September 24, 2014

On a Scale of 1-10, It’s 15

Dollars an hour, that is. There is a continuing push in Saint Louis and other cities throughout the country to improve the pay of low-wage workers. That is a noble sentiment and I, for one, hope that wages do go up. In fact, I want wages to go up for everybody. However, increasing the minimum wage is the wrong way to go about it.

If proponents are successful in raising the minimum wage to $15 an hour, there will be a lot of pain. First, such an increase will cause job losses. A Congressional Budget Office (CBO) report estimated that if the minimum wage went up to $9 an hour, 100,000 jobs would be lost. If the wage went up to $10.10 an hour, the number of jobs lost would increase to 500,000. If the CBO is correct about job losses, one shudders to think about how many jobs would be lost if the minimum wage went up to $15.

Is the loss of so many jobs worth the increase in wages for those workers who manage to keep their jobs? That’s a question for proponents to consider. They also should consider the fact that many people who work for minimum wage are not poor. Why mandate raises for them while risking job losses for the same people wage-hike proponents are trying to help?

There is a better way to help poor families. Both the CBO report and Professor David Neumark’s 2012 study on the minimum wage find that the Earned Income Tax Credit (EITC) is a better alternative for helping poor families than increasing the minimum wage.

The EITC is a refundable tax credit that provides direct cash assistance to low-income families. The tax credit is more effective at helping poor families because it is specifically targeted toward them. The minimum wage is not. For example, a teenager working a minimum-wage job whose father is a corporate attorney and whose mother is a surgeon would receive the same monetary benefit as a single mother of two working at McDonalds. That would not be the case with the EITC. If Missouri and other states really wanted to help poor families, expanding the EITC would be a more effective tool than increasing the minimum wage.

September 12, 2014

Luxury-Oriented Development in Clayton

This week, Clayton proposed granting a 50 percent property tax abatement for 20 years to a $72 million luxury apartment development—The Crossing—in the heart of downtown Clayton, an area which the city council absurdly declared “blighted.” The city argues that the development will bring more economic activity and act as transit-oriented development.

We have written many times before that using tax incentives to lure development either generally diverts development from other areas or, worse, provides tax breaks to development that would have occurred anyway. These abatements put the pressure of funding local services on businesses or areas of the city that are not so favored by the city council. This type of central planning by tax policy creates an uneven playing field that is unfair and ultimately economically damaging. Allowing a luxury property developer and future residents to pay lower property tax rates, when rates were just increased for the rest of Clayton, is questionable policy.

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The Crossing

The argument that this development will boost transit ridership is also flawed. While changing zoning restrictions to allow less parking for a downtown building is not objectionable, using possible transit ridership to justify tax favoritism is bad policy. The relative affluence of Clayton has meant that local MetroLink ridership is far below what planners hoped for before the station opened in 2006. Original projections would have had the Clayton station serve 3,000 riders each weekday shortly after opening. Today, total ridership is 880 per weekday, and only 213 Clayton residents use the MetroLink to get to work. Four times that number walk.

The idea that luxury apartment dwellers will greatly boost this ridership is unlikely, because the affluent typically own vehicles and are much less likely to use transit than those with lower income. Even if all the residents of The Crossing did use public transportation, is it not enough that city, county, and federal government spent hundreds of millions building a light rail line to Clayton, and they continue to provide subsidized tickets that cover less than a third of that rail’s operating costs? Do we need to subsidize their luxury apartments next to the station as well?

Chances are some of the new residents will use transit, more will walk, and most will drive to their destinations. As for the local economy, the effects of diverting development and rearranging tax burdens will go unseen. But the good news is (for those with the means), new luxury apartments are coming on the market! And just wait until you see the location …

June 30, 2014

Vetoes, Vetoes, And More Vetoes

There has been a lot of consternation in the Missouri Legislature about Gov. Jay Nixon’s vetoes and withholds (withholds differ from vetoes in that withheld money can be released if state revenues are available later in the year, while vetoed funds are just not spent) from the fiscal year 2015 budget. Many legislators are upset with the governor for claiming that their budget is out of balance while his own executive budget was larger than the one the legislature passed. To be fair, a lot of the difference is due to the governor’s budget including funds for expanding Medicaid, but the governor’s budget also was relying on revenue growth that was higher than even the legislature was expecting.

All that said, there actually is a lot to like in these vetoes. For example, the governor vetoed more than $7 million in funds for biodiesel incentives. The state should be eliminating these types of incentives and it is a good thing that Gov. Nixon is cutting back on them. The governor also is vetoing $2 million in funding for the Rolling Stock Tax Credit. The Show-Me Institute has published numerous writings about the desirability on cutting back on these types of tax credits. It is good to see Gov. Nixon trying to do so.

Gov. Nixon’s vetoes could go further. For example, he withheld $5 million from efforts trying to lure the Republican National Convention to Kansas City. There has been a lot said about using government money to try to lure big events, but in this case, the money isn’t necessary because the Republican National Committee has already narrowed its search down to Cleveland and Dallas. Gov. Nixon should have simply vetoed this specific appropriation.

There was a lot to like in the governor’s vetoes. If the legislature was more disciplined, many of the vetoes would not have been necessary. Hopefully, state spending can be controlled going forward.

April 23, 2014

Kansas City Streetcar Economic Development Claims Don’t Add Up . . . Literally

Perhaps in reaction to the Show-Me Institute’s assertion that there are no studies supporting the claim that streetcars alone cause economic development, NextRailKC hurriedly compiled a list claiming to prove the opposite. (NextRailKC removed the original list, but we’ve saved it here.) We say hurriedly because not only does the information provide no detail on how it was collected, but the table attached isn’t even properly tabulated. Simple arithmetic (we used a calculator) indicates that their table yields $791 million in development and 1,984 housing units. (The summary they provide is $879 million and 1,997, respectively. They even mis-tabulate the numbers provided in their legend. What did Kansas City pay for this?)

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One of the development projects that indicated the streetcar was a “key reason” for their development was the Centric Projects Headquarters, and the project is listed at $2 million. According to Centric’s website, it is a general contracting firm. Kansas City Mayor Sly James appointed the founder, Richard Wetzel, to the streetcar advisory group to consider the Country Club Right of Way. In a blog post on the Centric website, Wetzel wrote, “For years, I have been an advocate of fixed-rail transit in Kansas City.” Wetzel is not a disinterested party; he is a self-described advocate for the streetcar.

As for the so-called economic development that Centric and Wetzel provided Kansas City, for which the streetcar was a “key reason,” it’s not so impressive. The Kansas City Business Journal reported on May 22, 2013, that:

Centric Projects LLC is moving its offices two blocks up Main Street to accommodate rapid growth at the Kansas City commercial general contractor.

The 3-year-old firm is moving from its current 3,000 square feet of space at 2024 Main St. to a new 5,500-square-foot space at 1814 Main St. by the end of July.

The building was previously occupied by Western Blue, which left Kansas City for Kansas City, Kan., in 2010, and is undergoing $1.5 million worth of renovations ahead of the relocation.

So there you have it. Centric’s $2 million economic impact supposedly due to the streetcar is a $1.5 million remodel to a space that likely would have required remodeling regardless who, or why, it was occupied. The company moved two blocks up Main, meaning that they didn’t even move to the streetcar line from somewhere outside the Transportation Development District (TDD). They simply moved to a different point on it. Kansas City officials want you to think this is all due solely to the uncompleted downtown streetcar.

It gets better. That same Business Journal piece goes on to state that Centric is receiving tax incentives for staying in Kansas City, Mo.:

Centric also is receiving tax credits from Missouri for keeping jobs in the state. Kounkel did not say how the tax credits are oriented but said the credits are tied to the number of employees the firm hires and will help “offset expenses.”

Representatives of the Missouri Department of Economic Development, which typically handles the state’s tax credit programs, were not immediately available for comment.

Whatever the amount, the money was wasted, as Centric’s founder said they never considered a move out of state:

“We never considered a move to another state or municipality,” Richard Wetzel, partner at the firm, said in a release. “While we do work all over the metropolitan area, Kansas City, Missouri — and specifically the Crossroads (Arts District) — is where we want to continue to hang our shingle.”

Centric’s example only serves to confirm the Show-Me Institute’s claim that there is no evidence that streetcars alone lead to economic development. Centric did not move from outside the streetcar taxing district so there is no net new development. The $2 million (actually $1.5 million) economic impact it claims would likely have been required of anyone who occupied the space, and Centric received other economic incentives to relocate within the TDD.

We learned all of this in the course of a few hours searching online. Is Kansas City really this inept at calculating economic development, or is this a concerted effort to mislead voters?

April 17, 2014

Pennsylvania’s Tax Credit Scholarship Program…Winning!

This week, the Show-Me Institute released our third and final case study about tax credit scholarship programs in other states: “Pennsylvania’s Education Improvement Tax Credit Program: A Winning Educational Partnership.”

The study’s author, Andrew LeFevre, is well acquainted with Pennsylvania’s tax credit scholarship program, having served as the executive director of the REACH Alliance and the REACH Foundation, statewide school choice organizations. He wrote:

In 2001, Pennsylvania became the first state in the nation to enact a highly innovative public-private partnership in the form of an education tax credit aimed at corporations. Since then, the popular Educational Improvement Tax Credit (EITC) Program has provided more than 430,000 scholarships to students from low- and middle-class families . . .

In 2012-13 alone, the program provided more than 68,000 K-12 and pre-K scholarships. “The EITC Program has accomplished what many have been advocating for years: a way for the business community to be involved in children’s education and provide more schooling options,” LeFevre said.

I encourage you to check out this new case study along with our studies about tax credit scholarship programs in New Hampshire and Arizona. I also invite you to learn more about tax credit scholarships by attending our event on April 25, “Expanded Opportunities: A Discussion About Tax Credit Scholarships.”

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April 11, 2014

Mark Your Calendars For Our April 25 Tax Credit Scholarship Event

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When I speak about tax credit scholarships, I get a lot of questions: What is a tax credit scholarship? How would that work? What are the chances of that passing in Missouri?

If you want to find out the answer to these and other questions, join us on April 25 at Lindenwood University in St. Charles, Mo. We are partnering with the Hammond Institute for Free Enterprise at Lindenwood University to present a dynamite event, “Expanded Opportunities: A Discussion About Tax Credit Scholarships.”

Jason Bedrick, of the Cato Institute, and Jonathan Butcher, of the Goldwater Institute, will present information about how these programs are working in other states. You can download their recent case studies for the Show-Me Institute about the New Hampshire and Arizona programs directly from our website.

Attendees also will be able to take part in a panel discussion with Missouri Sen. John Lamping (R-Dist. 24), Sen. Maria Chappelle-Nadal (D-Dist. 14), Missouri Speaker of the House Tim Jones (R-Dist. 110), and Rep. Michael Butler (D-Dist. 79).

RSVP online, mark your calendars, tell your friends, and join us on April 25.

April 10, 2014

Let’s Fix The Transfer Problem ‘One Piece At A Time’

One Piece at a Time” is one of my favorite Johnny Cash songs. In the song, a young man goes to “workin’ on a ‘sembly line” in a Detroit auto plant. He devises a plan to build a car by sneaking parts out one piece at a time. In the end, he has created a “’49, ’50, ’51, ’52, ’53, ’54, ’55, ’56, ’57, ’58, ’59 automobile.” I was reminded of this song as I drafted my testimony for Missouri Senate Committee Substitute for Senate Bills 493, 485, 495, 516, 534, 545, 595, 616, 624. It wasn’t just the name of the bill that reminded me of the song, but the way that so many different parts that seemingly do not go together were crammed into one bill.

Though the bill touches on many different topics, I tried to limit my testimony to the crux of the bill — the student transfer issue. As I said in my testimony:

Ever since the Missouri Supreme Court upheld a student’s right to transfer from an unaccredited school district to a nearby accredited one, Missouri school leaders have coordinated efforts to put an end to the transfer law. Some concerns regarding the transfer program hold merit. For instance, the current law has the potential to lead to the bankruptcy of unaccredited districts or to lead to overcrowding in accredited ones. Unfortunately, these problems have led many to ask, “How can we end student transfers?” rather than, “How can we make the transfer law work for students?”

Missouri Sen. David Pearce (R-Dist. 21) reiterated this point, stating that this bill is intended to reduce the number of students transferring.

Allowing students to choose their school is a good thing and we can make this program work for students if we institute four changes.

  1. Give accredited school districts the right to determine how many students they will accept.
  2. Fix the tuition calculation so that unaccredited districts will not be forced to pay rates that are higher than they spend themselves.
  3. Expand choice to private schools in the same or adjoining counties.
  4. Establish a fund to provide transportation for transfer students. Appropriations from general revenue and donations from the public could fund this.

You can read more details about my suggestions in my full testimony.

March 27, 2014

State Audit Recommends Sunset Of Historic Preservation Tax Credit

You saw the original, and now here’s the sequel. Just weeks after producing an excellent report on Missouri’s Low Income Housing Tax Credit, Missouri’s state auditors have returned with a review of the Historic Preservation Tax Credit (HPTC) program. We have talked about the HPTC at length here on the blog and elsewhere, and I am delighted that the state’s auditors took a look at a program that has hemorrhaged taxpayer money for years.

What did the auditors find? A lot. For starters, HPTC tax credits have cost the state nearly $600 million over the last five years alone and more than a billion dollars over the last 10. Missouri leads the country in “qualified rehabilitation expenses” (QRE) for historic preservation, which relates to the expenses against which the HPTC could be applied. Broadly speaking, the higher the QRE that rehabbers claim under the HPTC, the more money the state will be spending on it.

So, how big is Missouri’s QRE lead? Check out this chart from page 8 of the audit.

For perspective, Massachusetts, Virginia, Pennsylvania, and New York are all original U.S. colonies. Are we to believe that Missouri should have been subsidizing preservation spending at almost twice the rate as the next closest state… and not only that, subsidizing it at that level for more than a decade?

I can appreciate that we love our old buildings in Missouri, but if anything and everything can get the stamp of being “historic,” then we degrade the things that are, in fact, historic and waste limited taxpayer resources in the process. Could some projects be worthy of taxpayer support? Possibly, but those cases would be an exception, not a billion dollar rule.

To name a fraction of the examples that underscore this reality, Norwood Hills Country Club should not have received taxpayer money. A whole host of private mansions that the HPTC subsidized should not have received taxpayer money. Check out this story, from the audit:

In 2011, the DED issued about $296,000 in credits to an applicant who renovated a 3-story, 5,400 square foot home in an affluent neighborhood in a metropolitan area. The applicant purchased the home in 1993 for nearly $300,000 and reported about $1.2 million in qualified rehabilitation expenditures. The home has a fair market value of approximately $434,000.

So the owner buys a $300,000 house, drops $1.2 million into it, gets nearly $300,000 (almost what he paid for the house originally!) in credits from the state, and the value of the house rises… about $130,000? On what planet does subsidizing a private residence in a wealthy neighborhood make any sense for taxpayers? Why did Missourians have to effectively reimburse this person the purchase price of their home? Who’s looking out for the taxpayers here? And who in their right mind and looking at the numbers thinks this is a good “investment” for the state?

The HPTC is a mess of a program. The least the legislature could do is set a date for this madness to end.

March 14, 2014

Bloodletting In Clayton

For centuries until approximately 200 years ago, bloodletting was a common treatment for illness. If you were sick, you would go get a nice bleeding. We finally learned what should have been obvious: with the exception of one or two illnesses, bleeding was a terrible idea that did more harm than good. The Missouri local tax equivalent to bloodletting is the economic development sales tax.

Government does a terrible job planning the economy, whether it is a Soviet five-year plan or retail TIFs (tax increment financing) in Saint Louis County. Municipal government can improve the local economy by doing the things it needs to do well: police, fire, local roads, etc. It does not need to “develop” our economy, especially because “economic development” in Missouri is synonymous with taxpayer subsidies and corporate welfare.

Clayton, the Saint Louis County seat and the region’s other downtown, is considering an economic development sales tax, along with three other tax increases, on the April ballot. Doing four tax increases at once (four!) is crazy, but the point of this post is just the economic development sales tax.

Clayton has been careful in its use of tax incentives and other economic development tools in comparison to other Saint Louis County municipalities, which admittedly is a very low bar. Clayton deserves credit for that. So I can’t understand why it would propose raising a tax to do more of something it should not do in the first place: government planning of the local economy.

Clayton officials likely would claim that the intention for the new tax funds is not more use of subsidies or more local planning, but a continued focus on business recruitment, retention, etc. I believe them, and in the short run, I am sure that would be true. But, in my opinion, the increased use of, and funding for, government economic development activities will almost certainly be followed by heavier use of various subsidies and tax incentives. Cities such as Clayton should be moving in the opposite direction with less or zero use of these types of programs, not increasing taxes to do things they should skip from the start.

More to come on these four tax increase proposals next week.

March 12, 2014

State Audit Recommends Sunset Of Low-Income Housing Tax Credit

A new state audit recommends a sunset of the state’s low-income housing tax credit. It’s a great recommendation that we have supported in the past. You can find the full audit here and the “citizen summary” here. The audit highlights a broad set of problems with the current program — not the least of which being that nearly $1.5 billion worth of Low-Income Housing Tax Credits (LIHTC) are outstanding and have not been redeemed. This paragraph from the auditor’s press release is indispensable (emphasis mine):

Currently, only 42 cents of every dollar issued actually goes toward the construction of low income housing; the remainder goes to the federal government in the form of increased federal income taxes, to syndication firms, and to investors. State law allows claiming the same project costs under two or more tax credit programs. This “stacking” of tax credits can be lucrative for developers, but it generates no additional economic activity or state benefit.

To reiterate: Less than half of the money spent through the LIHTC program… actually goes toward the building of low-income housing. Page 16 of the audit goes through all of the auditor’s recommendations, including the idea of adding substantive spending caps to the LIHTC. That’s an excellent idea. When you have a billion-dollar budget-buster like this sitting out there, a strong cap is an obvious and common sense reform, though the Missouri House’s track record on tax credit reform issues has been abysmal.

Either way, the auditor’s report recognizes the need for reform to the LIHTC. It’s an open question whether the legislature will also recognize the problem.

March 7, 2014

The Effects Of A Minimum Wage Increase

On Tuesday, the St. Louis Post-Dispatch published a letter from scholars at the Show-Me Institute arguing that raising the minimum wage to $10 would hurt Missouri. They write that by unilaterally raising the minimum wage, Missouri would lose jobs to other states.

Except for Illinois, where the minimum wage is $8.25 an hour, the states surrounding Missouri have a minimum wage of $7.25 an hour. Many current and future businesses in Missouri, especially those near the state’s borders, would have a large incentive to relocate to surrounding states if Missouri raises its minimum wage all the way up to $10 an hour.

One reader who responded to the letter on the Post-Dispatch website asked what the effect on jobs was when Missouri increased its minimum wage in January from $7.35 to $7.50 an hour. First, it is too early to start making judgments about the effect of the recent minimum wage hike because it is only early March. Second, even if there isn’t much of an impact with this minimum wage hike, we must consider the degree of the increase. Going from $7.35 to $7.50 an hour represents a 2 percent increase in the minimum wage. A business might be able to absorb that increased cost and not feel compelled to move. However, the proposal in question would raise the minimum wage by 33 percent.

There are only so many additional costs a business can absorb before going out of business. Do we really want to risk these businesses leaving the state and taking the jobs they provide with them for something that even proponents say is a “blunt instrument” for helping poor people?

We all want to help the poor and truly disadvantaged, but there are better ways to do it. One thing to consider would be to follow the lead of 20 other states and establish a state Earned Income Tax Credit (EITC) to supplement the federal one. Both David Neumark, in his Show-Me Institute policy study examining the effects of the minimum wage, and the Congressional Budget Office’s analysis of federal minimum wage proposals acknowledge the EITC as a more cost-efficient way to help the working poor.

February 11, 2014

Aerotropolis Revisited

Many Missouri residents remember the ill-fated effort to create a China Hub at Lambert-St. Louis International Airport. The plan, dubbed “Aerotropolis,” envisioned more than $300 million in subsidies for developers and air freight carriers to construct a Midwest hub for exports to China. Analysts at the Show-Me Institute argued that the high subsidies would harm Missouri economically and the supposed benefits to Saint Louis would be illusory. The plan was defeated in 2011, and cargo flights from China to Saint Louis have halted due to a downturn in the international cargo industry. However, like the broom from the Sorcerer’s Apprentice, bits of the chopped-up Aerotropolis legislation are still taking on a life of their own.

The sliver that has come back to life this time is “freight forwarding tax credits.” These tax credits are available to airlines or air freight companies that transport cargo on a direct international flight. Missouri House Bill 1500 (HB 1500) proposes a 40-cent/kg. cargo tax credit for any of those flights leaving a Missouri airport. The proposal calls for eventually allocating $60 million, with a yearly cap of $8 million. The purported purpose of the bill is to encourage foreign trade, presumably by making it cheaper for Missouri products to reach international markets.

However, as of this year, no direct international cargo flights leave Lambert. In addition, the only international passenger flights from Lambert go to resort destinations in Latin America. Whatever demand there is for Missouri exports in Latin America generally, it is unlikely that this demand is in seasonal resort towns such as Cancun and Montego Bay. As HB 1500 only allows tax credits for cargo on direct international flights, there may be few or no companies to take advantage of the proposed tax credit.

So who benefits? One possibility is that this bill is designed to subsidize Brownsville International Air Cargo Inc., which was in negotiations with Lambert for cargo space that could involve freight forwarding to Mexico. Another possibility is that the tax credit will act as another carrot to attract direct international flights to Lambert. Passenger airlines make 5-10 percent of their revenue from “belly cargo” on passenger flights. Making that cargo more profitable could make Lambert more competitive.

While these might seem like enticing goals to some, they are far from promoting Missouri’s foreign trade. The fact is, most cargo hubs in the United States are at either the major air passenger hubs (Los Angeles International Airport, JFK International in New York, etc.) or centers for major shipping companies (Memphis International Airport). Export tax credit or not, Lambert will not become a major air traffic hub when its landing fees are three to four times those of competing airports. Subsidizing a direct flight to Europe or Latin America may bring benefits to a few, but there is little reason the whole state should pay for this.

Like the original Aerotroplis plan, HB 1500 gives tax credits to select industries with only long-shot hopes for significant increases in Missouri exports. Saint Louis could be better off by making the airport, the city, and the state more competitive and economically vibrant, not pinning hopes on tax credit magic.

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