Findings and Recommendations from Study of
Tax Incentive Use in St. Louis City
The City of St. Louis, like most major US cities, utilizes a variety of tax incentives for economic development, including tax increment financing (TIF), tax abatements and bond financing. Often these incentives are combined with state and federal incentives, such as the state historic tax credit and the federal New Markets Tax Credit.
St. Louis Development Corporation (SLDC) contracted with Public Financial Management (PFM), to conduct a study of tax incentive use in the City of St. Louis. For this study, PFM subcontracted with the Public Policy Research Center (PPRC) and St. Louis Universityy. PPRC collected and analyzed all the city data on tax incentive use from 2000-2014. Additionally, the project team conducted numerous interviews with experts on city planning and development, as well as obtained, cleaned and analyzed historic data related to incentive use and outcomes associated with specific projects as well as neighborhoods and the City as a whole.
The full report can be viewed or downloaded here.
Below are highlights of the findings, as well as some recommendations formulated by PPRC.
Inventory of Incentives
- This report represents the first ever comprehensive inventory and all major local and state economic development incentives used by the City of St. Louis, including the location of the incentive use, when the incentive was used and an estimate of cost.The report looks at incentive use from 2000 to 2014, and found that projects in the city received a total of $3.85 billion from various local incentive programs, including tax abatement, tax increment financing (TIF), New Market Tax Credits and local bonding.Another $2.03 billion came from State of Missouri incentives, including business credits, real estate tax credits, contributory tax credits and state investments/bonds and grants.
- The report includes the first ever estimate of total incentive cost by incentive at the city and neighborhood level, showing that incentive use is concentrated in the city, with three neighborhoods—Downtown, Downtown West and Midtown— receiving approximately two-thirds of the value of incentives.
- By combining different data sets on incentives, the report demonstrates how local developers layer incentives to execute projects—combining different local incentives, different state incentives and local with state incentives.The geographic pattern of this layering is a part of the story of development in the city during this period—for example, the use of historic tax credits, tax abatement and TIFs to complete downtown loft and commercial development, the use of low income tax credits and tax abatement to build affordable housing in lower income neighborhoods both in North and South St. Louis and the use of abatement alone and in combination with state tax credits to rehabilitate historic neighborhoods in the central corridor and South St. Louis.
- While incentive use is correlated with increasing economic outcomes within neighborhoods—namely increased assessed value—this is largely due to the increased values at the location of the incentive use and less to spillover effects on surrounding properties.Moreover, there is evidence that some types of incentive use—particularly involving incentives for retail, commercial projects—is correlated with a loss of economic activity in the surrounding area, as new business at incentivized projects substitutes for reduced business at existing facilities.
Patterns of Incentive Approval
- The process of pursuing and securing the use of incentives is fragmented, decentralized and not designed to maximize economic and social benefits.While the city utilizes opportunity planning to build larger district plans, in many cases local government is reactive to the proposals of private developers.
- Different incentives utilize different criterion—often not well defined—meaning that it is difficult to assess 1) whether projects need incentives (market gap) or 2) whether incentivized projects will bring long term net benefits to the city, either in economic or social terms.
- Because of the lack of clear metrics and principles regarding incentive use, incentives like abatement have become more or less universally available incentives in particular parts of the city, with no real calculation as to whether the project needs or deserves the incentive.
- The fact that data on incentive use at the project use—including data on the project itself—is not centrally gathered and stored makes it difficult to calculate the cost of incentive use, particularly for stakeholders like local public schools that do not formally participate in the process of approving incentives.
PPRC has developed several recommendations, based on its analysis of the data and the impact on the City of St. Louis. These include:
- Whether their local economic benefits, the game of incentive use is a political one in which local public agencies must balance the desire of developers for incentives will broader local needs and interests.
- Stronger, more formal and transparent metrics regarding the use of incentives—applied as part of the approval process—could help balance the playing field, providing local economic development officials more muscle to push back when incentive use is not necessary.
- These metrics should include measures that attempt to estimate the net benefits of incentive use—whether the cost of public incentives (and the potential negative consequences of incentive use on surrounding business activity) is exceeded by probably increases in assessed value, income taxes or other local revenue sources.Other metrics looking at the rate of return for particular projects could help identify where incentives represent a “market gap” and, conversely, where they are just an additional “ask” by developers.
- More fundamentally, decisions regarding the use of incentives need to recognize that incentivized projects produce not just economic benefits, but also other social benefits not usually incorporated in conventional metrics, including quality jobs, environmental benefits, affordability, public health and equity benefits.
- Additionally, local policy makers should understand that many parts of the city are largely “cut” out of the incentive game, including a large number of low and moderate income communities where economic development is needed and that reforms in incentive use should use an equity perspective to explore how potential changes, including the introduction of differently designed incentives, could encourage incentive use where it is needed.