April 18, 2015

No, Post-Dispatch, the Rams Don’t Pay Their Way

StadiumEarlier this week, the St. Louis Post-Dispatch published an editorial discussing whether the tax revenue brought in by the Rams is enough to cover the costs associated with building the Edward Jones Dome. Their answer: probably yes. My colleague Joe Miller and I have looked at this issue, and our answer: probably no.

Why the discrepancy? Well, let’s look at the Post-Dispatch‘s “back-of-the-envelope” calculations:

  • They assume roughly $1 million a year from taxes on the Rams’ profits. We have no problem with that.
  • The Post-Dispatch counts the total $151 million of player payroll as taxable, when it isn’t. Rams players play half of their games in other states/cities, so they pay income taxes to those states. This is double counting, since they also count visiting teams’ income taxes too. Taking this into account, Joe and I estimated the income taxes generated by players’ salaries—along with those generated by the coaches, staff, and other employees of the Rams—comes to roughly $11 million.
  • Taxes from sales of merchandise and food and beverages have to be balanced against what would have been received from local businesses had the Rams been absent. The Post-Dispatch gave no indication that they took this into account. According to our calculations, the net sales tax revenue along with ticket tax revenue amounts to roughly $3 million.
  • Add in the Rams’ rent, and you get another $250,000 in revenue.
  • Like the Post-Dispatch, we found it difficult to determine how much the city, county, and state would receive in additional hotel tax revenue.
  • Overall, we estimate the Rams generate between $15-16 million in tax revenue ($10-11 million for the state, $3-4 million to the city, and the remainder to the county). That’s a far cry from the $24 million the city, state, and county put in to finance the dome. Plus, the Post-Dispatch makes no mention of the annual maintenance costs of the dome, which totaled $7 million last year and are projected to run between $5-9 million going forward.

I like football and want the Rams to stay in Saint Louis, but the only way I want to pay for them is by buying a ticket on game day. Giving further subsidies to the Rams will not be a boon to the local economy (which the editorial board, to its credit, recognizes), and it probably will end up being a net loss for taxpayers.

April 16, 2015

Tax Foundation: Missouri’s Sales Taxes Still Well Above Average

Last year, I wrote in Forbes about whether Missouri is a “low tax state.” (It isn’t.) I explored how Missouri compared to other states on a variety of taxes. At the time, by the Tax Foundation’s metrics, Missouri’s combined state and local sales taxes ranked 14th highest in the country.

This finding probably surprised a few Missourians, but it shouldn’t. Missouri’s state sales tax may be relatively low at 4.225 percent, but locally imposed sales taxes nearly double the average sales tax paid in Missouri stores. This includes extra sales taxes in special taxing districts like Kansas City’s Power & Light District, which can pump the sales taxes actually paid by consumers to well over 10 percent. These sales taxes are, of course, in addition to the state’s income and property taxes, which aren’t exactly low either. This is why Missouri isn’t a “low tax state.”

The Tax Foundation released its 2015 sales tax rankings, and . . . well . . . Missouri still ranks 14th at a rate of 7.81 percent, well ahead of 29th-ranked Florida (6.65 percent), which, of course, doesn’t have an income tax. The Tax Foundation’s report makes special mention of the failure of Missouri’s transportation sales tax last year, which would have added another three-quarters of a percent to the state’s already-high sales tax. Had Amendment 7 passed and bumped the state’s average sales tax to over 8.5 percent, chances are very good that Missouri would have jumped into the top 10 of high sales tax states, ahead of states like California (8.44 percent) and New York (8.48 percent). Missouri’s sales taxes are already bad; this year it is cold comfort to know that they could have been worse.

Missouri needs substantive, across-the-board tax relief. There’s still time for the legislature to act this year—at least on the income tax—but the clock is ticking.

April 14, 2015

The 27th State: Missouri’s Place in “Rich States, Poor States”

For folks in the free-market movement, the annual publication of Rich States, Poor States (RSPS) in many ways marks time. The book is part almanac and part analysis; it explores the minutia of state economic policies nationwide, highlights ongoing state economic successes or failures, and assesses the prospects of states succeeding economically in the future.

rich-states-poor-states-2015-edition-1-638It always makes for interesting reading, and this year’s edition (released last week) is no exception. Missouri’s economic performance has bounced along RSPS’s bottom quintile of states since its first edition, and unfortunately Missouri hasn’t made much progress since 2008; Missouri now ranks 42nd of 50 states in economic performance for 2015. That finding is consistent with economic assessments we’ve shared with readers in the past. Simply put, the state hasn’t made a lot of economic progress over the last decade relative to its peers.

Missouri is seeing movement in its “economic outlook”—but it’s all in the wrong direction. In 2012 Missouri ranked 7th for how bright its economic future appeared, which at the time I noted that the ranking looked a bit like an aberration. Only three years on, however, the state has dropped back to 27th overall. That is the worst Missouri has ever done in RSPS’s outlook ranking, dating all the way back to 2008 when the state ranked 25th. Suffice it to say, a weak economic track record paired with a mediocre economic outlook doesn’t inspire a lot of confidence in the status quo.

The fact is not a whole lot changed from 2013 to today, which is sort of the problem. States across the country are pursuing tax cuts and regulatory reforms in earnest, and yet Missouri has been slow to respond for years. Last year’s tax cut was an important first step toward turning the economic tide, but it is too small and being too slowly instituted to be a last step. Time is running out for the legislature to do much on the tax issue this year; it will be interesting to see if the body chooses to do nothing.

Alcohol Tax Rates Are Low . . . and They Should Stay That Way

I think we can all agree that drinking in excess is not good for you. Not only is it bad for your health, but if you’re not smart, such a habit could end up destroying the lives of others as well. That’s why I applaud the intentions behind Christopher Ingraham’s recent op-ed, if not his prescription.

wineIn his article, Ingraham calls for raising alcohol taxes, stating: “Higher taxes make alcohol more expensive. More expensive alcohol makes people drink less of it. And when people are drinking less, they’re less likely to suffer costly health problems or do stupid things like drive drunk.”

If Ingraham’s ultimate objective is to make people drink less alcohol, why not just ban it? Wouldn’t prohibition really reduce the health problems associated with alcohol consumption? However, we’ve already tried Prohibition, and it didn’t work out too well. So Ingraham’s alternative is to raise taxes to cut down on consumption. Except, there are problems with that approach as well. Increase taxes too much and people will resort to smuggling. It’s happening in New York with cigarettes. What’s to say it wouldn’t happen with alcohol?

Both Ingraham and I want to cut down on drunk driving. Thankfully, drunk driving is already on the decline. Since 1986, alcohol-related fatalities have seen a 54 percent decline! Why solve a problem that is already fixing itself?

There are negative side effects to raising alcohol taxes as well. Because of our low taxes on alcohol, cigarettes, and gasoline, commuters from out of state make it a point to purchase these products in Missouri. If we raise taxes on alcohol we are removing an incentive for people to shop in Missouri. If less people shop here, Missouri businesses will suffer and the state will see less tax revenue. How will that help anybody?

I can sympathize with Ingraham’s efforts to curb the more negative effects of heavy alcohol consumption, but the biggest problem, drunk driving, is becoming less of one over time. Coupled with the fact that increased alcohol taxes can hurt Missouri businesses, we should leave tax rates alone and focus on other ways to improve public health and safety.

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.

April 3, 2015

Paying for the Privilege . . . to Stay in Bridgeton

After staying overnight in Jefferson City last week, I awoke to find my hotel bill laying on the floor in front of the door. For those who travel frequently, this is not an unusual sight. It also isn’t unusual to spot a line item that tells you how much you have to pay because of the city or county’s hotel tax. Sometimes that amount is relatively miniscule, other times it can be quite large. If the Bridgeton City Council gets its way, for guests of Bridgeton, it will be the latter.

Hotel ExteriorHotel taxes are not an uncommon occurrence in Missouri. In fact, the Show-Me Institute’s Sales Tax Fast Facts pamphlet has 17 entries for cities/counties with a hotel/occupancy tax, and that list is by no means exhaustive. As you can see, hotel tax rates can range from 3 percent in Hermann to 12.25 percent in Hazelwood. In most cases, visitors to Saint Louis County pay the same hotel tax rate (7.25 percent) because of the countywide pool which, among other things, goes to pay off construction costs for the Edward Jones Dome.

The Bridgeton City Council, however, wants more hotel taxes to go directly to them. The council placed a proposal on the April ballot that will raise its hotel tax from 85 cents a night to three dollars a night. I can see why this would be an attractive option. Many people who stay in hotels are not residents of the city/county where the tax is imposed. For politicians and residents alike, getting others to pay for city services sounds like a good idea. However, just because a city can extract revenue from visitors, doesn’t mean it should.

Hotels already pay commercial property taxes and the Saint Louis County property tax surcharge (the highest in the state). They have to pay business licensing fees, and guests already have to pay the city and county sales tax. Why does Bridgeton need to levy even more taxes? Is it because it keeps relying on TIFs? Maybe Bridgeton should stop giving away special handouts and broaden their tax base instead of shrinking it and relying on higher rates to make up for lost revenue.

I highly doubt I will ever stay in a Bridgeton hotel, so when I wake up in the morning, the effects of this proposal won’t be staring me in the face. However, city residents should ask themselves whether they want to approve a tax increase, no matter who it may hurt.

April 1, 2015

The 411 on a CID in the B70

Some business leaders in Columbia want more attention for their slice of town. To do that they are getting together to create a new community improvement district (CID) for the Business 70 Loop. This sounds innocent enough. However, CIDs are just another example of the alphabet-soup taxing districts that increase tax rates to fund new services for a questionable public purpose.

CIDs are independent taxing districts created to collect sales and property taxes and spend money to improve an area in a variety of ways, including beautification and infrastructure. There are two primary problems with CIDs. The first problem is transparency. The auditor’s office has consistently found deficiencies in reporting and documentation for these districts.

The other issue with CIDs is their lack of a cap on property taxes. Under the current proposal, the CID would levy an additional 47 cents per $100 of assessed value of property taxes on top of what people/businesses already pay. However, there is no statutory language preventing the CID from increasing property taxes further. An extreme example is when a CID in the Lake of the Ozarks levied an additional $4 per $100 of assessed value. I’m not saying this proposed CID will have taxes go up that high, but there is nothing stopping such an increase from happening except the restraint of the CID board.

Given these problems, what is the compelling reason for establishing a CID, especially since the area is already seeing redevelopment? As the Columbia Tribune states:

He also cited Miller’s 2012 purchase of the old Commerce Bank building at 500 Business Loop 70 W., Head Motor Company’s recent upgrades and his own redevelopment of the Parkade Center as examples of the type of redevelopment he would like to see along the corridor. Further east, Business Loop 70 boasts a newly remodeled Burger King and renovated McDonald’s.

“We’re starting to see redevelopment occur, and we want to make sure we have pro-redevelopment policies in place,” Burnam said.

If this article tells us anything, it appears that legal restrictions on renovating existing lots are the problem. Maybe proponents should work on fixing the regulatory environment instead of raising taxes.

CIDs have serious issues and should only be undertaken without serious safeguards in place, if at all. The Business Loop in Columbia might not be a paradise, but is it so blighted that the only thing left to do is establish a CID? Color me skeptical.

March 25, 2015

Are Things Looking Up in Kansas?

Ulysses_grant_001There is an old story from the Civil War that takes place after the first day of the Battle of Shiloh. The Union Army of the Tennessee under General Ulysses S. Grant had been surprised by Confederate forces and had been pushed back to the Tennessee River. That evening, Brigadier General William Tecumseh Sherman remarked to General Grant, “Well Grant, we’ve had the devil’s own day, haven’t we?” Grant replied, “Yes. Lick ’em tomorrow though.” With the assistance of Union reinforcements that evening, that’s exactly what they did.

Now, the economic border war is not nearly as serious as actual combat between two opposing armies, but like Confederate General P.G.T. Beauregard, opponents of the tax cuts in Kansas are eager to declare a complete victory. The truth is that it appears Kansas just received some reinforcements, this time from the Bureau of Labor Statistics (BLS).

1024px-Pgt_beauregardAccording to the BLS, Kansas private-sector job growth in 2014 surpassed that of Missouri (1.87 percent vs. 1.16 percent). Also, earnings in Kansas have grown nearly five times the rate that they have in Missouri (2.98 percent vs .59 percent). Does this mean we, as tax cut proponents, should declare victory? No. The next couple of months’ job or wage figures could change how the two states stack up. Overall, I think we just need more time to determine the tax cut’s effects. I definitely wouldn’t go as far as to say that these tax cuts are leading Kansas toward a disaster of biblical proportions.

As I’ve said many times, tax cuts are not everything. There are many factors that influence how an economy performs. However, with that being said, taxes do matter and income taxes in particular are harmful to economic performance. I hope these latest figures can give opponents a moment of pause before writing Kansas’ tax cut obituary.

March 24, 2015

Don’t Let Transportation Development Districts Charge Fuel Taxes

A new bill in the Missouri Legislature (HB 1362) would allow transportation development districts (TDDs) to implement fuel taxes along with sales and property taxes. This is a bad idea because TDDs are only partially democratic, not transparent, and very often do not spend their resources on roadwork.

Fuel taxes can be an effective way of paying for roads and bridges in Missouri. As we have argued many times before, fuel taxes tie the act of using roads with paying for the upkeep of the roads. We have even written on how fuel taxes at the county and city level may be a feasible option for road funding as well.

However, there are important differences between state fuel taxes that pay for highways and fuel taxes imposed by TDDs. Fuel taxes at the state level, and even the county or city level, must be spent on highway- or road-related projects. These taxes are only passed by existing, regularly elected legislatures (or a vote of the people); the political boundaries are well known and easily recognizable. State and local governments provide extensive information on how fuel tax revenue is collected and spent.

TDDs are a different story altogether. For instance, do you live in a TDD? Have you shopped in a TDD in the last week? If you can answer yes to any of these questions, do you know what type of tax they collect, what they spend tax money on, where their boundaries are, or who runs the district? Did you ever get to vote on the TDD or its representatives?

Even for those in charge of state oversight, it is hard to know the answer to any of these questions. The fact is that TDDs are ad-hoc specially created taxing districts with idiosyncratic boundaries. They are created through what is not a normal democratic procedure (see “qualified voters” and flexible district boundaries), with boards that are not elected in the normal sense. They do not have to spend their money on roads at all, such as TDDs in Saint Louis and Kansas City that fund streetcars.

It is questionable enough to allow these types of entities to charge sales and property taxes like they do now, but allowing fuel taxes would be even worse. It is easy to imagine a situation where many gas stations in the state quickly become part of microscopic taxing districts that are impossible for the public to be aware of or to track.

State fuel taxes are a reasonable method of funding state roads, but allowing quasi-democratic, non-transparent, and (to the lay resident) invisible taxing districts to use fuel taxes to fund hyper-local desires is more a recipe for highway robbery than highway funding.

Still Coughing Up More for Education

In an era where we shield more and more people from being offended, never mind hurt, it appears that it is still okay to pick on smokers. So it’s no surprise that some policymakers want to use them to fund goodies for the rest of us.

The latest anti-smoker proposal aims to raise the cigarette taxes to around 90 cents a pack (cigarette taxes in Missouri currently are 17 cents a pack) in order to fund scholarships for students. On the surface, this proposal sounds appealing, but raising excise taxes in order to fund education is not good policy. There are a couple reasons why this is the case: First, cigarette taxes are regressive. Poor people smoke more than higher-income individuals, and smoking takes up a higher percentage of their income.

Second, an increase in cigarette taxes can harm Missouri businesses. More people commute into Missouri than out of it. Our low excise taxes serve as an inducement for out-of-state visitors to purchase alcohol, gasoline, and cigarettes in Missouri instead of Kansas and Illinois. The chart below from  showmedata.org shows just how low Missouri’s taxes are in comparison to Kansas and Illinois (Missouri is in yellow).

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If this proposal becomes law, Missouri’s cigarette tax rate will be higher than in Kansas. It isn’t hard to imagine commuters on State Line Road choosing a Kansas convenience store over a Missouri one if products are cheaper.

Now, some might argue that raising cigarette taxes is good in and of itself because doing so will reduce cigarette usage and improve public health. That’s partially true, but the effect is small. If the increased tax revenue would be spent on treating smoking-related illnesses, then the conversation would be worth having. However, even if we agreed that a tax hike should go to increased health spending, if taxes go up too much, people would simply resort to smuggling.

Personally, I’m not a fan of smoking. My grandfather suffered from emphysema due to his smoking. However, just because I don’t like an activity doesn’t mean I believe the government should treat it as a piggy bank for more spending. Let’s find ways to cut spending, not increase it.

March 23, 2015

Increased Fire Tax in Kirkwood? Why Now Indeed!

Kirkwood Bill

A leaflet arguing for a tax increase surprised some Kirkwood residents this month when they found it tucked into their city-issued electricity bills. The tax advertised in the leaflet would up the sales tax rate by 0.25 percent in order to add new cross-trained firefighter/paramedics to Kirkwood’s Fire Department. With the need for municipal fire services in decline and only an increase in EMS cited as justification for the tax increase, I can’t help but wonder if this tax hike would unnecessarily nickel and dime people choosing to spend their money in Kirkwood.

Let’s break this down. Since the 1970s and 1980s, when fire alarms, new technologies, and improved building standards decreased the number and severity of fires in the country, there has been a steady increase in the number of people employed as firefighters. You might think the number of people employed to fight fires would decrease as the need for fire response decreased. You’d be wrong.

To compensate for this decrease in the demand for their services, fire departments began taking on the broader role of providing emergency medical services—that is, driving ambulances and providing on-the-scene support to people involved in accidents. Fire departments might have saved money if they then decreased the number of people employed as firefighters and invested more heavily in paramedics and EMS equipment, which typically cost less, but that didn’t happen.

Here we have a textbook case of mission creep, the tendency of government organizations to gradually shift their goals and expand their purpose. Society no longer needs as many people fighting fires, yet because government lacks an efficient mechanism for linking supply and demand, we continue to spend an increasing amount of tax revenue on fire protection. Government has a tendency to grow, even as needs shrink.

If the city of Kirkwood wants more paramedics, then they should hire more paramedics, not firefighters. Shifting resources to pay for more EMS and less fire services, or even privatizing certain functions, could help pay for this. It’s simply a waste of money to raise taxes to hire workers for an unneeded and more expensive job.

March 11, 2015

Rams to Make Missouri Millions?

At a meeting of the House Government Oversight and Accountability Committee, the Missouri economic development director argued that the state could make millions off building the Rams a new stadium to replace the Edward Jones Dome, on which the state still owes $60 million. Unfortunately, the director’s numbers do not stand up to close scrutiny.

The crux of his argument is that taxes on growing NFL salaries (starting at $10 million in 2017 and growing at 3 percent thereafter) would help raise about $300 million. However, if we assume that the total income taxes from the Rams is $10 million a year growing at a rate of 3 percent, the actual present value of 30 years of state income taxes would be less than $200 million, assuming the recently passed tax cuts take effect. Even if the economic development director’s number is accurate, $300 million is still less than the total public cost of the stadium plan ($405 million).

The economic development director likely meant that the state, as in just the political entity of the state of Missouri, could make millions on a new stadium. But only half of the cost is the state’s, with the other half coming from the Saint Louis area. Saint Louis City has an earnings tax, but, even accounting for that income tax, revenue is most likely to remain between $250 and $300 million, well under the public cost of the stadium.

Stating that the stadium plan would fall short of recovering tax subsidies and fail to promote economic growth is not an anti-Rams position, it is the opinion of most economists. As one researcher put it:

There are absolutely no publicly subsidized stadiums and arenas that generate enough direct or indirect tax increases to balance the initial (and ongoing) public outlay. . . . In fact, some research suggests that sports stadiums actually decrease economic activity and tax revenue in areas where they are built. . . . However, strategically placed stadiums and arenas can sometimes ride existing redevelopment trends, but they are never the cause of these trends.

The state of Missouri and the city of Saint Louis should be honest with residents. If we use public dollars to keep the Rams, it will be about pride, not tax revenue or development.

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