Tag Archives: Economic development

Spirit Aerosystems tax relief

Wichita’s largest employer asks to avoid paying millions in taxes, which increases the cost of government for everyone else, including young companies struggling to break through.

This week the Wichita City Council will consider offering Spirit Aerosystems economic development incentives that will allow the company to avoid paying some $45 million in taxes. This will be accomplished through the authorization of $280 million of Industrial Revenue Bonds. 1

Industrial Revenue Bonds are a vehicle for generating and conveying tax exemptions. 2 In the IRB program, government is not lending money, and Wichita taxpayers are not at risk if the bonds are not repaid. In fact, in the present case the applicant company plans to purchase the bonds itself, according to city documents. Instead, the purpose of the IRB process is to allow Spirit to escape paying property taxes and sales taxes.

Cost of Spirit Aerosystems incentives.
Cost of Spirit Aerosystems incentives.
Usually the agenda packet the city prepares for council members and the public contains the amount of tax expected to be foregone. For this item that summary is missing, and the sales tax exemption is not mentioned. I have prepared a table summarizing data from the analysis prepared for the city by the Center for Economic Development and Business Research at Wichita State University.

Of note, the share of the cost of the incentives born by the City of Wichita is small, slightly less than one percent. The bulk of the cost is born by the State of Kansas, with the Derby School District and Sedgwick County facing smaller shares of the cost.

Also, the city is forcing a decision on a neighboring jurisdiction that it would not accept for itself, unless it uses one of many exceptions or loopholes. This adverse decision is forced upon the Derby School District. It faces a benefit-cost ratio of 1.16 to 1, which is below the city’s standard of 1.30 to 1, unless an exception is cited. 3 The Derby School District is not involved in this action and has no ability to affect the issuance of these bonds, should it desire to.

Besides this, the granting of these tax breaks calls into question the validity of taxation. If a company can be excused from tens of millions of dollars in taxes, can we say there is equal treatment under law?

Effect on young companies

When large companies receive tax abatements and exemptions, others must pay the cost of government. In particular, small and young business firms are usually not eligible for incentive programs like that being offered to Spirit, and therefore must bear a disproportional share of the cost of government. This is an important consideration, as Wichita is relying on entrepreneurship as a principle method of growing its economy.

The cost of these tax abatements burdens 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. This action — the award of incentives to an established company — is harmful to the Wichita economy for its strangling effect on entrepreneurship and young companies. As this company and others receive incentives and escape paying taxes, others have to pay.

There’s plenty of evidence that entrepreneurship, in particular young business firms, are the key to economic growth. But Wichita’s economic development policies, as evidenced by this action, are definitely stacked against the entrepreneur. As Wichita props up its established industries, it makes it more difficult for young firms to thrive.

Additionally, Wichita relies on targeted investment in our future. Our elected officials and bureaucrats believe they have the ability to select which companies are worthy of public investment, and which are not. But as we’ve seen in the unfortunate news emanating from several local companies, this is not the case. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)

Taxes for you, but not for me

Based on documents supplied by the city, Spirit will avoid paying $6,620,025 in sales tax through its participation in the IRB program. Kansans should be aware that our state has one of the highest sales taxes in the nation on groceries. The effect of this falls disproportionally on low-income households. 4

Spirit Aerosystems contribution to Yes Wichita

While Spirit seeks to avoid paying millions in sales tax, it campaigned for ordinary Wichitans to pay more sales tax. When Wichita placed a one cent city sales tax on the ballot in November 2014, Spirit Aerosystems contributed $10,000 to the group campaigning in favor of the sales tax. 5 Spirit’s immediate past president contributed $10,000 to the same effort.

Small business

This week American City Business Journals presented the results of a study of small business vitality in cities. 6 Wichita ranked at number 104 out of 106 cities studied. Awarding incentives to large companies places small business at a disadvantage. Not only must small business pay for the cost of government that incentivized companies avoid, small companies must also compete with subsidized companies for inputs such as capital and labor.

Finally, research has found that the pursuit of large companies doesn’t produce the desired growth: “The results show that large firms fail to produce significant net benefits for their host communities, calling into question the high-stakes bidding war over jobs and investment.” 7


Notes

  1. City of Wichita. Agenda for May 3, 2016. Available at wichita.gov/Government/Council/Agendas/05-03-2016%20City%20Council%20Agenda%20Packet.pdf.
  2. Weeks, Bob. Industrial revenue bonds in Kansas. Available at wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/.
  3. Sedgwick County/City of Wichita Economic Development Policy. Available at www.wichita.gov/Government/Departments/Economic/EconomicDevelopmentDocuments/City%20of%20Wichita%20Economic%20Development%20Policy.pdf.
  4. Weeks, Bob. Wichita sales tax hike harms low income families most severely. Available at wichitaliberty.org/wichita-government/wichita-sales-tax-hike-harms-low-income-families-severely/.
  5. YES WICHITA INC. Receipts and Expenditures Report. December 30, 2014. On file at Sedgwick County Election Office.
  6. Wichita Business Journal. The State of Small Business: Wichita scores low in small biz vitality. Available at www.bizjournals.com/wichita/print-edition/2016/04/29/the-state-of-small-business-wichita-scores-low-in.html.
  7. William F. Fox and Matthew N. Murray, “Do Economic Effects Justify the Use of Fiscal Incentives?” Southern Economic Journal, Vol. 71, No. 1, 2004, p. 79.

WichitaLiberty.TV: Trump and the Wichita Eagle, property rights and blight, teachers union, and capitalism

In this episode of WichitaLiberty.TV: Was it “Trump” or “Bernie” that incited a fight, and how does the Wichita Eagle opine? Economic development in Wichita. Blight and property rights. Teachers unions. Explaining capitalism. View below, or click here to view at YouTube. Episode 117, broadcast April 24, 2016.

Wichita doesn’t have this

A small Kansas city provides an example of what Wichita should do.

For several years, the Kansas city of Lawrence has published an economic development report letting citizens know about the activities of the city in this area. The most recent edition may be viewed here.

The Lawrence report contains enough detail and length that an executive summary is provided. This is the type of information that cities should be providing, but the City of Wichita does not do this.

It’s not like the City of Wichita does not realize the desirability of providing citizens with information. In fact, Wichitans have been teased with the promise of more information in order to induce them to vote for higher taxes. During the campaign for the one cent per dollar Wichita city sales tax in 2014, a city document promised this information regarding economic development spending if the tax passed: “The process will be transparent, with reports posted online outlining expenditures and expected outcomes.” (This is what Lawrence has been doing for several years.)

The “Yes Wichita” campaign promised, “Reports will be measured and reported publicly.” (But “Yes Wichita” was a campaign group and not an entity whose promises can be relied on, and can’t be held accountable for failure to perform.)

These are good ideas. The city should implement them even though the sales tax did not pass. If it’s good for citizens to have this type of information if the sales tax had passed, it’s good for them to know in any circumstance, because the city (and other overlapping governmental jurisdictions) still spends a lot on economic development.

Why is this information not available? Is the communications staff overwhelmed, with no time to provide this type of information?

During the sales tax campaign Wichita city staff had time to prepare news releases with titles like “City to Compete in Chili Cook-off” and “Jerry Seinfeld Returns to Century II.”

Since then the city has hired additional communications staff, adding a Strategic Communications Director last spring.

Wichitans need to know that besides living in a city that doesn’t provide much information about its operations, the city believes it is doing a good job. Here is a Wichita city news release from 2013:

“The City Council has stressed the importance of transparency for this organization,” City Manager Robert Layton said. “We’re honored to receive a Sunny Award and we will continue to empower and engage citizens by providing information necessary to keep them informed on the actions their government is taking on their behalf.”

When I’ve expressed frustration with the process of asking for information from the city, communications staff told me this: “I should note that the City has won multiple awards for openness and citizen participation, but City leaders recognize this work is never done. They strive each and every day to become more open and transparent and will continue to do so.”

Wichitans need to wonder:

  • Why can’t we have the same information about our city government that residents of Lawrence have?

  • Was transparency promised only to get people to vote for the sales tax?

  • Is transparency really a governing principle of our city?

What else can Wichita do for downtown companies?

With all Wichita has done, it may not be enough.

Within a month, these two headlines appeared in the opinion pages of the Wichita Eagle:

Investment in downtown Wichita is impressive 1

State and local leaders need to help meet Cargill’s needs 2

The second headline was in response to the news story “Cargill plans to move its Wichita headquarters — but where?” 3 In this story, Carrie Rengers reports “Cargill is looking to move its Wichita headquarters, but whether that’s within downtown, where it already is, or outside of it or even outside of Kansas is unclear. … City and state officials are working in full gear to make sure Wichita — downtown specifically — is the option Cargill selects.”

Rengers reports that Wichita city officials say no specific incentives have been offered to Cargill, but “any incentives likely would involve infrastructure help, such as with parking, or assistance with easing the process for a new building, such as with permitting.” Wichita Mayor Jeff Longwell says “cash incentive won’t be an option,” according to Rengers.

A Cargill official says that the company needs to attract millennials and younger people, who are not attracted to “traditional office space and office-type buildings.”

Now, consider the first opinion headline: “Investment in downtown Wichita is impressive.” In this op-ed, Phillip Brownlee writes “It’s encouraging that investment in downtown Wichita is continuing — and that it is mostly privately funded. A vibrant downtown is important to the city’s image and to attracting and retaining young adults. More than $1 billion in private and public investment has occurred downtown in the past decade. About $675 million of that investment has been privately funded, and $411 million has been public projects, according to Wichita Downtown Development Corp.”

Brownlee goes on to note other investments, such as 800 new apartment units “in the works.”

On the importance of downtown, Brownlee writes “City leaders have long recognized the value of a healthy downtown. Besides the symbolic importance of not having a lot of empty buildings, many young adults prefer an urban environment. That makes downtown important even for businesses not located there, because it can help or hurt their ability to recruit and retain young professionals.”

I see a discontinuity. Our city’s leaders — opinion, elected, and bureaucratic — brag about all the investment in downtown Wichita, public and private, yet it doesn’t seem to be enough to retain a major Wichita employer in downtown.

At least editorialist Rhonda Holman recognizes the problem in her column: “It’s concerning that Cargill’s stated intentions to relocate and consolidate have not included a commitment to remain downtown or even in Wichita or Kansas.” What is her solution? “Elected and business leaders need to be creative and assertive in helping Cargill meet its needs.”

I share Holman’s concern. It’s very troubling that with $411 million in private investment over the past decade, downtown Wichita still isn’t attractive enough to retain Cargill, if the company’s intent to move is real and genuine. And advising the same group of people who have been in power during the decline of the Wichita economy to be “creative and assertive” is a solution?

What’s even more disconcerting is that the person who has overseen much of this downtown spending has been promoted. Now Jeff Fluhr of Wichita Downtown Development Corporation is president of Greater Wichita Partnership, with responsibility “to grow the regional economy.”

Forgive me if I’m underwhelmed.

Regulation
One of the things that may be offered to Cargill, according to Rengers, is “assistance with easing the process for a new building, such as with permitting.” This is a big red flag on a very tall flagpole. If the city has regulations so onerous that they are a consideration as to whether to locate in Wichita, this is something that must be fixed immediately. But the instinct of the Wichita City Council and city bureaucrats is to create more regulations covering everything from the striping of parking lots to the personal hygiene of taxi drivers.

Cash incentives
Mayor Longwell says there will be no cash incentives offered to Cargill. Instead, something like help with parking may be offered. This might take the form of building a parking garage for Cargill. We should ask: What is the difference between giving cash to Cargill and building a parking garage for Cargill’s use? There really isn’t a meaningful difference, except for Cargill. That’s because cash incentives are taxable income. Free use of a parking garage isn’t taxable. 4 5

Further, Cargill may qualify for PEAK, or Promoting Employment Across Kansas.6 This program allows companies to retain 95 percent of the payroll withholding tax of employees. The original intent of this program was to lure companies to locate in Kansas, but in recent years the program has been expanded to include incentivizing companies to remain in Kansas. While this is a state program and not a city program under the mayor’s control, PEAK benefits are more valuable than cash.


Notes

  1. Brownlee, Phillip. Investment in downtown Wichita is impressive. Wichita Eagle. March 5, 2016. Available at www.kansas.com/opinion/editorials/article64129977.html.
  2. Holman, Rhonda. State and local leaders need to help meet Cargill’s needs. Wichita Eagle. April 1, 2016. Available at www.kansas.com/opinion/opn-columns-blogs/now-consider-this/article69534982.html.
  3. Rengers, Carrie. Cargill plans to move its Wichita headquarters — but where? Wichita Eagle. March 29, 2016. Available at www.kansas.com/news/business/biz-columns-blogs/carrie-rengers/article68700517.html.
  4. Journal of Accountancy, (2009). Location Tax Incentive Not Federal Taxable Income. Available at: www.journalofaccountancy.com/issues/2009/apr/locationtaxincentive.html.
  5. American Institute of CPAs, (2015). Federal Treatment of State and Local Tax Incentives. Available at: www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2008/CorpTax/Federaltreat.jsp.
  6. Weeks, Bob. In Kansas, PEAK has a leak. Voice For Liberty in Wichita. Available at wichitaliberty.org/kansas-government/kansas-peak-leak/.

Wichita economic development and capacity

An expansion fueled by incentives is welcome, but illustrates a larger problem with Wichita-area economic development.

Last week a Wichita company received economic development incentives in conjunction with an expansion. This is the third incentive the company has received in four years. The incentives are forgiven property taxes and sales taxes. 1 Simply, the company is allowed to skip paying many of the same taxes that everyone else must pay, including low-income households paying sales tax on groceries.

While the expansion of this company is welcome news, the hoopla surrounding it shows how we can’t rely on government intervention to pull Wichita out of its slump. Here are some figures.

According to the Bureau of Labor Statistics, Wichita metropolitan area employment is 14,500 less than its peak in 2008. Manufacturing jobs are down by 23,600 from the peak in 1998, or down by 15,400 from 2008. 2

In 2012 when this company requested an incentive, its employment was given as 110. 3 Current employment is given as 130, and by 2021, the company is required to employee 188 people. 4

So if everything goes as planned, 5 three economic development incentives programs will boost a company’s employment from 110 to 188. That’s an increase of 78 jobs over nine years, or about nine jobs per year.

If we look at these jobs in the larger context, we see that these jobs represent 0.5 percent of the jobs lost in the Wichita area since 2008. If we are relying on these jobs to spur a renaissance of manufacturing in Wichita, they represent 0.3 percent of manufacturing jobs lost since its peak.

This company and these three economic development incentives are not the only efforts the city has made. Other incentives to other companies have created jobs. But this company is considered a significant and major success. The awarding of this inventive was evidently such an uncommon event that it merited a large article in the Wichita Eagle. In his remarks, according to meeting minutes, Wichita Mayor Jeff Longwell said “this is how we move Wichita forward” and “this is how we grow our businesses here in Wichita and help them be successful.”

The jobs are welcome. But this incident and many others like it reveal a capacity problem, which is this: We need to be creating nine jobs every day in order to make any significant progress in economic growth. If it takes this much effort to create 78 jobs over nine years, how much effort will it take to create the many thousands of jobs we need to create every year?

A related problem is that we don’t know how many jobs are created by the city’s economic development efforts. As part of a campaign for a city sales tax in 2014, the city promised a web site to track the progress of jobs created. The sales tax didn’t pass, but the city still engages in economic development, and still does not track results. At least not publicly, and when I’ve asked, the results provided have been sketchy and incomplete.

On top of this, we don’t know if the incentives were necessary to enable the company to expand. Usually city documents state that incentives are necessary to make economic activity “viable.” No such claim was made in the documents supporting this incentive.

The large amount of bureaucratic effort and cost spent to obtain a relatively small number of jobs lets us know that we need to do something else in order to grow our local economy. We need to create a dynamic economy, focusing our efforts on creating an environment where growth can occur organically without management by government. Dr. Art Hall’s paper
Embracing Dynamism: The Next Phase in Kansas Economic Development Policy provides much more information on the need for this.

Another thing we can do to help organically grow our economy and jobs is to reform our local regulatory regime. Recently Kansas Policy Institute released a study of regulation and its impact at the state and local level. This is different from most investigations of regulation, as they usually focus on regulation at the federal level.

Business Perceptions of the Economic Impact of State and Local Government Regulation coverThe study is titled “Business Perceptions of the Economic Impact of State and Local Government Regulation.” It was conducted by the Hugo Wall School of Public Affairs at Wichita State University. Click here to view the entire document.

Our civic leaders say that our economic development efforts must be reformed. Will the path forward be a dynamic economy and reformed regulation? Or will it be more bureaucracy, handfuls of jobs at a time?


Notes

  1. Wichita City Council meeting agenda, April 5, 2016, p. 12.
  2. According to the Bureau of Labor Statistics, the peak of nonfarm employment in the Wichita metropolitan area was in 2008, where employment averaged 310,500. For 2015, employment averaged 296,000. That’s a loss of 14,500 jobs. For manufacturing jobs, the peak was 1998, when employment in this field was 75,900. In 2008 the figure was 67,700 jobs, and in 2015, 52,300 jobs. This is a loss of 23,600 jobs from manufacturing’s peak, or of 15,400 jobs from Wichita peak employment in 2008.
  3. Wichita City Council meeting agenda, September 11, 2012, p. 45
  4. Wichita City Council meeting agenda, April 5, 2016, p. 12.
  5. So far, employment is not progressing as planned. In the 2012 agenda item, it was said that employment would rise by 50 jobs over the next five years, which you by 2017. Current employment, according to the current city council agenda, is 130, which is 30 jobs short. The deadline for this projection has not yet arrived.

Wichita TIF district disbands; taxpayers on the hook

A real estate development in College Hill was not successful. What does this mean for city taxpayers?

ParkstoneSeeking to promote the redevelopment of land northeast of Douglas and Hillside, the City of Wichita entered into agreements with Loveland Properties, LLC, College Hill Urban Village LLC, and CHUV Inc. The original plans were grand: A Northeast Brownstone Complex located at the northeast corner of Victor and Rutan, a Condominium Tower and Brownstone Complex, a West Brownstone Complex, and the South Retail/Residential Complex. A city analysis in 2007 projected that by 2010 the value of these projects would be $61,817,932.

Unfortunately, this project did not proceed as planned. The Northeast Brownstone Complex was built, and nothing else. Those brownstone condominiums proved difficult to sell. The project held great promise, but for whatever reasons things did not work as planned, and the city has lost an opportunity for progress.

The questions now are: What is the impact on taxpayers? Is there anything to learn as the city moves forward with other public-private partnerships?

City documents tell the story of this project, if you know how to read between the lines. 1

City document says: “The City financed $3,685,000 in TIF bonds in 2014.”
What it means to you: Tax increment financing, or TIF, is a method of economic development financing whereby additional property taxes (the “increment”) are redirected back to a real estate development. In this case, the city sold these bonds and gave the proceeds to the developer. Then — according to plan — as property values rose, the correspondingly higher property taxes generated by the development would pay off the bonds. Except, property values did not rise. So who pays? According to the bond documents, 2 “The full faith, credit and resources of the Issuer are hereby pledged for the payment of the principal of and interest on this Bond.” The Issuer is the City of Wichita, and the resources the city has to pledge are taxes it collects from its taxpayers.

ParkstoneCity document says: “An additional amount of tax exempt expenses related to the project, totaling $1,785,000, were paid off by the Finance Department using cash from the Debt Service Fund.”
What it means to you: These costs were to be paid by the developer, but the developer did not pay. So, the city’s Debt Service Fund was used. The Debt Service Fund gets its money from taxpayers, and this money is being used to pay off a debt owed by a private person. This is necessary because the debt payment is guaranteed by the city, which in turns means it is guaranteed by the taxpayers. If not spent to satisfy the debt for this project, this money might have been used to pay off other city debt, reduce taxes, pay for more police and firemen, fix streets, and satisfy other needs.

City document says: “The City will be responsible for maintenance and property taxes for the property until the property can be sold.”
What it means to you: More expense for city taxpayers.

ParkstoneCity document says: “Any tax increment generated from existing and future development will be used to repay TIF bonds. Staff does not expect remaining TIF revenue to be sufficient to repay the outstanding debt.”
What it means to you: As explained above, taxpayers are on the hook for these bonds.

The original agreement with the developer says: “In addition to all the terms, conditions and procedures for fulfilling these obligations, the Development Agreement also provides for a Tax Increment Shortfall Guaranty in which the developer and other private entities with ownership interest in the project are required to pay the City any shortfall in TIF revenue available to pay debt service on TIF bonds.”
What it means to you: Nothing. It should mean something. The city tells us its participation in these ventures is free of risk to citizens. That’s because recipients of incentives like TIF pledge to hold the city harmless if things don’t work out as planned. In this case, if the TIF district revenue is not enough to pay the TIF district bonds, the developer has pledged to pay the difference. But it is unlikely that the city will be able to collect on the promise made by this developer.

But there may be good news: The first phase of the project, the brownstones, is now owned by Legacy Bank. Hopefully, the city will be able to collect the TIF shortfall from this new owner so that taxpayers don’t have to pay.

The project plan formulated by the city says: “Net tax increment revenue is available to pay debt service on outstanding general obligation bonds issued to finance eligible project costs.” This statement is true if everything works as planned. But real estate development is risky. Things may not work out as planned. City documents don’t tell taxpayers this. Instead, city leaders present these projects as though everything will work out as planned.

There is some undeveloped land that was to be used in future phases of the project. But even empty land is harmful to city taxpayers, as city documents state: “The developer has not paid property taxes on the parcels from 2010 to 2015, resulting in $400,080 in current and delinquent taxes owed. The City will now be responsible for the taxes.”


Notes

  1. Wichita City Council Agenda Packet, March 15, 2016. Available here.
  2. From the Additional Provisions of the series 813 bonds: General Obligations. The Bonds constitute general obligations of the Issuer payable as to both principal and interest, in part from special assessments levied upon the property benefited by the construction of the Improvements (as said term is described in the Bond Resolution), in part from incremental property tax revenues derived in certain tax increment financing districts within the Issuer and, if not so paid, from ad valorem taxes which may be levied without limitation as to rate or amount upon all the taxable tangible property, real and personal, within the territorial limits of the Issuer, the balance being payable from ad valorem taxes which may be levied without limitation as to rate or amount upon all the taxable tangible property, real and personal, within the territorial limits of the Issuer. The full faith, credit and resources of the Issuer are hereby pledged for the payment of the principal of and interest on this Bond and the issue of which it is a part as the same respectively become due

Sedgwick County economic development incentives status report for 2015

Sedgwick County has released its annual report on the performance and status of economic development incentives for 2015.

Section I, titled “Summary Totals for Loans & Grants Executed 2005 — 2015,” holds data that must be interpreted carefully. The report shows a total of $11,682,500 in loans and grants. Of that total, $5,000,000 was advanced to Cessna in 2008 to help with the Columbus jet program. But Cessna canceled that program and repaid the loan. It’s almost as though this activity never took place.

Of particular interest is Section III, titled “Individual Loan & Grant Incentive Results.” These programs are specifically designed to induce the creation of jobs, and in some cases capital investment. This section holds a number of evaluations that read “Not Meeting Commitment.” One example is NetApp. The county reports that “Company Commitment at Compliance Review” is 268 jobs, but the county found that “Company Performance at Compliance Review” is 124 jobs, which is 46 percent of the goal. NetApp is significant as it is one of the larger incentives offered, and the jobs have high salaries.

Another observation is the small amount of the incentives. The majority are for less than $50,000, with one being $10,000. Often these small amounts are promoted as responsible for — or at least enabling — investments of millions of dollars. These incentives come with large costs besides the cash value. Companies must apply for the incentive, county and other agency staff must evaluate the application, there is deliberation by commissioners and council members, and then effort spent producing the thoughtful and thorough report such as this produced by the Chief Financial Officer of Sedgwick County. (The City of Wichita produces no similar report, despite dangling its possibility if voters passed a sales tax. See Wichita can implement transparency, even though tax did not pass.)

Click here to access this report.

Wichita economic development items this week

Two economic development items on tap in Wichita this week illustrate failures or shortcomings of the regime.

Update: Both items passed by seven to zero votes at the March 1, 2016 council meeting.

This week the Wichita City Council will consider two economic development items.

The first item concerns a company named Epic Sports. In 2012 this company received property tax abatements from the City of Wichita in exchange for a 100 percent property tax exemption. The measure passed by a vote of six to one, with former council member Michael O’Donnell voting no.

Now Epic Sports has found greener pastures, it seems. Well, it didn’t just find them, it sought them, according to city documents: “The company approached economic development professionals in Butler County regarding incentives.” The same documents note “[Butler County] professionals did not target Epic Sports as a prospect for relocation.” With the new focus on regionalism, we can’t have one county poaching companies from another, it seems.

The city has negotiated that Epic Sports will repay 55 percent of the forgiven property taxes.

Here’s what is notable about this incident. Epic Sports has 110 employees and says it has outgrown its Wichita facility. City documents state the company has “searched for new facilities or land in the Wichita area but could not find a suitable property.” That is remarkable, if true. Wichita does not have any warehouse space suitable for a company of 110 employees? What, may I ask, have Wichita’s many economic development professionals been doing if we have no space for such a modestly-sized company? (On the other hand, with the focus on regionalism, and with Wichita and Butler County in the same region, why should we care?)

The second item the council will consider concerns a company that received a property tax exemption based on a commitment to invest a certain amount of capital and create a certain number of jobs. While the capital investment was made, the company has not met the jobs goal. In this case the city is invoking a portion of its economic development policy which allows modification of an incentive agreement based on poor economic conditions. If the Current Conditions Index, a product of the Center for Economic Development and Business Research at Wichita State University, drops by five or more points during the term of an incentive agreement, the city can make a modification. Based on this, the city is extending the deadline for the company to meet the jobs goal. Repayment of forgiven property taxes could be required if the company does not meet the deadline.

Brookings Metro Monitor and Wichita

A research project by The Brookings Institution illustrates the poor performance of the Wichita-area economy.

Metro Monitor from The Brookings Institution rates metropolitan areas on a number of indicators.

Brookings Metro Monitor, Wichita, Map 2016-02On the map of metropolitan areas, blue means faster growth, and orange means slowest. You can see that Wichita has the economic growth of a typical rust belt city. (Click charts for larger versions.)

Brookings Metro Monitor, Wichita, Indicators 2016-02The table showing changes in indicators over the past decade shows Wichita almost always below the middle.

Brookings Metro Monitor, Wichita, Trends 2016-02The charts of trends over time shows Wichita falling behind the nation, then catching up in 2007 and 2008, but falling behind since then. As time goes on, the gap between the nation and Wichita widens, not narrows.

These unfortunate facts about the Wichita economy are old news, if we’ve been paying attention. See, for example Employment by metropolitan area, Wichita’s growth in gross domestic product, and Wichita per capita income not moving in a good direction.

The response of Wichita political, bureaucratic, and civic leaders is, by any measure, new paint on an old barn, or just keeping pace with other cities. The Greater Wichita Partnership is just a new name for the same old collection of institutions and people who have been responsible for the dismal performance shown in Brooking’s Metro Monitor. In fact, if you visit greaterwichitapartnership.org and click on “Economic Development” you’re taken to the same old page for Greater Wichita Economic Development Coalition, although with a new logo. Same old barn; new paint.

While we have to hope that the Wichita State University Innovation Campus works as advertised, we also must realize that dozens and dozens of major and minor universities across the country already have similar initiatives up and running.

Tax increment financing in Kansas

In this excerpt from WichitaLiberty.TV: How does Tax Increment Financing (TIF) work in Kansas? Is is a good thing, or not? View below, or click here to view at YouTube. Originally broadcast June 7, 2015.

Continue reading Tax increment financing in Kansas

Reforming economic development in Wichita

In this excerpt from WichitaLiberty.TV: Can we reform economic development in Wichita to give us the growth we need? View below, or click here to view at YouTube. Originally broadcast May 10, 2015.

Continue reading Reforming economic development in Wichita

In Sedgwick County, choosing your own benchmarks

The Sedgwick County Commission makes a bid for accountability with an economic development agency, but will likely fall short of anything meaningful.

Greater Wichita Partnership 01The Greater Wichita Partnership is a reorganization of local economic development agencies. It has asked the Sedgwick County Commission for $300,000 to fund a portion of its activities this year. Those on the commission who are skeptical of GWP and its predecessors have asked for measurable outcomes of the progress GWP makes.

Here is a paragraph from the agreement with GWP that commissioners will consider this week:

9. Measurable Outcomes. GWP shall be subject to measureable outcomes as it shall determine, subject to review by the Board of Sedgwick County Commissioners. GWP shall present an annual report to the Board of Sedgwick County Commissioners at a regularly-scheduled Commission meeting no later than December 31, 2016.

I appreciate the attempt by members of the county commission to ask for accountability. But this paragraph is so weak as to be meaningless. The nature of the measurable outcomes is not defined, even in broad strokes. Further, GWP gets to decide, at an unknown time, what constitutes the measurable outcomes. Then the county commission gets to “review” them, which is a weak — really, nonexistent — form of oversight. We ought to ask that the county commission “approve” them, and sooner rather than later.

Sedgwick County Courthouse 2014-03-23But there is a bit of good news. Paragraph 10 of the agreement calls for a separate accounting fund to be created for the money the taxpayers of Sedgwick County will give to GWP. Then: “GWP agrees and understands that, by entering into this funding Agreement, any and all of its records, documents, and other information related to the Fund and the activities financed thereby shall be open and made available to the public upon request, in accordance with the Kansas Open Records Act.”

That’s good news, and a move towards the type of transparency and accountability that local governments — especially the City of Wichita — promote but finds difficult to actually deliver. Although this provision applies to only the county-supplied funds, hopefully GWP will realize that being transparent is better than being secretive.

WichitaLiberty.TV: Wichita’s attitude towards empowering citizens, tax credits, and school choice

In this episode of WichitaLiberty.TV: The City of Wichita’s attitude towards empowering citizens, government spending through tax credits, and school choice in Kansas. View below, or click here to view on YouTube. Episode 103, broadcast December 13, 2015.

WichitaLiberty.TV: Wichita outreach, city council, and entrepreneurship

In this episode of WichitaLiberty.TV: A look at Wichita community outreach and communications, rewriting city council history, and entrepreneurship. View below, or click here to view at YouTube. Episode 102, broadcast December 6, 2015.

Shownotes

Cash grants still in use

Wichita is moving away from the use of cash incentives for economic development, except for this.

We’ve been told that the city is not going to use cash incentives for economic development. But an item the Wichita City Council will consider this week includes a cash grant of $10,000.

125 N. Emporia, scheduled to receive economic development incentives.
125 N. Emporia, scheduled to receive economic development incentives. Courtesy Google.
This grant is part of the city’s facade improvement program. Under it, properties in certain parts of the city can apply to use special assessment financing to pay for the improvement of their outside appearance. The city borrows the funds and advances them to the property owner. The bonds are repaid through special assessment taxes that are added to the property’s tax bill.

This process is similar to the way the city finances improvements such as street, water, and sewer infrastructure in new neighborhoods or commercial developments. Except: The infrastructure in new development becomes the property of the city. For a facade improvement project, the improvements remain private property.

Are facade improvement cash grants an exception to the new era of economic development in Wichita? Or when will we start implementing these new policies? Some might say that the grants are not for the purposes of economic development. If not, then how does the city justify these grants?

There is perhaps an even more important question the city needs to recognize and answer, which is this: Why are incentives like this necessary? The city says that without the incentive the project is not economically feasible: “The Office of Urban Development has reviewed the economic (gap) analysis of the project and determined a financial need for incentives based on the current market.”

(In case council members make the argument that the facade improvement is not an incentive, remind them that city economic development officials disagree.)

What is it that makes this project economically unfeasible? Why is investment not possible without taxpayer assistance? These are the questions the city needs to answer before asking taxpayers to make a cash grant to this building’s owners.

Wichita to consider tax abatements

Wichita considers three tax abatements, in one case forcing an “investment” on others that it itself would not accept.

This week the Wichita City Council will consider three tax abatements to companies in the aerospace business. Two are very large companies, and one is in the small business category.

In two cases the tax abatements are implemented through industrial revenue bonds. Under this program the city is not lending money. Instead, the program is a vehicle, created by under Kansas law, for companies to avoid paying property tax. In some cases companies may also avoid paying sales tax.

In another case the property tax abatement is conveyed through the city’s Economic Development Tax Exemption (“EDX”) program, which allows the city to forgive the payment of property taxes. In many instances, the issuance of Industrial Revenue Bonds is required by law in order to achieve tax forbearance. The EDX program does away with the often meaningless issuance of bonds, and lets the city implement, in a streamlined fashion, the primary economic goal: Granting permission to skip the payment of property taxes.

The goal of the industrial revenue bonds, however, is often obscured by news media and the city itself. For example, in the agenda material for the Cessna IRBs, the city states “Bond proceeds will be utilized to finance capital investment in the Wichita facilities.”

But later in the same document, we see “The IRBs will be purchased by Cessna and will not be offered to the public.” So the IRBs — the bonds the city is authorizing — aren’t really financing anything. By buying the bonds itself, Cessna is self-financing the purchases or obtaining the funds in some other way. The IRBs are merely a device to grant tax abatements. Nothing more than that — except that the bond program obfuscates the true economic meaning of the transaction, adds costs to the applicant company, and adds cost to the city (offset to some degree by fees paid by the applicant company).

Regardless of the cost and hassle to Cessna, the program has a payoff. City documents state that Cessna could save as much as $317,357 per year in property taxes.

For the Bombardier Learjet IRBs, the city tells us that “Bond-financed purchases are also exempt from state and local sales taxes.” The amount of abated taxes is not given.

For Perfekta, an aerospace supplier, the city is using the EDX program to convey a property tax abatement, with the estimated value of the tax exemption in the first full year being approximately $110,792, according to the agenda packet.

In this case, the city did not award a 100 percent tax abatement. This is due to the city’s policy of requiring a benefit-cost ratio of 1.3 to one, although there are exceptions the city may use. In this case, the city adjusted the amount of tax abatement down until the 1.3 benchmark was achieved, as described in city documents: “To achieve the ratio of benefits to costs of at least 1.3 to 1.0 as required in the City/County Economic Development Policy, the percentage abatement should be reduced to an 89% tax exemption on a five-plus-five year basis.”

The benefit-cost ratio is calculated by the Center for Economic Development and Business Research (CEDBR) at Wichita State University based on data supplied by the applicant company and the city. The rationale behind these calculations is a matter of debate. Even if valid, calculating the ratio with such precision is folly, reminding us of the old saw “Economists use a decimal point to remind us they have a sense of humor.”

Of note, while the city wants to “earn” a 1.3 ratio of benefits to costs, it forces a lower ratio on two overlapping jurisdiction, as shown in city documents:

City of Wichita 1.34 to 1
City of Wichita General Fund 1.30 to 1
Sedgwick County 1.24 to 1
USD 259 1.17 to 1
State of Kansas 7.94 to 1

The county and school district have no choice but to accept the decision made by the city and accept a “return” lower than the city would accept for itself.

The city presents a benefit-cost ratio to illustrate that by giving up some property taxes, it gains even more tax revenue from other sources. But a positive benefit-cost ratio is not remarkable. Economic activity generally spawns more economic activity, which government then taxes. The question is: Did the city, county, school district, and state need to give up tax revenue in order to make these investments possible?

The problem with these actions

Part of the cost of these companies’ investment, along with 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 which firms will be successful. So we need an economic development strategy that creates an environment where these young entrepreneurial firms have the greatest chance to survive. The action the Wichita city council is considering this week works against entrepreneurial firms. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)

A major reason why these tax abatements are harmful to the Wichita economy is its strangling effect on entrepreneurship and young companies. As these companies and others escape paying taxes, others have to pay. This increases the burden of the cost of government on everyone else — in particular on the companies we need to nurture.

There’s plenty of evidence that entrepreneurship, in particular young business firms, are the key to economic growth. But Wichita’s economic development policies, as evidenced by this action, are definitely stacked against the entrepreneur. As Wichita props up its established industries, it makes it more difficult for young firms to thrive. Wichita relies on targeted investment in our future. Our elected officials and bureaucrats believe they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by government that shapes the future direction of the Wichita economy.

These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This lack of knowledge, however, does not stop governments from creating policies for the awarding of incentives. This “active investor” approach to economic development is what has led to companies receiving grants or 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. Young entrepreneurial companies are particularly vulnerable.

Embracing Dynamism: The Next Phase in Kansas Economic Development PolicyProfessor 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: “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.'”

(For a summary of the peer-reviewed academic research that examines the local impact of targeted tax incentives from an empirical point of view, see Research on economic development incentives. A sample finding is “General fiscal policy found to be mildly effective, while targeted incentives reduced economic performance (as measured by per capita income).”)

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 for everyone is an example of such a policy. Abating taxes for specific companies through programs like the Wichita city council is considering this week is an example of precisely the wrong policy.

In explaining the importance of dynamism, Hall wrote: “Generally speaking, dynamism represents persistent, annual change in about one-third of Kansas jobs. Job creation may be a key goal of economic development policy but job creation is a residual economic outcome of business dynamism. The policy challenge centers on promoting dynamism by establishing a business environment that induces business birth and expansion without bias related to the size or type of business.”

We need to move away from economic development based on this active investor approach, especially the policies that prop up our established companies to the detriment of dynamism. 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.

Kansas cities force tax breaks on others

When Kansas cities grant economic development incentives, they may also unilaterally take action that affects overlapping jurisdictions such as counties, school districts, and the state itself. The legislature should end this.

When Kansas cities create tax increment financing (TIF) districts, the overlapping county and school district(s) have an opportunity to veto its creation.

But for some other forms of incentives, such as tax increment financing district redevelopment plans, property tax abatements, and sales tax abatements, overlapping jurisdictions have no ability to object. There seems to be no rational basis for not giving these jurisdictions a chance to object to the erosion of their tax base.

This is especially important for school districts, as they are often the largest tax consumer. As an example, when the City of Wichita offered tax abatements to a company in June 2014, 47 percent of the abated taxes would have gone to the Wichita school district. But the school district did not participate in this decision. State law gave it no voice.

Supporters of economic development incentives say that the school district benefits from the incentives. The argument is that even though the district gives up some tax revenue now, it will get more in the future. This is the basis for the benefit-cost ratios Wichita uses to justify incentives. For itself, the City of Wichita requires a benefit-cost ratio of 1.3 to one or better, although there are many loopholes the city can use to grant incentives when this threshold is not met. For the June project, city documents reported these benefit-cost ratios for two overlapping jurisdictions:

Sedgwick County 1.18 to one
USD 259 1.00 to one

In this case, the city forced a benefit-cost ratio on the county that the city would not accept for itself, unless it uses a loophole. For the school district, the net benefit is zero.

The Kansas Legislature should look at ways to make sure that overlapping jurisdictions are not harmed when economic development incentives are granted by cities. The best way would be to require formal approval of the incentives by counties, school districts, and any other affected jurisdictions.

Two examples

In June 2014 the City of Wichita granted tax abatements for a new warehouse. City documents gave the benefit-cost ratios for the city and overlapping jurisdictions:

City of Wichita General Fund 1.30 to one
Sedgwick County 1.18 to one
USD 259 1.00 to one
State of Kansas 12.11 to one

It is not known whether these ratios include the sales tax forgiveness.

While the City of Wichita insists that projects show a benefit-cost ratio of 1.3 to one or better (although there are many exceptions), it doesn’t apply that standard for overlapping jurisdictions. Here, Sedgwick County experiences a benefit-cost ratio of 1.18 to one, and the Wichita school district (USD 259) 1.00 to one. These two governmental bodies have no input on the decision the city is making on their behalf. The school district’s share of the forgiven taxes is 47.4 percent.

In November 2014 a project had these dollar amounts of property tax abatement shared among the taxing jurisdictions in these estimated amounts, according to city documents:

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

The listing of USD 259, the Wichita public school district, is likely an oversight by the city, as the subject 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

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.

Historic preservation tax credits, or developer welfare?

A Wichita developer seeks to have taxpayers fund a large portion of his development costs, using a wasteful government program of dubious value.

When you hear of a program titled “historic preservation tax credits” you might find yourself in agreement. Preserving history: Who can be against that? And tax credits: Aren’t those just technical adjustments on someone’s tax form?

The Colorado-Derby Building, now renamed and used by the Wichita public school district.
The Colorado-Derby Building, now renamed and used by the Wichita public school district.
If you look closely, however, you’ll find that the historic preservation tax credits program can include buildings with only the slightest historic significance, and has great cost to taxpayers.

The Colorado-Derby Building at 201 N Water Street in Wichita has been nominated for placement on the Register of Historic Kansas Places. It’s a nondescript building which currently houses administrative offices for the Wichita public school district and is known by a different name. Still, it is eligible for placement on the register for being an “example of this private investment trend,” that being the building of office buildings midcentury. A laudable accomplishment, but hardly notable.

The real reason for seeking placement on the register of historic places is money. By using historic preservation tax credits the developer of this building can get taxpayers to pay for much of the costs of rehabilitation. Almost half, which will be millions in this case.

Under the program this building is entering, its owners will receive 25 percent of rehabilitation expenses. The federal government provides tax credits of 20 percent. It’s likely that the owners of this building will also seek these credits.

So with both tax credit programs, 45 percent of the cost of rehabilitating this building could be paid for by taxpayers. And, given the history of the developer, it’s likely he will find other ways to get taxpayers to pay for even more.

Tax credits

USD 259 Alvin E. Morris Administrative Center 2008-04-07 11Tax credits may be a mystery to many, but there is no doubt as to their harmful effect on state and federal budgets. When using tax credits, the government, conceptually, issues a slip of paper that says something like “The holder of this document may submit it instead of $500,000 when making a tax payment.” So instead of paying taxes with actual money, the holder of the credit pays with, well, a slip of paper worth nothing to the government treasury.

This is a direct cost to the government, according to both reason and the Kansas Division of Legislative Post Audit. Last year, after conducting an audit of Kansas tax credit programs, auditors explained: “Tax credits, which the government offers to try to induce certain actions by the taxpayer, reduce income tax revenues because they are subtracted directly from the amount of taxes due.” (emphasis added)

The confusing nature of tax credits leads citizens to believe that they have no cost to the state or federal government. But tax credits are equivalent to government spending. The problem is that by mixing spending programs with taxation, some are lead to believe that tax credits are not cash handouts. But not everyone falls for this seductive trap. In an article in Cato Institutes’s Regulation magazine, Edward D. Kleinbard explains:

Specialists term these synthetic government spending programs “tax expenditures.” Tax expenditures are really spending programs, not tax rollbacks, because the missing tax revenues must be financed by more taxes on somebody else. … Tax expenditures dissolve the boundaries between government revenues and government spending. They reduce both the coherence of the tax law and our ability to conceptualize the very size and activities of our government. (The Hidden Hand of Government Spending, Fall 2010)

The use of tax credits to pay for economic development incentives leads many to believe that what government is doing is not a direct subsidy or payment. In order to clear things up, perhaps we should require that government write checks instead of issuing credits.

Back to Kansas: The audit of the historic preservation tax credits program found that in 2001, when the program was started, the anticipated cost to the state was about $1 million per year. By 2007, the actual cost to the state was reported at almost $8.5 million.

Further, the audit found what many already knew: tax credit aren’t an efficient way of transferring subsidy to developers. Most of the time, the developers sell the credits to someone else at a discount, as the audit explains: “The Historic Preservation Tax Credit isn’t cost-effective. That credit works differently than the other three because the amount of money a historic preservation project receives from the credit is dependent upon the amount of money it’s sold for. Our review showed that, on average, when Historic Preservation Credits were transferred to generate money for a project, they only generated 85 cents for the project for every dollar of potential tax revenue the State gave up.”

It would be more efficient for everyone if the state would simply write checks to the developers instead of issuing tax credits. But then the actual economic meaning of the transaction would be laid bare for all to see.

Then, what qualifies as historic can change as political conditions require. Earlier this year the Wichita city council reversed a decision by the Historic Preservation Board and allowed a property owner to proceed with the demolition of three formerly historic buildings in southern downtown Wichita.

The historic preservation tax credit program is a government handout mechanism we no longer need. Today, most of the money goes to wealthy developers or corporations that can afford to redevelop downtown hotels and lofts with their own money — instead of asking low-income families to pay sales tax on their groceries to fund their tax credits.

Material from the Kansas State Historical Society
Nomination for listing on Register of Historic Kansas Places

Colorado-Derby Building – 201 N Water St., Wichita, Sedgwick County

Constructed in 1959-1960, the nine-story Colorado-Derby Building is an early example of a Modern Movement speculative office tower erected within a pattern of development that shaped Wichita’s downtown at midcentury. New buildings erected as icons on the skyline were intended to refresh, modernize, and revitalize the downtown core through public and private investment in civic and commercial improvements. Frank and Harvey Ablah recognized the onset of this trend and constructed the Colorado-Derby Building to provide speculative office space, redeveloping the site of the Ablah Hotel Supply Company. Named for its largest and most prominent tenant, the Colorado-Derby Building was fully occupied when it opened in 1960 and maintained high occupancy rates over the following decade. The construction and subsequent occupancy of this building illustrates the continuing importance of manufacturing industries to the economy of Wichita at midcentury and the ability of these industries to contribute to the economic and physical revitalization of downtown. The blocks immediately surrounding the building continued to develop in a similar fashion over the following decade with large-scale modern buildings and parking lots replacing smaller commercial and industrial buildings built a half-century earlier. All of this development activity culminated in a formal Urban Renewal project utilizing federal funds in the late 1960s. In Wichita, private investment focused on providing office space for industrial companies, rather than public funding initiated the revitalization that transformed downtown. The Colorado-Derby Building is nominated under Criterion A an important early example of this private investment trend.

Wichita to consider three tax abatements

When considering whether to grant three property tax abatements, the Wichita city council is unlikely to ask this question: Why can’t these companies expand if they have to pay the same taxes everyone else pays?

This week the Wichita City Council will consider property tax abatements for three different companies.

Wichita Urban DevelopmentOne is a new request for property tax relief under the city’s Economic Development Tax Exemption (EDX) program. The company is a supplier to the aerospace industry.

The second is a request for a five-year extension of a five-year property tax abatement. The company met the goals established five years ago. This company is a supplier to the aerospace industry.

The third is another request for a five-year extension of a five-year property tax abatement. The company met the goals established five years ago. This company is a supplier to the oil and gas industry.

To justify the cost of the tax abatements, the city presents benefit-cost ratio calculations. The city requires that the ratio be at least 1.3 to one, although there are exceptions. In each of these three cases the benefit-cost ratio for the school district is less than 1.3 to one. The city, in other words, is forcing school districts to accept investments that the city itself would not make, unless it invoked an exception. The school districts have no ability to limit their participation in these tax abatements other than lobbying the city.

For all the information provided in city documents, some important questions remain unanswered. Perhaps the most important question is this: Are these tax abatements necessary for these companies to carry out their expansion plans? City documents are silent on this question.

Was it a question of feasibility? Some economic development programs require that the applicant demonstrate the necessity of an incentive. Often the city presents a “gap” analysis that purportedly shows a gap between available financing and what is necessary to make the project feasible. But these arguments were not advanced. If they had — that is, if the companies say that if they have to pay property taxes then they can’t afford to expand — then we would be stuck with this question: Why are Wichita industrial property taxes so high that investments like this are not feasible?

The city presents a benefit-cost ratio showing that by giving up some property taxes, it gains even more tax revenue from other sources. But a positive benefit-cost ratio is not remarkable. Economic activity generally spawns more economic activity, which government then taxes. The question is: Did the city, county, school district, and state need to give up tax revenue in order to make this investment possible? (That’s right. The action by the city affected three other jurisdictions.)

Part of the cost of these companies’ investment, along with 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 which firms will be successful. So we need an economic development strategy that creates an environment where these young entrepreneurial firms have the greatest chance to survive. The action the Wichita city council took this week works against entrepreneurial firms. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)

The problem with these actions

A major reason why these tax abatements are harmful to the Wichita economy is its strangling effect on entrepreneurship and young companies. As these companies and others escape paying taxes, others have to pay. This increases the burden of the cost of government on everyone else — in particular on the companies we need to nurture.

There’s plenty of evidence that entrepreneurship, in particular young business firms, are the key to economic growth. But Wichita’s economic development policies, as evidenced by this action, are definitely stacked against the entrepreneur. As Wichita props up its established industries, it makes it more difficult for young firms to thrive. Wichita relies on targeted investment in our future. Our elected officials and bureaucrats believe they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by the state that shapes the future direction of the Wichita economy.

These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This lack of knowledge, however, does not stop governments from creating policies for the awarding of incentives. This “active investor” approach to economic development is what has led to companies receiving grants or 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. Young entrepreneurial companies are particularly vulnerable.

Embracing Dynamism: The Next Phase in Kansas Economic Development PolicyProfessor 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: “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.'”

(For a summary of the peer-reviewed academic research that examines the local impact of targeted tax incentives from an empirical point of view, see Research on economic development incentives. A sample finding is “General fiscal policy found to be mildly effective, while targeted incentives reduced economic performance (as measured by per capita income).”)

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 for everyone is an example of such a policy. Abating taxes for specific companies through programs like the Wichita city council used this week is an example of precisely the wrong policy.

In explaining the importance of dynamism, Hall wrote: “Generally speaking, dynamism represents persistent, annual change in about one-third of Kansas jobs. Job creation may be a key goal of economic development policy but job creation is a residual economic outcome of business dynamism. The policy challenge centers on promoting dynamism by establishing a business environment that induces business birth and expansion without bias related to the size or type of business.”

We need to move away from economic development based on this active investor approach, especially the policies that prop up our established companies to the detriment of dynamism. 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.

Bombardier can be a learning experience

The unfortunate news of the cancellation of a new aircraft program can be a learning opportunity for Wichita.

As Wichita seeks to grow its economy, the loss of a new aircraft program at one of the city’s major employers is unwelcome news. Now it is important that our leaders and officials seek to learn lessons from this loss. But first, we must acknowledge the loss. Wichita economic development officials are quick to trumpet successes, but so far there is no mention of this loss from the city or its economic development agencies.

The project received state, local and federal incentives. Lots of incentives. These incentives took the form of cash grants, forgiveness of taxes that would otherwise be due, and the ability to reroute its employee withholding taxes for the company’s exclusive benefit. So one lesson is that when local officials complain of the lack of money available for incentives, they are not being truthful.

A second lesson is the limited ability of incentives to overcome obstacles. In this case, the company said the incentives were necessary to make the project economically feasible. Incentives were awarded, but the project failed.

There are some important public policy issues that should be discussed:

Did the incentives induce Bombardier to take risks that it would not have taken had it been investing its own funds, or funds it had to raise from stockholders and debtholders?

Will the politicians that took credit for landing the Model 85 and its jobs now recognize the futility of their efforts?

Will the government agencies that took credit for creating jobs adjust their records?

Incentives like these are often justified using a benefit-cost ratio. This incident reminds us that these calculations are valid only if the investment works as planned. Will local governments recalculate the benefit-cost ratios based on the new information we now have?

Perhaps most important: Who has to pay the costs of these incentives? Part of the cost of this company’s investment, along with 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. This action — the award of incentives to an established company — is harmful to the Wichita economy for its strangling effect on entrepreneurship and young companies. As this company and others receive incentives and escape paying taxes, others have to pay.

There’s plenty of evidence that entrepreneurship, in particular young business firms, are the key to economic growth. But Wichita’s economic development policies, as evidenced by this action, are definitely stacked against the entrepreneur. As Wichita props up its established industries, it makes it more difficult for young firms to thrive. Wichita relies on targeted investment in our future. Our elected officials and bureaucrats believe they have the ability to select which companies are worthy of public investment, and which are not. But as we see in the unfortunate news from Bombardier, this is not the case. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)