Economic development

Political cronyism has become the way

by Bob Weeks on May 7, 2012

“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.

Tagged as: Capitalism, Corporate welfare, Economic development, Free markets, Kansas state government, Sam Brownback, Sedgwick county government, STAR bonds, Wichita city government

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Tax costs block progress in Kansas

by Bob Weeks on April 28, 2012

If we in Kansas and Wichita wonder why our economic growth is slow and our economic development programs don’t seem to be producing results, there is now data to answer the question why: Our tax costs are high — way too high.

Recently the Tax Foundation released a report that examines the tax costs on business in the states and in selected cities in each state. 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.

The report is Location Matters: A Comparative Analysis of State Tax Costs on Business.

The study is unusual in that it looks at the impact of states’ tax burden on mature and new firms. This, according to report authors, “allows us to understand the effects of state tax incentives compared to a state’s core tax system.” In further explanation, the authors write: “The second measure is for the tax burden faced by newly established operations, those that have been in operation less than three years. This represents a state’s competitiveness after we have taken into account the various tax incentive programs it makes available to new investments.”

The report also looks at the tax costs for specific types of business firms. For Kansas, some individual results are better than overall, but still not good. For a mature corporate headquarters, Kansas ranks 30th. For locating a new corporate headquarters — one that would benefit from tax incentive programs — Kansas ranked 42nd. For a mature research and development facility, 46th; while new is ranked 49th. For a mature retail store, 38th, while new is ranked 45th.

There are more categories. Kansas ranks well in none.

The report also looked at two cities in each state, a major city and a mid-size city. For Kansas, the two cities are Wichita and Topeka.

Among the 50 cities chosen, Wichita ranks 30th for a mature corporate headquarters, but 42nd for a new corporate headquarters.

For a mature research and development facility, Wichita ranks 46th, and 49th for a new facility.

For a mature and new retail store, Wichita ranks 38th and 45th, respectively.

For a mature and new call center, Wichita ranks 43rd and 47th, respectively.

In its summary for Kansas, the authors note the fecklessness of Kansas economic development incentives: “Kansas offers among the most generous property tax abatements and investment tax credits across most firm types, yet these incentives seem to have little impact on the state’s rankings for new operations.”

Kansas tax cost compared to neighbors. Click here for a larger version.

It’s also useful to compare Kansas to our neighbors. The comparison is not favorable for Kansas.

More evidence of failure

Recently the Greater Wichita Economic Development Coalition issued its annual report on its economic development activities for the year. This report shows us that power of government to influence economic development is weak. In its recent press release, the organization claimed to have created 1,509 jobs in Sedgwick County during 2011. According to the Bureau of Labor Statistics, the labor force in Sedgwick County in 2011 was 253,940 persons. So the jobs created by GWEDC’s actions amounted to 0.59 percent of the labor force. This is a very small fraction, and other economic events are likely to overwhelm these efforts.

In his 2012 State of the City address, Wichita Mayor Carl Brewer took credit for creating a similar percentage of jobs in Wichita.

The report by the Tax Foundation helps us understand why the economic development efforts of GWEDC, Sedgwick County, and Wichita are not working well: Our tax costs are too high.

While economic development incentives can help reduce the cost of taxes for selected firms, incentives don’t help the many firms that don’t receive them. In fact, the cost of these incentives is harmful to other firms. The Tax Foundation report points to this harm: “While many state officials view tax incentives as a necessary tool in their state’s ability to be competitive, others are beginning to question the cost-benefit of incentives and whether they are fair to mature firms that are paying full freight. Indeed, there is growing animosity among many business owners and executives to the generous tax incentives enjoyed by some of their direct competitors.”

But there is one incentive that can be offered to all firms: Reduce tax costs for everyone. The policy of reducing tax costs for the selected few is not working. This “active investor” approach to economic development is what has led companies in Wichita and Kansas escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. 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.”

In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and Kansas has been pursuing and which Wichita’s Brewer wants to step up: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”

There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs is an example of precisely the wrong policy.

We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances, except to reduce the cost of government for everyone.

Tagged as: Carl Brewer, Economic development, Economics, Greater Wichita Economic Development Coalition, Interventionism, Kansas state government, Tax abatements, Wichita city government

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Kansas and Wichita quick takes: Wednesday April 25, 2012

by Bob Weeks on April 25, 2012

Income growth in Kansas and Sedgwick County. Emily Behlmann of Wichita Business Journal reports: “Personal income in Kansas grew by 2.71 percent from 2009 to 2010, or by 1.76 percent per capita, according to estimates released Wednesday by the U.S. Bureau of Economic Analysis. That’s slower than the national growth rate of 3.7 percent overall, the bureau reports. And as the database below shows, Sedgwick County’s growth rate was slower than both the national and state averages.” (Database: Kansas counties post slower-than-average personal income growth). This is more evidence that our current economic development policies in Wichita and Sedgwick County are failing. See Wichita economic development isn’t working.

Tax reform is needed in Kansas. A message from Americans for Prosperity, Kansas: “Kansas has the second highest top marginal individual income tax rate amongst neighboring states. Is it any wonder that the state had a net loss of over 17,000 taxpayers between 2000 and 2009? Americans for Prosperity is advocating for aggressive tax reform that includes two key elements: An aggressive and immediate reduction in the individual income tax rate, and a ‘trigger’ that sets aside future state tax revenue growth above three percent to fund future reductions in the income tax. Passage of a tax bill containing these two ingredients will help slow government spending and encourage investment and job-creation. … The economic indicators show that our state needs aggressive tax reform. Key measurements of Kansas’ stagnant growth show: From 2001 to 2010, Kansas ranked 40th in the country in net domestic population migration, representing the smallest growth amongst neighboring states. (Source: U.S. Census Bureau). Kansas lost more than 39,000 private sector jobs from 2001 to 2010. (Source: Bureau of Labor & Statistics). From 2000 to 2009, Kansas ranked 43rd in the United States in taxpayer net migration, resulting in a net loss of 17,574 tax filers. (Source: Bureau of Labor & Statistics). … The longer Kansas waits to enact meaningful tax reform, the further we’ll fall behind. Kansas legislators have a tremendous opportunity to pass a tax bill that lowers the individual income tax burden and establishes a growth trigger to fund future reductions.” AFP has a system to help citizens to contact their legislators by clicking here.

Protect us from onion prices. Specifically, volatility in onion prices, as according to CNN the onion is the only commodity for which futures trading is banned. Futures contracts are the mechanism by which speculation is accomplished. Tim Cavanaugh explains in How Will Obama Protect Us From Onion Speculators? at Reason.

Silencing ALEC. Fred Smith of the Competitive Enterprise Institute contributes this letter to the Wall Street Journal, criticizing those who attempt to shut down debate through intimidation, the target being American Legislative Exchange Council (ALEC): “The attack on the American Legislative Exchange Council (ALEC) is part of a broader attack by those seeking to drive all market voices from the marketplace of ideas. (“Shutting Down ALEC,” Review & Outlook, April 18). As the Founders realized, ‘factions’ — what we now call ‘special interests’ — are an unavoidable aspect of democracy. The Founders’ solution was not to suppress factions, but to ‘set faction against faction’ to ensure vigorous debate. The attack on ALEC runs counter to that spirit. It is a concerted effort to silence one faction by driving productive economic voices from the policy debate. … When businesses seek to expose and reduce the harmful consequences of capricious legislation, that is both their right and good for democracy. When market voices are excluded from the policy debate, the only voices left are those motivated purely by ideology. And as history shows, the greatest harm to nations comes from ideologues who believe they know what’s best for everybody. … Our Founders gave us a system based on the battle of ideas. If critics of the free market believe they have a strong case, they should seek to win that battle openly, rather than by silencing the opposition through intimidation. What ALEC’s opponents seek is nothing less than the sabotage of democracy. It is especially unfortunate when businesses retreat from backing free-market groups like ALEC when they come under pressure. America needs more CEOs willing to stand up for free enterprise. Readers who agree should let those CEOs know now.”

TSA in Wichita, and in general. Wichita meteorologist Mike Smith mentions an incident at the Wichita airport involving TSA handling of a young girl. It’s a nationwide story now. See Latest TSA Outrage — In Wichita This Time . … Speaking of TSA, John Stossel recently had a segment on his television show. Did you know that the security screening at the San Francisco airport is not handled by the TSA? Makes me want to go there. Stossel reports: “A leaked 2007 TSA study found that San Francisco’s private screeners were twice as good at detecting fake bombs as TSA screeners.” More from him at The TSA Just Won’t Let Go: Governments cling to power even when private solutions work best.

An extra comma. A recent article in the Lawrence Journal-World illustrates the harm of using too many commas, a problem, I fear, I have, myself. The article started with this sentence: “A proposal to reduce the Kansas Earned Income Tax Credit would throw thousands of working families into poverty, religious and social service, advocates said Tuesday.” A literal reading of this sentence would indicate a boom in people participating in “religious” and “social service.” That’s not what happened. The unintended use of the last comma changed the meaning of the sentence.

If I wanted America to fail. Americans for Limited Government has a new site named FreeMarketAmerica. Its video If I wanted America to fail is being viewed thousands of times, and is the subject of some controversy. I suggest viewing this powerful statement. In a press release, ALG writes: “The success of Free Market America’s launch shows that Americans are still very interested in the ideals of free markets and limited government, and stopping the Big Government environmentalists nationwide. Our video, ‘If I wanted America to fail,’ has more than half a million views on YouTube in just a few days,’ said Bill Wilson, president of Americans for Limited Government. … ‘The widespread success of this project shows that Americans are willing to stand up and fight for freedom and prosperity and against the heavy hand of big government. With many in the conservative media and conservative bloggers spreading this message and taking our content viral, the Big Green agenda will soon be facing an uphill battle.’”

Tagged as: Americans For Prosperity, Economic development, Environment, Free markets, Government spending, Regulation, Sedgwick county government, Taxation, Wichita city government

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Rich States, Poor States 2012 edition released

by Bob Weeks on April 25, 2012

This month American Legislative Exchange Council (ALEC) released the fifth edition of Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index. As in the past, Kansas performs in the middle of the pack in one measure, below average in another, with little or no progress achieved in making Kansas competitive with other states.

The report’s authors are Arthur B. Laffer, Stephen Moore, and Jonathan Williams. Besides the ranking of the states, the Rich States, Poor States report always contains useful information about economic and tax policy. This year a chapter is titled “10 Golden Rules of Effective Taxation,” starting with “When you tax something more you get less of it, and when you tax something less you get more of it.”

Another important rule or observation is “An increase in tax rates will not lead to a dollar-for-dollar increase in tax revenues, and a reduction in tax rates that encourages production will lead to less than a dollar-for-dollar reduction in tax revenues.” People seek to avoid paying taxes, and as tax rates rise, they will employ various methods to accomplish this. Some will simply stop earning more income. That’s why predictions of increased revenue after tax rate increase are rarely fulfilled. Similarly, when tax rates are reduced, the incentive to avoid taxes is reduced. Additionally, the business decision process is focused on achieving productive economic goals instead of tax avoidance.

Rule five is the famous Laffer Curve: “If tax rates become too high, they may lead to a reduction in tax receipts. The relationship between tax rates and tax receipts has been described by the Laffer Curve.”

Rule seven explains the strategy behind Kansas Governor Sam Brownback’s goal of reducing and eliminating the Kansas income tax: “Raising tax rates on one source of revenue may reduce the tax revenue from other sources, while reducing the tax rate on one activity may raise the taxes raised from other activities.” If business taxes rise, we expect less business, therefore fewer employees with jobs contributing taxes. The converse — if business taxes fall, we expect more business activity — means more employees paying the other taxes that Kansas relies on: sales and property taxes.

In the second chapter — Paving the Path to Prosperity — the authors discuss migration data made available by the Internal Revenue Service. Despite the fact that some states have gorgeous weather and in some states the weather is terrible, that’s not why people move around: “Census data consistently shows that people choose where to live, engage in commerce, and invest based on economic competitiveness.” California and Hawaii are losing many people to states where the economic climate is better. While we in Kansas can’t control the weather, we can control our state’s economic policies: “State elected officials obviously have little control over their states’ 10-day forecasts, but they do control their states’ tax climates. We know tax policy is not the only reason people are motivated to live, invest, or grow a business in a state, but it plays a significant
role. State lawmakers should keep this in mind as they shape public policy.”

The impact of state employee pension plans is also important, write the authors. Kansas is in especially poor condition in the area, and emerging legislation offers some relief for Kansas taxpayers, but not much.

In the chapter “Policies for Growth” the authors address an issue very relevant to Kansas. It is said by many that we need an income tax in Kansas because we aren’t blessed with natural resources like, say, Texas, which receives huge income from the oil industry. First, the author’s note that having an income tax is still harmful: “But while the existence of oil, gas, and other natural resources clearly makes things easier for a state’s government, they do not negate the impact of a state’s income tax.”

In Texas, by the way, three percent of the state’s budget comes from severance taxes. (In Kansas it is 1.1 percent.) While this revenue is helpful to Texas, it isn’t anywhere near the magnitude of benefit that the Kansas government spending lobby would have you believe.

If we need more evidence of the harmful effects of income taxes, the authors present results from the 11 states that have introduced an income tax over the past 50 years. The results? “What we find astonishing is how the size of the economy in each one of these states has declined as a share of the total U.S. economy compared with a time just prior to when each state introduced its income tax. Some of the declines are quite large.”

While there is a link between income tax rates and state economic performance, the authors did not find the same link regarding sales tax rates. It has a neutral effect, they write, and is a preferred method for generating revenue for the states. Sales tax receipts are also less volatile than income tax revenues.

Kansas among the states

Rich States, Poor States evaluates state economies two ways. The “Economic Outlook Ranking” is a forecast looking forward. It is based on factors that are under control of the states. The “Economic Performance Ranking” is a backward-looking rating that measures state performance, again using variables under control of each state.

For Economic Performance Ranking, Kansas is ranked 39 among the states, near the bottom in terms of positive performance. In the 2010 edition, Kansas was ranked 40th, and in 2010, 34th. Kansas is not making progress in this ranking of state performance.

In the forward-looking Economic Outlook Ranking, Kansas ranks 26th. Again, Kansas is not making progress, compared to other states. In annual rankings since 2008 Kansas has been ranked 29, 24, 25, 27, and now 26.

In this ranking, Kansas performs well for having no inheritance or estate tax, having a good state liability system, a state minimum wage that is not higher than the federal minimum wage, having low workers’ compensation costs, and being a right-to-work state.

Areas in which Kansas performs poorly include personal income tax progressivity, sales tax burden, recently legislated tax changes, debt service, and number of tax expenditure limits (Kansas has none).

A problem in Kansas is the number of government employees. The measure “public employees per 10,000 population” is 708.2, which ranks Kansas 48th among the states. Only Alaska and Wyoming have more government employees per capita.

The complete Rich States, Poor States report is available for purchase or free download at Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index. An oped in the Wall Street Journal by authors Laffer and Moore is at A 50-State Tax Lesson for the President: Over the past decade, states without an income levy have seen much higher growth than the national average. Which state will be next to abolish theirs?.

Tagged as: Capitalism, Economic development, Economics, Government spending, Kansas legislature, Kansas state government, Sam Brownback, Taxation

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In Kansas, STAR bonds vote uplifted cronyism over capitalism

by Bob Weeks on April 24, 2012

Recently both chambers of the Kansas Legislature passed similar bills authorizing a five year extension of the Kansas STAR bonds program. In the House the bill passed 92 to 31. In the Senate the vote was 27 to 13.

The STAR bonds program provides a way to redirect sales taxes to project developers instead of the state treasury, which is where most people think taxes go — or should go.

Not so with STAR bonds. In the words of the Kansas Department of Commerce, the program offers “municipalities the opportunity to issue bonds to finance the development of major commercial, entertainment and tourism areas and use the sales tax revenue generated by the development to pay off the bonds.” This description, while generally true, is not accurate. A proposed STAR bond district in Wichita includes much area beyond the borders of the proposed development, including a Super Target store, a new Cabela’s store, and much vacant ground that will probably be developed as retail. The increment in sales taxes from these stores — present and future — goes to the STAR bond developer.

I asked a number of members of the Kansas House and Senate to explain their votes in favor of extending the STAR bonds program. It was difficult to extract answers, but I finally a received a few.

One member explained to me that some votes are “ugly.” Yes, indeed I would say, including this member’s. But that’s no reason not to vote correctly in favor of limited government, capitalism, and free markets. Sometimes members have to vote according to their campaign promises.

One member explained to me that the bonds that will be sold are bought by private investors, and there’s nothing wrong with that. That’s true, but stopping the thought process there is naive. How are payments on these bonds to be made, we have to ask. The answer is payments are made, at least partially, from the captured sales tax revenue. That’s revenue not earned by the developers. Instead, it is revenue collected by government in the form of taxes that consumers have no choice but to pay. From the developers’ viewpoint (and pocketbook) it is a gift from government that others in similar situations are not able to receive. These gifts of money from government to business are known as cronyism. It is Kansas being business-friendly, which is not the same as capitalism-friendly, and it makes our state poorer and less able to compete.

Some made the argument that STAR bond proceeds can be used only for certain allowable expenses such as “horizontal” expenses. Arguments such as these are commonly made to support government subsidy programs. Supporters argue that since the use of the funds is restricted, this somehow makes it allowable, even benign. But this is nonsense. If I gave you $100 with the stipulation that you could spend it only on Mondays, would anyone deny that you are wealthier by $100? That is, of course, if you were planning to spend money on Mondays. And if you weren’t, couldn’t you shift some of your spending to Mondays?

This is the nonsensical nature of these arguments. Still, many purportedly fiscal conservatives are persuaded.

Simply put, the STAR bonds program turns over taxation to private parties for their own benefit. When we are willing to turn over taxation to the benefit of private interests, we have to wonder a few things:

First, why do we need taxation at all, if we can simply excuse some from participating in the system?

Second: Can something be moral if it is not applied equally to everyone?

Third: Sometimes it is claimed that without the government subsidy, a project is not economically feasible. Developers have lots of ways to make a project appears that it needs government help, and they have multimillion dollar motives to do so. But when something is truly not economically feasible, that means that the judgment of the marketplace is that the product or service is not desired — at least not at a price necessary to make the project profitable. But not to worry — our fearless government leaders will override the judgment of free people trading freely in markets. They will enact a forced transfer of wealth from taxpayers to the developers whose ideas can’t make it in the market. These leaders include Kansas Governor Sam Brownback, Secretary of Commerce Pat George, the Speaker of the House and President of the Senate, and chairs of key committees, except (surprisingly) Les Donovan, chair of the senate tax committee.

For more on the harm to capitalism of the STAR bonds program, see Kansas STAR bonds vote a test for capitalism.

In the House of Representatives, there were two explanations as to why some members voted no. The first one reads: “I vote NO on HB 2561. Star Bonds are a form of failed economic policy that Kansas should distance itself from. It is time for government to stop picking winners and losers and instead promote economic policies and a lower tax structure that all Kansans can benefit from. Star bonds are a form of centralized planning that favors a few at the expense of other taxpayers and businesses. These bonds divert needed money from police, fire, roads, and other core functions of government for 10, 20, and even 30 years. Mr. Speaker, I vote NO, choosing to support the taxpayers who voted me in office.” This was in the names of Pete DeGraaf, Virgil Peck, Jr, Randy Garber, Charlotte O’Hara, Owen Donohoe, and Connie O’Brien.

A second statement read: “HB 2561 goes against my principles of free enterprise and limited government. By redirecting tax revenue to a particular business, STAR bonds create an unequal playing field. STAR bonds favor a few at the expense of other taxpayers and businesses. These bonds divert money needed for core functions of government for decades into the future. It is time for government to stop picking winners and losers and instead promote economic policies and a lower tax structure from which all Kansans can benefit. Mr. Speaker, I stand with the voters that elected me. I vote NO on HB2561.” This was in the names of Jim Howell, Dennis Hedke, TerriLois Gregory, Brett Hildabrand, Greg Smith, Kelly Meigs, Amanda Grosserode, Jana Goodman, Lance Y. Kinzer, Mitch Holmes, Marc Rhoades, Kasha Kelley, Dan Collins, and Tom Arpke.

In the House, there were a number of members who voted in favor of the STAR bonds program in spite of proclamations of fiscal conservatism. Many of these members are looking for ways to reduce the growth of Kansas government and taxes. Some are in high leadership positions. Yet, somehow they didn’t see the harm in voting for the STAR bonds program. This list includes Steve Brunk of Wichita; Richard Carlson of St. Marys and Chair of the House Taxation Committee; Mario Goico of Wichita; Phil Hermanson of Wichita; Kyle Hoffman of Coldwater; Steve Huebert of Valley Center; Dan Kerschen of Garden Plain; Mike Kiegerl of Olathe; Marvin Kleeb of Overland Park and vice-chair of House Taxation Committee; Brenda Landwehr of Wichita; Peggy Mast of Emporia, who is Assistant Majority Leader; Mike O’Neal of Hutchinson, who is Speaker of the House; Les Osterman of Wichita; Joe Patton of Topeka; Scott Schwab of Olathe; Arlen Siegfreid of Olathe, who is Majority Leader; Gene Suellentrop of Wichita; and Brian Weber of Dodge City.

In the Senate, these votes came from Terry Bruce of Hutchinson; Dick Kelsey of Goddard, Jeff King of Independence; Garrett Love of Montezuma; and Susan Wagle of Wichita.

Tagged as: Capitalism, Economic development, Free markets, Interventionism, Kansas legislature, Kansas state government, STAR bonds, Subsidy, Taxation

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Sedgwick County migration

by Bob Weeks on April 18, 2012

Using statistics from the Internal Revenue Service, Kansas Policy Institute has found that Sedgwick County is losing people and income to other states.

The data is based on IRS migration data, which tracks when taxpayers change addresses.

From 2005 to 2010, Sedgwick County lost 1,547 exemptions to other states. Exemptions are a surrogate for the number of people.

For the same period, Sedgwick County lost $163 million of income (adjusted gross income) earned by people who moved to other states.

Tagged as: Economic development, Sedgwick county government

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Kansas should improve economic climate, rely less on incentives

by Guest Author on April 12, 2012

By Maurice McTigue, Vice President and Distinguished Visiting Scholar, Mercatus Center at George Mason University. He participated in the forum produced by Kansas Policy Institute this week.

Kansas policymakers left for recess on the heels of a very disappointing jobs report last week. According to the latest jobs report, the state ranked fourth in terms of jobs lost with a 5,700 decrease in employment. As legislators prepare to return in a couple weeks, they should consider what’s best for the Kansas economy. That is, pursue goals that make Kansas a better place to do business than any other state.

Kansas has a history of giving incentives to attract business. Despite this, businesses are leaving, and taking jobs and revenue with them. Legislators should look at all the hoops businesses must go through in Kansas and decide what hurdles can be removed to eliminate uncertainty and make the state more attractive for investment. Instead of asking what subsidy Kansas can give firms to get them to do business here, policymakers should ask existing business what it needs to operate more efficiently and effectively.

Certainty is a key component to sound economic development because it allows businesses to make permanent plans and decisions.

If Kansas had an economic climate that made it the best place to do business, regardless of outside contracts, defense restructuring, or inside subsidies, Boeing might not be leaving in 2013. If businesses understand the tax and regulatory landscape, and can count on it to be permanent, they can make good decisions. Outside factors are offset by a predictable and stable economic climate that allows them to be profitable. Certainty keeps jobs in Kansas creating revenue, not incentives.

The problem with incentives is that they are not free, and result in a cost to someone else since they come from tax revenue. The referendum on the Ambassador Hotel tax exemption in Wichita illustrates this lose-lose situation. If the hotel needs a tax credit to do business, it was likely not competitive in the first place. Businesses and taxpayers naturally oppose unfair advantages, and once subsidies are gone, the business may fail anyway.

To compete, Kansas should first think about businesses and people trading in the local economy and what permanent changes it would take to expand those businesses, instead of offering subsides. For sustainable economic growth, it is better to have 1,000 local businesses hire one extra person than use an incentive to bring in one business that may hire 1,000. Those jobs stay because of the permanent and positive business climate generating revenue, as opposed to jobs resulting from incentives that may leave and cost revenue dollars.

Once achieved, economic competitiveness is not something that can then be forgotten. A major role for any economic development agency should be vigilance in seeking competitive improvements. This includes monitoring processes and procedures that make the state unproductive and advocate for their removal or reform.

Key battles on taxes and the budget lie ahead; jobs and Kansas’s future are at stake. Let’s hope decision makers see fit to avoid merely doing things as they have always been done. Most incentives or subsidies are payments to compensate for things in the economy that need to be fixed, but nobody wants to make the necessary changes. A better economic development program is cultivating a climate where it is unnecessary to offer any special incentives to encourage business and investors to come to your state.

Tagged as: Economic development, Free markets, Interventionism, Kansas Policy Institute, Kansas state government, Subsidy, Taxation, Wichita city government

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Thinking beyond stage one in economic development for Wichita

by Bob Weeks on April 9, 2012

Critics of the economic development policies in use by the City of Wichita are often portrayed as not being able to see and appreciate the good things these policies are producing, even though they are unfolding right before our very eyes. The difference is that some look beyond the immediate — what is seen — and ask “And then what will happen?” — looking for the unseen.

Thomas Sowell explains the problem in a passage from the first chapter of Applied economics: thinking beyond stage one:

When we are talking about applied economic policies, we are no longer talking about pure economic principles, but about the interactions of politics and economics. The principles of economics remain the same, but the likelihood of those principles being applied unchanged is considerably reduced, because politics has its own principles and imperatives. It is not just that politicians’ top priority is getting elected and re-elected, or that their time horizon seldom extends beyond the next election. The general public as well behaves differently when making political decisions rather than economic decisions. Virtually no one puts as much time and close attention into deciding whether to vote for one candidate rather than another as is usually put into deciding whether to buy one house rather than another — or perhaps even one car rather than another.

The voter’s political decisions involve having a minute influence on policies which affect many other people, while economic decision-making is about having a major effect on one’s own personal well-being. It should not be surprising that the quantity and quality of thinking going into these very different kinds of decisions differ correspondingly. One of the ways in which these decisions differ is in not thinking through political decisions beyond the immediate consequences. When most voters do not think beyond stage one, many elected officials have no incentive to weigh what the consequences will be in later stages — and considerable incentives to avoid getting beyond what their constituents think and understand, for fear that rival politicians can drive a wedge between them and their constituents by catering to public misconceptions.

The economic decisions made by governing bodies like the Wichita City Council have a large impact on the lives of Wichitans. But as Sowell explains, these decisions are made by politicians for political reasons.

Sowell goes on to explain the danger of stopping the thinking process at stage one:

When I was an undergraduate studying economics under Professor Arthur Smithies of Harvard, he asked me in class one day what policy I favored on a particular issue of the times. Since I had strong feelings on that issue, I proceeded to answer him with enthusiasm, explaining what beneficial consequences I expected from the policy I advocated.

“And then what will happen?” he asked.

The question caught me off guard. However, as I thought about it, it became clear that the situation I described would lead to other economic consequences, which I then began to consider and to spell out.

“And what will happen after that?” Professor Smithies asked.

As I analyzed how the further economic reactions to the policy would unfold, I began to realize that these reactions would lead to consequences much less desirable than those at the first stage, and I began to waver somewhat.

“And then what will happen?” Smithies persisted.

By now I was beginning to see that the economic reverberations of the policy I advocated were likely to be pretty disastrous — and, in fact, much worse than the initial situation that it was designed to improve.

Simple as this little exercise may sound, it goes further than most economic discussions about policies on a wide range of issues. Most thinking stops at stage one.

We see stage one thinking all the time when looking at government. In Wichita, for example, a favorite question of city council members seeking to justify their support for government intervention such as a tax increment financing (TIF) district or some other form of subsidy is “How much more tax does the building pay now?” Or perhaps “How many jobs will (or did) the project create?”

These questions, and the answers to them, are examples of stage one thinking. The answers are easily obtained and cited as evidence of the success of the government program.

But driving by a store or hotel in a TIF district and noticing a building or people working at jobs does not tell the entire story. Using the existence of a building, or the payment of taxes, or jobs created, is stage one thinking, and no more than that.

Fortunately, there are people who have thought beyond stage one, and some concerning local economic development and TIF districts. And what they’ve found should spur politicians and bureaucrats to find ways to move beyond stage one in their thinking.

An example are economists Richard F. Dye and David F. Merriman, who have studied tax increment financing extensively. Their article Tax Increment Financing: A Tool for Local Economic Development states in its conclusion:

TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable.

So TIFs are good for the favored development that receives the subsidy — not a surprising finding. What about the rest of the city? Continuing from the same study:

If the use of tax increment financing stimulates economic development, there should be a positive relationship between TIF adoption and overall growth in municipalities. This did not occur. If, on the other hand, TIF merely moves capital around within a municipality, there should be no relationship between TIF adoption and growth. What we find, however, is a negative relationship. Municipalities that use TIF do worse.

We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.

In a different paper (The Effects of Tax Increment Financing on Economic Development), the same economists wrote “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not. … These findings suggest that TIF trades off higher growth in the TIF district for lower growth elsewhere. This hypothesis is bolstered by other empirical findings.”

Here we have an example of thinking beyond stage one. The results are opposite of what one-stage thinking produces.

Some city council members are concerned about creating jobs, and are swayed by the promises of developers that their establishments will employ a certain number of workers. Again, this thinking stops at stage one. But others have looked farther, as has Paul F. Byrne of Washburn University. The title of his recent report is Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth, and in its abstract we find this conclusion regarding the impact of TIF on jobs:

Increasingly, municipal leaders justify their use of tax increment financing (TIF) by touting its role in improving municipal employment. However, empirical studies on TIF have primarily examined TIF’s impact on property values, ignoring the claim that serves as the primary justification for its use. This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.

While this research might be used to support a TIF district for industrial development, TIF in Wichita is primarily used for retail development. And, when thinking beyond stage one, the effect on employment — considering the entire city — is negative.

It’s hard to think beyond stage one. It requires considering not only the seen, but also the unseen, as Frederic Bastiat taught us in his famous parable of the broken window. But over and over we see how politicians at all levels of government stop thinking at stage one. This is one of the many reasons why we need to return as much decision-making as possible to the private sector, and drastically limit the powers of politicians and governments.

Tagged as: Capitalism, Economic development, Economics, Interventionism, Politics, Subsidy, Tax increment financing, TIF districts, Wichita city council, Wichita city government

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Southfork TIF should, again, be rejected

by Bob Weeks on April 9, 2012

Tomorrow the Wichita City Council considers the formation of a tax increment financing (TIF) district in south Wichita. Known as the Southfork TIF District, the developer is Wichitan Jay Maxwell. His agent is Tim Austin.

The TIF proposal has been revised since it was approved by the Wichita city council last December, but rejected by the Sedgwick County Commission in January. Like all TIF districts, this form of government intervention in the economy does more harm than good, and should be rejected.

TIF is not free money

Supporters of TIF usually contend that TIF has no cost. This is not the case. This new development will consume fire, police, and other governmental services, but will not contribute its share of property taxes to pay for these. Instead, some portion of the property taxes will be redirected back to the TIF district to benefit the developers. Others will have to pay taxes to make up this deficit, or will have to accept a reduced level of service. See Tax increment financing is not free money.

There’s also the “but-for” argument: without the benefit of TIF, the project will not be built, and therefore no tax revenue would be received. It’s a powerful argument, if it were really true. But those who seek this type of government funding can always find a way to make their financial projections “prove” the need for TIF money. Governments then take them at their word.

We might ask ourselves this question: If TIF is truly without cost, why not have more TIF districts? Why not offer TIF for all new development?

The role of politics

Maxwell and Austin have some queer ideas regarding the nature of markets and politics. In an email message to supporters of the Southfork TIF, Austin wrote: “There are many underlying political winds working against the Southfork TIF.” In another email message, he wrote: “As I mentioned previously, there are underlying political interests at play that appear to be making this a political matter as opposed to a vote the merits of the TIF, the project, and South Wichita.”

Austin has it exactly backwards. It is he and Maxwell who are arguing for using the political process to enrich themselves. Those such as myself who oppose government interventions like TIF are arguing against using the political process — against making this a political matter, that is.

The supporters of government intervention such as TIF often make claims of “market failure.” They claim that the free market system has failed to deliver what they want, so they make appeals to government to intervene. This moves society away from markets and civil society and toward politics and cronyism.

In reality, markets do quite well in allocating the resources of our economy, despite the claims of many, including historians who should know better. There are those who may feel they’re not getting everything they deserve through the market process, but that’s no reason to introduce the tremendous inefficiencies and distortions that the political process brings with it. In his book How Capitalism Saved America: The Untold History of Our Country, From the Pilgrims to the Present, Thomas J. DiLorenzo explained:

Most historians also uncritically repeat the claim that government subsidies were necessary to building America’s transcontinental railroad industry, steamship industry, steel industry, and other industries. But while clinging to this “market failure” argument, they ignore (or at least are unaware of) the fact that market entrepreneurs performed quite well without government subsidies. They also ignore the fact that the subsidies themselves were a great source of inefficiency and business failure, even though they enriched the direct recipients of the subsidies and advanced the political careers of those who dished them out.

Political entrepreneurs and their governmental patrons are the real villains of American business history and should be portrayed as such. They are the real robber barons.

The idea of “market failure” is used by the promoters of this TIF district. They claim that only government — that is, politics — can make things right, at least according to their vision.

Political entrepreneurs, by the way, are those who seek their profits through government, not markets. Instead of seeking to create products and services that please customers, they seek to please politicians and bureaucrats. This move away from market entrepreneurship to political entrepreneurship is especially sad in Wichita, where we have a proud tradition of market entrepreneurs with famous names: Lloyd Stearman, Walter Beech, Clyde Cessna, W.C. Coleman, Albert Alexander Hyde, Dan and Frank Carney, Fred C. Koch, and many others.

Do TIF districts work?

In deciding whether TIF districts “work” we must come to an agreement of what “work” means. Generally, most supporters of TIF — besides the obvious motivations of the developers who are directly enriched by them — claim increased development and jobs.

But there’s plenty of evidence to the contrary.

As far as increased development: Yes, that generally happens within the TIF district. But what about the overall city? The answer is that TIF is harmful.

Regarding the effect of tax increment financing (TIF) districts on economic development, economists Richard F. Dye and David F. Merriman have studied the issue extensively. Their paper The Effects of Tax Increment Financing on Economic Development bluntly states the overall impact of TIF: “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not.”

Later in the same paper the authors conclude: “These findings suggest that TIF trades off higher growth in the TIF district for lower growth elsewhere. This hypothesis is bolstered by other empirical findings.” More on their work is at Tax increment financing (TIF) and economic growth.

Others may support TIF for its purported positive impact on employment. Sure, it’s easy to drive by a TIF district and see people at work. But that doesn’t tell the whole story.

One person who looked at the effect of TIF on employment in the entire city is economist Paul F. Byrne. He concluded this: “Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment.”

More on his work is at Does tax increment financing (TIF) deliver on its promise of jobs?

We must conclude that TIF does not meet the goals of increased development and/or jobs, if we consider the impact on everyone. What we’re left with is the well-known problem that public choice economics — the economics of politics — has described: Concentrated benefits and dispersed costs. It’s the reason why those who seek enrichment at Wichita City Hall and other governments make so many political campaign contributions.

This particular applicant

We also need to look at the characteristics of this applicant. The Wichita Business Journal reported this regarding a company Maxwell owned:

Pixius proposes to repay, over a 10-year period, $1.3 million of a $6.4 million loan from the U.S. Department of Agriculture’s Rural Utilities Service, according to court documents. The loan was part of a 2002 Farm Bill pilot program that loaned more than $180 million to ISPs to expand Internet service to rural areas.

“To my memory … Pixius is the only one (to receive a loan) that’s had to file bankruptcy to work out of its situation,” says Claiborn Crain, USDA spokesman.

When the government helped out Maxwell in the past, it cost taxpayers $5.1 million in a loan discharged in bankruptcy. His company is set apart from other similar companies in that, according to the USDA spokesman, only Maxwell’s declared bankruptcy.

I suggest that Maxwell has had his turn at the government funding trough. Taxpayers can’t afford to give him another.

Tagged as: Economic development, Economics, Entrepreneurship, Interventionism, Tax increment financing, TIF districts, Wichita city council, Wichita city government

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Kansas Policy Institute to host economic development summit

April 9, 2012

A summit on local economic development will be held in Wichita in April.

Tagged as: Economic development, Kansas Policy Institute, Kansas state government, Mike Pompeo, Sedgwick county government, Wichita city government

Economic development

Cronyism Undermines the Beneficial Role of Business in Society

More evidence of failure

Kansas among the states

TIF is not free money

The role of politics

Do TIF districts work?

This particular applicant

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