Whether one agrees with the effectiveness and wisdom of government involvement in local economic development, there’s one thing that’s certain: facts and understanding are in short supply.
An illustration of how confusing things can get was provided last Wednesday at a meeting of the Sedgwick County Commission. Aviation manufacturer Bombardier LearJet was seeking a small part of a larger incentive package from the county. The county was being asked to contribute $1 million, but the overall package Bombardier is seeking is worth $52.7 million. That’s the entire cost of the Wichita portion of the project.
A large part of the package Bombardier is seeking is based on the Promoting Employment Across Kansas (PEAK) program. Administered by the Kansas Department of Commerce, the program allows qualifying companies to retain 95 percent of the state income withholding taxes their employees pay.
It’s a roundabout method of distributing corporate welfare that allows companies — and gullible or self-serving politicians — to pretend as though this program has no cost, or that companies are in fact investing their own money.
In the present case, Bombardier LearJet plans to obtain $27.0 million throuogh this program. It’s described in a company presentation as “Initial State of Kansas Bond Issuance.” They call it that because the State of Kansas will issue bonds that LearJet will buy. That makes it seem that Bombardier LearJet is actually contributing something of their own.
This misconception might be reinforced in a dialog between John Dieker, vice president of strategic projects for Bombardier Learjet, and Sedgwick County Commissioner Jim Skelton. Skelton was perhaps trying to counter my testimony earlier in the meeting. I had wondered if Bombardier LearJet was contributing even one dollar of their own funds to the project.
Skelton asked Dieker “Where is this money coming from?”
Dieker replied “We have the incentives we got from the state at $27 million. We have the interest that throws off since corporate bought the bonds, that’s corporate money that’s going back into the project, so that’s $6 million.
Skelton asked “So the corporation did buy the bonds?”
The answer was “Yes, corporation bought the bonds.”
Skelton concluded: “Well that’s your … I would consider that your money, sir.”
Dieker didn’t dispute Skelton’s conclusion. He should have.
Here’s how this financing works, in this case: The state issues $27 million in bonds and sells them to Bombardier Learjet. At this moment, LearJet holds bonds (both an asset and a liability) worth $27 million. The state’s balance sheet hasn’t changed.
Going forward is where Bombardier LearJet benefits. In the normal course of affairs, the bonds would be repaid out of the company’s cash flow. But under the PEAK program, the bonds are repaid by its employees, through the tax withheld on their paychecks.
The benefit to LearJet is that it has to pay these taxes, but it manages to be the exclusive beneficiary. Normally these taxes go to fund the operations of Kansas state government. But under the PEAK program, these tax payments go right back to Learjet and are used to pay off the liability of the bonds. The tax payments never benefit the state, as do tax payments from almost all other companies in Kansas. (Bombardier is not the only company benefiting from PEAK.)
Bombardier is even counting the interest on these bonds as part of their capital contribution to the project. The interest, however, is also being paid by employee withholding taxes, at no cost to the company.
So did Bombardier LearJet contribute $27 million of its own money, as Skelton claims? When the entire economic transaction is considered, the answer is absolutely not.
If you’re not convinced by this argument, simply ask: why would Bombardier LearJet engage in such a transaction if it didn’t benefit them?
Schemes like this call into question one of the the fundamental principles of taxation: that the proceeds be used to fund the operations of government, not to enrich one particular person or company. But continually, chasing economic development dreams, states and local government concoct schemes like PEAK — and others like tax increment financing (TIF) districts, Community Improvement Districts (CIDs), rebates of hotel guest taxes, revenue bonds of various forms, and other monstrosities — that turn over a public function to benefit private interests.