Empower Missouri’s Affordable Housing Coalition recently released their 2020 legislative priorities. You can read it here. Some things on the list are very straight forward, some are really big asks, and some are common sense. However, one in particular is a bit more complicated.
Cities and states have a slate of tools available to them to help encourage development. These resources were designed to spur growth in underserved areas or markets. Usually this happens with tax abatement, waiving sales tax on building materials, or a break on payroll tax for the contractors, etc. These savings on taxes can be folded in to the financing package to help meet any gap that may prevent the developer from making a large enough profit to offset their risk. In rare cases, the city may offer low cost lines of credit or even cash incentives.
These tools are especially important in communities that have been historically disinvested, such as North of Delmar in St Louis or East of Troost in Kansas City. Developing in these communities is often vital to the health of the neighborhoods, providing access to necessary supports such as quality food or healthcare. Similarly, rural communities often benefit from access to retail outlets as job producers and access to low cost goods. Without these tools, often the hard costs of the infrastructure are a barrier, stopping this growth from happening.
These tools can also help fill the gap where the private market doesn’t serve people, especially those with low or extremely low incomes. Housing affordable to people who earn 30% of the Area Median Income will not happen without as many incentives as possible. For these projects, a mixture of incentives, abatement, and tax credits are necessary to make the development financially possible. This is especially true for new building, which is quite expensive.
Of course it is important that cities and the state balance the usefulness of these incentives against the public cost. Especially when property tax abatements are used. A property tax abatement essentially freezes the property tax of a specific development in time. So for example, the developer will pay property tax on an empty lot for 10, 15, even 25 years or more past the time a building is built there. Over that length of time, the taxing jurisdictions that are supposed to be using that property tax to adequately serve the community simply misses out on that portion of funding.
Property taxes fund important community services like libraries and school districts. Missouri teachers are some of the lowest paid in the country, and part of this may be due to our current economic incentive policy. Often the argument in favor of property tax abatement is that the lot where the development stands wouldn’t have brought in any new tax dollars had it been left undeveloped for those 25 years. A new office high rise, for example, will bring payroll and sales tax to a community. However, this money never makes it back to the taxing jurisdictions that are funded primarily by property tax. The city or state may enjoy a boost in sales tax revenue, but the schools will continue to miss that revenue while their costs increase.
These abatements are sometimes used as designed, to actually benefit community. Tower Grove Neighborhood in St Louis uses property tax abatement to rehab abandoned homes and return them to the housing market. Tax incentives saved a Sunfresh grocery store in the Linwood shopping center in Kansas City.
Many studies show that these incentives are not awarded equitably. Designed to serve under developed communities or underserved markets, these incentives often are used in wealthy communities or thriving downtown corridors. National studies show that cities with high incentive use are also more inequitable.
Inequitable incentives are of particular concern when used to offset the development of ‘luxury’ developments. For example, Cordish has used a combination of incentives to develop luxury high rise apartments and entertainment venues in Kansas City and St Louis. I enjoy a drink in Power and Light as much as anyone, but I enjoy a well-funded school district more. The high rents of these luxury developments help to raise the cost of housing in all of downtown, pushing out people who have lived in the city for decades.
Developers are required to show that a specific project is useful to the community. They also must show that A.) the area where the development is slated meets the definition of ‘blight’; and B.) the development would not be financially viable but for the incentive.
There are several ways states have reigned in these incentives. Some communities have shortened the abatement period to only ten years. Some have passed caps so only a portion of property taxes can be diverted. Some states have significantly narrowed the definition of ‘blight.’ In Missouri, our current definition includes ‘detrimental to … morals.’ That is quite a subjective measure.
Empower Missouri hopes Missouri will pass HB 1350, which would allow school districts more input into incentive negotiations, including the ability to protect their portion of any abatement. States with this provision find that school districts are more involved from the beginning and not likely to actually need to completely opt out of the package. We would love to see that ability expanded to all taxing jurisdictions, but school districts often take the largest hit in these packages.
These incentive programs are often convoluted and difficult to understand. This is on purpose; there are literally millions of dollars available if you can figure it all out. That doesn’t mean we should give up. Those interested in social justice must demand equitable tax structures. These incentives take funding from their intended purpose (schools, libraries, mental health and emergency funds, etc) and divert it back to developers to offset construction costs. This should only happen when the community benefit outweighs the loss of that instructional time or free public resource.