New article on tax increment financing in Missouri shows impact of KS/MO border war

After several years of work, my colleague Susan G. Mason (Boise State University) and I have published a new article on TIF in Missouri, specifically in the St. Louis and Kansas City metropolitan areas. "Exploring Patterns of Tax Increment Financing Use and Structural Explanations in Missouri's Major Metropolitan Regions" appeared in the July 2018 edition of the HUD journal Cityscape, downloadable for free here. We omitted the two cities from our earlier statistical analysis (in the paywalled Economic Development Quarterly, May 2010) because they are much larger than any other Missouri city and use TIF far more than any of them, making them statistical outliers.

In our earlier article, “Tax Increment Financing in Missouri: An Analysis of Determinants, Competitive Dynamics, Equity and Path Dependence,” we found that early adopters of TIF tended to be heavier users of TIF far past the first TIF adopted, that TIF as used in Missouri exacerbated inter-jurisdictional inequity (cities with higher poverty rates were less likely to use it than cities with lower poverty rates), and we found strong evidence for competitive dynamics in the use of TIF: Cities that were adjacent to a TIF-using city were two and a half times as likely as average to use TIF themselves, and implement more TIF projects.

The new article is an exploratory study, as it is impossible to generalize from two cases. But one thing we established clearly, based on complete data from 1988 to 2013 for St. Louis, and from 1988 to 2012 for Kansas City, is that Kansas City's tax increment financing projects are marked by much higher aid intensity (the EU term that equals subsidy/investment) than those of St. Louis. Indeed, even excluding 2009 in St. Louis, which was marked by several multi-billion projects with low aid intensity (and at least in the case of Northside Regeneration, had substantial state funding not reflected in Exhibit 4 of the article), the overall average aid intensity, ex-2009, is 17%.

By contrast, in Kansas City, the average aid intensity of the city's TIF projects comes to a whopping 36%,* more than twice as much. Everyone we interviewed on the question considered that there is much greater competition for investment with Kansas than with Illinois in the two metro regions. The difference in aid intensities is consistent with this thesis.

These points take on renewed importance as Missouri's Governor Mike Parson is convening the Governor's Conference on Economic Development in Kansas City this week. As you may recall, Missouri and Kansas came close to a truce in the border war in 2016, but it collapsed when Governor Sam Brownback proposed legislation that did not match what Missouri passed in 2014. Since Missouri has a new governor now and Brownback will be replaced in 2019, there is renewed optimism that a binding halt can be brought to the use of state subsidies in the border war.

The Governor's Conference will include a panel Friday on the border war in which I'll take part. We will discuss the background, data on the cost of the border war, and a potential solution. I will also point out that TIF is impacted by the border war, too. It will be great to try to persuade lawmakers and the governor.

Unfortunately, the cost to attend is prohibitively expensive, but I will report back next week.


* The mandatory typo occurs in Exhibit 3, Kansas City, in the line summarizing 1988-2006. First, the correct amount for total TIF reimbursement is $3,527,420,262, excising the stray "1" in the millions area. The correct aid intensity for that period is 36%, not the 21% listed and probably copied from the previous line.

Basics: Tax Increment Financing Subsidies

Last week I made a presentation to the Colorado Assessors Association on tax increment financing (TIF) subsidies. With the organization's permission, I am sharing the PowerPoint presentation for my talk, as well as adding this introduction.

The talk begins by putting TIF in the context of subsidies generally. As a subsidy, TIF is subject to the three main potential drawbacks of their use: Inefficiency, inequality, and environmental harm. These differing harms often call forth coalitions that prove the adage that "Politics makes strange bedfellows." One example was a joint appearance by Ralph Nader, Rep. John Kasich, and Grover Norquist in 1997. I was in a similar coalition in 2003 fighting a TIF that would have leveled downtown O'Fallon, Missouri, then the fastest-growing city in the state. Our leadership included people from liberal Democrats to future Tea Party members. Similarly, the mayor and TIF-supporting council members were bipartisan. It's easy to find single-party governments that abuse subsidies, too, whether it's now-Governor Kasich offering $400 million to move Sears from Illinois, or Democratic stronghold Kansas City, MO, offering multiple multi-hundred million dollar TIFs.

I then go on to discuss the legal particularities of TIF, which gives it another level of controversy. Tax increment financing typically allows governments to capture the property tax revenue of other districts (something especially hard on school districts), and these revenue fights are matched by the intense hatred the use of eminent domain usually brings forth.

The very first state to adopt TIF (in 1952), California axed TIF in 2011 due to its budget crisis, caused in part because the state reimbursed property tax revenue that school districts lost to TIF. Last year, a new version of TIF was passed, but it completely removes the option to take money from school districts, and lets other taxing jurisdictions opt out as well (see below).

Also of note in TIF history is the constant pressure to expand the locations able to use it (i.e., progressively less economically deprived areas want it in their subsidy arsenal) and the gross overuse of TIF for retail projects. As I mention in the link, St. Louis-area municipalities gave $2 billion in retail TIF from 1990 to 2007, creating all of 5400 jobs, no more than we'd expect on the basis of the area's income growth. That's why the relevant slide says $2 billion = 0 jobs.

Thanks to Karen Miller of the CAA for inviting me and agreeing to let me post the PowerPoint.

Cross-posted at Angry Bear.

Discussing Tax Increment Financing on TV

I recently appeared on a local public access TV show, "Conversation with Lee Presser," discussing tax increment financing and European Union subsidy control regulations. It's a great format, just an almost 30-minute discussion without interruption, which allowed me to explain the problems with TIF as it has been used in Missouri in great detail. We also had a shorter conversation about EU regulations to control investment incentives and other subsidies, which covered the basics of transparency, maximum subsidy rates that vary by how rich the region is, and the reduction in those rates for large projects. Many thanks to Lee Presser for having me on. If you are interested in economic development issues, I think you will enjoy the program.

"A Conversation with Kenneth Thomas - UMSL Professor of Political Science - 10/23/12"

The Folly of Subsidizing Retail

Next to giving subsidies for a company to relocate, or to prevent it from locating, the lease defensible common use of investment incentives is for retail. Why should this be? Let me count the ways.

Most importantly, retail is a derivative economic activity, as David Cay Johnston says. A location's population and income determine how much retail it can support. For this reason, the apparent job creation of retail subsidies is completely phantom, as sales and jobs are simply transferred from older stores to newer locations. The best proof of this is contained in a groundbreaking study by the East-West Gateway Council of Governments, the regional planning agency of the St. Louis metropolitan area.

East-West Gateway's study found that from 1990 to 2007 (i.e., before the financial crisis), the over 100 local governments of the St. Louis metro area had collectively provided over $2 billion in subsidies for malls and other retail facilities. Most of this was in the form of tax increment financing, a popular local subsidy tool in both Missouri (to the tune of $339 million annual average from 2004 to 2006; see p. 7 in the source) and Illinois. Yet, by the end of this 17 year period, there were only 5400 more retail jobs in the metro area than at the beginning. This would total $370,370 per job if the jobs were created by the subsidies; however, it is more likely that they are simply due to income growth in the region. (Note to reporters: This would be a great study to replicate in your area.)

Second, retail jobs are not all that good. Here is a custom graph from FRED showing the nominal wage trend for all production and non-supervisory workers (blue) and for production and nonsupervisory workers in retail (red). As you can see, the wage gap has been increasing for 40 years. As of September, the exact figures were $13.86/hr. for retail vs. $19.81/hr. for all private industries. Moreover, given that the overall total as shown in the graph actually represents a decline in real wages, the decline in retail is much more pronounced.

In addition to the low pay, retail workers rarely get benefits. According to a new report, only 29% of retail workers get health care benefits, even though half of retail employees have college degrees and 70% are over age 24.

Third, retail does not generate much secondary employment, the way manufacturing does. It does require warehouse jobs, but those generally get subsidized, too, as in the case of Wal-Mart.

The bottom line, then, is simple. Retail is a derivative economic activity that generates almost no new spinoff activity, and local governments (except perhaps in poor areas with food deserts) should not subsidize it. As we have seen in St. Louis, local governments have proven perfectly capable of wasting billions of dollars for temporary gains in sales tax revenues. It's time to stop the madness.

How bad can "corporate socialism" get? David Cay Johnston gives us a glimpse

David Cay Johnston has a new column up today showing us some of the worst outcomes from corporate subsidies: incentives for retail development.

Johnston analyzes the case of a proposed redevelopment of the nearly-shuttered Medley Centre Mall in Irondequoit, Monroe County, New York, where developer Scott Congel is seeking a $250 million sales tax TIF. Originally a $260 million project, Congel now says he will invest $750 million to build a hotel and condos as well.

Johnston points out that retail is practically the worst thing government can subsidize, because it is almost entirely derivative of a region's population and income. If income falls (actually, even if it stays the same), the new mall can only succeed if it takes sales away from other existing outlets. And it's even worse than Johnston says, because retail jobs tend to have relatively poor pay and benefits.

The best study on this subject was conducted by the East-West Gateway Council of Governments, which is the regional planning agency for the St. Louis metropolitan area. This report found that from 1990 to 2007, local governments in the region had spent $2 billion in retail subsidies, repeatedly shifting the location of sales but generating no tax growth beyond the area's income growth. This comes to an astonishing $370,000 per net job if we believe that the incentives created the jobs, which is unlikely since sales growth did not exceed regional income growth. The cost per job is actually infinite.

Johnston points out more outrageous aspects to the Medley Centre proposal. Instead of conducting its own analysis of the economic impact of mall redevelopment, the developer commissioned and paid for a report, which "found" that the subsidized mall would see its sales grow from $30 million a year to $420 million per year. Johnston, by contrast, found that real income had fallen by $2.5 billion (13%) from 2000 to 2008 in Monroe County, and rightly argues that it makes the 14-fold increase in sales predicted "unlikely." Similarly, Johnston found that hotel demand in Monroe County had been flat for two decades.

Johnston also reviewed building costs for condos and hotels, finding that the $750 million price tag was "wildly inflated." As he points out, even if the figure was right, the subsidy has an aid intensity (subsidy divided by investment) of 1/3, whereas if the investment is only $260 million as earlier promised, the aid intensity comes to 96%. This would rival the 98% aid intensity on the Electrolux manufacturing plant being built in Memphis, itself an absurd level of subsidization, but at least for manufacturing rather than retail jobs.

The Medley Centre project has not yet received final approval, but it is an excellent example of all that is wrong with subsidized retail development. It won't create any new net jobs, the jobs at the mall will be low quality, the economic "analysis" was bought and paid for by the beneficiary, and the cost will be outrageously high. Let's hope there is some way it may yet be stopped.

Colorado Governor Hickenlooper Vetoes Sales Tax TIF Expansion

Leigh McIlvaine at Clawback reports that Colorado Governor John Hickenlooper has vetoed SB 124, a bill that would have expanded the use of sales tax for tax increment financing of tourist projects under the Regional Tourism Act. While subsidy reformers in the state have so far been able to defeat sales tax TIF at the local level (unlike, for example, Missouri), the Regional Tourism Act allows this at the state level, but only for two projects per year expected to bring in tourists from out of state -- not that interstate sales tax competition is such a great use of subsidy dollars anyway.

The bill would have made it possible to approve six projects in a single year. This would weaken oversight of the program since all the projects would have been approved at one time. As McIlvaine points out, the bill was especially controversial because Gaylord Entertainment in Aurora (near Denver International Airport), already heavily subsidized, had applied to receive a further subsidy through the Regional Tourism Act. Gaylord has already lured a major convention, the Western Stock Show, to relocate from Denver.

Gaylord, already in the top 25 subsidies in the U.S. since 2000 (a revised version of my paper on this is almost ready to go back to the journal) at $300 million, is demanding that the state provide the full $85.4 million it has requested under the Regional Tourism Act or the $824 million project will not be built at all. This represents a nominal aid intensity of 46.8% of the investment and, according to Denver Business Journal, is more than twice as high a subsidy as Gaylord has ever received. The Colorado Economic Development Commission must make a decision on this and five other applications for the two awards on May 18.

The Governor's veto ensures that only two projects can be approved this year and allows him to "keep limits on the on the new tax-incentive program before the state committed too much money on an annual basis to tourism projects," as the Denver Business Journal said Tuesday. The story notes that the bill only passed the House of Representatives by a 37-27 vote. This guarantees that the veto will not be overridden.

Though it was a bad move to approve state sales tax TIF at all, Hickenlooper's veto prevents it from becoming a worse problem and slows the likely push to increase total subsidies under the program and weaken the targeting inherent in authorizing only two projects per year. For this, he is to be commended.

California, Birthplace of TIF, Axes It

One of the many innovations California has given the country is that it was the first to adopt tax increment financing, or TIF. TIF is an extremely popular local subsidy tool that is funded through the anticipated increase in tax revenues (the "tax increment") resulting from a development project. TIF projects sometimes issue revenue bonds against this expected revenue to finance the project, and in some cases projects are financed on a pay-as-you-go basis as the anticipated revenue materialize over the life of a project.

On February 1, however, TIF came to an end in California, 60 years after its introduction there, as legislation abolishing the redevelopment agencies that used TIF came into effect. By 2010, there were approximately 425 redevelopment agencies statewide overseeing about $8 billion of tax increment per year. As far as I know, this exceeds TIF in the rest of the country put together.

How did this happen? When Governor Jerry Brown was elected in 2010, he inherited a state budget deficit of over $20 billion. He decided, as I had recommended for Missouri in 2009, that the huge amount of money going to subsidies and debt service should be returned to state and local governments instead, as a way of paring down the state's deficit. As KABC reported, over $1 billion a year would be returned to school districts, and $500 million annually to local governments.

The abolition of redevelopment agencies was passed primarily with Democratic votes (Contra Costa Times 3/16/11, via Nexis subscription service), but it had the support of Republican assemblyman Chris Norby of Fullerton, who had been an early critic of the agencies in the 1990s (the 2006 version of his publication, "Redevelopment:  The Unknown Government" is here).

While other states have been spurred by the budget crisis to cut some of their subsidies to business, California has gone the farthest by eliminating tax increment financing. I have argued before that subsidy cuts could offset a large part of state and local budget deficits, and it's heartening to see it happen in the birthplace of TIF. Let's hope we see more of this before the year is out.

Mississippi's Eminent Domain Reform Initiative Passes with 73%

While national attention focused on the defeat of the "personhood" initiative in Mississippi on Tuesday, voters there approved Initiative 31, an amendment to the state constitution that bans the use of eminent domain to transfer property from one private owner to another (h/t Jim Roos, Missouri Eminent Domain Abuse Coalition) with 73% of the vote.

Eminent domain, where government takes private property for public use, is regulated by the Fifth Amendment to the Constitution, which says, "...nor shall private property be taken for public use, without just compensation." The issue of what constitutes a "public use" has been expanded by court decisions over several decades, with the U.S. Supreme Court's 5-4 ruling in Kelo v. City of New London that economic development qualifies as a public use, even when the property is being transferred to a different private owner.

Eminent domain is heavily entwined with economic development subsidies, in particular tax increment financing. Removing "blight" is often a reason a government can resort to eminent domain, and some variant of blight must be shown in most states to allow the use of tax increment financing. I argued in Competing for Capital that fighting subsidies often attracts "strange bedfellows" coalitions, because they can be criticized on efficiency, equity, and environmental grounds, potentially pulling opponents to subsidies from across the ideological spectrum.

For similar reasons, we see unusual political coalitions fighting private-to-private eminent domain. For one thing, these cases usually involve subsidies, as did Kelo. People understandably don't want to lose their homes, but they are especially incensed if they are losing their homes to enrich a company or private developer. Moreover, such cases can heavily impact minority communities (if property values are lower there) and small businesses (especially if compensation only takes property value into account, but not the value of the ongoing business). In Mississippi, the Southern Christian Leadership Conference and the National Federation of Independent Businesses filed a joint amicus brief with the state supreme court to keep Initiative 31 on the ballot, represented by the libertarian Institute for Justice. Talk about strange bedfellows!

This coalition can break down, however. As Ilya Somin at the Volokh Conspiracy points out, when eminent domain reform is paired with other measures, it often fails. He gives the examples of Proposition 98 in California, which included rent control restrictions, and Proposition 90, which included "regulatory takings" provisions (these limit government ability to adopt new regulations). Understandably, those additions saw off the liberal wing of the eminent domain reform coalition. "By contrast," he says, "all twelve 'clean' anti-Kelo measures have passed, usually by lopsided margins..."  The Institute for Justice, however, does push "regulatory takings" provisions. To its credit, it did not demand them as a price for defending Initiative 31 in court.

With the passing of Initiative 31, Mississippi has given subsidy opponents leverage as well as protecting property owners from having to transfer their property to private developers, which often translates into an additional subsidy.

$100 million Incentive Packages: US 13, EU 5. Have I Missed Any?

I am reworking my list of the top 25 subsidy packages in the U.S. for a new article I'm working on. In my book, Investment Incentives and the Global Competition for Capital, I used the top 25 projects from 1999 to early 2008. For the article, the table will cover 2001 to the present. In addition, I am interested in uncovering all incentive packages of $100 million or more since early 2008. In the European Union, there are only five $100+ million incentive packages in the last three years. (Source: European Commission, search for cases with decision date after 1/1/2008 and Primary Objective of Regional Development.)

In the United States, by contrast, state and local governments have given at least 13 packages with a nominal subsidy value of $100 million or more since early 2008. (As with the book, I will be calculating their present value, because that is what the European Union does; this allows for better comparability of subsidies and, besides, present value is the more meaningful figure.) Before I send this article off, I want to make sure I haven't missed any, which is why I am asking for your help. Please let me know if there are any projects I've missed. I will, naturally, acknowledge you in the article.

First, here is a corrected version of the table that appeared in the book. In the course of writing a report, not yet published, for the North Carolina Budget and Tax Center, I discovered that our estimate of Google's subsidy in North Carolina was too low. It is corrected here.

Company	Year	City	State	Present Value
Boeing	2003	Everett	WA	$1,984,400,000
Advanced Micro Devices	2006	Malta	NY	$1,118,000,000
ThyssenKrupp	2007	Mount Vernon	AL	$734,304,000
Scripps Research Institute	2003	Palm Beach County	FL	$566,500,000
IBM	2000	East Fishkill	NY	$533,083,333
Volkswagen	2008	Chattanooga	TN	$450,139,048
Kia	2006	West Point	GA	$353,083,333
Toyota	2006	Blue Springs	MS	$291,634,000
Nissan	2000	Canton	MS	$289,666,667
Sematech	2007	Albany	NY	$269,444,444
Hyundai	2002	Montgomery	AL	$233,936,363
Ford	2006	Detroit	MI	$219,780,000
Toyota	2003	San Antonio	TX	$218,100,000
International Sematech	2002	Albany	NY	$175,636,364
Dell	2004	Winston-Salem	NC	$174,230,401
Goodyear	2004	Akron	OH	$173,099,088
Samsung Austin Semiconductor	2006	Austin	TX	$171,244,444
Eli Lilly	1999	Indianapolis	IN	$150,916,667
Marathon Oil	2007	Detroit	MI	$148,800,000
Honda	1999	Lincoln	AL	$144,221,818
Google	2007	Lenoir	NC	$140,592,593
General Motors	2000	Lansing	MI	$138,844,542
Alenia/Vought	2004	Charleston	SC	$133,133,333
Dell	1999	Nashville	TN	$132,373,334
Hemlock Semiconductor	2007	Hemlock	MI	$124,226,666

Source: Investment Incentives and the Global Competition for Capital and author's calculations

While researching this new article, it occurred to me that Kansas City, MO, has given several tax increment financing (TIF) subsidies that exceed the lowest value in this table. In fact, four Kansas City TIFs should have appeared in the table: KC Live, H&R Block, Pershing Road, and Three Trails (source). KC Live, the smallest of these, had a nominal subsidy of $167.9 million. To the best of my knowledge, the EU does not approve subsidies for retail, and I know for a fact that it does not approve them in the steel industry (ThyssenKrupp in the table above, Nucor in the table below).

The following list was begun by identifying the "top projects of the year" for 2008-10 according to Site Selection magazine. Pursuing news stories to determine the incentive package details led to the discovery of several other projects of at least $100 million in nominal subsidy value.

Company          State           Minimum nominal incentive package

AREVA             ID              $276.6 million present value
Nucor                LA             $373 million
Hemlock            MI             $358.4 million
Spirit Aero         NC            $250.9 million
Cerner/OnGoal  KS             $230 million
Hemlock            TN            $200 million
Electrolux          TN             $188.3 million present value
Ford                  KY            $180 million
Boeing              SC              $900 million
Apple                NC            $320.7 million
Xtreme             MI              $100 million
Schott               NM            $130 million
Panasonic         NJ              $102 million

Thus, in the last three years, there have been at least 13 deals for $100 million or more in the U.S. (though the last three may fall below $100 million in present value) compared to just five in the European Union. The deals in the U.S. are larger, too: the largest deal in the EU is for Global Foundries (formerly Advanced Micro Devices) in Dresden, Germany, where EU state aid rules allowed it to receive 211.0 million euros, about $284.9 million. Not only is this dwarfed by what South Carolina gave Boeing, Global Foundries is asking New York State for $1 billion for a new wafer fabrication plant there. As I will argue in the article, new evidence continues to demonstrate that the EU is  successful in reducing the investment incentives granted to mobile investors there, compared to what they get for similar projects in the U.S.

Again, these results are preliminary, but striking. Because of the EU's centralized register of cases, it is more likely that I may have missed 9-figure subsidies in the U.S. than in the EU. Of course, please let me know if I've missed any in either place. Thanks!

Defending Against Relocation Threats with Retention Subsidies -- Paid with Employee Taxes

When companies threaten to relocate, often desperate states and cities will give almost anything to keep them. As I mentioned in a previous column, New York City and Kansas City have been among the larger victims of this dynamic. In his most recent column, David Cay Johnston (now at Reuters) lays out a depressing, newish, way that states are cannibalizing their tax revenues to retain existing businesses: letting companies keep withheld taxes of their employees.

Painful as it feels to have a lot of hard-earned income taken from your paycheck for taxes, a new Illinois law does something Americans may find surprising. It lets some employers pocket taxes for 10 years.

You read that right -- in Illinois the state income taxes withheld from your paycheck may be kept by your employer under a law that took effect in May.

As Johnston shows, these deals were almost entirely for retention of existing facilities. Motorola, Chrysler, Ford, and Mitsubishi were not required to create any new jobs, while Continental Tire has to create 400 new jobs. Navistar, however, is getting this subsidy despite the fact that it will lay off 900 of its 3100 current workers. (Note that Illinois did some one-off deals using this tactic before the new law went into effect.)

I mentioned that keeping one's employees' taxes is not entirely new. For example, in Missouri, cities with an earnings tax (St. Louis and Kansas City) can use those anticipated revenues in tax increment financing subsidies. In 2004, Kansas City did just that, giving H&R Block a brand new headquarters building worth $308.4 million, paying $292.3 million of the cost through its TIF (KC Star, March 4, 2004), a more than 94% subsidy! This project was a relocation within Kansas City, under threat of relocation to Kansas.

The threat of relocation of such large projects is a huge one and can generate gigantic windfalls for the companies exploiting their mobility. Ultimately, we need national rules against job piracy so retention subsidies become unnecessary.