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Tax incentives: If you fund it, we will build it

By Benjamin Israel

Ever wonder why a multi-billion dollar company needs a tax incentive to build a new headquarters? The short answer is, it does not. Neither does a national store chain need a tax incentive to build a new store.

But when an economic development official in St. Louis County was asked why the county offered a subsidy to Brown Shoe to help fund its planned headquarters in Clayton, Nancy Schnoebelen said, “We want to keep them here. They could have gone to Madison (Wisconsin).”

Schnoebelen, vice president of marketing for the St. Louis County Economic Council, said that St. Louis County had to offer incentives to compete with other cities and states that offer incentives.

Tax Increment Financing (TIF) is among the most common carrots used to lure developments to particular cities. Although Brown Shoe withdrew its proposal to build an office, retail and condominium complex on its current campus and surrounding land, the prospect of tax incentives helped consolidate its management in Clayton rather than Madison and brought good-paying jobs to the area.

Les Sterman, executive director of the East-West Gateway Council of Governments, a regional planning agency, wrote in an e-mail that the case of Brown Shoe was a good use of tax incentives because “incentives are being used to keep good jobs in the region.”

However, Sterman also wrote that most TIFs are misused, particularly when a city uses it to attract retail.

“The proper use of TIF remains that which was conceived in 1952 - to restore and revive truly blighted areas that pose a legitimate threat to the health and welfare of both the inhabitants and surrounding areas,” Sterman wrote. “TIF should also be focused on creating good, family-supporting jobs (as opposed to retail jobs) and strong neighborhoods.”

Retail jobs pay far less than those in management and production.

TIF diverts increases in tax revenues due to rising property values and income from sales from the school districts, cities, fire districts and other jurisdictions to a fund used specifically to fund improvements in the TIF district. For example, St. Louis County has a one-half cent transportation sales tax, about half of which goes to Metro and an additional one-quarter cent sales tax dedicated to Metro. Sales tax revenue diverted to TIFs has cost Metro $8 million a year at a time when it has to cut back services, Sterman said.

“Every other special-purpose district, from community college districts to the zoo-museum district to your local fire district is losing tax revenue so we can pay for new shopping centers,” Sterman said. “In part because of TIFs and abatements, the tax burden is increasingly shifting to residential property, leading to higher property taxes for homeowners.”

To create a TIF, a city creates a special TIF commission to study the area. The commission must study conditions to see if the area meets the legal definition of “blight” and recommend a development plan. The City Council or Board of Aldermen makes the final decision. Until recent changes in Missouri law, the city appointed the majority of commission members, with minority representation from the county and other jurisdictions. Under the new law, in St. Louis City and St. Louis, St. Charles and Jefferson Counties, the county appoints the majority of members, but the city still makes the final decision. However, it will take a two-thirds majority of the City Council or Board of Aldermen for the city to act against the commission's recommendation.

Generally, the TIF district will sell tax-free municipal bonds to pay for improving the area and use the tax-increment revenue, the revenue generated over and above what the district generated before the city created the TIF, to pay off the bonds. Under Missouri law, the TIF district has 23 years to retire the bonds.

Different jurisdictions in St. Louis County have lost almost $1.5 billion to TIFs, Sterman wrote.

“What they lost has not been made up for in overall economic growth,” Sterman wrote. “Sales tax collections have not grown for several years and the number of retail jobs has increased only by a trivial amount.”

Others who have studied TIFs have come to the same conclusion.

“There's no evidence that TIFs would increase the retail pie since all you're doing is moving (stores) around,” said Todd Swanstrom, Des Lee professor at the Public Policy Research Center at the University of Missouri-St. Louis.

Swanstrom said TIFs make sense if a city looks only at its tax revenue to use a TIF to bring in retail, but “there's a conflict between one municipality and another. You're eroding the tax base of one to help another.”

In many cases, TIFs bring retail to areas that may already have too much, Swanstrom said. He pointed to Brentwood, Maplewood and Richmond Heights, which have all used TIFs to bring retail near the intersection of I-64 and I-170.

“It's hard to believe that some of the most attractive land in the area wouldn't be developed without a tax incentive,” Swanstrom said.

Another site of TIF-backed retail development was in the Chesterfield Valley, which may be the world's longest strip mall. One of the largest local TIFs was created in Chesterfield Valley after the flood of 1993. The strip mall and other development in the Valley brought in enough revenue to pay off the TIF bonds 10 years early.

Barry Flachsbart served on the Chesterfield City Council when it enacted the TIF, but voted against it.

“I didn't think we should be encouraging development on a floodplain,” Flachsbart said. “Now it's so fabulously successful.”

Flachsbart said he expected the floodplain would have developed anyway but not as quickly.

According to a statement from city government issued when it retired the TIF in 2007, “When the TIF was established in 1994 there were 240 licensed businesses within the Chesterfield Valley. Today there are more than 860 businesses, employing nearly 12,500 people. Following the flood, the assessed valuation of property in the Valley had dropped to $18 million. Property within the Chesterfield Valley is currently valued at over $176 million. The success of the Valley TIF has enabled city officials to cut Chesterfield's property tax rate in half since 2001.”

Academic studies show that Chesterfield's experience is not typical.

For example, two economists, Richard Dye and David Merriman, studied TIF districts in 235 municipalities in northeastern Illinois, not including Chicago, for the Institute of Government and Public Affairs at the University of Illinois. They found, to their surprise, that on the whole, cities and towns with TIFs grew more slowly than those without TIFs. They concluded that “government subsidies reallocate property improvements in such a way that capital is less productive in its new location.”

They found that the TIFs do increase growth within the TIF districts but hurt the areas outside the TIF districts more.

In Chesterfield, the TIF paid more than $35 million out of the $72 million TIF fund for building a 500-year levee and storm water improvements to keep a future flood at bay. As a result, although Chesterfield may be better protected against a flood, other places may be more in danger.

“New and enlarged levees, especially those built to a very high level and/or levees enclosing a large portion of the floodplain, can increase flood levels at locations along the opposite bank, upstream and downstream,” wrote Nicholas Pinter, professor of geology and environmental resources at Southern Illinois University-Carbondale, in an e-mail.

It is hard to blame Chesterfield or any other affluent Missouri city for using TIF to spur local development. A 2003 Brookings Institution study found that although TIF was created to give government the ability to promote development in blighted inner-city areas, it found that “vague definitions of the allowable use of TIF permit almost any municipality, including those market forces already favor, to use it. Weak limits on its use for inefficient interlocal competition for tax base touch off struggles between localities.”

In other words, if one city does not use it, its next door neighbor probably will.

What has happened is that a program designed to help the inner city is, in the St. Louis area, used predominantly in affluent outer suburbs. The Brookings study found that 57 percent of TIF properties in the area lie outside of I-270 in affluent suburbs. Most of the rest are in affluent inner-ring suburbs like Bentwood and Richmond Heights.

“Good examples of TIF are hard to come by in our region,” Sterman wrote. “University City used TIF to redevelop the old Mercy High School site along Olive for a Schnucks store. The high school had long been abandoned and the prospects for redevelopment were very slim. On the other hand, bad examples are almost any use of TIF for retail projects in an affluent suburb, which includes most of Central and West St. Louis County. There are too many of these to mention.”