Follow-Up Post: Suggestions to Address the Issues Surrounding Economic Development Incentives

By Dr. John Urkevich, Executive Director

In a recent post (see Economic Development Incentives and The Impact on Public Schools), I provided information on a study commissioned by CSD of Greater St. Louis and other education organizations to gauge the impact of Economic Development Incentives on funding for public education.

CSD acknowledges the need for development incentives in some instances (e.g. to help rehabilitate truly distressed areas or to provide development incentives to assist in retention or attraction of jobs that might otherwise go to other states).

The reality, though, is that these tax incentives are being used for many other purposes with less overall community benefit.

As promised, the following are some suggestions offered by CSD to address the issues surrounding the use of Economic Development Incentives. These suggestions were shared with the Missouri Legislature’s Joint Committee on Tax Policy.

Suggestion Number 1
Differentiate between uses: Generally it is no more difficult to acquire tax incentives for a retail store or housing development than it is for a new manufacturing plant. Even though such uses generate increased economic activity for that local site and maybe even for a small geographic area, that economic activity may produce losses for nearby areas—such that the overall community benefit is nothing or negligible.

Consider making approval of some types of projects such as retail more difficult to approve than others such as industrial. Furthermore, the amount of tax incentive could be less for these marginal value projects than others.

Suggestion Number 2
Some projects generate new or improved public infrastructure, such as improved roads. Others divert almost all funds to private purposes. Some projects have high soft costs (attorney, accounting, bond counsel, consultants, architect, etc.) whereas others devote larger percentages of the funds to producing values that can ultimately produce revenue. Those that produce infrastructure of value beyond the immediate area of the site should be treated more positively than those which don’t.

Consider establishing a hierarchy of uses. In other words, reduce the percentage of property taxes/sales taxes, etc. for costs that go into soft costs and private use compared to what is available for costs of improved public infrastructure.

Suggestion Number 3
Generally a single political subdivision or its appointees (e.g. a municipality) can approve a project without the support of any other governmental entity, since they are assigned the majority of the votes. Of course, they are motivated to do what is best for the municipality, but without regard to the county, library, junior college, school, etc. and without regard to the neighboring municipality.

Consider changing the approval structure such that multiple parties must be convinced of the value in order to proceed, and the broader the area involved in the approval, the less parochial the decisions are likely to be.

Suggestion Number 4
These programs have no cap. The amount of tax dollars involved can grow without limit—and most are growing exponentially.

Consider that for many of the state’s tax incentives, the total benefits given are limited by statute or appropriation. This assures that the projects with marginal benefits are excluded. Consider adopting a similar oversight and limitation method for local tax incentives.

Suggestion Number 5
There is an imbalance of what incentives are provided. For many municipalities the property tax is a minor source of revenue, outpaced by sales taxes and utility taxes and sometimes even fees and fines. Therefore, when a city abates/diverts property tax revenue, the costs are felt by others.

Aside from being more selective and less parochial in the approval process, you might also consider requiring that a greater percentage of the benefits come from sales taxes and less from property taxes.

Cooperating School Districts of Greater St. Louis will continue to work with its member school districts to help educate the public about the impact Economic Development Incentives have on local schools.

Economic Development Incentives and The Impact on Public Schools

By Dr. John Urkevich, Executive Director

On August 20, I testified before the Missouri legislature’s Joint Committee on Tax Policy, offering information and suggestions related to tax abatements and their impact on public schools. The testimony was a first in what will be a consistent effort in the coming months to shed light on this important topic.

In 2007, CSD joined a number of educational organizations to commission a study on the use of economic incentives in Missouri and attempt to gauge the impact of these incentives on funding for public education. The study, conducted by Doolin Ward LLC of Kansas City, focused on four types of incentives: Chapter 353, Chapter 100, Enhanced Enterprise Zones (EEZ) and Tax Increment Financing (TIF) during 2007. To become familiar with the types of incentives, click here.

Some key findings include:

• In 2007 alone, more than $140 million in tax revenues were lost to public schools as a result of more than $3 billion in assessed valuation being diverted or abated through economic incentives. Most public schools in Missouri are heavily dependent upon property tax revenue to fund educational programs. And while it is easy to argue that many of the developments would not have moved forward without the economic incentives, this is not always the case. Regardless, the use of economic incentives should not benefit one Missouri community at the expense of another Missouri community – or at the expense of public services.

• Economic Development Incentives have been used in 73 of 114 plus counties in Missouri. Under the current system, school districts are the primary contributors and cities are generally the ones that control the granting of tax abatements or diversions. This is happening all across the state and the momentum is building to grant more and more tax relief to developers.

• CSD believes that as a result of the use of economic development incentives, a significant shift in tax burden may be occurring that puts less responsibility on commercial property at the expense of residential taxpayers and small businesses. The chart below illustrates this point.

Between 1985 and 2007 in St. Louis County, residential assessed valuation increased by 10 percent of the total while commercial assessed valuation decreased by 5 percent and total personal property decreased by 5 percent. The blue slope line (residential) on the chart (see above) shows an increase over time while the red slope line (commercial) shows a decrease. This may be one of the largest “silent” tax increases on homeowners and small businesses in the State of Missouri ever.

While I have provided just a quick glimpse into this study, more information will follow soon. Tax incentives are a tool of choice for many economic development organizations. I agree that economic stagnation is not in the best interest of public education; however, proper balance must be the goal.

We’ll blog more on this topic and include suggestions for improvement.