Municipal Tax Incremental Financing Supports Big Business, Inequality in Kansas City

Municipal Tax Incremental Financing Supports Big Business, Inequality in Kansas City Jamie Ferris Anne Dunning, Ph.D. Urban Planning 705 17 May 2013

Municipal Tax Incremental Financing Supports Big Business, Inequality in Kansas City

Kansas City, Missouris [KCMO] economy, like those of cities across the country, is struggling to recover from the national recession that began in 2008. According to Noble (2010), The Missouri state budget for 2013 estimates only $7.585 billion in general revenue funds, nearly $500 million less than Governor Jay Nixons recommended amount. With u nemployment in the metropolitan area at approximately 8 percent in February (U.S. Bureau of Labor Statistics), while slightly higher than the national average of 7.7 percent, much focus in the city has been on balancing the budget, creating jobs, and fostering economic growth ( National unemployment update , 2013). Historically, the KCMO urban core has experienced negative effects of urban sprawl, losing much of the metropolitan population, particularly those affluent residents of the urban core, to surroun ding suburban areas on both the Missouri and Kansas sides of the city. Census data shows that the most expensive homes in Kansas City form a ring around the city; this golden ring has been moving farther from downtown at a rate of about two miles per decade. In its wake are acres of declining property values that have left many residents stranded (Anderson 12-13). Between 1990 and 1996, the Kansas City metropolitan area spread 70%, while its population, now over two million, increased only 5% (Lacayo). This disproportionate growth is unsustainable in regard to both resources and economics. Dr. Robert Freilich of the University of Missouri-Kansas City suggests in his 1997 report To Sprawl or Not to Sprawl: a National Perspective for Kansas City , sprawl has engendered six major

Municipal Tax Incremental Financing Supports Big Business, Inequality in Kansas City

crises for Americas major metropolitan regions. These crises are: central city and first and second-ring suburban distress; environmental degradation through loss of wetlands, sensitive lands, air and water quality degradation; massive gasoline energy overutilization; fiscal insolvency, transportation congestion, infrastructure deficiencies and taxpayer revolts; massive agricultural land conversion; and housing inaffordability (2). In recent years, KCMO has supported downt own revitalization efforts through market intervention and by promoting the development of not only business but residential and entertainment areas an attempt to re -grow the tax base and bring residents, art, culture and tourism to the area. KCMO adopted the Greater Downtown Area Plan in March 2010 , outlining goals for the economic, social and environmental development of the city. The five outlined goals include: doubling the population downtown, increasing employment, Creating a walkable downtown, retaining and promoting safe, authentic neighborhoods, and promoting sustainability (Greater Downtown Area Plan). Much of this development is stagnating however, due to the weak economy and therefore a hesitant c onsumer base in the metro area. The relatively static tax revenue causes further problems for the city that is already facing a revenue shortage. The 2012-2013 city budget proposed by the Office of Management and Budget [OMB], which includes a 4.9 percent increase over the FY 2011-2013 budget, keeps the general fund flat and proposed increased fees and taxes as

Municipal Tax Incremental Financing Supports Big Business, Inequality in Kansas City

well as reduction or stagnation in work force and employee benefits (OMB, 2012). Because it is the general fund that is experiencing the majority of the budget cuts, this does mean a reduction in funding [or a lesser increase] to the Department of Economic Development, in addition to many other programs and departments. Though this department is encountering financial restrictions, it is still receiving nearly 10 percent of the city bu dget. In 2010, City Manager Troy Schulte wrote in the budget proposal to then Mayor Mark Funkhouser that in this economic climate the city must work to identify local partnerships to leverage additional resources to address needs in entrepreneurship, s mall business assistance and workforce development (OMB, 2010). Schulte suggested that while financial assistance from the state may be necessary, fostering these aspects of the economic situation will help make KCMO more competitive in acquiring new busin esses and lessen the risk of losing some of those opportunities to other cities, particularly across the state line in Kansas (OMB, 2010). These priorities remain at the forefront, as expressed in the FY 2012 -2013 budget. According to Blakely and Leigh (20 10), community and business development are merged as a vehicle to mobilize essential community resources for the generation of shared wealth both in terms of individual and collective wellbeing and in terms of a stronger set of economic institutions that can compete both locally and globally (266). The Economic Development Corporation of Kansas City [EDC] (2007) sites the purpose of economic

Municipal Tax Incremental Financing Supports Big Business, Inequality in Kansas City

development

is

to

encourage

private

investment,

increase

municipal

population and grow the tax base, helping to keep taxes low, increase the quality of life and create job opportunities for community members, upgrade infrastructure and the physical appearance of the city and create

entrepreneurial opportunities (New City, 2007). In order to do so, KCMO utilizes both supply and demand side aspects of economic development to in effort to maximize business expansion and foster as much job creation and employment opportunities as possible. The city implements supply side methods with much greater frequency, however. Due to allowances of the structure of state laws and policies in Missouri, KCMO frequently utilizes Tax Increment Financing [TIF], Chapter 353 tax abatement and Enhanced Enterprise Zones as well as provisions of the Missouri Downtown Economic Stimulus Act [MOD ESA] of 2003 to create and provide incentives for economic activity and development, among many other supply side programs. Currently, the Economic Development Committee expresses their priorities to be business development, retention and expansion. The council is approaching this through the use approximately 24 incentive programs and tools for economic development and business projects (New City, 2007). These 24 programs can be simplified into eight categories; tax abatement, tax redirection, tax cre dits, self-assessment, property assembly and remediation, infrastructure provision, business financing and business assistance (New

Municipal Tax Incremental Financing Supports Big Business, Inequality in Kansas City

City, 2007). For the purpose of this study, only KCMOs use of TIFs, Super TIFs, MODESA provisions, Ch. 353 Tax Abatements , and Enhanced

Enterprise Zones will be considered in analyzing the efficiency and effectiveness of the citys economic development. In Missouri, TIF projects must receive approval by the TIF Commission [TIFC] and City Council at a public hearing (see Fig ure 1 for complete approval process). The TIF proposal is required to meet two criteria in order to be considered. It must be a project that, without out the TIF, would not otherwise be developed [called the but for test] and it must have one of the following: blight conditions, be located in a Conservation Area [likely future blight without prevention], be located in an Economic Development Area [not required to exhibit blight or Conservation Area characteristics] where the council believes the proposed TIF project would be in the publics best interest (New City, 2007). Revenue for the approved TIF projects can come from the following sources: Payment in Lieu of Taxes [PILOT] provisions, Economic Activity Taxes [EATS] In certain situations projects m ay receive State Supplemental TIFs (New City, 2007). With PILOT funding, r eal property tax rates are frozen for a term up to 23 years per project. The taxes generated by the initial assessed value of the property [and paid for by the property owner] are distributed to the affected taxing districts for the duration of the TIF plan (New City, 2007). The incremental taxes on the value of the property are

Municipal Tax Incremental Financing Supports Big Business, Inequality in Kansas City

paid to the city where it is deposed into a special allocation fund. The money in this fund is then a llocated to cost of the TIF plan and the developers expenses (Kelsay, 2007). EAT financing, however, is money accrued from the tax revenue generated by the increased economic activity in the development area such as sales, utility and profit earnings. O f this revenue, up to 50 percent is available to developers for reimbursement. Missouri is one of only nine states to allow this type of tax abatement. Additionally, KCMO is one of few areas to implement use of the Super TIF, an extension of the EAT abat ement policy that allows developers to receive up to 100 percent reimbursement (Kelsay, 2007). TIF projects may also be eligible for State Supplemental TIFs that includes state tax revenue in the funding. The state funding is in addition or supplementary to PILOT and EAT financing. These TIF projects must be in a blighted or levee area, however (New City, 2007). In addition to EAT tax abatement, KCMO provides Chapter 353 Tax Abatement as an of incentive blighted to stimulate private of] investment reconstruction and or

redevelopment

areas[consisting

rehabilitation of any blighted area and provision for such industrial, commercial, residential, public or recreational developments (New City, 2007). In order to qualify for 353 Tax Abatement, the projec t must pass the but for test, proving the development would not occur without the 353 incentive. The area of redevelopment must also be blighted or blighting

Municipal Tax Incremental Financing Supports Big Business, Inequality in Kansas City

(New City, 2007).

The incentive this provides for developers is 100

percent tax abatement of real value for 10 years and 50 percent for the following 15 years (New City, 2007). In addition, the Power of Eminent Domain enables the developer to condemn properties that could not be acquired through normal negotiations (New City, 2007). A program to attract new business as well as provide incentive for existing businesses to expand is KCMOs creation of Enhanced Enterprise Zones. Enhanced Enterprise Zones are specified geographic areas designated by local governments and certified by the Miss ouri Department of Economic Development (Kansas City Area). These areas are denoted for high poverty and unemployment rates. The program provides state income tax exemptions and credits as well as local property tax abatement to property owners who make improvements to real property. Benefits are designed to encourage investment and growth and to help address unemployment and underemployment within the Citys Enhanced Enterprise Zone (New City, 2007). Specifically, if a business within the enterpris e zone employs at least two new employees and meets a minimum $100,000 investment, property owners may receive up to 100 percent tax abatement for 25 years on improvements to the property (New City, 2007). From the state, owners

may receive up New Job Credits for up to 10 years, Resident Credits [for employees who reside in the enterprise zone] for up to 10 years, Salary Credits [for employees making more than the national average] for up to 10

Municipal Tax Incremental Financing Supports Big Business, Inequality in Kansas City

years, as well as a 2 percent investment credit (New Cities , 2007). The Missouri Downtown Economic Stimulus Act [MODESA], passed in 2003, allows some central business district projects to request that specified State tax revenues be used to supplement local revenues (New City, 2007). These projects, which m ust be located in either a blighted or Conservation Area, have to demonstrate promotion of tourism cultural activity, arts, entertainment, education, and mass transit, among other community -fostering plans which cost at least an estimated $10,000,000 and w ill provide at least 100 new jobs within three years (New City, 2007). Cities that receive MODESA funding are able to have up to 50 percent of estimated incremental tax revenues from the business redevelopment area pay for eligible public projects (N ew City, 2007). These revenue

reallocations, in addition to the municipalitys PILOT and EAT funding that it supplements, are intended to help grow the metropolitan area and promote urban renewal. KCMO has a strong entrepreneurial base; with organizatio ns such as the Kaufman Foundation and the Small Business Technology and Development Center [SBTDC] at the University of Missouri -Kansas City, there are many resources for independent start -up companies and entrepreneurs from the nonprofit and private secto r. fairly limited. Small Business Financing, a revolving loan fund for small businesses Incentives from the city, however, are still

Municipal Tax Incremental Financing Supports Big Business, Inequality in Kansas City

10

planning fixed asset purchases of $1 million or less is available through the Kansas City Economic Development Corporatio n [EDC], a public/private organization that promotes development and job growth in KCMO. This financing is intended to help create and maintain non -retail jobs in the metro. These loans, which are available up to a maximum of $150,000 and 40 percent of total costs, (New City, 2007) are intended to support small businesses development and growth. Robert Long, Development Services Specialist for the EDC, described how KCMO plans to foster entrepreneurship in the metro. The EDC has developed a partnership with the SBTDC to address the needs of small businesses and entrepreneurs, he said, we also work with the citys relatively new BizCare office to help clients navigate the citys permitting, licensing and zoning proc esses (2010). As Blakely and Leigh (2010) point out, it is difficult to compare the budget of an entrepreneurial strategy with those of traditional business recruitment incentive packages, (271) however, investment in local business resources can cult ivate a sustainable environment of local entrepreneurship. Though the city suggests it is making strides to create an environment that is supportive of local startup companies in an attempt to not only facilitate economic development but become less reli ant upon the business decisions of others locatedhundreds of miles away and with no personal comm itment to [KCMO] (R. Long , 2010), limited measures have been truly

Municipal Tax Incremental Financing Supports Big Business, Inequality in Kansas City

11

taken so far. This process presents a clear inequity in terms of endowments, process, and outcomes, stemming from t he prevalence of TIF-based incentives for business and economic development has been great throughout the KCMO metro area due to the availability of program implementation and the allowance of discretion in approving TIF projects. The use of both TIF and EAT practices increased over 200 percent between 2000 and 2004 (Kelsay, 2007). Based on maps (see Figure 3) of KCMO TIF district demographics, [2007], 88 percent of TIF projects have occurred in KCMO Council Districts one, two, four and six. These districts are the most highly populated, and maintain the highest level of educated, affluent, non -minority residents. In contrast, KCMO Council Districts, three and five which are the lowest income, highest minority districts, hold only 1 2 percent of TIF projects. This unequal TIF project distribution is counter -intuitive considering the existence of [physical] blight as common criteria for project approval, though, as Long noted, the Missouri TIF statue does not use socio -economic distress factors to determine physical blight ( Long, 2010). As can be seen by the distribution of incentive -based projects in the urban core, the more distressed areas are not truly given priority in redevelopment and renewal efforts. In order to successfully grow the population and economy of the urban KCMO area, particularly when attempting to reverse the damage done by the recent recession, the most

Municipal Tax Incremental Financing Supports Big Business, Inequality in Kansas City

12

severely distressed areas must be stabilized and made to prosper; if incentive use will increase once again in order to do this, it must be done equitably. As Blakel y and Leigh (2010) write, increased business investment can transform many inner cities from places left behind by the new economy into places leading the way to economic success (266). Investment in the urban core is vital, otherwise the continued inequ alities will only cause further detriment to the sustainability of the city as a whole. Additionally, a strong sense of social community, it is clear that development that is to be sustainable and its effects lasting must encourage social community development as well. Though civic engagement has been in severe decline over the last two decades, rates of participation increase with urban revitalization movements, improving citizen involvement in the community (Putnam, 2000). Likewise, as Thad Williamson of the Jepson School of Leadership Studies, University of Richmond suggested, a place that looks and feels like a coherent community should help produce citizens who are better able to identify with where they live and are more engaged in civic and political life (235).

Municipal Tax Incremental Financing Supports Big Business, Inequality in Kansas City

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Figure 1

Municipal Tax Incremental Financing Supports Big Business, Inequality in Kansas City

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Figure 2

Figure 3

Municipal Tax Incremental Financing Supports Big Business, Inequality in Kansas City

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Figure 4

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References

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