Everyone Loses in Missouri's Tax-Subsidy Wars

In 2010, the Walmart at Cypress Village Shopping Center in St. Ann, Missouri, unceremoniously closed. The culprit? A brand new Walmart two miles away in the adjoining city of Bridgeton. STL Today tells the story in an article titled Area stunts growth by feeding on itself. It's a familiar story in nearly every corner of suburban America in the 21st century: 

Source: Google

The anchor tenant now occupies more than half of the space, and leasing agent Jeff Eisenberg fears that the remaining stores won't survive without the traffic Walmart brings. "That space could be dark for the next four to 10 years," he worries.

It's a familiar pattern across metropolitan St. Louis, where the inventory of retail space has grown more than twice as fast as the population over the last decade. The difference shows up in "for lease" signs dotting corridors like St. Charles Rock Road, where Cypress Village straddles the border between Bridgeton and St. Ann.

There's a twist to this story, however, that is uniquely characteristic of the St. Louis metropolitan area in particular. The new Walmart up the street was in Bridgeton for a reason: $7.2 million in incentives from the city in the form of tax increment financing (TIF). The public subsidy lowered Walmart's cost of real-estate. And Bridgeton, for its end of the deal, got the retail tax base that otherwise would have gone to St. Ann, which lost an estimated $100,000 a year in revenue. As for the accessibility of Walmart and its low, low prices to the region's shoppers? Net change zero. 

"For the most part, it's just stealing from the next guy," says Kenneth Thomas, an associate professor of political science at the University of Missouri-St. Louis.

A couple weeks ago, we profiled an ill-conceived project in University City, Missouri, an inner-ring suburb of St. Louis. The city is on the verge of approving a $70 million TIF district and master redevelopment for 50 acres at the intersection of Olive Boulevard and Interstate 170. The project will displace at least 77 homes and 22 small businesses, to be replaced with a suburban-style redevelopment whose anchor tenant is an as-yet-unamed big-box store. (Speculation holds that it will be Costco.)

The area has long been considered St. Louis's "Chinatown" and is home to a wide variety of immigrant-owned businesses, both inside and outside the redevelopment area. These are local entrepreneurs whom the city should be championing. This project would be worrisome enough if that were the only thing wrong with it.

However, this TIF project is also a bad financial deal for the St. Louis region, and even for University City itself. The city justifies it as the only way to get needed growth, but the reality is that with a deal like this, University City is mortgaging its future for a short-term infusion of revenue.

The TIF Wars: A Region-Wide Race to the Bottom

This project is part of an unfortunate history in the St. Louis region of abusing TIF—University City is not alone or unusual. The number of TIF districts in the metropolitan region increased from three in 1988 to 191 in 2011, diverting $800 million in tax revenues just so far (with a total public commitment of about $2.4 billion).

TIF 101 (Graphic source: City of University City, MO)

An explainer for the non-policy wonks in the crowd: TIF works by capturing the tax increment from new development—any new annual revenue above and beyond what was coming in beforehand—and putting it into a special fund used to pay off costs associated with that development. At the end of a pre-set period (usually 15 or 20 years), the TIF district is dissolved, and all property taxes revert to the general fund.

TIF is meant to be used only in situations where no redevelopment would be viable but for the TIF subsidy (called the "but for" test). The rationale for local government is that there is no money being lost, because the additional taxes that are foregone to repay the TIF bonds would never have existed at all if TIF had not been used.

TIF can thus jump-start revitalization in places where the market won't. It's not inherently bad, but it's a dangerous financing tool for long-term revenue stability. Read this summary of recent research from the Lincoln Institute of Land Policy to learn more about why.

One reason for this practice is the extreme fragmentation of the region's governing structures. St. Louis County has 88 separate municipalities (which does not include, by the way, any neighborhoods in the city of St. Louis itself, which is not incorporated into the county). Each of these micro-municipalties must maintain its own budget and employ its own staff, and each of which is incentivized to view areas just a mile or two away on either side as rivals for the spoils of growth, rather than partners in pursuing regional prosperity. 

The second reason is that these fragmented cities are, by and large, heavily dependent on sales tax to fund their operations. Sales tax is 32% of University City's 2018 budget, more than twice the share of property tax. Sales tax dependence makes St. Louis-area cities' revenues highly volatile.

Finally, Missouri's TIF laws create a perfect storm of perverse incentives by allowing sales tax revenues to be captured by a TIF district.

University City is a "pool city" with regard to sales tax: it shares St. Louis County’s 1% local sales tax revenues with other municipalities on a per capita basis. TIF allows U City to, essentially, capture 50% of the additional sales-tax revenue brought in by a presumptive Costco and associated development, and spend it on local needs.

The catch: every other city with a similar TIF deal gets to do the same. And reliance on sales tax revenue has the unfortunate effect of promoting an overreliance on retail over other types of projects.

TIF in metro St. Louis is applied in a way that is worse than zero-sum. By subsidizing retail, suburbs are just shifting the tax base around amongst themselves, not growing the region's wealth. There's evidence that the practice deepens racial inequality. It certainly constitutes a huge net transfer of public wealth into private hands.

This is beggar-thy-neighbor economic development. And U City may be on the winning end of this deal, but by perpetuating this practice, it helps ensure it will be on the losing end of others in the future.

I spoke with Gerry Connolly of Team TIF, a group that pushes for more transparency in the use of tax incentives in St. Louis. He told me that the size of the subsidy, relative to the size of the project as a whole, is extraordinary in the University City case: about 35%, which is twice the regional norm. And yet, despite raised eyebrows and heavy public scrutiny, the city's analysis has been less than fully transparent: the City has refused to release a key consultant's report to the public until after the deal with the developer, Novus, is signed.

"It's a race to the bottom," says Connolly, who argues that state action is needed to end the TIF Wars. The State of Missouri could amend the laws authorizing TIF districts, or ban the financing tool outright for certain types of projects. Until it does, a small municipality like U City might well feel that, by being asked not to use TIF to lure retail, it's being asked to unilaterally disarm while its neighboring cities do not. I asked Connolly if this was the case. He agreed that it is.

Why University City Thinks This is a Good Deal

It should be acknowledged that the backers of the University City deal claim, essentially, "This TIF is different." The proponents of this project are not stupid or oblivious: they understand the Prisoner's Dilemma they're in too. It would be easy to take cheap shots; instead, let's actually let the city's leaders speak for themselves in justifying the deal. (Source: "ROARS Special Edition on the Redevelopment Plan Overview," available here.)

University City seeks to use this unique opportunity to bring attention to and reinvest in the 3rd Ward and Olive Boulevard, a part of the city that has long been neglected. The City envisions a healthy, vibrant, stable residential neighborhood north of Olive that is racially and economically inclusive. University City plans to use Tax Increment Financing (TIF) to fund this redevelopment.

University City's TIF is unique because the funds generated from the TIF (in RPA1), will not simply be confined to that area (RPA1). Instead, part of the funds will be used to revitalize certain 3rd Ward residential neighborhoods (RPA2) and the Olive commercial corridor (RPA3).

Current conditions at the redevelopment site. (Source: University City, MO)

In University City's telling of this story, it has very little to lose. This is not a case of traditional development versus auto-oriented development, because the area (despite the presence of successful, minority-owned businesses) is already characterized by a low-productivity land use pattern, with ample parking, underutilized land, and a large public storage facility.

And the area is, genuinely, struggling. From the redevelopment plan:

The total equalized assessed value (EAV) of the real property in both RPA 1 and RPA 3 has steadily decreased since 2011 as properties have been reassessed. The total EAV across RPA 1 and RPA 3 declined approximately 9% from 2011 to 2017. During this same period, real property assessed value throughout St. Louis County increased nearly 10%.

The subsidy will be a chance to do large-scale redevelopment and bring in money that would not otherwise have come in. That money will go to a revolving loan fund for commercial property owners elsewhere in U City (including immigrant businesses) to make improvements to their properties: in other words, the kind of ground-up, small-bet projects that Strong Towns advocates for.

And they're not losing anything, say the project proponents, because "but for" this TIF, the area around Olive and I-170 wouldn't redevelop at all under existing market conditions.

So now does the alleged Costco sound like a good project? We still think it isn't. This project exposes the city to some serious risk. It doesn't address the underlying reasons for University City's fiscal troubles or stagnant property values. And most troubling, it completely fails to position U City for future, sustainable growth and prosperity—and likely distracts the city's attention from the things it really should be doing to lay the groundwork for that growth.

Big-box retail is a losing economic development strategy.

 If you're going to subsidize a major development project as a way of bringing sustainable growth to your city, it really shouldn't be retail. And it really, really shouldn't be big-box retail.. Here's why: retail is, by and large, not an industry that brings wealth into a region from outside. This makes it unlike export industries like manufacturing, agriculture, software development, publishing, insurance, even tourism and businesses that cater to tourists.

Big-box retail does not create any new wealth for the St. Louis region. It doesn't create any additional spending power. Local retail is a zero-sum game: whatever dollars are spent in University City are not spent in Brentwood; whatever dollars are spent in St. Louis are not spent in St. Charles. If all tax subsidy dried up tomorrow, "retailers will probably still find a way to sell us stuff," says NextSTL's Richard Bose in this excellent analysis of the U City project.

And yet, according to STL Today, nearly half of the $1.3 billion in TIF authorized in the Missouri portion of the St. Louis metro area from 2000 to 2010 paid for suburban shopping centers. "Local governments also approved $340 million in new sales taxes to pay for roads and parking, mostly at retail centers," the article continues.

I get why University City wants a Costco. Costco's average sales per store are about $150 million annually. The Census Bureau reports that University City's total retail sales in 2012 were about $156 million. So a Costco theoretically represents about a doubling of the city's retail tax base.

But a Costco also likely represents zero net gain in retail sales in the St. Louis region, because it's not adding to the region's disposable income. What happens when it goes away? What happens when one of U City's neighbors offers a sweeter deal?

An analysis by geoanalytics firm Urban3 of the relative fiscal productivity of a Walmart and an urban downtown building.

Even if that worst-case scenario doesn't come to pass, there's the long-term economic performance of big-box stores to consider. And the evidence is not rosy. As a rule, the Costcos of the world aren't designed to last long. And they're not a very productive use of a city's most limited resource—land—while they're still there: big-box revenue per acre is negligible compared to that of traditional mixed-use development. Strong Towns member Jake Krohn crunched the numbers in his small town and found Target and Walmart were both worth only about 20% as much per acre as a single traditionally-developed downtown block. 

When big-boxes close—and to be clear, they're often built to last only 10 to 15 years—they leave behind a blighted landscape, and oversized infrastructure that was built to handle the regional traffic, as these photos by Johnny Sanphillippo illustrate.

Cities take a big risk with this kind of development. Not only are mom-and-pop businesses more productive per unit of land they sit on, but if one closes, the rest of the business district is resilient. With a big-box store, if the anchor closes, the whole district will be in peril.

This project's revitalization promises are far from a sure bet. And yet, U City is convinced it can't get a better development proposal—on the basis of, at least as far as I can tell from the city's own documents, more hand-waving assertion than actual analysis.

University City's analysis stacks the deck in favor of a foregone conclusion.

 TIF's "but for" test, applied properly, should mean, "But for this subsidy, no revitalization of any sort is going to occur here." Cities too often take it to mean "But for this subsidy, this particular project would not be viable."

This is evident in University City's own justifications for the project. The City's redevelopment plan states this:

Following are a number of factors that have led us to conclude that the Area likely will not be developed without the adoption of tax increment financing:

• The cost of site preparation;

• The cost of property acquisition and assembly;

• The cost of construction of various buildings and site improvements;

• The cost of residential and commercial building rehab;

• The cost of removal of obsolete utilities; and

• The cost required to construct utilities and other public infrastructure capable of supporting redevelopment envisioned by this Plan.

The above is a list of factors that preclude a large-scale, suburban-style, auto-oriented redevelopment of the entire 50-acre area by a single developer. "Property acquisition and assembly" is a tell here, and so is "public infrastructure capable of supporting redevelopment." (Infrastructure already serves the site, just not adequate infrastructure to serve a large influx of shoppers from the adjacent freeway.)

Data: City of University City, MO. Chart produced by Daniel Herriges.

The city is making a convincing argument that, without TIF, a big-box-anchored shopping plaza that attracts travelers from I-170 would not occur. Fair enough. But why is that the only option?

The city's Cost-Benefit Analysis, unless backed by much more detailed study that hasn't been released or summarized for the public, is a remarkable display of shaky justification. Here’s a graph that shows what U City has projected revenues to be over the 23 years of the TIF.

The city's numbers assume robust, resilient growth within the TIF district after redevelopment:

The market value is assumed to grow three percent (3%) after full build-out at each reassessment year (on odd-numbered years). This growth rate is an appropriate assumption with respect to well occupied, well-maintained commercial and retail developments elsewhere in St. Louis County.

The thing is, we know the typical big box's track record. We know how suburban auto-oriented land uses tend to fare after a generation. What happens if that Costco—the anchor of the whole development—closes in 12 years or so, as so many big boxes do?

The city also asserts that nothing good at all will happen without the TIF:

Based on the historic trends in the assessed value of real property in the Area, this analysis assumes that the market value of real property in the Area will not increase over time and will decrease over the next 10 years. This analysis estimates that the Redevelopment Area will not be subject to future investment without the use of tax increment financing and that the assessed value of the Redevelopment Area will remain unchanged into the future. This analysis also assumes that retail sales within the Area would not increase over time and would remain flat.

U City's no-build projections are revealing in their stark pessimism: Do you really think nothing can be accomplished there? Or are you just saying that to justify the subsidy package? By their seeming inability to envision the improvement of this site short of buying it all up and starting over from scratch, University City is overlooking better opportunities to build resilient wealth.

The Bottom-Up, Sustainable Alternative

Here's the thing: this is St. Louis's Chinatown. You already have a place recognized throughout the region, a place with an identity you can build on. The strip malls and physical setting are a bit shabby, yes. But you don't think you can improve it incrementally, instead of displacing ethnically diverse businesses from an ethnically diverse business district that’s known throughout the region?

There is low-hanging fruit here that U City isn't grasping, because it can't seem to see beyond the megaproject. Here's what they should do: adopt an approach based on Strong Towns's "Neighborhoods First" program. And do it city-wide. Or, as our president, Chuck Marohn puts it:

By observing how neighbors live their lives, by asking them where their daily struggles are, by getting out on the street and discovering what is actually going on, any local government can discern what their community’s pressing needs are. These projects are the high return investments and they are all around us.

A portfolio of incremental projects, each building on observed needs and past successes, is the basis of a solid, long term investment strategy for communities of any size. It is an approach that fits into every budget.

I can't speak for U City's leaders, but local governments are usually afraid of an incremental approach because it feels risky, because no one small bet is sure to pay off. That makes it hard to justify each line item.

But the reality is exactly the opposite: a small-bets approach is a less risky form of economic development, because you can see what's working and do more of it, and see what's not working and do less of it. You can adjust and adapt. 

In 2018, University City took in just shy of $17 million in property and sales taxes (FY 2018 adopted budget page 43).

Projections for the TIF deal have tax revenues to U City alone, just from the 50-acre redevelopment site, increasing from $173,997 to $2,739,501 over 23 years: a difference of $2,565,504. What would it look like if U City got that same amount of growth in its tax base in the same time frame, spread evenly across the whole city?

It would look like a 15% increase in the city's tax base in 23 years, or less than 1% per year.

So, here's Strong Towns's challenge to University City: Find incremental, low-risk, small-bet actions you can take to improve the value of properties in your city by 1% this year.

Then do it again next year.

And the year after that.

Throw out what's not working. Do more of what is working. Listen to your property owners and small business owners regularly: ask them what they need.

If the sort of revitalization University City wants to do in Ward 3 has a positive return-on-investment, then you can do it even without a surge of TIF revenue. You can even make the area a TIF district to recapture and reinvest the value created slowly over time. (Again, TIF itself isn't the problem; using it to subsidize unproductive and risky mega-projects is.) Start small, and scale up your efforts every year.

Few St. Louis suburbs are playing the incremental-development game. Few of them are in it for the long haul of being desirable, distinctive places 20, 50, and 100 years from now. Few of them are finding and making the highest-returning small investments in overlooked neighborhoods and commerical districts. There's untapped opportunity there.

On the other hand, if a heavily-subsidized Costco and hotel next to the freeway is U City's model of economic growth, then in 23 years, U City will be every bit as fragile as it is today, if not more so.

In 23 years, the city will still be heavily reliant on sales taxes to fund services, and that sales tax base will be vulnerable to being stolen by whichever neighboring cities are willing to shell out bigger corporate subsidies.

In 23 years, the city will still be saddled with an unproductive land-use pattern around Olive and I-170. Worst-case, they'll have some serious retail blight on their hands. What to do then? More TIF?

In 23 years, the city may have found ways to improve its sales pitch and appeal to potential residents and entrepreneurs—"Why should you live here and not another St. Louis suburb?  Why should you open your business here? What do we offer that makes us a distinctive community, a place worth caring about?"

But if so, this TIF won't have done a thing to help it do so. Because in the history of humanity, no one has ever answered the above question with "Costco."