The Truth About Tax Incentives

Estimated reading time: 3 minute(s)

With some adjustments to the city’s tax abatement system, real estate developers can pursue successful projects that benefit all of St. Louis.

Most of us would love to avoid expensive property taxes, and St. Louis has capitalized on that to encourage new development. The city has a longstanding program of generous tax incentives for developers, offering breaks to projects ranging from single-family homes to towering condominiums.

While these incentives have created a certain amount of growth in the central corridor of St. Louis, our current system isn’t operating at its full potential. Without comprehensive reform, St. Louis will continue to suffer from budget shortfalls and deny funding to the neighborhoods that need it most.

A Flaw in the Design

The city of St. Louis uses two methods — property tax abatements and tax increment financing (TIF) — to incentivise new development in St. Louis. Developers who win tax abatements freeze tax assessments to pre-development levels, effectively delaying payments for five to ten years.

With TIF, a district’s property taxes are frozen for 23 years and instead, that money is funneled into a special allocation fund. Developers can then be reimbursed from that fund for eligible costs, but no more than 15% of a project’s budget can come from the fund. In both cases, projects must be approved in advance of construction, and must have the support of the appropriate alderman.

In theory, these incentives encourage development where there otherwise would not have been a project, but things don’t unfold that way in practice. Nearly 84% of TIF dollars and 70% of tax abatement dollars end up in the central corridor of St. Louis, which includes neighborhoods like the Central West End and Lafayette Square. The question is: do developments in wealthier areas require these incentives, or would the projects go forward without them?

These tax breaks have very real costs for St. Louis — the city has given out more than $700 million in incentives since 2000, money that could have been used to fund schools, infrastructure, or public safety. Some of those incentives were undoubtedly necessary, but those that weren’t place unwarranted strain on the city’s financial health.

As they currently stand, tax incentives also contribute to the displacement of black residents. Roughly 4,500 people have moved to the central corridor since 2000, but over 1,000 black homeowners and tenants have left. Some neighborhoods have seen even greater loss — Tower Grove East has received $1.4 million in abatements, but has lost more than 43% of its black population.

Changing the System

Tax incentives can be a useful development tool — and are, in many cases, necessary to make a project profitable — but we need to be smarter about how we deploy them. What good are expensive high-rise apartment buildings if our schools and infrastructure can’t support them, or if we’re amplifying gentrification and displacement instead of alleviating it?

Stricter qualifications for tax abatements would be an ideal first step, and thankfully, the city has already started. The Land Clearance for Redevelopment Authority (LCRA) has tightened its criteria for recommending abatements in stronger neighborhoods, but it’s still sending mixed signals about certain properties. The LCRA and the Board of Aldermen need to work together to create a strategic economic development plan for the city that identifies deserving candidates for abatement and aware incentives appropriately.

To avoid conflicts of interest, I also support an independent panel to rule on abatement applications. Above all else, aldermen and city officials need to ask themselves: “will this development happen without these incentives, or does the incentive merely increase the profit margin for the developer?”

Our Role in Development

Though asking developers to reject tax incentives may seem like a losing battle, I believe that we have a vital part to play in reforming the abatement system. If we pursue projects that have tangible benefits for the city as well as our business, we can make the best possible use of the incentives available.

At Radius Realty, we’re pursuing a number of projects in North St. Louis in the hope of creating a new standard of development for the area. We’ve invested in a number of multi-family units for low-income residents and we’ve received the most interest from tenants of any property we’ve ever built or sold. We truly believe that, by using tax incentives to constructively improve vulnerable communities, we can grow our business without depleting the city’s coffers or displacing its residents.

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Adam is the co-founder and managing broker at Radius Realty, a full-service real estate brokerage in St. Louis. A proud native son, he uses his knowledge of his hometown to simplify real estate for property owners and renters. Adam is also the president of Mobilize Missouri, a grassroots organization for progressive activism, and served as Political Director for the Bernie Sanders campaign in Missouri in 2016.