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).

3862

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.

March 6, 2015

Missouri’s Fuel Taxes in Context

On March 1, Iowa increased its fuel taxes by 10 cents per gallon. Other states, including Nebraska, Minnesota, South Dakota, and Illinois, are considering following suit. The Missouri Legislature is currently entertaining multiple proposals for increasing the state gas tax, and just recently a new bill was introduced in the senate (SB 540) calling for a 6 cent increase over two years.

Why the push to raise the gas taxes? Missouri, like other states, depends on its fuel tax to fund its state highway system. In 2014, the state’s fuel taxes brought in approximately $489 million for the Missouri Department of Transportation (MoDOT). Furthermore, because 30 percent of fuel tax revenue goes to cities and counties, local governments also rely on fuel taxes for road improvements. In 2014, fuel taxes provided $179 million to local governments statewide.

However, given the amount MoDOT claims it needs to maintain the state highway system, current revenue may be insufficient. Missouri’s fuel tax has not increased since 1996. With Missourians buying less gas, and the costs of maintaining the state highway system growing all the time, MoDOT warns of a large budget shortfall by 2017. As fuel taxes allow people who benefit from the roads to pay for them, it is an attractive funding source for roads in Missouri and other states.

Fortunately for Missourians, any fuel tax increase would be from a low base. At 17 cents a gallon (both regular and diesel), Missouri has the fifth lowest regular fuel tax and fourth lowest diesel fuel tax in the nation. As of January 2015, the average national state fuel tax was 29.89 cents per gallon regular, 30.02 cents per gallon diesel. Missouri also has a low fuel tax compared to its neighbors:

mo_gastax

As the map above demonstrates, Missouri has a lower fuel tax than any neighboring state save Oklahoma, which substantially tolls its state roads. The size of Missouri’s state highway system adds to the problem. With more than 33,000 lane miles, Missouri has the nation’s seventh largest state highway system, the largest of its neighbors.

If SB 540 becomes law, MoDOT would see approximately $165 million additional dollars per year, which likely would stave off the implementation of the 325 Plan. It would also mean more revenue for cities and counties. For example, Saint Louis City could see almost $4 million more per year to spend on local roads from the passage of SB 540.

Missouri has comparatively low fuel taxes, and low taxes benefit residents. But a well-maintained highway system has benefits of its own. Missourians should consider whether preserving that system is worth paying a little more at the pump.

March 4, 2015

Schools and Libraries Should Get a Piece of the Action

Localities engaged in a tax subsidy bender shouldn’t be surprised if they wake up with a nasty hangover in the form of increased property taxes. When cities decide to binge on Tax Increment Financing (TIF), the cities themselves may not feel the pain, but other taxing districts like schools and libraries are impacted. This has caught the attention of some in the legislature. While it appears that forcing localities to sober up is off the table, they are at least working on giving taxpayers an aspirin.

The pain relief comes in the form of Senate Bill 114 (SB 114), which aims to redirect 50 percent of incremented property tax revenues (i.e., the additional property taxes that would be generated by the increases in assessed value of new developments in a TIF district) back to the school and library districts. Currently, these other taxing districts do not receive additional property tax revenue from any increases in assessed value for redeveloped property in a TIF district. Since TIFs can last up to 23 years, the amount of property tax revenue schools and libraries can forgo is quite considerable.

This is especially troubling for school and library districts, since they both rely heavily on property tax revenue. That is why there has been a long history of these taxing districts opposing TIF projects. School district opposition to TIF projects stretches back at least into the 1990s. They understand that as operating costs grow over time (due to inflation, added population, and so forth), they will have to find additional revenue. Forgoing property tax revenue through TIFs means they will have to resort to tax increases on the people and businesses not located in the TIF district. If SB 114 is enacted, hopefully these rate increases can be forestalled or even avoided altogether.

No matter the context, I’m generally not a fan of overindulging. When local governments overindulge on TIFs, I am particularly appalled. Considering the fact that TIFs don’t work in stimulating net economic development, I’d rather localities avoid their use altogether. Barring that, at least some legislators are trying to mitigate some of TIF’s more damaging side effects.

February 24, 2015

Fuel Taxes Back on the Table in Missouri

Recently, two Missouri House Bills (HB 995 and HB 738) proposed to increase fuel taxes in Missouri to fund the state highway system.

The Missouri Department of Transportation (MoDOT) has been ringing the alarm bell for years about the impending shortfall in the funds necessary to maintain Missouri’s state highway system. With the failure of Amendent 7 last year, MoDOT unveiled its 325 Plan, which shows how the state would prioritize its declining construction budget. While much of the vital portions of state highways could be maintained in the condition they are in today, more than 20,000 miles of state highways would fall into disrepair.

Much of the problem lies in the gradual deterioration of the user-fee funding base of MoDOT, specifically the state fuel tax. The fuel tax last increased in 1996, and Missouri now has the country’s fifth lowest regular gasoline tax and fourth lowest diesel fuel tax.

But now that could change. HB 738 would scrap the cent per mile fuel tax altogether and replace it with a per gallon tax equal to 10.6 percent of the wholesale per gallon price of gasoline, based on regular six-month averages. The result of moving to a percentage calculation is if the fuel price remains low, at say two dollars wholesale, the fuel tax would be about 21 cents a gallon. But at a price of three dollars, the fuel tax would be around 31 cents a gallon. At three dollars a gallon, MoDOT would have an extra $400 million to spend on the state highways over what the 17 cent gas tax currently raises.

HB 738’s method of calculating the fuel tax would, at higher gas prices, essentially wipe out MoDOT’s funding problems in one fell swoop and ensure that as input costs for MoDOT rise (because of higher fuel costs), so does funding. However, it also means that, as pain increases at the pump for the average Missourian, taxation piles on.

In contrast, HB 995 proposes to simply raise the fuel tax by two cents beginning next year. That would raise approximately $78 million in new revenue, 70 percent of which ($55 million) would go to MoDOT (the other 30 percent goes to cities and counties for their transportation needs). Because those funds can be used to match federal dollars on a 4:1 basis, that two cent tax increase could retain $230 million federal transportation dollars.

HB 995, while not immediately solving all of MoDOT’s problems, has its own advantages. The comparatively small increase in the fuel tax gives consumers time to adjust to the changes and would not increase taxation as fuel costs rise. Furthermore, the increase is small enough that it is likely not to trigger the state’s Hancock Amendment, meaning it could pass without going to a public vote. With the addition of tolling the state’s most expensive projects, small increases in the existing fuel tax rate could give MoDOT what it needs.

A fuel tax, unlike sales taxes, is a fair and economically sound way of funding roads. It is good that the legislature is looking into updating its user funding base, although it should also consider whether the response is appropriate to the need.

January 30, 2015

The Return of the Transportation Sales Tax

Last year, Missourians soundly rejected Amendment 7, which proposed a 0.75 cent increase in the state sales tax to fund transportation improvements in the state. Its main purpose was to head off an impending funding crisis for the Missouri Department of Transportation (MoDOT), which will not have enough funds to maintain the highway system in its current state by 2017. But it turns out Missourians might not have seen the last of that transportation sales tax.

Whatever the reasons Amendment 7 failed, it was good for Missouri that it did, because it was not wise policy. Using a general sales tax to pay for highways is both unfair and economically unsound. Instead, the state should modernize the user-tax base that currently funds MoDOT. That could mean increasing the fuel tax, raising the motor vehicle sales tax, indexing licensing fees to inflation, implementing tolling, or some combination of those methods. That way, those who use the roads would pay for them, and in proportion to their use. Using general sales tax to fund roads subsidizes driving and interstate trucking that passes right through Missouri. As we wrote before:

… the fact is the vast majority of trucking freight in Missouri is not bound for Missouri. For example, of the 500 million tons of freight traffic in 2011, only 39 percent of that freight is either inbound or intrastate trucking. Forty-six percent of traffic by weight simply passes through Missouri. In terms of value of the goods transported, only 26 percent has a destination within Missouri while 61 percent of goods by value transit the state.

Unfortunately, a new bill in the Missouri House (HJR 33) would simply revive Amendment 7, albeit in a different form. Instead of raising the state sales tax by 0.75 percent, the bill would divert 0.10 percent of the state sales tax into the road fund for five consecutive years until the amount diverted reached 0.50 percent (two-thirds of Amendment 7). If that came to pass, it would mean that 12 percent, or $233 million in 2014 numbers, of state sales tax revenue would be diverted to the state road fund. That is likely to lead to budget cuts in other state programs or higher taxes for Missourians.

As we have written before, the defeat of Amendment 7 opened the door for sound, user-based policy solutions to MoDOT’s funding problems. HJR 33 is not one of these.

January 28, 2015

The Wonderful Evergreen Clause

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Imagine you had a contract with your employer that could never be altered unless both you and your employer agreed to the changes. Imagine this contract was a windfall for you, giving you a four-day weekend, up to three months paid vacation each year, and the ability to retire early with a great pension. That might be great for you, but would it be fair?

If you live in the Saint Louis Metropolitan Area, as a taxpayer you might be the employer bound to such an agreement. The beneficiary of this arrangement? Your local firefighters union.

Nicknamed “evergreen clauses” because they make a contract last forever, these contract provisions are popping up in government collective bargaining agreements across the country. And they create a situation where elected officials cannot alter the pay, benefits, or work rules captured in a union contract unless the union agrees to this change. In practice, this means that pay and benefits can be ratcheted up in years when public finances are good and the union controls public officials, but pay and benefits cannot be brought back down when the union loses its influence or public coffers are tapped.

In West County, the Monarch Fire Protection District has tried to change the terms of its contract with International Association of Fire Fighters (IAFF) Local 2665, but it is limited by an evergreen clause. At issue in the contract are provisions that state:

  • There will be no duties (other than an alarm) assigned to safety staff after noon of each working day. Each working day is a 24-hour shift.
  • A firefighter/paramedic works three days in each nine-day period (two-to-three days each week).
  • A firefighter/paramedic with 15 years of service (most of the shift staff) is entitled to 27 days of paid vacation each year. Working nine days a month, this comes to about three months of vacation a year.
  • In addition to vacation days, a firefighter/paramedic also receives paid days off in the form of sick days and “Kelly” days.
  • Sick leave accrues over time and can be “cashed out” for pay.

Perhaps these provisions made sense when they were adopted several years ago, but now the fire district, and by extension the taxpayers, are powerless to change them.

Contracts like this shift the power of government away from the democratic process to the government union benefiting from the contract. Missouri citizens should consider whether they really want their government to have the power to bind itself to a contract indefinitely.

At the time this story went to print, the firefighters union had not responded to our request for comments.

January 2, 2015

Map Series: VIII. The Kansas City Streetcar and Tax Abatements

KC_SC_Abatements

The map above shows the route of the Kansas City Streetcar (under construction), as well as tax abatements enacted by Kansas City from 2011 to 2013. As the map demonstrates, this area of downtown, and particularly the area around the proposed streetcar, has seen the ample use of these tax breaks. Although city leaders and news outlets claim the streetcar creates development, these tax abatements and a combination of other planning factors that favor this small section of downtown may be diverting development. Read more from the Show-Me Institute on the Kansas Streetcar and tax abatements here.

 

December 22, 2014

Urban Neglect: Kansas City and TIF

My colleague Michael Rathbone and I authored an essay titled “Urban Neglect, Kansas City’s Misuse of Tax Increment Financing.”

In the essay we examined Tax Increment Financing (TIF) project data provided by Jackson County and census data on household income. We found that in Kansas City the majority of taxpayer subsidies go to parts of town that are relatively wealthy and economically vibrant, rather than to the poor and economically depressed areas for which TIF was ostensibly designed.

Mike Mahoney of KMBC filed a story on our report. In it he interviewed Councilwoman Cindy Circo, who offered:

But it is the private development that drives the actual project itself. The city doesn’t go through the TIF process itself and be the developer.

This is an odd statement because Burns & McDonnell, and every other company that seeks a TIF subsidy, argues that the project could not go forward without public investment. So while Circo may be correct that the city does not choose the individual projects that apply for TIF, the TIF Commission and the city have demonstrated time and again that they aren’t really vetting applications, which has created an “anything goes” environment. One need only study the Citadel project to know that this is true.

If the city’s appointees on the TIF Commission were better at approving only legitimately blighted properties—those that truly require public investment—public subsidies might more often be used in the parts of town that really needed it. Instead, the subsidies flow to well-connected business leaders and their development lawyers, and public dollars unnecessarily go to projects such as Country Club Plaza and River Market.

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