May 22, 2015

Convention Hotel: Power & Light District v. 2.0?

Just in case you thought the city actually had learned its lessons from the Power & Light District debacle, recent reports will disabuse you of that notion. We were initially told that there only would be a $35 million payout from the city, financed by bonds. The rest of the $150 million in city support would be made up of abatements, TIF, and a Commercial Improvement District (CID) tax.

Steve Vockrodt at The Pitch considers other costs that the city doesn’t seem to be including in their estimates:

The property upon which the hotel will be built (bound by Truman Road and 16th Street and by Baltimore and Wyandotte) is mostly city-owned, which means that it currently generates no property taxes. Troy Schulte, the city manager, has said the land is worth $13 million.

Assuming that valuation is correct, it means that the land—if the city sold it to a developer and it returned to the tax rolls—would generate $333,998 a year in property taxes. Under TIF, the development captures all that money.

Given these arrangements, then, the public subsidy for the hotel is going to be a lot more than $35 million. About half the cost of the $300 million project will wind up being paid for by public taxes.

But wait, there’s more. The Kansas City Business Journal adds:

In addition, the just-released copy of the memorandum states, the city will pay fixed annual management fees to the hotel owner through the 15-year catering agreement. The fees, ranging from $2.4 million to $5.4 million, have a net present value of $47.3 million, according to the [Memorandum of Understanding] MOU.

And if event gross revenues are insufficient to make the scheduled fee payment, the MOU states, “the city shall pay from any legally available city funds.”

In other words, if the project underperforms, taxpayers will make up the deficit. Sound familiar? The MOU also requires that taxpayers subsidize the construction of the hotel by forgoing tax income on the materials; income from the sale of the site to be used; and a cap on the fees required for construction. These costs likely are not counted in the project total, but they are real funds the city would forgo. The Journal continues:

In addition, the developers will receive a sales tax exemption on construction materials, and the city, which owns three-quarters of the proposed hotel site, will donate that land (though it will be due payment if the hotel is ever sold).

The MOU also calls for the city to cap the developer’s fees for zoning, permits, inspections and reviews at $800,000 and to provide no subsidies to any competing hotels for 10 years after the new Hyatt’s opening.

That last part is the kicker. Hyatt realizes that the deal it wantswith its myriad subsidies, tax breaks, and payoutsif directed toward other hotels, would hurt their business. It only follows that the deal they are asking for now will hurt the hotels already downtown.

Who on the City Council is going to stand up for (1) those existing hotels who likely will be hurt by this project and (2) the taxpayers who are being asked to underwrite something that will undercut previous subsidized investments?

May 21, 2015

The Convention Hotel’s Tax Breaks and Gimmes

Reviewing the Memorandum of Understanding (MOU) between the city of Kansas City and the developers who want to build a convention hotel, I see that the developers are asking to be exempted from all sorts of taxes. You can read your own copy of the MOU here:

It appears that, unlike most TIF projects, the developers want 100 percent of incremental economic activity taxes, including sales taxes and the earnings tax. Page 11 of the MOU states,

The City will . . . redirect through its annual budget the City’s portion of the Project TIF for a period of 23 years and Super TIF for a period of 30 years generated from the Project’s tax revenue sources . . .

In  other words, they want the half that they get from the TIFs directly, and then they want the city to give them the rest through the appropriations process. Here is the tax revenue the developers want to keep:

  • Tax Increment Financing (TIF): as mentioned above, all economic activity taxes collected by and for the county, school district, library district, and the zoo will be redirected back to the project for 23 years.
  • A Super TIF that collects for 30 years the tax not captured in the TIF above, including the convention and visitors tax, and redirects it to the developers.
  • A 100 percent exemption on sales taxes on construction materials and real/personal property taxes.
  • The creation of a 1 percent Community Improvement District (CID) tax that will then be redirected back to the developers.

Here are some extra freebies the developers want:

  • A cash contribution of $35 million.
  • The city’s portion of the land, valued at $13 million.
  • Fees generated by zoning, permits, inspections, etc., capped at $800,000.
  • A management fee to the hotel for catering amounting to $62,363,816 over 15 years. Should the event fees be insufficient to cover this, the city will pay, “from any legally available city funds,” just like we do with the Power & Light District.

Here are some possible problems for the city, based on past issues:

Not mentioned in the MOU is any exemption from the streetcar Transportation Development District (TDD). Apparently, funding the downtown streetcar is more important than funding the city, county, schools, libraries, and zoo. What does that say about the City Council’s view of the rest of Kansas City?

Kansas City’s Convention Hotel Memorandum

The City Council of Kansas City is considering subsidizing half of a $300 million downtown convention hotel adjacent to Bartle Hall. There is a lot to be considered in the deal, the least of which being whether the city should be using taxpayer dollars to build hotels when the city seems unable to provide basic services.

As we examine the deal, we wanted to share the Memorandum of Understanding with our readers. You can find a copy of it here.

May 7, 2015

Is Ballparks of the Ozarks Swinging for the Tax Incentive Fences?

Few would dispute that Missouri is obsessed with baseball. From the Major Leagues to the Negro Leagues, the Show-Me State has a long reputation for hosting some of the best baseball teams and talents the country has ever known. It isn’t surprising, then, to hear that a group of Saint Louis-based investors think there’s a market for a baseball-themed resort in Missouri, or that those investors just broke ground for it in the Lake of the Ozarks, Missouri’s resort capital.

baseballAccording to Ballparks of the Ozarks COO Bob Ramsey,

[the investors] didn’t want chain link fences [for their baseball development.] We didn’t want dusty, aluminum bleachers, with mom and kids baking in the sun and everybody complaining.

What did we want? We wanted [a] destination. We wanted amenities.

Our fields as constructed will be state-of-the-art. What will push our ballparks beyond what competitors have to offer will be our amenities. Families and teams from across the nation will be drawn to the “America’s Baseball Resort” experience.

As a former little leaguer, I’m actually pretty fond of chain-link fences, dusty fields, and aluminum bleachers, but we all know that resorts are supposed to be glitzy and glamorous. If given the choice between little league and big league amenities, developers will understandably pursue the big league amenities.

Folks may not know that to get those big league amenities, this proposed baseball-themed complex may be swinging for the fences to get financial assistance from the government. Novogradac, a national accounting firm that among other things helps “prepare tax credit applications,” hosts on its website what appears to be a New Markets tax credit allocation request for Ballparks of the Ozarks. New Markets tax credits are intended to

foster the construction and rehabilitation of real estate and the expansion of operating businesses in order to create jobs, generate economic activity and improve the quality of services in low-income communities and to low-income persons.

Unsurprisingly given those requirements, the request specifically says that the resort will “support existing ‘lake’ area businesses which struggle during off peak seasons” and will provide “opportunities for low-income, minority and disadvantaged youth to utilize high quality athletic facilities through affiliated organizations.”

In other words, to help the poor, the project summary suggests that the government should help pay for a baseball resort—and indeed, quite a lot of it. Novogradac’s page suggests Ballparks of the Ozarks is seeking to have $14 million in tax credits allocated to the project, and not only that, the summary implies that but-for the federal money, the project might not go forward.

How that jibes with the project’s recent “groundbreaking,” I don’t know.

I wish the developers of Ballparks of the Ozarks the best of luck, but there may be cause for concern from the perspective of sound public policy. If a resort can’t make it on private funds alone, taxpayers shouldn’t have to cover the gap.

May 6, 2015

I “Think” We Have a Problem Here

When I read about the state’s decision to suspend one of its tax incentives to IBM because of low employment numbers at their service center, I felt it was closing the barn door after the horse had bolted. The state had already awarded IBM $10 million in incentives, so the fact that it was revoking the BUILD credits—one of many incentives IBM was receiving—leaves a sour taste in my mouth.

IBM_signIn 2010, the state and city combined to give IBM a sweetheart deal in order to lure them to Columbia. The BUILD incentives were just one of many carrots IBM received. The others included:

  • $14.7 million through the Missouri Quality Jobs program
  • $4.2 million in new jobs training
  • $300,000 for customized job training
  • $412,500 in recruitment assistance
  • Sales tax exemptions and tax abatements for personal property

The cherry on top of this deal was when Columbia leased a $3 million building on LeMone Industrial Blvd. to IBM for one dollar a year. IBM was supposed to create 600 jobs at this call center by 2013. As of March 2015, the center only has 453 employees. Hence the BUILD incentives, which required a minimum of 500 employees at the center, were suspended.

We wrote that these incentives to IBM were not a good idea back when they were originally awarded. Tax credits are not a good economic investment for the state to be making, and cities, including Columbia, should not be hollowing out their property tax base by buying buildings so they can lease them to favored businesses. If the state and its cities really want to help businesses, they should keep taxes low for everybody.

The failure of tax credits to deliver promised economic benefits is not isolated to Columbia. I hope policymakers can learn from these examples and stop trying to pick winners and losers with subsidies, but I won’t hold my breath.

April 30, 2015

Promise Zone Just the Latest of Many Development Zones for Saint Louis

This week, the Obama Administration announced that parts of Saint Louis City and North Saint Louis County would become the latest federal “Promise Zones,” a designation that will put these areas in the front of the line when it comes to getting federal poverty aid and Department of Housing and Urban Development (HUD) funding. While there is hope that the zone can be a catalyst for change in Saint Louis, this is hardly the first time the Saint Louis region has become part of a federal zone or the target of HUD aid.

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

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

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

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

April 24, 2015

Of Stadiums and Economic Spillovers

Recently, we wrote a letter to the Post-Dispatch that criticized the idea that new tax revenue from a riverfront stadium would “pay” for $405 million in public subsidies. In response, one Saint Louis County resident claimed that: 1. spending on the Rams is not diverted from other areas; and 2. he trusts the governor and his numbers, not the Show-Me Institute’s.

First, we’ll address the substitution effect, or the idea that money spent on the Rams does not necessarily mean new economic activity. Our critic claims that if the Rams leave, he and many others would not be spending their dollars downtown. The problem with that reasoning is that it conceptualizes the Saint Louis region as municipally balkanized, and not as part of a regional or state economy, which in fact they are. Thus, if he and other county residents stay in the county on Sunday and spend money there, the regional and state economy is unaffected, along with the regional and state tax base.

Addressing the second point, if our critic does not believe Show-Me Institute’s numbers, why not the Brookings Institution, which wrote:

A new sports facility has an extremely small (perhaps even negative) effect on overall economic activity and employment. . . . No recent facility has been self-financing in terms of its impact on net tax revenues. Regardless of whether the unit of analysis is a local neighborhood, a city, or an entire metropolitan area, the economic benefits of sports facilities are de minimus . . . most tax collections inside a stadium are substitutes: as other entertainment businesses decline, tax collections from them fall.

Or our critic could also read a review of the economic literature, which finds:

Because sports facilities are not expected to generate additional net output in a metropolitan area and no systematic empirical analysis ever finds evidence that they do, sports facilities cannot be counted on to augment tax collections.

Put simply, the evidence on whether sports stadiums generate economic growth or sufficient tax revenue to justify large subsidies is overwhelmingly in the negative. Our findings accord with these prior results, the governor’s and Post-Dispatch’s do not. I’ll leave it to the reader to decide whose heart is leading whose head.

April 16, 2015

Kansas City Builds by Digging Itself into Holes

We’ve written extensively about the money that Kansas City has been handing out to downtown developers. Every dollar they give away is one less for infrastructure and basic services. Proponents claim that this is all worth it because of the revitalization of downtown. (Other observers, such as the Kansas City Business Journal, seem more cautious.) If the handouts of the past have been so successful, we should be able to sit back and watch all the private economic development dollars roll in. Yet despite claims of success, Kansas City is still giving away money.

  • Cordish, the company that brought us the Power & Light District then sued to lower their county property taxes, says that the downtown investment has been a success! But apparently the success wasn’t great enough to forgo further subsidies for two more residential buildings.
  • The Port Authority in Kansas City recently announced that they will be using public dollars to subsidize the construction of luxury residential condominiums along Kansas City’s riverfront. There is great demand they say, but apparently not enough to avoid the use of public underwriting.
  • A Crossroads hotel has received TIF subsidies, and an apartment building in the same area is receiving a property tax abatement and a $1 million exemption in sales taxes.

When will the public subsidies end? How do we know when we’re done? Is there any incentive for developers to say they do not need public subsidies? (The answer to that last question is no.) This is important because every subsidy means less money for city and county services; every abatement means less money for schools, less money for libraries. Right now, at least $93 million of city revenue is redirected each year to these developers. That doesn’t include the new projects for Cordish, Burns & McDonnell, and Cerner. Developers shouldn’t be encouraged to build skyscrapers while digging taxpayers into a hole.

April 13, 2015

Tax Incentives: How Much Money Do Governments Give Away?

This summer the Governmental Accounting Standards Board (GASB) is set to release new guidance to state and local governments on how to report the tax incentives they distribute every year. The nonprofit board largely determines financial reporting standards for state and local governments. So although GASB may itself seem like an obscure organization, its guidance is closely watched and widely accepted by governments across the United States.

As reported in The Nerve,

. . . state and local governments for the first time would have to report, among other things, in their annual financial statements:

  • General description of their tax abatement programs;
  • The total number of tax abatement agreements entered into during the reporting period, and the total number of agreements in effect at the end of the period;
  • The dollar amount by which the reporting government’s tax revenues were reduced during the reporting period because of tax abatement agreements; and
  • A description of the types of commitments other than to reduce taxes—for example, tax dollars spent on purchasing land and installing utility lines—and the most “significant individual commitments other than to reduce taxes, if any, made by the reporting government in tax abatement agreements.”

Translation? Governments would have to disclose, in a standardized format, exactly how much money they give away. That’s a huge paradigm shift, both from the standpoints of government transparency and public research. Greg LeRoy of Good Jobs First, a Washington, D.C.-based think tank that looks at tax incentives, called the development “tectonic.” “These things (incentives) have gotten so out of control, so overgrown, so arcane—it’s been off the radar.”

LeRoy is right, of course. If local and state governments have to divulge all of the relevant details about the incentives they’re giving away, it could have a huge impact on how governments interact with tax incentive beneficiaries—and how taxpayers view the tax incentive programs themselves. As explained in the blog Next City,

Cold, hard numbers could soon settle the heated debates about whether tax incentives encourage regional growth and competitiveness or simply deplete public resources. LeRoy argues that any site location consultant for a corporation could tell you that tax breaks often don’t affect the bottom line: State and local taxes comprise less than two percent of a company’s total cost structure. Other environmental factors like labor, logistics and materials matter much more. But companies would never admit that to the governments offering them free money.

Like other places around the country, Missouri’s tax incentive programs are a mess. If GASB institutes robust accounting standards for these incentives—and it appears it might—it may go a long way to draining the cronyism swamp in this state. Cross your fingers.

March 24, 2015

Touted Benefits of the Film Tax Credit Program Are Misleading

On Wednesday, March 18, the House Committee on Economic Development and Business Attraction and Retention held a hearing on House Bill 803 (HB 803), which would reinstate the film tax credit program. This is the same program that granted a $2.36 million tax credit to the producers of Gone Girl. Michael Rathbone and I submitted testimony against the reauthorization of the film tax credit program. Luckily, Michael was able to testify before the committee. He was the only person to testify against this wasteful policy proposal.

Since news articles reporting on the hearing only highlighted the arguments of those in support of HB 803, I’ll reiterate what analysts at the Show-Me Institute have written so many times before: Film tax credits are bad public policy!

filmcrewSupporters of the program argue that the film tax credits bring immense economic benefits to the state. However, the problem with this argument is that it doesn’t look at the costs of the program along with its benefits. While supporters spout claims that “Gone Girl brought in $7 million into the economy,” the reality is the program’s return on investment (tax dollars generated versus tax dollars spent) is merely cents on the dollar. In other words, the program does not pay for itself.

Furthermore, the argument that the film tax credit helps create permanent jobs is a fallacy. Film production jobs, by their very nature, are short-lived. To add insult to injury, the highest paying jobs often go to non-Missouri residents, since production jobs require specific and highly skilled professionals. However, perhaps the most shocking fact is that Missouri has had a film tax credit program since 1999, and yet, according to data gathered by the Bureau of Labor Statistics, jobs related to film production decreased during the time the film tax credit program was in place.

It is bewildering that lawmakers can ignore important economic indicators, and the advice of the state’s own Tax Credit Review Commission, just so Missouri can play hostess to Hollywood for a few weeks. I hope legislators and political spectators will take a look at our testimony and exercise some common sense.

March 17, 2015

Saint Louis Riverfront Stadium: The Maintenance Dimension

Missouri officials say they need a new stadium to keep the Rams. They plan to pay $405 million toward the riverfront stadium by extending existing bonds and offering millions in state tax subsidies. Unfortunately, they do not talk about how that new stadium, along with the teamless dome, will pay for upkeep.

In 2015, the Edward Jones Dome’s maintenance and renovation is $7 million. In the next decade, regular maintenance costs are expected to vary between $7 million and $9 million annually. The upkeep of the dome is paid for by the public, not the Rams or conventions. Approximately $4 million a year comes from the city and county. In addition, the state pays $2 million toward maintenance as part of the deal that originally financed the dome ($10 million for construction debt, $2 million for upkeep and renovation). As the Post-Dispatch reported last year, the dome is in a relatively serious financial hole, and Missouri officials are going to need to find new revenue sources to maintain Saint Louis’ current stadium.

The riverfront stadium plan, unlike the Edward Jones Dome, apparently does not have a revenue stream for its upkeep. However, if costs are anything like the dome’s, the stadium will require at least $5 million to $9 million a year over its useful life. Setting aside the unlikely event of the Rams deciding to cover that cost, Missouri and the Saint Louis region should be preparing to spend at least $125 million in present-value dollars for the upkeep of a new stadium, over and above the initial capital cost.

The additional cost of maintaining a new stadium, and not just its initial cost, makes justifying the project, on economic terms, very difficult. A $405 million upfront cost, plus $125 million for maintenance, far exceeds even rosy projects for the additional tax revenue a stadium might generate. Since the vast majority of economists agree that stadiums do not spur urban regeneration or create economic development, there is only one defense for the new stadium plan: civic pride.

EdwardJonesDome

Can Laclede’s Landing Survive Government Planning?

Recently, the Post-Dispatch reported that many businesses in Laclede’s Landing, a riverfront entertainment district in downtown Saint Louis, are struggling to stay afloat. Half of the district’s 14 bars have closed in the last 18 months.

The immediate culprit of the decline is construction: work on the area’s road system and renovations to the Arch grounds have made the Landing difficult to get to for tourists and residents alike. With construction slated to continue for the next couple of years, many local businesses are calling it quits. According to some business owners, regional planners were so focused with large improvements to the riverfront that they were unwilling to heed the concerns of the neighborhood.

Officials can argue that, despite the present hard times, the area will be better served in the long run by riverfront improvements. However, Laclede’s Landing has deeper problems than transitory construction disruptions. Saint Louis has changed since the 80s and 90s, when the Landing was downtown’s premier entertainment district. From the mid-90s onward, Laclede’s Landing has had to deal with the rise of competitor bar districts, often heavily subsidized by the city and state government.

We can see evidence of the declining comparative vitality of Laclede’s Landing in the neighborhood’s building permits. In the 1990s, Laclede’s Landing had a greater value of building permits per square mile than other entertainment districts in the city, excluding the Central West End.

ll_blog_chart

Since the 1990s, Laclede’s Landing has been eclipsed. Whereas the Landing had more building permits than the center of Washington Avenue in the 1990s, in the 2000s Washington Avenue had more than ten times the permits of Laclede’s Landing. From 2011-2014, Laclede’s Landing had the least new building permits by value of any of the neighborhoods sampled, even falling behind the upstart Cherokee Street. Lacelde’s Landing was also the only entertainment district to have fewer building permits in the 2000s than it had in the 90s.

One entertainment district being eclipsed by others is no reason to blame regional planners. However, the competition has not been on a level playing field. The region and state have given extensive tax credits to much of Laclede’s Landing’s competition (especially nearby Washington Avenue), as the map below shows:

ll_blog

In just the sample area of Washington Avenue, the city handed out more than $60 million in tax credits from 1999-2011. The sample area of the Central West End received almost $50 million. Laclede’s Landing, by comparison, received less than $2 million in tax credits.

The future of Laclede’s Landing is uncertain. But it seems assured that Saint Louis will continue to make where people spend their free time a matter of public policy. And while government preference can create well publicized winners, it can also make losers. In the 70s, Laclede’s Landing was arguably part of the former, now, it is in danger of joining the latter group.

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