Tag Archives: Economic development

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.)

Wichita’s growth in gross domestic product

An interactive visualization of gross domestic product for metropolitan areas.

Gross domestic product is the sum of the value of all goods and services produced for a period of time. The Bureau of Economic Analysis makes this statistic available for metropolitan areas. GDP is not the only way to measure the economic health of a region, but it is one way. I’ve gathered the data and made it available in an interactive visualization.

Growth of GDP for Wichita and selected cities. Click for larger version.
Growth of GDP for Wichita and selected cities. Click for larger version.
When using the visualization you may select total GDP, or GDP for private industry or government alone. You may select any number of metropolitan areas to appear on the chart. By clicking metro names in the legend, you can highlight or emphasize the series for one metro area. Use Ctrl+click to select more than one at a time.

Of note, recently James Chung delivered a lecture in Wichita. As part of the presentation, he mentioned three areas that he thought were doing things well: Cedar Rapids, Des Moines, and Omaha. A nearby illustration shows the visualization of the growth of GDP for these metro areas and Wichita. You can see that GDP for these areas have grown faster than has GDP for Wichita. (This visualization shows GDP change since the start of the chart, so that the growth of metro areas of different sizes can be compared.)

Growth of GDP for Wichita and selected cities. Click for larger version.
Growth of GDP for Wichita and selected cities. Click for larger version.
Another illustration compares Wichita to several cities that were part of the Wichita Metro Chamber of Commerce’s city-to-city visits. While in some years the visit has been to cities like Austin that have grown rapidly, that is not always the case.

Click here to open the visualization in a new window.

Data is from Bureau of Economic Analysis, an agency of the United States Department of Commerce. Visualization created using Tableau.

Using the visualization.
Using the visualization.

WichitaLiberty.TV: Wichita’s regulations and economic development

In this episode of WichitaLiberty.TV: Do Wichita’s many laws and regulations accomplish their goals? Then, are Wichita’s economic development policies likely to work? Episode 98, broadcast October 18, 2015. View below, or click here to view in high definition at YouTube.

Entrepreneurship in Wichita

As Wichita seeks to reboot its spirit of entrepreneurship, we should make sure we do things that have a chance of working. The Kauffman Foundation has conducted research. One paper is Guidelines for Local and State Governments to Promote Entrepreneurship. In its introduction, it holds this:

In this paper, we begin with a critical overview of two of the most commonly used strategies to promote entrepreneurship: creating public venture funds and business incubators. We then explain that these strategies often neglect an essential principle: connectivity and learning by entrepreneurs. Next, we describe ways in which public venture funds and incubators can be reorganized based on the connectivity principle before concluding with several other recommendations for how cities and states can promote entrepreneurship and begin to see real results that transform economies and provide new opportunities to residents.

Kauffman also has many videos based on its research into this topic. An example is Myth-busting Entrepreneurship.

Wichita cheers its planned economy

While success in growing a company is welcome in Wichita, there are broader issues that affect the rest of the metropolitan area.

Tweet from Wichita city officials
Tweet from Wichita city officials
This week the Wichita City Council extended a property tax abatement for a manufacturing company in Wichita. The tax abatement was granted under the city’s Industrial Revenue Bonds program. Under this program no city money is lent to the company. The sole reason for the bonds is the accompanying property tax exemption, and in some cases, a sales tax exemption.

City documents from 2008 estimate the company will avoid paying $239,051 in property taxes for the first year. Savings for subsequent years are probably similar. This week’s action by the city council extends this benefit for another five years.

While the city’s economic development staff cheers the company’s success, important questions are not addressed. Perhaps the most important question is this: Was this tax abatement necessary for this expansion to proceed? City documents are silent on this question. At the 2008 council meeting the necessity of the tax abatement was not mentioned or discussed.

Why were the bonds necessary? The company did not lack access to credit, as city documents state the company purchased the bonds itself. The company either had cash, or access to credit.

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. Something like this.

But no such claim was made for this matter.

Perhaps this proposed expansion just barely missed being economically feasible, and if the company could avoid paying the same property taxes that most everyone else pays, the project would be feasible.

But this argument was not advanced. If it had been, then we would be stuck with the question of 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.)

No one made that argument.

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. 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 this action

A major reason why this action is harmful to the Wichita economy is its strangling effect on entrepreneurship and young companies. As this company 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.

Wichita perpetuates wasteful system of grants; feels good about it

While praising the U.S. Economic Development Administration for a grant to Wichita State university, Wichita city planners boost the growth of wasteful government spending.

Tweet from Wichita city officials
Tweet from Wichita city officials
News that Wichita State University received a grant from the U.S. Economic Development Administration was praised by City of Wichita bureaucrats. Such praise only serves to perpetuate a federal agency that does more harm than good, entrenching the “You take yours, I’ll take mine” logic that leads to ever-rising spending.

The tweet from Wichita city planners is designed to make us feel happy for Wichita State University. Having accepted these funds, now we have to tolerate grants like these made by the EDA:

    Harry Reid Research Park
  • In 2008, the EDA provided $2,000,000 to begin construction of the UNLV Harry Reid Research & Technology Park in Las Vegas, NV. For many years the UNLV Harry Reid Research & Technology Park featured a paved road and a website claiming the first anticipated tenant would move in in 2010. But there are signs of life now in 2015, according to the article Signs of life emerge at UNLV’s long-dormant technology park.)
  • In 2010, $25,000,000 was spent by the EDA for a Global Climate Mitigation Incentive Fund and $2,000,000 for a “culinary amphitheater,” wine tasting room and gift shop in Washington State.
  • In 2011, the EDA gave a New Mexico town $1,500,000 to renovate a theater.
  • In 2013, the EDA also gave Massachusetts $1.4 million to promote new video games.
  • Back in the 1980s, the EDA used taxpayer dollars to build replicas of the Great Wall of China and the Egyptian Pyramids in the middle of Indiana. They were never completed — it is now a dumping ground for tires.

So in exchange for WSU receiving a few million dollars, we have to put up with the above. We have to wonder if Harry Reid being the number one Senate Democrat had anything to do with a grant for a facility named in his honor. We have yet another government agency staffed with a fleet of bureaucrats, including a chief who will travel to Wichita to promote and defend his agency. We have another government agency that believes it can better decide how to invest capital than the owners of the capital. We have another example of shipping tax dollars to Washington, seeing a large fraction skimmed off the top, then cities and states begging for scraps from the leftovers.

Rep. Pompeo on the EDA

U.S. Representative Mike Pompeo has sponsored legislation and offered amendments to end the EDA. In January 2012 he wrote an op-ed which explains the harm of the EDA. Here is an excerpt:

Last week, Secretary Fernandez invited himself to Wichita at taxpayer expense and met with the Wichita Eagle’s editorial board. Afterwards, the paper accurately noted I am advocating eliminating the EDA even though that agency occasionally awards grant money to projects in South Central Kansas. They just don’t get it. Thanks to decades of this flawed “You take yours, I’ll take mine” Washington logic, our nation now faces a crippling $16 trillion national debt.

I first learned about the EDA when Secretary Fernandez testified in front of my subcommittee that the benefits of EDA projects exceed the costs and cited the absurd example of a $1.4 million award for “infrastructure” that allegedly helped a Minnesota town secure a new $1.6 billion steel mill. As a former CEO, I knew there is no way that a taxpayer subsidy equal to less than one-tenth of one percent (0.1%) of the total capital needed made a difference in launching the project. That mill was getting built whether EDA’s grant came through or not. So, I decided to dig further.

I discovered that the EDA is a federal agency we can do without. Similar to earmarks that gave us the infamous “Bridge to Nowhere” or the Department of Energy loan guarantee scandal that produced Solyndra, the EDA advances local projects that narrowly benefit a particular company or community. To be sure, the EDA occasionally supports a local project here in Kansas. But it takes our tax money every year for projects in 400-plus other congressional districts, many if not most of which are boondoggles. For example: EDA gave $2 million to help construct UNLV’s Harry Reid Research and Technology Park; $2 million for a “culinary amphitheater,” tasting room, and gift shop at a Washington state winery; and $500,000 to construct (never-completed) replicas of the Great Pyramids in rural Indiana.

Several times in recent decades, the Government Accountability Office has questioned the value and efficacy of the EDA. Good-government groups like Citizens Against Government Waste have called for dismantling the agency. In addition, eliminating the EDA was listed among the recommendations of President Obama’s own bipartisan Simpson-Bowles Deficit Reduction Commission.

So why hasn’t it been shut down already? Politics. The EDA spreads taxpayer-funded project money far and wide and attacks congressmen who fail to support EDA grants. Soon after that initial hearing, Secretary Fernandez flew in his regional director — again at taxpayer expense — to show me “all the great things we are doing in your home district” and handed me a list of recent and pending local grants. Hint, hint. You can’t say I wasn’t warned to back off. Indeed, Eagle editors missed the real story here: Secretary Fernandez flew to Wichita because he is a bureaucrat trying to save his high-paying gig. The bureaucracy strikes back when conservatives take on bloated, out-of-control, public spending, so I guess I’m making progress.

Please don’t misunderstand. I am not faulting cities, universities, or companies for having sought “free” federal money from the EDA. The fault lies squarely with a Washington culture that insists every program is sacred and there is no spending left to cut.

A federal agency run at the Assistant Secretary level has not been eliminated in decades. Now is the time. My bill to eliminate the EDA (HR 3090) would take one small step toward restoring fiscal sanity and constitutional government.

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

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

Following, Pompeo’s remarks on the floor of the United States House of Representatives.

In search of a level playing field

A national survey finds that small business leaders overwhelmingly believe that state economic development incentives favor big businesses, that states are overspending on large individual deals, and that state incentive programs are not effectively meeting the needs of small businesses seeking to grow. From Good Jobs First.

Survey: Small Business Group Leaders Say States Favor Big Businesses at the Expense of Small Firms Seeking to Grow

Washington, DC, September 29, 2015 — A national survey of 41 leaders of small business organizations representing 24,000 member businesses in 25 states reveals that they overwhelmingly believe that state economic development incentives favor big businesses, that states are overspending on large individual deals, and that state incentive programs are not effectively meeting the needs of small businesses seeking to grow.

In Search of a Level Playing Field coverA large majority also say small businesses interests in economic development are not well represented in their state capitols. The credit crunch is a critical problem, and many also emphasize that public goods that benefit all employers-such as job training, education, and transportation-deserve to be a higher priority.

The study was funded by the Ewing Marion Kauffman Foundation. It is available on the Good Jobs First website here.

“Our findings are absolutely consistent with what we have heard for years from small business leaders,” said Good Jobs First executive director Greg LeRoy. “Despite their pro-small business rhetoric, state officials’ programs are perceived as biased in favor of large companies that receive big tax-break packages.”

Specifically:

  • 92 percent believe that the spending balance on incentives between small and large businesses in their state is biased toward big businesses (69 percent strongly believe).
  • 79 percent believe that their state is overspending on big incentive deals, hurting state finances (56 percent strongly).
  • 87 percent say that small business interests in economic development issues are not effectively represented in their state’s capital (36 percent strongly).
  • 85 percent believe that economic development incentives in their state are not effectively addressing the current needs of small businesses that are seeking to grow (36 percent strongly).
  • 72 percent do not believe their state’s current incentive policies are effective in promoting economic growth (23 percent strongly).

The respondents lead groups from 25 states, including all but one of the 15 most-populous. They belong to networks formed in the past 15 years, many with economic development missions. None is contracted by state or local governments to perform economic development functions such as outside-firm recruitment.

“Our next study will examine in great detail how well or poorly state incentive programs treat small, local and/or entrepreneurial businesses versus large, multistate companies” added LeRoy.

Good Jobs First is a non-profit, non-partisan resource center on economic development. Founded in 1998, it is based in Washington DC.

Another week in Wichita, more CID sprawl

Shoppers in west Wichita should prepare to pay higher taxes, if the city approves a Community Improvement District at Kellogg and West Streets.

Next week the Wichita City Council will consider the formation of a Community Improvement District (CID) surrounding the intersection of Kellogg and West Streets.

CIDs are a relatively recent creation of the Kansas Legislature. In a CID, merchants may charge additional sales tax, up to an extra two cents per dollar. For more about their mechanism, see Community improvement districts in Kansas. In the present case, the developer proposes to charge an extra one cent per dollar in tax. This extra sales tax, minus a handling fee, will be periodically remitted to the developer. It’s important to note that CID proceeds do not flow to the merchants who collect them.

This CID is “pay-as-you-go,” meaning the city is not issuing bonds or loaning money.

This CID, should the council approve, will contribute to CID sprawl. This is a condition in which more and more of the city is overtaken by CIDs and their higher taxes. In effect, a sales tax increase is taking effect. Because of the city’s weak protection of shoppers from these CID taxes, many Wichitans and visitors will pay higher taxes than they expected. This harms the reputation of Wichita.

(Of note, Kansas raised the statewide sales tax this year. Because Kansas is one of the few states that tax groceries at the full rate, low-income families are harmed most by the higher sales and CID taxes. See Kansas sales tax has disproportionate harmful effects for analysis.)

This CID is likely to be sold to citizens as contributing to public infrastructure. It’s true that a traffic signal on West Street and widening of that street are listed as uses of CID funds. But the amount budgeted is $350,000, which means that the improvements will not be substantial. This inclusion of public infrastructure is likely part of a strategy of sweetening the deal. It’s not all about greedy developers, the city will say. Some of the funds are going to public infrastructure. This strategy was used to justify the Cabela’s CID, in which part of the CID funds are paying for improvements to the intersection of K-96 and Greenwich Road.

This CID proposal contains two new provisions that may help blunt some of the criticism of CIDs as harmful to other business firms in the city. First is this condition: “Allow the City to review and approve or deny the relocation of any business within three miles of the district, for the first three years, on any property in which the developer requests reimbursement for the land acquisition.” This seems designed to restrict “poaching” of merchants from other nearby landlords who are not being subsidized by a CID. Whether this condition has any real meaning is unknown. In practice, the city has been reluctant to enforce restrictions similar to this.

Some of the first buildings to be demolished on West Street, according to a city schedule of milestones. Click for larger.
Some of the first buildings to be demolished on West Street, according to a city schedule of milestones. Click for larger.
Also there is this condition: “Demolition or rehabilitation of three identified structures and additional investment within the district within the timeframe below.” Following this is a schedule of milestones. This may be in response to instances where the city has authorized a subsidy program, but nothing happened, or happened slowly. The Exchange Place project at Douglas and Market is one example. Another is the CID at Central and Oliver. Principals of the Kellogg and West CID are also involved in the Central and Oliver CID, and little has happened there since its formation.

Another important public policy issue regarding CIDs is this: If merchants feel they need to collect additional revenue from their customers, why don’t they simply raise their prices? We can easily see their rationalization: It’s better for us that unwitting customers pay higher sales taxes rather than higher prices. We can blame government for the taxes, but we get the money. 1

Customers of merchants in CIDS ought to know in advance that an extra tax is charged. Some have recommended warning signage that protects customers from unknowingly shopping in stores, restaurants, and hotels that will be adding extra sales tax to purchases. Developers who want to benefit from CID money say that merchants object to signage, fearing it will drive away customers.

State law is silent on this. The City of Wichita requires a sign indicating that CID financing made the project possible, with no hint that customers will pay additional tax. The city also maintains a website showing CIDs. This form of notification is so weak as to be meaningless, but this was the decision the city council made. 2

CIDs allow property owners to establish their own private taxing district for their exclusive benefit. This goes against the grain of the way taxes are usually thought of. Generally, we use taxation as a way to pay for services that everyone benefits from, and from which we can’t exclude people. An example would be police protection. Everyone benefits from being safe, and we can’t exclude people from participating in — benefiting from — police protection.

But CIDs allow taxes to be collected for the benefit of one specific entity. This goes against the principle of broad-based taxation to pay for an array of services for everyone. But in this case, the people who benefit from the CID are quite easy to identify: the property owners in the district. We shouldn’t let private parties use a government function for their exclusive benefit.

  1. The premise of this question is not accurate, as it is not the merchants who receive CID funds. Landlords do. The more accurate question is why don’t landlords raise their rents?
  2. Weeks, B. (2014). Wichita City Council fails to support informing the taxed. Online. Voice For Liberty in Wichita. Available at: http://wichitaliberty.org/wichita-government/wichita-city-council-fails-support-informing-taxed/ Accessed 31 Aug. 2015.

Wichita CID illustrates pitfalls of government intervention

A proposed special tax district in Wichita holds the potential to harm consumers, the city’s reputation, and the business prospects of competitors. Besides, we shouldn’t let private parties use a government function for their exclusive benefit.

This week the Wichita City Council will consider the formation of a Community Improvement Districts to benefit a proposed hotel in west Wichita.

CIDs are a relatively recent creation of the Kansas Legislature. In a CID, merchants may charge additional sales tax, up to an extra two cents per dollar. For more about their mechanism, see Community improvement districts in Kansas. In the present case, the developer proposes to charge hotel guests an extra two cents per dollar in tax. If retail stores are developed, their customers will pay the CID tax too. This extra sales tax, minus a handling fee, will be periodically remitted to the developer.

From Google Earth, a view of the restaurant and hotel on the subject property. If a house this blighted had been owned by a poor inner-city resident, the city would have long ago condemned and demolished the building, at the homeowner's expense.
From Google Earth, a view of the restaurant and hotel on the subject property. If a house this blighted had been owned by a poor inner-city resident, the city would have long ago condemned and demolished the building, at the homeowner’s expense.
One reason to oppose the formation of this CID is it contributes to Wichita’s reputation as a city of high taxes. The nearby table gives an example of what a hotel bill will look like. There’s the existing guest tax of 6 percent. The city started collecting the 2.75 percent “tourism fee” this year. 1 (How many cities charge visitors a fee for visiting?) There’s the combined state and county sales tax of 7.5 percent, and then the CID tax of 2 percent. The total of these taxes is 18.25 percent.

A sample hotel bill in Wichita.
A sample hotel bill in Wichita.
The mayor and city council members note that these taxes are paid by people from out of town. They think it’s a smart strategy. But some significant fraction of these taxes are paid by Wichitans, particularly the many companies that have their scattered employees travel to Wichita. And, has anyone ever paid a hotel bill for visiting friends and relatives?

Welcome to Wichita Tourism Fee billboardBesides this, do we really want to punish our guests with these taxes? A city tourism fee? Welcome to Wichita, indeed.

Another important public policy issue regarding CIDs is this: If merchants feel they need to collect additional revenue from their customers, why don’t they simply raise their prices? We can easily see their rationalization: It’s better for us that unwitting customers pay higher sales taxes rather than higher prices. We can blame government for the taxes, but we get the money. 2

There is the competitive effect on other hotels in the area to consider. Some hotel owners feel the ability of one hotel to collect the CID tax for its own benefit gives an unfair competitive advantage.

Customers of merchants in CIDS ought to know in advance that an extra tax is charged. Some have recommended warning signage that protects customers from unknowingly shopping in stores, restaurants, and hotels that will be adding extra sales tax to purchases. Developers who want to benefit from CID money say that merchants object to signage, fearing it will drive away customers.

State law is silent on this. The City of Wichita requires a sign indicating that CID financing made the project possible, with no hint that customers will pay additional tax. The city also maintains a website showing CIDs. This form of notification is so weak as to be meaningless, but this was the decision the city council made. 3

CIDs allow property owners to establish their own private taxing district for their exclusive benefit. This goes against the grain of the way taxes are usually thought of. Generally, we use taxation as a way to pay for services that everyone benefits from, and from which we can’t exclude people. An example would be police protection. Everyone benefits from being safe, and we can’t exclude people from participating in — benefiting from — police protection.

But CIDs allow taxes to be collected for the benefit of one specific entity. This goes against the principle of broad-based taxation to pay for an array of services for everyone. But in this case, the people who benefit from the CID are quite easy to identify: the property owners in the district. We shouldn’t let private parties use a government function for their exclusive benefit.

  1. Weeks, B. (2014). Wichita seeks to add more tax to hotel bills. Online. Voice For Liberty in Wichita. Available at: http://wichitaliberty.org/wichita-government/wichita-seeks-add-tax-hotel-bills/ Accessed 31 Aug. 2015.
  2. The premise of this question is not accurate, as it is not the merchants who receive CID funds. Landlords do. The more accurate question is why don’t landlords raise their rents?
  3. Weeks, B. (2014). Wichita City Council fails to support informing the taxed. Online. Voice For Liberty in Wichita. Available at: http://wichitaliberty.org/wichita-government/wichita-city-council-fails-support-informing-taxed/ Accessed 31 Aug. 2015.