TIF Financing is a Band-Aid for Saint Louis’s Economic Woes

Recently, STL Today (the webpage of the St. Louis Post-Dispatch) asked readers whether or not TIFs are a good idea. I said no.

Now, I don’t even care what this project is. It could be a factory that makes labradoodle Build-A-Bears or one that offers a cure for meth addiction (a big problem for Missouri and Illinois.) It could be condos, apartments, a thriving artisan district. I don’t care what it is: taxpayer-funded incentives for development are never a good idea. But I think those entities should be allowed to make those mistakes.

Earlier in the day a friend of mine called me “insane” for positing that people calling Albert Pujols greedy should never take a job that offers them substantially more money at the risk of being hypocritical. So, maybe today is one of those days for me.

But back to Tax Increment Financing, or TIFs. These are common in virtually all states, and states, cities, and counties also often have separate programs that do very similar things: mainly give a benefit to an individual, group, or company for doing a certain thing. In short, TIFs are a form of incentives borne by taxpayers either directly or indirectly. They are subsidies, and they distort markets.

Example: Ohio Governor John Kasich worked out a deal to keep American Greetings in Northeast Ohio. The city of Brooklyn, Ohio raised its city income tax, which was a factor in American Greetings seeking alternate opportunities. So, Ohio will spend (or forgo in revenues) nearly $100 million over 15 years to keep the company in Ohio.

From the Cleveland Plain Dealer:

Advocates of a regional approach to economic development were thrilled that American Greetings will stay in the area. But they said competitive courting of the company could hurt the region’s economy.

“We are pitted against ourselves,” said Hudson Mayor William Currin, who is active with the Regional Prosperity Initiative, a 4-year-old group dedicated to regional land-use planning, revenue sharing and cooperation among cities.

Wrong. Wrong. Wrong. Competition is a good thing. Regional planning has gotten Cleveland, well, nowhere. Cuyahoga County and Cleveland City have lost a lot of people since 1990. The wrong answer is saying “competitive courting” (i.e. competition) hurts the region and having the state come in to have the entire state’s taxpayers foot the bill or give a discount to one company (American Greetings) over thousands of other companies to stay.

If American Greetings wants to leave Cleveland, Brooklyn, or Ohio all together. Who cares? Why is it people in downstate Ohio’s responsibility to provide incentives for people closer to Canada than they are Kentucky? Or any Ohioan for that matter?

Same goes for Missouri. I read a while back about two suburbs in a sort of feud because Wal-Mart got incentives to locate in city “X.” The incentives expired. Wal- Mart noticed there were 4 other suburbs down the way lacking a Wal-Mart. “Hey! Wouldn’t you like some commerce and jobs? Why not hook us up with some tax incentives and we’ll move down the street!” And that’s what they did. City “Y” got the new Wal-Mart and City “X” now has a vacant lot.

Now, I’m all for allowing companies to accept these handouts and for government to make these stupid decisions. A society is not free if people don’t have the right to make mistakes. But I think they’re malarkey. And yes, state vs. state TIF battles are indeed competition, but they’re inefficient competition that does not provide long-term growth in the aggregate economy.

A city, state, or county, only has a finite amount of tax revenue it can either give or forgo to attract commerce. That makes sense because if a small suburb’s budget outlays are $20 million and their revenues are $22 million, clearly they cannot offer $20 million in loans or forgone tax revenue.

My biggest problem with such incentives is that they are the very definition of picking winners and losers. So, Ohio gives benefits to American Greetings — but what about all of the other businesses? Later on, they’ll give other incentives to bring in other companies, but when American Greetings’ incentives expire or other companies are offered such deals in other places, how will those communities in NE Ohio be able to offer similar deals to keep them? They won’t always be able to do that. And, at some point, they’ll have to raise tax rates to offset their previous follies.

The merry-go-round of taxpayer-funded incentives works in theory, but it is not the most economically efficient method for sustainable growth. And we’re only discussing a small part of the picture here. The federal government offers a variety of such incentives, too, dispersed sporadically throughout the tax code.

The best solution, in my view, is to offer companies this: a stable tax rate and regulatory climate. Brooklyn, Ohio raised its city tax (which is an intrinsically bad idea, if you ask me) and American Greetings around that time decided to leave. It’s a vicious cycle. However, there are many cities that just say “no special benefits, we are what we are and that’s not going to change.” Those cities may achieve slower growth rates than some places that go TIF or incentive crazy, but they are more likely to have sustainable tax rates and do a better job of retaining jobs because of it. Nothing is more disconcerting to a CFO than a region that is volatile, offers crazy amounts of incentives, and then has to kill their local economy with painful tax increases to pay for their previous mistakes. Businesses like certainty more than they like crony capitalism, as hard as it may be to believe. The biggest companies can play this game best, since relocating is easier.

If all cities, counties, and states didn’t play the incentive handout game, the competition would be centered around tax rates and regulatory and zoning burdens. The most efficient cities at providing public services at lowest cost and highest benefit (and those with propitious climates for agriculture, yadda yadda) would benefit. The markets would do what they do best: allocate resources in the most efficient possible manner. Subsidies only distort those markets, which is why I think they’re never the right solution, even if they produce Build-A-Bear Labradoodles that everybody loves.

(Note: I don’t think Build-A-Bear actually makes Labradoodles.)

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