How does Fragmentation negatively impact the economic success of our region?
As part of their research, Better Together canvassed the St. Louis business community. They secured feedback from 1500 small business owners through a series of meetings. I recently attended a similar meeting, so I assume the format was similar: About 150 people showed up. We were asked a series of survey questions before splitting up into several groups for a guided discussion.
Throughout these meetings, the most frequent complaint was about the confusing nature of applying for a business license. Since each municipality is, for the most part, responsible for regulating its own businesses, there is a wide variety of different processes one must go through. Different municipalities have different permits, costs, required paperwork, online availability, and different offices responsible for supervising the process.
Some municipalities do it well. Maplewood, for example, has a well-designed online source of information, a phone number for the city clerk, and an easy-to-follow process. It’s probably no surprise that Maplewood is thriving. On the other hand, many expressed frustration at the process in St. Louis City. One person commented on the lack of communication between the License Collector and the Collector of Revenue. It’s required to receive a clearance from the Collector of Revenue before the License Collector can grant you the business license. This lack of communication makes the process more difficult. The owners of the Fortune Teller Bar on Cherokee street had a similar complaint about the differing and inaccurate information given to them by different offices.
St. Louis City really needs to step its game up.
What’s the problem?
On the surface, this variability between municipalities might not seem like a problem. I mean, one of the main arguments against a merger is the idea that municipalities will have to compete against each other in order to attract people to live within them. Maplewood is out-competing St. Louis City and therefore St. Louis City will be forced to improve their processes. Many of the business owners even expressed appreciation for the smaller size of their municipalities. One owner said that he was walked through the process by the City Treasurer and gets regular check-ins by the mayor. This wouldn’t happen in a large consolidated bureaucracy.
I guess the main problem to this high variability is the extra level of abstraction it adds to the already complicated process of starting a business. You have to filter through each of the 92 municipalities to find the best fit. Obviously an ideal situation would be one where we had Maplewood’s well managed process for the whole city. Better Together recommends a streamlined system similar to Pennsylvania’s Welcoming Center. Creating a similar website could be done by a private party and doesn’t even require the legislature to step in. That being said, I’m not entirely convinced by Better Together that fragmentation is a problem when it comes to starting a business. It might even be a feature.
Of course I’m open to different interpretations.
Tax Increment Financing
When it comes to a municipality’s ability to influence economic development, the most utilized tools are tax incentives in the form of Tax Abatement, CIDs, TIDs, and, most infamously, TIFs. I’ll focus on TIFs (Tax Increment Financing) here because it was most thoroughly covered in Better Together’s report and because it’s a frequently discussed issue.
Tax Increment Financing typically works like this: You find a district that needs to be improved and a developer willing to invest in it. You freeze the amount of property taxes coming from that district at its current level and then issue bonds to raise the capital for an upfront investment into the district. As the district is developed and its value increases, you use the increased property tax revenue to repay bond obligations. This technique is beneficial for the developer because his business will do better when the area around it is improved. It’s beneficial for the government because it’s a good way to target investment towards certain areas.
Tax increment financing has proved to be a useful tool. The Cortex district is a TIF district, and it looks to be a promising source of future income and technology jobs. The Pagedale TIF has been used by Beyond Housing to bring fresh grocery options to a low income food desert.
Despite the good, there can be problems, especially in fragmented areas such as our own.
For starters, the power to create a TIF resides, for all intents and purposes, with the governments of individual municipalities. Although the official process does require the creation of a TIF Commission which is responsible for looking out for the region as a whole, it’s very easy to override these commissions. All it takes is a 2/3 majority vote of a municipality’s Board of Aldermen. Considering the average municipality only has 6 aldermen, this means it only requires a 4 person vote to override the regulatory TIF commission. This is very easy to do.
Why is this a problem?
The issues emerge when you consider the fact that each municipality is competing with its neighbor for business and sales tax revenue.
Better Together sums this up with a story:
“One need look no further than a 2010 TIF approved by the Bridgeton City Council that provided $7.2 million in tax-increment financing for the creation of a Walmart on St. Charles Rock Road. In fact, this TIF was granted so that Walmart could relocate an older store already located on St. Charles Rock Road and only two miles away. The older Walmart was located in both Bridgeton and St. Ann. However, when Walmart announced it was seeking to move to another site with expanded space, Bridgeton stepped forward to retain the store and the sales tax revenue. Municipal leadership warned that Walmart would simply close the smaller store and relocate to another city if Bridgeton refused to offer a TIF, and the store would take $1 million in annual sales tax revenue with it. The initial site of the original Walmart remains undeveloped today.”
According to a report conducted by the East-West Gateway Council, the use of tax incentives by one municipality appears to have negative impacts on neighboring municipalities, most notably the loss of sales tax revenue. This creates a zero-sum-game which puts each individual municipality in a terrible negotiating position. Large corporations appear to be acutely aware of this fact, as the story about the Walmart in Bridgeton shows.
What has been the effect of this strategic disadvantage?
According to the East-West Gateway report, 598 smaller retail stores have closed over the last 10 years. Despite these closures, employment in retail actually increased by 2700 jobs, implying a replacement of smaller stores by larger corporations. This means there’s less room in the market for local shops and entrepreneurs and that, most likely, profits are leaving the region. E-W gateway determined that each of those 2700 jobs came at a cost of $12,000. This is not considered a good trade-off.
The problems go deeper for the region as a whole.
Creating a TIF district has become a politically expedient way for politicians to increase tax revenue. It’s difficult to get re-elected if you raise the property taxes of your constituency and/or decrease the quality of government service. On the other hand, if you can lure business to your municipality via Tax Increment Financing, you can harvest the sales tax revenue without raising taxes on the people who will be voting for you next election cycle.
This basic political fact has possibly led to the overwhelming reliance on sales taxes in our region. Chesterfield, Town and Country, Ladue, Crestwood, and Wildwood are just a few of the many municipalities raising almost 50% of their total tax revenue through sales tax. This allows these municipalities to maintain artificially low property tax rates while still maintaining decent levels of service. Sales taxes are more detrimental to low income individuals. Since it appears that an increase in sales tax revenue for one municipality results in a decrease in revenue for a neighboring municipality, the wealthiest among us are, essentially, placing most of their tax burden on people outside of their communities. At least they are according to Better Together.
What is the solution here?
Better Together points out that Missouri is 1 of only 14 states which allows the capture of 50% sales tax along with 100% of the property tax of a TIF district. Most states only allow the capture of property tax. This fact makes TIFs
more financially rewarding potentially less risky to municipalities(more revenue available to pay down TIF Bonds) in Missouri and, therefore, increases the likelihood of their use. Next, Better Together points out that Missouri is 1 of only 6 states which require approval solely by a municipality for the creation of a TIF. Of those 6, only Missouri and Colorado are allowed to capture sales tax as well as property tax. This is a rare situation, and creates an environment where TIFs are more likely to be abused.
This is a situation that can probably be somewhat improved, if not completely fixed, by the Missouri State Legislature. Even without a full consolidation.
This leads me to believe that, perhaps, many of our problems can be fixed without a politically difficult consolidation process.