A Discussion On Tax Incentives

I recently did a blog on all the development activity on De Tonty Street in the Shaw Neighborhood. In that post I made the following comment:

"It's really good to see this level of investment, taking vacant lots and bringing dignified homes and much needed tax dollars back to the people of the city....remember, a large part of the school budgets come from property taxes."

While this is true, it was pointed out to me in a brief Twitter exchange that while there is a little money added to the city coffers in the case of the De Tonty Street town home and apartments, there are significant tax abatements in place for the developers that allow them to pay very little property taxes for many years:

Now, my modus operandi as a St. Louis blogger is not to mimic real journalism where everything I say is fact checked, verified and sourced.

The writing I do here is strictly done as a hobby/no pay and that's what keeps it fun. I try to focus on my optimism and not my cynicism for St. Louis. I try to give a personal perspective on city topics through a typically cup-half-full lens.

That said, I want to gain an understanding of how tax abatements work and what they impact. I want to understand why so many people seem to be upset by this process (except for the developers of course). I've noticed this trend on social media and in some mainstream media outlets.

Basically, I want to know enough to be a critical thinker on the matter...and today, I stand ignorant on the subject.

And if someone takes the time to reply with thoughtful exchanges of ideas or data on social media, I'm open to continuing that conversation. So I reached out to Andrew Arkills through Twitter and a couple days later, we're talking over coffee on the subject.

The purpose of this post is to provide some resources for those who want to learn a little more on this complicated topic and to share some of the things I learned from Andrew and some of the opinions we shared.

So why does Andrew care so much and seem so knowledgeable on tax abatements?

He works in the private sector in the supply chain field where he's tasked with budget and cost of goods savings for his employer. He's a numbers guy and is fiscally conservative by training. Best of all, he's a concerned citizen of St. Louis and is worried about what he considers abuse of tax abatements, the process of how they are awarded to developers and the overall city budget.

Why should we be concerned with tax abatements for developers?

We are told that the city's budget is barely balanced and the the schools don't have enough money and that the city's credit rating has been downgraded.

Tax abatements don't fit the model of paying down debt, providing services and maintaining our infrastructure. 

When you listen to why most people move to the suburbs, they will often cite crime and/or schools as critical factors. Schools receive a significant portion of their budget from property taxes. 

A breakdown of what your property taxes fund can be found on the city's website and below:

~58% of property taxes go to the schools, but the zoo, museums, libraries, junior college, parks and recreation and routine city maintenance and services are funded this way as well. This is important stuff toward making a city livable. 

For instance, the zoo has mentioned the possible need to start charging for admissions due to losses in tax base that are due in part to abatements.

It affects us all.

But there is headway being made toward making some much needed changes to the system.  

A study was commissioned by the St. Louis Development Corporation (SLDC) and completed in May, 2016. It takes a comprehensive look at tax incentives. Here's an excerpt from the executive summary:

As with most major US cities, the City of St. Louis uses a variety of tax and other incentives to foster economic development. These incentives include tax increment financing (TIF), tax abatements and bond financing; they are often coupled with state and federal incentives, such as the state historic tax credit and the federal New Markets Tax Credit. Over a 15 year period, the value of the primary City tax incentives (through TIF and tax abatement) has totaled $709 million.

While economic development incentives are broadly used, there are legitimate questions about their efficacy and administration. To gain a better understanding of past and present use of incentives in the City and across the country, the St. Louis Development Corporation (SLDC) commissioned this study.

The report is nearly 200 pages and is quite thorough, the St. Louis Post-Dispatch and NextSTL both wrote very insightful pieces on the report. But, I would start with the full report if you want to know the extent that incentives have been given throughout the city.

Click HERE to download the full report.

I asked Andrew where he got the information included in his tweet on how much taxes the specific De Tonty town homes and apartments project received and he said you can find tax information on a parcel by parcel basis on the city's Geo St. Louis website. This is where you can enter an address and see what property taxes were paid as well as the assessed value. 

For instance, if the developer paid taxes for a year when they owned a lot and paid a small amount of taxes, this is what the value stays at for X number of years after the project is completed. Those terms are negotiated between the developer and the city.

Sometimes this tax information is hard to find. Andrew found that when a property is about to be abated, the history is removed from Geo St. Louis so you can't see the amount the city lost. By his best estimation, the city is not even tracking how much they are removing from the tax base. There is no easy way to track the incentives, and from an audit standpoint, this can be risky and untraceable. 

The city is not sharing the annual amount it is giving away. It is not being tracked. Andrew has tracked it for a year. The SLDC study claimed the number is around $709M over a 15 year period.

We both agreed that we are not anti-development, and there are cases to be made where TIFs and abatements are successful: think of cash cows like IKEA that will likely pay off the municipal bonds earlier than the the agreed upon term, or historic tax credits that help incentivize preservation of our built environment. These make sense. 

But if we're going to move forward we have to do so in a smart, coherent manner. As of now, incentives are managed on a ward by ward basis.

In some wards, a community development corporation (CDC) may be calling the shots; as is the case in the Central West End; but where neighborhoods do not have that resource, it is largely up to the elected alderman to assign these incentives, seemingly on a whim.

Andrew explained that by statute, abatements have to be sponsored by the alderman. A developer can approach the SLDC or the alderman. A bill then gets introduced in the alderman's name, and they have to specifically say "no" if they do not agree with the incentive. Otherwise, it gets introduced to the floor and once it gets to the point, it is hard for it not to pass.

We discussed the lack of process, formula or rubric to fairly qualify and consider incentives and appropriately assign them across the city on a project by project basis. We need a scoring matrix that proves the benefit to the citizens as well as the developer.

It would be much more transparent and palatable to the citizenry if a formula was in place to remove the subjectivity and relationship aspect. That formula could include important variables like a certain percentage of affordable housing units, minority participation in construction, numbers of jobs it will create to offset the property tax loss, etc. 

But it is hard to stomach incentives for a business to pull a musical chairs and move from one part of the city to another, not creating new jobs or services and abandoning another property in another part of town.

We agreed that you don't want to close the door entirely on incentives; clearly there are cases where it is needed, like struggling neighborhoods where there has been no development for years and the infrastructure has rotted or is non-existent.

A compromise seems easy in theory, we just need the political will to make it happen. The great thing is, we both agreed that more people are paying attention to the system. W

e should demand a coherent, streamlined, process-based system. We simply need oversight to help fight cronyism.

We are not alone in this thought, the St. Louis Post-Dispatch wrote an excellent editorial piece making a strong case for a plan:

The plan should also encourage ending a quaint political perk known as “aldermanic courtesy,” which means an alderman doesn’t ask too many questions of a colleague requesting a tax abatement in his ward.

There should be healthy debate and lots of scrutiny about the best way to encourage balanced development. If well-connected homeowners or developers are buying property in healthy or upcoming neighborhoods yet still receiving tax abatements for five or 10 years, aldermen need to be asking why.

The formula has to be transparent and used justly and fairly across the city. People will be okay with that. We need an economic development plan to share the rules and look at the city's needs and what needs to be developed, what corridors are being prioritized for development. That would make it easy to see the marching orders and see the goal. Like if the city had a goal to get rid of 25% of their LRA properties by x year, we'd watch it change.  Say for instance if Page Avenue was prioritized as a commercial corridor, we could agree to incentives to bring back some much need services to an underserved population.  Incremental change is accepted if it is transparent and rules are followed.

Hopefully as the mayoral debates come to fruition and the aldermanic numbers decrease, this will be part of the discussion. We share the hope that while social justice, race, crime and poverty are huge issues and are the ones that lend themselves to headlines and attention grabbing quotes, we need to keep the tax base system as part of the discussion.

Hopefully people like Andrew will be the ones to keep the discussion going and convince more people like me to take a harder look, do some reading and try to think critically on this important issue.

Hey, nobody wants to pay taxes, my home has historic tax credits that limited the amount of taxes I pay. That will expire soon and my taxes will go up. I'm not happy about that, but I accept it. 

I'm just not convinced each and every project needs TIF or abatements. We need a smart, transparent, just formula. 

It's hard to believe a ten year tax abatement is necessary in CWE, Shaw or Tower Grove South. The developer needs to fund projects, not the city. The schools need the money. We can't keep giving away the treasury.

I think we'd be a much better city.

I'm hopeful that we can make these much needed changes and we can elect people with the will to execute a plan.