[O]nly 71 entities used these tax credits in the last full year they were active. That’s right, just 71! Forgoing millions of state tax dollars in favor of so few entities seems like the opposite of the governor’s sentiment in the tax rebate discussion. I’d simply ask the same logic to be applied to agricultural tax credits. Research and experience have shown us that these programs do not work. Instead of using the special session to double down on bad policies, a better and fairer solution is to lower taxes for everyone.

Indeed, as Show-Me Institute analysts argued for with SBs 3 & 5, generally the best kind of investment government can make is in “the market.” Like investors, government certainly has the power to make big bets on small industries, but the prudent approach with taxpayer money is to let all Missourians keep and invest their money through tax cuts, rather than dole out more and more cash to rent-seeking special interests.

The good news is the legislature did pass a broad-based tax cut bill in the special session. Quite a treat for taxpayers! The bad news is it also passed the tax credits we warned about to benefit special interests in the agricultural industry. Quite a trick! Boo.

Show-Me Institute staff have noted the problems with “economic development” tax credits for years; those problems include their haphazard creation and the way in which they, in practice, serve to gild the coffers of a host of powerful special interests in the state. Those objections and criticisms are as applicable now as they’ve ever been. It doesn’t matter if tax credits such as these go to large-scale property developers in cities or large-scale farmers in the countryside—it’s bad policy, and wrong, to force the rest of the taxpaying population to underwrite the profits of these private actors.

Taxpayers shouldn’t have to have to endure the “tricks” of tax credits to get the “treats” of better tax policy through income tax cuts. At some point, legislators need to gather the courage and say no to this constant rent seeking, once and for all.

The post Boo: Agricultural Tax Credit Passage No Treat for Taxpayers appeared first on Show-Me Institute.

The new order affects new constructions, major remodels, parking lot reconstruction and overlay projects, and changes in use or occupancy classification. The changes apply to properties zoned for commercial, industrial, institutional, recreational, cultural, or municipal and park land uses. These properties must equip 2 percent of their parking spaces with electric vehicle (EV) chargers and have the electric wiring ready for another 10 percent of spaces on standby.

Not every property will be affected by this decision. But why should any?

The bill’s sponsor stated that its purpose is to incentivize more Missourians to drive EVs. However, EV ownership in Missouri, while small, is already increasing. Why not let property owners add EV charging spaces on their own and compete for EV drivers rather than force every renovating business to do so?

In addition to the bill’s warped incentives, it reeks of what economists call rent seeking, which is when companies use the political process to pad their bottom lines rather than providing a better service to customers. In this case, a prime beneficiary of the new requirements is local monopoly utility Ameren (which according to one councilmember lobbied heavily in the bill’s favor), which gets to make more money from captive customers simply by governmental order.

Another major problem is that installing EV charging stations is not cheap (they cost roughly $5,000 per unit). But the bill makes no mention of how property owners will pay for this. This is a government mandate that will squeeze business and property owners while only benefiting the existing electricity monopoly.

EV ownership is a personal preference. If more Missourians purchase EVs, businesses can make their own decisions about installing  EV charging stations and competing for customers’ business. Shouldn’t competitive markets decide these kinds of things instead of government bureaucrats?

The post St Louis County Council Mandates Businesses Install EV Charging Stations appeared first on Show-Me Institute.

Under the best circumstances, Burns & Mac officials claim they will create up to 2,000 jobs for only $40,000,000 in public taxpayer money. That is a cost of $20,000 for each job. That’s not bad by government standards; a study in Saint Louis found that Tax Increment Financing (TIF) created retail jobs at a cost of $370,000 each. Let”s hope the TIF is as successful as Burns & Mac claims, but experience suggests otherwise.

Soon we will write up an analysis of what Burns & Mac is asking for, and it isn’t as small a subsidy as they would like you to believe.

While the Show-Me Institute understands that businesses must seek the best deal they can, including public assistance if offered, we fault municipalities for being too eager to give away the shop. Burns & Mac is well connected. CEO Greg Graves is a former president of the Chamber of Commerce. Kansas City Mayor Sly James said the city was going to help the project months before Burns & Mac (publicly) asked for help. Those are the benefits of being a political crony.

But what’s worse about this whole ordeal is not Burns & Mac’s shameless rent-seeking, or promoting a public policy that has been proven unsuccessful, or that the earnings tax — which Graves said he is proud to pay — is being diverted to political cronies. No, the worst part is the response from Burns & Mac: “We are not requesting all the incentives that were available to us.”

In other words, “we could have taken more.” And certainly the City Council would have given more. Is that comforting to anyone?

The post Corporate Welfare Defense: ‘We Could Have Taken More’ appeared first on Show-Me Institute.

Recent  news of the city of Columbia offering special incentives to American Airlines, but not to Delta, prompted Phil Garcia to write about the consequences of rent seeking (and even compared the situation to his children wanting more allowance). Garcia commented how rent seeking hurts competition and raises taxpayer burdens. Check out his excellent letter to the editor in the Jefferson City News Tribune — Your Opinion: Airport ‘rent-seeking’.

Also read our posts explaining why Columbia made a poor decision, and a related op-ed about how Columbia intends to pay for an airport expansion.

The post Privilege Seeking appeared first on Show-Me Institute.

In officially joining the “Aerotropolis” bandwagon and calling for a special session of the Missouri Legislature in September, Nixon used the phrase “Let’s get it done” several times in a twenty-minute speech. That was his way of endorsing the much-talked-about bill to support the development of an air cargo hub at Lambert-Saint Louis International Airport.

The bill would pass out $360 million in tax credits – with $300 million going to support the development of additional warehousing space and the rest going as an inducement to freight forwarders to send additional cargo through Lambert.

But if the goal is to transform Lambert into the world’s next great cargo hub, will this legislation be enough to “get it done”? Will it succeed in creating thousands of new jobs and providing a major boost to the region and state?

There is no reason to suppose it will.

As policy analysts at the Show-Me Institute have pointed out in a number of papers and commentaries, there are acres and acres of unused warehousing space in and around Lambert. If setting up a Midwestern cargo hub at Lambert is such a great idea, why has the sensible money stayed on the sidelines? Why does the hub need tax credits or other government guarantees to attract investments for upgrades, retrofits, or new construction for refrigeration?

After months of discussion, supporters of the Aerotropolis legislation have yet to produce a serious cost-benefit analysis of what Missouri taxpayers should expect in return for a substantial investment in the project.

The St. Louis Regional Chamber and Growth Association (RCGA) produced an eight-page statement making the claim that $300 million in public incentives for new warehousing would lead to $34 billion in private economic activity over the next two decades. That is an economic multiplier of more than 100. Perhaps suggesting the lack of a sound basis, the RCGA has yet to identify the assumptions used in reaching this astounding conclusion.

At the same time, no group supporting the proposed legislation has produced a shred of evidence that the Chinese government or even a single international carrier is committed to turning Saint Louis into a major air cargo hub.

Greg Lindsay, who co-wrote the book Aerotropolis: The Way We’ll live Next, has publicly scoffed at the pending legislation. He has called the proposed investment both “too much” – in representing an egregious waste of taxpayers’ money – and “too little” – as billions of dollars of additional investment would be required to enable Lambert to compete with established powerhouses such as Dallas Fort Worth and Chicago O’Hare International Airports.

It is not surprising that supporters of the Aerotropolis legislation are anxious to stop talking and swing into action in passing a bill. Even they must know the economic case behind the legislation does not survive close scrutiny.

In his press conference in Saint Louis, Governor Nixon engaged in the kind of chest-thumping that often accompanies large job creation schemes, calling for “decisive” action by the public sector. “We need a bold spirit and competitive vision again,” Nixon proclaimed. “We are competing against the world.”

But if business generation is the real goal, you don’t start by slaying the great Goliath of global competition. Instead, you begin by providing a better product or service that someone else will want to pay for – at a price that will provide a decent profit.

That kind of thinking is alien to glory-seeking and intervention-minded politicians. It is also alien to rent-seeking business people – business people, that is, who would rather lobby for special favors from government than compete in the open market; business people who would rather drop the real risk of capital investment at the feet of taxpayers rather than lift it onto their own shoulders.

Over the past several years, we have seen many examples of much touted job creation and pump-priming economic schemes, at the federal as well as the state level – everything from “cash for clunkers” to the massive $787 billion stimulus bill.

What they all have in common is simply this: They don’t “Git-R-Done.”

The post Aerotropolis: The Wrong Way to Get-It-Done appeared first on Show-Me Institute.

In no place was this clearer than in Saint Louis during the 2011 legislative session. Under the guise of increasing international trade, Saint Louis developers and politicians pushed hard for creating $360 million in state tax credits. Unfortunately, those tax incentives had little to do with realizing the Aerotropolis dream.

Of the $360 million, $300 million would have gone toward subsidizing the construction of warehouses, while the remaining $60 million would have been devoted to encouraging international freight forwarders to send flights to Saint Louis.

Although one sixth of the total package would at least go toward bringing air traffic to Saint Louis, the remaining $300 million in warehouse subsidies was troublesome. Warehouse subsidy proponents excitedly discussed the 27 million square feet of new warehouse space that could be constructed with those millions, without mentioning that more than 18 million square feet in developed warehouse space near the airport was already vacant and available.

“If someone’s looking for space, we have space available,” said David Randolph, vice president of CBRE, an area real estate brokerage firm that managed the sale and lease of many of those vacant warehouses. Randolph said that the subsidies for new construction would be unfair to individuals who had already built warehouses in the area.

The Midwest China Hub Commission (MCHC), the same Missouri organization promoting the creation of an Aerotropolis in Saint Louis, noted in its internal review of the Missouri tax credit legislation that the state money slated for warehouse construction could end up funding activities unrelated to air transportation.

The MCHC worried that the Aerotropolis tax credit legislation defined “cargo activity” too broadly. From its analysis: “The definition … specifically includes facilities related to truck, rail and water transportation; this may be appropriate, but may incentivize facilities that have only a limited relationship to the Air Cargo facility …”

Furthermore, the MCHC noted that the areas most likely to be awarded the warehouse tax credits had already received nearly $100 million in development tax incentives, and had the ability to draw upon nearly $200 million more. Here at the Show-Me Institute, a nonpartisan research organization dedicated to studying Missouri state and local policy, we wondered why there was such a push for the $300 million in new tax credits, given the incredible amount of tax incentives already available to area developers. At some point, the state must stop subsidizing failure.

At no point had the Chinese government or Chinese cargo companies stated publicly that the hundreds of millions in subsidies were a crucial prerequisite to sending more flights to Saint Louis. In fact, the idea of increasing international trade at the Lambert–St. Louis International Airport had been in the works for years. Only at the last minute did a prominent developer’s attorney, who was also involved in the talks with China, propose the subsidies.

Increased trade is important for any economy, and the United States should not wall itself off from other countries. Air cargo is certainly one way to expand trade throughout the world. Unfortunately, though, the best ideas can be co-opted in order to push benefits for the politically powerful.

If Aerotropolis-style development is the right move for a city, private investment and development will blossom without handouts. The Aerotropolis idea should not be used as a back door to push through large-scale subsidies for the select few. Hopefully, other cities can avoid the political posturing and favor-trading that Saint Louis found itself mired in.

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

The post Trade Promotes Growth, Except When Hijacked by Subsidy-Seeking Special Interests appeared first on Show-Me Institute.

So it would be better to not subsidize these programs and allow them to not exist? It’s not worth it to let them become proven while working toward the longer-term goal of eliminating the subsidies?

The writer introduces infant industry argument, which supporters of subsidies commonly use. The argument implies that emerging industries need to be protected temporarily in order to develop the economies of scale that established companies and industries possess.

My answer is an emphatic yes. For reasons that I am about to describe, it would be better if the state did not subsidize these programs.

If these subsidies were eliminated, many groups would be better off. Consumers represent one group that would certainly benefit. Protecting industries hurts consumers because it: (1) restricts new suppliers from entering the market (which restricts supply and increases the price to the consumer); (2) removes the incentive for existing suppliers to innovate (which decreases product quality); and, (3) restricts their access to consume non-protected competitive products. Furthermore, eliminating subsidies to particular industries will not restrict the variety of goods and services available to consumers. When industries focus production according to their comparative advantage and then trade with others, Missourians will still be able to consume in the absence of subsidy.

Taxpayers would be better off in the absence of such subsidies, as well. The subsidies distort relative prices, which consequently distorts the mix of goods and services available for consumption. A firm that receives a subsidy from the government can charge a lower price to consumers, who consequently have an incentive to consume a greater quantity of it. Additionally, if the subsidies were eliminated, taxpayers would be able to keep a greater percentage of their earnings that they can save, invest, and/or spend on the goods and services that they naturally prefer in the private sector, rather than the goods or services that happen to have artificially lower subsidized prices.

Another group that would benefit from the elimination of subsidies is businesses and industries that do not currently receive subsidies. The government places this group at an artificial competitive disadvantage by dispensing political favors to its competitors.

Milton and Rose Friedman disputed the infant industries argument in their book Free to Choose: A Personal Statement. They wrote:

[T]he “infant industry” argument [is] advanced, for example, by Alexander Hamilton in his Report on Manufactures. There is, it is said, a potential industry that, if once established and assisted during its growing pains, could compete on equal terms in the world market. A temporary tariff is said to be justified in order to shelter the potential industry in its infancy and enable it to grow to maturity, when it can stand on its own feet. Even if the industry could compete successfully once established, that does not of itself justify an initial tariff. It is worthwhile for consumers to subsidize the industry initially–which is what they in effect do by levying a tariff–only if they will subsequently get back at least that subsidy in some other way, through prices lower than the world price or through some other advantages of having the industry. But in that case is a subsidy needed? Will it then not pay the original entrants into the industry to suffer initial losses in the expectation of being able to recoup them later? After all, most firms experience losses in their early years, when they are getting established. That is true if they enter a new industry or if they enter an existing one. Perhaps there may be some special reason why the original entrants cannot recoup their initial losses even though it may be worthwhile for the community at large to make the initial investment. But surely the presumption is the other way.

Additionally, subsidized industries have difficulty weaning themselves off government assistance. I have previously discussed this in the context of film tax credits. When a state protects a particular industry and/or provides financial aid, the industry tends to remain dependent on that protection or subsidy. Furthermore, industries that are subsidized do not have an incentive to innovate because they are not subject to the same competitive pressures as those that are unsubsidized.

More often than not, when an industry refers to itself with the “infant” term, it’s simply seeking rent through legislative favoritism. Milton and Rose Friedman also discussed this concept in Free to Choose: A Personal Statement. They wrote:

The infant industry argument is a smoke screen. The so-called infants never grow up. Once imposed, tariffs are seldom eliminated. Moreover, the argument is seldom used on behalf of true unborn infants that might conceivably be born and survive if given temporary protection; they have no spokesmen. It is used to justify tariffs for rather aged infants that can mount political pressure.

The post The Case for Eliminating Subsidies to Industries appeared first on Show-Me Institute.

But did you know that there is an entire journal devoted to explaining what tax credits are and how to get them? And, yes, you can subscribe to the print version.

The existence of this journal makes sense. After all, if governments are giving away relatively easy-to-obtain public money, we would expect businesses to crop up in order to make a profit by helping others access taxpayer money. This journal, and all the other companies and websites dedicated to encouraging others to apply for public tax incentives are illustrative of the strange activity that is a byproduct of government-manufactured incentives.

(special thanks to Christine Harbin for suggesting that I shamelessly copy Tyler Cowen.)

The post Fake Markets in Everything appeared first on Show-Me Institute.

Lower taxes in all likelihood. Greater legal protection against discrimination claims. And less exposure to potential litigation involving work place illnesses and injuries.

If the state government were to reduce the overall cost of doing business in Missouri, the state would likely experience a higher marginal amount of business activity.

I emphasize the word overall. Overall welfare would increase if the state government adopted policies that affect all businesses in the same way. I worry that the state government in Missouri could decide to lower the tax burden of only a select group of businesses, which would increase the burden on those that remain in the tax base.

As an additional negative consequence, providing favors for a select group would pit industries against each other in a competition for state tax incentives. This practice would incite businesses to expend resources in an effort to solicit the favor of government officials, instead of performing productive activities in the private sector.

The post Keep the Playing Field Level in Missouri appeared first on Show-Me Institute.

First, the bad news, which is really not all that bad — yet. The Environmental Protection Agency (EPA) approved increasing the amount of ethanol allowed in the standard blend of gas, from 10 percent to 15 percent. The important thing to note here is that the agency has allowed such an increase, not required it. There is really no argument against allowing the option for retailers who wish to undergo the expense in order to sell a higher blend, or to consumers who choose to buy that higher blend. So, as long as it remains an option rather than a rule, I see nothing wrong with the EPA’s decision.

The fear, of course, is that states like Missouri will subsequently require the higher blend for gas sold in the state. We currently have a ludicrous law that requires a 10-percent blend of ethanol in Missouri gas, whether we want it or not. If the state were to increase that requirement now, it would be a sick joke. I am tepidly optimistic that this won’t happen, because the higher blend is not recommended for most old cars.

I agree with this part of the article suggesting that, minus the requirement, most gas stations won’t choose to sell the higher blend, and we might not have much to worry about:

Critics said the decision could be a frustration to drivers and argued that many retailers will opt not to sell the higher blend because of the expense of adding new pumps and signs.

In places where there is enough demand, retailers will choose to sell it. Customers should also be informed enough to realize that the suddenly cheaper option at the pump might not be right for their cars. If everyone read this blog, they would already understand this.

On to the potentially more exciting news: getting rid of federal ethanol subsidies entirely! The main ethanol support programs are scheduled to expire at the end of the year, and Congress has yet to renew them. Abolishing these subsidies — or, more accurately, just letting them expire — would be the sole crowning achievement of the 111th Congress. Seriously, getting rid of those subsidies would be a victory for markets and freedom, and a loss to rent-seekers everywhere. The 111th Congress would deserve praise for letting them expire.

The post Ethanol Update on Recent Policy Decisions and Options appeared first on Show-Me Institute.

With seven of the 25 commissioners present, nine residents testified in favor of different tax credits. Due to low numbers, the commission was in recess for a majority of the time between 3 p.m. and 9 p.m.

But each participant told commissioners about how tax credits help his or her project or program.

These tax credit programs affect a greater number of Missourians with their diffused costs than with their concentrated benefits, but the negatively affected group unfortunately has less of an incentive to testify at these meetings because their individual losses are comparatively small.

Quite unfortunately, the rent-seeking occurs on both sides of the table. The members of the Tax Credit Review Commission include businessmen whose companies have directly benefited from tax credits. Many other members of the committee represent the real estate industry, and would certainly benefit from an increase in construction activity.

Did anybody else notice that there are are no economists on the committee, despite the fact that its focus is economic development? This is unfortunate, yet unsurprising.

The Tax Credit Review Commission is holding regional meetings throughout Missouri this week. The schedule is available online. I encourage Missouri taxpayers who are concerned with the costs and negative consequences of tax credit programs in Missouri to attend. I plan to attend and deliver testimony at the regional meeting in Saint Louis on Sept. 21.

(I adapted the title of this blog entry from a recent — and related! — article in Reason: “Let’s Cut Spending! (Just Not Any of the Spending That Benefits Me.)

The post Let’s Cut Tax Credit Programs! (Just Not Any of the Tax Credits That Benefit Me) 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.

Let’s start in Kansas City, where the city council appears set to establish new code requirements for doors. That’s right — doors. Apparently, the incentive we all have not to get robbed isn’t good enough in KC; now you’ll be subject to mandates to install special doors on new homes, which will raise the cost of housing in KC (although probably only marginally). At least they got rid of one bad part of the proposal:

[Councilwoman Cathy] Jolly brought the idea to the council in April, but encountered resistance from some council members who worried that some of the new code requirements would give a competitive advantage to an Overland Park company that specialized in a device to reinforce door frames.

Jolly insisted she was not trying to play favorites, and the latest version of the ordinance deleted language aimed at a particular device or specification.

I still think the reinforced door requirement is unnecessary, but at least the most “rent-seeking” aspect of the proposal was removed.

On to St. Louis. Before I criticize, I shall praise. There was an insanely obvious example of rent-seeking this month as the fire sprinkler industry attempted to get a county code passed that would require a comprehensive fire sprinkler system in every new home built in the county. I give both the sprinkler industry and the union credit for not even trying to deny the obvious benefits to them. The next item will get no such credit. The article features this quote from the president of the Home Builders Association of St. Louis & Eastern Missouri:

“The sprinkler industry has been basically advocating mandatory sprinklers in all new homes for probably 20 years and realized, ‘We can’t sell this to the general public, so let’s focus our efforts on convincing the fire service community,'” he said.

Mike Mahler, business manager for the 500 members of Sprinkler Fitters Local 268, conceded [the] point but said that did not mean residential sprinklers were not a good idea.

“We got the ball rolling on this because this is a great product,” Mahler said. “We educated the fire marshals: Here’s what sprinklers can do, here’s how they can save lives. And the fire marshals carried the ball from that point on.”

I commend the St. Louis County Council for removing this requirement from the new building code. Mandatory sprinklers are not needed for safety in the county and were properly taken out of the bill.

But on the other hand, the council seems set to approve a new licensing requirement for residential HVAC workers in St. Louis County. The city of St. Louis just passed the same requirement in April. Jefferson County is supposedly going to consider it later this year. Wherever it passes, it’s bad. This type of licensing requirement is a totally unnecessary handout to current HVAC contractors who want to push current and future competitors out of their way. It is “rent-seeking” at its worst. I testified against the bill yesterday at a committee hearing. At least two of the councilmembers asked some terrific questions of the public works director, and appear set to vote against it — although it will still probably pass. One of them summed up the real reasons behind the move in the a Post-Dispatch article about the licensing proposal:

“There is no evidence of a dangerous situation,” [Councilman Greg] Quinn said after the committee meeting. The licensing “was not generated by the public. It was generated by the industry to protect itself from competitors and increase profit,” he said.

To sum up, the makers or installers of doors, fire sprinklers, and heating and air conditioning units have all sought protective measures from local government. The same thing happens all the time at the national level, and it is one of the most depressing aspects of democracy.

The post Trade Codes and Rent Seeking Are Hot in Missouri Tonight 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.

The post Tax Credits Are an Undesirable Strategy for Missouri appeared first on Show-Me Institute.

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.

The post Should We Save, or Should They Go? appeared first on Show-Me Institute.

“The city doesn’t want to have to get between them,” Zoning and Planning Department head Ted Shekell said. “Let the best snow cone win.”

It is nice to see a planning and zoning official who understands that their role, if there is to be one, should be limited. But I do love the story and the dispute. I’ll let my friend “D,” who sent it to me, sum up all the great stuff included in one small story:

The story has it all. Misuse of needless licensing to stifle competition, a b.s. argument about protecting jobs, and sno-cones.

I can fairly claim to be more knowledgeable about the machinations of the snow cone oligopoly than most bloggers. I hope, for the sake of capitalist enterprise in the Metro East, that they experience a record heat wave this summer and both stands have a blow-out year — provided they only serve authentic Rio Syrup in their cones.

The snow cone market is highly variable and dependent on both season and weather. The obvious goal is to keep fixed costs extremely low and then the variable costs sort of take care of themselves. Sort of the exact opposite of the utility business model. If it is 102 degrees in July, trust me that people will pay just about any price for a snow cone. Unless, of course, some jerk in city government gives permission for someone else to also operate a stand nearby. Just who does O’Fallon think it is, that it refuses to prevent someone from operating a competing business? If governments at every level started acting like this, the next thing you know we’d be responsible for our own health care. …

P.S.: Here’s a link to the movie reference in the title of this blog entry.

The post Rent-Seeking Snow Cone Stands Wage Fight to the Stain appeared first on Show-Me Institute.

It strikes me that the debate over the appropriateness of raw milk consumption is a natural application of the general principle in Ain’t Nobody’s Business if You Do: The Absurdity of Consensual Crimes in Our Free Society, by Peter McWilliams, which we recently read for the Show-Me Institute’s book club. His central idea is the following:

You should be allowed to do whatever you want with your own person and property, as long as you don’t physically harm the person or property of a nonconsenting other.

It should not be the role of government to protect individuals from their own actions, such as consuming raw milk. Consumers of raw milk are rational, consenting adults. They can judge for themselves the costs and benefits associated with consuming milk that is unpasteurized. A person may harm himself by drinking raw milk (just as he may harm himself by drinking pasteurized milk), but he does not harm others by doing so.

Furthermore, it should not should not be the role of government to instruct individuals about which products are appropriate to consume and to produce, and which behaviors are appropriate to engage in, provided they do not hurt other individuals. Individuals who desire to buy raw milk should have the freedom to do so, and dairy farmers who want to produce and sell raw milk should similarly be free to do so.

As an unintended negative consequence, prohibiting the sale of raw milk will be ineffective at stopping its consumption; instead, it will drive such consumption underground and encourage real crimes. Raw milk bans will increase search and transaction costs for the consumer — they could join a raw milk club, travel to a state that permits it, or buy the product disguised with a misleading label.

Sarah Brodsky has written previously about the laws related to raw milk consumption. McWilliams would disagree that the consumption of raw milk should be illegal. From his book:

People often use the word legal too loosely. They fail to give sufficient thought as to what legal and illegal really mean. When we say a given activity should be illegal, what we’re saying is that if someone takes part in that activity, we should put that person in jail. When it comes to consensual crimes, however, when people say, “It should be illegal,” what they usually mean is, “That’s not right,” “That’s not a good idea,” or “That’s immoral.” When using the word illegal, it’s important to remember how forceful the force of law truly is. We are all entitled, of course, to our opinions about certain activities, but do we really want to lock up people who don’t go along with our opinions?

Parenthetically, from the article, I suspect that raw milk bans could be motivated by rent-seeking behavior. Producers of pasteurized milk could encourage banning raw milk as a means to create a barrier to entry to the market:

To some, new legislative efforts to relax raw milk laws could encourage more producers in the struggling dairy industry to get into the raw milk game[.]

Similarly, bans on the production and sale of raw milk discourage small farms from entering and operating in the market, and they favor larger firms that currently operate in the market and possess the resources to pasteurize their product.

The post Raw Milk Consumption: A Consensual Crime appeared first on Show-Me Institute.

This represents an unfortunate trend in public policy: to counteract the negative consequences of one policy, government officials propose another policy that further distorts the market, instead of repealing the first policy. It’s similar to the way in which the federal government subsidizes the production of corn, then proposes to tax products made with corn syrup. If New York City were serious about solving its budgetary problems, perhaps it would consider eliminating the 5-percent film tax credit that it offers to producers, instead of slapping fees on top of subsidies.

I have additional concerns about the policy. From the article:

“Everybody I’ve talked to about this—and I’ve called a number of producers—they couldn’t stop laughing because it’s $300 one time,” said Mr. Bloomberg. “They go anyplace else, they pay $1,000 every two weeks. And it’s such a small percentage of their budget.”

If a producer is in Bloomberg’s list of contacts, he has probably already experienced success in the film or television industry and has a large budget. I am skeptical that Bloomberg has any small-scale, independent filmmakers on speed-dial. Additionally, I’m not surprised at all that these large-scale producers would support an additional barrier to entry in the film industry — the fee positively affects them because it protects them from future competitors. This is a prime example of rent seeking.

Mayor Michael Bloomberg […] said the fee was too small to impact Hollywood business decisions.

Although $300 may not be significant to productions with large budgets, this fee could have a measurable effect on smaller, independent productions. Many of these producers will decide to move away from New York City as a result of this policy, and it’s possible that some of them may end up in Missouri. According to the Missouri Film Commission, Missouri does not require local film permits.

The post Two Market Distortions Do Not a Free Market Make appeared first on Show-Me Institute.

No, wait … not interesting. What’s that other word? Oh yeah: tedious. I spent three hours in a hearing room with most of the time taken up by an abstruse discussion of appraiser regulation. The only people in the room who seemed to be actually animated by the subject were the interested appraisers and representatives of appraisal management companies. Most of the representatives seemed to idle the time away browsing the Internet on their laptops and phones. The rest sat there, supporting their heads with their hands and wearing the painfully bored looks of people firmly convinced they are meant for something better in life than this.

Even for all the hearing’s spectacular boredom, however, I did learn a thing or two. First, appraisal regulation is a subject far more complicated than anyone should ever want to know. The big change under discussion that night was the move to a greater reliance on appraisal management companies (AMCs) over the old-fashioned kind of appraisers. This shift has been ongoing for some time but received a big boost when the Home Valuation Code of Conduct (HVCC) essentially became the law of the land. I will spare you most of the further details (if you really must know, I recommend this article) except to say that although it does appear the HVCC is kind of a disaster, the new bill being used to rectify the problems looks like it just benefits the appraisers at the expense of AMCs and consumers.

Now, I fully admit that I am no expert in the field, but when every appraiser testifying for the bill complains that AMCs do less expensive work than appraisers, it sets off my Rent-Seeking Alarm. It sure seems to me that the appraisers are using the problems in the HVCC as a way to limit their competition and raise rates. But I could be wrong. Given the massive complexity of the regulatory code surrounding appraisals, it probably isn’t possible to know how the bill would change the system ex ante, and this presents a massive problem for regulators.

Writing about Democratic members of Congress who did not understand how tax changes in the health care bill would affect large companies, Glenn Reynolds describes this same problem:

The United States Code — containing federal statutory law — is more than 50,000 pages long and comprises 40 volumes. The Code of Federal Regulations, which indexes administrative rules, is 161,117pages long and composes226volumes.

No one on Earth understands them all, and the potential interaction among all the different rules would choke a supercomputer. This means, of course, that when Congress changes the law, it not only can’t be aware of all the real-world complications it’s producing, it can’t even understand the legal and regulatory implications of what it’s doing.

There’s good news and bad news in that. The bad news is obvious: We’re governed not just by people who do screw up constantly, but by people who can’t help but screw up constantly. So long as the government is this large and overweening, no amount of effort at securing smarter people or “better” rules will do any good: Incompetence is built into the system.

The good news is less obvious, but just as important: While we rightly fear a too-powerful government, this regulatory knowledge problem will ensure plenty of public stumbles and embarrassments, helping to remind people that those who seek to rule us really don’t know what they’re doing.

And that’s assuming the legislators actually take the time to try and understand the legislation. What’s more likely is what I witnessed last Wednesday: disinterested representatives killing time until the end of the session by checking their email and text messages. If a regulation is so complex that the regulators can’t even be bothered to understand it, it is likely to be ineffectual at best and counterproductive at worst. In regulation, less is often more.

The post Mr. Payne Goes to Jefferson City appeared first on Show-Me Institute.

Should we expect another fight over this unnecessary, anti-competitive, and simply appalling use of government to restrict competition? Well, given that one of the people who led the fight against this same effort in 2000 — and who was partly successful in that effort — is now a cosigner on the letter requesting the expansion of licensing authority in the county, I don’t have much hope.

My initial post on this HVAC licensing issue last month has all the links you need to find media stories on this subject. I once again recommend the Riverfront Times story from 2000. I basically feel like a boxer who is still standing, but has been hit so many times that he can’t respond. (And, yes, I have boxed and know what it’s like to be hit really hard in the face.) These proposals are coming, they are a perversion of capitalism, and they will raise costs for St. Louis consumers, yet there is absolutely nothing anyone can do to stop it from happening. The capacity to fight back that existed in 2000 just does not appear to be extant right now (as I am sure the licensing proponents are well aware).

The post The Attack of the Rent-Seeking HVAC Contractors Has Begun! appeared first on Show-Me Institute.