The Missouri Supreme Court is considering whether to strike down a law authorizing tens of millions of dollars of state tax credits for a developer who bought large amounts of land in north St. Louis with the yet unmet goal of an $8.1 billion makeover for the area.
Arguments Wednesday before the state's high court focused on whether the tax credits amount to an unconstitutional granting of public money to a private person or corporation. An attorney for two St. Louis residents challenging the law said the tax credits are similar to getting cash from the state and thus violate the Missouri Constitution.
But the state attorney general's office, which is defending the law, contended the tax credits cannot be considered public money because they only reduce the amount of taxes owed without actually paying money out of the state treasury.
In the past two years, the state has issued $28 million of tax credits to developer Paul McKee's NorthSide Regeneration LLC. NorthSide Regeneration has proposed to put 10,000 new homes and millions of square feet of office space in a two-square-mile area north of downtown St. Louis. The tax credits were authorized under a 2007 state law tailored for his project. They are intended to offset part of the cost of buying and maintaining property, such as boarding up vacant buildings or clearing out weeds. But eligibility is limited only to those who have accumulated large amounts of land in impoverished areas.
McKee's project has essentially been on hold because of a pair of court battles.
Last July, a St. Louis circuit judge overturned the city's approval of a $390 million tax increment financing package for McKee's project. While that ruling is on appeal, the developers have been reworking the plan with the hope of again winning city approval, said Paul Puricelli, an attorney for NorthSide Regeneration.
The separate case on appeal Wednesday to the Supreme Court focuses on the state's portion of the tax incentives. State law authorizes up to $20 million a year - or a total of $95 million - of "land assemblage" tax credits. A Cole County circuit judge ruled in March 2010 that the two residents who sued did not have legal standing to challenge the law, and even if they did, the tax credits did not violate the constitution.
Attorney Irene Smith, who filed the lawsuit, argued Wednesday that the land tax credits were little different than the land giveaways to railroad companies that were common in the 1800s and which she said inspired the constitutional prohibition on granting public money, property or credit to private entities. She also pointed to a 1987 Missouri Supreme Court ruling that struck down a law allowing certain bondholders to receive tax credits to guard against potential defaults. The court in that case said there was no difference between the state tax credit and an outright payment to the bondholders.
Tax credits can be used to reduce the amount of income taxes owed to the state. But recipients of some tax credits also can sell them, often at a discounted value. Such deals provide upfront cash for developers while allowing corporations or investors to use the credits to reduce big tax liabilities.
Supreme Court Judge Michael Wolff picked up on Smith's argument when questioning State Solicitor Jim Layton, who was defending the law.
"If I can pay that liability with my tax credit, it is just like real money. What's the difference?" Wolff asked.
Layton said the difference is that tax credits allow money to remain in the pockets of people, instead of giving people money that already had been paid into the public treasury. If a tax credit were considered a grant of public money, then there is no way to differentiate it from a tax deduction, tax exemption or even the repeal of an existing tax - all of which reduce the tax liability for a person or business, he said.
Layton urged the court to overturn its 1987 decision. That decision came at a time when tax credits were not too common. But Missouri now offers about 60 different tax credit programs, benefitting everything from business developments to social causes such as food pantries and domestic violence shelters.
Among those watching Wednesday's arguments were the two plaintiffs, Barbara Manzara and Keith Marquard, who both own property near the area targeted for redevelopment. Manzara said she is renovating a 5,000 square-foot brick home built 1896 that had previously been divided into apartments. She said she decided to sue after many nearby homes were hit by arsonists or brick thieves because they sat vacant while McKee was accumulating property.
"After we saw enough of our neighbors' houses burned, we just had to do something," Manzara said.