Tag Archives: Corporate welfare

Boeing Wichita tax abatements, annual value, from City of Wichita.

Wichita to consider tax exemptions

A Wichita company asks for property and sales tax exemptions on the same day Wichita voters decide whether to increase the sales tax, including the tax on groceries.

This week the Wichita City Council will hold a public hearing concerning the issuance of Industrial Revenue Bonds to Spirit AeroSystems, Inc. The purpose of the bonds is to allow Spirit to avoid paying property taxes on taxable property purchased with bond proceeds for a period of five years. The abatement may then be extended for another five years. Additionally, Spirit will not pay sales taxes on the purchased property.

City documents state that the property tax abatement will be shared among the taxing jurisdictions in these estimated amounts:

City $81,272
State $3,750
County $73,442
USD 259 $143,038

No value is supplied for the amount of sales tax that may be avoided. The listing of USD 259, the Wichita public school district, is likely an oversight by the city, as the Spirit properties lie in the Derby school district. This is evident when the benefit-cost ratios are listed:

City of Wichita 1.98 to one
General Fund 1.78 to one
Debt Service 2.34 to one
Sedgwick County 1.54 to one
U.S.D. 260 1.00 to one (Derby school district)
State of Kansas 28.23 to one

The City of Wichita has a policy where economic development incentives should have a benefit cost ratio of 1.3 to one or greater for the city to participate, although there are many loopholes the city regularly uses to approve projects with smaller ratios. Note that the ratio for the Derby school district is 1.00 to one, far below what the city requires for projects it considers for participation. That is, unless it uses a loophole.

We have to wonder why the City of Wichita imposes upon the Derby school district an economic development incentive that costs the Derby schools $143,038 per year, with no payoff? Generally the cost of economic development incentives are shouldered because there is the lure of a return, be it real or imaginary. But this is not the case for the Derby school district. This is especially relevant because the school district bears, by far, the largest share of the cost of the tax abatement.

Of note, the Derby school district extends into Wichita, including parts of city council districts 2 and 3. These districts are represented by Pete Meitzner and James Clendenin, respectively.

The city’s past experience

Wichita Mayor Carl Brewer Facebook 2012-01-04Spirit Aerosystems is a spin-off from Boeing and has benefited from many tax abatements over the years. In a written statement in January 2012 at the time of Boeing’s announcement that it was leaving Wichita, Mayor Carl Brewer wrote “Our disappointment in Boeing’s decision to abandon its 80-year relationship with Wichita and the State of Kansas will not diminish any time soon. The City of Wichita, Sedgwick County and the State of Kansas have invested far too many taxpayer dollars in the past development of the Boeing Company to take this announcement lightly.”

Along with the mayor’s statement the city released a compilation of the industrial revenue bonds authorized for Boeing starting in 1979. The purpose of the IRBs is to allow Boeing to escape paying property taxes, and in many cases, sales taxes. According to the city’s compilation, Boeing was granted property tax relief totaling $657,992,250 from 1980 to 2017. No estimate for the amount of sales tax exemption is available. I’ve prepared a chart showing the value of property tax abatements in favor of Boeing each year, based on city documents. There were several years where the value of forgiven tax was over $40 million.

Boeing Wichita tax abatements, annual value, from City of Wichita.
Boeing Wichita tax abatements, annual value, from City of Wichita.
Kansas Representative Jim Ward, who at the time was Chair of the South Central Kansas Legislative Delegation, issued this statement regarding Boeing and incentives:

Boeing is the poster child for corporate tax incentives. This company has benefited from property tax incentives, sales tax exemptions, infrastructure investments and other tax breaks at every level of government. These incentives were provided in an effort to retain and create thousands of Kansas jobs. We will be less trusting in the future of corporate promises.

Not all the Boeing incentives started with Wichita city government action. But the biggest benefit to Boeing, which is the property tax abatements through industrial revenue bonds, starts with Wichita city council action. By authorizing IRBs, the city council cancels property taxes not only for the city, but also for the county, state, and school district.

Wichita City Library, 1965

What incentives can Wichita offer?

Wichita government leaders complain that Wichita can’t compete in economic development with other cities and states because the budget for incentives is too small. But when making this argument, these officials don’t include all incentives that are available.

In making the case for an economic development fund paid for by a sales tax, the argument goes like this: “Wichita and Sedgwick County compete conservatively with incentives. The City of Wichita and Sedgwick County have a total of $1.65 million in new uncommitted funds for cash incentives this year with any unused money going back to the general fund.” (Will Wichita Accelerate Competition for Primary Jobs?, presentation made to Wichita city council.)

This statement is true only if we use a very narrow definition of the word “incentive.” By any reasonable definition, Wichita has many incentives worth much more than what is claimed by Wichita economic development officials and politicians.

In fact, the report cited above contains contradictory information about the amounts that are available for economic development incentives in Wichita. Here is an example: “The $4.5 million PEAK program incentive from the Kansas Department of Commerce was an important factor in keeping NetApp in Wichita. Locally we were able to provide $836,000 in incentives.”

So with an incentives budget of $1.65 million, a Wichita company received $5.3 million in incentives. Some of that, like the PEAK incentive, is paid over a period of years. But that amount doesn’t begin to describe the benefits NetApp received.

Available incentive programs

Kansas Department of Commerce logoA letter to NetApp from the Kansas Department of Commerce laid out the potential benefits from the state. As detailed in the letter, the programs with potential dollar amounts are:

  • Promoting Employment Across Kansas (PEAK), up to $7,705,535
  • Kansas Industrial Training with PEAK, up to $160,800
  • sales tax savings of $6,880,000
  • personal property tax exemption, $11,913,682
  • High Performance Incentive Program (HPIP), $8,500,000

The total of these is $35,160,017. Some of these benefits are paid over a period of years. The PEAK benefits are payable over seven years, according to the letter, so that’s about $1.1 million per year. These are potential benefits; the company may not actually qualify for and receive this entire amount. But it’s what the state offered.

It’s true that some of these programs are not cash incentives of the type Wichita complains of lacking. But if a company is going to make purchases, and the state says you can skip paying sales tax on the purchases — well, that’s as good as cash. $6,880,000 in the case of NetApp, according to the Kansas Department of Commerce.

Local tax exemptions

Besides sales tax exemptions, the city has other types of tax exemptions it regularly offers. These exemptions can have substantial value. In 2008 as Drury contemplated Broadview Hotel 2013-07-09 020purchasing the Broadview Hotel, the city allowed the hotel to escape paying much of the taxes that the rest of us have to pay. According to city information, Drury planned to spend $22,797,750 on the hotel. If we use this as the appraised value for the property when it is complete, the annual property taxes due for this property would be $22,797,750 times .25 times 126.323 divided by 1000, or $719,970. This calculation may be rough, but it gives us an approximation of the annual operating subsidy being given to this hotel for the next ten years.

It's important for citizens to know incentivesWhen Boeing announced in 2012 that it was closing its Wichita operations, city leaders complained that Boeing was leaving Wichita even though it had received many incentives. From 1979 to 2007, Boeing received tax abatements through the industrial revenue bond process worth $658 million, according to a compilation provided by the City of Wichita. (This is not money the city lent or gave to Boeing. IRBs provide a vehicle for granting tax abatements or exemptions.) At the time, city officials said the average amount of bonds was $120 million per year. With Wichita commercial property tax rates at 3.008 percent ($30.08 per $1,000 of appraised value), according to GWEDC, that’s a tax savings of around $3.6 million per year. To Boeing, that’s as good as receiving cash year after year.

Tax increment financing

In 2013 Wichita approved a package benefiting Exchange Place in downtown. Here’s what the city council agenda packet gives as the sources of financing for this project.

HUD Loan Amount         $29,087,700
Private Equity            5,652,254
Tax Credit Equity        19,370,395
TIF Proceeds             12,500,000
Total Sources of Funds  $66,610,349

TIF, or tax increment financing, diverts future increased tax revenues away from their normal uses and diverts them back to the project. In this case, the city will borrow $12,500,000 by selling bonds. It will give this money to the developer. Then, TIF proceeds will be used to repay these bonds.

Some will argue that TIF isn’t really an incentive. The owners of the property will have to pay their property taxes, just like any other property owner. But for this project, the property taxes are used for the project’s own benefit instead of funding the costs of city government. This project gets to spend $12.5 million of its property tax payments on itself, rather than funding the costs of Wichita city government.

Tax credits

Ambassador Hotel sign 2014-03-07Note that the sources of financing for the Exchange Place project includes “Tax Credit Equity.” Here’s an example of another downtown project, the Ambassador Hotel, and the incentive package the city prepared:

  • $3,325,000 in tax increment financing.
  • $4,245,000 in city funding under the capital improvement plan (CIP), to build parking for the hotel.
  • $3,800,000 in tax credits from the State of Kansas.
  • $3,500,000 in tax credits from the U.S. government.
  • $537,075 in sales tax exemptions on purchases during the construction and furnishing of the hotel.
  • $60,000 per year in community improvement district (CID) sales tax. The hotel charges an extra two cents per dollar sales tax, which the state returns to the hotel.
  • $127,499 per year (estimated) in rental revenue to the developers from a sweetheart lease deal.
  • Participation in Wichita’s facade improvement program, which provides special assessment financing that is repaid.

All told, this project was slated to receive $15,407,075 in taxpayer funds to get started, with additional funds provided annually.

The tax credits for this project are historic preservation tax credits. They have the same economic impact as a cash payment. The federal tax credits are available across the country, while the Kansas tax credits, of course, are a state program. In this case the hotel developers received an upfront payment of $3.8 million from the state in a form that’s as good as cash.

STAR bonds

Last year a STAR bonds district in northeast Wichita was approved to receive $31,570,785 from these bonds. The STAR bonds are paid off with sales tax revenue that would otherwise go to the state and overlapping jurisdictions. This is sales tax collected from the business’s customers, and doesn’t cost the business anything.

Adding it up

This list is not complete. There are other programs and other beneficiaries of economic development subsidies. With this in mind, it is disingenuous for city and other officials to use the $1.65 million figure as though it was all Wichita had to offer. It’s important for citizens to know that contrary to the claims of officials, Wichita has many economic development incentive programs available, and some have substantial value to the recipients, with corresponding cost to the city and other jurisdictions.

United States Capitol, July 2011

Elections in Kansas: Federal offices

Kansas Republican primary voters made two good decisions this week.

Kansas held primary elections this week. The primary election, of course, does not determine who wins the office; it only selects one Democratic and one Republican candidate to move forward to the November general election. But in many cases, the primary is the election, at least the one that really makes a difference. That’s because in Kansas, often there may be no Democratic Party candidate. Or if there is a Democrat, that candidate may have little money available to campaign in a district with a large Republican voter registration advantage.

It’s important to note that some candidates who will appear on the general election ballot in November did not appear on any primary election ballot. That’s because parties other than Democratic and Republican select their candidates in a convention. In particular, there are two prominent candidates in this category. One is Keen Umbehr, the Libertarian Party candidate for governor. The other is independent candidate Greg Orman, who is running for United States senator. Both are serious candidates that deserve consideration from voters.

Let’s take a look at a few results from the primary election.

United States Senate

United States Senate Primary, 2014
In the contest for the Republican Party nomination for United States Senate, Pat Roberts won, receiving 48 percent of the vote. He moves on to face not only the Democratic nominee, but also an independent candidate who is already advertising on television. The problem Roberts faces going forward is the fallout from his scorched-earth campaign. He went negative against Milton Wolf from the start, focusing on issues that are worth considering, but quite trivial considering the big picture.

Pat Roberts millions on negative ads
Roberts ran an advertisement near the end of the campaign that took Wolf’s words grossly out of context, and Roberts should be ashamed for stooping to that level. Another thing Roberts can be ashamed of is his refusal to debate opponents. He said he would debate. He should debate. It’s a civic obligation. He also largely avoided news media.

Pat Roberts StarKistDuring the campaign, I was critical of Roberts. I looked at votes he had taken while in the Senate. I looked at the way he ran his campaign. I was critical. I hope that I kept my criticism based on — and focused on — facts and issues. But another problem Roberts has is the behavior of his supporters, both official and unofficial. They too ran a scorched-earth campaign.

Tweet about Milton Wolf I’d like to show you some of the posts made on Facebook and Twitter about Wolf and his supporters, but this is a family-oriented blog. Roberts will need the support of all Kansas Republicans in the general election. He needs to hope that they don’t peel off to the Democrat or Independent candidates. Roberts needs all Kansas Republicans to vote, and vote for him. But the behavior of his campaign and its supporters has harmed Republican party unity. What’s curious to me is that I don’t think they realize the harm they have caused.

United States House of Representatives, district 4

United States House, District 4For United States House, fourth district, which is Wichita and the surrounding area, incumbent Mike Pompeo won over Todd Tiahrt, 63 percent to 37 percent. This contest was curious for a number of reasons, such as the former holder of the office seeking it again, and running against a man he endorsed twice. It attracted national attention for that reason, but also for something more important: Tiahrt was advocating for a return to the practice of earmarking federal spending. Tiahrt concentrated a few issues in a campaign that was negative from the start.

Tiahrt claimed that Pompeo voted to support Obamacare seven times. But everyone who examined that claim, including several political science professors, said it was unfounded, going as far as saying it broke the truth entirely. The Tiahrt campaign also took a speech Pompeo had made on the floor of the House of Representatives and used just one sentence of it in a deceptive manner. The campaign also took a bill that Pompeo introduced — having to do with GMOs — and twisted its meaning in order to claim that Pompeo doesn’t want you to know the ingredients used in food. Tiahrt criticized Pompeo for missing some votes during the campaign, even though Tiahrt had missed many votes during his own campaign four years ago.

In the face of these negative ads, Pompeo remained largely positive. He released one television ad that rebutted the claims that Tiahrt had made. Is it negative campaigning to rebut the false accusations of your opponent? Pompeo had one ad that mentioned “goofy accusations” made by his opponent, which hardly qualifies as negative. Other than that, the Pompeo campaign remained largely positive. That is quite an accomplishment in today’s political environment.

This campaign was also marred by vitriol among supporters. In my opinion, based on my observations, the Tiahrt supporters that engaged in this behavior have some apologies to make. Pompeo goes on to face a relatively unknown Democrat in the heavily Republican fourth district.

United States House of Representatives, district 1

United States House, District 1For United States House, first district, which is western Kansas, although the district extends east enough to include Emporia and Manhattan, incumbent Tim Huelskamp was challenged by Alan LaPolice. Huelskamp won with 55 percent of the vote. Huelskamp had faced criticism for not being supportive of various subsidy programs that benefit farmers, most notably for ethanol. Outside groups joined the race, running ads critical of Huelskamp for that reason. Some ads were critical of Huelskamp for being removed from the House Agriculture committee, that move seen as retaliation for not supporting Speaker of the House John Boehner. Huelskamp now moves on to face a Kansas State University history professor who was also the mayor of Manhattan.

The meaning of these results

What do these results mean? These three elections — Senate and two House contests — attracted national attention. The Friday before the election, Kimberly Strassel wrote in the Wall Street Journal of the importance of the fourth district contest. She wrote:

A big decision comes Tuesday in the Kansas GOP primary. The Sunflower State is in the throes of political upheaval, with most of the attention on the fortunes of Gov. Sam Brownback and Sen. Pat Roberts. But the race that may say far more about the direction of the GOP is taking place in Wichita, the state’s Fourth District, in the standoff between Rep. Mike Pompeo and challenger Todd Tiahrt.

Pompeo was elected in the 2010 tea party surge, with a particular focus on liberating private enterprise. He’s made a name for himself as a leader in the fight to end corporate welfare and pork, and to cut back on strangling regulations.

A Crony Capitalist Showdown

After detailing some legislative activity and accomplishment, Strassel noted the difficulty that fighters for economic freedom encounter: She wrote “Such principles are precisely what conservative voters claim to demand from their representatives. Yet the antisubsidy line has hardly been an easy one, even in conservative Kansas — which collects its share of federal largess. And Mr. Tiahrt knows it.”

Continuing, she wrote: “The choice voters fundamentally face on Tuesday is whether they want a congressman who works to get government smaller for everyone and to end corporate welfare, or a congressman who grabs what he can of big government to funnel to his district, and embraces crony capitalism. The latter is a return to the unreformed GOP, a groove plenty of Republicans would happily slide back into — if only voters gave the nod. We’ll see if Kansas conservatives do.”

There’s something there that bears repeating: “Such principles are precisely what conservative voters claim to demand from their representatives.” In the case of Huelskamp and Pompeo, voters supported two candidates who have these principals, and who follow them. In the United States Senate contest, that almost happened.

U.S. Capitol Dome us-capitol-325341_1280

In Kansas fourth district, fundamental issues of governance arise

The contest in the Kansas fourth district is a choice between principle and political expediency, and between economic freedom and cronyism.

While some news articles and political columns have described the contest for Republican Party nomination for United States House of Representatives between Todd Tiahrt and Mike Pompeo as a yawner, as between two candidates with few and only minor distinguishing positions — there are important differences. The press is starting to notice.

A Crony Capitalist Showdown

In the Wall Street Journal columnist Kimberly Strassel made the case for this contest’s importance as a bellwether of Republican sentiment:

A big decision comes Tuesday in the Kansas GOP primary. The Sunflower State is in the throes of political upheaval, with most of the attention on the fortunes of Gov. Sam Brownback and Sen. Pat Roberts. But the race that may say far more about the direction of the GOP is taking place in Wichita, the state’s Fourth District, in the standoff between Rep. Mike Pompeo and challenger Todd Tiahrt.

The 50-year-old Mr. Pompeo — an Army veteran, Harvard Law grad and businessman — was elected in the 2010 tea party surge, with a particular focus on liberating private enterprise. He’s made a name for himself as a leader in the fight to end corporate welfare and pork, and to cut back on strangling regulations. (Potomac Watch: A Crony Capitalism Showdown, August 1, 2014)

(If the above link does not work for you because you don’t have a subscription to the Wall Street Journal, click here.)

Such principles are preciselyAfter detailing some legislative activity and accomplishment, Strassel notes the difficulty that fighters for economic freedom encounter: “Such principles are precisely what conservative voters claim to demand from their representatives. Yet the antisubsidy line has hardly been an easy one, even in conservative Kansas — which collects its share of federal largess. And Mr. Tiahrt knows it.”

Concluding her column, Strassel outlines the choice that so many writers have failed to realize:

The choice voters fundamentally face on Tuesday is whether they want a congressman who works to get government smaller for everyone and to end corporate welfare, or a congressman who grabs what he can of big government to funnel to his district, and embraces crony capitalism. The latter is a return to the unreformed GOP, a groove plenty of Republicans would happily slide back into — if only voters gave the nod. We’ll see if Kansas conservatives do.

Another example of the difference between the two candidates is the Export-Import Bank. Conservative groups are urging that Congress not reauthorize the bank, a vote that will happen soon. The most common argument is that it harms American jobs, and there are allegations of corruption in its operations.

While in Congress, Pompeo voted against the reauthorization of the bank. He has said he would vote against its reauthorization again unless there is significant reform. Tiahrt, on the other hand, voted in favor of the Export-Import Bank. It’s representative of the type of cronyism he has supported while in office, and would likely support again, especially as his positions tack to the political left.

Finally, Tiahrt has recently criticized Charles Koch and Americans for Prosperity, leading us to wonder if Tiahrt understands or embraces the principles of economic freedom and free markets.

United States Capitol, July 2011

Pat Roberts, senator for corporate welfare

Two years ago United States Senator Pat Roberts voted in committee with liberals like John Kerry, Chuck Schumer, and Debbie Stabenow to pass a bill loaded with wasteful corporate welfare.

The Wall Street Journal noticed a vote made by Senator Roberts in committee that lead to the fiscal cliff bill . The newspaper explained the harm of this bill in its editorial:

The great joke here is that Washington pretends to want to pass “comprehensive tax reform,” even as each year it adds more tax giveaways that distort the tax code and keep tax rates higher than they have to be. Even as he praised the bill full of this stuff, Mr. Obama called Tuesday night for “further reforms to our tax code so that the wealthiest corporations and individuals can’t take advantage of loopholes and deductions that aren’t available to most Americans.”

One of Mr. Obama’s political gifts is that he can sound so plausible describing the opposite of his real intentions.

Senator for Corporate WelfareThe costs of all this are far greater than the estimates conjured by the Joint Tax Committee. They include slower economic growth from misallocated capital, lower revenues for the Treasury and thus more pressure to raise rates on everyone, and greater public cynicism that government mainly serves the powerful.

Republicans who are looking for a new populist message have one waiting here, and they could start by repudiating the corporate welfare in this New Year disgrace. (Crony Capitalist Blowout: A tax increase for everyone but the favored wealthy few. January 4, 2013)

The Journal took the rare measure of calling out the senators who voted for this bill in committee, as shown in its nearby graphic. There it is: Pat Roberts voting in concert with the likes of John Kerry, Chuck Schumer, and Debbie Stabenow.

If Tom Coburn of Oklahoma could vote against this bill in committee, then so could have Pat Roberts. But he didn’t.

WichitaLiberty.TV set 2014-04-29 01 800

Wichita: We have incentives. Lots of incentives.

In this excerpt from WichitaLiberty.TV: Wichita government leaders complain that Wichita can’t compete in economic development with other cities and states because the budget for incentives is too small. But when making this argument, these officials don’t include all incentives that are available. View below, or click here to view on YouTube. More information on this topic is at Contrary to officials, Wichita has many incentive programs.

Wichita City Budget Cover, 1975

In Wichita, ‘free markets’ cited in case for economic development incentives

A prominent Wichita business uses free markets to justify its request for economic development incentives. A gullible city council buys the argument.

At the December 10, 2013 meeting of the Wichita City Council, Bombardier LearJet received an economic development incentive that will let it avoid paying some property taxes on newly-purchased property. The amount involved in that particular incident is relatively small. According to city documents, “the value of the abated taxes on that investment could be as much as $1,980.”

Wichita Economic DevelopmentThis week Bombardier was before the council again asking for property tax abatements. City documents estimate the amount of tax to be forgiven as $1,098,294 annually, for up to ten years. The document prepared for council members did not address sales tax, but generally sales taxes are forgiven when using the program Bombardier qualified for.

The December 10 meeting was useful because a representative of Bombardier appeared before the council. His remarks help us understand how some prominent members of Wichita’s business community have distorted the principles of free markets and capitalism. As illustrated by the fawning of Wichita City Council Member and Vice Mayor Pete Meitzner (district 2, east Wichita) and others, elected officials have long forsaken these principles.

Bombardier’s argument

Don Pufahl, who is Director of Finance at Bombardier Learjet, addressed the council regarding this matter. He started his remarks on a positive note, telling the council “There are various aspects to a free-market economy. There’s the rule of law, there’s property rights, and another major aspect is incentives.”

Economic development incentives reduce riskWe must be careful when using the term incentive. In a free-market economy or capitalism, incentive refers to the motivation of the possibility of earning profits. Another incentive — the other side of the same coin — is avoiding losses. That’s why capitalism is called a profit-and-loss system. The losses are just as important as profits, as losses are a signal that the economic activity is not valued, and the resources should be shifted to somewhere else where they are valued more highly.

But in the field of economic development as practiced by government, incentive means something given to or granted to a company. That’s what the representative from Bombardier meant by incentive. He explained: “One party, in this case, the local government, uses incentives for another party, in this case our company, to invest in the community.”

A few thoughts: First, Bombardier is not investing in the community. The company is investing in itself. I’m sure Bombardier’s shareholders hope that is true.

Second, the free market system that the speaker praised is a system based on voluntary exchange. That flows from property rights, which is the foundational idea that people own themselves and the product of their labor, and are free to exchange with others. But when government uses incentives, many people do not consent to the exchange. That’s not a free market system.

Milton Friedman: Capitalism and FreedomThird, an important part of a free market system is market competition. That is, business firms compete with others for customers. They also compete with other business firms for resources needed for production, such as capital. When government makes these decisions instead of markets, we don’t have a free market system. Instead, we have cronyism. Charles G. Koch has described the harm of cronyism, recently writing: “The effects on government are equally distorting — and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”

In the same article Koch wrote: “We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.” (Charles G. Koch: Corporate cronyism harms America)

The representative from Bombardier also said that the city’s incentives would reduce Bombardier’s investment risk. There is little doubt this is true. When a company is given money with no strings attached except what the company already intends to do and wants to do, that reduced a company’s risk. What has happened, however, is that risk has not been eliminated or reduced. It has merely been shifted to the people of Wichita, Sedgwick County, the Wichita public school district, and the State of Kansas. When government does this on a piecemeal basis, this is called cronyism. When done universally, we call this socialism.

We can easily argue that actions like this — and especially the large subsidies granted to Bombardier by the state — increase the risk of these investments. Since the subsidies reduce the cost of its investment, Bombardier may be motivated to make risky investments that it might otherwise not make, were it investing its own funds (and that of its shareholders).

Entrepreneurship, EntrepreneurThe cost of Bombardier’s investments, and the accompanying risk, is spread to a class of business firms that can’t afford additional cost and risk. These are young startup firms, the entrepreneurial firms that we need to nurture in order to have real and sustainable economic growth and jobs. But we can’t identify these. We don’t know who they are. But we need an economic development strategy that creates an environment where these young entrepreneurial firms have the greatest chance to survive. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)

Now the city and Bombardier will say that these investments have a payoff for the taxpayer. That is, if Bombardier grows, it will pay more in taxes, and that constitutes “profit” for taxpayers. Even if we accept that premise — that the city “profits” from collecting taxes — why do we need to invest in Bombardier in order to harvest its “profits” when there are so many companies that pay taxes without requiring subsidy?

Finally, the representative from Bombardier said that these incentives are not a handout. I don’t see how anyone can say that and maintain a straight face.

wichita-chamber-job-growth-2013-12
It would be one thing if the Wichita area was thriving economically. But it isn’t. We’re in last place among our self-identified peers, as illustrated in Wichita and Visioneering peers job growth. Minutes from a recent meeting of Greater Wichita Economic Development Coalition, the primary organization in charge of economic development, holds this paragraph: “As shown in the Chart below Wichita economy suffered the largest loss of employment among peer cities and has not seen any signs of rebounding as the other communities have. Wichita lost 31,000 jobs during the recession principally due to the down turn in general aviation.”

Following is a fuller representation of the Bombardier representative’s remarks to the council.

There are various aspects to a free-market economy. There’s the rule of law, there’s property rights, and another major aspect is incentives.

One party, in this case, the local government, uses incentives for another party, in this case our company, to invest in the community.

As the company moves forward to invest in the community, those investments are not without risk. … Your incentives allow us to offset some of that risk so that we can move forward with those investments, which hopefully create new jobs and also then also improves the quality of life in our community. … These incentives are not a handout. They are a way that the local government uses such things to offset some of the risk that is involved in local companies as they invest in the community, bring jobs to the community, and improve the community overall.

‘Earmark Distribution Agency,’ dealer of pork, proposed for elimination

From the office of United States Representative Mike Pompeo, an example of Rep. Pompeo opposing corporate and business welfare that benefits a few parties at detriment to the rest of the economy. Video of Pompeo speaking on the floor of the House on this matter is here, or below.

Congressman Mike Pompeo, R-Kansas, offered an amendment to H.R. 4660, the Commerce, Justice, Science, and Related Agencies Appropriations Act for Fiscal Year 2015, to eliminate the Economic Development Administration (or the “Earmark Distribution Agency”). The amendment would send EDA’s total funding — $247 million in FY 2015 — to the Deficit Reduction Account, saving up to $2.5 billion over 10 years based on current levels.

“We need to solve America’s debt crisis before it is too late, and that means reducing wasteful spending, no matter the agency or branch of government,” said Rep. Pompeo. “The EDA should be called the ‘Earmark Distribution Agency,’ as it continues to spend taxpayer dollars on local pet projects in a way similar to congressional earmarks — which have already been banned by the House.” Examples of the “Earmark Distribution Agency” spending taxpayer dollars wastefully:

    Harry Reid Research Park
  • In 2008, the EDA provided $2,000,000 to begin construction of the UNLV Harry Reid Research and Technology Park in Las Vegas, NV. Currently the UNLV Harry Reid Research & Technology Park features a paved road and a website claiming the first anticipated tenant would move in in 2010. (There’s nothing there.)
  • In 2010, $25,000,000 was spent by the EDA for a Global Climate Mitigation Incentive Fund and $2,000,000 for a “culinary amphitheater,” wine tasting room and gift shop in Washington State.
  • In 2011, the EDA gave a New Mexico town $1,500,000 to renovate a theater.
  • In 2013, the EDA also gave Massachusetts $1.4 million to promote new video games.
  • Back in the 1980s, the EDA used taxpayer dollars to build replicas of the Great Wall of China and the Egyptian Pyramids in the middle of Indiana. They were never completed—it is now a dumping ground for tires.

Rep. Pompeo concluded: “EDA has for too long been the dumping ground for taxpayer money. The road to America’s return to fiscal sanity starts with abolishing this agency.

Wichita city hall

Contrary to officials, Wichita has many incentive programs

Wichita government leaders complain that Wichita can’t compete in economic development with other cities and states because the budget for incentives is too small. But when making this argument, these officials don’t include all incentives that are available.

The document Will Wichita Accelerate Competition for Primary Jobs? contains contradictory information about money available for economic development incentives in Wichita. The usual argument that officials make is represented by this quotation from the report: “Wichita and Sedgwick County compete conservatively with incentives. The City of Wichita and Sedgwick County have a total of $1.65 million in new uncommitted funds for cash incentives this year with any unused money going back to the general fund.”

But the same report contains this: “The $4.5 million PEAK program incentive from the Kansas Department of Commerce was an important factor in keeping NetApp in Wichita. Locally we were able to provide $836,000 in incentives.”

So with an incentives budget of $1.65 million, a Wichita company received $5.3 million in incentives. Some of that, like the PEAK incentive, is paid over a period of years. But that amount doesn’t begin to describe the benefits NetApp received.

A sample of available incentive programs

Kansas Department of Commerce logoA letter to NetApp from the Kansas Department of Commerce laid out the potential benefits from the state. As detailed in the letter, the programs with potential dollar amounts are: Promoting Employment Across Kansas (PEAK), up to $7,705,535; Kansas Industrial Training with PEAK, up to $160,800; sales tax savings of $6,880,000; personal property tax exemption, $11,913,682; and High Performance Incentive Program (HPIP), $8,500,000. The total of these is $35,160,017. Some of these benefits are paid over a period of years. The PEAK benefits are payable over seven years, according to the letter, so that’s about $1.1 million per year. These are potential benefits; the company may not actually qualify for and receive this entire amount. But it’s what the state offered.

It’s true that some of these programs, strictly speaking, are not “cash incentives” of the type Wichita complains of lacking. But if a company is going to make purchases, and the state says you can skip paying sales tax on the purchases — well, that’s about as good as cash. $6,880,000 in the case of NetApp, according to the Kansas Department of Commerce.

Local tax exemptions

Besides sales tax exemptions, the city has other types of tax exemptions it regularly offers. These exemptions can have substantial value. In 2008 as Drury contemplated Broadview Hotel 2013-07-09 020purchasing the Broadview Hotel, the city allowed the hotel to escape paying much of the taxes that the rest of us have to pay. According to city information, Drury planned to spend $22,797,750 on the hotel. If we use this as the appraised value for the property when it is complete, the annual property taxes due for this property would be $22,797,750 times .25 times 126.323 divided by 1000, or $719,970. This calculation may be rough, but it gives us an idea of the annual operating subsidy being given to this hotel for the next ten years. Remember, city officials complain of an incentives budget of only $1.65 million per year.

It's important for citizens to know incentivesWhen Boeing announced in 2012 that it was closing its Wichita operations, city leaders complained that Boeing was leaving Wichita even though it had received many incentives. From 1979 to 2007, Boeing received tax abatements through the industrial revenue bond process worth $658 million, according to a compilation provided by the City of Wichita. At the time, city officials said the average amount of bonds was $120 million per year. With Wichita commercial property tax rates at 3.008 percent ($30.08 per $1,000 of appraised value), according to GWEDC, that’s a tax savings of around $3.6 million per year. To Boeing, that’s as good as receiving cash year after year. Remember, city officials say the incentives budget is $1.65 million per year.

Tax increment financing

In 2013 Wichita approved a package benefiting Exchange Place in downtown. Here’s what the city council agenda packet gives as the sources of financing for this project.

HUD Loan Amount         $29,087,700
Private Equity            5,652,254
Tax Credit Equity        19,370,395
TIF Proceeds             12,500,000
Total Sources of Funds  $66,610,349

TIF, or tax increment financing, diverts future increased tax revenues away from their normal uses and diverts them back to the project. In this case, the city will borrow $12,500,000 by selling bonds. It will give this money to the developer. Then, TIF proceeds will be used to repay these bonds.

Some will argue that TIF isn’t really an incentive. The owners of the property will have to pay their property taxes, just like any other property owner. But for this project, the property taxes are used for the project’s own benefit instead of paying for city government. This project gets to spend $12.5 million of its property tax payments on itself, rather than funding the costs of Wichita city government.

Tax credits

Ambassador Hotel sign 2014-03-07Note that the sources of financing for the Exchange Place project includes “Tax Credit Equity.” Here’s an example of another downtown project, the Ambassador Hotel, and the incentive package the city prepared:

  • $3,325,000 in tax increment financing.
  • $4,245,000 in city funding under the capital improvement plan (CIP), to build parking for the hotel.
  • $3,800,000 in tax credits from the State of Kansas.
  • $3,500,000 in tax credits from the U.S. government.
  • $537,075 in sales tax exemptions on purchases during the construction and furnishing of the hotel.
  • $60,000 per year in community improvement district (CID) sales tax. The hotel charges an extra two cents per dollar sales tax, which the state returns to the hotel.
  • $127,499 per year (estimated) in rental revenue to the developers from a sweetheart lease deal.
  • Participation in Wichita’s facade improvement program, which provides special assessment financing that is repaid.

All told, this project was slated to receive $15,407,075 in taxpayer funds to get started, with additional funds provided annually.

The tax credits for this project are historic preservation tax credits. They have the same economic impact as a cash payment. The federal tax credits are available across the country, while the Kansas tax credits, of course, are a state program. In this case the hotel developers received an upfront payment of $3.8 million from the state in a form that’s as good as cash. Remember, city officials say the incentives budget is $1.65 million per year.

STAR bonds

There are more programs the city and state use to provide incentives. Last year, according to city documents, a STAR bonds district in northeast Wichita was approved to receive $31,570,785 from these bonds. The STAR bonds are paid off with sales tax revenue that would otherwise go to the state and overlapping jurisdictions. This is sales tax collected from the business’s customers, and doesn’t cost the business anything. Remember, city officials say the incentives budget is $1.65 million per year.

This list is not complete. There are other programs and other beneficiaries of economic development subsidies. It’s important for citizens to know that contrary to the claims of officials, Wichita has many economic development incentive programs available, and some have substantial value to the recipients, with corresponding cost to the city and other jurisdictions.

Wichita City Budget Cover, 1968

Poll: Wichitans don’t want sales tax increase

kansas-policy-institute-logoFollowing is a press release from Kansas Policy Institute.

Scientific Poll: Wichitans Don’t Want Sales Tax Increase

They’re opposed to business incentives, want to pursue privatization over tax increases, and have concerns about how city hall has recently spent money.

May 2, 2014 — Wichita — According to a newly released poll from Kansas Policy Institute, Wichitans may want more jobs and a secure water source but they certainly don’t support a sales tax increase as the means to get either. A scientific survey of 502 registered Wichita voters, conducted by SurveyUSA, shows strong opposition to a sales tax increase, as well as a possible explanation for their opposition. Full results, cross tabs, and methodology are available here.

  • 63 percent oppose a sales tax increase to provide incentives to businesses; only 28 percent support the idea
  • 64 percent oppose a sales tax increase to expand or renovate convention spaces such as the Hyatt Hotel and Century II; only 28 percent support the idea
  • 78 percent would be willing to pay a higher sales tax to secure a long-term water source and build new infrastructure but 65 percent believe the City should fund those projects through privatization rather than raise taxes.

“Government typically claims that citizen support for certain projects means they are also supportive of higher taxes, but that’s often because citizens are presented with false choices,” said Dave Trabert, president of Kansas Policy Institute. “That’s exactly what the City of Wichita did with their ACT ICT community meetings. Wichita officials were simply looking for justification to do what they wanted to do — raise taxes.”

Trabert believes the survey provides insight on citizens’ opposition to tax increases. “Only 28 percent of Wichitans believe city officials have efficiently used taxpayer money. 78 percent believe the City should adjust spending and be more efficient to fund new infrastructure and secure a long-term water source. City officials would understand that if they had an honest dialogue with citizens about all of the options, instead of just pushing a tax increase.”

Kansas Policy Institute is planning a series of public forums over the coming months to examine multiple options for long-term water solutions, economic development and infrastructure. National experts on privatization and other options will be brought in, as well as government officials who have successfully used privatization to provide services. The effectiveness of taxpayer subsidies will also be explored. Local elected officials and other civic leaders will be invited to participate.

charles-koch-wall-street-journal-2014-04-03

Cronyism is welfare for rich and powerful, writes Charles G. Koch

“The central belief and fatal conceit of the current administration is that you are incapable of running your own life, but those in power are capable of running it for you. This is the essence of big government and collectivism.”

That’s Charles G. Koch writing in the Wall Street Journal. The article is Charles Koch: I’m Fighting to Restore a Free Society, and is available to read without subscription or payment. In the article, Koch explains his involvement in public affairs:

Far from trying to rig the system, I have spent decades opposing cronyism and all political favors, including mandates, subsidies and protective tariffs — even when we benefit from them. I believe that cronyism is nothing more than welfare for the rich and powerful, and should be abolished.

Koch Industries was the only major producer in the ethanol industry to argue for the demise of the ethanol tax credit in 2011. That government handout (which cost taxpayers billions) needlessly drove up food and fuel prices as well as other costs for consumers — many of whom were poor or otherwise disadvantaged. Now the mandate needs to go, so that consumers and the marketplace are the ones who decide the future of ethanol.

There, Charles Koch explains a big problem with the insidious nature of government. Even those who are opposed to government interventions in markets find themselves forced to participate in government subsidy programs. When they do, they are often labeled as hypocrites for accepting benefits from the government programs they oppose. Koch Industries, as a manufacturer of gasoline, blends ethanol with the gasoline it produces. Federal law requires that. Even though Koch Industries opposed subsidies for ethanol, the company accepted the payments. A company newsletter explained: “Once a law is enacted, we are not going to place our company and our employees at a competitive disadvantage by not participating in programs that are available to our competitors.” (As Koch explains in the current article, the subsidy program for ethanol has ended, but there is still the mandate requiring its use in gasoline.)

Learn how economic freedom creates prosperity and improves lives throughout the world.
Learn how economic freedom creates prosperity and improves lives throughout the world.
Walter Williams, as he often does, explains the core of the problem using his characteristically blunt imagery: “Once legalized theft begins, it pays for everybody to participate.” Williams says not only does it pay to participate, the reality is that it is often necessary to participate in order to stay in business. This is part of the treacherous nature of government interventionism: A business can be humming along, earning a profit by meeting the needs of its customers, when government radically alters the landscape. Perhaps government backs a competitor, or forces changes to business methods that have been working satisfactorily and harming no one. What is the existing business to do in response? Consent to be driven out of business, just to prove a point?

Existing firms, then, are usually compelled to participate in the government program — accepting subsidies, conforming to mandates, letting government pull the strings. This creates an environment where government intervention spirals, growing by feeding on itself. It’s what we have today.

It happens not only at the federal level, but at state and local levels. Referring to a City of Wichita incentive program for commercial real estate, Wichita developer Steve Clark said: “Once you condition the market to accept these incentives, there’s nothing someone else can do to remain competitive but accept them yourself. Like the things we’re working on with the city, now we have to accept incentives or we’re out of business.”

In Kansas, there are state income tax credit programs that award credits (economically equivalent to cash payments) to companies that meet certain requirements that were established by the legislature and are administered by bureaucrats. These corporate welfare programs, which represent cronyism, are more valuable than lower tax rates, at least to influential Kansas businesses.

All this leads to a country whose government stifles the potential of its people — or even worse, as Koch explains — causes actual and severe harm:

Instead of fostering a system that enables people to help themselves, America is now saddled with a system that destroys value, raises costs, hinders innovation and relegates millions of citizens to a life of poverty, dependency and hopelessness. This is what happens when elected officials believe that people’s lives are better run by politicians and regulators than by the people themselves. Those in power fail to see that more government means less liberty, and liberty is the essence of what it means to be American. Love of liberty is the American ideal.

Charles Koch: I’m Fighting to Restore a Free Society

Instead of welcoming free debate, collectivists engage in character assassination.

By Charles G. Koch

I have devoted most of my life to understanding the principles that enable people to improve their lives. It is those principles — the principles of a free society — that have shaped my life, my family, our company and America itself.

Unfortunately, the fundamental concepts of dignity, respect, equality before the law and personal freedom are under attack by the nation’s own government. That’s why, if we want to restore a free society and create greater well-being and opportunity for all Americans, we have no choice but to fight for those principles. I have been doing so for more than 50 years, primarily through educational efforts. It was only in the past decade that I realized the need to also engage in the political process.

Continue reading at Wall Street Journal (subscription not required). More about Koch Industries, including an interview with Charles Koch that covers some of these topics, is available in a recent issue of Wichita Business Journal. Click here for free access.

Wichita not good for small business

The Wichita Business Journal reports today:

When it comes to having good conditions to support small businesses, well, Wichita isn’t exactly at the top of the list, according to a new ranking from The Business Journals.

In fact, the Wichita metro area’s small-business vitality score is nearly at the bottom — 99th out of the 101 U.S. metro areas included in the study. (Wichita near bottom for small-business vitality score, April 2, 2014)

Many in Wichita don’t want to recognize and confront the bad news about the performance of the Wichita-area economy. Last year, when presenting its annual report to local governmental bodies, the leaders of Visioneering Wichita would not present benchmark data to elected officials.

wichita-peer-job-growth-1990-2014-01

So what is the record of the Wichita metropolitan area regarding job creation, that seeming to be the most popular statistic our leaders cite and promote? I’ve prepared statistics from the Bureau of Labor Statistics, U.S. Department of Labor for Wichita and a broad group of peer cities. I included our Visioneering peer cities, cities that Visioneers traveled to on official visits, and a few others. The result, shown nearby, is not pretty. (Click on charts for larger versions, or click here to use the interactive visualization)

wichita-peer-job-growth-2007-2014-01

If we look at job creation starting in 1990, Wichita lags behind our Visioneering peers, but not behind all the peer cities that I selected. Wichita does better than Springfield, Illinois, for example. I chose to include that as a peer metropolitan area because that’s the immediate past city that Gary Plummer worked in. He was president of that city’s Chamber of Commerce, and is now president of the Wichita Chamber. Note the position of Springfield: Last place.

In next-to-last place we see Wichita Falls, Texas. I chose to include it because it is the immediate past home of Tim Chase. He was the head of Wichita Falls Economic Development Corporation. He’s now president of Greater Wichita Economic Development Coalition, the primary organization in charge of economic development for the Wichita area.

In second-to-last place we see Pittsburgh, which I added because Visioneering leaders recently made a visit there.

Then, we come to Wichita.

If we look at job creation since 2007 we find Wichita in a common position: Last place in job creation, and by a wide margin except for two cities. One is Wichita Falls, where our present GWEDC president recently worked. The other city that barely out-performs Wichita is Chattanooga, which I included because Visioneering civic leaders recently traveled there to learn from that city.

Over the decades in which Wichita has performed poorly, there have been a few common threads. Carl Brewer has been council member or mayor since 2001. Economic development director Allen Bell has been working for the city since 1992. City Attorney Gary Rebenstorf has served for decades. At Sedgwick County, manager William Buchanan has held that position for more than two decades. On the Sedgwick County Commission, Dave Unruh has been in office since 2003, and Tim Norton since 2001. It is these officials who have presided over the dismal record of Wichita.

Wichita City Manager Robert Layton has had less time to influence the course of economic development in Wichita. But he’s becoming part of the legacy of Wichita’s efforts in economic development.

toolbox-29058_640

These leaders often complain that Wichita does not have enough “tools in the toolbox” to compete with other cities in economic development. Wichita does, however, have and use incentives. The State of Kansas regularly offers incentives so generous that Kansas business leaders told the governor that they value these incentives more than they would value elimination of the state corporate income tax.

Incentives: We have them. They haven’t worked for us.

It is nearly certain that this year Wichitans will be asked to approve a higher sales tax in order to pay for many things, including the more aggressive approach to job creation that Brewer mentioned. Based on the track record of our elected officials and bureaucrats, we need to do this: Before approving the tax and expenditures, Wichitans need to take a long look at the people who have been in charge, and ask what will be different going forward.

Wichita economic development: Worth higher taxes?

In this excerpt from WichitaLiberty.TV: Wichita city and business leaders are likely to ask Wichitans to support a higher sales tax in order to support additional economic development efforts. Should Wichitans vote in favor of this? View below, or click here to view at YouTube.

Another thing that a tax increase in Wichita might be used for is for economic development. That is, paying subsidies to companies so that they will provide jobs in Wichita.

wichita-chamber-job-growth-2013-12
It’s felt that Wichita needs to step up its economic development efforts because things haven’t been going well lately. Not that everyone agrees. You’ve seen the charts I showed you, showing the growth of jobs in Wichita and also other economic indicators. When we compare Wichita with the nation as a whole and with our Visioneering peer cities, Wichita is almost always in last place. When I presented this data to the Wichita city Council, the Council members did not believe these numbers. So here’s a chart that was presented recently at a Wichita Metro Chamber of Commerce meeting. It uses the same data source that I use, the Bureau of Economic Analysis, and it shows the same data using the same methodology. It comes to the same conclusion: Wichita performs poorly.

Our chamber of commerce and its leadership will use this poor performance to argue that Wichita needs to spend more money on economic development. And that’s a problem.

Your chamber of commerce radio buttons
Very often, local chambers of commerce support principles of crony capitalism instead of pro-growth policies that allow free enterprise and genuine capitalism to flourish.

Now you may be confused. Most people probably think that local chambers of commerce, since their membership is mostly business firms, support pro-growth policies that embrace limited government and free markets. But that’s not always the case. Here, in an excerpt from his Wall Street Journal article “Tax Chambers” Stephen Moore explains:

“The Chamber of Commerce, long a supporter of limited government and low taxes, was part of the coalition backing the Reagan revolution in the 1980s. On the national level, the organization still follows a pro-growth agenda — but thanks to an astonishing political transformation, many chambers of commerce on the state and local level have been abandoning these goals. They’re becoming, in effect, lobbyists for big government.

“In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses — at least those not connected at the hip with government — to prosper. Journalist Tim Carney agrees: All too often, he notes, state and local chambers have become corrupted by the lure of big dollar corporate welfare schemes.”

This is the argument that the Wichita Chamber of Commerce and the city council will be making: We don’t spend enough on business welfare. Capitalism and the free market: These things don’t work, they will tell us. Only government can save Wichita from decline. Business leaders will tell us we need more taxes for more spending on economic development. But be careful here:

There’s a difference between “business leaders” and “capitalists.”

Last year Charles Koch explained the difference in an article in the Wall Street Journal. He wrote:

“Far too many businesses have been all too eager to lobby for maintaining and increasing subsidies and mandates paid by taxpayers and consumers. This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.”

He continued:

“The effects on government are equally distorting — and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”

In his article, Koch makes an important observation when he defines cronyism: “We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.”

You regular viewers know that we have a problem with cronyism in Wichita. This is exemplified by incidents like where a mayor votes to send millions of taxpayer dollars to a man who owns movie theaters, and then the mayor sells his barbeque sauce in those theaters. It’s when a real estate developer lists the mayor and city manager as business references when bidding for a city project and thinks that no one will care or notice. It’s when a city council member receives thousands in campaign contributions from an out-of-state construction company right at the time he votes to award a contract to that company. It’s when the city council votes to give over-priced no-bid construction contracts to their significant campaign contributors.

In other words, instead of allowing people to direct resources to where they believe they will be most useful, our local government direct resources to their cronies. Where it’s useful for their political careers.

I’m of the opinion that it has harmed Wichita’s economic growth. It’s one of the reasons why Wichita is the bottom line in the charts we’ve seen. But many of our business leaders, and almost all of our political leaders, propose more of the same.

That’s right. Instead of focusing on things like water and sewer pipes, government wants to raise taxes so that it can direct more of our economy. Having neglected our water and sewer infrastructure to the point where the mayor says we need to spend at the rate of $70 million dollars per year for the next 30 years, our city leaders are going to ask us for more tax money so that they can try to fix the Wichita economy.

Returning to Stephen Moore’s article. Here he quotes Jon Caldera of the Independence Institute. “I used to think that public employee unions like the National Education Association were the main enemy in the struggle for limited government, competition and private sector solutions. I was wrong. Our biggest adversary is the special interest business cartel that labels itself ‘the business community’ and its political machine run by chambers and other industry associations.”

Let’s ask our business and political leaders some questions. First, will we acknowledge Wichita’s poor economic performance, or will we continue to ignore the facts and statistics? Second: Will we realize that the cozy relationship between city hall and a small group of insiders — Wichita’s cronies, if you will — is harmful and corrosive? Third: Will we realize that free enterprise and capitalism work better than cronyism?

In Wichita, ‘free markets’ used to justify business welfare

Wichita City HallIncredibly, a prominent Wichita business uses the free market to justify its request for economic development incentives. A gullible city council buys the argument.

At the December 10, 2013 meeting of the Wichita City Council, Bombardier LearJet received an economic development incentive that will let it avoid paying some property taxes on newly-purchased property. The amount involved in this particular incident is relatively small. According to city documents, “the value of the abated taxes on that investment could be as much as $1,980.”

(Bombardier receives millions each year in other government subsidies; see Kansas PEAK program: corporate welfare wrapped in obfuscation and Bombardier Learjet should pay just a little for examples.)

While the amount of the incentive granted in the December 10 action is small, the meeting was useful in letting us understand how some prominent members of Wichita’s business community have distorted the principles of free markets and capitalism. As illustrated by the fawning of Wichita City Council Member and Vice Mayor Pete Meitzner (district 2, east Wichita) and others, elected officials have long forsaken these ideas.

Bombardier’s argument

Don Pufahl, who is Director of Finance at Bombardier Learjet, addressed the council regarding this matter. He started his remarks on a positive note, telling the council “There are various aspects to a free-market economy. There’s the rule of law, there’s property rights, and another major aspect is incentives.”

We must be careful when using the term incentive. In a free-market economy or capitalism, incentive refers to the motivation of the possibility of earning profits. Another incentive — the flip side of the same coin — is avoiding losses. That’s why capitalism is called a profit-and-loss system. The losses are just as important as profits, as losses are a signal that the economic activity is not valued, and the resources should be shifted to somewhere else where they are valued more highly.

But in the field of economic development as practiced by government, incentive means something given to or granted to a company. That’s what the representative from Bombardier meant by incentive. He explained: “One party, in this case, the local government, uses incentives for another party, in this case our company, to invest in the community.”

A few thoughts: First, Bombardier is not investing in the community. The company is investing in itself.

Second, the free market system that the speaker seemed to praise is a system based on voluntary exchange. That flows from property rights, which is the fundamental idea that people own themselves and the product of their labor, and are free to exchange with others, or to not exchange. But when government uses incentives, many people do not consent to the exchange. That’s not a free market system.

Third, an important part of a free market system is market competition. That is, business firms compete with others for customers. They also compete with other business firms for resources needed for production, such as capital. When government makes these decisions instead of markets, we don’t have a free market system. Instead, we have cronyism. Charles G. Koch has described the harm of cronyism, recently writing: “The effects on government are equally distorting — and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”

In the same article Koch wrote: “We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.” (Charles G. Koch: Corporate cronyism harms America)

The representative from Bombardier also said that the city’s incentives would reduce Bombardier’s investment risk. There is little doubt this is true. What has happened, however, is that the risk has not been eliminated or reduced. It has merely been shifted to the people of Wichita, Sedgwick County, the Wichita public school district, and the State of Kansas. When government does this on a piecemeal basis, this is called cronyism. When done universally, we call this socialism.

We can easily argue that actions like this — and especially the large subsidies granted to Bombardier the by state — increase the risk of these investments. Since the subsidies reduce the cost of its investment, Bombardier may be motivated to make risky investments that it might otherwise not make, were it investing its own funds (and that of its shareholders).

The cost of Bombardier’s investments, and the accompanying risk, is spread to a class of business firms that can’t afford additional cost and risk. These are young startup firms, the entrepreneurial firms that we need to nurture in order to have real and sustainable economic growth and jobs. But we can’t identify these. We don’t know who they are. But we need an economic development strategy that creates an environment where these young entrepreneurial firms have the greatest chance to survive. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)

Now the city and Bombardier will say that these investments have a payoff for the taxpayer. That is, if Bombardier grows, it will pay more in taxes, and that constitutes “profit” for taxpayers. Even if we accept that premise — that the city “profits” from collecting taxes — why do we need to invest in Bombardier in order to harvest its “profits” when there are so many companies that pay taxes without requiring subsidy?

Finally, the representative from Bombardier said that these incentives are not a handout. I don’t see how anyone can say that and maintain a straight face.

wichita-chamber-job-growth-2013-12
It would be one thing if the Wichita area was thriving economically. But it isn’t. We’re in last place among our self-identified peers, as illustrated in Wichita and Visioneering peers job growth. Minutes from a recent meeting of Greater Wichita Economic Development Coalition, the primary organization in charge of economic development, holds this paragraph: “As shown in the Chart below Wichita economy suffered the largest loss of employment among peer cities and has not seen any signs of rebounding as the other communities have. Wichita lost 31,000 jobs during the recession principally due to the down turn in general aviation.”

Following is a fuller representation of the Bombardier representative’s remarks to the council.

There are various aspects to a free-market economy. There’s the rule of law, there’s property rights, and another major aspect is incentives.

One party, in this case, the local government, uses incentives for another party, in this case our company, to invest in the community.

As the company moves forward to invest in the community, those investments are not without risk. … Your incentives allow us to offset some of that risk so that we can move forward with those investments, which hopefully create new jobs and also then also improves the quality of life in our community. … These incentives are not a handout. They are a way that the local government uses such things to offset some of the risk that is involved in local companies as they invest in the community, bring jobs to the community, and improve the community overall.


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Wichita City Council makes an uneconomic decision

Wichita City Hall

Last year the Wichita City Council was faced with a decision regarding a program designed to stimulate the sales of new homes. Analysis revealed that even though the city had an opportunity to make an investment with a purportedly high return on investment, it would be better off, dollar-wise, if it did not make the investment. What did the city council do? The following video explains the decision the council faced. View below, or click here to view in High Definition on YouTube. More information is at Wichita new home tax rebate program: The analysis and Wichita HOME program has negative consequences.

Your local chamber of commerce: Working for you?

Your chamber of commerce radio buttons

Very often, local chambers of commerce support principles of crony capitalism instead of pro-growth policies that allow free enterprise and genuine capitalism to flourish.

We may soon have an example of this in Wichita, where business leaders are tossing about ideas for tax increases. I distinguish between “business leaders” and “capitalists.”

Most people probably think that local chambers of commerce, since their membership is mostly business firms, support pro-growth policies that embrace limited government and free markets. But that’s not always the case. Here, in an excerpt from his article “Tax Chambers” Stephen Moore explains:

The Chamber of Commerce, long a supporter of limited government and low taxes, was part of the coalition backing the Reagan revolution in the 1980s. On the national level, the organization still follows a pro-growth agenda — but thanks to an astonishing political transformation, many chambers of commerce on the state and local level have been abandoning these goals. They’re becoming, in effect, lobbyists for big government.

In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses — at least those not connected at the hip with government — to prosper. Journalist Tim Carney agrees: All too often, he notes in his recent book, “Rip-Off,” “state and local chambers have become corrupted by the lure of big dollar corporate welfare schemes.”

“I used to think that public employee unions like the NEA were the main enemy in the struggle for limited government, competition and private sector solutions,” says Mr. Caldera of the Independence Institute. “I was wrong. Our biggest adversary is the special interest business cartel that labels itself ‘the business community’ and its political machine run by chambers and other industry associations.”

From Stephen Moore in the article “Tax Chambers” published in The Wall Street Journal February 10, 2007. The full article can be found here.

Wichita City Council makes an economic decision

Last year the Wichita City Council was faced with a decision regarding a program designed to stimulate the sales of new homes. Analysis revealed that even though the city had an opportunity to make an investment with a purportedly high return on investment, it would be better off, dollar-wise, if it did not make the investment. What did the city council do? The following video explains the decision the council faced. View below, or click here to view in high definition on YouTube. More information is at Wichita new home tax rebate program: The analysis and Wichita HOME program has negative consequences.

Change in needed in Wichita

A version of this op-ed by John Todd appeared in the Wichita Eagle.

John Todd, American PatriotChange is desperately needed in Wichita — change to allow exceptionalism and end failed economic subsidies.

Once again, several of the favored downtown development group partners have lined up outside City Hall with outstretched palms to receive prime city owned Arkansas River corridor land for bargain basement prices layered with generous incentives.

I heartily support private real estate development downtown and across Wichita. It creates jobs, enhances quality of life, expands the tax base and provides economic uplift. However, projects involving generous taxpayer funded “economic development” incentive handouts transfer the risk and tax burden from developers back to taxpayers who rarely realize any direct benefits from the projects.

The downtown WaterWalk project essentially gave away 20 acres of prime city owned land with a reported $41 million incentive package that included diverting tax revenue to the developer with unknown benefits to taxpayers. Compare this with the Waterfront development at 13th and Webb Road that received no subsidy and generates an estimated $2.5 million in annual tax revenues for the public treasury.

To paraphrase a thought attributed to several authors: “A Democracy cannot survive as a permanent form of government, because, when people discover they can vote money for themselves out of the public treasury, they will bankrupt it.”

I believe it is time for the citizens of Wichita to move forward by putting a new marketing program in place titled, “Capitalizing on Exceptionalism: A New Chapter in Wichita.”

To make it work, we must enlist the support of key, wealth producing, connected people of influence in our community as well as the everyday hard working citizen entrepreneurs and craftsmen, and provide the marketing forum for them to recognize and realize that Wichita can be exceptional, and that we don’t have to embrace a “follow the herd” mentality that will lead us to economic destruction and mediocrity.

We must change the “entitlement” mentality that permeates the social and the business segments of our whole country, starting in particular with our own community. Wichita can become the exceptional example of economic prosperity others will strive to emulate.

If we can move away from the entitlement attitude and get government out of the way, our private sector entrepreneurs and craftsmen can match anyone in the country; and all of this can be achieved by rejecting the corporate welfare trap we have fallen into.

John Todd
Wichita

Could Wichita be the next Detroit?

That Detroit has declared bankruptcy: Does this mean anything for Wichita? From time to time we see news stories wondering if there is a parallel between these two cities — one known as Motor City, and the other as the Air Capital.

wichita-detroit-job-industry-concentration

The similarity is the concentrated nature of the economies of the two cities. Both have, as can be seen in the nearby chart, a greater percentage of jobs in manufacturing than does the United States as a whole.

Furthermore, when considering the dominant manufacturing industry in each city, we see that Wichita is more concentrated in aviation than Detroit is in automobiles. Much more concentrated, 13 percent to six percent.

Joseph Ashby on Wichita and Detroit.

On his radio show, Joseph Ashby talked about the business of making airplanes. He’s an aerospace engineer. The complexity of airplane manufacturing, he says, has protected the domestic industry from foreign competition. But that can change. I would say that change is likely.

Ashby also noted that our economic development programs heavily favor the aviation industry, which makes it more difficult for aspiring companies in other diverse industries to start and thrive. He isn’t the first to wonder about this. In 2010 Alan Cobb wrote:

What can we do to prevent Wichita from falling into the hole that is Detroit?

A simple answer is to continue throwing money and other goodies to keep the aviation companies. A better answer is we need to get rid of the notion that our elected officials and others have so much forethought to know what will or won’t be successful in 20 or 50 years. They don’t. …

While state and local government poured incentives into the Big Three’s trough, the marginal costs of doing business for everyone else crept up. …

It‘s the classic example of the seen vs. the unseen. We see the new factory Pontiac builds. We don’t see the businesses that reduce their size, close or just move. The irony is we will still see the Pontiac factory after it is closed and boarded up.

For each tax dollar given to the auto industry, one is taken one away from entrepreneurs trying to create the next GM, Ford, Google or Apple. This may not be too bad the first time or the second time, but over years and decades, the results can be significant. The “next big thing” will be created in a state with a better tax and regulatory climate. (Detroit, corporate welfare and Wichita’s future)

This week the Sedgwick County Commission will be asked to make a forgivable loan — in essence, a grant of free money — to an aerospace company. The City of Wichita will likely be asked to do the same. The State of Kansas is probably offering additional business welfare, although the state won’t say. These actions increase the cost of business for the firms that we need to diversify our economy, and makes it more difficult for them to survive.

Here’s something else: Wichita has a lot of debt. Not Detroit levels, thankfully. But we can’t borrow even $30 million to build a new library without swelling debt ratios over acceptable limits.

How does Wichita have so much debt? Here’s an example. Recently the city spent $400,000 on a project to analyze aging fire stations with the aim of planning future projects. Fire stations are a long-lived capital asset, which is the type of asset and spending spending that is commonly financed with long-term debt. But an analysis to see if the spending is necessary and what type of spending is needed? This is current consumption and should not be paid for by long-term debt. Yet, the city paid for this with borrowed funds. This type of borrowing is common.

Finally, a big problem that contributed to Detroit’s problems is corruption. Wichita isn’t Detroit when it comes to corruption. But we could be headed that way. We have serious problems like overpriced no-bid contracts for the mayor’s fishing buddy, mysterious campaign contributions from a Michigan company involved in a large contract before the council, and a Methodist minister’s foray into real estate development and politics. We have city ordinances regarding ethics that seem to have a clear meaning, but the city attorney says they don’t apply.

Warren Theater Brewer's Best 2013-07-18

Notwithstanding these serious issues, it’s darkly comical to note this: Wichita Mayor Carl Brewer has voted several times to grant various forms of business welfare to movie theater owner Bill Warren and his partners. Then — and I swear I am not making this up — when Brewer started manufacturing and selling barbeque sauce, it was sold at Warren’s theaters. It still is, as of last week.

Are there no adults in the room?

Kansas bonds downgraded; economic development programs imperiled

money-bag-struggle

Moody’s Investor Service has downgraded the credit rating of a series of bonds that Kansas uses to fund an economic development program. The program is IMPACT (Investments in Major Projects and Comprehensive Training), which provides financial benefits to companies locating to or expanding in Kansas.

The problem is that the state borrows money to give to companies, and uses the withholding taxes of these companies’ employees to repay the bonds. So what happens if the state reduces — or eliminates — the personal income tax? Moody’s explains:

Because IMPACT program bonds are backed by a statutory allocation of revenue from income tax withholding, efforts to eliminate the state income tax without defeasing the debt or substituting a new revenue source will expose bondholders to risks greater than previously anticipated. IMPACT debt has historically been supported by steadily growing revenues from a source that was broad-based and important to the state’s continued operations. Last year’s major income tax rate reductions, followed by additional cuts this year, constitute what we expect to be a trend of repeated cuts in the revenues pledged to these bonds. The final maturity on the IMPACT bonds is 2023, by which time Kansas may have fully removed the income tax. So far, there is no assurance the state will allocate revenue from a different source or take other steps protect bondholders. (Moody’s downgrades Kansas Department of Commerce IMPACT bonds to A3 from Aa3)

I don’t think there’s much likelihood that the state will fail to pay these bonds fully as payments become due. Even though the spending that produced this debt, in my opinion, is ill-considered, it’s still an obligation of the state.

But in a blog post, the Wichita Eagle editorial board could barely conceal its glee that a State of Kansas program might encounter difficulties during the Brownback regime. That’s because income tax rates have been reduced, and will fall farther. This threatens the government spending that the Eagle editorialists favor over private-sector spending.

Besides this one Kansas spending program, others will probably also be affected by lower income tax rates. Another economic development program Kansas uses is 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.

What’s interesting is that the money paid to companies is based on the withholding of employee taxes, not actual taxes paid. Withholding is just an estimate. At the end of the year employees file tax returns to compute their actual tax liability. Based on the difference between withholdings and liability, the state may issue a refund (or maybe the employee owes more).

It’s common for people to receive tax refunds. For employees that work for companies participating in PEAK, their tax withholdings (less five percent) have already been spent by the state in the form of economic development incentives. Their refunds have to be funded in some other way.

Other government spending programs will be affected, too. Historic preservation tax credits are used to funnel millions to developers in downtown Wichita, for example. These credits have value only as long as someone owes income tax (or similar taxes paid by financial institutions) to the state. If there are no income taxes, these tax credits have no value.

This is all good. It’s great that tax rates are falling. It’s also good that the state loses some of its tools for dishing out business welfare. With programs like PEAK and tax credits, the legislature authorizes the program by passing a law. After that, the programs function on auto-pilot. Companies apply for the benefits, and then either automatically or at the discretion of the bureaucracy, applications are approved and benefits flow.

This leads to systems with little accountability. Expenditures are barely noticed. The normal basis for justifying taxation is threatened. Employees that work at PEAK companies might look at the Kansas tax withheld on the paychecks and rationalize “Well, at least it’s going for the kids’ schools or some other beneficial purpose.”

No. Their withholding taxes are being paid (less five percent) to their employer.

Without these tax expenditure programs, legislatures would have to pass specific bills to spend taxpayer money. Can you imagine if the State of Kansas passed a bill to give $3.5 million in taxpayer credits to developers of a luxury hotel in downtown Wichita? Citizens would look at things differently. They’d wonder why we’re spending this way. Using semi-mysterious mechanisms like PEAK and tax credits shrouds the true economic transactions taking place.

Starwood calls on Wichita

Office worker using telephone and computer

This Tuesday the Wichita City Council considers economic development incentives to Starwood Hotels & Resorts for a call center to open in Wichita.

Besides the usual problems with cronyism and corporate welfare (see Wichita-area economic development policy changes proposed for explanation of some problems), there are a few issues to consider regarding this item.

First, the site where the Starwood call center will be located is owned by Max Cole. He and his wife are significant campaign contributors to Wichita City Council Member James Clendenin (district 3, southeast and south Wichita). Under the concept of pay-to-play laws that Wichita needs, Clendenin should refrain from voting on this matter.

Second, a table of salaries supplied in the agenda packet makes an implied promise that probably won’t be kept. The table shows numbers of jobs (actually full-time equivalents), the hourly pay rate, and the annual wage. The annual wage, in all cases, is 2,080 times the hourly rate, meaning it is assumed that workers will work 40 hours per week, 52 weeks per year.

Information from the Kansas Department of Commerce offers more detail. Initially, 495 full-time and 55 part-time jobs will be created. In year five, the total will be 860 full-time and 95 part-time total. There is also this notation: “The company will pay at least 50% of employee health insurance benefits.”

As you may be aware, one of the provisions of Obamacare is that if employees work over 30 hours per week, the employer must provide health insurance or be fined. As a result, many companies across the county are scaling back weekly work hours to less than 30.

We ought to ask if Starwood intends to hire employees who will work 40 hours per week, if they want to. Will the liberals on the Wichita City Council — Mayor Carl Brewer, Council Member Lavonta Williams (district 1, northeast Wichita), and Council Member Janet Miller (district 6, north central Wichita) — ask that Starwood operate under the standards of Obamacare? The table presents data as “full-time equivalents,” which provides room for Starwood to go either way.

Starwood is asking for a forgivable loan of $200,000 from Wichita, and another of the same amount from Sedgwick County. I asked the Kansas Department of Commerce if it would reveal the programs and incentives that Starwood will receive from the State of Kansas. It would not supply that information at this time, but I obtained the information by another means. The state describes its offer to Starwood as worth “up to $1,583,272.” Of this, $750,000 would be in the form of direct cash grants.

Here is a link to the relevant pages from the Wichita city council agenda: Starwood Hotels & Resorts Economic Development Incentive Agreement with City of Wichita, Kansas. Also, from the Department of Commerce: Starwood Hotels & Resorts Economic Development Incentives offered by State of Kansas.

Governing by extortion destroys freedom

By Dave Trabert, Kansas Policy Institute.

Government takes and gives

Merriam-Webster defines extortion as the “… exaction of money or property through intimidation or undue exercise of authority.” It’s illegal for individuals or corporations to engage in extortion, but some governments are increasingly using forms of extortion to exact higher taxes, make citizens more dependent upon government and ultimately, strip away economic and political freedom.

Government intimidation may not come with Soprano-like threats of violence. Some government officials may not even realize they are extorting the populous — the practice of presenting the government solution as the only option has become that commonplace. But no matter how politely or subtly phrased, the message is “give us what we want or else …” The “or else” comes in many forms.

The federal government punishes citizens with flight delays and service cuts to senior citizens while continuing to lavish taxpayer money on favored political friends and countless other examples of waste and duplication. The federal government will either get to borrow and spend as much as it wants or innocent citizens will pay the price.

Some state officials in Kansas want to extend a temporary sales tax and/or take away deductions for home mortgage interest and property taxes. They say it’s necessary to avoid massive budget deficits that would de-fund schools and services. The message is that higher taxes are the only alternative, when in fact they could choose to bring down the cost of government services and stop giving out corporate welfare in the name of economic development.

University officials in Kansas say they will raise tuition, eliminate professors, and restrict student admissions if state aid is even slightly reduced. They say nothing of reducing administrative costs that rose three times faster than inflation or using large cash reserves that accumulated from a 137 percent increase in tuition and fees over the last ten years. Give them what they want or students, parents, and staff will suffer.

Local governments routinely tell citizens that taxes must be increased to avoid police and fire layoffs, pool closings and other direct service reductions. Why not consolidate overlapping government programs and bureaucracy instead of raising taxes? Or maybe stop giving taxpayer money away to friendly developers who support the growth of government and help underwrite campaigns for public office?

Our state and nation were founded on the principles of freedom and limited government. Yet those who stand in defense of freedom are often met with ridicule. Carl Brewer, the Mayor of Wichita, recently issued a thinly veiled threat to sue a woman for asking him to recuse himself from a vote to give a $700,000 sales tax exemption to a campaign contributor (and fishing buddy). A columnist for the Hutchinson News falsely blamed those who want less government intrusion in our lives for poverty, high property taxes and other woes as opposed to following his prescription for progressive, big government solutions.

Thomas Jefferson said, “Government exists for the interests of the governed, not for the governors.” Some in our state seems to have forgotten that and are working to prove another of his maxims, “The natural progress of things is for liberty to yield and government to gain ground.”

Citizens must be persistent and vocal in reminding elected officials of the former or we shall continue to suffer the loss of liberty.

Developer welfare expanded in Kansas

Money Grabber

This week the Kansas House of Representatives considered a bill that would expand the application of tax increment financing (TIF) and community improvement district taxes. The bill, HB 2086, is not a major expansion, but is still harmful.

On Monday the bill failed to pass, with 61 members voting in favor, and 60 against. (63 votes are needed to pass a bill.)

On the following day, Rep. Scott Schwab made a motion to reconsider. If agreed to, Schwab’s motion would force another vote on the passage of the bill. The motion passed, and when the vote on the bill was tallied, it had passed with 81 votes.

Democrats who changed their votes from No to Yes are Barbara Ballard, Brandon Whipple, Ed Trimmer, Jerry Henry, Julie Menghini, Nancy Lusk, Patricia Sloop, Paul Davis, Stan Frownfelter, Tom Burroughs and Valdenia Winn.

Republicans who changed their votes from No to Yes are Dennis Hedke, James Todd, Kelly Meigs, Kevin Jones, Marty Read, Ramon Gonzalez, Scott Schwab, and Vern Swanson.

One Republican, Marc Rhoades, changed his vote from Yes to No.

The original coalition of votes that defeated the bill on Monday was a mix of free-market Republicans and Democrats. The free-market members vote against this bill because it is contrary to the principals of capitalism. Many Democrats vote against bills like this because they see it as welfare for greedy developers or other business interests. An example of the latter is Rep. Ed Trimmer, who on the Kansas Economic Freedom Index for last year scored very near the bottom in terms of voting for economic freedom.

But somehow, he and the other Democrats listed above were persuaded to change their votes.

(Click here to open spreadsheet in new window.)

Carl Brewer: The state of Wichita, 2013

Wichita Mayor Carl Brewer, State of the City Address, January 29, 2013

Much like President Barack Obama in his recent inaugural address, Wichita Mayor Carl Brewer displayed his collectivist instincts in his “State of the City” address for 2013. His speech, as prepared, may be read here.

Opening, the mayor said “Wichita has overcome great challenges in the past and will overcome these as well, but we’ll need to work together.”

Near the close, the mayor said “THE TIME FOR ACTION IS NOW! We have reached a point where we MUST come together as a community, and create a plan that defines our priorities and the City we are to become.” And then: “For all of our differences, I have never doubted this community’s ability to come together and protect what matters most.” (The capitalization is in the mayor’s prepared text.)

But what’s really important to Wichita is economic development. Regarding that, Brewer said this:

As we struggle to compete for new businesses and new jobs, especially in light of job losses in aviation, we must face the reality that we are competing with other cities that offer economic incentives for business development and expansion. If we want to be IN the game, we need to PLAY the game, but we have no dedicated funding source for economic development. If we’re serious about finding new jobs for our people — and I am — we must change this scenario as soon as possible. Where will those incentive dollars come from? (Capitalization, again, is from the original.)

The idea of a dedicated funding source for economic development is something that many in Wichita would support. Many would oppose it, too. But instead of just lobbing rhetorical questions (Where will those incentive dollars come from?), the mayor should give us some answers. Or, at least make a specific proposal. Does the mayor recommend a sales tax increase? Or allocating specific levels of property tax to economic development? (The city is doing this on a temporary basis.) Or asking the state legislature to fund Wichita’s economic development, as we insist the legislature fund our airline subsidy program?

Whatever it is, Mayor Brewer, give us some specific ideas as to how you want to raise this money, and how you would spend it.

It’s that spending, I think, that people in Wichita have concern over. The cumulative record of Brewer, the city council, and city bureaucratic staff hasn’t inspired trust and confidence. Giving the city additional dollars to spend on economic development is not a wise investment.

For example, the mayor says that subsidizing downtown development is good economic development strategy. But we see the mayor and nearly all council members voting to give an overpriced no-bid contract to their significant campaign contributors. This happened despite the company’s large cost overruns on previous no-bid contracts awarded by the city. Is that good economic development practice?

We see the city council sitting in a quasi-judicial role, adjudicating the award of an airport construction contract when one of the parties is a significant campaign contributor. In fact, Key Construction — the company that prevailed in that decision — through its principals and executives, was the sole source of campaign funds raised by Lavonta Williams (district 1, northeast Wichita) in 2012 as she prepared to run for reelection this spring.

Key’s executives also contributed heavily to James Clendenin (district 3, southeast and south Wichita) last year. He’s running this spring, too.

At the time this airport contract was being handled, Council Member Jeff Longwell (district 5, west and northwest Wichita) was campaigning for the Sedgwick County Commission. Campaign finance reports revealed contributions from parties associated with Walbridge, a Michigan construction company. Why would those in Michigan have an interest in helping a Wichita City Council member fund his campaign for a county office? Would the fact that Walbridge is a partner with Key Construction on the new airport terminal, and that Longwell would be voting on that contract, provide a clue?

Or: A movie theater owner and business partners contribute to the mayor’s (and other) campaigns. Mayor and council vote to give a no-interest and low-interest loan and tax breaks to theater owner and his partners. Mayor goes into barbeque sauce business. Mayor’s barbeque sauce is now sold at movie theater.

Doesn’t Carl Brewer see anything wrong with this? Don’t his advisors tell him that this creates the appearance of impropriety? Does the mayor consider whether these actions make a positive impression on those who might want to invest in Wichita?

We see the city awarding economic development incentives that were not necessary for the project to proceed. It took a special election to teach the mayor and council that lesson. By the way, that unneeded and rejected incentive was awarded to the significant campaign contributors of Mayor Brewer and most council members.

We see the city taking credit for building up the tax base, yet giving away tax revenue in the form of property tax abatements, IRBs, tax increment financing, and STAR bonds.

The bureaucratic missteps: The Southfork TIF district is just the latest example.

The lack of respect for citizens’ right to know how taxpayer funds are spent is another troubling aspect of Brewer’s tenure as mayor. None of the words “accountability,” “transparency,” or “open government” were mentioned in the mayor’s address this year, as they have been in the past. No sense in calling attention to an area where the city has failed, I suppose.

All this is done in the name of economic development and jobs. But Wichita is underperforming Kansas and the nation in these areas. Under Brewer’s leadership, however, we are overachieving in the advancement of cronyism and its ills.

The record indicates that our officeholders, and those who advise them, are not worthy of our trust, and certainly not more taxes for economic development.

After last year’s State of the City speech, I noted “Wichita’s mayor is openly dismissive of economic freedom, free markets, and limited government, calling these principles of freedom and liberty ‘simplistic.’ Instead, his government prefers crony capitalism and corporate welfare.”

I also wrote: “Relying on economic freedom, free markets, and limited government for jobs and prosperity means trusting in free people, the energy of decentralized innovation, and spontaneous order. A government plan for economic development is the opposite of these principles.”

This year, the outlook for economic freedom and limited government in Wichita is gloomier than ever before. The door for those who wish to profit through cronyism is wide open. We’ll have to hope that, somehow, Wichita can learn to thrive under this regime.

Questioning Pat Roberts

One of the small news items emerging from the Kansas Republican Party Convention last weekend is that Pat Roberts will run for reelection to the U.S. Senate next year.

So is this a good thing, or not? Gidget of Kansas GOP Insider (wannabe) offers one opinion in her post on the topic:

Look, I like Sen. Roberts. He’s a nice enough guy, but he will not make any waves. He will not rock any boats. I do not understand it. Most 76 year olds are willing to wear purple suits and red hats in public as some sort of matter of pride. It’s their way of saying, I’ve lived long enough I’ll do as I damn well please.

But not Sen. Roberts.

Where every member of the Kansas delegation in the House voted against the plan to avoid the so-called fiscal cliff — there was Roberts being a “statesman” by raising your taxes without the agreement of any cuts.

This is a regularly repeated occurrence for those in the U.S. Senate. They are absolutely willing to sell the people down the river in return for being called “statesman” and getting re-elected.

The truly disgusting part is that we’re all going to vote for Sen. Roberts again.

If he draws a primary opponent, it will be a miracle. And even if he does draw a primary opponent, everyone will tip toe around for fear of upsetting Roberts and the many people who owe him their careers.

The Wall Street Journal noticed a vote made by Senator Roberts in committee that lead to the fiscal cliff bill. The newspaper explained the harm of this bill in its editorial:

The great joke here is that Washington pretends to want to pass “comprehensive tax reform,” even as each year it adds more tax giveaways that distort the tax code and keep tax rates higher than they have to be. Even as he praised the bill full of this stuff, Mr. Obama called Tuesday night for “further reforms to our tax code so that the wealthiest corporations and individuals can’t take advantage of loopholes and deductions that aren’t available to most Americans.”

One of Mr. Obama’s political gifts is that he can sound so plausible describing the opposite of his real intentions.

The costs of all this are far greater than the estimates conjured by the Joint Tax Committee. They include slower economic growth from misallocated capital, lower revenues for the Treasury and thus more pressure to raise rates on everyone, and greater public cynicism that government mainly serves the powerful.

Republicans who are looking for a new populist message have one waiting here, and they could start by repudiating the corporate welfare in this New Year disgrace.

The Journal took the rare measure of calling out the senators who voted for this bill in committee, as shown in its nearby graphic. There it is: Pat Roberts voting in concert with the likes of John Kerry, Chuck Schumer, and Debbie Stabenow.

If Tom Coburn of Oklahoma could vote against this bill in committee, then so could have Pat Roberts. But he didn’t.

Charles Koch profiled in Forbes

The new issue of Forbes features a cover story on Charles and David Koch. It is very interesting and seems a balanced and fair article, but there are a few things that stand out. (Inside The Koch Empire: How The Brothers Plan To Reshape America.)

An example: “Both Kochs innately understand that — unlike the populist appeal of their fellow midwestern billionaire Warren Buffett and his tax-the-rich advocacy — their message of pure, raw capitalism is a much tougher sell, even among capitalists.”

I think the author should have written “even among business executives” rather than capitalists. That’s because Charles Koch has been outspoken about business cronyism, in September writing in The Wall Street Journal: “Far too many businesses have been all too eager to lobby for maintaining and increasing subsidies and mandates paid by taxpayers and consumers. This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.”

I would imagine that most of the business leaders seeking government subsidies and mandates consider themselves capitalists. That’s a problem.

Then: the description of “pure” capitalism as raw. I think we’re starting to realize just how raw politics and government have become. Capitalism, however, is a system based on respect for property and peaceful, beneficial exchange. Tom G. Palmer in the introduction to The Morality of Capitalism explains: “Far from being an amoral arena for the clash of interests, as capitalism is often portrayed by those who seek to undermine or destroy it, capitalist interaction is highly structured by ethical norms and rules. Indeed, capitalism rests on a rejection of the ethics of loot and grab, the means by which most wealth enjoyed by the wealthy has been acquired in other economic and political systems. … It’s only under conditions of capitalism that people commonly become wealthy without being criminals.”

Often corporations are criticized by liberals as being too focused on short-term gains, that corporate raiders buy firms, gut them, chop them up, sell off assets, lay off employees, pile on debt — you know the story as used against Mitt Romney. But look at how Koch Industries operates:

Charles spent $6 billion upfront to buy Georgia-Pacific, and rather than satisfy quarterly earnings estimates or dividend-hungry investors, he immediately directed the new division’s cash flow toward paying down the $15 billion in liabilities that it inherited. …

The Koch long-game strategy is absolute: If it makes sense to them, the Kochs stay with the plan, no matter how burdensome or how long it takes. “We buy something not to milk it but to build it, to take its capabilities and add to them, and build new businesses,” [Charles] Koch says.

That sounds like a business strategy the left should embrace, not vilify.

Another curious statement by the author: “Given their strict adherence to the principals of transparent free markets, the Kochs’ secrecy seems hypocritical.” This is curious because transparency is an attribute not often associated with advocacy for free markets. Transparency is more associated with government as a desirable goal. Charles and David Koch are private citizens, not agents of government.

There’s good news near the end of the article:

The brothers’ new political emphasis in the coming year? Fighting corporate welfare.

While Obama talks about getting rid of lobbyists, Charles says, the “only way he can achieve that stated objective is to get government out of the business of giving goodies. That’s like flies to honey,” he adds. “The first thing we’ve got to get rid of is business welfare and entitlements.”

There’s much more in the article, available at Inside The Koch Empire: How The Brothers Plan To Reshape America.

Wichita’s $60 million gift to Spirit Aerosystems — not

When I read that Wichita had invested nearly $60 million in its Spirit AeroSystems plant, I thought I must have been napping during a city council meeting. Instead, the lede of the story in the Tulsa World newspaper was a misstatement of the mechanism of Industrial Revenue Bonds (IRBs).

The News reported “News that the city of Wichita is moving to invest nearly $60 million in its Spirit AeroSystems plant has Vision2 backers warning that Tulsa’s aerospace jobs are at risk of poaching by other cities.”

A Tulsa television news report offered similar reporting: “… after the City of Wichita, Kansas offered roughly $60 million in incentives to try and steal Spirit Aerosystems away from Tulsa.”

When news stories cover IRBs, the stories usually focus on the amount of the bonds, as in these two examples. That’s unfortunate, as the amount of the bonds is really a minor component of the story.

You see this misunderstanding revealed in comments left to newspaper articles reporting the issuance of IRBs, where comment writers complain that the city shouldn’t be in the business of lending companies money.

This confusion hides the reason why IRB transactions take place, which is tax avoidance. That’s the real story of Industrial Revenue Bonds: Companies escape paying the property and sales taxes that you and I — as well as most business firms — must pay.

Reading the city council agenda packet regarding the IRB issue tells the story. The city is not lending Spirit money. In fact, no one is, according to the city document: “Spirit AeroSystems, Inc. intends to purchase the bonds itself, through direct placement, and the bonds will not be reoffered for sale to the public.”

Also, the city has no obligation to pay the bondholders should Spirit default. This is a moot point in this case, as the issue of the bonds is also the buyer. But this is the case with all IRBs.

It’s not uncommon for the issuing company to buy the bonds. So why issue the bonds? The agenda packet has the answer: “The bond financed property will be eligible for sales tax exemption and property tax exemption for a term of ten years, subject to fulfillment of the conditions of the City’s public incentives policy.”

City documents didn’t give the amount of tax Spirit will avoid paying, so we’re left to surmise. Bonds could be issued up to $59.5 million. Taxable business property of that value would generate an annual tax bill of around $1.8 million per year, but Spirit would not pay that for up to ten years. If all the purchased property was subject to sales tax, that one-time tax exemption would be $4.3 million. These are the upper bounds of the tax savings Spirit Aerosystems may receive. Its actual savings will probably be lower, but still substantial.

These numbers are the economic benefit of the bonds to Spirit, and the opportunity cost of the bonds to taxing jurisdictions. The $60 million “investment” or “incentive” reported by two Tulsa news sources is incorrect.

Industrial Revenue Bonds, a confusing program

IRBs are a confusing economic development program. It sounds like a loan from the city or state, but it’s not. The purpose is to convey tax avoidance.

Here’s language from the Wichita ordinance that was passed to implement the bonds: “The Bonds, together with the interest thereon, are not general obligations of the City, but are special obligations payable (except to the extent paid out of moneys attributable to the proceeds derived from the sale of the Bonds or to the income from the temporary investment thereof) solely from the lease payments under the Lease, and the Bond Fund and other moneys held by the Trustee, as provided in the Indenture. Neither the credit nor the taxing power of the State of Kansas or of any political subdivision of such State is pledged to the payment of the principal of the Bonds and premium, if any, and interest thereon or other costs incident thereto.”

So no governmental body has obligations to pay the bondholders in case of default. But this language hints at another complicating factor of IRBs: The city actually owns the property purchased with the bond proceeds, and leases it to Spirit. Here’s the preamble of the ordinance: “An ordinance approving and authorizing the execution of a lease agreement between Spirit Aerosystems, Inc. and the City of Wichita, Kansas.”

Other language in the ordinance is “WHEREAS, the Company will acquire a leasehold interest in the Project from the City pursuant to said Lease Agreement.” There’s other language detailing the lease.

We create this imaginary lease agreement — and that’s what it is, as it doesn’t have the same purpose and economic meaning as most leases — for what purpose? Just so that certain companies can avoid paying taxes.

The city does have another program that allows it to exempt these taxes under some circumstances without having to issue bonds. In this case the goal of the program is laid clear: tax avoidance.

IRBs are a confusing program that obfuscates the actual economic transaction. That’s not good public policy, whether or not you agree with the concept of selective tax abatements as economic development.

Similarly, a principle of good tax policy is that those in similar situations should face the same laws. IRBs are contrary to this.

While we can understand that citizens — with their busy lives — may not be informed or concerned about the complex workings of IRBs, we should expect more from our elected (and paid) officials. But we find often they are not informed.

As an example, in 2004 the Wichita Eagle reported: “In July, the council approved industrial revenue bond financing and a $1.7 million property tax abatement for Genesis Health Clubs. Council members later said they didn’t realize they had also approved a sales-tax break.” (Kolb goal : Full facts in future city deals, September 26, 2004)

Here we see Wichita City Council members not aware of the basic mechanism of a major city program that is frequently used. This is in spite of an informative city web page devoted to IRBs which prominently states: “Generally, property and services acquired with the proceeds of IRBs are eligible for sales tax exemption.”

Yes, that page was active in 2004.

Wichita economic development, two stories

Two items on the agenda for the Wichita City Council give an insight into the nature and efficacy of economic development efforts in Wichita.

First, a local company will come to the Wichita City Council asking for a property tax exemption. This is not unusual, as it happens almost every week, and multiple times at some meetings. In this case, we learn that estimates of job creation used to support an economic development incentive weren’t realistic.

The company, MoJack, had received a forgivable loan from Wichita and Sedgwick County based on promises to create a certain number of jobs. The loan amount was $35,000 from each, for a total of $70,000. If MoJack meets the job and payroll targets, the loan will be forgiven.

But we learn in city materials this week that there’s been a change: “As a result of this expansion, Mojack plans to add at least 26 new employees to its workforce at a starting average wage of $44,000. In June 2012, Mojack repaid the forgivable loan because it had been based on an earlier estimate that 53 new jobs would be created, which was not realistic.” (The agenda report may be read at Public Hearing and Tax Exemption Request (Mojack Holdings, LLC/Mojack Distributors, LLC).)

In June, MoJack repaid its forgivable loan to Sedgwick County, presumably for the same reasons.

While city officials say they conduct due diligence before granting economic development incentives, the reality is that economic development officials have to work with whatever figures the applicant companies provide. How can the city verify the projected growth of a company? We wouldn’t want to even give that a try.

What’s important is this: Greater Wichita Economic Development Coalition is our economic development agency. In their annual report of their activities, they took credit for the MoJack jobs. Now that the number of jobs to be created is expected to be smaller, will GWEDC update its job creation figures?

Also, MoJack participated in several economic development incentives from the state of Kansas. Hopefully the Kansas Department of Commerce will consider the new, revised employment projects with managing its incentive awards, and will also update its claims of job creation accordingly.

We also learned this week that Hawker Beechcraft may not be meeting its agreed-upon employment levels required to continue to receive incentives from the state, Sedgwick County, and City of Wichita.

In Wichita Business Journal reporting we learn the numbers:

Hawker Beechcraft Corp. appears to be close to violating an agreement with state and local governments to maintain employment of at least 4,000 workers in Wichita.

The company has declined to discuss its employment level in detail and as recently as last week told the Wichita Business Journal that it had employment of 4,500 workers, the same number it reported to the WBJ in March.

However, according to a database of mass layoffs maintained by the Kansas Department of Commerce, from March to June this year Hawker issued 885 60-day layoff notices to Wichita employees. And since late July it has filed layoff notices for 56 more Wichita workers.

All told, that’s 941 layoff notices since March. If all those job cuts have taken place, and the 4,500 number was accurate in March, that would suggest a current employment level of 3,559 in Wichita, based solely on layoffs and not assuming any potential attrition or, on the other hand, new hires.

The article explains that while the official job count for agreement compliance purposes is taken at the end of the year, Hawker is not forthcoming with information about its employment levels. While it is not required to answer WBJ’s questions about its job count, we should remember that we have a public-private partnership with Hawker, under which taxpayers will be investing millions in the company. Wichita economic development leaders tout the public-private partnership as a powerful tool.

By taking our money and entering in a partnership, Hawker ought to be more forthcoming with legitimate information requests. Failure to do so is not polite, even if it is not required.

There’s also this question: When Hawker releases its employment figures, will GWEDC adjust its success story to reflect the likely lower number of jobs? If we’re to have an economic development effort that’s based on factual information, GWEDC should. But based on past history, I doubt it will. Therefore, we continue to make decisions based on incomplete data and facts.

By the way, the Hawker Beechcraft campus is outside the city limits of Wichita. By what authority does the city give it Wichita taxpayers’ money?

Wichita economic development initiatives to be announced

Tomorrow the Wichita Metro Chamber of Commerce will announce, according to the Wichita Eagle, new economic development initiatives. Said to be the product of months of discussion, past history suggests that the efforts will not be fruitful for the Wichita area. The inclinations of the parties involved in this effort are for more government intervention and less reliance on economic freedom and free markets.

Do economic development incentives work?

Judging the effectiveness of economic development incentives requires looking for the unseen effects as well as what is easily seen. It’s easy to see groundbreaking and ribbon cutting ceremonies. It’s more difficult to see that the harm that government intervention causes.

That’s assuming that the incentives even work as advertised in the first place. Alan Peters and Peter Fisher, in their paper titled The Failures of Economic Development Incentives published in Journal of the American Planning Association, wrote on the effects of incentives. A few quotes from the study, with emphasis added:

Given the weak effects of incentives on the location choices of businesses at the interstate level, state governments and their local governments in the aggregate probably lose far more revenue, by cutting taxes to firms that would have located in that state anyway than they gain from the few firms induced to change location.

On the three major questions — Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Are incentives, at worst, only moderately revenue negative? — traditional economic development incentives do not fare well. It is possible that incentives do induce significant new growth, that the beneficiaries of that growth are mainly those who have greatest difficulty in the labor market, and that both states and local governments benefit fiscally from that growth. But after decades of policy experimentation and literally hundreds of scholarly studies, none of these claims is clearly substantiated. Indeed, as we have argued in this article, there is a good chance that all of these claims are false.

The most fundamental problem is that many public officials appear to believe that they can influence the course of their state or 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 their expectations about their ability to micromanage economic growth and making the case for a more sensible view of the role of government — providing the foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.

Other economists have studied tax increment financing (TIF) and have concluded that it is an overall negative factor for the entire region where it is used. Another study found that TIF districts created for retail use had a negative effect on municipal employment.

Last week Dave Trabert wrote in the Kansas Policy Institute blog: “There’s a very simple reason that these well-intended initiatives haven’t worked: local government and their public-private partners are offering employers what they want them to have instead of what they need to create jobs. The Wichita Chamber’s own survey of business owners said taxes were too high. WIBA’s member survey identified tax and regulatory issues as their top concerns, as did the US Chamber of Commerce. Yet government and their public-private partners ignore what the customer wants because they don’t want the same things.”

Wichita’s record on economic development

Earlier this year Wichita Mayor Carl Brewer said that the city’s efforts in economic development had created “almost 1000 jobs.” While that sounds like a lot of jobs, that number deserves context.

According to estimates from the Kansas Department of Labor, the civilian labor force in the City of Wichita for December 2011 was 192,876, with 178,156 people at work. This means that the 1,000 jobs created accounted for from 0.52 percent to 0.56 percent of our city’s workforce, depending on the denominator used. This miniscule number is dwarfed by the normal ebb and flow of other economic activity.

It’s also likely that the city’s economic development efforts were not responsible for a large proportion of these jobs. But government still takes credit. Also, the mayor did not mention the costs of creating these jobs. These costs have a negative economic impact on those who pay them. This means that economic activity — and jobs — are lost somewhere else in order to pay for the incentives.

The mayor’s plan going forward, in his words, is “We will incentivize new jobs.” But under the mayor’s leadership, this “active investor” policy has produced a very small number of jobs, year after year. Doubling down on the present course is not likely to do much better.

There’s even confusion over whether our efforts are working. In 2005, a Wichita Eagle editorial commented on a GWEDC report: “Among the points in Thursday’s report worthy of pride was this: the observation by coalition president J.V. Lentell that he’s never seen the cooperation on economic development between the public and private sectors as good as it is now. ‘I’m here to tell you, I think it’s on track,’ Lentell said, emphatically.” (July 29, 2005)

But in January of this year, an Eagle article listed several things Wichita needs, such as free land and buildings, money for closing deals, and a larger promotions budget. The reporter concluded “The missing pieces have been obvious for years, but haven’t materialized for one reason or another.”

So even if we believe that an active role for government is best, we have to conclude that our efforts aren’t working. Several long-serving politicians and bureaucrats that have presided over this failure: Mayor Carl Brewer has been on the city council or served as mayor since 2001. Economic development director Allen Bell has been working for the city since 1992. City Attorney Gary Rebenstorf has served for many years. At Sedgwick County, manager William Buchanan has held that position for 21 years. On the Sedgwick County Commission, Dave Unruh has been in office since 2003, and Tim Norton since 2001. (Unruh has said he wants to be Wichita’s next mayor.)

These people all believe in government-directed economic development. We need to hold them accountable.

Finally, consider Wichita job growth. As shown in the accompanying chart, the growth in government employees has outstripped private sector job growth. The increase in local government employees is particularly striking.

Wichita job growthWichita job growth. Data is indexed, with 1990 equal to 1. Source: Bureau of Labor Statistics.

What our leaders want

I don’t know what will be in the economic development plan, but it is possible — likely, even — that there will be a call for a tax revenue stream for economic development. In February a company location consultant told Wichita leaders “Successful communities need a dedicated stream of money for economic development.” The news story reported “He was preaching to the choir. GWEDC leaders have been saying for some time that now is the time to go to the business community and the public to make the case for more money and resources.” (Consultant: Wichita needs sites, closing fund to lure business, Wichita Eagle February 16, 2012.)

Wichita leaders continually call for more “tools in the toolbox” for economic development. They have spoken approvingly of a sales tax for such purposes. Money, of course, is what funds the tools.

At one time local chambers of commerce would oppose tax increases. They would promote free market principles as the way to create a positive business environment. But this year it was the official position of the Wichita Chamber that eight government subsidy programs was not enough for a downtown hotel, and that there should be a ninth.

A few years ago Stephen Moore wrote a piece for the Wall Street Journal that that shows how very often, local chambers of commerce support principles of crony capitalism instead of pro-growth policies that support free enterprise and genuine capitalism: “The Chamber of Commerce, long a supporter of limited government and low taxes, was part of the coalition backing the Reagan revolution in the 1980s. On the national level, the organization still follows a pro-growth agenda — but thanks to an astonishing political transformation, many chambers of commerce on the state and local level have been abandoning these goals. They’re becoming, in effect, lobbyists for big government. … In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses — at least those not connected at the hip with government — to prosper. Journalist Tim Carney agrees: All too often, he notes in his recent book, ‘Rip-Off,’ ‘state and local chambers have become corrupted by the lure of big dollar corporate welfare schemes.'”

Does Wichita have the will?

Dr. Art Hall, who is Director of the Center for Applied Economics at the Kansas University School of Business has made a convincing case that less government involvement, not more, is needed. He argues that a dynamic economy is what Kansas needs, not one where government directs taxpayer investment for economic growth.

Hall writes this regarding “benchmarking” — the bidding wars for large employers that are the foundation of Wichita economic development, and the battle for which Wichita is likely preparing: “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.”

Hall’s paper on this topic is Embracing Dynamism: The Next Phase in Kansas Economic Development Policy.

We need to recognize that government as active investor doesn’t work. A serious problem with a plan for increased economic interventionism by government is the very nature of knowledge. In a recent issue of Cato Policy Report, Arnold King wrote:

As Hayek pointed out, knowledge that is important in the economy is dispersed. Consumers understand their own wants and business managers understand their technological opportunities and constraints to a greater degree than they can articulate and to a far greater degree than experts can understand and absorb.

When knowledge is dispersed but power is concentrated, I call this the knowledge-power discrepancy. Such discrepancies can arise in large firms, where CEOs can fail to appreciate the significance of what is known by some of their subordinates. … With government experts, the knowledge-power discrepancy is particularly acute.

Relying on economic freedom and free market solutions for economic growth and prosperity means trusting in the concept of spontaneous order. That takes courage. It requires faith in the values of human freedom and ingenuity rather than government control. It requires that government officials let go rather than grabbing tighter the reins of power, as will probably be the key feature of Wichita’s new economic development plan.

But Wichita’s mayor is openly dismissive of economic freedom, free markets, and limited government, calling these principles “simplistic.” Instead, he and most others prefer cronyism and corporate welfare. That hasn’t worked very well so far, and is not likely to work in the future.

NetApp economic development incentives: all of them

Tomorrow the Wichita City Council will consider economic development incentives designed to secure new jobs in Wichita at NetApp. Few Kansans, however, are probably aware of the entire scope of the incentive package and the harm it causes.

NetApp is asking both the City of Wichita and Sedgwick County to provide an economic development incentive to the company in exchange for bringing jobs to Wichita. The proposed amount is $312 per year per job from each body, for up to five years. City documents indicate that NetApp’s intent is to create 418 new jobs, and the maximum grant is capped at $418,000 from each body.

City documents also calculate the benefit-cost ratio, which is given as 3.93 to one. When considering benefit-cost ratios, we also need to realize that the “benefits” in the calculation are in the form of increased tax revenue paid to the city, county, etc. There is no consideration of actually rewarding the taxpayers that pay for — and assume the risk of — economic development incentives. Furthermore, these benefits are not like profits that business firms earn. Instead, they are in the form of taxes that government takes.

In one sense, this proposed incentive is a refreshing change. Instead of using programs like industrial revenue bonds, community improvement districts, EDX, tax increment financing, sales tax bonds, forgivable loans, and other programs, the city and county are proposing cash. Instead of confusing programs where the economic costs are difficult to understand — and sometimes hidden from public view — the city and county will simply pay cash.

But what Wichita and Sedgwick County will pay is just a small portion of the total incentives NetApp is likely to receive. City documents often detail the incentive programs contemplated by the Kansas Department of Commerce. But the city documents for this item, as well as publicly available county documents, don’t mention these.

A June letter from the Department of Commerce to NetApp lays out the potential benefits from the state. As detailed in the letter, the programs with potential dollar amounts are: Promoting Employment Across Kansas (PEAK), up to $7,705,535; Kansas Industrial Training with PEAK, up to $160,800; sales tax savings of $6,880,000; personal property tax exemption, $11,913,682; and High Performance Incentive Program (HPIP), $8,500,000. The total of these is $35,160,017.

PEAK allows companies to retain 95 percent of their Kansas payroll withholding tax for a period. According to the Department of Commerce document, this effectively allows NetApp to retain an estimated 4.9 percent of what it pays these employees. See Kansas PEAK program: corporate welfare wrapped in obfuscation.

The nearly $12 million in personal property tax exemption arises from a 2006 law whereby the state no longer taxes business equipment and machinery for all companies. This is not a targeted incentive for NetApp; it is something that all companies in Kansas benefit from.

The document also informs NetApp that it should qualify for the High Performance Incentive Program (HPIP), which offers a 10 percent tax credit on the qualified net, new capital investment.

I wonder: If the city and county recalculated their benefit-cost ratios, this time including the cost of the portion of the Kansas Department of Commerce incentives paid for by Wichita and Sedgwick County residents, what would the investment look like?

Kansas is not the only state that NetApp is receiving millions from. North Carolina is victim, too.

Today’s Wall Street Journal carries an article written by Charles G. Koch, chairman of the board and CEO of Wichita-based Koch Industries that warns of the rise of cronyism and the harm it causes (Charles G. Koch: Corporate cronyism harms America).

NetApp appears to have mastered the process that Charles Koch warns of: “We are on dangerous terrain when government picks winners and losers in the economy by subsidizing favored products and industries. There are now businesses and entire industries that exist solely as a result of federal patronage. Profiting from government instead of earning profits in the economy, such businesses can continue to succeed even if they are squandering resources and making products that people wouldn’t ordinarily buy.”

NetApp is not the only economic development incentive the council will consider tomorrow. As each program is approved, as more economic development is directed by government, we risk another harm that Koch warns of: “Put simply, cronyism is remaking American business to be more like government. It is taking our most productive sectors and making them some of our least.”

Kansas and Wichita quick takes: Thursday May 17, 2012

Watchdog reporter at Pachyderm. This Friday (May 18th) the Wichita Pachyderm Club features Paul Soutar, Reporter for Kansas Watchdog, speaking on “The evolution of journalism and how the new media empowers citizens.” The public is welcome and encouraged to attend Wichita Pachyderm meetings. For more information click on Wichita Pachyderm Club. … The club has an exceptional lineup of future speakers as follows: On May 25th: Ron Estes, State Treasurer of Kansas, speaking on “A report from the Kansas Treasurer.” … On June 1st: Gary Oborny, Chairman/CEO Occidental Management and Real Estate Development, CCIM Designated member of the Storm Water Advisory Board to the City of Wichita, speaking on “What is the economic impact of EPA mandates on storm water quality in Wichita?”

Kansas senators vote for cronyism. Veronique de Rugy explains the harm of the Export-Import Bank of the United States in Why Would Anyone be Against the Export-Import Bank? “First, the Ex-Im Bank is nothing more than corporate welfare. This is an agency that is in the business of subsidizing private companies with taxpayer dollars. … An excellent paper by Cato Institute’s trade analyst Sallie James exposes just how unseemly, inefficient, and irrelevant the Export-Import Bank is. As James explains, the Bank not only picks winners and losers by guaranteeing the loans of private companies, but it also introduces unfair competition for all the U.S. firms that do not benefit from such special treatment.” The bill is H.R. 2072: Export-Import Bank Reauthorization Act of 2012. Both Kansas senators Jerry Moran and Pat Roberts voted for this bill. So did U.S. Representative Kevin Yoder of the Kansas third district. But Representatives Tim Huelskamp, Lynn Jenkins, and Mike Pompeo voted against it.

Koch = big oil? Politico: “The Koch brothers have an unlikely ally in the war of words with their liberal adversaries: the nation’s journalistic fact-checkers. Both The Washington Post’s Fact Checker blog and the nonpartisan site FactCheck.org have dinged critics of David and Charles Koch in recent weeks for referring to the billionaire brothers as Big Oil. Why? Because Koch Industries’ business interests extend well beyond the company’s involvement in petroleum refining and other oil-based operations. And while no corporate midget, the company isn’t anywhere near as big as true oil giants like ExxonMobil. ‘So even if all of Koch Industries’ revenues came from its refining business — which they do not — they would still be a fraction of the revenues of the companies that actually represent ‘Big Oil,” the FactCheck.org critique read.” More at Fact-checkers and Kochs’ ‘Big Oil’. Another example of how facts don’t get in the way of Koch critics. Or try For New York Times, facts about Kochs don’t matter.

Economic freedom. Why does the political left criticize Charles and David Koch? In the following video from last year, Koch Industries CEO and board chairman Charles G. Koch explains the principles of economic freedom, something that he and David Koch have worked to advance for many years. These principles, according to Koch, include private property rights, impartial rule of law, free trade, sound money which reduces boom and bust cycles, and a small and limited government. These principles are good for everyone, I should add, including those currently at the bottom of the economic ladder.

We aren’t Greece … yet. “Once again, Greece finds the international community questioning its ability to pay its debts. Default and an exit from the Euro Zone (or countries which share the Euro as a common currency) threatens on the horizon. Here in the U.S., we face high debts and have a lowered credit rating due to Washington’s inability to agree on deficit reduction. Just how alike are our two nations?” An infographic from Bankrupting America explains.


Bankrupting America

Political cronyism has become the way

“A society whose businesses engage in cronyism instead of serving people will not be prosperous, and in America it is clear that cronyism is becoming a more common choice,” writes Sam Patterson at EconomicFreedom.org.

Cronyism is the practice of seeking business success through government rather than through markets. The difference is that business succeeds in the market by providing goods and services that people are willing to buy. Political cronyism, on the other hand, results in people being forced to buy from, or to otherwise involuntarily subsidize, certain business firms that have succeeded in the political arena.

In Kansas, despite the fiscal conservatism of Kansas Governor Sam Brownback and many members of the legislature, political cronyism thrives. An example is the increased powers given to the Kansas PEAK program (Promoting Employment Across Kansas). A more recent example is the vote to extend the STAR bonds program. Both programs provide business firms a way to obtain money isolated from market forces. Instead, applicants must meet the guidelines of a government program.

In Wichita and Sedgwick County, cronyism is firmly established as economic development policy. It’s little wonder that our policies are failing and we are losing people and income to other states.

Cronyism Undermines the Beneficial Role of Business in Society

By Sam Patterson

The role that business plays in society is straightforward — businesses produce goods and services that people consider beneficial. If a business can do that while wisely using resources, it makes a profit. Successful businesses benefit society by producing goods or services which improve people’s lives, and are then rewarded with profit. Those profits enable businesses to innovate or offer more goods and services, further improving people’s lives. Businesses must cater to the needs of society or they will find that they are not rewarded with profit and may well no longer exist.

At least, that’s how it works in a free market. There is another path for businesses to make profit other than providing valuable products. It’s called cronyism. Cronyism occurs when a business colludes with government officials to create unfair legislation and/or regulations which give them benefits they could not have otherwise obtained voluntarily.

Continue reading at Cronyism Undermines the Beneficial Role of Business in Society.

Cabela’s opening a reminder of failure in Wichita

Yesterday’s opening of a Cabela’s store in Wichita was celebrated as a great success, but the circumstances of the store’s birth should remind us of the failure of Wichita’s economic development strategies and efforts.

We have to ask why Wichita is not able to attract retailers like Cabela’s without offering some sort of subsidy. In the current example, we are allowing Cabela’s to add 1.2 cents per dollar extra sales tax. Cabela’s keeps one cent, and 0.2 cents will be used to build a new highway exit ramp — one not seriously contemplated until Cabela’s wanted it.

This turnover of public taxation to private interests through the community improvement district (CID) program is contrary to good public policy. The power to tax is one of the most important — and harmful — functions of government. It ought to be used to pay for public goods, instead of being turned over to private benefit, as it has for Cabela’s.

At the opening ceremony, I spoke with Kansas Governor Sam Brownback and reminded him that just two weeks ago Wichita voters spoke out against special tax deals similar to the deal Cabela’s received. What is the future of these special tax deals? “I think the better approach is broad tax reduction,” he said.

While the governor was referring primarily to income taxes, there is strong evidence that Kansas needs to reduce all forms of business tax costs. The release of a report from the Tax Foundation ranking the states in business tax costs brought that into sharp focus two weeks ago. The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms.

This raises the question: Was the CID tax giveaway truly necessary for Cabela’s to open, or is Cabela’s business model so flimsy that it requires corporate welfare to survive, or is Cabela’s simply an opportunistic company, willing to feed off taxpayers as another source of profit?

Community Improvement Districts

CIDs allow merchants to apply a higher sales tax rate to sales. The money from shoppers is collected under the pretense of government authority, but it is earmarked for the exclusive benefit of the owners of property in the CID. This is perhaps the worst aspect of CIDs. Landlord and merchants already have a way to generate revenue from their customers under free exchange: through the prices posted or advertised for their products, plus consumers’ awareness of the sales tax rates that prevail in a state, county, and city.

But most consumers may never be aware that they paid an extra tax for the exclusive benefit of the CID. If they happen to calculate the sales tax they paid, they may conclude that the high CID rate is charged all across Wichita — thereby staining our reputation.

The Wichita city council had a chance to provide transparency to shoppers by requiring merchants in CIDs to post signs informing shoppers of the amount of extra tax to be changed in the store. But CID advocates got the city council to back down from that requirement. CID advocates know how powerful information is, and they along with their allies on the city council realized that signage with disclosure would harm CID merchants. Council Member Sue Schlapp succinctly summarized the subterfuge that must accompany the CID tax when she said: “This is very simple: If you vote to have the tool, and then you vote to put something in it that makes the tool useless, it’s not even any point in having the vote, in my opinion.” She voted against the signage requirement.

Jeff Longwell (district 5, west and northwest Wichita), in explaining his vote against the signage requirement with the tax rate displayed, said he thought this information would be confusing to shoppers.

Are incentives necessary?

The age-old question is whether economic activity will occur without economic development incentives. Governor Brownback said it is a “legitimate question” as to whether Cabela’s would be here anyway.

In the case of Cabela’s, the store might not be in Wichita without incentives, as the company has shown itself to be especially eager and adept at gathering corporate welfare paid for by taxpayers. One writer concluded “For its part, Cabela’s is unabashed about its dependence on corporate socialism, even declaring in its annual report that grabbing public money is key to its business plan.”

We see elected officials and economic development bureaucracies eager to create jobs, so much so that they offer incentives that are not necessary. This leads to a cycle of dependency on city hall for economic development. That’s good for politicians and bureaucrats, but bad for everyone else.

It would be one thing if our economic development activities were working. But there’s evidence that they’re not. Recently we learned that the job-creating activities of Greater Wichita Economic Development Coalition last year resulted in a number of jobs barely more than one-half of one percent of the labor force.

That’s not a very good job. But keeping a website up to date ought to be easy. The GWEDC site, however, is terribly out of date. On a page titled Recent Relocations Highlights, the most recent item is from 2009. Have we not had any relocations since then, or does GWEDC simply not care to update and maintain its website?

A recent Wichita Eagle article, (Why isn’t Wichita winning projects?, January 22, 2012 Wichita Eagle), after listing four items economic development professionals say Wichita needs but lacks, reported “The missing pieces have been obvious for years, but haven’t materialized for one reason or another.”

If these pieces are truly needed and have been obviously missing for years: Isn’t that a startling assessment of failure of Wichita’s economic development regime?

A Wichita shocker

“Local politicians like to get in bed with local business, and taxpayers are usually the losers. So three cheers for a voter revolt in Wichita, Kansas last week that shows such sweetheart deals can be defeated.” So starts today’s Wall Street Journal Review & Outlook editorial (subscription required), taking notice of the special election last week in Wichita.

The editorial page of the Wall Street Journal is one of the most prominent voices for free markets and limited government in America. Over and over Journal editors expose crony capitalism and corporate welfare schemes, and they waste few words in condemning these harmful practices.

The three Republican members of the Wichita City Council who consider themselves fiscal conservatives but nonetheless voted for the corporate welfare that voters rejected — Pete Meitzner (district 2, east Wichita), James Clendenin (district 3, southeast and south Wichita), and Jeff Longwell (district 5, west and northwest Wichita) — need to consider this a wake up call. These members, it should be noted, routinely vote in concert with the Democrats and liberals on the council.

For good measure, we should note that Sedgwick County Commission Republicans Dave Unruh and Jim Skelton routinely — but not always — vote for these crony capitalist measures.

The Wichita business community, headed by the Wichita Metro Chamber of Commerce endorsed this measure, too.

Hopefully this election will convince Wichita’s political and bureaucratic leaders that our economic development policies are not working. Combined with the startling findings by a Tax Foundation and KMPG study that finds Kansas lags near the bottom of the states in tax costs to business, the need for reform of our spending and taxing practices couldn’t be more evident. It is now up to our leaders to find within themselves the capability to change — or we all shall suffer.

Wichita, Kansas voters reject corporate welfare and cronyism

From Americans for Prosperity, Kansas.

Tuesday, Kansas voters made a bold statement, rejecting a plan favoring cronyism and big government, instead choosing to take a stand for fiscal responsibility.

The Ambassador Hotel, which will receive $15 million in subsidies plus several hundred thousand annually, wanted to keep 75 percent of the guest tax they charged patrons, amounting to roughly $2.25 million in guest tax revenues over the next 15 years. The guest tax is a tax charged at Wichita hotels, otherwise used to promote convention and tourism.

This proposed guest tax subsidy was put to a vote, a plan which voters rejected by a 61 to 39 margin.

“The Ambassador Hotel guest tax subsidy was a prime example of political cronyism,” said Derrick Sontag, State Director of AFP-KS. “We were glad to see that voters made the right decision when presented with the facts about just how much public funding this development is receiving.”

“The vote shows that taxpayers recognize the problems with corporate welfare and are willing to take a stand for fiscal responsibility,” Sontag said. “This victory is just one small step towards more responsible government.”

Opponents of the tax subsidy recognize that government’s job is not to pick winners and losers, and AFP applauds those in Wichita who made their voices heard in support of limited government and the free market.

Wichita Ambassador Hotel radio ads

There are two radio advertisements regarding the special election regarding the Wichita Ambassador Hotel.

Wichita Ambassador Hotel 60 second spot

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What’s the real cost of the Ambassador Hotel? The out-of state developer building this project received over $3.3 million in tax increment financing, diverting money from Wichita police and fire departments. They received more than $4.2 million from the city to fund parking. The State of Kansas gave them $3.8 million in tax credits. And they got another $3.5 million in tax credits from the federal government. Now they want to keep 75% percent of the guest tax that promotes tourism in Wichita, including improvements to Century II. Why should an out-of-state developer receive sweetheart tax treatment when local taxpayers and businesses have to make up the difference? Maybe a better question is … When will it end? Vote no on February 28th to promote fairness. Vote no to protect Century II. Vote no to protect local businesses from unfair competition. If you’re tired of back-room political deals, vote no on February 28th. Get the facts at dtwichita.com. That’s dtwichita.com. Paid for by Tax Fairness for All Wichitans.

Wichita Ambassador Hotel 30 second spot

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What’s the real cost of the Ambassador Hotel? The out-of state developer building this project has received over 15 million dollars in tax credits and incentives. Now they want to keep 75% percent of the guest tax that promotes tourism and improvements to Century II. When will the sweetheart deals end? Vote no on February 28th to protect Century II. Vote no on February 28th to protect local businesses. Get the facts at dtwichita.com. Paid for by Tax Fairness for All Wichitans.

For the Ambassador Hotel in Wichita: 8 or 9 government subsidy programs?

Supporters of a guest tax rebate program for Wichita’s Ambassador Hotel don’t tell you that the vote on February 28th concerns only one of the potential nine taxpayer-funded government subsidy programs for the hotel.

Voting No on February 28th leaves eight government subsidy programs in place. Only one program is affected.

Here are the government subsidy eight programs the hotel already has in place that will not be affected by the February 28th election:

  • $3,325,000 in tax increment financing. This diverts money from services like police, fire, and schools to provide benefits to the developers, in this case parking for the hotel.

  • $4,245,000 in city funding under the capital improvement plan (CIP), to build parking for the hotel.
  • $3,800,000 in tax credits from the State of Kansas. Taxpayers across Kansas have to make up this missing revenue.
  • $3,500,000 in tax credits from the U.S. government. Taxpayers across the country have to make up this missing revenue.
  • $537,075 in sales tax exemptions on purchases during the construction and furnishing of the hotel. That’s missing revenue that other Kansas taxpayers have to make up.
  • $60,000 per year in community improvement district (CID) sales tax. The hotel charges an extra two cents per dollar sales tax, which the state returns to the hotel.
  • $127,499 per year (estimated) in rental revenue to the developers from a sweetheart lease deal.
  • Participation in Wichita’s facade improvement program, which provides special assessment financing that is repaid.

All told, this project will receive $15,407,075 in taxpayer funds to get started, with additional funds provided annually.

The election on February 28th concerns one additional government subsidy program: $134,000 per year in guest taxes. A special city charter ordinance would allow the hotel to keep 75 percent of the guest tax it collects, instead of that revenue going to the city’s convention and tourism fund. This is the ordinance that is the subject of the February 28th election.

A vote of No keeps eight government subsidy programs in place. These generous taxpayer-funded programs should be enough.

Market solutions best for Wichita

As appearing in the Sunday Wichita Eagle.

Market solutions best for Wichita

By Bob Weeks

In his “State of the City” address for 2012, Wichita Mayor Carl Brewer spoke on several topics that deserve discussion. As an example, several times he criticized those who act on “partisan agendas.” Partisan refers to following a party line, usually with a negative connotation.

But the city council, even though it has four Republican members, almost always votes uniformly with Brewer (a Democrat). The only exception is Republican Michael O’Donnell (district 4, south and southwest Wichita). The other Republican members routinely vote in concert with the Democrats and liberals on the council.

Also, consider the many members of the business community who appeal to the city for subsidies and increased government intervention: Many of these are Republicans — conservative Republicans, many have personally told me.

This describes a lack of partisanship. Those such as myself who frequently oppose the mayor and his policies are more accurately characterized not as acting along party lines, but as acting on their belief in economic freedom, free markets, and limited government.

The mayor said that the city’s efforts had created “almost 1000 jobs.” That’s just over one-half of one percent of Wichita’s labor force, a miniscule number that is dwarfed by the normal ebb and flow of other economic activity.

Still, the mayor’s plan, in his words, is “We will incentivize new jobs.” But this active investor policy has produced only a small number of jobs, year after year. While the mayor repeatedly said that the city has been “courageous,” in reality, Wichita does about the same as other cities.

Professor Art Hall of Kansas University School of Business makes a convincing case that Kansas needs to abandon its active investor approach to economic development, where government decides which companies will receive special treatment through various forms of subsidy. This is the approach of Wichita, and according to the mayor’s vision, this plan is to be stepped up.

Hall cites research indicating that local officials believe they can influence local economies far more than evidence indicates. He also believes that we can break out of the bidding wars for large employers by employing a strategy of economic dynamism. Government would concentrate on the basics, building a platform where all businesses have a chance to thrive, instead of betting on just a few anointed winners as we presently do. This would truly distinguish Kansas and Wichita.

The mayor criticized those who “provide simplistic answers to very complicated challenges.” He may be referring to those like myself who, like Hall, advocate for free market solutions. We are criticized for not having a plan for government to implement, but that’s precisely the point. Relying on economic freedom, free markets, and limited government for jobs and prosperity means trusting in free people, the energy of decentralized innovation, and spontaneous order. A government plan for economic development is the opposite of these principles.

We need business and political leaders in Wichita and Kansas who can see beyond the simplistic imagery of a groundbreaking ceremony and who can assess the effect of our failing economic development policies. Unfortunately, we don’t have many of these — and Mayor Brewer leads in the wrong direction, preferring crony capitalism and corporate welfare instead.

Wichita Chamber of Commerce

News that the Wichita Metro Chamber of Commerce has decided to support the “Vote Yes” campaign in the February 28th Wichita city election should disappoint those who believe in economic freedom, free markets, and limited government as the engine of job creation and prosperity.

The subject of the election is a Wichita city charter ordinance that rebates 75 percent of the Ambassador Hotel’s guest tax collection back to the hotel. In January I made a presentation to a Chamber committee in an effort to persuade it to support the “Vote No” campaign, or to stay neutral.

There was some hope that the Chamber would support free markets and limited government — instead of crony capitalism and corporate welfare — as sound policies for economic development. Many in Wichita thought that the Chamber had turned in this direction of economic freedom about two years ago.

Now the Chamber’s decision lets us know it believes that eight government subsidy programs supporting the Ambassador Hotel are not enough: The Chamber says there must be a ninth.

This decision reminds me of a piece in the Wall Street Journal by Stephen Moore that shows how very often, local chambers of commerce support principles of crony capitalism instead of pro-growth policies that support free enterprise and genuine capitalism.

Most people probably think that local chambers of commerce, since their membership is mostly business firms, support pro-growth policies that embrace limited government and free markets. But that’s not always the case, as we can see in Wichita. Here, in an excerpt from his article “Tax Chambers” Moore explains:

The Chamber of Commerce, long a supporter of limited government and low taxes, was part of the coalition backing the Reagan revolution in the 1980s. On the national level, the organization still follows a pro-growth agenda — but thanks to an astonishing political transformation, many chambers of commerce on the state and local level have been abandoning these goals. They’re becoming, in effect, lobbyists for big government.

In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses — at least those not connected at the hip with government — to prosper. Journalist Tim Carney agrees: All too often, he notes in his recent book, “Rip-Off,” “state and local chambers have become corrupted by the lure of big dollar corporate welfare schemes.”

“I used to think that public employee unions like the NEA were the main enemy in the struggle for limited government, competition and private sector solutions,” says Mr. Caldera of the Independence Institute. “I was wrong. Our biggest adversary is the special interest business cartel that labels itself ‘the business community’ and its political machine run by chambers and other industry associations.”

From Stephen Moore in the article “Tax Chambers” published in The Wall Street Journal, February 10, 2007. The full article can be found at Liberalism’s Echo Chambers.

Carl Brewer: State of the City for Wichita, 2012

Last night Wichita Mayor Carl Brewer delivered his annual State of the City Address. The text of the address may be read at State of the City Address.

In his speech, Brewer several times criticized those who act on “partisan agendas.” This is quite a remarkable statement for the mayor to make. Partisan usually refers to following a party line or platform. The mayor didn’t mention who he was criticizing, but it’s likely he was referring to myself and others like John Todd, Susan Estes, and Clinton Coen, as we appear regularly before the city council, usually in disagreement with the mayor and his policies.

What’s remarkable is that the council, even though it has four Republican members, almost always votes uniformly with Democrat Brewer and the other two politically liberal members of the council. The only exception is Michael O’Donnell (district 4, south and southwest Wichita), who is often in a minority of one voting in opposition to the other six. The other Republican members — Pete Meitzner (district 2, east Wichita), James Clendenin (district 3, southeast and south Wichita), and Jeff Longwell (district 5, west and northwest Wichita) — routinely vote in concert with the Democrats and liberals on the council.

Remarkable also are the many members of the business community who appeal to the council for subsidies, increased government intervention, and more central planning from city hall: many of these are Republicans. Conservative Republicans, many have personally told me.

This describes a lack of partisanship. Most of the mayor’s critics, such as myself, are more accurately characterized not as acting along party lines, but as acting on their belief in economic freedom, free markets, and limited government.

Economic development

The mayor said that the city’s efforts in economic development had created “almost 1000 jobs.” While that sounds like a lot of jobs, that number deserves context.

According to estimates from the Kansas Department of Labor, the civilian labor force in the City of Wichita for December 2011 was 192,876, with 178,156 people at work. This means that the 1,000 jobs created accounted for from 0.52 percent to 0.56 percent of our city’s workforce, depending on the denominator used. This miniscule number is dwarfed by the normal ebb and flow of other economic activity.

The mayor did not mention the costs of creating these jobs. These costs have a negative economic impact on those who pay these costs. This means that economic activity — and jobs — are lost somewhere else in order to pay for the incentives.

The mayor’s plan going forward, in his words, is “We will incentivize new jobs.” But under the mayor’s leadership, this “active investor” policy has produced a very small number of jobs, year after year. Doubling down on the present course is not likely to do much better.

But there are those who disagree, despite all evidence to the contrary. Sedgwick County Commissioner Dave Unruh — a conservative Republican, for those keeping track of partisanship — recently called for a “deal-closing” fund of $100 million. A funding source of this magnitude would undoubtedly require a new tax. There are many who feel there should be a new sales tax devoted to economic development and downtown Wichita development. We should not be surprised to see such a proposal emerge, and not be surprised that civic and business institutions will support it.

The mayor repeatedly said that the city has been “courageous.” In reality, Wichita does about the same as everyone else. But there is a way Wichita could distinguish itself among cities.

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, tax increment financing, community improvement district special taxes, and other forms of subsidy. Being an “active investor” has been the approach of the City of Wichita, and according to the mayor’s vision, this plan is to be stepped up in the future.

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.”

We need business and political leaders in Wichita and Kansas who can see beyond the simplistic 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 — and Mayor Brewer leads in the opposite direction.

Critical of misinformation campaigns

In his speech, Brewer was critical of those who “spread misinformation.” He was not specific as to who he’s criticizing, and I wouldn’t expect him to name specific people in a speech like this.

But when the mayor criticizes people for being uninformed or misinformed, he needs to look first at himself. He and city staff also need to engage their critics and be responsive to requests for information.

As an example of misinformation, the mayor cited this evidence that city policies are working: “The proposed Ambassador Hotel with a 3-to-1 private to public investment ratio.”

The city arrived at this ratio by employing a very narrow definition of public investment. When tax credits from the State of Kansas and federal government as well as other sources of public subsidy are accounted for, the ratio drops to less than two to one.

It’s true that considering only the city’s artificially narrow definition of public funding, the ratio does reach three to one. But Wichitans also have to pay part of the costs of the tax credits and other subsidies.

The city has also been less than honest in its promotion of the cost-benefit ratio for the Ambassador Hotel project. The city officially cites a cost-benefit study produced by Wichita State University Center for Economic Development and Business Research. Part of that study produced a cost-benefit ratio of 2.63 to one, and that’s what the city uses as justification for its participation in the project.

But the full story of the costs and benefits of this project are contained in these numbers from the WSU analysis:

                                    ROI   Cost-benefit ratio
City Fiscal Impacts General Fund  163.2%        2.63
City Fiscal Impacts Debt Service  -17.2%        0.83
City Fiscal Impacts                -9.8%        0.90

WSU evaluated the impact of the Ambassador Hotel on the City of Wichita’s finances in two areas: The impact on the city’s General Fund, and separately on the city’s Debt Service Fund. The two were combined to produce the total fiscal impact, which is the bottom line in this table.

The City of Wichita cites only the positive impact to the General Fund figure. But the impact on the Debt Service fund is negative, and the impact in total is negative.

It’s true that the ROI and cost-benefit ratio for the General Fund indicate a positive investment return. But the cost of the Ambassador Hotel subsidy program to the General Fund is $290,895, while the cost to the Debt Service Fund is $7,077,831 — a cost factor 23 times as large.

Citizens ought to ask: Who is spreading misinformation?

It is difficult to get a response from city hall regarding questions like these. So far city economic development director Allen Bell has not agreed to meet with representatives of Tax Fairness for All Wichitans, a group opposed to the subsidies for the Ambassador Hotel. (I am part of that group.) The city and its allied economic development groups will not send representatives to participate in a public forum on this matter.

Simplistic answers

The mayor criticized those who “provide simplistic answers to very complicated challenges.” He may be — we don’t really know — referring to those like myself who advocate for free market solutions to problems rather than reliance on government. Certainly the mayor believes that government must act — “courageously” he said — to confront our problems.

A problem with the mayor’s plan for increased economic interventionism by government is the very nature of knowledge. In a recent issue of Cato Policy Report, Arnold King wrote:

As Hayek pointed out, knowledge that is important in the economy is dispersed. Consumers understand their own wants and business managers understand their technological opportunities and constraints to a greater degree than they can articulate and to a far greater degree than experts can understand and absorb.

When knowledge is dispersed but power is concentrated, I call this the knowledge-power discrepancy. Such discrepancies can arise in large firms, where CEOs can fail to appreciate the significance of what is known by some of their subordinates. … With government experts, the knowledge-power discrepancy is particularly acute.

Relying on free market solutions for economic growth and prosperity means trusting in the concept of spontaneous order. That takes courage. It requires faith in the values of human freedom and ingenuity rather than government control. It requires that government officials let go rather than grabbing tighter the reins of power.

Mayor Brewer, five of six city council members, and the city hall bureaucracy do not believe in these values. Wichita’s mayor is openly dismissive of economic freedom, free markets, and limited government, calling these principles of freedom and liberty “simplistic.” Instead, his government prefers crony capitalism and corporate welfare. This is the troubling message that emerges from Brewer’s State of the City address.