First Ward Councilman Tom Oldham commented that he feels that Chapter 353 is a great tool, as evidenced by his visits to Elm Springs, a community that also took advantage of the Chapter 353 program. Elm Springs went from blight to beauty as a result, Oldham said.

(Note: I assume he meant Excelsior Springs, which has a 353 plan, and not Elm Springs—I can find no municipality in Missouri with that name.)

Did a 353 urban redevelopment plan really turn Excelsior Springs (or Elm Springs?) from blight to beauty? Of course not. Granting some properties in a designated area a tax abatement if they undergo the required legal process isn’t going to grow the economy. If you want to cut taxes, great—cut taxes for everyone, not just a designated few. The idea that politicians are qualified to pick the right companies or properties is absurd.

Economist Dick Netzer once mocked the exaggerated claims of success by economic development officials and politicians by writing, “Who needs oil wells, when a state can be another Kuwait just by increasing the budget of a tiny agency?” Those claims of subsidy success often border on the absurd. I once heard a Clay County economic development official claim that “all of the growth” in the town of Liberty—a fast growing, exurban community north of Kansas City the likes of which have been growing across the nation for decades—was due to a tax increment financing (TIF) package. All of it, he stated with certainty, as if suburbanization didn’t exist until Missouri’s TIF law was passed in the late 1980s.

Economists Alan Peters and Peter Fisher studied tax incentives closely and concluded that they work about ten percent of the time (as measured by job creation), and the other 90 percent are simply a waste of money. They added that, like the Clay County official mentioned above, economic development officials often credit all new employment and growth to tax subsidies.

The City of Saint Louis has been using tax incentives like 353 urban redevelopment plans, Enterprise Zones (EZs), TIF, and other subsidies as redevelopment tools for over half a century. How has it worked out? Colin Gordon, in his 2008 book Mapping Decline, documents the decline of the City of Saint Louis. The book’s research is exhaustive. The dominant theme of the book is the use of urban renewal tools and tax subsidies—and their absolute, total failure. From his conclusion:

The overarching irony, in Saint Louis and elsewhere, is that efforts to save the city from such practices and patterns almost always made things worse. In setting after setting, both the diagnosis (blight) and its prescription (urban renewal) were shaped by—and compromised by—the same assumptions and expectations and prejudices that had created the condition in the first place.

The dirty little secret that nobody seems to want to recognize is that 353 Plans, EZs, TIF projects, , tax abatements, and other subsidies do not work. They don’t succeed in growing the local economy, be it urban, suburban, or rural. The panoply of subsidies that come into play when a large area is declared blighted can have a number of adverse side effects. They shrink the local tax base, introduce more cronyism and favoritism into the economy, encourage more government planning of the economy, and increase the chances of eminent domain abuse. As a famous Swedish economist once said:

It is not by planting trees or subsidizing tree planting in a desert created by politicians that the government can promote . . . industry, but by refraining from measures that create a desert environment.

The Chapter 353 urban redevelopment plan didn’t help grow Excelsior Springs. It didn’t help grow St. Louis, nor any of the other cities that have such a plan. It won’t help grow Sedalia, either, but it will be great for the politically connected parties who get the tax subsidies they are after.

The post Sedalia Doesn’t Need a 353 Redevelopment Plan appeared first on Show-Me Institute.

Tax-increment financing (TIF) is Missouri’s bad idea that refuses to die. Now it is Boonville’s turn to face off against the TIF zombie. Developers have proposed a new, 400-home subdivision in Boonville. Great news, right? Well, there is a catch. The developers want a massive TIF subsidy to fund the project. Residents and taxpayers in Boonville should reject this horror show of a proposal.

TIF is a type of tax subsidy that allows developers to keep the taxes they would otherwise pay to fund some of a project’s costs. With TIF, if a property generated $100 in property taxes before it was developed but generates $200 after improvements are made, the developer gets to keep the $100 difference.

Of course, the actual numbers in this proposal for Boonville will dwarf our little example. As best we can tell, the current property pays $1,176 per year in taxes based on its current appraised value (as farmland) of $116,300. The new subdivision, based on stated goals of 400 homes at an average of $200,000 each, would, if not for the TIF, pay $1,026,912 in property taxes, based on an assessment of $15.2 million at the current area tax rate. With TIF, that would result in an annual subsidy—once the project is fully built—of approximately $1,025,736. For the life of the TIF (23 years is standard), that would be an estimated $23,591,930 maximum subsidy. That is outrageous. Even if the city council were to consider a smaller subsidy, any tax incentive would be a needless giveaway to the developer.

While the people of Boonville may want more housing opportunities for the area, using TIF for residential projects would benefit only the developer. If the city’s population grows as the TIF proposal assumes, and people currently living in Columbia or elsewhere move in to fill the 400 new homes, it is certain that at least some of them will have school-aged children. Boonville will have hundreds of new children in the school district without the expanded tax base to pay for them. Of course, a likely scenario is that some of the home purchasers will come from other parts of Boonville. Local families will move from houses where their property taxes fund the schools to new homes where they do not. How do you think the Boonville R-1 school district is going to pay to educate the children in this subdivision with 400 homes not paying taxes to the schools? There is only one answer: they are going to raise taxes on everyone else.

TIF has had numerous negative economic effects in Missouri. It has increased government involvement in the economy, subsidized politically connected developers, sparked abuse of eminent domain, shrunk the tax base, and made corporate welfare a permanent fixture of development. Furthermore, TIF has failed at its main purpose: economic growth. An Iowa study of TIF usage concluded that, “On net (…) there is no evidence of economy-wide benefits, fiscal benefits, or population gains.” Other studies across the country have found similar results.

The dirty little secret that economic development officials in Boonville and around the state don’t want you to know is that subsidies like TIFs and Enterprise Zones do not work. They do not succeed in growing the local economy. St. Louis and Kansas City have tried using generous taxpayer subsidies to revive their local economies for decades. It has not worked. I can already hear readers in Boonville saying, “But we’re not Saint Louis or Kansas City.” That’s absolutely right—you are not. And there is no reason for you to imitate their mistakes. It is one thing for Saint Louis or Kansas City to try these projects and have them fail. It would be even worse for a city like Boonville to follow that example with the knowledge that the entire process has consistently failed. At least the trailblazer who takes the wrong path has an excuse.

The post Will Boonville Repeat the Mistakes of St. Louis and Kansas City? appeared first on Show-Me Institute.

Creating special zones to channel development is not a new concept in Saint Louis. Much of the city is part of a federal “Empowerment Zone,” which gives distressed areas tax incentives and federal grants. East Saint Louis is already part of an Empowerment Zone and an “Enterprise Community.” Saint Charles became a federal “Renewal Community” following flooding in the 1993. In addition, areas of North County have Foreign Trade Zone (FTZ) status (the entirety of the city and county are FTZ eligible), which qualify some businesses for customs-free imports. Much of the city and parts of the county are in “HUBZones,” which are designed to give federal procurement preference to small businesses in distressed areas.

Even at the state level, the Saint Louis area has special development zones. Much of Saint Louis City is an “Enhanced Enterprise Zone,” which provides state tax credits to certain types of businesses setting up in certain areas. Nearly 100 census tracts in the Saint Louis area are designated as distressed communities, making businesses eligible for large tax credits through the state’s Rebuilding Communities program.

Aside from special zones, the Saint Louis area has been the recipient of just about every type of development aid that HUD has available. In the 1990s, the state received $15 million in Section 108 grants to spend on housing. In the late 1990s, the city received $20 million in Community Development loans and $2 million in Community Development grants. The city spent that money on the Renaissance Center hotel, which turned out to be a financial disaster. More recently, HUD gave a grant for the planning of the Lemay Community Center. The only major HUD programs the Saint Louis region has not benefited from are those targeted at rural areas and arson/terrorism.

When we consider that Saint Louis City, North Saint Louis County, and East Saint Louis have, since the early 1990s, benefited from exactly the kind of federal attention the “Promise Zone” would bring, it is difficult to conclude that adding yet another zone is part of the answer. Given the continued “disinvestment” in these targeted areas over the last 20 years and the growing evidence that such zones do not generate progress, it may be time to consider other policy solutions to combat economic decline.

The post Promise Zone Just the Latest of Many Development Zones for Saint Louis appeared first on Show-Me Institute.

Tax credits and enterprise zones are among the items included in calculating the total amount of subsidies provided to these companies. We have written extensively on how these and similar programs do not generate the type of growth that supporters of these programs claim. Unfortunately, policymakers seem to be big fans of these types of subsidies, as are the companies that benefit from receiving them.

Guess which company is the biggest beneficiary of corporate welfare. I’ll give you a minute. Need a hint? They build airplanes. Give up? I’ll show you.

Boeing collects more in corporate welfare than the next two companies combined. Missouri did its part in improving the company’s bottom line when it gave Boeing a massive handout so that it would locate additional aircraft manufacturing here. However, the state is unlikely to get enough money in return in order to justify these subsidies. To generate sufficient returns, Boeing’s investment in the area would have to be in excess of what they made in profits for all of last year. Color me skeptical that they’ll make an investment that large.

Instead of giving out all of this taxpayer money to specific businesses, why doesn’t the government just cut taxes for all businesses? The state would make itself more attractive to businesses, and it would avoid the management problems that occur with these tax credits.

The post Missouri Is One of the Top States . . . in Corporate Welfare appeared first on Show-Me Institute.

In 2006 and again in 2010, Money Magazine cited Lee’s Summit as one of the 100 Best Cities in the United States. The Lee’s Summit Chamber of Commerce boasts on its website: “Lee’s Summit is an ideal place to live and work, providing a desirable lifestyle that everyone can enjoy — high-quality, affordable housing in safe neighborhoods endowed with fine schools and excellent health care facilities.”

So why in the world is the Lee’s Summit City Council rushing to adopt an economic development program aimed at blighting large swaths of the city?

There is only one possible answer: The city council has been bitten by the same parasitical EEZ bug (Enhanced Enterprise Zone) that has attached itself to other cities and counties across Missouri.

In fact, almost a third of our state has been officially declared “blighted” as a result of the widespread use of EEZs, TIFs (Tax Increment Financing), TDDs (Transportation Development Districts), and other such programs that combine local subsidies for commercial development with the use of eminent domain — enabling developers to force residents out of their homes and small business owners out of their shops and offices.

On April 11, we presented testimony to the city council on the efficacy — or, more accurately, the inefficacy — of Enterprise Zones in Missouri. The Show-Me Institute had recently conducted a study comparing the economic performance of two groups: (1) eight Missouri counties that employed Enterprise Zones, and (2) 12 neighboring and economically similar counties that did not. We found that economic growth in the two groups was almost identical.

In other words, there was no evidence that Enterprise Zones had any positive impact on economic growth or employment. They seemed to be a waste of time and money.

Our statements to the Lee’s Summit City Council made this perfectly clear, and none of the economic development officials, city staff, or consultants at the meeting made an effort to argue otherwise.

Yet it was a clear that most members of the city council, along with the consultants and development staff, had already made up their minds: They wanted to move ahead as quickly as possible in setting up an EEZ.

One reason for the rush is the fear that the 2010 Census numbers, which are still being finalized, will show that poverty and unemployment rates in Lee’s Summit have dropped since the previous Census — which could have the effect of making Lee’s Summit ineligible for the subsidies from the Missouri Department of Economic Development (DED).

Not that Lee’s Summit was any kind of an economic basket case 10 years earlier. Based on the 2000 Census, the median income for a family in Lee’s Summit was $70,702, or close to double the median family income for the state as a whole.

Nor does Lee’s Summit suffer from a lack of growth. Between 2000 and 2010, the population of Lee’s Summit grew from 70,700 people to 91,364 — an increase of 29 percent.

But neither prosperity nor rapid growth has dampened the enthusiasm of some city council members at the thought of spending some easy money.

On the night that we testified, one member of the city council argued that because the DED is giving the money away, Lee’s Summit might just as well take it. The proposed EEZ for Lee’s Summit is a particularly egregious example of throwing away taxpayer money for no good cause — in promoting a solution for a problem that does not exist.

Patrick Tuohey is the western Missouri field manager and David Stokes is a policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.

The post Lee’s Summit EEZ: A Solution In Search Of A Problem appeared first on Show-Me Institute.

The post Lee’s Summit Should Not Institute an Enterprise Zone appeared first on Show-Me Institute.

Ray County is in the process of establishing eight different EEZ districts under one county umbrella. This is a massive bet government planners make that they know what, where, and how economic growth will occur in the county over the next two decades. I have studied the results of Enterprise Zones (EZs, the very similar precursors to EEZs in Missouri) in counties that adopted large EZs in the 1980s in Missouri. The economic data shows that the counties that adopted these zones did no better than neighboring counties that did not. Government planners cannot see the future, and they should not be empowered to use tax dollars to bet on it.

The dirty little secret that the DED, MARC, and the Ray County EEZ proponents do not want you to know is that EEZ, Tax Increment Financing (TIF), Transportation Development Districts (TDD), and other similar subsidies do not work. They do not succeed in growing the local economy. All this myriad of subsidies does is shrink the local tax base, encourage more government planning of the economy, and increase the chances of eminent domain abuse. As a famous Swedish economist once said, “It is not by planting trees or subsidizing tree planting in a desert created by politicians that the government can promote . . . industry, but by refraining from measures that create a desert environment.”

If you ask a DED or MARC official how effective EEZs are, they will tell you how much investment has occurred within EEZs over the past decade. Their hope is that you will assume all the investment is because of the EEZ. Their lie-by-omission is that they have no idea how much the EEZ aided that investment and how much would have occurred anyway. The consensus among economists is that special tax incentives such as EEZs matter little, and only a very small portion, if any, of investments within a zone can be credited to the subsidies. Yet government planners will happily let people assume the incentives make all the difference while hoping nobody asks any follow-up questions.

Most people would claim to oppose corporate welfare, but that is exactly what is being hoisted upon us in Missouri; one special taxing district at a time. This is all being done under the cover of fixing blight, without any real definition of what that means. But the word “blight” is not empty talk. It means many things. One thing it means is that Ray County is taking a major step toward much heavier use of taxpayer subsidies for all types of commercial activity. Once you have blighted a major portion of the county, it is but a short walk to the point where almost every development in the area has some type of subsidy. That is not a “maybe.” That is the current reality in Kansas City and Saint Louis.

Tools such as EEZs fail because politicians cannot see the future better than markets can. Ray County should focus on low taxes for all businesses, not special incentives for a few. It already has the lowest commercial property tax surcharge in the region. Ray County should trumpet that loudly. It does not need a massive implementation of Enhanced Enterprise Zones.

David Stokes is a policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.

The post Ray County Does Not Need Enhanced Enterprise Zones appeared first on Show-Me Institute.

The post Three Ways Bad Public Policy Hurts Missouri appeared first on Show-Me Institute.

The dirty little secret that the DED and the Callaway County EEZ proponents do not want you to know is that EEZ, Tax Increment Financing (TIF), Community Improvement Districts (CID), and other subsidies do not work. They do not succeed in growing the local economy. All this myriad of subsidies does is shrink the local tax base, encourage more government planning of the economy, and increase the chances of eminent domain abuse. As a famous Swedish economist once said, “It is not by planting trees or subsidizing tree planting in a desert created by politicians that the government can promote . . . industry, but by refraining from measures that create a desert environment.”

If you ask a DED official how effective EEZs are, they will tell you how much investment has occurred within EEZs over the past decade. Their hope is that you will assume all the investment is because of the EEZ. Their lie-by-omission is that they have no idea how much the EEZ aided that investment and how much would have occurred anyway. The consensus among economists is that special tax incentives such as EEZs matter little, and only a very small portion, if any, of investments within a zone can be credited to the subsidies. (This should not be a surprise unless you believe politicians have the ability to see the future and know exactly what business to invest taxpayer dollars in 25 years from now.) Yet the DED will happily let people assume the incentive makes all the difference while hoping nobody asks any follow-up questions.

Most people would claim to oppose corporate welfare, but that is exactly what is being hoisted upon us in Missouri; one special taxing district at a time. This is all being done under the cover of fixing blight, without any real definition of what that means. But the word “blight” is not empty talk. It means many things. One thing it means is that Callaway County is taking a major step toward much heavier use of taxpayer subsidies for all types of commercial activity. Once you have blighted a major portion of the county, it is but a short walk to the point where almost every development in Callaway has some type of subsidy. That is not a “maybe.” That is the current reality in Saint Louis and Kansas City.

The Callaway supporters of the EEZ say that other cities have used these tools with great success (see the KRCG Channel 13 news story on Nov. 29, 2012, for one example). In this, they are completely wrong. The can say it works elsewhere all they want, but they might as well be staring you in the face and telling you the sun rises in the north. The City of Saint Louis has been using urban redevelopment tools such as Enterprise Zones and many others for half a century. How has it worked out? “Mapping Decline,” by Colin Gordon, is a 2008 book that documents the decline of the city of Saint Louis. The book’s research is exhaustive. The dominant theme is the use of urban renewal tools and tax subsidies (including EEZ) — and their absolute, total failure. From the conclusion:

The overarching irony, in Saint Louis and elsewhere, is that efforts to save the city from such practices and patterns almost always made things worse. In setting after setting, both the diagnosis (blight) and its prescription (urban renewal) were shaped by — and compromised by — the same assumptions and expectations and prejudices that had created the condition in the first place.

I can already visualize Callaway residents saying, “But we’re not Saint Louis.” You are correct, you are not; so do not follow a path that will make your city repeat Saint Louis’ mistakes. It is one thing for Saint Louis to try these projects and have them fail. It would be even worse for a place such as Callaway to follow that example already knowing that the entire process has failed. At least the trailblazer who takes the wrong path has an excuse.
Tools such as EEZs fail because politicians cannot see the future better than markets can. Callaway County should focus on low taxes for all businesses, not special incentives for a few. It does not need an EEZ.

David Stokes is a policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.

The post Callaway County Does Not Need An EEZ appeared first on Show-Me Institute.

The post Measurements of Enterprise Zones: Comparative Economic Growth in Missouri Counties appeared first on Show-Me Institute.

That is pretty much how Columbia city leaders responded to objections to the recent Enhanced Enterprise Zone (EEZ) designation declaring more than half of Columbia as blighted.

“The word ‘blight’ is just semantics,” the Columbia mayor told a crowd.

“Blight” is not semantics. In this context, it is a word loaded with hidden meaning that the mayor and others do not want to discuss. It does mean that Columbia is taking a major step toward much heavier use of taxpayer subsidies for all types of commercial activity. Once you have blighted more than half the city, it is a short step to the point where almost every development receives some type of subsidy. That is not a “maybe.” That is the current reality in Saint Louis and Kansas City.

The dirty little secret that Regional Economic Development, Inc. (REDI), the local media, and Columbia city officials do not want you to know is that EEZ, Tax Increment Financing (TIF), Community Improvement Districts (CID), and other subsidies do not work. They do not succeed in growing the local economy. “Call me blighted and give me the money,” as one city councilman stated, may be an oafish example of out-of-control government, but even worse is the abject economic ignorance it displays.

The panoply of subsidies that come into play when a large area is declared blighted have a number of adverse side effects. They shrink the local tax base, encourage more government planning of the economy, and increase the chances of eminent domain abuse.

As a famous Swedish economist once said, “It is not by planting trees or subsidizing tree planting in a desert created by politicians that the government can promote . . . industry, but by refraining from measures that create a desert environment.”

The Columbia supporters of the EEZ, the same group that supported the recent TIF projects and the downtown Columbia CID, say that other cities have used these tools with great success (for example, an editorial in the Columbia Daily Tribune, Aug. 13, 2009). In this, they are completely wrong. They might as well stare you in the face and tell you the sun rises in the north. The City of Saint Louis has been using urban redevelopment tools such as Enterprise Zones and many others for half a century. How has it worked out? Mapping Decline, a 2008 book by Colin Gordon, documents the decline of the city of Saint Louis. The book’s research is exhaustive. The dominant theme is the use of urban renewal tools and tax subsidies (including EEZ) – and their absolute, total failure. From the conclusion:

The overarching irony, in Saint Louis and elsewhere, is that efforts to save the city from such practices and patterns almost always made things worse. In setting after setting, both the diagnosis (blight) and its prescription (urban renewal) were shaped by — and compromised by — the same assumptions and expectations and prejudices that had created the condition in the first place.

I can already hear readers in Columbia saying, “But we’re not Saint Louis.” You are right, you are not; so do not follow a path that will make your city repeat Saint Louis’ mistakes. It is one thing for Saint Louis to try to these projects and have them fail. It would be even worse for a city like Columbia to follow that example with the knowledge that the entire process has failed. At least the trailblazer who takes the wrong path has an excuse.

David Stokes is a policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.

The post EEZs Are An EZ Path To Corporate Welfare appeared first on Show-Me Institute.

But the idea of awarding tax credits up front should give everyone else pause. We know that tax credits have a dismal track record at delivering on results promised (state audit reports and independent analysis have shown this). So why expand the DED’s power to award tax credits?

The argument is that if Missouri doesn’t award tax credits, other states will, and as a result will encourage companies to leave Missouri and take their jobs and economic impact to other states. Though the argument sounds plausible, we have to consider the facts.

Missouri already issues hundreds of millions in tax credits each year. During fiscal year 2010, Missouri issued more than $400 million in tax credits. To what benefit? According to the state auditor, tax credit programs cost more than predicted, and the DED was frequently overstating job claims and investment estimates related to tax credit awards.

Texas doesn’t award nearly as much as Missouri does in tax credits. The Post-Dispatch reporter, Tim Logan, writes that tax credit programs are “big in Texas.” However, the fund he cites is the Texas Enterprise Fund, which has pledged $439 million in credits to companies since 2003. Though Texas uses tax credits, the program Logan cites pledged over an eight-year period as much as Missouri pledged in a single year.

In fact, according to the state’s “Tax Exemptions & Incidence Report,” Texas tax credit programs offer a relatively small amount in tax credits for job creation. For example, Texas’ “Refund for Job Creation in an Enterprise Zone” awards a maximum of $5,000 for companies that can show that they created at least 10 new jobs.  In its report on tax exemptions, Texas notes that the revenue cost of that program is “negligible.” If we look at Missouri, the state issued nearly $15 million in “Quality Jobs” tax credits during fiscal year 2010. Tax credits may be big in Texas, but they are really big in Missouri.

We might be winning the bidding war with Kansas. Legislators point to businesses that move from Kansas City, Mo., to Kansas City, Kan., when tax credits are promised. But, according to Kansas’ recent Tax Expenditure Report, the state’s tax credit expenditures for development and services are about $200 million. Missouri may be giving away about twice as much tax revenue to favored industries and companies than Kansas.

Furthermore, Missouri has a more favorable tax climate than Kansas. The Show-Me Institute collects and posts tax data for all 50 states to help people compare tax burdens among states. According to that data, about 23% of Missourians’ income goes to taxes. However, 26.5 % of Kansans’ income goes to taxes.

In short: When it comes to taxes, Missouri is already competitive, compared to Kansas. We should continue to lower our tax burden for all, in order to entice more businesses and individuals to move to this state.

If tax credits result in growth, Michigan would be an economic powerhouse. It is not. Every time I hear a legislator or reporter question whether tax credits are needed to move industry to a state, I can’t help but think of my home state. Michigan awarded more than $1 billion in tax credits last year to just a few auto companies. In fact, the governor’s report on tax exemptions estimates that more than $33 billion in tax exemptions are awarded each year in the state. And, what exactly does Michigan have to show for that much in tax credits and other awards? Not a lot.

Look, tax credits don’t guarantee growth. What they do guarantee is that many pay a tax rate that is too high so that the favored few can get a tax break.

The post Some Facts About Tax Credit Programs in Other States appeared first on Show-Me Institute.

Legislators are considering moving forward with the so-called “Aerotropolis” legislation, a bill that would create $360 million in tax credits. Of that total, $300 million would go toward subsidizing warehouses, and $60 million would go toward subsidizing cargo flights from Saint Louis to international destinations. The bill’s proponents promise that these tax incentives will increase air cargo traffic to the region and boost the state and local economy.

Policy analysts at the Show-Me Institute have researched this proposal extensively. Based on a thorough review of the legislation, we believe that the proposal is a raw deal for Missouri taxpayers, and that certain provisions are indistinguishable from the cronyism often seen at the federal level.

Furthermore, the use of tax credits to encourage economic development has a poor track record, both in Missouri and nationwide. Our case study detailing the most serious problems with the bill, and with tax credits in general, is available online. We encourage all who are interested in good government to read that paper.

Without endorsing the use of any tax credits in this case, changes to the legislation might mitigate the harmful effects on the state economy and taxpayers. Below are revisions that we believe should be considered if the legislation moves forward despite a lack of substantive empirical support.

Allow all new warehouse owners to compete for the tax credits
All arbitrary limits on Aerotropolis eligibility should be removed.

The Aerotropolis tax credits would subsidize warehouse construction, as well as cargo flights from Saint Louis to international destinations. Up to $300 million in tax credits — more than 80 percent of the bill’s tax breaks — would be made available for the construction of new warehouses around the airport. Those tax credits could be used to pay up to 30 percent of a warehouse owner’s demolition, construction, and equipment costs.

The bill requires that warehouses qualifying for those incentives must be built on 100 contiguous acres of land or in specially designated areas. There does not seem to be any practical reason for the “100 acre” requirement contained within the Aerotropolis tax credit bill. The requirement seems to serve only to restrict who could draw upon such tax credits, narrowing the field to a small pool of large-scale developers.

This restriction should be removed. If the state is determined to subsidize warehouse construction — without any substantive empirical evidence that such subsidy would lead to increased economic growth and international trade — such subsidies should at least be made available as broadly as possible.

Accountability measures
Include clawback provisions and reporting requirements in the legislation.

In its current form, the Aerotropolis legislation does not include any sort of clawback provisions or reporting requirements. Accountability provisions should be added. If claims of job creation and investment are used to sell the creation of $360 million in state tax credits, then those credits should be evaluated objectively on the merits of job creation and investment.

In 2010, Gov. Jay Nixon tasked the Missouri Tax Credit Review Commission with reviewing the state’s tax credit programs. The commission recommended that:

…strict statutory clawbacks to be enforced by the State in cases of non-compliance with program requirements be included in all tax credit programs currently lacking such provisions.

And that:

…all applicants for state incentives be required to enter into a contract with the agency administering the tax credit specifying standards of performance, program requirements, and penalties in the issue event of non-compliance.

The commission’s recommendations are sensible, and should be extended to all prospective tax credit programs, including the Aerotropolis legislation.

As written, the legislation requires that new warehouses be built, and little else. If the state subsidizes warehouse construction, but there is no increase in demand for warehouse space, the state will be either subsidizing the construction of vacant warehouses, or helping owners of new warehouses drive owners of older warehouses out of business. Either case is not a desirable outcome for the state or for the area economy.

If legislators move forward with the Aerotropolis bill, a provision that would require an objective evaluation of the tax credit program — that is neither conducted by nor commissioned by an organization receiving any benefit from the Aerotropolis legislation — should be added.

Such an evaluation could be made three years after the inception of the tax credit program. It could include a comparison of the level of international cargo processed at area warehouses, employment numbers at area warehouses, and area warehouse vacancy rates before and after the creation of the tax credit program. If that objective review finds that the Aerotropolis program has not delivered on its promises, then the state should cease authorizing tax credits under the legislation.

In line with the Tax Credit Review Commission’s recommendations, the Aerotropolis legislation should also include clawback provisions. If warehouse owners receive Aerotropolis tax credits, and are found not to be in compliance with its requirements, or are not processing any level of international cargo, then the state should have a mechanism to recover the tax credits awarded to such noncompliant owners.

Furthermore, the Show-Me Institute has highlighted the fact that, despite proponents’ statements to the contrary, the Aerotropolis legislation would allow tax credits to be issued to owners of warehouses that do not process any international cargo. Since the primary argument for the Aerotropolis tax credits is that the incentives would promote international trade, the definitions within the Aerotropolis bill should be revised so that only warehouses processing international cargo may receive the credits.

Grants of Extensive Political Power (135.1503)
Remove the provision that would grant power to the mayor and county executives to determine who could receive the warehouse tax credits.

The Aerotropolis bill gives the authority to the mayor of Saint Louis or the executive officers of nearby counties the power to designate “gateway zones.” While this power sounds innocuous, it has important ramifications.

Those chief executives would become gatekeepers in the distribution of millions of taxpayer dollars. The Aerotropolis legislation would create $300 million in tax credits that would subsidize warehouse construction. That tax credit money may be awarded only to warehouses built in gateway zones.

Even if motives are pure, the ability to pick what areas could be eligible for hundreds of millions in tax credits would be an incredible power. The legislation does not say anything about monitoring such designations. Nothing in the legislation would prevent one of these chief executives from using such power as an indirect way to acquire campaign contributions or other untoward benefits.

A simple way to stop any such potential abuse of power would be to take the city and county chief executives out of the equation. If the state — despite a lack of substantive empirical evidence that these tax credits will do any economic good — really wants to subsidize warehouse construction, then all vacant land owners should be able to compete equally for the tax credits. There is no need to give special power to city and county executives. The language creating this power should be removed.

If this delegation of power is kept in the Aerotropolis legislation, then the Mayor and county executives should be required to make their gateway designations at a public meeting, with any and all applications and correspondence to the mayor or county executives requesting such a designation treated as public information.

Restrict the ability to layer tax credits with other tax incentives
It is fiscally irresponsible for the state to heavily subsidize projects under certain programs.

It is no secret that the state heavily subsidizes some projects through a myriad of its tax incentive programs. The level of subsidy for those projects can reach absurd heights. According to an analysis of state tax credit data, Missouri’s fifth Senate District – which includes downtown Saint Louis – was the recipient of nearly $1 billion in state tax credits between 2000 and 2010. This total does not include local tax subsidies, such as property tax abatement and tax increment financing (TIF), which likely are substantial. The Aerotropolis tax credits, as proposed, could easily be layered on top of existing tax incentives already offered by the state or local government.

In fact, in an internal review of the Aerotropolis legislation, Saint Louis County identified five areas near the airport that would likely be eligible for Aerotropolis tax credits. According to the county’s analysis, those areas had already been authorized to receive or were eligible to receive almost $300 million in state and local tax incentives, including Brownfield and Enhanced Enterprise Zone tax credits, as well as tax increment financing, property tax abatement, sales tax exemption, and state tax increment financing.

Some existing Missouri tax credit programs place restrictions on the layering of tax credits. For example, the Missouri Quality Jobs tax credits explicitly prohibit recipients from also receiving Enterprise Zone or Enhanced Enterprise Zone tax credits, Business Facility Program tax credits, Rebuilding Communities tax credits, or Brownfield Jobs and Investment tax credits.

It would be prudent to add similar restrictions to the Aerotropolis tax credit legislation. Similar tax incentive programs that should not be combined with the proposed Aerotropolis program include: Distressed Areas Land Assemblage tax credits, tax increment financing, state tax increment financing, Enhanced Enterprise Zone tax credits, and Brownfield tax credits. Those tax incentive programs are designed to encourage similar activity – construction – that the Aerotropolis legislation is designed to encourage. The state should not award redundant incentives.

Final thoughts

The proposed Aerotropolis legislation is problematic, especially in light of questionable jobs claims and the expansion of power for local government executives contained within the bill. There appears to be an incredible amount of political pressure attempting to push the tax credit measures forward, despite a lack of substantive empirical study. Moreover, China, the country cited by proponents as the source for increased international cargo traffic, has not stated publicly that warehouse construction tax credits are necessary before it will consider sending more cargo flights to the Lambert Airport.

All of the above facts should give legislators pause. But, if the state legislature is prepared to go forward and pass the Aerotropolis tax credits despite those concerns, then provisions designed to protect Missouri taxpayers should be added to the bill.

The post Mitigating the Harmful Effects of the ‘Aerotropolis’ Legislation appeared first on Show-Me Institute.

Over the holiday weekend, while the commission that he appointed was wrapping up its recommendations for targeted tax credit reform, the governor handed out some more. From an article in the Houston Herald:

Nixon was in Mountain Grove to announce Missouri has awarded $305,907 in Enhanced Enterprise Zone (EEZ) tax credits to 3G Processing, the company that will process food waste into animal feed. It is completely renovating a former steel plant and purchasing new equipment for its facility.

I happened to miss this because I was in Wisconsin for the weekend. Thankfully, though, a regular Show-Me Daily reader alerted me to the event by email.

This particular tax credit program has been shown to fail to deliver on promised results. In a report issued in September 2010, the Missouri state auditor studied 19 businesses authorized for Enterprise Zone Tax Credits (EZTC) and Enhanced Enterprise Zone Tax Credits (EEZTC), and found that the actual jobs created were 6.1 percent fewer than proposed in 2007, and actual investment was 29.5 percent less than proposed.

Despite the program’s lack of success in producing the desired outcome, the Tax Credit Review Commission recommended expansions — not limitations — to the Enhanced Enterprise Zone tax credit program in its final report to the governor. It recommends amending the program to include a discretionary option for up-front financing, and it also recommends expanding the definition of distressed communities to expand eligibility. Because this particular program is underperforming, expanding it will make Missourians worse off.

The post Continuing Mixed Messages on Targeted Tax Credits appeared first on Show-Me Institute.

The discretionary program offers state tax credits, accompanied by local real property tax abatement, for businesses that meet criteria such as adding jobs. […]

Ipock said state tax credits will only be allowed for qualified businesses and are geared toward industrial development.

Businesses that are ineligible to receive the tax credits include gambling establishments, adult businesses, retail trade, educational services, religious organizations, public administrators, food and drink establishments.

I disagree that the program’s benefits should be for “qualified” businesses. This is the same as the fundamental argument against targeted tax credits, like those to filmmakers. The government should not have the authority to pick and choose which businesses can operate in its borders. These programs create inequality because they force businesses that aren’t “qualified” to compete at a comparative disadvantage. This consequently encourages corruption, because it gives businesses an incentive to solicit the government for special treatment.

Instead, Webster County should focus on creating a favorable tax environment that would benefit all businesses equally, such as reducing commercial property tax surcharges and repealing mandates. If the city of Saint Louis were toying with such an idea, I would recommend that it repeal the earnings tax instead.

I also disagree that the focus of the program should be on job creation. Public works projects, such as Enhanced Enterprise Zones, encourage nonproductive work (e.g., “work for works’ sake”). I think that Milton and Rose Friedman would agree; in Free to Choose: A Personal Statement, they write:

If all we want are jobs, we can create any number—for example, have people dig holes and then fill them up again or perform other useless tasks.

Furthermore, although the program may be successful at attracting the targeted industries, any activity that it generates will be discounted by the amount of the economic incentives that it takes to attract it. As Henry Hazlitt explains in Economics in One Lesson, spending in the private sector destroys jobs in the private sector. This is because public spending is financed by money that is taken from taxpayers, who can’t spend this money on products and services in the private sector that would generate productive economic activity.

When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only of where bridges must be built the government spenders begin to ask themselves where bridges can be built.

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