The 'but-for' test gets a failing grade

Let's say you have a property tax bill of $2,000 -- or about the same amount that would allow you to finish a long-postponed kitchen remodeling project that you have been saving up for. Wouldn't it be great if someone else paid your property taxes for you so that you could finally do that kitchen? For you, that's just wishful thinking, but something very similar regularly happens for well-heeled developers all across Missouri. Thanks to tax increment financing (TIF), many developers are excused from paying property taxes and use the money they save to make major improvements to their commercial real estate properties. The Marquette Tower and H&H project in Cape Girardeau is a case in point.

In case you are not familiar with the details, the City of Cape Girardeau created a TIF district in 2016 and has been doling out public dollars for projects such as the Marquette Tower and H&H ever since. Per the terms of the TIF, throughout its entire 23-year life, 90 percent of the increased property taxes that are generated as a result of an increase in property value do not become public revenue to be allocated on local services. Instead, they are redirected back into the cost of the development. Additionally, 50 percent of the new economic activity taxes--that is, sales taxes, earning taxes, and utility taxes -- generated within the development area are treated the same as the increased property taxes.

On its website, the Cape Girardeau Chamber of Commerce states that programs such as TIF are "major tools used by communities to spur economic development, but they are often misunderstood." It is ironic, therefore, that the Chamber would contribute to this misunderstanding by misrepresenting the effects of TIF while touting the Marquette and H&H project in downtown Cape. To put it clearly, TIF is generally -- and this project is no exception -- foolish public policy that creates tax breaks for wealthy developers with little oversight.

In an article on the same website, the Chamber tries to assure readers that the standard for determining if the subsidy was necessary -- the "but-for" clause -- protects taxpayers from bad deals. However, this is not the case. According to the statute, the but-for requirement can be met if the developer provides a sworn letter stating that the subsidy they are seeking is necessary. That's right: in order to "prove" that it would not be able to complete the project without public assistance, the developer needed only to publicly state that this is the case. These are not rigorous standards, and no taxpayers should feel protected from bad deals.

In the Marquette Tower and H&H project's TIF application, the developer estimated that without public assistance the rate of return on his investment would be --1.1 percent. However, if the project were approved for TIF, his return would increase to 6.3 percent. Therefore, TIF is being used to socialize the risks of an otherwise unprofitable investment, while ensuring the privatization of the rewards. Like I said, no taxpayers should feel protected from bad deals.

Despite any endorsement from the Cape Girardeau Chamber of Commerce, TIF is not beneficial to the local community. Diverting tax dollars away from schools and other public services in order to provide increased incentives to developers is not good public policy, and the Marquette and H&H project is no exception.

Andrew Aubuchon is a Policy Research Intern at the Show-Me Institute.