Missouri Tax Credits - The Republicans Might be Right on this One
Tax credits are the sneaky twin of government appropriation. Sometimes, when the prospect of attaining direct government funding of your special interest is simply too daunting, tax credits offer an easier route to accomplish the same goal. If direct spending is "pork", tax credits are "sausage" - kind of the same thing, but more highly processed, and more likely to include snouts and anuses.
According to the Star this morning, there are currently 61 different tax credit programs in the state of Missouri. They are administered by the Missouri Development Finance Board, and their "counsel" is Gilmore & Bell, a law firm specializing in transferring public dollars to private pockets though tax incentive deals and bonds (or, as they phrase it, "one of the leading public finance law firms in the United States"). Gilmore & Bell's website brags about how many public dollar giveaways it worked on in 2008 - just under five billion dollars nationwide.
If you're looking for the heart of darkness for governmental spending, you've found it.
The funny thing is, this secretive little back room has flourished for years, because it has no natural enemies. Democrats tend to support it because much of the money goes to big projects in the urban areas. Republicans tend to support it because most of the money goes to insanely wealthy insiders who know how to work the system - country club Republicans and development lawyers. It's a rare opportunity to toss money around without supporting increased government spending, and appearing to actually be reducing taxation.
It's even shadier than that, though. There is actually a market for these tax credits, and they get sold to the wealthiest entities in the state, at a discount. If I get a million dollar tax credit, but I don't pay much in taxes because I don't earn much, I can sell that million dollar credit to a multi-millionaire for $850,000. The millionaire gets a million off his taxes for only $850,000, and I get $850,000, while the taxpayers get the shaft.
To Gilmore & Bell and the Missouri Development Finance Board, that's a victory to brag about on your website. For the taxpayers, though, that's a million dollars that needs to come from somebody else's pocket.
Of course, with this much money being tossed around, there are puppets who can be counted upon to stand up for the status quo.
Ironically, the loudest defense of tax credits is based upon the fact that they accomplish much good. Indeed, that is absolutely true. Not even a secretive board sequestered in a back room in Jefferson City can spend millions upon millions of dollars without accomplishing some good. Spending money makes people happy.
But, if the money spent is so darned wonderful, what's the problem with dragging the process into the light? The proponents of change want to set caps on how much money the Missouri Development Finance Board can give away from our treasury without approval - can anyone seriously argue there should be no limits? They also want to treat the tax credits like appropriations - and they are exactly like appropriations, only shadier, so I agree with that point as well.
When you hear the wonderful accomplishments of tax credits, and how many jobs they have created and how much investment they have spurred, congratulate the defenders of the status quo on their achievements.
But ask them why, if everything they are doing is so darned positive, they fear more accountability?
Labels: republicans, tax credits, tax policy
posted by Dan at 3/24/2009 05:53:00 AM
9 Comments:
Dan, Dan; this is far more knee jerk than expect from you, other than on TIF. 61 credit programs is kinda nuts; but the large number stems in part from that Missouri pride and joy, the Hancock Amendment. In effect, tax credits let the legislature target development without a net effect, because the amount of taxes the state can collect is capped. Your "big mean rich developer" meme is out of place for the vast majority of the credits, which are intended to foster small business growth--and some weird ones, too--sawdust, wood chips, logging, on and on.
I assume your rant is aimed at the biggies--historic rehabilitation, low-income housing, and job creation. Ask the folks working at the Harley plant, getting health insurance and paying taxes to the state if they agree.
Both historic and low-income housing credits are tied to Federal programs, have built in limits on fees and return on investment and reward people--yes, even the evil "developer" class--for projects that are economically viable and contribute to the community for years. They are simply tools. Consider low-income housing credits, Federal and state: the point is to generate equity to build housing, which reduces the amount of debt needed, which reduces the amount of cash needed to pay the debt service, which reduces the rent levels. Imagine! Every project budget is reviewed and approved annually, and if it looks like the owner may make an "excessive" profit, rents are reduced.
Finally, the "OMG they sell credits for $.85" whine. I admit, it's not obvious, but it's a favorite attack by the uninformed; I hate to see you there. The reality--when you pay state income tax, you generate a deduction from your income for Fed. tax purposes. When you use a state tax credit, you lose that deduction. Every dollar of state tax credit used costs $.35 in additional Fed income tax. Teh only reason some credits are worth %.85 is that they generate balancing deductions for the increase in Fed. tax. On top of that, in some cases (low-income housing, for example) investors pay for credits today that will be available over a ten year period.
We all know the games you can play with stats; but in fact, a number of econ studies have shown more return to the state in income, business and property taxes than loss from the rehab credit. The low-income housing credit generates construction jobs and related income tax, raises local property tax bases and generates decent, affordable housing in every area of the state.
It's an easy attack, on a complex set of issues; something you're usually better at than this.
It's even shadier than that, though. There is actually a market for these tax credits, and they get sold to the wealthiest entities in the state, at a discount. If I get a million dollar tax credit, but I don't pay much in taxes because I don't earn much, I can sell that million dollar credit to a multi-millionaire for $850,000. The millionaire gets a million off his taxes for only $850,000, and I get $850,000, while the taxpayers get the shaft.
I may return to this post, because I'm afraid it's filled with epic fail, not at all in your usual style. The quote above leaves out many things, including--to get your million dollar credit, you would have to spend far more than that. You'd have to rehabilitate an historic building--spend about $4MM on qualified expenses, approved and audited by the state Dept. of Natural Resources and the U.S. Dept. of the Interior. That doesn't count the costs of acquiring the building, off site and infrastructure improvements, etc.
All of the credits are created by statute, and are awarded after performance of some economic action that the legislature has determined is a public good. You can argue that legislators don't always do that--I certainly wouldn't argue with you on that topic--but in that case, you've chosen the wrong target for your rant. The premise of such incentives is that some desirable outcome--decent housing for low income earners, preservation of significant buildings, even development of commercial uses for sawdust--won't happen through market forces. It's more profitable to rent at whatever the market will bear, it's cheaper and more efficient to build a new building than adapt an old, etc.
Finally--"shady!!!" The fucking statutes are public, the legislative process is public, the application process for credits is public (and often highly competitive), and the projects qualifying for credits exist in the world. Neighborhood Preservation Credits are preserving a residential neighborhood between St. Lukes and the Plaza--you can go look at the buildings, you can read the statute and see what's required, you can review the applications and audit documentation. You can argue that it would be better to just let the neighborhood go commercial/office, but you don't make that argument after the fact to the folks who use the credits to make a project feasible.
Les -
Do you really believe that it is good tax or economic policy to have these little Easter eggs for favored businesses built into our tax system? Sawdust? Really?
If you go back and read what I wrote, you'll see that I didn't advocate abolishing tax credits - I called for a little rationality and transparency for a program you acknowledge is "kinda nuts".
As for your accusation that I was whining about the discount, let me ask you one question. Do you deny that the overwhelming majority of tax credits are used by those at the top of the tax brackets?
Finally, you do exactly what I figured the defenders of the status quo would do - you point to a couple good uses and use them to somehow indicate that we should not subject the process to increased scrutiny. Sorry, that's just not good enough for me. I'm sure vigilantes killed some bad guys, too.
Do you really have a problem with requiring approval for credits over $50 million tax dollars? Do you really have a problem with requiring that these expenditures go through the same process as appropriations?
This comment has been removed by a blog administrator.
Sorry, but wildly misinformed and inaccurate attacks on my job aren't going to stay up here. (For that matter, neither would well-informed and accurate ones, come to think of it - but the deleted comment happened to be wildly misinformed and inaccurate.)
Better late than never?
As for your accusation that I was whining about the discount, let me ask you one question. Do you deny that the overwhelming majority of tax credits are used by those at the top of the tax brackets?
Of course not--buying a credit, or investing in a credit project, only makes sense if you have an income tax liability. On the other hand, many of them are generated by and available to individual homeowners, start up businesses, etc. I've used them, from single family low-income housing deals. But the economics cut both ways--it's much more difficult for a developer to market credits to 100 people than to 1; more expensive, more regulated, more inefficient. You're basically arguing against huge income discrepancies, here--I'm with ya, but it's a different argument. People/businesses with investment capital make investments.
Look, tax credits are an investment. You can put your money in a savings account; the more you put in, generally, the higher your return. You can invest in tax credits--and a developer can sell that investment only to the extent it creates a return to the buyer comparable to the return he can get on his money elsewhere. But he's not going to sell it for less either--he wants the money for his project/business.
If I owe $100. in taxes, I'm not going to go pay $100 for $100 worth of tax credits--what's the point? I save nothing, but I generate transaction costs. How about I pay $90? Hmm--Mo. tax goes down $100; I can write off the cost, so Fed and Mo. tax goes up about $4 (.4 x extra $10 income, I make $6 on the deal. I'd probably do that. But wait--the credit project closes in Jan., so I could have left my $90 in the bank for a year and made a couple of bucks, there's some risk in the business deal--nah, I can do as well or better with less headache.
But I'll say--if you think you will pay non-discounted prices for tax credits, I can guarantee I'll find as many as you want, and more. You've got my number.
Do you really have a problem with requiring approval for credits over $50 million tax dollars? Do you really have a problem with requiring that these expenditures go through the same process as appropriations?
Personally, yes; $50MM cap would cost Mo. tremendously in job creation, affordable housing and preservation of historic properties--like small town downtowns, as well as things like the KC Board of Trade building. It would likely reduce Mo's overall tax receipts as well. Am I fundamentally opposed to caps? No; most of the credits have them already. I am opposed to appropriations--too much uncertainty; you wouldn't get investors or bridge financing, because you could get to the end of a project and have nothing. Cap at a reasonable level, set qualifications, allocate first come first served to qualified projects so they're not distributed as political goodies--fine, and most of the affected industries will agree.
Do you really believe that it is good tax or economic policy to have these little Easter eggs for favored businesses built into our tax system? Sawdust? Really?
C'mon, Dan, of course it's good policy to incentivize socially desirable endeavors. Do you really think it's good policy to give tax breaks for charitable and religious contributions, hmm?
As to sawdust--you're drifting into Jindal/volcano monitoring territory, here. Turns out the Ozarks, one of the state's poorest areas, generates a lot of sawdust--logging is a significant industry. Most of it gets burned (not good for lots of reasons), landfilled (ditto), lays about generating mold, etc. Now, there are some things you can do with sawdust--but they tend to need capital for startup; there's probably more things that could be done with them, if some bright Hatfield had an incentive to try. I think it's great to create a way to raise capital--jobs, hope, all that stuff.
Finally, you do exactly what I figured the defenders of the status quo would do - you point to a couple good uses and use them to somehow indicate that we should not subject the process to increased scrutiny. Sorry, that's just not good enough for me. I'm sure vigilantes killed some bad guys, too.
I said you are welcome to argue about the uses--but at the moment, you haven't demonstrated you know what any of them are, you are just whining. Similarly, you don't demonstrate any idea of what the current level of scrutiny is--some credit programs are out of reach of small timers already, because the application and compliance programs are extremely onerous and complicated--if anything, the oversight bureaucracy is overdoing it. I'll turn your vigilante jibe around--you seem to be arguing that since a policeman made a false arrest, we should handcuff them all. It's no trick to find a silly or illegitimate instance of a credit; to assume from that that every credit program is uncontrolled largess for the robber barons is unworthy of you.
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