Aerotropolis Tax Credits Deconstructed: What Do We Really Get for Our Money?

Senate Bill 390 proposes $480 million in tax credits spread out over 15 years in an attempt to spur private investment in warehousing, cold-chain facilities and distribution centers and to lure (air) freight forwarders to set up shop in the St. Louis area. The goal is to create an International cargo hub at Lambert-St. Louis International Airport.

Opponents are voicing concerns. Some of the questions asked: “Why would we commit to these tax credits without a commitment from the Chinese?” or “Shouldn’t there be a provision in the bill that voids it if the Chinese don’t commit?” and the obvious: “Why should Missouri tax payers help pay for this hub? If it’s such a good idea shouldn’t it pay for itself?” All are good questions. The concerns are real.

However, shouldn’t the most important question be: “What do we really get for our money?” After all, tax incentives are nothing new. They’ve been used successfully (and unsuccessfully) in the past but if that’s what it takes to accomplish our goal, why not? So let’s try to break down how these tax credits are constructed and how much private investment is needed for the whole $480 million to be awarded.

The bill basically consists of four main sections:

  • $120 million for the reimbursement of the cost of interest on construction loans
  • $60 million directly subsidizes the companies that conduct export. Basically the ones that actually get the freight into the belly of an airplane
  • $300 million for the reimbursement of the cost of building the warehouses needed to house shippers, manufacturing and freight forwarders
  • An uncapped amount allowing companies to keep 50% of the state income tax of their employees and exempts qualifying companies from paying income tax

{what will it take to see crowded runways at Lambert once again?}

This money is not just given to these entities. There are requirements and limitations built into the bill to ensure companies that want to enjoy the tax credits actually conduct freight forwarding, export or manufacturing related to the cargo hub. There are also set time limits.

The actual bill (SB390) is 11 pages so let’s break it down to the four essential parts:

Part 1: $120 million for the cost of interest on construction loans.

  • Limited to no more than 3 years
  • 75% over no more than 60% of the actual cost
  • Interest rate of maximum 7%

An example: A 20,000 square foot warehouse is built at a cost of $1,000,000.00. It complies with all the regulations in the bill and hub related activities are conducted.

The tax credits awarded would be 75% over 60% of the actual cost = $450,000 x 7% interest = $31,500 per year. Over three years the owner of the warehouse would receive $ 94,500 in tax credits or 9.5% of the investment. This is the maximum amount in tax credits this owner could receive. Depending on the level of activity it could be less but it could never be more.

Some opponents contended that 75% of the interest would be paid by the tax payer. If you actually break down the bill the actual percentage of the tax credits in this section is 9.5% of the total private investment.

A private investment of almost 1.3 billion dollars would be required to exhaust this $ 120 million in tax credits. For this $1.3 billion, 25 million square foot of warehouse space could be built, an area as large as 434 football fields or almost half of Forest Park. If on average one worker per 1,000 square feet would be employed in these new warehouses, 25,000 new jobs would be created.

Part 2: $60 million for the companies that conduct export.

  • Allows freight forwarders an average incentive of 27.5 cents per kilogram of exported freight

A total of 480,000,000 pounds of air freight would be subsidized under this section. A Boeing 777 with a 60% load factor holds 140,000 pounds of cargo. This equates to a total of 3428 outbound flights. Adding the same number of inbound flights a total of 6856 flights would be have to be conducted to exhaust the money in this section. Remember; only the outbound flights receive tax credits.

Part 3: $300 million for the reimbursement of the cost of building the warehouses.

  • Allows owners of warehouses an average reimbursement of 4% per year over the cost of building with a maximum of 20% over 5 years. (The actual numbers are 3% or 5% with a maximum of 15% or 25%. I’m using the average for clarity.)

Using the example of the warehouse in section 1, an additional $200,000 in tax credits can be received (depending on the level of activity) within a 5-8 year window by the owner of the building, provided that the building houses a facility where export or manufacturing related to the hub is conducted. This is the maximum credit available. If less activity is conducted the credits will be less. It can never be more.

To summarize: the builder/owner of a warehouse could enjoy tax credits of a maximum of 29.5%. (part 1 and 3 combined. This includes the interest in example 1.) To exhaust the tax credits of $300 million in this section a total private investment of 1.5 billion dollars in just the real estate would be required.

{there's plenty of room to expand, will the Aerotropolis bill invite development?}

Finally, Part 4: An uncapped amount allows companies to keep 50% of employee state income tax and exempts them from paying income tax.

This is a hard nut to crack. Let’s try some examples based on rough estimates. I tried to be as accurate as possible but the point is to illustrate the big picture.

Example 1:
The Aerotropolis Bill is wildly successful and every year 2,000 new jobs are created for a total of 14,000 jobs in seven years. The average yearly salary is $ 40,000. In this (hypothetical) case, based on the 50% state income tax incentive, it would cost the tax payer an additional $ 67 million or $1,200 per job per year over the seven years. Keep in mind: the state still receives 50% of the normal income tax = $67 million. Without the incentives it would have received $ 134 million in taxes, hence the “cost” of $ 67 million.

Example 2:
Assuming labor cost of 30%, total revenue of all new companies over these seven years would have accumulated to 7.4 billion dollars. At an average profit margin of 8%, total state income tax would have been in the 300 million dollar range. (Again, a rough estimation by crystal ball but you get the picture.)

In conclusion, this bill is not just geared to the Chinese. If they invest in facilities here, they will receive tax credits but the same goes for South Americans, local investors or anyone else who meets the requirements. It makes the St. Louis region (in a 50-mile radius around Lambert) more attractive to national and international investment. This is the key. To lure these types of businesses to our region we’ll have to give them an incentive to offset the initial risks and high investments. If we don’t do it, others will.

Yes, the total cost to Missouri tax payers could be more than $480 million but only if the program is highly successful. An enormous amount of private investment would need to happen:

  • 1.5 billion dollars of private investment in warehouses, distribution centers and manufacturing
  • 25,000,000 square foot of new warehouses
  • 15,000-25,000 new jobs in 7-15 years with a potential total payroll between 600 million-1 billion dollars per year
  • 3,500 outbound flights operated with incentives over the first 7-10 years. At a (US-Int’l) average of $ 37 per pound the value of the goods exported would be about $5 million per flight. The subsidized flights alone would export $17 billion in US products.

Now, let’s say all of the above does not happen, the bill is a complete failure and the Chinese decide to go elsewhere. No warehouses, no new jobs, no cargo flights. That would cost the Missouri tax payer nothing, zilch, nada. Which scenario would you prefer?

St. Louis RCGA Aerotropolis Economic Impact Estimate