July 21, 2014

Amendment 7: The Tax That Keeps On Taxing

According to current projections, the proposed Missouri Amendment 7, or 0.75-cent transportation sales tax, would raise $5.4 billion for roads, bridges, and other projects over the next 10 years. The Missouri Department of Transportation (MoDOT) has been active in promoting a list of those projects, showing how it would spend the largess. But what is less publicized is that many projects on that list receive the sales tax funds contingent on local governments also bringing money to the table. In many cases, projects approved for state sales tax money require local governments, and their taxpayers, to provide tens or even hundreds of millions of additional dollars.

Take the example of the Saint Louis area. The City of Saint Louis is set to get $25 million for a streetcar that goes from downtown to the Central West End. That might not be such a bad deal, if it were not contingent on Saint Louis coming up with an additional $271.5 million to complete the plan. The sales tax will also provide $40 million to the city for bus rapid transit, but only if Metro can come up with an additional $40 million. In return for $20 million for an I-64/22nd St. Parkway interchange (mostly to the benefit of the Northside Redevelopment Project), the city and developers have to provide an additional $8.9 million. All told, in return for $270 million in state sales tax money, the City of Saint Louis has to find an additional $323 million from other funding sources. That’s $1,016 for every man, woman, and child living in the city.

The story is similar in Kansas City. The city will get $144 million for the streetcar, contingent on it finding the rest of the half billion needed to make the project happen. While Kansas Citians have long been aware of, and been familiar with plans to fund, the streetcar, this is not so for other projects. Kansas City will receive $24 million for a bike path from Pleasant Hill to Kansas City, if it can find $48 million locally. For those counting, that’s a $72 million bike path. Altogether, projects that the sales tax would fund require $459 million in additional funding from the Kansas City area.

The result of these policies is that after taxes have gone up statewide, purportedly to save our “crumbling” highways, local governments may have to increase taxes even further to secure funding for projects on MoDOT’s list. Amendment 7 is the tax that keeps on taxing.

July 17, 2014

Are Missouri’s Highways And Bridges Crumbling?

Supporters of Amendment 7, the proposed 0.75-cent transportation sales tax, have increasingly begun to argue that Missouri’s roads and bridges are in desperate need of repair. Whether it’s an editorial in the St. Louis Business Journal, a radio host on KMOX, or a bus with a piece of bridge lodged in it, the message is the same: Missouri’s transportation infrastructure is “crumbling.” Presumably, if Amendment 7 does not pass, soon we will be living in the Missouri version of I am Legend. However, all the empirical evidence suggests that the opposite is the case.

ialPictured: Missouri’s Highway System – 8/6/2014

We have often commented that Missouri is “middle of the pack” in various state rankings. Not so with our state highway system. According to the Reason Foundation, our highway system is the eighth best in the nation, in part due to the good condition of our interstate highways and rural roads. The National Chamber Foundation has ranked our road quality seventh best in the nation, with only 6.3 percent of Missouri roads in mediocre or poor condition.

This is not surprising to those familiar with Missouri’s recent infrastructure expenditures. In the last 10 years, Missouri’s highway system added more lane miles while increasing the percentage of major highways in good condition to 88.5 percent and repairing a third of the state’s deficient bridges. And as transit supporters are wont to point out, Kansas City and Saint Louis hold first and second place on a list of cities with the most highway miles per capita. Missouri was able to perform so many projects in the last decade because it issued more than $3 billion worth of bonds and received more than $600 million from the federal Stimulus Act. That allowed the Missouri Department of Transportation (MoDOT) to implement the “Smoother, Safer, Sooner Road and Bridge Program” and the “Safe and Sound Bridge Improvement Program,” among other projects.

When we look at Missouri’s highway infrastructure today, the reasonable conclusion is that the system is in good condition, the best it has been in decades. While Missouri’s highway infrastructure has specific needs (I-70 rebuild, Broadway Bridge), by no definition is the system “crumbling.” MoDOT does have a funding problem, but there is time to select the right funding solution. There is no imminent crisis which would force us to accept an unfair, and economically unsound, transportation sales tax.

July 16, 2014

The Report The Airport Advisory Group Doesn’t Want You To See

Granted, that is a cliché title, but we can defend it. Twice, Show-Me Institute staff reached out to the Kansas City Airport Terminal Advisory Group (ATAG) about incorrect claims they were making in their presentations. We know from an open records request that they received our offer, considered it, and then ignored it while trying not to seem like they were ignoring it.

Dave Fowler, co-chairman of ATAG and a former managing partner at KPMG in Kansas City — one of the world’s largest auditing firms, — shockingly wasn’t ever concerned with the cost details. And whenever people provided financial information that did not align with the city’s talking points, it was dismissed. The affordability of the whole scheme was never seriously considered.

Until now.

Joe Miller, a policy researcher at the Show-Me Institute, has compiled all the cost data and concluded that over 30 years, it would be cheaper to renovate the Kansas City International Airport (MCI) twice than to build a new $1.2 billion terminal. Add this analysis to the many other points we’ve raised about the environmental or competitive need for a new terminal and it becomes impossible to find any worthwhile reason to tear down one of the country’s finest airports.

July 15, 2014

Breaking: Another Study Backs Up The Show-Me Institute

The Competitive Enterprise Institute grabbed our attention when it released a new report comparing the unfunded pension liabilities of all 50 states. Spoiler alert: Missouri ranks in the middle third (more on this later).

An interesting point raised in the report was that, “…the discount rate used in the valuation of liabilities should be a low-risk rate, ideally as low as the rate on Treasury bonds.” In a Show-Me Institute Policy Study, Andrew Biggs also urged state pensions to use a low-discount rate in valuing their liabilities (the discount rate is the interest rate that pension plans use to translate future liabilities into current dollars). It’s encouraging to know that other institutes are reaching similar conclusions.

However, it isn’t encouraging that this report found that after using a more appropriate discount rate, the amount of Missouri’s unfunded pension liabilities totaled more than 4 percent of Missouri’s entire economy. As of the end of last year, Missouri’s economy was $258 billion; 4.2 percent of that is $10.8 billion. If the state cannot make up that amount, then you, the taxpayer, are on the hook to make up the difference. Table7.1There are other states whose pensions are in much worse shape than Missouri’s, but our state still faces an economic ticking time bomb. Whether dealing with a grenade (Missouri) or a daisy cutter (Illinois), taxpayers will not be happy to be caught in the blast. The Show-Me Institute has written extensively about how Missouri can start to address its pension problems by shifting to more efficient plans such as defined contribution or cash balance plans. Hopefully, this new report can serve as a wake-up call to policymakers that change is needed.

July 9, 2014

How Much Does A Competitive Transportation System Cost?

Recently, NextSTL began reposting “A World Class Transportation System” by Chuck Marohn. While this recommendation may not hold for future installments, the first of the series deftly describes how the “more is better” mentality drives unsustainable transportation policies. It also points out that projections used to justify new transportation infrastructure projects are often at odds with reality, which we confront in case after case.

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The post shows that in Minnesota (the original focus), the number of vehicle miles driven has leveled off in recent years. This is true in Missouri as well, but some planners have consistently predicted a return to growth, despite low population growth, struggling economies, and increasing fuel prices. Missourians already clock a daily average of 32 miles; even if robust economic growth returns, it is not certain that they would choose to drive much more. Now that less than 3 percent of Missouri workers are carless, one of the largest drivers of traffic growth over the last few decades (more people with more cars) is almost tapped out.

The “more is better” approach to road building is rampant in Missouri, never more so than today. The state just finished a decade of unprecedented spending on its transportation system. Amendment 3 allowed the Missouri Department of Transportation (MoDOT) to spend billions improving the state’s highways and bridges, and the federal Stimulus Act pumped money into roads and everywhere else. Transit, too, has seen massive investment, with more than $2 billion in new capital funding from 2000 to 2012. After all this, we are told that Missouri’s infrastructure is crumbling and that we do not spend enough. What’s clear is that more money spent does not equal money well spent, and that the time has come for Missourians to rethink what an economically sound transportation system should look like.

July 8, 2014

The Math Does Not Add Up For Murky Kansas City Streetcar Deal

In a previous post, we commented on how officials from Kansas City and the Missouri Department of Transportation (MoDOT) are hammering out a deal to divert $144 million of the proceeds from the proposed statewide sales tax to the Kansas City streetcar. According to the Kansas City Business Journal and the Kansas City Star, the plan will cap the sales tax increase in downtown Kansas City at 1 percent (0.25 percent for the streetcar Transportation Development District, or TDD, and 0.75 percent for the proposed statewide sales tax).

Source: Kansas City Business Journal

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Speaking of bad math, the cost of the projects in MARC’s chart (above) adds up to $800.4 million, not $775.7 million. So what’s getting cut? Does anyone check these things? 

On the surface, that sounds great for residents of downtown Kansas City (if not elsewhere). Previously, they were asked to pay a 1 percent higher sales tax to get the streetcar expansion. Now, they still pay 1 percent more, but they get other road and transit projects that state taxpayers fund, in addition to the streetcar expansion.

Haven’t seen a deal like that since Billy Mays died. But wait, there’s more!

Actually, the math for that “swap” does not work. The TDD’s 1 percent sales tax was supposed to bring in approximately $30 million a year. If the city reduces that rate to 0.25 percent, it will create a funding gap of almost exactly $210 million. That’s the reason the city was originally asking for $210 million; it was not some random number (although the city is not beyond doing that).

Drop the amount that streetcar gets from the state to $144 million, and a $65 million funding gap opens up. And remember that the original plan already had a $31 million unresolved budget gap. That leaves almost $100 million up in the air, ready to come crashing down on Kansas City taxpayers. Unless there is some other very large source of funding for the streetcar, the TDD sales tax cannot be held to 0.25 percent. It would need to rise to about 0.50 percent to maintain adequate funding (but still not addressing the initial $31 million shortfall).

The underlying problem is the incredible expense of building a streetcar system. Even if the federal government and Missouri taxpayers cover massive portions of the streetcar’s cost, there’s still a significant burden for residents in downtown Kansas City. Residents in the proposed TDD, Kansas City, and state will have to decide whether the streetcar is worth it.

July 7, 2014

Kansas City’s Murky Streetcar Deal Goes Public

During the last couple of weeks, we have commented about the developing story of the closed-door dealings between Kansas City officials and the Missouri Department of Transportation (MoDOT) regarding the future of the streetcar and the proposed 0.75 percent statewide transportation sales tax. We also have pointed out how this process arbitrarily discards the regional priorities that a transparent public process created. Both of these terrible transportation policies are on the Aug. 5 ballot, so naturally Kansas City officials were worried that a whopping 1.75 percent increase in the sales tax for downtown Kansas City might end in mutual defeat.

Kansas City officials cooked up a plan that would make the tax increase a more palatable 1 percent in downtown Kansas City. They proposed a “swap” that would cap the streetcar’s Transportation Development District (TDD) sales tax at 0.25 percent on condition that the 0.75 percent sales tax passed (a total tax increase of 1 percent). In return, they called for $210 million to be diverted to the streetcar to make up for lost revenue. As we noted, that incredible amount of money could only result in virtually no money for other transit improvements or cuts to road funding. The media in Kansas City, despite ample evidence of a burgeoning deal, did not report on the story until the day before the long Fourth of July weekend.

The Kansas City Business Journal finally reported on July 3 that a deal was in the works, with $144 million going to the Kansas City streetcar, accompanied with sharp cuts to other transit and pedestrian improvement projects. That means about 18 percent of all regional transportation funds will be diverted to a questionable development scheme in downtown Kansas City, should the transportation sales tax pass.

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Both the Business Journal and the Star reported that the plan to cap the downtown tax increase at 1 percent is part of the deal, even though simply arithmetic makes this simple “swap” impossible (as a future post will detail).

This murky deal is the worst type of policy making. The “swap” essentially makes the streetcar policy and the transportation sales tax more politically palatable to those living in downtown Kansas City by making state taxpayers unwittingly pay for a massive share of the streetcar. This is the type of bargain that is only necessary because the state and Kansas City plan to spend huge sums on wasteful “transportation” projects, and only possible because a sales tax means that who pays has nothing to do with who benefits.

July 2, 2014

Give Tax Cuts A Chance

Taxes IconPerched atop his ivory tower, Paul Krugman, a Nobel Prize winning economist, has declared that the tax cuts enacted by the Kansas legislature in 2012 are a failure. Writing in The New York Times, Krugman avers that “the Kansas debacle shows that tax cuts don’t have magical powers” and that “faith in tax-cut magic isn’t about evidence.” Is the all-knowing economist correct?

(As an aside, it was Mr. Krugman, writing in The New York Times in 2011 who stated that “the V.H.A. [Veterans' Hospital Administration] is a huge success story, which offers important lessons for future health reform.”)

Mr. Krugman’s predictable protestations notwithstanding, there actually is a significant body of empirical evidence finding that, on average, states and countries with lower tax rates tend to grow faster. (See articles in this SMI study.) While economists, like any other group of scientists, debate their findings, there is real-world evidence to believe that reducing taxes can improve the economic lives of a state’s citizens.

Every principles of economics student, even those using Mr. Krugman’s textbook, learns that if you wish to reduce an activity, tax it. Since income taxes are derived from working, basic economic theory predicts that higher income taxes will reduce people’s incentive to work more hours. At the extreme, tax me 100 percent of my income and I’ll just stay home, thank you. So, lowering tax rates in income should reduce this disincentive to work.

Mr. Krugman does not seem to think that lowering taxes matters. The story that Walgreens is contemplating moving its headquarters to Switzerland to lower its tax burden belies that notion. Even if you find this proposed move disturbing, you cannot ignore the simple fact that Walgreen’s likely would not consider relocating if taxes were equal in the two countries. Tax rates really do matter in making economic decisions.

There is no denying the fact that since the Kansas legislature enacted the tax cut in 2012 (it became effective in 2013), the state’s economy has yet to achieve the economic take-off that some promised. Job growth is slower than the national average and, due partly to income shifting in response to the fiscal cliff, the drop in tax revenues in 2014 compared to 2013 has been larger than predicted.

Changes in the tax code cannot be expected to reverse years of weak economic performance overnight. Kansas, like many other states, is still recovering from the effects of the Great Recession. Like most medicines, changes in tax codes should not be expected to deliver immediate cures.

Before Mr. Krugman is anointed as the Cassandra of tax cuts, let’s give the experiment time to take hold. Time will tell, but basic intuition and existing evidence predicts that Kansas’ economic future is brighter today than it would have been without the tax cuts.

June 30, 2014

Vetoes, Vetoes, And More Vetoes

There has been a lot of consternation in the Missouri Legislature about Gov. Jay Nixon’s vetoes and withholds (withholds differ from vetoes in that withheld money can be released if state revenues are available later in the year, while vetoed funds are just not spent) from the fiscal year 2015 budget. Many legislators are upset with the governor for claiming that their budget is out of balance while his own executive budget was larger than the one the legislature passed. To be fair, a lot of the difference is due to the governor’s budget including funds for expanding Medicaid, but the governor’s budget also was relying on revenue growth that was higher than even the legislature was expecting.

All that said, there actually is a lot to like in these vetoes. For example, the governor vetoed more than $7 million in funds for biodiesel incentives. The state should be eliminating these types of incentives and it is a good thing that Gov. Nixon is cutting back on them. The governor also is vetoing $2 million in funding for the Rolling Stock Tax Credit. The Show-Me Institute has published numerous writings about the desirability on cutting back on these types of tax credits. It is good to see Gov. Nixon trying to do so.

Gov. Nixon’s vetoes could go further. For example, he withheld $5 million from efforts trying to lure the Republican National Convention to Kansas City. There has been a lot said about using government money to try to lure big events, but in this case, the money isn’t necessary because the Republican National Committee has already narrowed its search down to Cleveland and Dallas. Gov. Nixon should have simply vetoed this specific appropriation.

There was a lot to like in the governor’s vetoes. If the legislature was more disciplined, many of the vetoes would not have been necessary. Hopefully, state spending can be controlled going forward.

June 23, 2014

Missouri’s Airports Don’t Need Sales Tax Money

In August, Missourians will decide whether the state should increase the sales tax by 0.75 cents to fund transportation projects. Because the sales tax would raise money without relation to how much people use a particular type of transportation, some localities have proposed wasteful projects with little transportation merit. Among these questionable destinations for sales tax money are 16 airport projects.

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Airports in Missouri already are self-sufficient and/or receive significant federal and state funds. Missouri’s largest commercial airports, Lambert-St. Louis International, Kansas City International, and Springfield-Branson, are capable of financing any reasonable capital improvement projects without aid. In addition, these airports receive federal money through the Airport Improvement Program and the Passenger Facility Charge. Missouri’s largest airports do not need sales tax money.

Missouri’s smaller commercial airports, though not self-sufficient, already receive significant local, state, and federal aid. For instance, Columbia Regional Airport received $8 million in federal grants in the past three years and is slated to receive an extra $350,000 in the next five years from state airport grants. This is on top of a regional revenue guarantee scheme to entice airlines to fly out of Columbia without risk of financial losses. Joplin’s airport received $13 million in federal grants in the past three years and expects $10 million in state aid over the next five years. It also is a beneficiary of the Essential Air Service (EAS) program, which is essentially federally subsidized airline service.

Eleven of the proposed sales tax recipients are general aviation airports. While they may serve a useful purpose to local businesses and recreational fliers, these airports already are heavily subsidized. For example, Camdenton Memorial Airport is a small airport that plans to spend almost $826,443 in the next year with less than $100,000 of user-generated revenue. The remaining funds will come from the city coffers and federal or state grants. Without any sales tax money, this small airport with only 30 based aircraft is scheduled to receive $5.85 million in aid.

Simply put, like much of Missouri’s transportation system, airports already have effective funding mechanisms. For the smaller airports, it is probably too effective, unless you love enormous subsidies for small assets.

The fact that cities and counties plan to spend general sales tax money on Missouri airports is another reason the proposed Amendment 7 is terrible public policy.

June 16, 2014

User Fees Are A Better Way To Fund State Roads

In his latest Kansas City Star column, Dave Helling argues that it might be correct that everyone should pay for Missouri’s highways and bi-ways, not just the people using the roads. His argument is that we all benefit in some way, therefore, all of us should pay.

This argument is doubly flawed. First, in a user-pay system, the individual who doesn’t drive still pays for the road through the cost of the products he or she buys. This is factored in as companies have to take into account the cost of gas used to ship their goods; that cost varies based on the amount of highway required to move that good. Paying for the highway through user fees places a large direct cost on shipping companies and frequent drivers (who benefit greatly) and a tiny cost on those who do not drive but purchase shipped goods. Additionally, by paying for the shipped good based on its actual transport costs, user fees promote long-term economic prosperity because they encourage local products and efficient supply chains.

Second, all goods, services, and factors of production have indirect benefits. Take the example of a sandwich shop. Sure, those who eat the sandwiches benefit the most from the shop, but we all benefit from the new employment, the productivity of well-fed customers, and neighborhoods with vibrant businesses. So why make shop customers pay? Missouri could open sandwich shops, give the food away, and support the stores with general taxes.

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The logical conclusion here is a planned economy, which Helling and others making this argument would not support. But placing aside the polemics, there are good economic reasons that disconnecting the user of a good from the cost of that good is bad policy. Governments will have no way of ascertaining the economically efficient supply of highways for drivers (much less indirect benefits), likely resulting in a highway system that is simultaneously wasteful and inefficient. The lack of user fees on driving will subsidize the activity, leading to more waste and negative externalities such as congestion, more urban sprawl, and ultimately higher costs for the Missouri Department of Transportation (MoDOT).

Some goods and services (police, public parks) that the government provides may require general taxes for support. However, where possible, it is both fair and economically efficient for users to pay. That is the basis for Missouri’s state road spending right now. To change this model away from user fees will unfairly subsidize heavy road users and damage Missouri’s economy in the long run.

June 6, 2014

Ballpark Village Crushing It . . .

It seems that state and local development officials hit a home run when they decided to subsidize the construction of Ballpark Village. Yet, as I mentioned in my post last month, other local businesses feared that while Ballpark Village would do well, they would suffer losses. Their fear is now turning into reality.

Ballpark Village 2

As reported in the St. Louis Business Journal, bars and restaurants are taking serious hits to their sales. For example, Paddy O’s, a popular bar for pre-game and post-game activities, is expecting to draw $1.3 million in revenue this baseball season, a far cry from the $2.5 million they received last year. The Flying Saucer, another restaurant located near Busch Stadium, is looking at a 20-25 percent drop in business. These reports are anecdotal, but they fall in line with what economists find when they examine subsidies for similar types of developments, such as sports stadiums. While the subsidized development might do well, in many cases, it comes at the expense of other businesses in the area. Little to no actual wealth is actually created.

The government should not be subsidizing private developments. Even the ones that actually do well, such as Ballpark Village, just end up shifting consumer spending from one location to another. Instead, the government should be focusing its spending on areas that can benefit the public at large, such as public safety.

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