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

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.

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