in our development culture, and they have created an unfair environment where some companies gain competitive advantages over others.  It does our community little good to continue this trend, and Clayton should decide if giving away a full glass of milk would benefit anyone.

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Though I never met the man, I feel a debt of gratitude to Ronald Coase, the Nobel Prize-winning economist who died on Labor Day at age 102. Reading his “Nature of the Firm” – one of the most cited essays in all of economic literature – encouraged me to start my own business.

Two decades ago, I persuaded John McDonnell, the CEO of McDonnell Douglas, then the nation’s 23nd largest industrial company, to outsource the biggest part of my job (writing his speeches) back to me as an independent writer. I left the company with an annual contract that paid me no less money than I was making before and that allowed me to pursue other clients. But as I told John McDonnell, I also knew that I had to perform at a high level – being painfully aware of the fact that the company could cancel my contract at any time if I did less well as an independent contractor than I had as a “salary-man” (to use the Japanese expression) or employee.

Anyone familiar with Ronald Coase’s work will recognize that I had struck a classic “Coasian” bargain – finding an efficient free-market solution to a particular problem (my unhappiness with the corporate environment and desire for independence) that worked for both parties: The CEO accepted the notion that I would be a hyper-motivated non-employee, and I became my own boss.

Coase was the first to ask – and provide a plausible answer to – the question of why companies exist . . . and why a critical part of their success comes from getting large numbers of people to submit to a form of voluntary servitude – punching a time clock and giving employers the right to direct their performance in exchange for predetermined wages or salaries and protection from sudden or arbitrary dismissal.

His answer was that companies exist for the purpose of reducing “transactions costs” – meaning all the costs of trying to order economic activity through voluntary exchange. That includes the costs of searching out and evaluating other parties; negotiating contracts; maintaining communication; and policing and enforcing the terms of those contracts.

Imagine the extraordinary difficulty that a Henry Ford or a William Boeing would have faced in trying to contract out for every part and every task going into the assembly of a car or airplane. Hence the need for the visible hand of management in coordinating the allocation of resources.

At the same time, Coase fully appreciated the disciplines and rewards of free enterprise, and he was acutely aware of the tendency of corporate (or government) bureaucracies to stifle individual initiative and kill any sense of real ownership that people have over the quality of their own work. Within a large, publicly owned corporation, no one, including the CEO, is spending his own money.

Citing the picturesque words of another economist (D. H. Robertson), the British-born Coase, who spent most of his working life in the United States, described companies as “islands of conscious power” – or central planning – in an “ocean of unconscious (i.e., spontaneous free-market) cooperation . . . like lumps of butter in a pail of coagulating buttermilk.”

The “lump of butter” of which I was a part in the early 1990s was a shrinking rather than a growing mass: In just three years, the company shed more than 50,000 jobs, or 42 percent of the workforce. In the midst of all the downsizing, people were angry and confused – not knowing where the axe would fall next and bitterly resenting a sudden loss of the personal security that they had gained (and felt entitled to) through years of fealty to the same company. What they didn’t see was that a whole way of life was disappearing.

And now it is gone. Today, no one – not even someone graduating from a top business school – expects to spend his or her entire adult life with a single company. Everyone accepts that big companies really aren’t built to last. More like lumps of butter than castles of perpetual growth and stability, they may dissolve at any moment and disappear into the liquid churn.

One may think of the quarter of a century from 1955 (the first year of the Fortune 500) to 1980 as a golden age for big business in America. During that time, Fortune 500 companies ruled the roost – growing at about twice the rate of GDP growth and enjoying robust profitability from one year to the next – even during recessions. In 1975, the last year of the virulent recession touched off by the Arab oil embargo, only 15 Fortune 500 companies, or 3 percent of the total, reported losses, and all of the top 50 companies were solidly in the black.

Compare that to 1993 – which happened to be my last year as an employee at McDonnell Douglas. This was a brutal year for many big companies. Even though the 1990-91 recession was officially over, no fewer than 151 Fortune 500 companies – or just more than 30 percent – lost money in 1993, and that included 4 out of the top 10 (GM, Ford, IBM, and DuPont) and 22 out of the top 50 ranked by revenues.

To add just one more statistic gleaned from sifting through old issues of the Fortune annual survey, it is worth noting that Fortune 500 companies shed close to 3 million jobs in the 10-year period ending in 1993.

So what happened to bring the era of big business dominance to a close and set the stage for a new era of entrepreneurship and greater dispersal as opposed to centralization of economic activity?

We may turn to Ronald Coase for what I believe is the key insight. In his essay on the nature of the firm – published in 1937, when he was a young professor at the London School of Economics – he addressed the different ways in which technological advancements could affect the size of companies:

It should be noted that most inventions will change both the costs of organizing and the costs of using the price mechanism. In such cases, whether the invention tends to make firms larger or smaller will depend upon the relative effect on these two sets of costs. For instance, if the telephone reduces the costs of using the price mechanism more than it reduces the costs of organizing, then it will have the effect of reducing the size of the firm.

But of course, I thought, when I read those words for the first time. This was a year before John McDonnell and I struck our Coasian bargain. With his encouragement, I had agreed to take part in a research project by the Center for the Study of American Business at Washington University in St. Louis examining how U.S. firms (including McDonnell Douglas) were responding to the twin challenges of the information revolution and globalization . . . and to write sections of a book (The Dynamic American Firm) summarizing the findings.

Coase’s thinking loomed large in the book and in my own subsequent decision to go out on my own.

The mainframe computers that came into existence in the 1950s were so big and expensive that only the biggest companies could use them. With the help of these early computers in reducing the costs of organizing production and marketing, Fortune 500 companies became bigger and more prosperous throughout the sixties and seventies.

Then came the information revolution – which (even before the Internet) had the opposite effect of reducing the size of firms. It reduced the need for corporate bureaucracy. Still more, it caused many big companies to disassemble their carefully constructed vertical empires and to contract out for just about everything outside of their own core competencies. I knew that writing was not one McDonnell Douglas’s core competencies, and I reasoned that I should set a price for my work as an outside contractor that would be equal to the cost that the company would incur in having to hire a full-time speechwriter to replace me. Because the drafting of speeches and annual reports took maybe 50 percent of my time at McDonnell Douglas, I figured I would free up many hours that would go into serving other clients.

The Dynamic American Firm did not become a best-seller, but in re-reading some passages of the book, I can relive some of the excitement that I felt in pondering the next step in my own life:

Like “de-industrialization,” the rapid rise in business services and self-employment over the past several years has set alarm bells ringing in enlightened centers of thought. “In the future,” one displaced executive told Time magazine, “we are going to be moving from job to job in the same way that migrant workers move from crop to crop.”

Perhaps. But unlike the migrant worker, today’s corporate refugee, equipped with a personal computer, printer, copier and fax machine – all purchased for about $7,000 – can earn a good living toiling in the comfort of his, or her, home. That is so because the information revolution has greatly reduced transactions costs – for big firms and small contractors alike.

Coase may have done more to extend our understanding of business and commerce than any thinker since Adam Smith. But his influence did not stop there. He also had a profound influence in challenging the belief that government regulations, taxes, or subsidies were the best and, indeed, the only way of dealing with actions of business firms that have harmful effects on others, with a commonly cited example being the emission of sparks from a train that causes damage to a farmer’s crops along the railroad’s right-of-way.

In a “The Problem of Social Cost,” his second most famous essay, published in 1960, Coase argued that most disputes of this nature are best resolved by negotiation, rather than regulation or imposing strict penalties on the damaging party.

As Coase pointed out, both the railroad and the farmer would be better off if the latter agreed not to cultivate the vulnerable portion of his land in exchange for a payment that would equal or exceed the opportunity cost incurred in foregoing its cultivation. In other words, without regulation, the two sides could easily reach a mutually beneficial solution.

“The Problem of Social Cost” gave rise to a whole new body of literature in the field of “economics and the law.”

In awarding him the 1991 prize in economics, the Nobel committee observed that “Coase may be said to have identified a new set of ‘elementary particles’ in the economic systems.” Coase himself made no such claims, saying in a 2012 interview, “I’ve never done anything that wasn’t obvious and I didn’t know why other people didn’t do it.”

Andrew B. Wilson is a resident fellow and senior writer at the Show-Me Institute, which promotes market solutions for public policy in Missouri.

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According to an analysis by Richard Vedder, an economist at Ohio University, [LeBron] James’s net present value tax savings on his salary are between $6 million and $8 million by living in Miami versus his home town of Akron.

This demonstrates how taxes can incite people and businesses to change their behavior. When tax rates differ across geographies, individuals and businesses have an incentive to move to the area of lower burden. This is largely why states that do not tax income experience larger rates of growth than states that do.

Later in the article:

While LeBron’s departure got extraordinary media attention, it is hardly unique. In the early 1990s, Ohio was the home of 43 Fortune 500 companies. Twenty years later the number is 24. Census Bureau data show that from 2004-2008 Ohio saw a net outmigration of $6 billion of income and some 97,000 taxpayers. Even Ohio’s famously liberal Senator, the late Howard Metzenbaum, moved to Florida late in his life to reduce his estate taxes.

If Missouri were to reduce or eliminate its income tax, then it would encourage more individuals and businesses (and professional athletes!) to locate here.

I have no means to verify or disprove this, but perhaps James used the Show-Me Institute’s IDEAS application in his decision process. Individuals can use the site to compare competitive tax environments across states, and I encourage our blog readers to play with the site to see how they would fare if they relocated.

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This means someone in Jefferson City thought that it was a good idea to award more than $5 million dollars in tax credits to a Fortune 500 company. Although tax credits aren’t a direct transfer of funds from taxpayers to industry, if a targeted company receives such credits and government spending is not also reduced by that same amount, the marginal tax rate increases for everybody else. Shifting the tax burden in this way is in itself a form of corporate welfare.

There must be a mistake. Someone must have thought that Unisys’ $4.6 billion in revenue last year was a typo. I mean, sure, if the “b” in “billion” were an “m” instead, I would say, “Why not? They are obviously struggling for survival. Last time I checked, kids didn’t need that money for scholarships, the elderly sure don’t need it for health care, and our roads are in pristine shape everywhere I drive. Yep, go ahead and give our $5 million dollars to Unisys; we don’t need it around here.” Unfortunately, in immediate retrospect, I realize that a similar thought had to go through someone’s mind — and what may be even scarier is that this individual has the ability to shift hundreds of millions of dollars in tax burden away from whomever he or she deems worthy.

I’m glad we have safety nets for companies like Unisys; you never know when one of those multinational companies (whose revenue stream is more than half of Missouri’s revenue for last year) might just slip through the cracks.

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So, now that we have an opportunity to “save,” “keep,” or “retain” — choose your favorite active verb — yet another downtown employer, Peabody Energy Corp., through an outlay of millions of dollars, our local elected officials contend that local government faces the prospect of either doing something or doing nothing. If St. Louis does nothing, then the city faces the prospect of possibly “losing” 500 jobs, which could tarnish the “image” of downtown. If St. Louis does something, then the city could pat itself on the back for giving tax dollars to a Fortune 500 company.

Development “incentives” are anything but. On their face, they may appear to influence the course of business development, affecting company decisions to locate or to relocate. In reality, private market forces and intangibles determine business behavior in the marketplace.

As best I can discern, the only behaviors that government “incentives” encourage are the development of relationships between government officials that have been statutorily charged with bestowing our money to entities of their choosing and the corporations that so often laugh all the way to the bank.

Here at the Show-Me Institute, we have a different term for “incentives” of this variety: Corporate Welfare.

The provision of these welfare benefits on a case-by-case basis creates such a distorted environment for the exchange of goods and services as to necessarily disadvantage all market actors that do not receive the benefits in question. Ironically, rather than solving problems, these programs create problems, most notably that of rent-seeking by others.

At the end of the day, when the 10-year bonds or the five- to 25-year tax abatements are firmly in place and not subject to judicial abrogation, they do nothing to address underlying business conditions that make plausible a company’s purported threats to relocate.

Government incentives for some create an economic burden on others, ultimately proving a disincentive for many to engage in commerce.

Count me among those supportive of the position that it’s unwise when local government spends tax money in this manner.

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After 38 ½ years of service, Barbara Trzeszkowski reported for her last day of work on Monday at the Keansburg Board of Education. If her contract with the district withstands a number of legal and governmental challenges, the superintendent will ease into retirement with a $740,876 severance package that the state’s top education official compared to the “golden parachute” awarded to retiring Fortune 500 executives.

That’s the first paragraph (emphasis added, in all of this post’s quotations) from a New York Times article about superintendent pay in New York. After hearing more about Trzeszkowski’s contract, according to the article, New York politicians were outraged at the taxpayer expense involved in such an enormous retirement package.

Trzeszkowski’s benefit package is plump, to say the least:

In the next few weeks, Ms. Trzeszkowski, 60, was scheduled to receive $14,449 for unused vacation days, the first third of the $170,137 she had amassed in unused sick days, and the first 20 percent of $556,290 in severance pay. This was in addition to the $103,889 annual pension she was to collect from the district for the rest of her life.

To put this into perspective, many Missouri contracts I’ve seen have caps on the number of unused vacation or sick days for which a superintendent can collect pay. But some don’t. Several Missouri superintendents earn more than the $170,137 Trzeszkowski collects. However, the factor sending her benefits sky-high is the 38 and a half years she spent with her district, about 10 of which were as superintendent, the others as a teacher.

What can I say? The numbers speak for themselves. She is set to receive a great deal of money for the rest of her life in exchange for working for a single school district for more than 38 years.

Is it a fair trade? After all, Trzeszkowski certainly was loyal to her district. Was it her job to draw attention to the size of her benefit package? Well, at the very least, her school district’s board of education should have known better when negotiating her contract. At least one of them didn’t, according to the article:

Although he seconded the motion to approve Ms. Trzeszkowski’s five-year contract in February 2004, James Cocuzza, a former board member who is now a borough councilman in Keansburg, said he did not remember it.

“For 15 years, I always fought for zero increases in taxes,” he said. “I don’t see myself giving away three quarters of a million dollars.”

While Mr. Cocuzza said he regrets not paying more attention, he added that he was probably not alone in allowing such contracts to slip through.

“Let’s be honest,” he said. “We’re not professionals. That’s what we have the attorneys and negotiators for. But wait until the state checks out all the other districts and sees the contracts that got through. I bet they all got nice packages.”

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