An ongoing study by the Minnesota Taxpayers Association tells us that Wichita has high business property taxes. This may be a reason why the Wichita City Council feels it is necessary to offer relief from these taxes, but it is not an effective economic development strategy.
The MTA study (50-State Property Tax Comparison Study) finds that for a business consisting of property and fixtures, the effective tax rate of business property in Wichita is 2.914 percent. The average nationwide is 1.940 percent. This means that these taxes in Wichita are 50.2 percent higher than the nationwide average.
The situation isn’t so bad when we consider a different business with machinery and equipment as part of its mix of assets, as Kansas has exempted that property from taxation. In one scenario, the effective tax rate is 1.598 percent, which is still 12.1 percent above the nationwide average of 1.426 percent. In another scenario where the proportion of business property that is machinery and equipment is very high, the effective tax rate for Wichita is only slightly above the national average.
The study finds that Wichita is out-of-step with the rest of the nation when it comes to the ratio of effective tax rates between business and home tax rates. The U.S. average for this value is 1.724, meaning that the effective tax rate for business property is 1.724 times that of residential property. For Wichita, the value is higher at 2.316.
Wichita as active investor
Last week’s grant by the Wichita City Council of tax relief to Pulse Systems in the amount of about $87,000 per year illustrates how the city’s high business property tax rates inhibit business investment. It’s either that, or the city succumbs to simple greed by those who are willing to ask the government for money and make empty threats in pleading their case.
That day the city also started down a path that will lead it to exempting Bombardier LearJet from paying $1,217,000 per year in property taxes.
I can understand that people such as these applicant companies want to escape paying high business property taxes. But the solution is not to do what the Wichita City Council does week after week: grant exemptions on a case-by-case basis. These exemptions amount to the council asking the people of Wichita to make specific investments in these companies. That’s because when the city grants exemptions from paying taxes, others have to pay. This may be a reason why our effective tax rate is so high — for those companies that do pay taxes.
The notion that the City of Wichita can decide which companies are worthy of tax exemptions and investment is an illustration of what economist Frederich Hayek called a “conceit.” It’s so dangerous that his book on the topic is titled “The Fatal Conceit.” The failure of government planning throughout the world has taught that it is through markets and their coordination of dispersed knowledge that we learn where to direct capital investment. It is simply impossible for this city government to effectively decide which companies Wichitans should invest their tax dollars in.
Locally, Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business has made a convincing case that Kansas needs to move away from the “active investor” approach to economic development. This is where government decides which companies will receive special treatment, be it in the form of tax abatements, tax credits, grants, and other forms of subsidy.
While many feel that Wichita and Kansas must offer incentives to be competitive with our cities and states, our leaders, most recently Lynn Nichols, president of the Wichita Metro Chamber of Commerce, routinely complain that Wichita doesn’t have as much incentives and cash to offer as do other locations. The “embracing dynamism” approach advocated by Hall and others provides a way to break out of this rat race and provide a sustainable foundation for economic growth in Wichita and Kansas.
In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”
Later, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and Kansas rely on for economic development: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”
In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”
While it’s easy to see people going to work at a new large company, or an existing company that has expanded, we need to look at the effect on everyone in the city, county, or state. And when we do that, the research is not encouraging.
Echoing the findings of Hayek regarding the impossibility of government picking winning companies through its active investor approach, Hall writes: “Embracing dynamism starts with a change in vision. Simply stated, the state government of Kansas should abandon its prevailing policy vision of the State as an active investor in businesses or industries and instead adopt the policy vision of the State as a caretaker of a competitive ‘platform’ — a platform that seeks to induce as much commercial experimentation as possible. By way of analogy, the platform-caretaker vision says: The State of Kansas runs tournaments; it does not field players. Creating a platform to host world-class tournaments will attract world-class players. The platform will endure but players will come and go. The platform-caretaker vision implies that the state government need not commit scarce resources to the enormously difficult task of predicting the outcome of competition if it focuses on the much more manageable task of creating the platform on which competition takes place.”
We need business and political leaders in Wichita and Kansas who can see beyond the simple imagery of a groundbreaking ceremony and can assess the effect of our failing economic development policies on the entire community. Unfortunately, we don’t have many of these.
Paying for incentives
Something the Wichita City Council should consider implementing is a form of “pay-go.” This is where the city would reduce spending by the cost of economic development incentive.
The city, however, believes it has cost-benefit studies that purport that incentives pay for themselves. These studies, provided by Wichita State University Center for Economic Development and Business Research are not of the same type that a business makes, or that people make in their personal lives. There are not legitimate business investments that have a return of what the city council routinely accepts over any reasonable period of time, at least not without accepting huge risks.
The “benefit” that goes into these equations is in the form of future anticipated tax revenues. It simply recognizes that economic activity is good, and since government levies taxes based on economic activity, its tax revenues go up. This happens whether or not government claims responsibility for creating the economic activity.
More taxes being paid to the city doesn’t benefit the people of Wichita, and it’s they who have to pay in order so that the city can have increased tax revenues. It’s not beneficial to take more money out of the productive private sector for the purpose of feeding government.