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Thursday, July 27, 2017

The City’s Incentive Guidelines Are Toothless. Here Are Some Real Reforms

Posted By on Thu, Jul 27, 2017 at 6:20 AM

click to enlarge Right now, more affluent neighborhoods, like the Central West End, benefit from TIF — at the expense of schools and libraries, argues the author. - PHOTO COURTESY OF FLICKR/PAUL SABLEMAN
  • Right now, more affluent neighborhoods, like the Central West End, benefit from TIF — at the expense of schools and libraries, argues the author.

Policymakers and development officials appear incapable of responsibly awarding subsidies through programs like tax-increment financing (TIF) and tax abatement. These programs redirect increased taxes paid on improved property back to a developer, or prevent taxes from being collected on improved property at all. From 2000 to 2014, the city redirected or abated more than $700 million in property, earnings and other taxes through these programs.

The putative goals of TIF and abatement are to spur economic growth and redevelop blighted areas. In St. Louis and across the country, these programs have rarely accomplished either. A report released last year — commissioned by the very agency that administers many incentives — concluded, “While there may be disagreement about the value of some [subsidy] packages, it is clear that the city gains no net benefit from an extremely costly program with no real economic development impact.”

That same study also found that most subsidies go to relatively better-off parts of the city — the Central West End, Downtown, and Downtown West, for example — and not areas suffering genuine blight. In short, schools, libraries and other jurisdictions have missed out on hundreds of millions of dollars for little more than a few dozen ribbon cuttings and lots of facile ‘job creation’ talk. Worth it, right?

With public pressure mounting (thanks to watchdog groups like Team TIF), and with scant evidence that these incentives work, city officials are now considering various reforms to St. Louis’s economic development policies. This news is welcome, but will the measures be as ineffective as the subsidies themselves?

Many of the reforms are common-sense policies that should already be in place. For instance, one entails conducting a comprehensive project review for subsidy requests over $1 million. But if this is a reform, does that mean the city and its agencies haven’t been conducting thorough reviews of projects requesting major subsidies up to this point? (Note: it was just in 2015 that a full-time financial analyst was hired to review subsidy requests.) Other reforms contain so much noncommittal language — “except for,” “a to be determined amount,” and so on — that one cannot help but feel they’re completely meaningless.

The most promising reforms would shorten the terms of abatements and limit to ten percent the amount of development costs that could be covered by TIF in better-off parts of the city. (That this is a reform indicates just how far incentive use has drifted from its original purpose.) Unfortunately, even these measures would have little impact on the abuse of incentives or their detrimental effects.

For one, simply capping the percentage of costs covered by TIF doesn’t mean huge sums of cash won’t flow out of public coffers. If a $100-million project in the Central West End comes along, this “reform” would still allow for $10 million to be dished out — and that’s a lot of revenue to bleed.

Secondly, the shortening of abatements would simply push developers and their investors to seek TIF and other subsidies rather than abatement. Moreover, similar reforms were enacted in Kansas City last year but have yet to be enforced, and some fear they won’t ever be because of conflicting interpretations of the language in that city’s ordinance.

So, what reforms could genuinely curb incentive abuse? The surest and most effective reform is repeal: The legislature should simply eliminate these ineffective and misguided programs from state law. California, the state that created TIF, repealed it nearly a decade ago.

But short of repeal, what can we do? Here are several reforms the city could adopt that could actually make a difference:

Eliminate TIFs and Abatements for Projects with Other State/Local Subsidies. Subsidy proponents like to point out that TIFs and abatements usually cover only 15 percent of a project’s costs. What they don’t mention is that TIFs and abatements are only two of the many ingredients in the development subsidy stew. Developers often also receive sales taxes from special taxing districts (transportation development districts and community improvement districts) along with various state tax credits. For example, TIF will cover “only” 14.5 percent of costs for the initial phase of the $138 million City Foundry development, but other public sources will cover another 41.5 percent of its costs!

If a developer is receiving state tax credits or creating unaccountable micro-governments to levy extra sales taxes, the city should deny them any more public funding via TIF or abatement. The city can’t keep the state from subsidizing local projects, but it can turn its own spigots off. And if a developer claims it needs all these subsidies, perhaps the project isn’t such a great idea after all.

Adopt an Incentive Budget. I live on a budget. You live on a budget. Policymakers in City Hall pass and “live” on a budget. If we can do it, so can economic development agencies, developers, and their investors.

Policymakers should put a hard cap on how much they award annually in TIF and abatement. Think of this as an “incentive budget.” Just as the city budgets a certain amount for a program or service, it would allocate a certain dollar amount for TIF and abatement. The only difference would be that city officials couldn’t go beyond a certain amount — say, $50 million annually. (For context, in a single meeting earlier this year the TIF Commission awarded nearly $51 million in tax increment financing.)

Currently, policymakers have little political or financial incentive to tell developers “no,” but a strict cap could force them to do so. Such a cap could slow the bleeding of city revenues and force development officials to think harder about what projects get the limited number of subsidies available. It could also help the city, schools, and other jurisdictions manage future revenue losses.

Tie Incentives to Poverty and Productive Land Uses. If our improvident government is going to distort the market, it should at least distort the market in ways that have some social benefits, like the elimination of actual blight, the luring of new businesses to poverty-stricken neighborhoods, or the attraction of decently paying jobs.

Accordingly, policymakers should grant TIFs or abatements only in census tracts with prolonged and concentrated poverty or for industrial or commercial land uses. This practice could help keep TIF and abatement more in line with their original purposes: eliminating blight and attracting employers.

“But developers almost never propose projects in truly blighted parts of town!” True, but that’s because they can get the same subsidies in the Central West End or Downtown. And if TIF and abatement were restricted to just downtrodden neighborhoods, and no proposals came forward, that would provide evidence that these incentives are ineffective at actually eliminating blight.

Audit Subsidized Businesses’ Books. If you’re ready to open your pockets for taxpayer cash, you had better be ready to open your books to taxpayer scrutiny.

One of the biggest issues with TIF and abatement is how difficult it is to track their “success.” The most comprehensive data on TIF in Missouri is sourced right from developers’ own books, and isn’t audited for accuracy. Since the system allows recipients of TIF to self-report, whatever job creation figures a developer provides are accepted without independent verification. Current policies encourage developers to over-promise, and offer little recourse to the City if they under-deliver.

Firms subsidized through TIF or abatement (and in general) ought to have their books reviewed to ensure they’re actually creating permanent jobs and not just shuffling them around, pulling numbers out of the air, or counting temporary, tax-and-spend construction jobs. A disinterested auditor — like the state auditor — could look at payroll numbers to see if companies are actually growing, and if so, by how much and where. If the developers receiving taxpayer cash can’t keep up their end of the bargain, they ought to cough the subsidies back up.

Form a City–County Incentive Truce. Development officials argue that incentives are necessary if the city is to compete with municipalities in the county like Clayton. But starving schools and libraries just to entice a firm to move its headquarters down the road is irresponsible if not reckless. And while the redevelopment/in-fill crowd may want some vacant city lot transformed into a new building, doing so contributes little to nothing to the region’s economic growth. In fact, it shifts capital from more productive to less productive uses, making society as a whole poorer.

To stop this needless, taxpayer-funded race to the bottom, city officials should work in earnest with officials in the county (and vice versa) to (1) develop an incentive truce, where both agree not to poach businesses across the city–county line and (2) negotiate in unison with firms new to the area so the jurisdictions aren’t pitted against one another in bidding wars. Such collaboration may be difficult politically, but that doesn’t mean it shouldn’t be pursued. “Regionalism” in small steps?

Even the agency that administers TIF and abatements in St. Louis found that they offer no net benefit to the city. Defending the widespread use of development incentives requires serious mental gymnastics. Because of the money to be made from these incentives, proponents are willing to defend their use. But city officials can no longer in good conscience hand out subsidies and ignore their fiduciary duties. So if we aren’t going to pull these subsidy programs out by the root entirely, we should at least be serious about trimming them down to size.

Graham Renz is a policy analyst at the Show-Me Institute. The Riverfront Times welcomes well-reasoned essays on topics of local interest. Contact [email protected] if you've got something to say.

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