May 11, 2015

Shocking Support for Taxing Bed and Breakfasts

Bed & breakfasts (B&Bs) have a long history in this country. To many they are associated with comfort and an antique ambiance. To the taxman they are a prime opportunity to raise revenue.

bb-signLast week, the St. Louis Post-Dispatch reported that Saint Louis bed & breakfast owners are upset over the city assessor’s decision to assess their property (or at least the part used as B&Bs) as commercial properties. I can understand why these owners would be upset. According to the way properties are assessed for property tax purposes, if B&Bs were even partially assessed as commercial properties, the owners’ property tax bills would go up substantially.

I sympathize with any business owner that is facing a higher tax bill. However, I do not oppose this change. Saint Louis is doing the right thing here. If a property is engaged in commercial activity, the city should assess it as a commercial property. The situation is trickier with people renting rooms through airbnb. These lodgings are not necessarily full-time establishments, and so some mechanism needs to be in place to make sure they don’t get a tax advantage compared to traditional B&Bs.

Having a large property tax base is important. It’s especially important in Saint Louis because it can serve as a way to reduce (or even eliminate) the earnings tax. The Show-Me Institute released a paper arguing that the earnings tax could be replaced by a two-tier property tax (this differs from a traditional property tax in that the two-tier approach taxes the land more heavily than any improvements on the land). Even if the city sticks with a traditional property tax system, a wider base can generate more revenue to offset any reductions in the earnings tax.

Paying more in taxes is never fun, but low taxes for some shouldn’t come at the cost of a hollowed-out property tax base.

May 7, 2015

Commentary: Gas Tax Increase Is Sound Policy

Recently, the Columbia Daily Tribune published our op-ed on how the plan for a small increase in the fuel tax, along with tolling on major state projects, is sound policy. Here is an excerpt from the article:

Aside from giving policymakers breathing room to come up with more long-term solutions, the current proposal would create a public-private partnership authority that could, with the approval of the Missouri Legislature, allow the private sector to build and toll an expanded I-70, along with other infrastructure projects. This is a major opportunity for Missouri, which simply does not have enough tax revenue to rebuild our most expensive highways. In other states, leasing toll roads has resulted not only in better, less congested roads, but also significant upfront payments to improve the transportation system in general. Using tolls is also the fairest way for rebuilding major roads; only those who directly benefit will have to pay.

To read the full op-ed, click here to go to the Columbia Daily Tribune.

May 4, 2015

Updated Reports: Missouri Fast Facts 2015

Fast Facts Banner

The Show-Me Institute is proud to present Missouri Fast Facts for 2015. These Fast Facts booklets cover a variety of topics and contain useful information that people can reference without having to scan through 100-page reports (that’s our job). Want to know by how much Missouri’s public pensions are underfunded? Just check the Pension Fast Facts for an answer. Want to know how Missouri highways are funded? Take a look at our Transportation Fast Facts.

These booklets are packed with information, but if you want to know more about any of the topics they cover, please visit our main website, showmeinstitute.org.

Fuel Tax Increase, P3 Bill on Verge of Passing Senate

Last Thursday, SB 540, a bill languishing on the Missouri Senate floor that would increase the state fuel tax two cents, was amended and gained that body’s approval. The amendments, which will tier the fuel tax increase and create a board to look at tolling major transportation infrastructure projects, is an improvement over previous versions of the bill and should be given due consideration by policymakers.

The first major change to SB 540 is that instead of raising both regular and diesel fuel taxes by two cents the regular gasoline tax will only increase by 1.5 cents and diesel tax will increase by 3.5 cents. This type of change makes sense, because the vast majority of taxable diesel fuel is bought by trucks, which can do much more damage to the roads per gallon consumed. In fact, both the federal government and 20 other states have higher diesel taxes than regular fuel taxes. This change will have little impact on the total amount of new revenue raised, which will be just under $80 million given current fuel consumption in Missouri. However, this should provide enough funds to MoDOT (around $60 million) to maintain federal matching funds and give a much-needed boost to municipal road improvement budgets.

Aside from these tiers, another change to SB 540, named the “Public-Private Partnership (P3) Authority Act,” may provide more long-term opportunities for improving the state highway system. Even if fuel taxes increase, the state still will not have sufficient revenue to make expensive but necessary improvements to our state roads. A prime example of this is I-70, which will need to be rebuilt from the ground up at a cost of billions of dollars. A reasonable method of solving this problem is to use modern toll roads to pay for better infrastructure, as many states already have.

However, there are constitutional issues with MoDOT tolling the state highway system, which have to do with the dispersal of State Road Fund money. A way to avoid this problem is to have private companies take over the job of financing, building, and maintaining state highways as toll roads. Missouri already has a federal waiver to rebuild I-70 as a toll road, and an amendment to SB 540 would create a board that would look for public-private partnerships to do just that. This bill also includes a check, in that any tolling proposal would have to be approved by the legislature.

The amended SB 540 is a sound policy solution to MoDOT’s funding problems and would be a great step forward for Missouri. However, the bill still requires final senate approval before going to the house and the governor. We’ll keep you updated.

April 21, 2015

Getting the True Value of Farmland

farm

It’s interesting when there are two wildly different takes on the same thing. For example, take me vs. the general public on Dances With Smurfs or Michael Burry vs. the rest of Wall Street on the value (or lack thereof) of sub-prime mortgage bonds. Another instance—one that is costing all of us—is the State Tax Commission vs. everyone else on the value of farmland. This difference can affect many our tax rates.

In a recent paper (H/T David Nicklaus), David Larson of the Bureau of Economic Analysis performed a valuation on all land in each of the lower 48 states for 2009. Based on his calculations, Missouri farmland is worth $64.236 billion. Based on my calculations, using data contained in the State Tax Commission’s 2009 Annual Report, the total value of Missouri agricultural property in 2009 would come out to $13.3 billion. That’s a gap of more than $50 billion!

A reason for this big difference is that, instead of assessing all agricultural land at a flat 12 percent rate, actively farmed land receives a different assessment rate depending on its productive capacity. This practice results in an effective assessment rate of around 2-3 percent.

Such low assessments erode the property tax base. Even if the true value of farmland in Missouri was half of Larson’s estimate, if it were assessed at a flat 12 percent rate, the state would have an agricultural property tax base nearly two-and-a-half times the size of its current base. This larger tax base either could allow property tax rates in some areas to be cut or some localities could see an influx of new revenue.

I don’t want farmers’ property tax bills to skyrocket. However, the truth is their property is under assessed to such an extent that governments are forced to rely on other more destructive forms of taxation (i.e., income taxes), which the rest of us have to pay, in order to fund essential services. We should value farmers for the work they do, but we should also properly value the land they work on lest we pay more than we should.

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.

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