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Regular Show-Me Daily readers are, I am sure, nearly sick of hearing about Patrick Ishmael’s and my questions regarding that $300 million.

We wondered: Why was the state considering subsidizing warehouse construction in the St. Louis area if there was more than 18 million square feet in vacant warehouse space already available? Why did versions of the legislation give the mayor of St. Louis City and area county executives the power to restrict who could receive hundreds of millions in tax benefits? Why were the construction tax credits limited to individuals and companies who owned more than 100 acres of land? Where was a substantive cost-benefit analysis?

We would have stopped asking those questions if someone had provided substantive answers. And yet, there really were none.

It is brazen to ask for $300 million, in the public or private sector, without substantive evidence that the money is necessary and would be put to good, productive use. As such, the removal of warehouse and facility construction tax credits from the legislation is good news for Missouri taxpayers.

But, things could easily change. There is a chance that the $300 million could be reinserted at the last moment. CBS reports that the Missouri House may attempt to re-insert construction tax credits in the legislation and “ram the bill through the Senate.”

So, perhaps, this may be more about politics than good policy. I hope that isn’t the case.

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So where are these supposed 20,000 construction jobs coming from again?

The whole segment is worth hearing. The relevant part starts in at around 12:15.

Johnson also told Charlie Brennan that “freight forwarders would have to become members of the RCGA” to receive their credits — a requirement which isn’t in the legislation and would have utterly no policy value. Maybe Johnson was joking or misunderstood what seemed to be Brennan’s core question — how do you get these tax credits? — but given that the “joke” was interwoven into what sounded like a serious answer, Johnson should clarify.

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We’d like to thank Air Cargo News for the opportunity to comment on the substance of Missouri’s proposed “Aerotropolis” legislation, first critiqued in these pages by air cargo expert Michael Webber and since muddled by a response from the director of Lambert–St. Louis International Airport, Rhonda Hamm-Niebruegge.

If the director of the airport did indeed help introduce the bill that has gone before the Missouri legislature, as she asserted, there are serious questions she needs to answer. Contrary to her implication, the Aerotropolis legislation’s original price tag was not $360 million, but $480 million, which included tax credits for the payment of $120 million in interest costs for the building of warehouses.

For somebody who seemed particularly interested in Webber’s rhetorical precision, Hamm-Niebruegge’s obscuration of the original cost of the bill as she introduced it is revealing. She should have been more forthright about the details of her bill.

To her credit, Hamm-Niebruegge admits that warehouses would be fully eligible for $300 million in tax credits, in support of a projected maximum of eight flights per week — a meager result for such a large amount of taxpayer money.

More importantly, though, Hamm-Niebruegge has failed to explain why the legislation specifies that Missouri would restrict the $300 million in Aerotropolis warehouse subsidies solely to new warehouses located on 100 contiguous acres, in urban redevelopment areas, within the boundaries of the airport, or in areas managed by a port authority. Those strange provisions demand an explanation. Hamm-Niebruegge says that she helped introduce the legislation (original price tag: $480 million); she had the opportunity to explain these preferential carve-outs here, but declined to take it.

We doubt that there is a practical explanation. The 100-acre stipulation and other requirements serve only to limit the individuals that could have access to the tax credits, and it is disheartening that the executive director of an airport would be concerned with making sure that only a few politically powerful individuals and businesses would be eligible for hundreds of millions in state tax money.

Hamm-Niebruegge says that the proposed bill’s provisions “require that investment or export activity take place before the application for tax credits.” This is incomplete. A close reading of the legislation reveals that owners of these newly built warehouses who use two modes of commerce — perhaps road and rail transportation — could qualify for the Aerotropolis tax credits. Owners of the comparable refrigerated warehouses would qualify in this way, as well. There is no requirement in the legislation that those warehouses store any amount of international cargo. Is the purpose of the Aerotropolis tax credit legislation to encourage international trade, or is its purpose to subsidize warehouse construction?

Hamm-Niebruegge optimistically writes that the $300 million in warehouse tax credits could result in millions of square feet of new warehouse space, yet she does not mention the approximately 18 million square feet in developed warehouse space already vacant in the Saint Louis area. Why does the state need to subsidize the construction of more warehouse space if, as market research from CB Richard Ellis has shown, a great deal of space is already available? Again, we are disheartened by the possibility that public officials are in such a rush to subsidize the owners of vacant land that they fail to consider the considerable existing supply of warehouse space.

Proponents of the Aerotropolis subsidies, including Hamm-Niebruegge, point to an eight-page study commissioned by the St. Louis Regional Chamber and Growth Association (RCGA) purporting to show that the $300 million in warehouse construction tax credits would result in economic activity worth billions. We were disappointed, but hardly surprised, that the RCGA study failed to consider the cost of taking $300 million from all Missourians in order to award it to a favored few. Aerotropolis proponents fail to understand that tax credits are not free money. Every dollar that is given away in tax credits is a dollar that the state government must replace with cuts in current programs, or — more likely — through increased taxation.

Let us be clear: The Aerotropolis dream of attracting international trade to a region is by no means a poor one. In fact, increasing trade among countries is one of the best ways to improve economic welfare. However, we are concerned that the dream is being used as an excuse for public subsidy.

If the Aerotropolis dream is viable, as Hamm-Niebruegge states, where are the private investors clamoring to make a substantial positive return? The absence of such investor interest without heavy subsidy reveals that the “big idea” pushed by Hamm-Niebruegge, other public officials, and industry lobbyists is in trouble — with or without this extraordinarily problematic legislation that the director helped introduce.

Patrick Ishmael and Audrey Spalding are policy analysts at the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

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So, when we received a bundle of studies, draft studies, and progress reports this week from the Midwest China Hub Commission, the first thing I looked for were documents showing that warehouse space was needed.

But those documents show something entirely different.

According to reports commissioned by the China Hub Commission:

[Existing warehouse space] provides a short, medium and long-term solution for warehousing and ground handling needs in respect to this project.

And:

[Runways, ground handling, and warehouse space are] sufficient to manage and handle wide body air cargo flights from China. A recent on-site visit by a major international logistics firm has provided validation.

In fact, a study commissioned by the St. Louis Regional Chamber & Growth Association (RCGA) estimated that 45 million kilograms of cargo could be shipped to international destinations. Incidentally, that is almost exactly the amount of cargo that could be handled by existing facilities, according to the Midwest China Hub Commission reports.

And yet, as legislators were debating creating $300 million in tax credits to subsidize warehouse or facility construction, the RCGA pushed to publish a report purporting to show that $300 million in construction tax credits would result in more than 27 million square feet of warehouse space being construction, and that 20,000 jobs would be needed to construct and operate that space.

To add insult to injury, KMOV recently reported that the RCGA receives a great deal of taxpayer money, and doesn’t keep track of it very well.

What floors me is that given previous studies commissioned by proponents — including the RCGA itself — that 27 million square feet RCGA estimate is nonsense. And so are the related jobs estimates.

All of this leaves me wondering, what is that $300 million actually for?

After all, based on warehouse space analysis commissioned by China Hub proponents, $300 million for construction subsidies is likely $300 million too much.

The post According to China Hub Reports, Warehouse Space is Sufficient appeared first on Show-Me Institute.

If the director of the airport did indeed help introduce the bill that has gone before the Missouri legislature, as she asserted, there are serious questions she needs to answer. Contrary to her implication, the Aerotropolis legislation’s original price tag was not $360 million, but $480 million, which included tax credits for the payment of $120 million in interest costs for the building of warehouses.

For somebody who seemed particularly interested in Webber’s rhetorical precision, Hamm-Niebruegge’s obscuration of the original cost of the bill as she introduced it is revealing. She should have been more forthright about the details of her bill.

To her credit, Hamm-Niebruegge admits that warehouses would be fully eligible for $300 million in tax credits, in support of a projected maximum of eight flights per week — a meager result for such a large amount of taxpayer money.

More importantly, though, Hamm-Niebruegge has failed to explain why the legislation specifies that Missouri would restrict the $300 million in Aerotropolis warehouse subsidies solely to new warehouses located on 100 contiguous acres, in urban redevelopment areas, within the boundaries of the airport, or in areas managed by a port authority. Those strange provisions demand an explanation. Hamm-Niebruegge says that she helped introduce the legislation (original price tag: $480 million); she had the opportunity to explain these preferential carve-outs here, but declined to take it.

We doubt that there is a practical explanation. The 100-acre stipulation and other requirements serve only to limit the individuals that could have access to the tax credits, and it is disheartening that the executive director of an airport would be concerned with making sure that only a few politically powerful individuals and businesses would be eligible for hundreds of millions in state tax money.

Hamm-Niebruegge says that the proposed bill’s provisions “require that investment or export activity take place before the application for tax credits.” This is incomplete. A close reading of the legislation reveals that owners of these newly built warehouses who use two modes of commerce — perhaps road and rail transportation — could qualify for the Aerotropolis tax credits. Owners of the comparable refrigerated warehouses would qualify in this way, as well. There is no requirement in the legislation that those warehouses store any amount of international cargo. Is the purpose of the Aerotropolis tax credit legislation to encourage international trade, or is its purpose to subsidize warehouse construction?

Hamm-Niebruegge optimistically writes that the $300 million in warehouse tax credits could result in millions of square feet of new warehouse space, yet she does not mention the approximately 18 million square feet in developed warehouse space already vacant in the Saint Louis area. Why does the state need to subsidize the construction of more warehouse space if, as market research from CB Richard Ellis has shown, a great deal of space is already available? Again, we are disheartened by the possibility that public officials are in such a rush to subsidize the owners of vacant land that they fail to consider the considerable existing supply of warehouse space.

Proponents of the Aerotropolis subsidies, including Hamm-Niebruegge, point to an eight-page study commissioned by the St. Louis Regional Chamber and Growth Association (RCGA) purporting to show that the $300 million in warehouse construction tax credits would result in economic activity worth billions. We were disappointed, but hardly surprised, that the RCGA study failed to consider the cost of taking $300 million from all Missourians in order to award it to a favored few. Aerotropolis proponents fail to understand that tax credits are not free money. Every dollar that is given away in tax credits is a dollar that the state government must replace with cuts in current programs, or — more likely — through increased taxation.

Let us be clear: The Aerotropolis dream of attracting international trade to a region is by no means a poor one. In fact, increasing trade among countries is one of the best ways to improve economic welfare. However, we are concerned that the dream is being used as an excuse for public subsidy.

If the Aerotropolis dream is viable, as Hamm-Niebruegge states, where are the private investors clamoring to make a substantial positive return? The absence of such investor interest without heavy subsidy reveals that the “big idea” pushed by Hamm-Niebruegge, other public officials, and industry lobbyists is in trouble — with or without this extraordinarily problematic legislation that the director helped introduce.

Patrick Ishmael and Audrey Spalding are policy analysts at the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

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Christine Harbin, Patrick Ishmael, and I all took issue with the form of those tax credits, and with statements made by public officials in favor of the tax credits:

• We were concerned that public officials had not explained why tax credits for new warehouse construction made sense if the area had 18 million square feet in vacant warehouse space already available.
• We repeatedly asked for the in-depth study promised by Aerotropolis proponents in late 2010, only to be disappointed by an eight-page report that merely extended the poor assumptions already contained within the Aerotropolis legislation.
• We dug into the changes made to the legislation and pointed out that lawmakers had actually reduced the requirements for individuals and businesses to draw upon the proposed Aerotropolis tax credits.
• We even looked at the Midwest China Hub Commission’s internal review of the proposed tax credits and, perhaps surprisingly, agreed with its concerns. Most troubling was the fact that the areas that likely would be eligible for the Aerotropolis tax credits had already received or could have already received hundreds of millions in taxpayer subsidy. Why add more to the total?

Rainford writes:

[W]e are not gambling. The Aerotropolis credits cannot be used until the facilities are built and are being used for international cargo. If none of that happens, then no one will have used the Aerotropolis credits, and the state will lose nothing.

With all due respect, I find this statement misleading. True, the legislation does specify that some new warehouses must process some level of international cargo. But the devil is in the details.

Owners of warehouses with international cargo consisting of as little as 20 percent of their operations could receive the Aerotropolis tax credits for an overall subsidy of up to 30 percent of their demolition, construction, and equipment costs. Owners of warehouses with international cargo consisting of as little as 10 percent of their operations could receive the Aerotropolis tax credits for an overall subsidy of up to 20 percent of their demolition, construction, and equipment costs.

Most strikingly, owners of warehouses that use two modes of commerce — not necessarily air cargo, but perhaps road and rail transportation — could draw on the tax credits. So could owners of warehouses that are refrigerated for storage of perishable materials. Again, the Aerotropolis legislation doesn’t require those facilities to process international cargo.

My concerns with the proposed subsidies stand. Couldn’t these tax credits be used to pay for business as usual? There’s no protection for taxpayers specifying that, if the international agreements never materialize, the tax credits won’t be awarded.

For readers interested in the gritty details of the tax credit proposal and the flaws behind assumptions and statements made by Aerotropolis supporters, stay tuned. Look for a longer, more detailed publication in the next week or so. In it, we wonder, can Missouri really ship beef to China, as proponents have stated? Are the projected increases in flights realistic? And how have the results of tax credits fared in the past?

The post Aerotropolis Tax Credits Are Still a Bad Idea appeared first on Show-Me Institute.

Legislators, after all, are in a rush to pass a bill that would award $300 million to subsidize the construction of new warehouses. That collection of subsidies is known as the “Aerotropolis” bill. Proponents of the $300 million in subsidies say that the creation of new warehouses is crucial to getting more international freight traffic to Saint Louis, primarily from China.

There is a lot of space available near the airport.

I spoke with David Randolph, vice president of CB Richard Ellis, the brokerage company looking to lease the 405,000-square-foot building shown below. Randolph said that he hasn’t seen a shortage of warehouse space.

“If someone’s looking for space, we have space available,” he said.

Randolph disagreed with making tax credits available for the developers of new buildings.

“I personally think it would be a disadvantage to current owners of buildings that exist,” Randolph said, “that only new buildings get tax credits but old buildings do not.”

Matt Harrington, marketing manager at CB Richard Ellis, estimates that there is about 200 million square feet in developed warehouse, manufacturing, and flex space in the Saint Louis metro area, excluding Illinois. With a vacancy rate of 9 percent, about 18 million square feet is available, he said.

Here is some more space available for lease:

And some more:

This blog post could go on. There were many warehouses available for sale or rent. So, why exactly are legislators looking to award $300 million to subsidize the creation of new warehouses? There certainly seems to be no shortage of space for lease.

Christine and I would be happy to provide a tour to any legislators who are unaware that warehouse space is available. Or they could call David Randolph. His company’s phone number is listed on the “Available” sign above.

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Audrey Spalding, Tom Duda, and I spent yesterday afternoon driving around the area north of Lambert airport. We spotted quite a high number of empty warehouses. 

However, given the number of vacant warehouses and “Will build to suit” signs on empty lots, it seems to me that there is already a lot of capacity. I wonder: Where’s the demand for warehouses? If the ones that are currently near the airport are empty, why do legislators want us to spend $300 million on more of them?

It reminded me of downtown Saint Louis, actually — despite all of the “space available” signs on the office buildings, government officials still want to subsidize new construction downtown.

We’ll release a video soon about our trip, where we’ll talk more about this issue. We’ll try to get it edited and uploaded to the blog as soon as possible. Stay tuned to the Show-Me Institute!

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A set of subsidies for the construction of warehouses around the Lambert–St. Louis International Airport are now buried about halfway through this lengthy tax credit bill. If you’re an avid reader of Show-Me Daily, you already know that Christine Harbin and I have highlighted these subsidies extensively.

After all, it doesn’t seem to make much sense to award hundreds of millions of dollars to subsidize warehouse construction in the hopes of attracting increased international trade — without a comprehensive study demonstrating that more warehouses could help the state economy.

I don’t want to rehash all that. Instead, I want to detail the changes made to the “Aerotropolis” legislation. To summarize: The bill is more about subsidizing construction near the Saint Louis airport than attracting international trade.

The Good: Reduced Costs

• The cost to taxpayers has been reduced by $120 million. The old legislation would have awarded $120 million in tax credits to reimburse warehouse owners for a majority of the interest costs on their debt. That has been completely stripped out of the new legislation.
• Special tax exemptions for companies operating within a warehouse have been removed. If the old version of the Aerotropolis legislation had passed, companies operating within the already subsidized warehouses would have been exempt from state income tax and corporation franchise tax. Those are no longer in the legislation. I took particular issue with those exemptions because there was no limit imposed. Who could know how much revenue the state would forgo? Don’t get me wrong, lower taxes are definitely a way to encourage economic growth, but the legislature needs to lower taxes for all Missourians, not just the favored few (in this case, companies operating out of subsidized warehouses near the Saint Louis airport).
• The legislation no longer has a provision that would allow employers to keep the state income taxes withheld from employee paychecks. Thank goodness. The proposed legislation didn’t limit this amount, and the fiscal note didn’t estimate how much revenue the state would lose as a result. Additionally, this particular provision within the Aerotropolis bill seemed to match up with state tax increment financing (TIF) that had already been awarded to the Lambert Eastern Perimeter Redevelopment Project in 2006, meaning that development in this area is already subsidized.
• The Aerotropolis legislation awards $300 million in tax credits to developers and owners of warehouses. Under the original legislation, owners could receive partial reimbursement for their closing costs, brokerage fees, attorney fees, and maintenance costs of a property before actually building a cargo warehouse. With the new legislation, those costs are not eligible for state reimbursement. Only the costs of construction and demolition are now eligible.

The Bad: Lower Standards

• Originally, for an owner of a warehouse to get tax credits, the warehouse had to have a certain level of international shipping activity. The new legislation drastically reduces how much international cargo activity that a warehouse owner must process in order to be eligible for state tax credits. According to this version of the bill, a warehouse could be eligible for state subsidy if as little as 10 percent of its operations consisted of sending cargo to international destinations. And remember, legislators used the prospect of increased international trade to justify handing out hundreds of millions of dollars in taxpayer money. Is this legislation really just an effort to have the state subsidize the poorly managed city airport, which is currently carrying about $900 million in debt?
• The new legislation exempts warehouse companies and employees from the Saint Louis earnings tax. The state tax exemptions were eliminated from the earlier draft, and the city tax exemption was added. Again, it’s true that lower taxes encourage more economic growth, but why award that exemption only to a politically favored few? And wasn’t the city saying only a month ago that losing earnings tax revenue would result in a loss of city services?

The Ugly: Subtle Admission That Increased International Trade Is Unlikely

• The new legislation would award even more in state tax credits for each international export flight. In some cases, the increase is as high as 25 percent. The cap on those air export tax credits is still $60 million. Why would legislators increase the payout per flight but keep the cap the same? The only reason I can think of is that they think there won’t be enough export flights to hit the tax credit cap. This all goes back to my concern that there isn’t a firm commitment in place from any international company that, if more warehouses are built, there will be more international cargo flights traveling to and from Missouri.
• The new legislation would award more in state tax credits for warehouse construction. Again, the cap on the warehouse tax credits stayed the same, at $300 million. But the percentage of warehouse construction costs that the state will reimburse has increased in the new legislation. Is this an admission that fewer warehouses will be built?

There you have it. Although revisions to this legislation lowered some costs, the new bill reduces requirements to get state subsidies, and lowers the amount of “new activity” needed to hit the $360 million tax credit cap. Based on the changes made to the “Aerotropolis” subsidies, I would suggest a new name. How about “Lambert Warehouse Tax Credits”?

The post Changes to the “Aerotropolis” Legislation: A Critical Review appeared first on Show-Me Institute.

Trade boats in Changzhou, China. Photo by Audrey Spalding.

Given the opening sentence, a Post-Dispatch reader might misinterpret the article to mean that the $480 million in taxpayer money is intended to go directly to funding the proposed China Hub itself. But, as reported previously in the Post-Dispatch, a Chinese freight affiliate has already decided to send several cargo flights to the Lambert airport each week. Later in today’s article, the actual subsidy recipients are disclosed: $60 million would go to shipping companies that export by air from Missouri, and $420 million would go to build cargo warehouses and other storage facilities.

So, perhaps a better way for the Post-Dispatch article to start would be: “St. Louis developers’ dreams of building warehouses are going to need some state funding to become a reality.”

From an economic perspective, this doesn’t make much sense. If goals* are already in place to bring in increased air freight and to increase the number of Boeing 747s traveling between Saint Louis and Shanghai, then there surely will be an increase in economic activity, along with a demand for facilities to handle the increased freight and passenger traffic. If all it takes to profit off of that is to build some cargo warehouses, why does the state need to subsidize that construction?

Here are some possible reasons that state legislators are pushing for awarding the $480 million in subsidy:

1. There is a low chance of the “China Hub” idea actually coming to fruition.
    
   Well, then why subsidize the unnecessary construction of auxiliary cargo warehouses?
2. It’s very difficult to make a profit in Missouri.
    
   This may well be the case. But if the state awards tax credits without a corresponding decrease in other expenditures, the tax burden for everyone else (those who aren’t building warehouses in the Saint Louis area) will rise. Because the award of $480 million to the favored few will likely result in other businesses and individuals paying even more in taxes to the state, this proposal will actually make things more difficult for entrepreneurs.
3. Legislators want to award subsidy.
    
   It is also possible that there is no need for this subsidy, but that legislators personally benefit (increased power, campaign contributions, etc.) when they can claim responsibility for awarding millions in subsidy. And, fortunately for the legislators proposing this tax credit, there is little or no cost to them when spending $480 million in taxpayer dollars. There is a terrific branch of economic theory that examines this type of behavior in detail.

A better solution would be to reduce state barriers to trade, not increase them.

Reasons 1 and 2 are not legitimate. The state shouldn’t subsidize high-risk, unlikely projects, and legislators don’t get to spend other people’s money just to demonstrate their political heft. If subsidy is needed because Missouri puts up too many barriers to entrepreneurship, the state should remove some of those barriers instead of adding more. One idea could be to find an additional $500 million to cut from the budget (tax credits, perhaps), and reduce the tax burden for everyone.

But what about me?

Look, anyone can point out that some type of economic activity might not occur without state subsidy. That doesn’t mean that the state should throw millions at the “under-produced” project.

For example, I could say that “Audrey Spalding’s dreams of owning 10,000 pairs of shoes will need some state funding to become a reality.” The reason I don’t already own those shoes isn’t because of a market failure — it’s because I’m not willing to pay for that myself.

Similarly, developers can invest money, and take on the risk and possibility of a profit if they want to build warehouses themselves. If they’re unwilling to do that without nearly half a billion in taxpayer money, then these warehouses, like my 9,990 additional pairs of shoes, will have to wait.

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