Back in 2010, in an effort to spur job creation in Columbia, the city and state combined to award a $31.2 million incentive package to IBM so that it would place a new call center in the town. In return, IBM promised to create 600 jobs at the new center by 2013.                

Fast forward to March of 2015. Instead of 600 jobs, IBM had only created 453, far short of the number promised. Since then, things at the call center have deteriorated even further. Employment now stands at 388. This has prompted the state to withhold $800,000 in additional funding for the call center.

                Again, it’s good that the city and state didn’t give away the whole $31.2 million to IBM, but they’ve already have spent a lot of money (at least $10 million) on this project. Probably the most egregious part of the incentive package is the fact that the city of Columbia actually owns the building where the call center is located. This building cost the city $3 million and IBM’s rent is a miniscule $1 every year.

We were bearish on this plan when it was first enacted, and unfortunately for taxpayers, we were proven right. Tax credits are not a good economic investment, and their failure is not isolated to Columbia.

What is happening in Columbia is just another example of the consequences that occur when government picks winners and losers. If policymakers want to create economic growth, they should work to create a business environment that is welcoming to everybody and not just Big Blue. 

The post Columbia Feeling “Blue” About IBM’s Job Numbers appeared first on Show-Me Institute.

In 2010, the state and city combined to give IBM a sweetheart deal in order to lure them to Columbia. The BUILD incentives were just one of many carrots IBM received. The others included:

• $14.7 million through the Missouri Quality Jobs program
• $4.2 million in new jobs training
• $300,000 for customized job training
• $412,500 in recruitment assistance
• Sales tax exemptions and tax abatements for personal property

The cherry on top of this deal was when Columbia leased a $3 million building on LeMone Industrial Blvd. to IBM for one dollar a year. IBM was supposed to create 600 jobs at this call center by 2013. As of March 2015, the center only has 453 employees. Hence the BUILD incentives, which required a minimum of 500 employees at the center, were suspended.

We wrote that these incentives to IBM were not a good idea back when they were originally awarded. Tax credits are not a good economic investment for the state to be making, and cities, including Columbia, should not be hollowing out their property tax base by buying buildings so they can lease them to favored businesses. If the state and its cities really want to help businesses, they should keep taxes low for everybody.

The failure of tax credits to deliver promised economic benefits is not isolated to Columbia. I hope policymakers can learn from these examples and stop trying to pick winners and losers with subsidies, but I won’t hold my breath.

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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.

The post The Best Bargain I Ever Made appeared first on Show-Me Institute.

You may remember the IBM facility from news accounts in 2010, when the Columbia Missourian reported that state and local government had lined up an impressive subsidy package for IBM. It entailed more than $30 million in state and local tax subsidies, including a big exemption on local personal property taxes, and millions in state tax credits. The City of Columbia actually bought IBM’s building for $3 million and is leasing it to the company for just a $1 a year, meaning that the company is not paying property taxes on the building.

In exchange, IBM promised to bring  800 new jobs to the facility within three years, and is required to bring in at least 600.

According to the latest reports, IBM had 349 employees at its Columbia service center during the last months of 2011. But company officials promise that they are on track to have 800 new hires by the end of 2012. In order to hire the remaining 451 employees, IBM should be hiring at least one new employee every day, including weekends and holidays.

The IBM service center in Columbia could be a promising lead for those looking for work. After all, when all the state and local subsidies are accounted for, Missouri taxpayers will have subsidized IBM’s Columbia operation to the tune of nearly $40,000 for each job. Collecting a paycheck from the company is one way to try and recoup your tax dollars.

The post Help Wanted appeared first on Show-Me Institute.

The demolition of the Regency Hotel site. Photo by Timmy Huynh of the Columbia Missourian.

Since 2005, the City of Columbia has entered into the business of subsidizing development in a big way. The Columbia City Council approved its first Tax Increment Financing (TIF) project in 2009 and is considering another one.

In 2010, the city actually bought property for $3 million in order to lease it to IBM for $1 (yes, just a dollar) for at least 10 years. In fall 2011, the Columbia Missourian reported that IBM had hired just 101 full-time employees, far short of the 800 jobs promised.

It may not be a tax subsidy, but it is certainly a failed bet: The city has also built a very expensive parking garage that garishly lights up downtown Columbia in the evenings. The Missourian has reported that it costs more than $3,000 each month to keep the lights on in that garage. Of course, the cost of the parking lot is $21 million, and its parking revenue appears to have been paltry.

To this former Columbia resident, the city’s development bets seem contrived. The City Council, hoping for a better hotel, approved a large TIF for the Regency Hotel site on Broadway (demolition site pictured above). In my humble opinion, if the replacement of any hotel in Columbia could merit subsidy, I would nominate the Arrow Head Motel, which looks a little worse for the wear.

Now, the Columbia City Council is moving aggressively forward to allow for the awarding of Enhanced Enterprise Zone (EEZ) subsidies. The City Council voted 7-0 on Monday to set up an EEZ board, the first step needed to hand out EEZ development subsidies, despite the fact that many people showed up to protest that move.

What, exactly, is wrong with Columbia? The unemployment rate in the Columbia metropolitan statistical area is lower than the rest of Missouri. Columbia has a large college campus that guarantees a certain level of sales tax revenue and occupied apartments. It hosts football games that draw even more commercial activity to the city.

And yet, Columbia officials argue that a large swath of their downtown should be considered “blighted” and that the city needs development subsidies.

I wonder, to what success are those officials looking? I have pointed out before (in a Columbia newspaper) that TIF has a very poor track record on both sides of the state when it comes to creating long-term growth.

The Wall Street Journal just highlighted Kansas City’s bad development bets. The Saint Louis area’s use of development incentives has been so inefficient that we have spent more than $370,000 per job created. And the Associated Press just reported that the Kansas City development incentive border war has resulted in $750 million in incentives spent to move jobs across state lines.

Development subsidies that taxpayers fund are no way to provide long-term economic growth. But if Columbia’s city officials are itching to get into the development game, they should do so with their own money, and on their own time.

The post What Is The Matter With Columbia? appeared first on Show-Me Institute.

In short: Many promises made by legislators and organizations in favor of the tax credits are supported by little, if any evidence. Other promises — like the statement by Rep. Caleb Jones, that constituents could fly cattle to China — are flat out wrong.

The case study attracted the attention of none other than Greg Lindsay, co-author of Aerotropolis: The Way We’ll Live Next, and the only human to go undefeated against IBM’s Jeopardy!-playing super computer, Watson. Lindsay’s book is the foundational text for Aerotropolis proponents everywhere — so he is likely one of the experts who can comment most intelligently on the Saint Louis proposal.

From Lindsay, via Twitter: [After mentioning our case study] “Will this convince everyone in Missouri to please stop abusing this word?”

Then: “Calling some cargo flights and warehouses an aerotropolis doesn’t make it one.”

And then (emphasis added): “Well, nobody asked me, but as the guy who wrote the book on the subject, I don’t think it will work there.”

Well, I’m shocked. I’ve focused on the details of the legislation, pointing out details that appear to favor the politically connected few, and the current availability of warehouse space. I would have thought that the legislation’s authors — whoever they are, since many disavow any role in crafting the legislation when the details are discussed — would have perhaps solicited the opinion of the people who literally wrote the book on the Aerotropolis concept. Apparently, they didn’t.

On top of that, Lindsay doesn’t think the Saint Louis proposal will work. So why are legislators still pushing for this bill?

The post “Aerotropolis” Author Doesn’t Think Saint Louis Proposal Will Work appeared first on Show-Me Institute.

The interior of the Columbia building is primarily open space, with a few conference rooms partitioned away from the main areas. Yesterday, the spacious rooms were filled with row upon row of empty cubicles, furnished with telephones and lime-green desk chairs, but few computers. A handful of employees worked quietly among a sea of empty desks.

This is not an isolated example. Unfortunately, it’s a pervasive problem in Missouri. According to an article from the Associated Press (hat tip: Audrey Spalding):

Missouri has levied more than $1 million of penalties against dozens of tax credit recipients for violating a state reporting law intended to gauge whether their projects actually are producing the promised results.

Records provided to The Associated Press show 56 businesses, nonprofit groups and individuals have failed to meet the mandates of a 2004 state law that requires annual progress reports after receiving tax credits.

The list includes major employers such as Harley-Davidson Motor Co., as well as numerous developers who got historic preservation tax credits to remodel old buildings.

There are two problems here. The first problem is that targeted tax credits are an overhyped tool for economic development and they tend to fail to create the jobs and economic activity that they promise. The second problem, as illustrated in the second article, is a logistical one: Missouri is awarding tax credits at such a high rate, it can’t keep up with the required paperwork. This is bad news for taxpayers in Missouri because it means that they are stuck subsidizing failing projects.

The post Where Are the Promised Jobs and Economic Activity? 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.

As the first part of my strategy, I would hire a team of lobbyists in order to enact rules and regulations that discriminate against products from other states that compete with mine. If I could keep firms from other states from entering Missouri, I would not have to work as hard to compete with them. I would try to get the state government to impose strict licensing requirements in order to keep others from entering the industry and trying to compete with me. In doing so, I could charge a higher price to consumers living within the state because this protectionist policy would reduce supply, thereby raising my profits.

Protectionist policies may have high cost to society, but as a self-interested CEO, the profitability of my firm is my only concern. Of all business activities, lobbying has one of the highest rates of return. The Washington Post reported in April 2009 on a study finding that a single tax break in 2004 earned companies $220 for every $1 that they spent on the issue. That is a 22,000-percent rate of return!

I could invest a lot of money in research and development in an attempt to improve my product, only to have my efficiency copied and replicated by my competitors. On the other hand, I could contract with a lobbying firm to convince the Missouri state government to give me financial incentives, and then enjoy an artificial competitive advantage for a long period of time. I wouldn’t have to worry about competing with smaller companies that do not have my lobbying power. As an added benefit, by keeping these firms out of the market, Missouri workers can ensure the security of their jobs. Consumers will have the satisfaction that they are consuming products that were made by a worker in Missouri, not in another state — even if they have to pay more for their products in order to subsidize those jobs.

If this strategy doesn’t work, I could use a different one: pitting states against each other to see which will give me the most money. I’ll tell each state government that other states are offering me huge incentives to invest there, and that they must meet or exceed these offers in order for me to stay. Ford is an expert at this, and I’d definitely follow its example.

All of the large companies in Missouri engage in lobbying activities, so my firm would be at a disadvantage if I didn’t. It doesn’t matter how big or profitable the company is — they’re all doing this! Just in my recent memory, Scottrade secured $2.6 million, Ford secured $150 million, IBM secured $31 million, Mamtek got $17 million, and other, large, private developers secured TIF and tax credits.

The post My Next Career Move: Professional Rent-Seeker appeared first on Show-Me Institute.

Unsurprisingly, rent seekers tax credit supporters are critical of the new committee. According to an article in the St. Louis Post-Dispatch (emphasis added):

While the commission does include several prominent tax credit advocates, […] it lacks any representatives from small town Main Street groups, community development organizations or historic preservation groups, “all of whom have firsthand experience in how well the program works for the average citizen,” the [Coalition for Historic Preservation and Economic Development’s] press release reads.

Judging from the list of people on the committee, I don’t foresee many calls for scaling back these programs. Not only does the committee include bureaucrats and politicians, who have an incentive to grow the size of government, it includes businessmen whose companies have been issued tax credits. The committee includes a member from Hallmark, in Kansas City, which has received $8,657,730 in tax credits from the state government since 2000, according to the “Show-Me: Tax Credits” application. There is also a member from Commerce Bank in Saint Louis, which received $5,401,975 in historic tax credits in 2002. Legacy group investments received $183,586 in historic preservation credits in 2003. In addition, many other members come from the real estate industry, which would likely benefit from increased construction activity.

As I communicated to the Missouri Watchdog, I applaud the effort to review these programs, but I am skeptical that this commission will accomplish anything, given that the governor continues to dole out tax credits to his favored few (e.g., Ford, IBM, sugar substitute producers, data centers, filmmakers, etc.).

We live in a world of second-best options, and a review process is more desirable than nothing. The optimal solution would be to cut these incentive programs altogether, because they distort the playing field.

If the governor were serious about stimulating productive economic growth in Missouri, he would eliminate the programs entirely and return the money to taxpayers to spend on their own. People tend to spend their own money better than they do other people’s money, after all.

The post Regarding Missouri’s New Tax Credit Review Commission appeared first on Show-Me Institute.

Governor [Jay] Nixon has put forward an agenda to make government more efficient, effective and responsive to the needs of Missouri families. He is committed to […] placing a college education within reach for middle-class students.

The governor’s budget decisions, however, send the message that his priority is big businesses that have lobbying power — not students, not low-income or middle-class families, and not people who have mental illnesses or disabilities.

Just last week, the governor cut from the state budget hundreds of millions of dollars from programs that benefit these disadvantaged groups, including transportation aid and college scholarships. He says that the state government is strapped for cash and has run out of programs to cut, but then he doles out hundreds of millions in tax credits to big companies like Ford and IBM. As Martha King wrote yesterday, it’s nonsense.

Every day, it seems, there is a new company and/or industry seeking a handout from the Missouri state government, which is eager to oblige. According to the Columbia Daily Tribune (link via John Combest), the proposed beneficiary du jour is data centers:

Rep. Tim Flook, R-Liberty, submitted an amendment Monday afternoon to expand the bill offering incentives to Ford Motor Co. to include new incentives for data centers.

I’ve argued previously that offering state tax credits to data centers is not good policy. To make the situation worse, as part of the proposal, any data centers that locate in state will contribute zero revenue to the state:

Flook’s amendment, which passed out of the committee by a vote of 14-1 with one abstention, would give a sales tax exemption on the utilities for data centers. It also would exempt retail sales of certain tangible personal property and materials from sales tax if they are for facilities used by data storage centers and server farm facilities. A fiscal note outlining the cost to the state has not been attached yet.

By carving out sections of the tax base, the state government shifts the tax burden to those who remain. This leaves those who lack lobbying power to pick up the tab. The businesses that locate in Missouri as a result of this proposal will still consume services from the state government, but they won’t have to pay for them. (The rest of us will.)

The post The Governor’s Revealed Preference appeared first on Show-Me Institute.

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

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

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

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

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

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

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

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

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

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

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

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

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

The post States Can Entice Businesses and Industries Without Tax Credits appeared first on Show-Me Institute.

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

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

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

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

According to a study of tax credit cost controls recently released by Missouri State Auditor Susan Montee, tax credits have less of an impact than predicted and cost more than anticipated. The report reviewed 15 major tax credit programs in Missouri, and found that the fiscal notes underestimated the total cost of the programs by $1.1 billion over a five-year period. For the historic preservation tax credit — the one for which the author specifically lobbies — the redemptions far exceed the estimated fiscal impact. From the audit report (emphasis mine):

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

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

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

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

Quoting again from the Post-Dispatch editorial:

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

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

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

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

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

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

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

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

[T]hey are not giveaways.

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

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

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

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

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

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

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First, it could negatively affect 3,000 jobs statewide, according to the article. These 3,000 jobs don’t require subsidization from taxpayers, quite unlike the 600 jobs that the IBM service center has promised to create. The government should not favor certain occupations over others (i.e., computer technicians over strippers). Furthermore, these establishments provide employment for workers who are low-income and low-skilled, so restricting them would negatively affect this group. Additionally, because the bill outlaws contact between dancers and customers, such as tipping, a dancer’s income may decline.

Second, if the state government places these restrictions, the government will see a significant reduction in revenue. From the article:

[T]he Association of Club Executives […] says the note attached to this bill — $100,000 — grossly underestimates the loss in sales tax, income withholding and other costs to the state. They claim that if adult businesses are restricted as proposed, at least 60 percent of them would close, costing the state about $2.7 million in lost sales tax and $720,000 in lost state withholding taxes and would put about 1,800 people out of work.

This is another striking contrast from the aforementioned IBM service center, which will be located on tax-abated property and will therefore contribute no revenue to state coffers.

Additionally, as research analyst John Payne has previously argued, it is likely that some individuals would seek out substitutes, such as pornography and prostitution — perhaps even rape.

It would be beneficial if the government didn’t stop willing buyers and sellers from engaging in voluntary transactions in the marketplace. If a person happened to disapprove of these businesses, then he or she can choose not to patronize them and perhaps convince others to follow suit. Because this behavior does not cause physical harm to other people or their personal property, however, the government should not be involved. The scope of government should not extend to regulating the behavior of consenting adults in strip clubs, in sex stores, or in their own bedrooms.

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The financial services giant […] never asked for millions of dollars in incentives that the Greensboro City Council and Guilford County Board of Commissioners were prepared to consider.

This is advantageous for taxpayers in North Carolina and in Guilford County. Not only will they experience job growth and productive economic activity, they don’t have to subsidize those jobs.

Furthermore, their tax money can be diverted to programs that have a higher priority, such as education or infrastructure, or returned to them to save or to spend in the private sector.

Additionally, because AmEx remains in the tax base, the state and local government in North Carolina can assess a tax rate that’s lower and more equal for all taxpayers. Unlike the new IBM service center in Columbia, Mo., AmEx will contribute property tax revenues, which will benefit public schools in the area.

The News & Record editorial also says:

[American Express] operates on an ethic of giving to the community, not taking from it, and now it has enhanced that reputation many times over.

I applaud the restraint that American Express has shown, and I hope that other corporations follow this example in their own expansion efforts. According to the editorial, a computer distribution center has also opened in the area without government incentives.

North Carolina is fortunate because profitable, confident businesses like American Express are moving to the state on their own volition, and without the financial assistance of the government. (If only Missouri were so lucky!)

Hat tip to John Payne.

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Nixon proposed to “right-size” government by merging agencies, eliminating state holidays, laying off more employees, getting rid of state vehicles, scaling back employee pension and health benefits, privatizing child support collections and curtailing Missouri’s expansive tax credit programs.

He may talk the talk, but he doesn’t consistently walk the walk — he has continued to support giving tax credits to specific businesses. Here, I reference the $28 million in state incentives that the Missouri government is giving to IBM to locate in Columbia, Mo., or the proposed $15 million in tax credits to support the Ford plant in Claycomo, Mo.

Even though the incentive package for Ford’s Claycomo plant didn’t pass the state legislature, the governor strongly supported the proposal. According to the Kansas City Star:

The bills’ failure was a disappointment to Democratic Gov. Jay Nixon, who had pushed hard for both the jobs bill and retirement reform, and worked through the day Thursday and Friday to make a deal on their passage.

“Unfortunately, the General Assembly missed a critical opportunity by failing to pass this package,” Nixon said.

The recession has provided a new opportunity to evaluate the appropriateness and the effectiveness of specific government programs. I do give credit to the governor for communicating his commitment to reduce state expenditures. However, I wish that he would advance a consistent message regarding tax credits.

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IBM could bring $4.3 M to schools, slow budget cuts

In the article, reporter Molly Harbarger writes that at a press conference, Columbia’s mayor claimed that the new service center could bring in an additional $4.3 million in tax revenue for the Columbia Public School District during the next decade. District Superintendent Chris Belcher said that would amount to about $400,000 of extra income for the district per year.

Yet the school district, the city, and the state are forgoing large amounts of tax revenue to bring IBM to Columbia — that’s what this $31 million incentive package represents. To say that the school district will see its property tax revenues increase as a result of this project is, at the very least, to rely on uncertain and disputed methods to calculate the economic benefit of a new development.

As research analyst Christine Harbin wrote on Monday, the total $31 million price tag is actually an understatement of all the incentives awarded to IBM. Because the city owns the property where IBM will locate its service center (and will be leasing it to IBM for only $1 per year), the company will not have to pay property taxes on that property. In Harbin’s words, “this is a bigger subsidy than the $3 million the city paid for the building.” Furthermore, she noted, the $31 million does not include the sales tax exemption on personal property or the 50-percent property tax abatement on personal property awarded by Boone County.

So, at this point, there is no additional money going to the school district. After all, the city owns the building in which IBM will locate. Because the city will be leasing the property to IBM for the next 10 years, any improvements to the building will not bring additional tax revenue to the school district. In fact, it is a likely bet that some other company would have bought that building in the future, which means that the school district is not simply forgoing additional tax revenues, it is also missing out on the future property tax revenues that another, unsubsidized, company would have paid.

So, where exactly did the projected $431,000 in additional revenues for the district come from? The Missourian article doesn’t say. A quick search of Columbia’s website reveals a presentation from Regional Economic Development, Inc., about the purported benefits of the project, including the $431,000 figure — but no supporting research or background about how REDI came to that number is included.

In fact, as the Columbia Tribune reported, some government officials have suggested that the approval process for the IBM service center was less than transparent. Former city council member Karl Skala told Tribune reporter Jodi Jackson that “he was critical of Regional Economic Development Inc. for not providing more information to the Columbia City Council earlier in the economic recruitment process.”

I am skeptical of the claims made by Columbia’s mayor and district superintendent about the increase in property tax revenues. If nothing else, the school district cannot expect those benefits to accrue immediately. Had IBM itself paid for the building, the school district would have seen an immediate increase in its property tax revenues, to the tune of about $47,000.* Instead, the district appears to be banking on revenues that have yet to materialize — and probably won’t for a number of years, if at all.

In fact, most subsidized projects such as this fail to deliver on the promised economic activity. The Mackinac Center for Public Policy, a nonprofit think tank in Michigan, reported, after conducting an extensive survey and review of Michigan’s tax credits, that of 127 incentive packages awarded by the state, only 10 actually created the number of jobs initially promised within the expected time frame. That comes to less than 8 percent of projects that actually delivered the total number of jobs that had initially been pledged.

If projects supported by tax credits do such a poor job of delivering on job creation, we can likely expect similar errors to be made in the estimates of increased property tax revenue. There is a good chance that neither a total of 800 new jobs nor the additional tax revenue will come to fruition.

In short, the claimed future benefits of this project are promises, and nothing more.

* The $47,000 figure is based on the price that Columbia paid for the property. The purchase price of a property is not a perfect estimate of the appraised value of a piece of commercial property, but it is a good place to start.

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From the article:

State incentives:

• $8.6 million through the Missouri BUILD Program
• $14.7 million through the Missouri Quality Jobs program
• $4.2 million in new jobs training
• $300,000 for customized job training
• $412,500 worth of recruitment assistance
• Sales tax exemption on personal property under the Chapter 100 program

Local incentives:

The city of Columbia will buy the building at 2810 LeMone Industrial Blvd. for $3 million and will lease it to the company for $1 per year for 10 years with an option to extend it for an additional 5 years at the same price.

Boone County will provide a 50 percent property tax abatement on personal property for the depreciable life of equipment and will exempt personal property from sales tax.

According to another article in the Columbia Missourian, IBM has promised to bring 600 jobs to Columbia during the next 10 years. Given the $31 million incentive package, this means that taxpayers will be subsidizing each job by $51,670. Meanwhile, IBM will only have to pay its employees a minimum average annual wage of $43,750, and it will contribute zero property tax revenue. In exchange, IBM will provide exactly $10 in rent over 10 years.

Furthermore, because the city owns the property and is leasing it to IBM, the company will not have to pay property taxes on it — this is a bigger subsidy than the $3 million the city paid for the building. IBM will not be required to contribute personal property tax revenues for this facility to the state government, either.

The government shouldn’t carve out sections of its tax base, via methods like property tax abatements or tax increment financing, because this type of behavior shifts and increases the burden to those who do pay taxes. Additionally, this $31 million cannot be spent on other services, like education, or returned to taxpayers to spend in the private sector.

The incentives may increase employment in Columbia in the future, but given that the increase will come at such a supreme cost, it may not be worth it.

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