Below is a copy of the brief I wrote the other night. As it goes into too many dry specifics, I've decided not to send it out. I'm too tired to figure out how to post this as a word or pdf attachment, so no citations are included (I have citations for each assertion made). Considering that I spent a fair amount of time on it and nobody except Alex, Count, and Gone Corporate have read it, I figured I'd share it with you all
The China Hub: Missouri as a Gateway to the East
Cole Goodrich
If you look at the places that are really successful in America today...without exception, you have cooperation between a vibrant private sector and a smart government. –Bill Clinton on Meet the Press, September 18, 2011
After 4 years of fruitful negotiations between regional leaders and high-level Chinese officials, a handful of obstinate senators have temporarily grounded hopes of turning eastern Missouri into an international air cargo trade hub. Specifically, the state senate eliminated necessary incentives designed to encourage the development of facilities capable of storing time-sensitive cargo. This opposition is particularly discouraging considering that state senators seem to agree that Missouri would profit from the passage of the original legislation. In light of this apparent rift between political expediency and sensible policymaking, this paper seeks to dispel common misunderstandings of the bill in hopes of convincing voters to pressure legislators into supporting this potentially transformative initiative.
BACKGROUND
Currently, 130 million of the 150 million pounds of air cargo flown between the US and China each week is handled by Chicago’s O’Hare airport. American carriers transport the overwhelming majority of this cargo. Dissatisfied with this arrangement, the Chinese have made it clear that they intend to drastically increase the share of air cargo carried by Chinese airlines. In fact, China’s latest Five Year Plan places special emphasis on developing the airline industry and improving international shipping capabilities. In order to accomplish these goals and accommodate the predicted drastic increase in air cargo trade between the US and China, the Chinese are looking for an airport at which they would have the space and clout to operate a hub. Establishing such massive operations at a more congested airport would prove exceedingly difficult. Lambert seems to appeal to the Chinese because of the unique opportunities provided by the centrally located, largely vacant former international passenger hub.
These plans to handle a greater share of the air cargo trade follow what appears to be a significant shift in China’s economic development model. In relevant part, the Chinese are in the process of transitioning from being an export-driven economy to one focused more on domestic consumption. In fact, the latest economic data shows that imports have recently skyrocketed in China. In light of this, a trade hub in the region would provide an outlet for Missouri businesses to serve the rapidly growing consumer demand of the country that is home to roughly 20% of the human race. Furthermore, as the provision that subsidizes the transport of air cargo would only credit goods made in the US and then shipped abroad, the bill is designed to maximize benefits for Missouri businesses and workers.
Although the Chinese seem highly interested in capitalizing on the unique opportunities at Lambert Field, it is clear that the airport currently lacks the infrastructure necessary to support a thriving trade hub. This is exactly what the proposed Aerotropolis Tax Credit Act seeks to remedy.
BREAKING DOWN THE TAX CREDITS
In the words of the Missouri Supreme Court, “tax credits are not direct expenditures of funds generated through taxation… a tax credit is not a drain on the state's coffers, it closes the faucet that money flows through into the state treasury rather than opening the drain.” The tax credits proposed by the package, moreover, target business activity that does not currently exist in the region. As such, the state would merely temporarily refrain from collecting certain taxes that otherwise would not flow through this metaphorical faucet. In light of this, claims that the proposed tax incentives would “cost” Missourians the amount disbursed in credits are nothing more than disingenuous attempts to undermine the initiative.
Moving to the text of the original bill, the legislation includes incentives designed to lure freight forwarders (essentially travel agents for cargo) to the region and encourage the development of facilities designed to store time-sensitive goods. The current senate bill, however, includes only the incentives aimed at attracting freight forwarders to area. It appears that failing to include both kinds of incentives in the final bill would render the legislation ineffectual.
These freight forwarder credits are capped at $60 million and are to be disbursed over the course of seven years. Notably, an agent would only receive tax credits for exporting American made goods. In line with legislative intent to promote the export of agricultural products produced in rural Missouri, the bill provides 35 cents in credits for each kilo of perishable goods shipped through the hub. Agents would collect 30 cents per kilo on all other products. Additionally, these credits are heavily back-loaded, which means that the bulk of these credits would not be disbursed until after Missourians are in a better position to assess the success of the hub project. More specifically, these credits would be capped at $850,000 in the first fiscal year and $7.5 million in the second fiscal year. Contrary to the claims of some China hub opponents, these agents would have to ship cargo on an outbound international flight in order to receive credits. It seems that opponents who claim that freight forwarders need not move international cargo conflate the term “outbound cargo activity” with the term “qualifying outbound flight” as defined in the bill.
Turning to the portion of the bill deleted by the senate, in order to qualify for tax credits intended to encourage the development of adequate storage facilities, a company must first demonstrate that their facility satisfies a number of objective requirements. Firstly, the facility must be located within 50 miles of an airport and be situated on at least 50 continuous acres of land. However, a facility does not need to satisfy this acreage requirement if it is located adjacent to the airport. Secondly, a qualifying facility must produce at least 10 new jobs. Lastly, contrary to the claims of some critics, the facility must engage in international air cargo activity. Tax credits under this provision are disbursed in relation to the extent to which a given facility engages in international air cargo activity. These credits are capped at $300 million and are to be disbursed over the course of 15 years. Moreover, these incentives are heavily back-loaded, which means that the bulk of these credits would not be awarded until after Missourians are in a better position to assess the success of the hub.
In summary, the bill outlines clearly defined, objective criteria that an entity must satisfy in order to qualify for available tax credits. Moreover, these credits are capped and expire after 7 years (freight forwarding credits) or 15 years (warehouse credits), at which time the state would fully collect on hub operations. These credits are also heavily back-loaded, which would provide taxpayers with the opportunity to evaluate the merits of the hub before the bulk of credits are disbursed. Importantly, the bill targets business activity that does not currently exist in the region, which means that the incentives would not drain state coffers.
PROJECTED ECONOMIC IMPACT
The Missouri legislature recently requested that the Missouri Department of Economic Development conduct a study on the costs and benefits of the proposed legislation. The study concluded that in 15 of the 16 scenarios analyzed, facilities that qualified for tax credits would generate more money for the state than they consumed in tax credits. Again, however, it is worth noting that these incentives are tax credits that target business activity that does not currently exist in the region. Additionally, the study merely analyzed the revenue eligible facilities would provide the state. It did not attempt to examine the full economic impact of establishing an enduring trade hub with the country the IMF predicts will emerge as the largest economy in the world by 2016.
In addition to the MDED report, The St. Louis Regional Chamber & Growth Association also commissioned a study on the potential benefits of a China trade hub in 8 Missouri counties surrounding St. Louis. According to this report, the full impact of a China hub would generate nearly $22 billion over the course of 15 years. Additionally, taking into account the direct and indirect economic impact a hub would have on the regional economy, the study predicted that the hub would generate over 23,000 jobs within 15 years.
THE NECESSITY OF THE CREDITS
The tax incentives outlined in the bill are the most effective and realistic way of ensuring that necessary parties and infrastructure developments are in place to support a flourishing international trade hub at Lambert. Considering that the success of this initiative hinges on unrelated entities making massive investments in anticipation of the Chinese following through on their stated intention to turn St. Louis into a “major air trade hub,” the bill aims to mitigate risk during the time that the Chinese are incrementally increasing the number of flights landed per week at Lambert. Although the Chinese would not receive a single tax credit, they have repeatedly emphasized the necessity of providing such incentives to the American air cargo industry. In fact, they have stated their intention to establish hub operations in another Midwestern city should the Missouri legislature fail to pass the original legislation. In light of this conditional commitment, it is apparent that the various private entities on the American side would not make the necessary massive investments absent the incentives included in the legislation.
Another criticism of the initiative is that recipients of these incentives would leave Missouri after exhausting available tax credits. This is the primary critique advanced by Greg Lindsay, the author of author of Aerotropolis: The Way We’ll Live Next and editor of FedEx’s PR publication (FedEx could potentially lose from a thriving China hub). Although it is unlikely that such parties would abandon a city that serves as a hub for trade with the country projected to be the dominant economy in the world by 2016, legislators can reduce the likelihood of this outcome by retaining the provision that awards credits to companies that develop air cargo facilities. Contrary to Mr. Lindsay’s assertion, tax credits designed to encourage real estate investments could actually serve to ensure that necessary parties remain committed to the region; the more such entities invest in the project, the less likely it is that they would walk away after the tax incentives sunset.
Additionally, the Rex Sinquefield funded, Tea Party aligned Show-Me Institute has argued that sufficient warehouse space already exists in the region. However, it is hard to reconcile this claim with the fact that the current warehouse vacancy rate in the St. Louis area is significantly lower than the national average. Furthermore, existing facilities are woefully inadequate to handle the demands of a thriving air cargo hub. As such, it is clear that significant development must occur in order to support a thriving trade hub.
CONCLUSION
Despite the claims of critics, the Aerotropolis Tax Credit Act provides Missouri with a low-risk means of luring the Chinese to establish an air cargo hub at Lambert Field. In fact, as the incentives are performance-based, the state would award tax credits only to the extent that hub operations materialize. As such, if the Chinese do not establish air cargo operations, the state would not disburse a single tax credit.
On the other hand, if the tax credits manage to lure necessary parties to the table, the China hub could revitalize the regional economy. As such, Missouri is currently perhaps at a crossroads; state legislators will either enact legislation that could position the region to become a competitive player in the global economy, or they will refuse to revive the original aerotropolis bill, potentially condemning the state to future economic irrelevance. It is clear that the Chinese are intent on establishing an air cargo hub in the US. Let’s make it happen in Missouri.
I urge you to contact your state senator and implore him or her to support the original China hub legislation. Thank you for your time.
