An Assessment of the Effectiveness and Fiscal Impacts of the Use of Development Incentives in the St. Louis Region

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Executive Summary

In the last 20 years local governments in the metropolitan St. Louis region have diverted more than $5.8 billion in public tax dollars to subsidize private development through the use of various financial incentives, including tax increment financing, special taxing districts and tax abatements. Municipalities, counties and states used these development incentives in the competition to lure tax-generating businesses to their specific jurisdiction. These incentives subsidized new developments by taking a portion of what otherwise would have been paid as taxes and instead diverting them to the private developer to finance the development.

In response to concerns about the long-term effects on the economic health of the region and the fiscal well being of local governments, the East-West Gateway Board of Directors (made up of the region’s local elected officials) took the following action:

…authorize the staff to undertake a study of the effectiveness of local development incentives to help determine potential actions by the Board. The study should include an inventory of the amount of previous incentives granted by local government and the resulting economic activity from the projects financed through incentives. The study should also determine the effect of local development incentives on the ability of local governments to finance essential public services and the degree to which the extensive use of incentives contributes to economic and racial disparities in the region.

This research documents that the use of these tax incentives has been ineffective both as a way to increase regional sales tax revenue or to produce a significant increase in quality jobs. It also clearly has not helped municipalities avoid fiscal stress or had a general beneficial economic impact on the region.

Over the same period, the region has made modest employment gains, primarily in the service sector. Job growth overall has been sluggish, growing at a rate of about 0.8% annually from 1990 to 2007, with a significant slowdown after the year 2000, when the growth rate fell to 0.2%. Retail employment is of particular interest because, according to East-West Gateway estimates, about 80% of tax increment financing (TIF) and transit development district (TDD) incentives have been for retail oriented development. From 1990 to 2007, retail sector employment grew from about 142,100 jobs to 147,500, a gain of about 5,400 jobs. Since 2007, during the recession, both sales tax revenues and job growth have decreased significantly, as might have been expected.

In addition to the $2.5 billion documented in East-West Gateway’s Interim Report, this Final Report provides estimates of the additional tax revenue forgone through tax abatement programs in both states as well as tax revenue allocated to private development in the region through the use of state tax incentive programs. This report refines some of the data used in the Interim Report for TIF and special taxing districts, and includes more recent data, through 2009.

There are examples of the effective use of development incentives but they are greatly outnumbered by the projects that produce localized benefits at a high cost with little or no demonstrable economic benefit. The problem is not the use of incentives, but how they are used. The purpose of this report is to challenge community leaders, both in the public and private sectors, to reconsider the role of local development incentives as part of a comprehensive regional economic development strategy and to provide the necessary information to develop policy and legislative changes that might produce real and sustainable economic growth for the St. Louis region.

This Final Report includes research by East-West Gateway staff and research commissioned from area universities, and contains the following elements:

  • An inventory of the use of development incentives in the St. Louis region
  • An account of the local and regional effects of those tax incentives
  • An assessment of the local government finances
  • Conclusions and legislative recommendations

Based on the findings of this research, we have reached the following conclusions:

1. There has been a massive public subsidy of private development – more than $5.8 billion – in the last 20 years across the St. Louis region. The $5.8 billion diversion of public tax dollars to private developers is a conservative conclusion based upon the best available data. About half of this has been allocated through two types of programs that are predominantly used for retail development: tax increment financing (more than $2 billion) and special taxing districts (more than $500 million).

2. Evidence exists that the use of TIF and other tax incentives, while positive for the incentive using municipality, has negative impacts on neighboring municipalities. An examination of sales tax revenues and the use of TIF demonstrate that declining shares of sales tax revenue in one municipality often coincides with the use of incentives and growth of tax revenue share in neighboring municipalities. Zip codes that have TIF-related investment have been found to have an increase of jobs in the active TIF years, but that TIF use was associated with a decrease in jobs elsewhere.

3. Local governments in the region are under fiscal stress. A significant number of municipalities have experienced declining sales and/or property tax revenues, particularly when these revenues are adjusted for inflation. A significant number of municipalities faced budget deficits, layoffs and service cuts between 2000 and 2007, even though that was a period of time when the economy had generally fared well. In a survey of municipal officials, many indicated they had serious concerns about the long-term fiscal sustainability of their cities.

4. The use of tax incentives has exacerbated economic and racial disparity in the St. Louis region. Historically, tax incentives to private developers are less often used in economically disadvantaged areas and their more frequent use in higher-income communities gives those jurisdictions what amounts to an unneeded, extra advantage. Tax incentive tools such as v Chapter 99 and Chapter 353 tax abatements and TIFs were used repeatedly in the central business district and the west end of the city of St. Louis while they were used sparingly in depressed sections of North St. Louis. Throughout the region, areas of concentrated poverty begin at a distinct disadvantage when trying to compete for customers, businesses and jobs and are further handicapped when higher-income communities receive additional advantages through diversion of tax dollars to private developers via tax incentives.

5. A complete database of Missouri municipal finances is needed. The Illinois Comptroller has an electronic database of all taxing districts. In Missouri, such a system should be developed to help local officials to make informed decisions, and to provide transparency and accountability. The current system in Missouri involves municipalities filing hard-copy reports with the State Auditor Office.

6. Across all incentive programs, the provisions for uniform reporting of revenues, expenditures, and outcomes (jobs, personal income, increases in assessed value, etc.) are remarkably weak, particularly considering the involvement of public funds. In 2009 the Missouri legislature modified TIF and TDD statutes to require better reporting and, in the case of TDDs, a financial penalty for failure to submit annual financial reports. While these are improvements, it is still true that the state agencies that have the responsibility for maintaining reports have inadequate resources to discharge those responsibilities. Further, there is no mechanism to require a private project sponsor to deliver economic outcomes, or to allow the taxpayers to recoup the value of local tax incentives if those outcomes don’t happen (sometimes known as “clawback” requirements). Those accountability provisions apply to certain state subsidies like the Missouri Quality Jobs Act, but are absent for local incentives.

7. Educate the voting public on taxes and how public services are funded. Many citizens lack an understanding of how government is funded and the tradeoffs required to balance budgets. This fact, combined with a growing mistrust of government has led citizens to disengage from the process. Local governments have increasingly turned to using economic development incentives, particularly TIF and special taxing districts, as a mechanism to fund services. They are tools that local governments can use to control an additional revenue stream without a popular vote and avoiding legislative caps on major revenue sources. This is not a sustainable means of financing government. We must instead, educate the public on the true costs of services, the tradeoffs that exist and the options for funding public services.

8. There should be a complete database of public expenditures and outcomes for all publicly supported development projects. Because of the lack of widely available information, elected officials and the public cannot possibly make reasoned decisions about the expenditure of tax dollars to produce economic growth. Without that information, it is not possible to know whether local governments are getting value for those expenditures, and because there is no accountability for outcomes, the public cannot recover those expenditures in the event that outcomes are not achieved. One exception is the city of St. Louis, which has required a “clawback” provision in its redevelopment agreements since 2005.

9. Focusing development incentives on expanding retail sales is a losing economic development strategy for the region. The future of sales taxes as a principal source of revenue for local governments should come into question for several reasons: its inherent volatility; the likelihood of a long-term restructuring of retail trade; increasing level of sales taxes discourages spending and local sales in favor of non-taxed internet sales; and, the motivation this tax source provides to focus scarce tax dollars on incentivizing a type of development that appears to yield very limited regional economic benefit. As local governments come under increasing fiscal stress, the impacts of billions of dollars in forgone revenue will become increasingly apparent.

10. Broad measures of regional economic outcomes strongly suggest that massive tax expenditures to promote development have not resulted in real growth. While there are certainly short-term localized benefits in the use of incentives, regional effects are more elusive. Development incentives have primarily acted to redistribute spending and taxes. While distribution effects might yield broader economic benefits when used to redevelop economically distressed communities, when incentives are used in healthy and prosperous communities the regional effect may be to destabilize the fiscal health of neighboring areas. This conclusion particularly applies to retail development. While there is ample justification for tax expenditures on retail development in underserved areas, overall there seems little economic basis to support public expenditures for private retail development. Despite massive public investment, the number of retail jobs has increased only slightly and, in real dollars, retail sales or per capita spending have not increased in years. Furthermore, the region has seen a shift from goods producing (higher paying jobs) to service producing (typically lower paying) jobs, suggesting that although there are more jobs, they are of lower quality. Household income is lower and increasing more slowly than in most of our peer regions.

11. Set aside old ways of thinking and adopt an agenda for regional fiscal reform. In 2008, the Metropolitan Forum brought together a national panel of experts who studied the St. Louis region, concluding the region needs to adopt new ways of thinking. This research supports the need for a regional solution to the problematic overuse of development incentives and the fiscal crisis in which local governments find themselves. Local governments need support to change and adopt a better strategy for the future. Regional fiscal reform will only be possible through a large-scale collaborative process that cuts across jurisdictional boundaries and is inclusive of all sectors and levels of government.

Read report: An Assessment of the Effectiveness and Fiscal Impacts of the Use of Development Incentives in the St. Louis Region

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  • Nick

    “Evidence exists that the use of TIF and other tax incentives, while positive for the incentive using municipality, has negative impacts on neighboring municipalities.”

    So if A and B both happen at the same time, A must cause B? Just because tax revenues fall in a municipality adjacent to a TIF-heavy district doesn’t mean TIF development caused that revenue fall. Besides, many neighborhoods adjacent to TIF-heavy districts have seen vast improvements over the last decade. The Grove, Botanical Heights, Shaw, TGE, Lafayette Square, Soulard (just to name a few) have all done great even while the CWE and downtown bring in TIF money.

    “There are examples of the effective use of development incentives but they are greatly outnumbered by the projects that produce localized benefits at a high cost with little or no demonstrable economic benefit.”

    TIF money comes from localized districts. Why shouldn’t it be used for projects in that district? And since when are localized benefits not an economic benefit? No one ever argued a TIF-financed apartment building in the CWE is going to save the entire city.

    “The use of tax incentives has exacerbated economic and racial disparity in the St. Louis region.”

    Again, correlation doesn’t imply causation. St. Louis has seen economic and racial disparity for decades long before tax incentives were even an idea. The causes of these disparities are much deeper and more systemic than how we spend our tax dollars.

    There are certainly ways to improve how we spend our tax dollars, but these arguments put forth by this report are simplistic and mostly inaccurate. Economically depressed areas of the city would still be as economically depressed as they are today if TIF and abatements never existed. At least we have a built-up central business district to show for it.

    • STLEnginerd

      Actually correlation doe “imply” causation, it just doesn’t “prove”causation. The cause of disparities between municipalities as with individuals are varied and compounding. Hard to believe the liberal use of tax incentives in already stable and or growing district doesn’t have an impact on other less fortunate districts. If anything paying people to develop where there is already a market means it hard to find deep enough pockets to incentive development in harder areas.

      Saying that correlation doesn’t mean causation is like say 50 years
      of climate science doesn’t prove man made emissions are causing climate
      change. It is literally the same argument. Its not necessarily the entire answer but any objective person can see there is an impact.

      Incentives have their place. But the ability to grant them should be maintained at the REGIONAL level. Ideally the city re-enters the county eliminates point-of-sale cities, and TIFs are restricted to being disbursed at the county level by some central commission. Its not the TIFs would never be issued its that they would be more strategic and aimed at the regional benefit rather than local benefit.

      • Nick

        “Hard to believe the liberal use of tax incentives in already stable and or growing district doesn’t have an impact on other less fortunate districts.”

        First, the ‘hot’ construction market, even in the central business district, basically exists only because of the incentives. Everyone seems to act like CWE is as desirable as Manhattan because rents are higher than the rest of the city and we have a bunch of buildings going up there. Rents are still incredibly low in the CWE when compared to hot neighborhoods in virtually every other major city in the US. Without incentives, we’d see no growth.

        I never said there was “no” impact on less fortunate districts from TIF money going to development. There always exists trade offs with public financing. What I said was our impoverished neighborhoods would still be impoverished, which is true. We can argue all day long as to whether or not that means we should spend money one way or another. All I’m saying is, if we want development in the city, the price we have to pay is in TIF money.

        “But the ability to grant them should be maintained at the REGIONAL level. Ideally the city re-enters the county…”

        That’s all fine and good but is a political unreality for any of that to ever happen. I say we take what we can get.

        And correlation absolutely does not imply causation. The vast, vast majority of correlated variables of everything in the world has no causal impact on one another. Read the first chapter of any intro to stats textbook.

        • STLEnginerd

          “And correlation absolutely does not imply causation. The vast, vast
          majority of correlated variables of everything in the world has no
          causal impact on one another. Read the first chapter of any intro to
          stats textbook.”

          I think your usage of the word imply and mine might be different. I read it as a homonym to suggest or indicate. There are three possibilities from a statistical basis that i can think of for correlated data.

          A) Correlation means there is a causal relationship between the two variables.
          B) Correlation means there is a common as yet undetermined variable that has a causal relationship on both variables.
          C) You don’t have a statistically significant sample size from which to draw conclusions.

          Is there another I’m not thinking of. Data correlation is used all the time to determine and quantify causal relationships.

          When people seem to habitually throw around the correlation/causation corollary to dismiss other people’s suppositions without offering an alternate and equally supported hypothesis I find it to be irksome.

          • Nick

            “I think your usage of the word imply and mine might be different. I read it as a homonym to suggest or indicate.”

            First, I think you mean synonym, not homonym, and yes that is the same way I’m using the word “imply.”

            Correlation just means two variables trending in a direction together, with no implication of one causing the other. Causation obviously means one causes the other to move in a given direction. Causation implies correlation; the opposite is not true. I’m saying TIF dollars flowing into the CBD (variable 1) and worsening of economic conditions in some neighborhoods (variable 2) are both trending up (correlating), but the former is not causing the latter (as the study is arguing). As there are many variables that affect economic conditions in neighborhoods (such as racism, or jobs leaving the STL area, or folks preferring to live in St. Louis County, or St. Charles County, or regional fragmentation, etc.) to think TIF expenditures have even an iota of influence over the decline of neighborhoods relative to these other factors is just foolish, IMO.

          • Justin

            I agree we shouldn’t just write off a correlation because it does not imply causation. However, many correlations are spurious and it is often not easy tell if one variable causes another and
            if all the data are collected at one time it can be impossible.

            While a correlation is necessary to infer causation it is not sufficient. In addition one needs time precedence of the cause over the effect and needs to eliminate all other possible causes. When the above conditions are met one can safely infer causality.

            Typically, this either requires an experimental research design or a time panel design can work when experimental design is not feasible.

            Correlation is step towards determining a causal relationship, but alone leaves much to be desired.

        • Nat76

          I don’t see anyone mentioning that the use of incentives is the primary cause of decline in some areas, but it naturally follows that it is a contributing cause. If relatively well off Muni A uses incentives to attract sales tax adjacent to not as well off Muni B, it is going to siphon funds that would otherwise be collected in Muni B.

          As much as incentive use for commercial along the Clayton-DT corridor and residential incentive use in areas like South City have been criticized though, they do have a regional benefit. They are a counterweight to suburban job sprawl by anchoring professional employment centers (and residential neighborhoods) to the “spine” of the metro. It will inevitably displace some people, but regionally, it’s better to concentrate employment in an area where less advantaged can leverage transportation infrastructure to get to the central corridor than it is to leave them to figure out how to get to a retail job in Chesterfield valley.

          As for city vs county: I think we are nearing an inflection point. The city is becoming more professional/educated. The county is going the other way. In 15-20 years, there’s a real possibility that it will be the city resisting a merger rather than the other way around. Mid and West County will be fine. The areas where most city residents will live will be fine too. North and South County will be hurting. Fast forward to 2035 and a lot of neighborhoods featuring quickly built wood framed suburban homes from 1985 aren’t going to look so great.

          • Nick

            “I don’t see anyone mentioning that the use of incentives is the primary cause of decline in some areas, but it naturally follows that it is a contributing cause.”

            Not to nitpick, but I said “a primary cause,” not “the primary cause.” In this context, what I mean is “will the loss of tax dollars have a noticeable effect on impoverished neighborhoods?” I would say other factors are far more influential.

            “If relatively well off Muni A uses incentives to attract sales tax adjacent to not as well off Muni B, it is going to siphon funds that would otherwise be collected in Muni B.”

            If you were talking about, say, a pair of retail strip malls in Chesterfield Valley siphoning business away from an outlet mall in Hazelwood, I would agree with you. In the city it’s a little different. We’re using TIF to build things like large residential projects, hotels, and fancy Arch grounds. And at least on the residential side I think there’s enough demand (at the subsidized price) that these projects aren’t poaching off one another, at least not yet. My evidence for this is many neighborhoods adjacent to the central core that don’t get a heavy dose of incentives are also thriving residential centers.

          • Nat76

            I don’t really want to get into a debate on semantics between a/the primary cause. The report says the exacerbates, ie, makes muni fiscal conditions worse. It does this in much the same way you described in the Hazelwood v Chesterfield example and has been the subject of broad discussion as it relates to things like Ferguson. The degree to which it makes things worse is open to debate, but it unambiguously does exacerbate fiscal problems for governments that aren’t in a position to make use of the incentives to pull in sales tax. It’s a prisoners dilemma scenario, except some of the prisoners can’t “rat out” their fellow conspirators.

            As far as the impact on an intra-muni basis…that’s best measured on a case by case basis. There is ample evidence to refute the idea that the total pie is growing quickly enough in the city to offset the tendency of incentives to cannibalize business from other areas. Look at incentives for things like retail downtown and compare that to the growth in sales tax (by zip code, which is publicly available from MO adept of Rev). Look at Ballpark Village. Look at TIF EATs statements. Look at the city’s tax incentive study. Cannibalization is a real thing. The trick is to adequately estimate cannibalization when we issue incentives to ensure the incentive pays for itself.

          • Nick

            “The degree to which it makes things worse is open to debate, but it unambiguously does exacerbate fiscal problems for governments that aren’t in a position to make use of the incentives to pull in sales tax.”

            I wasn’t making any claims as to the fiscal issues for municipal governments(point number 3); only the effects on impoverished neighborhoods (point number 4). However, one thing that’s often overlooked is that property tax abatements often go to projects that wouldn’t generate any property taxes anyways (the Everly on Delmar for example).

          • Nat76

            Not to nitpick, but point 4 talks about communities and areas….not neighborhoods per se. This could be a muni or a set of munis or a local neighborhood area. The general point applies to all three though. 70% of all economic activity in the region is non-traded (outside of the metro), meaning it exists strictly to serve the needs of the region. If you are subsidizing non-traded business (like retail), then you are simply moving economic activity across imaginary lines. Increase restaurant space by 10% in the region and GDP from restaurants doesn’t increase 10%. Even in the traded sectors, most firms won’t leave for Cleveland if you don’t give massive development breaks. Think Centene. Their incentive ask is a drop in the bucket compared to their profits. If everyone in the region agreed not to offer incentives, they’d stay put, because the risk and cost of relocating their specialized workforce > the incentive. Someone will always flinch and offer incentives though.

            In most cases, “but for” the incentive, the development wouldn’t occur in that location, but the same level of economic activity would occur regionally. This relates directly to neighborhoods too though because once the infrastructure is in the ground, commercial tax revenues (on un-incented development) subsidize residential services. If a wealthier area lures away business because they can afford to offer incentives, then the impoverished area has a vacant building generating no use/sales/franchise tax. There is already low demand in poor areas. If there is no obvious alternate use, their property tax will decline. This leaves less money for services. Which translates to a worse quality of life at the neighborhood level in that tax jurisdiction. It’s a feedback loop and for a lot of poor areas–especially those in small municipalities–losing something that would be trivial for a larger community has a huge impact.

            Logically, everyone would cooperate and refuse to offer incentives for developments that merely result in a relocation of economic activity within the region…with caveats like 1) sites with pre-existing infrastructure should be encouraged/subsidized over greenfields and 2) projects with a goal of enhancing regional competitiveness (Cortex, industry colocation/clustering, regional assets/amenities) should be incented.

  • Hard-working Tax Payer

    Desco Group and Scnucks recently got a public welfare handout in the form of a TIF for the University Commons shopping center project across from Lindenwood University in St. Charles, Missouri.

    St. Charles leaders, SSM and Desco Group claimed there was a “sense of urgency” to get the old Fifth Street St. Charles Post Office relocated to the new University Commons development in order for the SSM St. Joseph hospital to have space for future expansion. It was smoke and mirrors. Desco/Schnucks are profitting off hard-working taxpayers. The development could have happened without a TIF, but the wealthy developers were greedy. Don’t they make enough money on high-rent commercial leases? Of course they do, but hey, let’s ask hard-working taxpayers foot the bill for a strip mall shopping center. Pathetic!

    Rinse and repeat this awful activity all around the surrounding St. Louis metropolitan area. It’s really sad for taxpayers and it is shameful for the greedy developers who always claim the development can’t happen without taxpayer support. Sickening!