China Hub Tax Incentives More Expensive Than Advertised

April 11, 2011

China Hub Tax Incentives More Expensive Than Advertised

Saint Louis politicians, media, and bloggers have enthusiastically embraced proposed legislation that would create a package of tax credits and other incentives to establish Lambert International Airport as a “China Hub.” The idea is that increased trade between Missouri and China could give both the state and city economies a boost.

The St. Louis Post-Dispatch editorial board wrote that, when it comes to the China Hub project, “Doing nothing is not an option.” City Mayor Francis Slay tweeted that the project is “the most important economic development bill the state Senate will consider this year.”

Legislators from rural areas of the state are excited too. Sen. Brian Munzlinger (R-Williamstown) told the Saint Louis Beacon that the project could serve to help the agricultural industry. From the Beacon:

Agriculture’s one of the largest industries we’ve got in this state,” said Munzlinger, whose district encompasses much of northeast Missouri. “And I see this as a major, major export enhancement that we can offer to ag producers in this state.

Many dreams are attached to the incentives that would be created under the “aerotropolis” bill. Let’s set aside the argument of whether those dreams are warranted. Today, I want to focus just on the cost of this legislation. After all, it is impossible to determine whether a proposed policy is a good idea without first knowing how much that policy will cost.

This legislation, if passed, will affect all Missourians. Because state legislators have a track record of approving tax credits and other related subsidies without a corresponding reduction in government expenses, the burden of paying for these incentives will likely fall on state taxpayers. At a minimum, the cost will amount to about $80 for every man, woman, and child in Missouri. The hidden costs of this bill will likely add a great deal more to that total.

Lawmakers and media bill it as a $480 million incentive package. However, after closely reading the proposed legislation, it becomes apparent that a number of costs are not part of that tally. Citing the $480 million figure ignores those costs entirely. Let’s try to break them down here.

$60 million: The aerotropolis bill would award $60 million in tax credits to freight companies for shipping cargo out of the state. The state will give more money to companies shipping perishable freight.
$120 million: The bill would award $120 million in tax credits to help pay off interest costs. This is important. Proponents say that the only way the state would hand out this money is if warehouses are in operation. But this amount is tied only to interest, loan fees, and closing costs. It is conceivable that the state, through this provision, could end up paying the interest costs associated with a failed vacant warehouse.
$300 million: The bill would award $300 million in tax credits to the owners of cargo warehouses. The money is tied to the amount that the owners would pay in income, corporation franchise, and bank taxes.

All of the above adds up to the $480 million cost cited. But wait, there’s more.

Double-dipping: In addition to the tax credits awarded above, cargo warehouse operators would be exempt from the state income tax and the state corporation franchise tax. The legislation doesn’t include a limit on these costs. Furthermore, the state fiscal note, which is supposed to estimate costs associated with this legislation, doesn’t attempt to estimate these costs either.

I know, you may be thinking, but doesn’t the aerotropolis legislation also award $300 million in tax credits to cargo warehouse owners in part for income and corporation franchise taxes already? The answer is yes. This legislation will effectively let some double dip. They will be exempt from those taxes and get to claim tax credits against those taxes, despite not paying them.
Keeping employee-paid taxes: Not only will cargo warehouse operators be exempt from the state income tax, but they could also keep half of the income taxes withheld from their employees. Again, the proposed legislation doesn’t limit this cost, and the state fiscal note doesn’t bother estimating how much tax revenue this could cost Missouri.

It also seems strange that this bill would let employers keep taxes that have been withheld from employee paychecks, because those taxes are technically part of an employee’s compensation. Chalk that up as just one more oddity in the aerotroplis legislation’s tangle of handouts.

The bottom line is that no one, not even the state committee tasked with determining the cost of the aerotropolis legislation, knows how much it will cost. The only thing we know is that the cost will likely be much higher than advertised.

I don’t understand why the legislators who sponsored this bill didn’t bother to impose limits on the additional incentives. Such limits would make the costs of the bill containable, and would help everyone understand how much Missouri will be giving up in order to heavily subsidize the building and operation of some warehouses.

I think state legislators owe Missourians the courtesy of at least knowing whether they will each be paying $80, $100, or even more for this project.

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That $80 per person is only paid if many more times that is produced. I don’t understand why you don’t seem to grasp the idea of economic incentives.

Comment by Jason — April 11, 2011 @ 4:21 p.m.
Jason, that is not true.

For example, the state will subsidize 75 percent of the above-mentioned interest costs. So, in that case the state will be paying $3 for every $1 an eligible entity pays in interest costs.

What do you mean by “many more times that is produced”? Are you referring to the proponents’ view that this type of subsidy serves as “investment” in the area?

If so, this view is mistaken. “Investments” such as those proposed by the aerotropolis bill can result in failure. If there were a market for cargo warehouses, then why is there a need for state subsidy? And if there isn’t, using taxpayer dollars to prop up cargo warehouses in the short term does no one any good.

(I also wonder how residents of Joplin, Van Buren, Butler, et al will benefit from this project)

Again and again, we see subsidized development fail. St. Louis Marketplace is one such example: http://urbanreviewstl.com/2004/12/st-louis-marketplace-a-predictable-failure/

Wal-marts moving down the street in order to take advantage of local subsidies are another great example.

As far as economic incentives go, I’d like to think I have a basic grasp of them. Subsidized costs can result in some unintended consequences by subsidizing unproductive behavior.

For example, if someone told me that for every $1 I spent on a television the state would give me $3 more to spend on a television, I would probably end up purchasing a more expensive television than I needed, and I probably wouldn’t spend much time searching for a better deal.

It seems like the same situation could apply with the aerotropolis tax incentives.

Finally, I would hope that if there is increased trade between China and Missouri that Missouri developers would be smart enough and entrepreneurial to be able to take advantage of such an opportunity without government help.

Comment by Audrey Spalding — April 11, 2011 @ 4:48 p.m.
The bill will not cost Missourians a dime. Taxes will start being generated(as opposed to zero taxes now)and entities that qualify will receive tax credits for only seven years. The state will levy less taxes (but more than the current $0.00)in the first seven years because of the incentives but then businesses will be taxed like any other business.

You wrote:
“It also seems strange that this bill would let employers keep taxes that have been withheld from employee paychecks, because those taxes are technically part of an employee’s compensation. Chalk that up as just one more oddity in the aerotropolis legislation’s tangle of handouts.”

I believe this is incorrect.
SB 390
3. An employee of a tenant or an entity, which under section 135.113 is retaining state income tax withheld on behalf of employees by such tenant or entity pursuant to section 143.221, shall receive full credit for the amount of tax withheld as provided in section 143.211

Comment by Frank DeGraaf — April 11, 2011 @ 5:11 p.m.
Audrey,

Your response to Jason:

“For example, the state will subsidize 75 percent of the above-mentioned interest costs. So, in that case the state will be paying $3 for every $1 an eligible entity pays in interest costs.”

is skewered. The bill states:

The 75% incentive on interest is limited to three years and by the following:
“the interest rate on such loan shall not exceed seven percent per annum;”

“Qualifying loan amount”, the principal amount of the loan or loans obtained in connection with the development and construction
of an eligible facility not to exceed sixty percent of the eligible costs of such facility, without regard to the actual principal amount of such loan or loans”

So it’s really 75% of 60% = 45% (up to 7% interest) for no more than three years.

You said:

“As far as economic incentives go, I’d like to think I have a basic grasp of them.”

Either you haven’t read the whole bill or you’re intentionally leaving essential parts out.

For a clear grasp and independent view on how this bill would help the state of Missouri create new and much needed economic development go to:
http://nextstl.com/transportation/the-aerotropolis-trade-incentive-tax-credit-act-how-to-make-lambert-airport-s-china-hub-a-reality

Comment by Frank DeGraaf — April 11, 2011 @ 7:17 p.m.
Frank, thank you for your substantive comments and informative post on nextSTL. I am excited when anyone pays such attention to the gritty details of policy.

I will try your points one by one.

1. “This will not cost Missourians a dime.”
In the broad sense, this statement assumes that the aerotropolis incentive bundle will create new economic activity. There is a very real possibility that this legislation will function instead to shift economic activity. Just because the activity takes a different form doesn’t mean that it is a net gain.

The issue here is that we need to try to compare the “seen” to the “unseen”. When considering public policy, we have to consider what is being given up for something else. Even if the cost of this legislation is a few dollars disparately and almost invisibly spent many times on small transactions throughout the state, the sum of those dollars and interactions may still be worth more than the crop of very visible warehouses this legislation hopes to bring about.

Even if you are correct that this legislation will result in no money being spent unless the desired economic activities take place, this will still cost Missourians money. New jobs, new businesses, and perhaps new residents would result in an increased use of government services. The marginal increase in tax revenue normally associated with such growth would be instead awarded back (in great part) to the eligible owners and operators detailed in the aerotropolis legislation.

If there really isn’t a cost to the state for abating taxes on new economic activity, then why isolate that benefit to entities in the St. Louis area alone? It would be a more level playing field if all businesses in the state could grow without paying income and corporate taxes on new growth.

Also, if the China Hub concept is as incredible as proponents state, then a great majority of the subsidies contained within this legislation are not necessary — the warehouses and jobs could be created anyway. So why award the money?

The burden should be on the state and proponents of this legislation to demonstrate that the desired activity would not occur without substantial subsidy, and that the favored few deserve a break above others.

2. 135.1513.2: “Any tenant or entity operating within an eligible facility shall be entitled to retain fifty percent of the state income tax withheld on behalf of employees by such tenant or entity pursuant to section 143.221, for each year during the eligibility period…”

Thank you for bringing 135.1519.3 to my attention. I overlooked it, and will try add a correction to this blog post in the a.m.

However, this doesn’t change my discomfort with 135.1513.2, which still appears to allow an employer to lay a claim on the employee taxes. Instead, I am more concerned. Are these provisions allowing two entities to claim credit to the same tax liability? Does this mean that this bundle of tax incentives is even more expensive than I thought and even more difficult to quantify? Yikes.

3. I appreciate the algebra. I used a simple example to illustrate a simple point: On the margin, people are careless when spending other people’s money. Really, it wouldn’t matter if the subsidy were three dollars for every one, or one dollar for every 100 spent. The same problem persists.

…

I want to reiterate that we don’t know how much this bundle of subsidies will cost. If it’s possible to justify state subsidy for some activity just to a)get more of it and b) because the subsidy is a small portion of the overall activity, then what can’t you justify subsidizing?

One of my least favorite aspects of subsidies such as those contained within the aerotropolis bill is that government entities are responsible for identifying what activity to subsidize, determining the measures of success, and for handing out rewards.

Couldn’t companies and individuals create innovative ways to support the increased trade with China while profiting from their innovation? Isn’t it possible that the state legislature hasn’t foreseen those methods, and could end up subsidizing the less efficient competition?

Profit, at least in a competitive market, does come not about through special favors.

PS. Would you feel any differently about subsidies for Missouri wine production or beef production? How about the assemblage and holding of vacant land?

http://www.showmedaily.org/2010/02/rent-seeking-behavior-in-the.html
http://www.showmedaily.org/2010/08/and-what-have-you-got-fat-cows.html

Comment by Audrey Spalding — April 11, 2011 @ 9:17 p.m.
(To all readers: I apologize for that lengthy comment. It won’t happen again. :D)

Comment by Audrey Spalding — April 11, 2011 @ 9:17 p.m.
I find this to be the least substantive comment I’ve ready anywhere all day:

“Also, if the China Hub concept is as incredible as proponents state, then a great majority of the subsidies contained within this legislation are not necessary — the warehouses and jobs could be created anyway. So why award the money?”

The mentality that says “if it’s so great, why isn’t it already happening and why can’t the free market just do it,” is broken. It’s false. It’s misleading. It’s a lie.

Comment by TomD — April 11, 2011 @ 9:48 p.m.
Incorrect, TomD. This is one of the most important insights economic theory has to offer: Redistribution doesn’t increase wealth, it reduces wealth — even when targeted to favored forms of economic development. As economist Frédéric Bastiat pointed out, every action has both effects that are obvious and effects that are hidden.

Unless government spending is reduced by the amount of each issued tax credit, every tax credit dollar is a dollar that will be paid for by other taxpayers, either through higher current marginal tax rates or through higher future taxes to pay down current debt.

Each of those dollars can’t be used in the market by its original owner to fill up a gas tank, buy groceries, take a child to piano lessons, or invest in an entrepreneurial idea. Even the very act of redistribution carries with it transaction costs and administrative overhead that turns an otherwise zero-sum expropriation into a dead-weight economic loss.

Thanks to the diffuse costs and concentrated benefits of special interest politics, these hidden effects go almost entirely unnoticed by the general public. But an expenditure that seems measly in political terms is actually a huge aggregate amount, sucked from the economy and redistributed to politically favored recipients.

There’s nothing special about any particular type of business or any particular form of economic activity that makes it an essential recipient of corporate welfare. And politicians have no special talent for figuring out which businesses are worthy of investment — indeed, they have a dismal track record in that regard. If we stop giving taxpayer handouts to favored business interests, that money will instead be invested in another, more productive area of the economy.

Targeted development tax credits are a recipe for economic stagnation. Letting capital flow naturally to business models that are profitable without subsidy, on the other hand, is how economies grow.

Comment by Eric D. Dixon — April 12, 2011 @ 12:17 a.m.
Audrey, thank you for you reply to my earlier comments. My assessment is that:
A. You are very concerned with the unknown total cost of the incentives.
B. A. is not an issue because no changes to this bill would be able to address your concerns. You’re just flat-out against tax credits.

In theory, I think you’re right and we shouldn’t give away anything. In reality however, the whole world is doing it. If we don’t play the game, someone else will and that’s a guarantee. I do agree with you that if we do offer tax breaks we should make sure that there is a strictly defined cap to the amount offered.

Comment by Frank DeGraaf — April 12, 2011 @ 1:07 a.m.
I would ask Mr. Munzlinger, could you provide examples where crops similar to those grown in Missouri are transported by airplane? In my experience, it is just too expensive.

Comment by Papillon — April 12, 2011 @ 9:28 a.m.
Frank: I re-read the provision of the China Hub legislation that you cited, and then discussed it with a tax attorney.

It turns out my original reading of the proposed statute is correct.

135.1519.3: An employee of a tenant or an entity, which under section 135.113 is retaining state income tax withheld on behalf of employees by such tenant or entity pursuant to section 143.221, shall receive full credit for the amount of tax withheld as provided in section 143.211

The “full credit” cited is not a tax credit for the employee. This is stating that the employee will not be on the hook for paying state income tax again — because to the state of Missouri, the employee will have actually paid only 50% of his or her income tax, with the rest going to the employer. This provision makes sure that, come tax time, the employee won’t have to pay another 50% to the state because the employer kept the money.

So my original concern stands. This does not allow two entities to claim the same tax dollar. I still finding it disturbing that this provision would enable employers to keep employee earnings.

Comment by Audrey Spalding — April 13, 2011 @ 11:29 a.m.
The bill will not cost Missourians a dime. Taxes will start being generated(as opposed to zero taxes now)and entities that qualify will receive tax credits for only seven years. The state will levy less taxes (but more than the current $0.00)in the first seven years because of the incentives but then businesses will be taxed like any other business.

Comment by Frank DeGraaf — April 11, 2011 @ 5:11 p.m.

Ah yes, the something from nothing argument Frank. This is my favorite argument from people who think subsidizing businesses is the way to go in economic development. If you cut the taxes paid by a certain industry or group of people, everyone else must pick up the slack or services must be cut.

It’s a fact that even with tax credits, there are costs. It’s a lie that they are costless. We all pay for Mizzou, the state police, and legislator salaries. When you issue $100 million in tax credits you either forgo $100 million in revenue and cut spending accordingly or you raise someone else’s taxes to make up for the lost revenue. Either way I’m going without something or paying more to make up for your supposedly costless tax credits.

Then, assuming you don’t mind these costs you have to consider a couple of things:

First, you have to consider whether or not this particular economic activity would have happened anyway. If so, then any tax credits or tax exemptions are wasted effort and money.

Second, you have to consider if an economic activity is really a net benefit to society as a whole if it has to be subsidized to exist.

Nowhere does this bill in any way have a mechanism to examine these two areas of consideration and judge the project on any merits other than geography and a local politician’s willingness to declare one patch of land a “Gateway Zone” over a different patch of land. The fact that the benefits of the Aerotropolis bill are tied to geography tells me that this bill is just another subsidy to the local real estate developers and a way to give the local officals a way to hand out favors without being held to any objective standard.

This is a badly flawed law that will enable even more looting of the state treasury by big real estate developers and the construction industry in general.

These people who would start these businesses are the most able and capable among us. Ask yourself why must we subsidize their business ventures at the same time we’re cutting funding for education accross the board in this state? We already have a large state government budget deficit. Aerotropolis and similar bills will make it worse while subsidizing even more real estate development to go with all the empty malls and other vacant space we have right now. We’re just getting to the bottom of the most recent real estate bust, why start subsidizing this stuff and get even more? Have we not learned that the cure for one bubble is not feeding the next one?

Comment by Keith Marquard — April 13, 2011 @ 11:17 p.m.

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That $80 per person is only paid if many more times that is produced. I don’t understand why you don’t seem to grasp the idea of economic incentives.

Comment by Jason — April 11, 2011 @ 4:21 p.m.

Jason, that is not true.

For example, the state will subsidize 75 percent of the above-mentioned interest costs. So, in that case the state will be paying $3 for every $1 an eligible entity pays in interest costs.

What do you mean by “many more times that is produced”? Are you referring to the proponents’ view that this type of subsidy serves as “investment” in the area?

If so, this view is mistaken. “Investments” such as those proposed by the aerotropolis bill can result in failure. If there were a market for cargo warehouses, then why is there a need for state subsidy? And if there isn’t, using taxpayer dollars to prop up cargo warehouses in the short term does no one any good.

(I also wonder how residents of Joplin, Van Buren, Butler, et al will benefit from this project)

Again and again, we see subsidized development fail. St. Louis Marketplace is one such example: http://urbanreviewstl.com/2004/12/st-louis-marketplace-a-predictable-failure/

Wal-marts moving down the street in order to take advantage of local subsidies are another great example.

As far as economic incentives go, I’d like to think I have a basic grasp of them. Subsidized costs can result in some unintended consequences by subsidizing unproductive behavior.

For example, if someone told me that for every $1 I spent on a television the state would give me $3 more to spend on a television, I would probably end up purchasing a more expensive television than I needed, and I probably wouldn’t spend much time searching for a better deal.

It seems like the same situation could apply with the aerotropolis tax incentives.

Finally, I would hope that if there is increased trade between China and Missouri that Missouri developers would be smart enough and entrepreneurial to be able to take advantage of such an opportunity without government help.

Comment by Audrey Spalding — April 11, 2011 @ 4:48 p.m.

The bill will not cost Missourians a dime. Taxes will start being generated(as opposed to zero taxes now)and entities that qualify will receive tax credits for only seven years. The state will levy less taxes (but more than the current $0.00)in the first seven years because of the incentives but then businesses will be taxed like any other business.

You wrote:
“It also seems strange that this bill would let employers keep taxes that have been withheld from employee paychecks, because those taxes are technically part of an employee’s compensation. Chalk that up as just one more oddity in the aerotropolis legislation’s tangle of handouts.”

I believe this is incorrect.
SB 390
3. An employee of a tenant or an entity, which under section 135.113 is retaining state income tax withheld on behalf of employees by such tenant or entity pursuant to section 143.221, shall receive full credit for the amount of tax withheld as provided in section 143.211

Comment by Frank DeGraaf — April 11, 2011 @ 5:11 p.m.

Audrey,

Your response to Jason:

“For example, the state will subsidize 75 percent of the above-mentioned interest costs. So, in that case the state will be paying $3 for every $1 an eligible entity pays in interest costs.”

is skewered. The bill states:

The 75% incentive on interest is limited to three years and by the following:
“the interest rate on such loan shall not exceed seven percent per annum;”

“Qualifying loan amount”, the principal amount of the loan or loans obtained in connection with the development and construction
of an eligible facility not to exceed sixty percent of the eligible costs of such facility, without regard to the actual principal amount of such loan or loans”

So it’s really 75% of 60% = 45% (up to 7% interest) for no more than three years.

You said:

“As far as economic incentives go, I’d like to think I have a basic grasp of them.”

Either you haven’t read the whole bill or you’re intentionally leaving essential parts out.

For a clear grasp and independent view on how this bill would help the state of Missouri create new and much needed economic development go to:
http://nextstl.com/transportation/the-aerotropolis-trade-incentive-tax-credit-act-how-to-make-lambert-airport-s-china-hub-a-reality

Comment by Frank DeGraaf — April 11, 2011 @ 7:17 p.m.

Frank, thank you for your substantive comments and informative post on nextSTL. I am excited when anyone pays such attention to the gritty details of policy.

I will try your points one by one.

1. “This will not cost Missourians a dime.”
In the broad sense, this statement assumes that the aerotropolis incentive bundle will create new economic activity. There is a very real possibility that this legislation will function instead to shift economic activity. Just because the activity takes a different form doesn’t mean that it is a net gain.

The issue here is that we need to try to compare the “seen” to the “unseen”. When considering public policy, we have to consider what is being given up for something else. Even if the cost of this legislation is a few dollars disparately and almost invisibly spent many times on small transactions throughout the state, the sum of those dollars and interactions may still be worth more than the crop of very visible warehouses this legislation hopes to bring about.

Even if you are correct that this legislation will result in no money being spent unless the desired economic activities take place, this will still cost Missourians money. New jobs, new businesses, and perhaps new residents would result in an increased use of government services. The marginal increase in tax revenue normally associated with such growth would be instead awarded back (in great part) to the eligible owners and operators detailed in the aerotropolis legislation.

If there really isn’t a cost to the state for abating taxes on new economic activity, then why isolate that benefit to entities in the St. Louis area alone? It would be a more level playing field if all businesses in the state could grow without paying income and corporate taxes on new growth.

Also, if the China Hub concept is as incredible as proponents state, then a great majority of the subsidies contained within this legislation are not necessary — the warehouses and jobs could be created anyway. So why award the money?

The burden should be on the state and proponents of this legislation to demonstrate that the desired activity would not occur without substantial subsidy, and that the favored few deserve a break above others.

2. 135.1513.2: “Any tenant or entity operating within an eligible facility shall be entitled to retain fifty percent of the state income tax withheld on behalf of employees by such tenant or entity pursuant to section 143.221, for each year during the eligibility period…”

Thank you for bringing 135.1519.3 to my attention. I overlooked it, and will try add a correction to this blog post in the a.m.

However, this doesn’t change my discomfort with 135.1513.2, which still appears to allow an employer to lay a claim on the employee taxes. Instead, I am more concerned. Are these provisions allowing two entities to claim credit to the same tax liability? Does this mean that this bundle of tax incentives is even more expensive than I thought and even more difficult to quantify? Yikes.

3. I appreciate the algebra. I used a simple example to illustrate a simple point: On the margin, people are careless when spending other people’s money. Really, it wouldn’t matter if the subsidy were three dollars for every one, or one dollar for every 100 spent. The same problem persists.

…

I want to reiterate that we don’t know how much this bundle of subsidies will cost. If it’s possible to justify state subsidy for some activity just to a)get more of it and b) because the subsidy is a small portion of the overall activity, then what can’t you justify subsidizing?

One of my least favorite aspects of subsidies such as those contained within the aerotropolis bill is that government entities are responsible for identifying what activity to subsidize, determining the measures of success, and for handing out rewards.

Couldn’t companies and individuals create innovative ways to support the increased trade with China while profiting from their innovation? Isn’t it possible that the state legislature hasn’t foreseen those methods, and could end up subsidizing the less efficient competition?

Profit, at least in a competitive market, does come not about through special favors.

PS. Would you feel any differently about subsidies for Missouri wine production or beef production? How about the assemblage and holding of vacant land?

http://www.showmedaily.org/2010/02/rent-seeking-behavior-in-the.html
http://www.showmedaily.org/2010/08/and-what-have-you-got-fat-cows.html

Comment by Audrey Spalding — April 11, 2011 @ 9:17 p.m.

(To all readers: I apologize for that lengthy comment. It won’t happen again. :D)

I find this to be the least substantive comment I’ve ready anywhere all day:

“Also, if the China Hub concept is as incredible as proponents state, then a great majority of the subsidies contained within this legislation are not necessary — the warehouses and jobs could be created anyway. So why award the money?”

The mentality that says “if it’s so great, why isn’t it already happening and why can’t the free market just do it,” is broken. It’s false. It’s misleading. It’s a lie.

Comment by TomD — April 11, 2011 @ 9:48 p.m.

Incorrect, TomD. This is one of the most important insights economic theory has to offer: Redistribution doesn’t increase wealth, it reduces wealth — even when targeted to favored forms of economic development. As economist Frédéric Bastiat pointed out, every action has both effects that are obvious and effects that are hidden.

Unless government spending is reduced by the amount of each issued tax credit, every tax credit dollar is a dollar that will be paid for by other taxpayers, either through higher current marginal tax rates or through higher future taxes to pay down current debt.

Each of those dollars can’t be used in the market by its original owner to fill up a gas tank, buy groceries, take a child to piano lessons, or invest in an entrepreneurial idea. Even the very act of redistribution carries with it transaction costs and administrative overhead that turns an otherwise zero-sum expropriation into a dead-weight economic loss.

Thanks to the diffuse costs and concentrated benefits of special interest politics, these hidden effects go almost entirely unnoticed by the general public. But an expenditure that seems measly in political terms is actually a huge aggregate amount, sucked from the economy and redistributed to politically favored recipients.

There’s nothing special about any particular type of business or any particular form of economic activity that makes it an essential recipient of corporate welfare. And politicians have no special talent for figuring out which businesses are worthy of investment — indeed, they have a dismal track record in that regard. If we stop giving taxpayer handouts to favored business interests, that money will instead be invested in another, more productive area of the economy.

Targeted development tax credits are a recipe for economic stagnation. Letting capital flow naturally to business models that are profitable without subsidy, on the other hand, is how economies grow.

Comment by Eric D. Dixon — April 12, 2011 @ 12:17 a.m.

Audrey, thank you for you reply to my earlier comments. My assessment is that:
A. You are very concerned with the unknown total cost of the incentives.
B. A. is not an issue because no changes to this bill would be able to address your concerns. You’re just flat-out against tax credits.

In theory, I think you’re right and we shouldn’t give away anything. In reality however, the whole world is doing it. If we don’t play the game, someone else will and that’s a guarantee. I do agree with you that if we do offer tax breaks we should make sure that there is a strictly defined cap to the amount offered.

Comment by Frank DeGraaf — April 12, 2011 @ 1:07 a.m.

I would ask Mr. Munzlinger, could you provide examples where crops similar to those grown in Missouri are transported by airplane? In my experience, it is just too expensive.

Comment by Papillon — April 12, 2011 @ 9:28 a.m.

Frank: I re-read the provision of the China Hub legislation that you cited, and then discussed it with a tax attorney.

It turns out my original reading of the proposed statute is correct.

135.1519.3: An employee of a tenant or an entity, which under section 135.113 is retaining state income tax withheld on behalf of employees by such tenant or entity pursuant to section 143.221, shall receive full credit for the amount of tax withheld as provided in section 143.211

The “full credit” cited is not a tax credit for the employee. This is stating that the employee will not be on the hook for paying state income tax again — because to the state of Missouri, the employee will have actually paid only 50% of his or her income tax, with the rest going to the employer. This provision makes sure that, come tax time, the employee won’t have to pay another 50% to the state because the employer kept the money.

So my original concern stands. This does not allow two entities to claim the same tax dollar. I still finding it disturbing that this provision would enable employers to keep employee earnings.

Comment by Audrey Spalding — April 13, 2011 @ 11:29 a.m.

Ah yes, the something from nothing argument Frank. This is my favorite argument from people who think subsidizing businesses is the way to go in economic development. If you cut the taxes paid by a certain industry or group of people, everyone else must pick up the slack or services must be cut.

It’s a fact that even with tax credits, there are costs. It’s a lie that they are costless. We all pay for Mizzou, the state police, and legislator salaries. When you issue $100 million in tax credits you either forgo $100 million in revenue and cut spending accordingly or you raise someone else’s taxes to make up for the lost revenue. Either way I’m going without something or paying more to make up for your supposedly costless tax credits.

Then, assuming you don’t mind these costs you have to consider a couple of things:

First, you have to consider whether or not this particular economic activity would have happened anyway. If so, then any tax credits or tax exemptions are wasted effort and money.

Second, you have to consider if an economic activity is really a net benefit to society as a whole if it has to be subsidized to exist.

Nowhere does this bill in any way have a mechanism to examine these two areas of consideration and judge the project on any merits other than geography and a local politician’s willingness to declare one patch of land a “Gateway Zone” over a different patch of land. The fact that the benefits of the Aerotropolis bill are tied to geography tells me that this bill is just another subsidy to the local real estate developers and a way to give the local officals a way to hand out favors without being held to any objective standard.

This is a badly flawed law that will enable even more looting of the state treasury by big real estate developers and the construction industry in general.

These people who would start these businesses are the most able and capable among us. Ask yourself why must we subsidize their business ventures at the same time we’re cutting funding for education accross the board in this state? We already have a large state government budget deficit. Aerotropolis and similar bills will make it worse while subsidizing even more real estate development to go with all the empty malls and other vacant space we have right now. We’re just getting to the bottom of the most recent real estate bust, why start subsidizing this stuff and get even more? Have we not learned that the cure for one bubble is not feeding the next one?

Comment by Keith Marquard — April 13, 2011 @ 11:17 p.m.

April 11, 2011