A story out of California discusses how municipal disincorporation is being considered by California cities under financial duress. Thankfully, Missouri is generally in much better fiscal shape than California or our neighbor to the east, but disincorporation is still a rarely considered option for small Missouri towns. There are a number of small towns in St. Louis County that contract for the county to perform many town services. The cities tax the residents, and use those revenues to pay the county to provide specific services. That is certainly more efficient than every small city providing every service themselves, but the kicker is that the county would provide these services to town residents anyway, out of their general county taxes, if the town didn’t exist as a political jurisdiction in the first place. In many instances, tiny cities exist only as middle-men for many public services, which the residents would receive from the county anyway if the town didn’t exist as an intermediary — and they’d have lower tax bills.

You may be asking, “Wouldn’t the county have to increase taxes to fund services to more people if the city disincorpoarated?” In many Missouri counties, the answer is “maybe.” But in St. Louis County, it is “no.” This is because of the county’s sales tax pool. If smaller cities disincorporated, the sales tax money that previously went to the cities would be redivided. The county’s share is based on its unincorporated population, which would rise if cities disincorporated, so the county would get more money from existing tax payments, and probably not have to raise other taxes.

I don’t want any state or county laws changed in a way that would mandate disincorporation. I just want the residents of smaller towns in Missouri, and especially in St. Louis County, to know that it is an option worth considering as cities face budget difficulties.

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

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

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

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

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

On the legislative front:

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

On the administrative front:

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

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

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

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

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

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

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

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

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

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

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

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

Photo Credit: Audrey Spalding

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

Forbes enters the discussion:

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

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

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

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

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

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

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

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

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

Many problems in public policy are government-created, and the best solution is not more government. Unfortunately and predictably, solutions involving more government will be supported by groups that are short-sighted and will benefit directly from them.

As the latest illustration of this, biodiesel producers in Missouri are calling for extending the $1-per-gallon biodiesel blender’s federal tax credit. In its Friday issue, the St. Louis Business Journal published two articles that profile a struggling biodiesel plant as it waits for extended handouts from the government.

Meanwhile, there exists a lack of demand for biodiesel in the market, and the government has responded by setting a mandate to create an artificial level of demand. From one article:

Environmental mandates that require oil companies to blend petroleum-based diesel with minimum levels of biodiesel [...] have increased demand, and therefore prices, for biodiesel and helped offset the loss of the expired tax credit.

The problem with mandates and production subsidies like those for biodiesel is that the government is encouraging energy producers to invest in an infrastructure that is neither efficient nor cost effective. Residents of Missouri and other states could achieve higher levels of utility if government stayed out of the market and allowed the profit-and-loss system to allocate resources. As another positive consequence of eliminating handouts to biodiesel producers, fewer resources would be distracted from the development of other alternative energies that are perhaps more viable.

According to the Saint Louis Business Journal, the Illinois state government pledged a $2.3 million business investment package to help Boeing open a manufacturing plant at MidAmerica Airport in Mascoutah, Ill.

Additionally, the article reports that “Boeing is Missouri’s largest manufacturer.”

I worry that this fact will mean that the Missouri state government will offer retaliatory tax incentives to Boeing in order “to keep these jobs in Missouri.” Economic development is not a zero sum game, and states should hesitate to view each others’ economic growth with antagonism. Both Missouri and Illinois will be better off if they specialized and engaged in mutually-beneficial trade instead of spending taxpayer money to compete over the same activities. Government intervention in interstate trade hurts business and discourages economic growth, defeating its ostensible intended purposes.

I also want to point out that Illinois is spending $2.3 million for 75 jobs, which is an expenditure of nearly $31,000 per job. This means that the project is already in the hole by this amount, plus deadweight loss.

Furthermore, Boeing and the state government may say that these 75 jobs are new. However, even if they are created as a consequence of the subsidy, they are not really new. This is because they represent the jobs that were destroyed by the $2.3 million that was taken from the taxpayers of Illinois.

As the end of the year draws nearer, the expiration of tax cuts passed in 2001 and 2003 also begins to creep over the horizon. As this happens, our federal government continues to spend what seems to be an infinite line of credit. Recent financial and health care reforms bring with them cost estimates that undoubtedly understate true costs. The same can be said about unemployment extensions.

The egregious amount of deficit spending is leaving taxpayers with a sizable bill. The federal government would like the “rich” (those that make more than $200,000 in pre-tax income) to pay a higher proportion of that bill, making them the lucky recipients of a tax rate increase. The politics of the tax cuts have already begun. It seems like an impossible task for Washington to divorce the economics from the politics. At this point in history I’m betting that that those individuals and families in the highest tax brackets will certainly see a tax increase come January.

The president recently said, “There will be no more taxpayer-funded bailouts. Period.” But, as Dan Henninger of the Wall Street Journal points out, “Raising taxes to cut the deficit is a bailout for the spenders.”

I’m beginning to think that an effective training regimen for politicians would include an undergraduate degree in linguistics.

Maybe I am missing something. Maybe classical microeconomics has become outdated and doesn’t adequately reflect decisions in the real world anymore. Maybe the nuance of their arguments is too much for me. Or maybe they’re wrong.

Economists have been developing mathematical equations since the days of Adam Smith, attempting to ascribe reality to a system of variables that can be changed and tweaked to more accurately reflect what economists empirically see. The problem with these equations is that they are not reality. That being the case, it is best to avoid needless complication.

Someone best illustrated this to me using the game of billiards as an analogy. Hitting the cue ball into the eight ball in an effort to send the eight ball into a corner-pocket requires skill and accuracy. Ricocheting the cue ball off the rail into the three ball which then will kiss the nine ball on its way into the two ball which will subsequently fall into the pocket is an entirely different problem. The more complex the system gets, the more accuracy is required, and initial mistakes are magnified further down the line.

Intertemporal decision making can be a complex problem to study, but most of the world makes such decisions intuitively — we are all practicing economists. The amount available for future consumption is future income plus savings plus the amount of interest earned on savings. If savings are negative, the person is borrowing and must pay back the amount borrowed plus the interest in the second period. This has the effect of reducing future consumption.

Future Consumption: P₂C₂ = M₂ – M₂t + S + iS

This means that today’s purchases change tomorrow’s parameters.

Current Consumption: P₁C₁ = M₁ – M₁t – S

Reality is an integration of these two equations. We do it constantly, and instantaneously most of the time. Income (M₁ & M₂) is a function of spent spent in leisure and work, and wages. People often decide how much they will work based on how much they plan to consume and how long it will take them to achieve the desired amount of income for that consumption (this also allows income to implicitly represent labor decisions in these micro equations).

Enter government, with a budget constraint that looks very similar. What is different is that the government doesn’t have to make labor decisions; it makes taxing decisions, and consumes through expenditures.

Government Expenditures: p₁E₁ = M_G + S

Government Revenue: M_G = M₁t (this form represents an income tax)

Taking from the income produced by others is the government’s only real source of revenue. This has two very obvious implications: 1) Taxation has an obvious impact on private consumption decisions, because it subtracts from real income (this also affects savings and consumption patterns, both now and later); and, 2) tax rates and government expenditure choices signal to the public the likely outcome of future taxation and expenditure decisions. This model of the aggregate economy suggests that eliminating the tax cuts will have deleterious effects on output and employment.

For some reason, Keynesian economists believe they have the power to affect the M₁ variable in this equation on a massive scale. The government is just adding pool balls to the equation. When the government decides to increase expenditures, it also has to increase revenue, by increasing the tax rate (t) now or in the future (after borrowing). This will have a negative effect on personal income, which translates to a decrease in personal consumption. The government has also decided to implement a progressive income tax structure. This means that, as M₁ increases, so does t. Because people tend to make decisions based on marginal welfare at their original consumption pattern, the last unit of consumption is roughly equal to the leisure that a person gives up to work that extra little bit so they can afford that last bit of consumption. With a progressive income tax, or an increase in the tax rate on any person, production is decreased at a marginal rate. When this happens to 300 million people at the same time, we begin to see problems.

The opponents of tax cuts often ask: What is the difference between swelling the public sector and cutting taxes, in terms of the federal government’s deficit? The answer is that they have different compensation structures and lead to different production decisions. Public money doesn’t force firms (whether they are public firms, or private firms contracted by the government) to make marginal decisions that maximize efficiency. Unfortunately, this means that public money is attached to inefficiency margins for anyone accepting it. Raising taxes therefore has a double whammy effect: Private production slows based on marginal decisions, and when it is converted to public money, it integrates inefficiency into each dollar.

Does this sound like a good prescription for an ailing economy?

Missouri’s Department of Health and Human Services  has estimated that more than one in five Missourians is obese, and that the more than $1.6 billion is spent in Missouri annually on obesity-related expenditures. According to the department, “Obesity is one of the most serious health issues facing society today.”

For people, I guess. For cows, Missouri’s policy is to encourage the bigger-is-better mentality.

The state has a tax credit for Missouri beef producers who raise Missouri-born cows that weigh at least 200 pounds more than the average weight of cows sold during the past three years. Beef producers are awarded $0.10 per pound of the extra weight, up to $3,000.

Regardless of the reason that the Missouri legislature created this tax credit, it is encouraging larger and larger cows by design. If growing larger cows were a more efficient means of beef production, then no tax credit would be needed. But if it’s more difficult to grow cows that weigh at least 200 pounds more than average, why on earth are are we subsidizing this wasteful activity?

I’m sure the cows would appreciate losing the extra baggage.

Hiking tax rates on cigarettes and alcohol would negatively affect businesses in Missouri, so the fact that the editorial board at the St. Louis Business Journal is promoting this paternalist policy is perplexing.

Raising the tax rates on “sin” products would be particularly harmful to convenience and grocery stores close to the state border, because they would lose business to states that assess lower tax rates relative to Missouri. As a similar consequence of this policy, fewer people and businesses would locate to Missouri because the costs of living and doing business would be higher here. By keeping its tax rate low relative to other states, Missouri can help ensure that its residents will shop within the state, and it can incite individuals located near the border to shop here, as well. As a consequence, Missouri can generate a higher amount of revenue.

Missouri residents and businesses would be better off if the state government pursued alternative strategies to address the budget deficit than increasing selective sales taxes on cigarettes and alcoholic beverages (or on fatty foods, soda, and tanning). If it created a low-tax environment instead, Missouri would attract more businesses and individuals to the state, and they would contribute additional tax revenue. Alternatively, if the state government stopped carving out large sections of the tax base and subsidizing the favored few, it would have fewer expenditures to cover.

As we’ve discussed before on Show-Me Daily, Missouri residents enjoy lower tax rates on “sin” products (e.g., beer, wine, spirits, cigarettes, and gasoline) than residents in neighboring states. In an editorial published on Friday, the St. Louis Business Journal editorial board argued that Missouri should increase its tax rates on these products as a means to cover its $600 million budget deficit.

Although I disagree with many of the points made in the editorial, and intend to address them in a future blog post, I find the following to be particularly egregious (emphasis mine):

This is more than a matter of budget balancing: It’s sound public policy. Higher taxes are meant to be a deterrent to behaviors that harm individuals and society as a whole.

Laws and the judicial system — not higher taxes — exist to deter individuals from harming others and society as whole. If a person causes physical harm to another person or property, then he or she gets sent to jail. If a person happens to view a behavior (i.e., smoking, consuming alcohol) as destructive, then he or she can choose not to engage in this behavior and perhaps persuade others to abstain also.

Every activity is associated with some level of risk, and individuals must weigh the costs and benefits of these activities. If I chose to engage in an activity, I accept the risk as a free adult. If I drive my car to work, I could crash into another car. If I walk instead, I could fall through an open manhole and break my leg. If I frequent the beach, I may get skin cancer. If I eat fatty food, I could develop heart disease.

As Peter McWilliams argues in Ain’t Nobody’s Business If You Do (which we read recently in the Show-Me Institute’s book club), it’s not the role of the government to protect individuals from risk or negative outcomes. He argues:

As we take risks, bad things will occasionally happen—that’s why they’re called risks. At that point, we must learn to shrug and say, “That’s life,” not, “Why isn’t there a law against this? Why isn’t the government protecting me from every possible negative occurrence I might get myself into?” When we, as adults, consent to do something—unless we are deceived—we become responsible for the outcome.

According to the St. Louis Post-Dispatch, home prices in the St. Louis region rose 20.4 percent in the last three months — much higher than the nationwide increase of 7.9 percent. From the article (link added):

The quick growth, according to real estate data firm Clear Capital, was driven largely by sales that involved the $8,000 tax credit for first-time homebuyers. Many of the places where sale prices grew most are less-expensive Midwestern markets where $8,000 has a bigger impact.

This stimulus is artificial, and it will end as soon as the state and federal governments stop propping up housing prices with programs like this one.

Owning a home is suitable for those who can afford the investment commitment and associated risks. Nudging people into homes that they can’t afford has overwhelmingly negative consequences and could prolong the housing crisis or provoke another one.

Because this tax credit keeps housing prices artificially high, it defeats its ostensible intended purpose of nudging people into owning homes. As I have discussed previously, the rate of homeownership tends to remain constant over time in Saint Louis and elsewhere, despite the government’s nudging. Although this tax credit gives an individual the ability to make a larger down payment on a house, he or she will incur tens of thousands of dollars in additional debt by purchasing a house that is overpriced.

Furthermore, this tax credit program largely shifts transactions from the future to the present, instead of inciting new transactions to occur. Many of these beneficiaries would have purchased a home independent of the tax credit. This program is similar to sales tax holidays and last year’s cash for clunkers program in this regard.

Given that encouraging homeownership is such bad policy, why does government extend and introduce new programs? In an article in The Atlantic, Megan McArdle provides an answer (link via Audrey Spalding):

[P]oliticians want to help poor people with capital formation, and homeownership is the way that the American middle class has traditionally gone about capital formation.

Too bad that real estate is not a good investment!

On Tuesday, Saint Louis city residents voted overwhelmingly to pass a $155 million bond for Saint Louis Public Schools (SLPS). According to the city’s Board of Election Commissioners, nearly 76 percent of the city residents who showed up at the polls voted for the bond.

One of the primary strategies with which proponents of a school bond promote such measures is to say that the bond will not result in an increase in taxes. This is misleading at best, and disingenuous at worst.

There are two main ways that school districts ask residents for more money. The first is by asking voters to approve a tax levy increase, which, if approved, results in a direct increase in the property tax rate. The second is by requesting that voters approve a bond. A bond is an issuance of debt. It does not directly raise your property tax rate, but the debt must be paid off in the future. And school districts pay off the bond issued today with property taxes tomorrow, plus interest.

According to St. Louis Public Schools’ 2009 Comprehensive Annual Financial Report (CAFR), district residents paid $3.8 per $100 of assessed property valuation. Of the school property tax rate, $0.6211 was used to pay off debt and debt-related costs. That means that more than 16 percent of the property taxes that district residents pay for SLPS are used to pay for the district’s debt. Tax dollars will be used to pay for the just-approved $155 million bond. Those millions will not appear out of thin air.

Reading the coverage leading up to the election, one statement stood out as particularly bad. As St. Louis Post-Dispatch reporter Elisa Crouch put it, “The bond measure would not result in a tax increase, [h]owever, taxpayers would pay the levy longer if the bond is approved. The district would retire its bonds in 2025, rather than 2018.”

Read that quotation again. It’s kind of ridiculous. Rationalizing school debt by saying that it won’t increase the tax rate, only the duration of payments, is akin to justifying taking on more credit card debt because it won’t increase your monthly payment — you’ll just have to spend a few more years making the minimum payment. If I applied this logic to my own finances, I’d have many wonderful impulse purchases (ooh!), but it would take me years of austerity to climb out of debt in the future.

I wonder when SLPS will get around to paying off all of this debt it has accumulated. Going back to the 2009 CAFR, you can see on page 105 that since 1999, SLPS has never managed to reduce the rate of taxes it charges residents for debt purposes. The rate has only increased, from $0.55 to $0.6211. In 2009, SLPS had accumulated a total of more than $245 million in bonds and notes payable, according to the CAFR. Furthermore, SLPS paid down $14.3 million of its debt last year, while paying an additional $8.95 million in interest charges. In fact, according to the CAFR, only $1 of every $2 that SLPS spent in 2009 on debt service went to paying down its debt. The rest was eaten up by interest, payments to an escrow agent, and bond issuance costs.

Debt is expensive. I’m sure SLPS — and Nicolas Cage — would agree.

Over at Cafe Hayek, Donald Boudreaux writes a letter to the editor that impugns an editorial in the Wall Street Journal for ignoring the unseen costs of the auto bailout. He argues (emphasis mine):

[T]he heart of the case against the bailout is that it saps the life-blood of entrepreneurial capitalism. The bailout reinforces the debilitating precedent of protecting firms deemed ‘too big to fail.’ Capital and other resources are thus kept glued by politics to familiar lines of production, thus impeding entrepreneurial initiative that would have otherwise redeployed these resources into newer, more-dynamic, and more productive industries.

The ‘success’ of the bailout is all too easy to engineer and to see. The cost of the bailout – the industries, the jobs, and the outputs that are never created – is impossible to see, but nevertheless real.

This is particularly relevant to Missouri, because the $150,000 tax credit package that Missouri decided to give to Ford is Missouri’s version of the auto bailout, and is also associated with unseen costs. Although it is easy to see the benefits of the policy, it is impossible to see the economic activity that would have otherwise occurred (Merci, Frédéric Bastiat!). When the state government provides financial assistance to specific companies or industries, it crowds out private investment and entrepreneurial initiative. In addition to many other negative consequences, it incites the producers to invest their resources in an activity for which the state does not have a competitive advantage, at the expense of investing in activities that are “newer, more-dynamic, and more productive.”

U.S. Sens. Tom Coburn and John McCain just released “Summertime Blues,” a report chronicling 100 wasteful uses of stimulus dollars. Let’s leave aside the question of whether the entire thing has been a waste, and tacitly agree that some types of stimulus spending can be relatively better than others. Spending $1 million for a highway that people need and use is better than spending $1 million for a highway that people don’t need and don’t use. But on to the waste and pork!

The report includes two examples in Missouri. Really, though, one should have been counted for Illinois rather than Missouri, which leaves us with only one citation for the Show-Me State. The expenditure that I dispute should be classified for Missouri — but without any dispute over its uselessness and absurdity — is the $430,000 given to the Army Corps of Engineers to enhance a museum about the Army Corps of Engineers. It’s no. 27 on p. 24 of the report. The museum, which I sheepishly admit I had never heard of (I go to the East Side Metro East for one thing and one thing only), is dedicated to the Mississippi River and the Army Corps of Engineers, and is in East Alton, Ill. So, that’s $430,00 more in spending so that the Army Corp of Engineers can tell the public what a good job they do.

This is not to say that the Army Corps of Engineers doesn’t do a good job. Rather, they should just do a good job without feeling the need to tell us about it. If I lived in Louisiana in 1927 or 2005, though, I might feel differently.

The Missouri example is $180,000 for scientists at the University of Missouri to deal with the pressing problem of why rat sperm becomes less useful when it is thawed after freezing. (This is example no. 95 on p. 45.) Apparently, this is exactly the type of project for which the stimulus was designed.

All in all, it could have been worse for Missouri. Many of the projects in other states cost millions of dollars more, and most closely resemble a project akin to: dig hole; fill in hole; repeat. Example no. 10 is one of my favorites: $100,000 for “Town replaces new sidewalks with newer sidewalks that lead to ditch.”

No matter where this spending occurs, though, we all pay taxes for projects like this, and elected officials all (or almost all — there are a few exceptions) fight for local spending and spoils.

An editorial in the Kansas City Star argues that Missouri should stop training companies to expect subsidies. It describes the phenomenon as a “subsidies-for-development disease [that] has become dangerously pervasive” in Missouri. This is something that contributors to Show-Me Daily have been arguing all along, and I am glad that others are beginning to assess tax credit programs critically.

Here’s one of the editorial’s major points:

It’s understandable that lawmakers would want to do something to protect the Claycomo jobs in the face of competing offers from other states that are equally shameless. Yet the whole process, despite the studied silence of Ford, had the feel of extortion. Ford never had to say a thing, but everyone knew the company was expecting something.

Ford expects handouts from other states too, despite the fact that it’s a profitable, private company. Ford is playing a game, and it is one that a state like Missouri can’t win. Unfortunately for taxpayers, Ford is not the only company playing — many other companies in other industries also pit states against each other in search of the biggest handout.

Additionally, from the editorial (emphasis mine):

“[Offering incentives] always has an unsavory feel,” said economist Chris Kuehl of Kansas City-based Armada Corporate Intelligence. “It’s not unlike the sports guy, dangling six different teams.” Kuehl said he actually heard someone compare the Ford deal to the bidding war over NBA star LeBron James.

Is Kuehl a Show-Me Daily reader? Perhaps the someone he refers to was Joseph Steelman, who made that exact comparison in a recent blog post. Or perhaps that person was myself, because I also previously discussed how the bidding war over James is an example of how taxes can incite people and businesses to change their behavior.

What a difference a month makes.

In July, the city of St. Louis’s Land Reutilization Authority (LRA) Board of Commissioners heard public testimony from six persons seeking to purchase property, and the board actually approved three of the sales! (Commissioners deferred action on one of the properties and offered a five-year “garden lease” on each of the other two parcels subject to public testimony.) Per its usual practice, the LRA sent buyers off with the encouragement that they “will receive a letter in the mail” enumerating their required next steps for taking title to the city-owned properties.

All other agenda items received their recommended actions.

The above may seem like nothing more than minutiae to persons unfamiliar with the problems associated with LRA ownership of formerly private lands, but for persons who live next door to any of the LRA’s thousands of parcels in the city or for taxpayers anywhere in the city, the above actions are of particular significance.

One person who testified this month seeking to purchase a vacant lot adjacent to her home spoke of how burglaries are “a constant problem,” and that she hoped the acquisition of the lot would allow her to better protect her property. Another potential purchaser expressed her desire to become a homeowner, only to be rebuffed by the commission with an admonishment that she “talk to the alderman,” demonstrate stronger financial abilities, and await further review by the commission at the next meeting. A husband and wife expressed their desire to purchase the lot adjacent to their home in order to provide space for room additions to accommodate their daughter, son-in-law, and grandchildren. Two representatives from a church spoke about how the purchase of a fenced parking lot would greatly assist in the church’s programming and outreach.

Considered together, the myriad of motivations and the multitude of proposed uses for LRA-owned land parcels suggest to me that individuals, when free to conduct land transfers, make better decisions about land use than do any seemingly well-intentioned bureaucrats on an executive commission.

The LRA meets in the Board Room at St. Louis Development Corporation, 1015 Locust Street, Suite 1200, at 8:30 a.m. on the last Wednesday of each month.

Eminem released a new CD in June. There is a track on the album titled “Talkin’ 2 Myself.” Sometimes I feel the exact same way:

Can anybody hear me yeah, I guess I keep talking to myself
Feels like I’m going insane, am I the one who’s crazy?

The president recently signed the Improper Payments Elimination and Recovery Act. I might favor this type of reform if the fraudulent payments it intends to target were recovered in a cost-effective manner. But is this law even needed?

Here’s a quote from the White House Blog:

Last year, improper payments by the Federal Government added up to $110 billion.

If a publicly owned corporation misplaced $110 billion dollars, it would be more than reprimanded — it would be bankrupt and out of business.

This legislation shows in unadulterated clarity the inherent flaws of government. The federal agencies responsible for this irresponsible behavior will be fined and face “penalties and other repercussions,” but I wonder who exactly the federal government thinks pays for penalties levied on federal agencies.

And people wonder why consumer confidence is low.

Missouri’s Department of Economic Development recently released a list of the members of the statewide Steering Committee for 2010 Strategic Initiative for Economic Growth (hat tip: Missouri Watchdog).

Because it has more business leaders than bureaucrats, hopefully this committee will propose solutions that are more market-driven than government-driven. Unfortunately, I can’t say the same for the new Tax Credit Review Commission.

Additionally, I am pleasantly surprised to see that only a small minority of the committee members work for companies that have been issued state tax credits since 2000. Of the 40 individuals listed, I could only find four that received any. According to the “Show-Me: Tax Credits” application:

• Wells Fargo Advisors has received $2.5 million in tax credits for development.
• Global Velocity has received $150,000 in tax credits through the Rebuilding Communities program.
• Walsworth Publishing received $2.292 million in tax credits through the EZ – Enterprise Zone program in 2001 and $15,068 through the Youth Opportunity Program between 2001 and 2002.
• Washington University received $2 million in tax credits New Enterprise program between 2002 and 2005.

Hopefully, this means that they will be more willing to reduce or eliminate expensive targeted tax credit programs in Missouri.

It may be time for a career change for me. Although I enjoy working at the Show-Me Institute very much, I am beginning to think that I would be better off if I became CEO of a mega-corporation and tilted the playing field to my favor with the help of my friends in Jefferson City. I will attempt to have more benefits concentrated on me, and more costs diffused away from me.

As the first part of my strategy, I would hire a team of lobbyists in order to enact rules and regulations that discriminate against products from other states that compete with mine. If I could keep firms from other states from entering Missouri, I would not have to work as hard to compete with them. I would try to get the state government to impose strict licensing requirements in order to keep others from entering the industry and trying to compete with me. In doing so, I could charge a higher price to consumers living within the state because this protectionist policy would reduce supply, thereby raising my profits.

Protectionist policies may have high cost to society, but as a self-interested CEO, the profitability of my firm is my only concern. Of all business activities, lobbying has one of the highest rates of return. The Washington Post reported in April 2009 on a study finding that a single tax break in 2004 earned companies $220 for every $1 that they spent on the issue. That is a 22,000-percent rate of return!

I could invest a lot of money in research and development in an attempt to improve my product, only to have my efficiency copied and replicated by my competitors. On the other hand, I could contract with a lobbying firm to convince the Missouri state government to give me financial incentives, and then enjoy an artificial competitive advantage for a long period of time. I wouldn’t have to worry about competing with smaller companies that do not have my lobbying power. As an added benefit, by keeping these firms out of the market, Missouri workers can ensure the security of their jobs. Consumers will have the satisfaction that they are consuming products that were made by a worker in Missouri, not in another state — even if they have to pay more for their products in order to subsidize those jobs.

If this strategy doesn’t work, I could use a different one: pitting states against each other to see which will give me the most money. I’ll tell each state government that other states are offering me huge incentives to invest there, and that they must meet or exceed these offers in order for me to stay. Ford is an expert at this, and I’d definitely follow its example.

All of the large companies in Missouri engage in lobbying activities, so my firm would be at a disadvantage if I didn’t. It doesn’t matter how big or profitable the company is — they’re all doing this! Just in my recent memory, Scottrade secured $2.6 million, Ford secured $150 million, IBM secured $31 million, Mamtek got $17 million, and other, large, private developers secured TIF and tax credits.

Now that the $150 million incentive package for Ford has passed, it’s apparently time to reverse positions and talk tough on tax credits again. On Wednesday, the governor created a commission that is supposed to evaluate the effectiveness and return on investment for each of Missouri’s tax credit programs.

Unsurprisingly, rent seekers tax credit supporters are critical of the new committee. According to an article in the St. Louis Post-Dispatch (emphasis added):

While the commission does include several prominent tax credit advocates, [...] it lacks any representatives from small town Main Street groups, community development organizations or historic preservation groups, “all of whom have firsthand experience in how well the program works for the average citizen,” the [Coalition for Historic Preservation and Economic Development's] press release reads.

Judging from the list of people on the committee, I don’t foresee many calls for scaling back these programs. Not only does the committee include bureaucrats and politicians, who have an incentive to grow the size of government, it includes businessmen whose companies have been issued tax credits. The committee includes a member from Hallmark, in Kansas City, which has received $8,657,730 in tax credits from the state government since 2000, according to the “Show-Me: Tax Credits” application. There is also a member from Commerce Bank in Saint Louis, which received $5,401,975 in historic tax credits in 2002. Legacy group investments received $183,586 in historic preservation credits in 2003. In addition, many other members come from the real estate industry, which would likely benefit from increased construction activity.

As I communicated to the Missouri Watchdog, I applaud the effort to review these programs, but I am skeptical that this commission will accomplish anything, given that the governor continues to dole out tax credits to his favored few (e.g., Ford, IBM, sugar substitute producers, data centers, filmmakers, etc.).

We live in a world of second-best options, and a review process is more desirable than nothing. The optimal solution would be to cut these incentive programs altogether, because they distort the playing field.

If the governor were serious about stimulating productive economic growth in Missouri, he would eliminate the programs entirely and return the money to taxpayers to spend on their own. People tend to spend their own money better than they do other people’s money, after all.

Last week, the Kansas City Star ran a story about a recent debate among local politicians in the Kansas portion of the metro area. They were asked whether they supported a regional sales tax to support the zoo, in both Missouri and Kansas counties, and they all said “no”.

This will be played in some circles as a lack of regionalism in the community, with Kansas residents unwilling to support an institution on the Missouri side of the river. I don’t think it is a big deal, because Kansas residents support the zoo every time they attend by paying an admission fee.

This is a more complicated question in St. Louis, where residents of both St. Louis city and county pay a tax for the zoo, and everyone gets in for free. I think that residents of the surrounding counties should be given an option whether to tax themselves to support the zoo or instead have to pay an admission fee. But I don’t think certain people should pay a tax to support a free zoo so that everyone else can also enjoy it for free. (And, yes, I realize you pay for the parking lots, and the train, and the food and drink sales, and the children’s zoo, so you probably spend plenty of money when you attend no matter where you come from.)

I’d like to see St. Charles, Franklin, and Jefferson counties institute a property tax (in the long run, hopefully just a land tax) for support of the zoo. Then the rate could be lowered even further — and it is already a pretty low tax. I also think the other counties should get a representative on the governing board of the zoo if they opt in.

Again though, it’s perfectly fine with me if the residents of those counties choose not to tax themselves for the zoo. In that case, they should pay an admission fee — simple as that. I’d love to hear someone from a surrounding county argue that they should pay neither taxes nor an admission charge to come to the St. Louis Zoo. All aboard the free rider train!

From an editorial on Missourinet (link via John Combest):

So if Ford develops an all-new vehicle, it’s investing about $3 billion before it even builds the production line and hires and trains the workers to put the vehicle together.

Woe is Ford! It has a high cost of production! Boo hoo!

I have no sympathy for the company and its high cost of production, given that it made $2.6 billion in profit in the second quarter alone and forecasts even more growth in the immediate future. (By comparison, the $150 million in tax credits that the Missouri legislature decided to give Ford is just a drop in the bucket!) Cars and trucks may be costly to produce, but they are also associated with high marginal revenues that cover this cost.

The debate on subsidizing Ford could benefit from a refresher on the theory of the firm.

This $3 billion investment for a new vehicle is a one-time upfront cost, and because Ford produces vehicles in very large quantities, that cost is diffused. Ford is making billions of dollars in profit, so we know that the marginal cost of producing a car is lower than the marginal revenue. Ford is a firm that operates in (what is supposed to be) a competitive industry; the perfect competition ideal is illustrated in the following graph:

Ford in the Short Run

If, perhaps, Ford finds that the marginal cost of producing a vehicle is lower than the price it can charge, it will lose money and will eventually choose to leave the market. Other firms that are able to produce the good at a lower average cost will enter the market instead because they can realize profit. This is how the competitive environment is supposed to work.

It would be beneficial if, instead of providing subsidies to profitable companies like Ford, the Missouri state government took a laissez-faire approach. Consumers would benefit, because they would be able to purchase goods at a lower cost instead of subsidizing private firms with their tax dollars. Producers in other industries would also benefit, because they would not be forced to compete at an artificial competitive disadvantage.

Earlier this week, the Kansas City Star published a fantastic editorial that illustrates the math behind low-income housing tax credits (emphasis mine):

Here’s how it works. Assume that you are a developer. You plan to build a low-income housing project with a total cost of $11 million. Of that, assume $10 million is eligible for the credits (land costs are excluded). The credits are limited to 90 percent of that figure, so assume that you get $9 million in credits.

The credits then are sold to investors. Assume that the investors, after discounting the net present value of the credits over 10 years, buy them for 60 percent of their face value — or about $5.4 million. Assume also that you get a regular mortgage loan equal to 70 percent of the $11 million total cost of the project — about $7.7 million. These are conservative estimates.

So the developer now has funding of approximately $13 million ($5.4 million plus $7.7 million) for a project that costs $11 million. The developer will receive a $2 million check at the closing, less any escrows.

Later in the editorial, the author demonstrates how these programs can be further manipulated to benefit the developer above all others. Then, he concludes:

At a time when government at every level is becoming insolvent, all of these programs should be subjected to a top-to-bottom review.

If tax credits programs in Missouri were continuously scrutinized, Missourians would be better off. This is particularly important because the Missouri state government doles out a tremendous amount of money through this program, which is a tab that taxpayers have to pick up. Using the “Show-Me: Tax Credits” application at Show-Me Living, I isolated the trend of tax credits issued under the Low-Income Housing program. Since 2000, there have been 437 credits issued in Missouri for a total amount of $1,360,900,251. The average amount awarded to a single recipient is $3,114,188. The smallest amount awarded to a single recipient is $14,230, and the largest awarded is $13,320,000.

The only positive thing that I can say about the following graph is that it illustrates a downward trend after 2006. However, I wonder if the decrease in the amount of credits issued and redeemed is simply indicative of a general decrease in construction projects because of the recession. It may be that fewer people build or renovate during periods of recession, regardless of state tax incentives.

Trend of Total Low-Income Housing Tax Credits Issued in Missouri

While it lobbied for $150 million in tax incentives from Missouri, Ford also courted Kentucky, Michigan, Ohio, and Illinois for financial assistance, communicating the message that it would locate within the borders of the highest bidder.

Pitting states against each other is one of the more significant negative consequences of offering generous incentive packages to single companies. It encourages states to offer incentive packages in ever-increasing amounts, in a desperate attempt to entice these companies to locate within the state. Then, the company tells each state government that other states are offering huge incentives for it to invest there, and that they must meet or exceed these offers in order for the company to stay.

In the case of Ford, it’s a confusing mess. After Ohio gave Ford $83 million in incentives during 2002 to expand in the state, Ford moved its production to Missouri. Because Illinois gave Ford an undisclosed amount of incentives in January 2010 to open an assembly plant in Chicago, the company moved its production of Explorers from Kentucky to Illinois. Just last month, the state government in Michigan awarded $10 million in Brownfield tax credits to Ford to redevelop a section of the Michigan Assembly Plant complex in Wayne. Meanwhile, Ford told the Missouri state government that it needs $150 million over 10 years to keep its Claycomo plant open, or else it would move production of its Ford Escape and Mercury Mariner to Louisville. At the same time, Ford seeks tax incentives from the Kentucky state government. They say that, in order to remain in Kentucky, they need financial assistance. Ford secured up to $180 million in incentives from Kentucky in 2008, and $66 million in 2007.

Now that Ford has secured $150 million from the Missouri state government, will the company ask for still more, or will it pack up and leave the state? How do we know that Ford won’t demonstrate the same behavior in Missouri?

When a large company like Ford pits states against each other, other groups are negatively affected. For example, it causes taxpayers to face a higher tax burden because the state has to pay for these incentive packages. It also forces small businesses that lack lobbying power to compete at a competitive disadvantage.

It’s a very expensive game, and taxpayers everywhere would be better off if their state governments stopped playing.

The Kansas City Star recently wrote that the Power and Light redevelopment project in downtown Kansas City will cost more than originally planned. The city originally lent the project $295 million, but now estimates that it will cost taxpayers another $230 million by 2033.

The project, cast as a “self-sustaining venture,” has had trouble occupying its 511,000 square feet of retail space. City planners blame the vacancy on the downturn of the economy. Without a fully occupied site, the project is having trouble recapturing the tax dollars originally allocated to finance the project.

This is not to say that the project was a failure, but rather to point out the difficulty in predicting its success. Of the original $295 million, $212 million was used to rebuild infrastructure around the project area (which could more readily be considered a legitimate expense). Many of my friends love the Power and Light District as a weekend hangout, but rosy projections and rationalization won’t save taxpayers any money.

A perfect example of the inherent fallacy of utilizing a centralized plan is found in Nassim Nicholas Taleb’s book The Black Swan. He writes:

The inability to predict outliers implies the inability to predict the course of history, given the share of these events in the dynamics of events.

Governments who believe they have a better chance than individuals of predicting future events have the tendency to be vastly irresponsible, and the bill almost always lands at the feet of the taxpaying public.

As plans like Kansas City’s Power and Light District come together, they are sold to the public in the most favorable light with the most favorable projections. Unfortunately, those projections almost never translate in the real world. Public projects usually cost more than expected and produce less.

The fact remains that the project has been undertaken, and I believe City Manager Troy Schulte put it best:

“20-20 hindsight is always good, but I’d tell taxpayers to come down and enjoy downtown, because you’re paying for it,” he said.

The Post-Dispatch recently published a letter to the editor that applauded the passage of the $150 million Ford Claycomo tax incentive package (link via John Combest):

The GOP should take positive action to keep jobs in Missouri. Look at Michigan. It offers numerous incentives to corporations to move to Michigan. And it works.

[...] With unemployment in Missouri at more than 9 percent, what exactly does the GOP have to offer?

From this letter, it is apparent that the writer measures success in terms of job growth. However, the writer ignores the fact that Michigan boasts the second-highest unemployment rate in the union — certainly higher than the rate in Missouri. According to the Local Area Unemployment Statistics (LAUS) from the Bureau of Labor Statistics, the unemployment rate in May 2010 is 13.6 percent in Michigan and 9.3 percent in Missouri.

Moreover, the unemployment rate in Missouri is historically much lower than Michigan’s. Using the Show-Me Institute’s IDEAS application, I produced the following graph:

Trend of Unemployment Rate In Michigan and Missouri

Why are there calls to emulate the public policies in Michigan? Its economy is in terrible shape! To paraphrase Catherine Aird, Michigan would be better viewed as a horrible warning than as a good example.

Furthermore, targeted tax credit programs do not work in Michigan. The Mackinac Center for Public Policy in Michigan has produced many studies that demonstrate this. As Audrey Spalding recently wrote on this blog, tax credits fail to deliver on their promises — particularly in terms of job creation, and particularly in Michigan.

The New York Times recently featured a micro-lending website, Kickstarter, that connects filmmakers to private individual donors. The initiative has been so successful, it is planning to host its first film festival.

From the article:

Kickstarter is a concept: a Web site that puts together creative types seeking money with backers willing to chip in micro- and macro-payments, a way to crowd-source the financing of ideas. Started last year, the company has become an unexpected influence on indie culture, a new model for a D.I.Y. generation.
[...]
Matthew Lessner, the director of “The Woods,” made his directorial debut with a viral video starring Michael Cera and has worked on videos for of-the-moment bands like Dirty Projectors and Fools Gold. He had already shot the film, his first feature, financing it on credit cards two years ago. But then the economy collapsed, and Mr. Lessner, 26, was left without money to finish it.

Enter Kickstarter, where Mr. Lessner was able to raise more than $11,000 from 95 backers to complete the film. “One of the things that’s most exciting about Kickstarter to me, it really provides an opportunity for films that otherwise would not have a chance,” Mr. Lessner said.

This demonstrates that a vibrant film community can emerge in the private sector, and that it doesn’t require financial assistance from the state government. I have argued, admittedly obsessively, against the use of film tax credits in Missouri on this blog.

Furthermore, this is evidence that in the unrestricted market, individuals that have a demand for film will voluntarily pay for it. In the status quo, state tax credits coerce individuals who do not possess a demand for film to pay for it through a marginally higher tax rate. This practice is particularly harmful to taxpayers, because they end up paying for something that they do not want. It is also harmful to businesses and individuals who operate outside of the film industry, because it forces them to compete at a competitive disadvantage.

A recent article in the St. Louis Beacon posed a question to local economists that is being tossed around globally:

Given the current state of the economy and the deficit, is this the time to pull back on stimulus spending and pay more attention to the deficit, or should Washington worry more about the short term and let the long term take care of itself?

The Paul Krugman camp, consisting of those economists wanting to stimulate the
recovery through expansive government spending, are — like the spending they are advocating — lost in their own arguments.
In the article, Steve Fazzari, a professor of economics at Washington University in St. Louis, states, “One person’s spending is someone else’s income.” I absolutely agree. But then, in a quick turn of events, he goes on to say, “When the government cuts spending, it’s cutting income to someone.” This is also true, strictly speaking, but the implications of his first statement are more important.

I used to mow lawns, and if my employer had told me that he would give my payment to my brother after I finished my work so that my brother could do some weeding, I would have immediately walked away and taken my labor elsewhere.

If that same employer had given me $10 the week before I was supposed to mow the lawn, two things might have resulted: (1) With cash already in hand, my attention to detail would have suffered considerably; and, (2) I would not have been in any hurry to finish the job.

Historically speaking, capital evolved before credit, and for most of the real world, that is how personal finance is understood — you largely only spend what you have. The problem that got us into this recession was egregious spending beyond our means. If mortgage lenders hadn’t been so eager to hand out money — apart from the fact that home loans were implicitly backed by the federal government’s approval — this last recession most likely could have been avoided.

Without the possibility of high default rates at the micro level, the financial instruments that impregnated the system with risk may never have been implemented on such a large scale. Now, after the crisis, we see the world’s top economists trying to formulate a plan to fix the system. In practice so far, that has involved injecting liquidity into the economy through massive government spending. The Krugman camp claims this is more responsible than private investment, because the Fed can print more money to increase the flow of capital rather than bearing the risks of default. There’s no need to worry about the deficit now, they say; we can take care of that later.

Yet few are buying the empty promises of the government. And why should they? With an aging population and massive health care overhauls on the way, everyone can see that entitlement spending is about to skyrocket. Higher taxes are almost certain. Increasingly larger numbers of the American people are holding onto their money in an effort to maintain liquidity in anticipation of the expiring tax cuts at the end of the year. Stimulus money is falling into the same trap; it’s not multiplying the way Keynesians had hoped because investors are wary of the uncertain economic conditions that may be brought about by still more government spending and higher taxes.

We cannot extricate ourselves from the hole we are in until we stop digging. Americans need to see the sunlight before they are willing to buy an expensive ladder to climb out.

LeBron James recently announced that he will be moving to Miami. This is great news for Miami, but terrible news for the rest of the cities courting him.

An economic impact study commissioned by the mayor of New York City concluded that the LeBron effect would likely inject $60 million per year into the local economy. Not surprising, given that ticket sales, advertising revenues, and team retail in Cleveland had increased dramatically since James’ rookie year.

Because of the way the free-agent landscape worked out, and overall team salary cap requirements, Miami was not able to offer James a competitive contract, while both New York and Cleveland were. But Miami did possess a wild card that the other suitors couldn’t match: tax-relief. No, not in the form of direct incentives, in the form of a healthier tax climate.

Interestingly, Florida does not impose a personal income tax, whereas both Ohio and New York levy personal income taxes of 6 percent and 12.6 percent, respectively, in their highest brackets. On a deal said to be worth around $100 million, that 12.6 percent tax on income wipes out the economic comparative advantage that New York may have had. However, the 6-percent income tax would level the playing field for Miami and Cleveland were it not for Cleveland’s pesky earnings tax. The 2 percent of James’ income that the city of Cleveland could claim was enough to give Miami the fiscal residual it needed to land its new money-making machine.

What can Missouri learn from all this?

Simply put, our current economic development plans may not be able to compete against states with lower taxes. New York may offer James lots of incentives to coax him to the state, but the simple ability to keep the money you’ve earned is a strong incentive in itself.