For advocates of free markets, St. Louis city presents a disturbing environment for the conduct of business. Indeed, the fact that so few construction projects occur here in the absence of subsidy necessarily makes the rare market-based development a news item in its own right. But what about projects that do not make the news?

Pictured above in August 2010 is the 1818 Washington Ave. Building in downtown St. Louis. Paired main entry doors punctuate the center of the building’s primary facade, while four ground-level storefront bays are at right. A pizza restaurant occupies this retail space, displaying a bright red-on-white background ”Now Open” sign, in addition to handsome neon signs for Bud Light and Bud Light Lime.

Two blocks to the southwest, at 2001 Olive St., a one-story building features plywood boards over the entirety of its glazed area. Permanent signage for the pizza place remains atop this building, while a banner reading “We Will be Relocating to 1818 Washington Ave. July 1st, 2010,” with red lettering on a white background, hangs from a ground-level storefront bay at left.

In a truly competitive free market, the story would end here: A business moved from one building to another. So what?

As this business relocation occurred in St. Louis city, however, legislated market distortion and an administrative exercise in symbolic violence likely contributed to the outcome pictured above.

On the legislative front:

Ordinances 67319, 67462 and 67463 designated 1818 Washington Ave. as a redevelopment area, executed a redevelopment agreement between the developer and the city of St. Louis, and authorized “$2,380,000 Plus Issuance Costs” in Tax Increment Financing (TIF) notes for the construction of 1818 Washington and another nearby project.

On the administrative front:

In addition to TIF, the 1818 Washington project stands to utilize “Federal and State Historic Tax Credit programs.” Combined, they could yield up to 45 percent of the project’s costs in tax credits for the developer — 20 percent for the federal credit; 25 percent for the state credit. (The building is a contributing resource in the “Lucas Avenue Industrial Historic District (Boundary Increase),” after all.)

In a free market, favorable lease terms or a street address on the vaunted Washington Avenue could prove enticements enough for a business to relocate. In St. Louis city, we are instead left to ask what role public monies are playing in a business location decision, and whether associated municipally approved TIF legislation is actually legal.

Missouri TIF law states the following in §92.805(4), RSM0:

For redevelopment projects or redevelopment plans approved after December 23, 1997, if a retail establishment relocates within one year from one facility to another facility within the same county and the governing body of the municipality finds that the relocation is a direct beneficiary of tax increment financing, then for purposes of this definition, the economic activity taxes generated by the retail establishment shall equal the total additional revenues from economic activity taxes which are imposed by a municipality or other taxing district over the amount of economic activity taxes generated by the retail establishment in the calendar year prior to its relocation to the redevelopment area;

If the pizza restaurant succeeds at growing its revenues dramatically at its new location, the rehabilitated building’s developer will prosper as government loses funds that it would receive were the restaurant not in a TIF district. Had the rehabilitated building attracted a business truly new to St. Louis city, government would receive a greater share of the TIF project’s associated revenues.

Subsidizing projects that displace economic activities from one site to another is a losing proposition for cities and their residents. In St. Louis city, the elimination of TIF would allow our community to awake from its current nightmare of ever-increasing taxes and instead move us toward broadly shared prosperity, courtesy of the free market.

From an article by the Associated Press (hat tip to Audrey Spalding):

Gov. Jay Nixon, who signed the legislation, has traveled the state promoting job expansions in other industries. He expressed little concern Friday about the potential loss of jobs for strippers and others in the adult entertainment industry.

“I do not believe that the economy of the future of my state will be built on that industry,” Nixon said.

If a person disapproves of the exotic services industry, then he or she may choose not to patronize those businesses. It is quite another thing, however, to prevent other individuals from engaging in voluntary market transactions.

The problem in Missouri is that the state government is propping up industries that are failing, and simultaneously squashing industries that are successful without subsidy in the private sector. Individuals and businesses should not be given special advantages over others — even if one economic activity (e.g., exotic dancing) is viewed as less glamorous or moral than another (e.g., filmmaking or computer services). Restrictions such as this one create inequality because they force unfavored businesses to compete at a competitive disadvantage in the marketplace. This invites corruption as a consequence, because the restrictions incite individuals and businesses to petition the government for special treatment.

If the state government in Missouri were serious about promoting economic development, it would stop attempting to pick and choose the economic activities that occur within its borders. This strategy didn’t work for the Soviet Union, and it won’t work for Missouri, either.

Sunday’s Post-Dispatch had a great story about expanded interest in hydropower along the Mississippi River. New technology is making it possible to generate power from rivers without the vertical drop, or “flow,” that has been needed in the past. That is why most of America’s hydropower has, to date, come from rivers that emerge from mountainous areas — they have a much greater flow. Anyway, the Post article details the renewed interest in Mississippi hydropower by private industry and public utilities. Of course, private investment is much more interesting to me, although most of the private proposals do involve using public dams along the river. It is exciting to read about these proposals, and I hope that local hydropower can take its place along with wind and solar power as an important auxiliary, peak, or complementary power source.

Of course, if you want clean and remewable baseload power generation for Missouri, there is really only one way to go. …

In The Economist, Will Wilkinson, a Missourian by birth, recently argued that the financial crisis was caused by the government’s attempt to reduce wealth inequality through homeownership (bolded emphasis mine):

If you ask me, the ultimate culprit in the financial crisis was the American cult of homeownership. There are many ways to help poorer Americans accumulate wealth, such as channeling payroll taxes into personal retirement accounts. But we don’t do that. Instead, because we consider it a humiliating indignity not to have a room or ten of our own, we subsidise home-buying six ways to Sunday and tell banks they won’t have to suffer the downside of loans offered to bad credit risks. I think it’s safe to say that this hasn’t turned out to be the best scheme for helping poorer Americans into the ownership class.

This commentary is consistent with my previous discussion of the negative policy implications of encouraging homeownership in Missouri, such as promoting inflated housing prices.

Unfortunately, the emphasis on homeownership persists in Missouri public policy. There have been recent calls from politicians in Missouri to make the federal homeowner tax credit permanent. From the Think Progress blog (hat tip to Audrey Spalding):

[T]he home buyer’s tax credit was enacted as part of the stimulus and then extended a couple of times, and by all accounts it was a complete and total boondoggle, costing taxpayers billions to subsidize activity that was going to happen anyway. Even the credit’s staunchest supporters have said that its “sunsetting is an incentive to drive people to the marketplace” and poo-pooed the notion of extending it forever, which clearly turns it into a permanent subsidy to the real estate industry.

Additionally, just as the government shouldn’t favor certain businesses and industries over others, the role of government should not be to favor or subsidize one lifestyle over another — like homeownership over renting, or rural lifestyles over urban ones. Despite its infinite wisdom, the government does not know the mix of goods and services that an individual or family should consume in order to maximize their level of utility. Missourians would be better off if the government stayed out of the housing market entirely.

I am a big fan of Jack Cashill’s writing over at Ingram’s, “Kansas City’s Business Magazine.” We just got our monthly edition today, and I highly recommend his editorial about the absurdity of modern urban planning. Here is one great line about his recent vacation to a decidedly unplanned New Jersey locale:

City planners would hock their first-born to create this kind of pedestrian traffic, but they don’t know how. They can no more plan “fun” than they could anticipate a popular demand for a fried Oreo. This hodgepodge of stuff was driven by the consumers as gauged and tweaked by savvy, on-site merchants over decades.

The entire article is well worth a read, as is the article on the water and sewer infrastructure in Kansas City.

Newsweek ran a good article on “New Orleans’ Charter-School Revolution” yesterday, and it shows the possibilities of a very open charter school system:

In most public school systems in America, students attend the school for which their neighborhood is zoned. But in the five years since Hurricane Katrina, New Orleans has created a school system unlike any other in the country. “We used Katrina as an opportunity to build—not rebuild, but build—a new school system,” says Paul Vallas, the outgoing superintendent of the Recovery School District, which, authorized by the state to turn around failing schools, took over most of New Orleans’s schools after the storm. Last year more than 60 percent of the city’s students attended charter schools; this year nine additional schools switched to a charter model, so that number will be higher. Vallas calls this new paradigm an “overwhelmingly publicly funded, predominantly privately run school system.”

In 2005 Orleans Parish was the second-worst-performing school district in the state, and in some schools 30 percent of seniors dropped out over the course of the year. In 2003 one high-school valedictorian failed the math portion of the state exit exam five times and could not graduate. Things were different at the charters: at New Orleans Charter Middle School, which in 1998 became the city’s first charter school, parents would put their head in their hands and cry if their child’s name didn’t come up in the admissions lottery.

In New Orleans today, students and educators have unprecedented leeway to mold educational experiences. Students can apply to and, if accepted, choose to attend any of the [...] 46 charter schools or 23 “traditional” schools. The vast majority of schools have open-enrollment policies that allow any student to attend, regardless of past academic success. (Schools with more applicants than spots hold lotteries.) The prevalence of charters means that in most of the city’s schools, educators can choose how their schools are run. Even in traditional schools, principals have unusual autonomy over the hiring—and firing—of teachers, since the city’s teachers’ union lost its collective-bargaining rights.

So far, the experiment appears to be working. Before Katrina, two thirds of students were attending schools deemed failing by state standards, notes Leslie Jacobs, a New Orleans education-reform advocate; in the 2010–11 academic year, she says, it will be less than one third. “The fact that we haven’t gotten everything right yet shouldn’t take away from the fact that we’re getting a whole lot more right,” she says. New Orleans schools are still performing below the state average on achievement tests, but according to Jacobs’s analysis of state data, the gap between New Orleans and the rest of the state has basically been cut in half.

Obviously, that’s far from perfect, but it’s more improvement than the city saw under the old regime. I also think that the teacher union’s loss of collective bargaining rights is a big reason that charters schools have the chance to succeed in New Orleans. Public school teacher unions typically act as a special interest groups hell-bent on stopping any kind of competition to the public school model, so they lobby for laws restricting options like vouchers, education tax credits, and charter schools. Missouri, for instance, has fairly strict rules on charters requiring them to have an academic sponsor and restricting their operations to the cities of Saint Louis and Kansas City.

Still, students in Missouri’s charter schools can be expected to outperform their public school counterparts over time, according to a study by Standford University’s Center for Research on Education, which my colleague Josh Smith blogged about last year. If Missouri offered an even more welcoming environment to charter schools — by, say, letting them operate anywhere in the state — we might be able to come closer to matching the impressive gains of the New Orleans’ schools. At the very least, the research shows that charter schools can replicate the academic accomplishments of public schools at a much lower cost, which is still a net benefit over the status quo.

Again, the evidence shows that schools are like most other institutions in that they perform best when their stakeholders have alternatives and choose which establishment to patronize.

Today the Saint Louis Business Journal published a letter to the editor by John Payne and me (link added):

Editor:

The editorial board recently oversimplified our views on rural broadband access (“It’s a wired world, after all,” Aug. 20 issue). We do not oppose the proliferation of broadband into rural areas, merely the government subsidization of such expansion. Greater broadband penetration in rural areas indeed provides social benefits, but we remain skeptical that those benefits will outweigh cost of millions in taxpayer dollars.

Solutions for extending broadband exist in the private sector. I-Land Internet Services, for example, is expanding broadband into rural western Missouri at no cost to taxpayers. Fifty percent of people living in rural areas already have home broadband Internet service, according to a Pew Internet study released earlier this month. Furthermore, of the people who do not have high-speed Internet, only 6 percent cited a lack of access as the primary reason for not subscribing, compared with 48 percent who find the Internet irrelevant and 18 percent who have usability issues. Eighty million dollars is a very high cost to benefit such a small subset of people.

Christine Harbin, research analyst, Show-Me Institute
John Payne, research assistant, Show-Me Institute

Of additional note, contributors to Show-Me Daily have discussed this issue before.

A friend emailed me this story from the Sun-Times about the City of Chicago continuing its privatization efforts. According to the article, officials are considering privatizing the famous Taste of Chicago, which I have attended a couple of times. My friend’s response was, “Why wasn’t it fully private in the first place?”, which I completely agree it should have been (no surprise there).

So, I started thinking about St. Louis’ own premier restaurant festival — the Taste of Clayton. I quickly learned two things about Taste of Clayton: I assumed it was private, but it has actually been run by the city; and, it isn’t happening at all in 2010. The Taste of Clayton was always run as a nonprofit event. The restaurants donated their time and effort, the city made all its expenses back so that taxpayers didn’t foot the bill, and the rest went to charity. (See pages 38 and 43 of the Clayton budget if you want the financial data.)

So, if the city really is considering new ideas for 2011, here is a simple one: Allow a private organization or entrepreneur to operate it as a for-profit enterprise! Charge them for the costs of street and police services at the event, and allow them to make money off of it.

But back to Chicago. Mayor Richard Daley says some terrific things in this story (ellipses in original):

But, Daley said he’s determined to hold the line on property taxes and all other taxes and fees and there are precious few alternatives.

“People don’t want to see government growing. They don’t want to see their taxes growing. … People are suffering,” he said.

“What can you do if it costs you more and more money? … You have to look at government differently. If you don’t look at government differently, you live in the past.”

I would dispute the line about precious few alternatives. Chicago could choose to fire the thousands of its city employees that essentially do nothing, including the infamous “Boiler Watchers” who do nothing but monitor public building boilers that have had internal alarm sensors for decades now. But that would mean taking machine party hacks dedicated public employees off of the public payroll.

Nonetheless, the proposal (and other similar privatization ideas) is getting the predictable response from the public employees’ union:

Phillips has said he’s “totally against” farming out recycling because it’s “less jobs for us” at a time when his members are taking unpaid furlough days and comp time instead of cash overtime.

I appreciate the honesty there. Government work is not about providing services; it’s about jobs for their union members. It’s almost refreshing to hear it said.

I commend Mayor Daley for these ideas (not that he cares what I think), and hope that our big city mayors in Missouri can learn from them. Although, to be fair, the Chicago system gives the mayor much more power there than is the case in St. Louis or Kansas City.

Photo Credit: Audrey Spalding

In response to my recent post about the different sales tax rates on sliced and unsliced bagels in New York, a commenter correctly points out that sales taxes in Missouri are similarly complicated and unintuitive. Under Section 144.014, RSMo, Missouri assesses a reduced sales tax rate — 1.225 percent instead of 4.225 percent — for certain food products but not others.

Forbes enters the discussion:

Missouri, for example, ruled in June that a retail drug store’s self-serve frozen meals, but not its self-serve coffee, would qualify for the state’s lower sales tax rate on food. Why? Food served hot doesn’t qualify for the lower rate. The store staff brews the coffee, which customers get for themselves in Styrofoam cups. But it is left to the customer to pop the frozen lasagna out of the freezer case and into the store’s microwave.

In an apparent attempt to clarify the differences in taxation on food items in Missouri, the Department of Revenue provides some examples. (I find these examples to be more confusing than clarifying, myself.)

Taxes are difficult to follow when they are different and ambiguous. As I discussed in my previous post on the subject, these taxes are associated with high administrative and compliance costs, and that Missourians would be better off if the sales tax were low and broadly based.

Not to just jump in and pile on, but it appears some people might lose some sleep if the city privatized the water division. Some of the employees, that is:

Kansas City officials said Wednesday that they were investigating an incident in which a man videotaped Water Services Department employees who appeared to be sleeping on the job.

Yes, I know it’s a cheap shot, but it was too easy to pass on. I will add that Kansas City did at least install water meters a long time ago.

I attended my first Land Clearance for Redevelopment Authority (LCRA) board meeting in Saint Louis yesterday. I couldn’t help but notice stark similarities and differences between the LCRA and the Land Reutilization Authority (LRA) board.

One stark difference is the amount of information that each board expects from the petitioners. When presenting before the LRA board, an individual has to demonstrate financial ability and provide the written endorsement of an alderperson, as contributors to Show-Me Daily have communicated previously. When presenting before the LCRA board, apparently, the presenter provides neither. He only has to cite the dollar amount that the developer is spending on the project, as well as the projected number of jobs that will be created.

As a related point of contrast, committee members of the LRA board pose probing questions to petitioners, whereas those of the LCRA members ask few, if any.

As a point of similarity, both the LRA and the LCRA promote policies that remove properties from the tax base and therefore reduce the amount of property tax revenue received by the city. Each has a different way to accomplish this, however — the LRA board denies proposals from individuals to buy properties that are withheld by the city, and the LCRA board approves proposals from private corporate developers to abate property taxes.

I encourage you to compare the number of suits in the first photo below to the number in the second photo.

To me, it begs the following question: Whom is Saint Louis City government serving: taxpaying individuals or corporate developers?

Land Clearance for Redevelopment Authority (LCRA) Meeting, August 24, 2010

Photo Credit: Thomas Duda

Land Reutilization Authority (LRA) Meeting, June 30, 2010

Photo Credit: Thomas Duda

The Wall Street Journal ran an article about how the state of New York is assessing taxes on sliced or prepared bagels — but not on unsliced bagels — at around $0.08 per bagel. The article illustrates the fact that selective taxes come with high costs of compliance.

It also shows the way in which high selective taxes negatively affect businesses — in this case, bagel stores. This tax could cause customers to patronize restaurants that are not subject to a higher marginal tax rate, instead of frequenting bagel stores. (This leads me to wonder whether the pizza or sandwich industries were behind this measure.)

What is the rationale of taxing sliced bagels over non-sliced bagels? Over other breads? Over other food products? Is consuming sliced bagels a behavior that should be deterred?

There are many calls to tax “sinful” products such as soda, cigarettes, alcoholic beverages, fatty food, and tanning because their consumption is linked to health conditions like obesity and cancer. Is consuming sliced bagels, as opposed to non-sliced bagels, similarly linked to a negative health condition?

I wonder whether restaurants in states that border New York are benefiting from increased sales of sliced bagels.

This is a teachable moment for the state government in Missouri. Instead of assessing a complicated myriad of selective taxes, like New York is doing, Missouri should implement a tax climate that is broadly based.