A Tale of Two Saint Pauls

 It was the best of times in Saint Paul, it was the worst of times, it was the age of affluence, it was the

age of poverty, it was the epoch of opportunity it was the epoch of squandered chances, it was the season of progress, it was the season of the status quo, it was the spring of competence, it was the winter of partisan incompetence, we had everything before us, we had nothing before us.

Saint Paul is a challenged city that has made a lot of mistakes.  It has overused Tax Increment Financing (TIF), rendering it fiscally poor and unable to perform basic city services such as snow plowing, filling potholes, or reconstructing and repaving streets.  The TIF also impacts the City’s schools, impacting their taxing capacity to fund programs.

In addition, stretching over several administrations and city councils, there just does not seem to be a priority or interest in addressing core city services.  For years I used to argue that one could get elected to local office anywhere in the US by running on core services such as streets, sidewalks, parks, fire, and policing.  But that no longer seems to be the case, at least in Paul.

In part due to the polarization and nationalization of American politics that extends down to the local level, voters seem less interested in these issues than before and candidates for local office run on national or global issues such as world peace or climate change.  Public officials in St. Paul seem uninterested in local issues, unwilling or uninterested in the nitty gritty of what local government is supposed to be about.  Single party rule, where there is no chance that come November this year when city council faces re-election, renders the threat of losing less than a viable check to force officials to focus on what is important as opposed to what is needed or essential.  Partisan and interest group capture have corrupted the decision making process.

But St. Paul officials also seem bent on simply making choices in the absence of evidence. This is the case now where the City and Planning Commission are preparing to eliminate single-family zoning.  

There is a fashionable belief among planners now that elimination of single family zoning will decrease residential segregation and housing costs. There is no evidence that densification will do that.  We already know in Minneapolis and from larger macro studies across the US that densification has not improved housing affordability and it has done little to increase overall supply.  Moreover, we see signs in Minneapolis that the elimination of single family zoning has led to venture capital buying up undervalued property in undervalued neighborhoods (mostly populated by people of color).  Eventually the new unit produced will be for more affluent users  because developers will build those units which are most profitable, and not necessarily those that are the most needed or affordable.

Think of the elimination of single family zoning as government-sponsored property flipping.  It is a new version of redlining that will foster gentrification in St. Paul.  The neighborhoods that will be most affected by the elimination of single family zoning will be Midway, Frogtown, Rondo, and perhaps the Payne and Arcade areas of the city.  Some of these neighborhoods have already experienced the largest property tax increases in the city; again an early city of gentrification.

But there are other reasons to question the elimination of single-family zoning. Jane Jacobs, whose Death and Life of Great American Cities is perhaps the best book ever written on planning and cities, points out, cities are generators of diversity.  They thrive on diversity in all forms, including architecture, design, and lifestyles.  Cities need many different types of neighborhoods and housing to be successful.

Years ago I consulted with one local city.  We realized they had a problem.    They were a bedroom suburb that had only one type of housing.  What they lacked is housing for everyone and for the cycles of our lives.  Cities need housing for singles, young couples, families, empty nesters, and then older people.   If one does not provide this diversity of housing people leave.

Cities need to retain all types of residents, including middle class individuals who wish to own their own home. There are all kinds of reasons to encourage home ownership, ranging from wealth building, producing neighborhood stability, to maximizing lifestyle choices.

In moving to eliminate single family zoning, St. Paul will do little to rectify the intense economic and racial residential segregation that exists.  Instead, it will only exacerbate existing gentrification and development patterns characteristic of the city for the last generation or so. What is needed is a change in policy and in how the City is run, but this decision is not an example of what positive change should be.  It is another sign of uniquely the problems St. Paul confronts.

Alas, all well-run cities are alike; each badly run city is badly run in its own way. 

Competing for businesses? A lot matters more than local tax-break bait

 My latest is in the Pioneer Press and reprinted below.

For the last 25 or so years the City of Saint Paul has used a variety of tax incentives to encourage business location decisions and encourage economic development. Are they necessary? The simple answer is no, and there are far more effective tools than tax breaks to to encourage business development.

Perhaps at the top of any list of political myths is the idea that taxes, including their incidences and incentives, are serious factors affecting business relocation decisions. At the core of this belief is the idea that businesses make decisions about where to locate a facility based primarily, or perhaps even exclusively, upon taxes. As a result of this belief, state and local governments have engaged in dramatic tax wars against one another to lure businesses to their community.

What do we really know about the impact of taxes upon business relocation decisions?

The literature is clear — tax breaks to encourage economic relocation are economically inefficient and wasteful.

Social entreprenteur Michael Kieschnick reviews numerous studies and methodologies examining the role of tax incentives on business location decisions. He concludes: “Even though there were considerable variations in the specific questions asked, the types of firms in the sample, and the areas in the country, taxes and financial inducements were consistently ranked in the bottom one-fifth or one-tenth of factors mentioned by respondents.”

Economist Michael Wasylenko in his State Tax Notes survey of more than 100  studies on the impact of taxes on business location decisions finds little evidence that the level of state and local taxation figures prominently in business location decisions. State and local tax incentives and financial inducements are not the only or even the primary influences on business location decisions.

Still other studies by economists reach a similar conclusion. Roger Schmenner notes how economists see taxes as having minimal impact on business location decisions, even though economic development practitioners and elected officials disregard his evidence. Timothy Bartik reviewed 84 econometric studies undertaken since 1979 examining the role of tax incentives, generally finding that taxes across regions had little impact on location decisions.

In “Money for Something: Job Creation and Job Quality Standards in State Economic Development Subsidy Programs,” the authors examined 238 state economic development programs across the 50 states and the District of Columbia. The analysis looked at a range of economic incentives that included tax cuts, subsidies, tax incentives, loans and several other inducements, including Tax Increment Financing (TIF) districts and enterprise zones. They similarly found these tax incentives have little impact on business location decisions.

When businesses are surveyed regarding factors important to their economic location and relocation, taxes often come in way behind proximity to markets, suppliers, labor costs and the quality of the labor force. Former University of Minnesota professor Ann Markusen found that quality of life and the arts are also critical factors driving economic development.

None of these conclusions should come as a surprise. Many of these other factors occupy a larger percentage of a business’ budget than do taxes, and all of them are far more critical to the long-term success of a business than are taxes. Moreover, when pressed, businesses will actually admit to this in public. For example, nearly 62% of those interviewed in a California study on hiring tax credits indicated that the tax credits had never or rarely affected their decision to hire individuals. In the same study, nearly half of those interviewed stated that tax incentives for relocation did not affect their decisions.

Overall, the economic development literature states that tax incentives and levels of taxation are not major determinants of relocation, but instead might have some marginal influence in terms of a small choice between sites in areas not far apart.

The argument here is not that taxes do not matter. Instead, they matter but at a lower order or in more subtle ways than chamber-of-commerce-types of arguments would suggest.

First, when decisions regarding location are being made, other factors rank higher, such as labor costs or access to markets and suppliers. This is what businesses will first consider when making more macro or first-cut decisions regarding where to locate. Once these major factors are considered, then taxes become a secondary or tertiary factor to narrow down more specific locations or jurisdictions in which to settle.

Thus, when a business adds up all of the costs and factors affecting where it should do business, there may be only a handful of places that make sense for a business to relocate to. Here is the point where businesses then pit communities against one another seeking to extract cut taxes in a bidding war that pits cities or states against one another.

In sum, tax cuts have a marginal impact on business location decisions. They also serve to shift tax burdens to other home owners or residents. Rarely do the supposed jobs produced by the business relocation pay for themselves.

If cities such as St. Paul do wish to encourage business relocation and economic development, they are better spending their money on quality schools, workforce training, infrastructure and perhaps other public safety and services to improve the quality of life in a community.

What will fix St. Paul’s failing infrastructure?

This blog appeared originally in Minnpost with John Mannillo. 

April 10, 2023

As winter ends St. Paul residents yet again experienced badly plowed streets and now miles of potholes that need not just patching but complete reconstruction. The City of St. Paul wants permission from the state and its voters to increase the existing sales tax of ½% to cover the costs of road maintenance.

While the city does need additional revenue to perform basic city services such as road maintenance, the sales tax increase is literally patching over a bigger problem for the city – how to increase its tax base.

The roots of the dilapidated streets has many causes.

One, for years road repair was at best only patching. The city stripped off the surface asphalt without reconstructing the base, the latter often is the original and worn-out brick or cobblestone. Such quick fixes are short term cheap, long term expensive.

Two, for years St. Paul has failed to prioritize basic city services in the budgeting and staffing allocation. This is especially true with streets.

But perhaps the most important reason is simple – the City of St. Paul is broke. It just does not have the money to fund road maintenance, at least under the way it currently operates. Thus the request for the increased sales tax. However, the proposed increase will not provide enough new funding to cover even the stated needs, no less sustain many other new and existing ones.

The solution to the city’s street and ultimately financial woes must lie in increasing its tax base. It cannot rely upon the state for more local government aid. Partisan disagreement and outstate legislators who do not feel an obligation to support the cities, especially when they see obvious mismanagement are reasons for this.

Sales tax increases are not an option. They are regressive upon the poor and especially in a city such as St. Paul which is not a major tourist center, they will fall more heavily upon residents who are already overtaxed.

Other user fees are not reliable and individuals can avoid them. For example, according to the Bike Coalition, 5% of the population are regular bike riders. If this amenity is paid from property taxes, 95% of the people who never use a bikeway will have to pay for it. This isn’t fair to most people. Automobile owners pay for license and registration fees, and gas tax. These funds are paid by automobile owners’ for the use, construction and maintenance of roads. Shouldn’t bike users pay fees to cover all the expenses for their particular use of bikeways? Bike riders have been able to shirk their responsibility to pay for an amenity few of us use.

Again, the solution is not raising taxes but expanding the overall tax base.

The root of the problem goes back to when Norm Coleman was mayor. He convinced the city to use tax increment financing (TIF) to fund development and St. Paul continues to rely on it to this day.

TIF operates by giving developers property and other tax breaks to developers for many years. In theory, the development is tax exempt but in practice is supposed to be captured by St. Paul in order to finance the tax break. It is sort of like supply-side economics for developers with the false belief that if we cut taxes for them everyone benefits.

The problem with TIF is that property taxes – which pay for city, school, and county services – are twofold. One, it takes away revenue to pay for the services for St. Paul, its schools, and the county. Two, overused as in St. Paul, it exempts more and more property from taxes, thereby failing to achieve its objective of promoting economic growth and an expansion of the tax base. St. Paul’s tax base, already challenged by the number of tax-exempted government and non-profit properties in the city, exacerbates its problem by giving developers TIF handouts that they do not need.

Since 1995, St. Paul has increasingly granted TIF to developers as an incentive to build in its city. This has been so abused to the point that without TIF expenses (debt service and reduced property valuations) St. Paul could more than cover all the needs of road repair and the Parks Department. The business community has always welcomed this subsidy, as well as most elected officials who see a benefit from new development, often before elections.

St. Paul has numbers approaching 60 TIF districts (not only just individual buildings). The legal requirement is that a TIF grant can be awarded to any development that will solve a situation of blight, and that the project would not proceed “but for” TIF. This has totally been ignored in St. Paul. Developers, when asked if they would develop without TIF, the answer of course has always been “No.” Property taxes for all these developments, for at least 25 year terms are granted back to developers. This results in a shifting of property taxes to other businesses and homeowners.

It doesn’t end there. Any developer interested in St. Paul, must compete with a myriad of competition from other TIF subsidized properties. Too often TIF is the easy answer. The theory is TIF will attract additional development that will provide new taxes. But new development in these districts also qualify for TIF and again do not increase any tax base. We have used up our most attractive commercial real estate for development that doesn’t generate taxes. Instead, it increases our tax burden these developments require for services.

Incentive to build new commercial projects in St. Paul, where there isn’t adequate demand, depletes overall commercial occupancy in the city. Rental rates are forced down. Property valuation on commercial property is determined from net operating income. When this is reduced, so is our tax base. This is the opposite result of what we were told TIF would do.

Now, the national impact of a 39% average commercial vacancy in downtowns after the pandemic will impact our tax base even more. The taxpayers will have to cover much of the debt service for those projects with general obligation bonds and without assessment agreements that guarantee shortfalls in required tax receipts to pay TIF debt.

So, in order to recover, we first need to stop the financial bleeding. This TIF addiction continues today. A sales tax increase does not solve the problem. A new strategy to expand the tax base is really what St. Paul needs to do.