Tag Archives: Economics

Evaluating economic development incentives

The evaluation of economic development incentives requires thinking at the margin, not the entirety.

When considering the effect of economic development incentives, cities like Wichita use a benefit-cost analysis to determine whether the incentive is in the best interests of the city. The analysis usually also considers the county, state, and school districts, although these jurisdictions have no say over whether the incentive is granted, with a few exceptions. The idea is that by paying money now or forgiving future taxes, the city gains even more in increased tax collections. This is then pitched as a good deal for taxpayers: The city gets more jobs (usually) and a profit, too.

Economic activity usually generates tax revenue that flows to governmental agencies. When people work, they pay income taxes. When they buy stuff, they pay sales taxes. When they create new property, it is taxed. This happens whether or not the economic activity is a result of government incentive.

When calculating benefit-cost ratios, government takes credit for the increase in tax revenue from a company receiving economic development incentives. Government often says that without the incentive, the company would not have located in Wichita. Or, without the incentive, it would not have expanded in Wichita. Now, it is claimed that incentives are necessary to persuade companies to consider remaining in Wichita rather than moving somewhere else.

But there are a few problems with the arguments that cities and their economic development agencies promote. One is that the increase in tax revenue happens regardless of whether the company has received incentives. What about all the companies that locate to or expand in Wichita without receiving incentives? How do we calculate the benefit-cost ratio when a company receives no incentives? The answer is it can’t be calculated, as there is no government cost. Instead, there is only benefit.

Then, we don’t often ask why do some companies need incentives, and others do not? Do the companies that receive incentives really need them? Why do some companies receive incentives multiple times?

Related is that jurisdictions may grant relatively small incentives and then take credit for the entire deal. I’ve been told that when economic development agencies learn of a company moving to an area or expanding their Wichita operations, they swoop in with small incentives and take credit for the entire deal. The agency is then able to point to a small incentive and take credit for the entire deal. As you can imagine, it’s difficult to get the involved parties to speak on the record about this.

Further, governments may not credit the contribution of other governments. In the past when the Wichita economic development office presented information about an incentive it proposed to offer to a company, it would sometimes list the incentives the company is receiving from other governments. As an example, when the city offered incentives to NetApp in 2012, the city’s contribution was given as a maximum of $418,000. The agenda material mentioned — obliquely — that the State of Kansas was involved in the incentive package. Inquiry to the Kansas Department of Commerce revealed that the state had promoted incentives worth $35,160,017 to NetApp. Wichita’s incentive contribution is just 1.2 percent of what the state offered, which makes us wonder if the Wichita incentive was truly needed.

The importance of marginal thinking

When evaluating economic development incentives, we often fail to properly evaluate the marginal gains. Here’s an example of the importance of looking at marginal gains rather than the whole. In 2012, the City of Wichita developed a program called New HOME (New Home Ownership Made Easy). The crux of the program is to rebate Wichita city property taxes for five years to those who buy newly-built homes in certain neighborhoods under certain conditions.

Wichita City HallThe important question is how much new activity this program will induce. Often government takes credit for all economic activity that takes place. This ignores the economic activity that was going to take place naturally — in this case, new homes that are going to be built even without this subsidy program. According to data compiled by Wichita Area Builders Association and the WSU Center for Economic Development and Business Research — this is the data that was current at the time the Wichita city council made its decision to authorize the program — in 2011 462 new homes were started in the City of Wichita. The HOME program contemplated subsidizing 1,000 homes in a period of 22 months. That’s a rate of 545 homes per year — not much more than the present rate of 462 per year. But, the city has to give up collecting property tax on all these homes — even the ones that would be built anyway.

What we’re talking about is possibly inducing a small amount of additional activity over what would happen naturally and organically. But we have to subsidize a very large number of houses in order to achieve that. The lesson is that we need to evaluate the costs of this program based on the marginal activity it may induce, not all activity. For more, see Wichita new home tax rebate program: The analysis.

What is the evidence on taxes and growth?

… results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy.

From Tax Foundation.

What is the evidence on taxes and growth?

By William McBride

The idea that taxes affect economic growth has become politically contentious and the subject of much debate in the press and among advocacy groups. That is in part because there are competing theories about what drives economic growth. Some subscribe to Keynesian, demand-side factors, others Neo-classical, supply-side factors, while yet others subscribe to some mixture of the two or something entirely unique. The facts, historical and geographical variation in key parameters for example, should shed light on the debate. However, the economy is sufficiently complex that virtually any theory can find some support in the data.

TaxFor instance, the Congressional Research Service (CRS) has found support for the theory that taxes have no effect on economic growth by looking at the U.S. experience since World War II and the dramatic variation in the statutory top marginal rate on individual income. They find the fastest economic growth occurred in the 1950s when the top rate was more than ninety percent. However, their study ignores the most basic problems with this sort of statistical analysis, including: the variation in the tax base to which the individual income tax applies; the variation in other taxes, particularly the corporate tax; the short-term versus long-term effects of tax policy; and reverse causality, whereby economic growth affects tax rates. These problems are all well known in the academic literature and have been dealt with in various ways, making the CRS study unpublishable in any peer-reviewed academic journal.

So what does the academic literature say about the empirical relationship between taxes and economic growth? While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy. In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth. Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption taxes and property taxes.

Continue reading at Tax Foundation.

Foundations of a Free Society

Described as “An introduction to the core principles that define a free society,” I highly recommend this short book. It’s written by Eamonn Butler of the Adam Smith Institute and published by Institute of Economic Affairs, a British think tank whose mission is to “improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.” (Being written in British English, a few words are spelled wrongly now and then.)

Eamonn Butler
Eamonn Butler
The book may be purchased or downloaded at no charge at Foundations of a Free Society. Here is the summary of the book, as provided by the author:

  • Freedom creates prosperity. It unleashes human talent, invention and innovation, creating wealth where none existed before. Societies that have embraced freedom have made themselves rich. Those that have not have remained poor.
  • People in a free society do not become rich by exploiting others, as the elites of less-free countries do. They cannot become rich by making others poorer. They become rich only by providing others with what they want and making other people’s lives better.
  • The chief beneficiaries of the economic dynamism of free societies are the poor. Free societies are economically more equal than non-free societies. The poor in the most-free societies enjoy luxuries that were undreamed of just a few years ago, luxuries available only to the ruling elites of non- free countries.
  • International trade gives entrepreneurs new market opportunities and has helped lift more than a billion people out of abject poverty in the last twenty years. Freedom is truly one of the most benign and productive forces in human history.
  • Attempts by governments to equalise wealth or income are counter-productive. They destroy the incentives for hard work and enterprise and discourage people from building up the capital that boosts the productivity of the whole society.
  • A free society is a spontaneous society. It builds up from the actions of individuals, following the rules that promote peaceful cooperation. It is not imposed from above by political authorities.
  • Government has a very limited role in a free society. It exists to prevent harm being done to its citizens by maintaining and enforcing justice. It does not try to impose material equality and it does not prohibit activities just because some people consider them disagreeable or offensive. Leaders cannot plunder citizens for their own benefit, grant favours to their friends, or use their power against their enemies.
  • The government of a free society is constrained by the rule of law. Its laws apply to everyone equally. There must be?due process of law in all cases, with fair trials and no lengthy detention without trial. People accused of offences must be treated as innocent until proved guilty, and individuals must not be harassed by being prosecuted several times for the same offence.
  • Tolerating other people’s ideas and lifestyles benefits society. Truth is not always obvious; it emerges in the battle of ideas. We cannot trust censors to suppress only wrong ideas. They may mistakenly suppress ideas and ways of acting that would greatly benefit society in the future.
  • Communications technology is making it more difficult for authoritarian governments to hide their actions from the rest of the world. As a result, more and more countries are opening up to trade and tourism, and new ideas are spreading. More people see the benefits of economic and social freedom, and are demanding them.

Commercial property taxes in Wichita are high

An ongoing study reveals that generally, property taxes on commercial and industrial property in Wichita are high. In particular, taxes on commercial property in Wichita are among the highest in the nation.

The study is produced by Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence. It’s titled “50 State Property Tax Comparison Study, March 2014″ and may be read here. It uses a variety of residential, apartment, commercial, and industrial property scenarios to analyze the nature of property taxation across the country. I’ve gathered data from selected tables for Wichita. A pdf version of the table is available here.

A pdf version of this table is available.
A pdf version of this table is available; click here.
In Kansas, residential property is assessed at 11.5 percent of its appraised value. (Appraised value is the market value as determined by the assessor. Assessed value is multiplied by the mill levy rates of taxing jurisdictions in order to compute tax.) Commercial property is assessed at 25 percent of appraised value, and public utility property at 33 percent.

This means that commercial property pays 25 / 11.5 or 2.18 times the property tax rate as residential property. (The study reports a value of 2.263 for Wichita. The difference is likely due to the inclusion on utility property in their calculation.) The U.S. average is 1.716.

Whether higher assessment ratios on commercial property as compared to residential property is good public policy is a subject for debate. But because Wichita’s ratio is high, it leads to high property taxes on commercial property.

For residential property taxes, Wichita ranks below the national average. For a property valued at $150,000, the effective property tax rate in Wichita is 1.324 percent, while the national average is 1.508 percent. The results for a $300,000 property were similar.

Wichita commercial property tax rates compared to national average
Wichita commercial property tax rates compared to national average
Looking at commercial property, the study uses several scenarios with different total values and different values for fixtures. For example, for a $100,000 valued property with $20,000 fixtures (table 25), the study found that the national average for property tax is $2,591 or 2.159 percent of the property value. For Wichita the corresponding values are $3,588 or 2.990 percent, ranking ninth from the top. Wichita property taxes for this scenario are 38.5 percent higher than the national average.

In other scenarios, as the proportion of property value that is machinery and equipment increases, Wichita taxes are lower, compared to other states and cities. This is because Kansas no longer taxes this type of property.

‘Public Choice’ explains much of government and politics

Public Choice - A PrimerIf you’ve wondered why government is as it is, the school of public choice economics offers insight and explanation. The Institute of Economic Affairs, a London think tank, has published Public Choice — A Primer. This short book explains the topic of public choice. By understanding it, we can learn more about how government and its actors operate.

Here’s a description of public choice from the book’s web page:

“Market failure” is a term widely used by politicians, journalists and university and A-level economics students and teachers. However, those who use the term often lack any sense of proportion about the ability of government to correct market failures. This arises from the lack of general knowledge — and the lack of coverage in economics syllabuses — of Public Choice economics.

Public Choice economics applies realistic insights about human behaviour to the process of government, and is extremely helpful for all those who have an interest in — or work in — public policy to understand this discipline. If we assumes that at least some of those involved in the political process — whether elected representatives, bureaucrats, regulators, public sector workers or electors — will act in their own self-interest rather than in the general public interest, it should give us much less confidence that the government can “correct” market failure.”

Here is the executive summary of the book:

  • Public Choice applies the methods of economics to the theory and practice of politics and government. This approach has given us important insights into the nature of democratic decision-making.
  • Just as self-interest motivates people’s private commercial choices, it also affects their communal decisions. People also “economise” as voters, lobby groups, politicians and officials, aiming to maximise the outcome they personally desire, for minimum effort. Consequently the well-developed tools of economics — such as profit and loss, price and efficiency — can be used to analyse politics too.
  • Collective decision-making is necessary in some areas. However, the fact that the market may fail to provide adequately in such areas does not necessarily mean that government can do things better. There is “government failure” too. Political decision-making is not a dispassionate pursuit of the “public interest,” but can involve a struggle between different personal and group interests.
  • There is no single “public interest” anyway. We live in a world of value-pluralism: different people have different values and different interests. Competition between competing interests is inevitable. This makes it vital to study how such competing interests and demands are resolved by the political process.
  • The self-interest of political parties lies in getting the votes they need to win power and position. They may pursue the “median voter” — the position at the centre, where voters bunch. Government officials will also have their own interests, which may include maximising their budgets.
  • In this struggle between interests, small groups with sharply focused interests have more influence in decision-making than much larger groups with more diffused concerns, such as consumers and taxpayers. The influence of interest groups may be further increased because electors are “rationally ignorant” of the political debate, knowing that their single vote is unlikely to make a difference, and that the future effects of any policy are unpredictable.
  • Because of the enormous benefits that can be won from the political process, it is rational for interest groups to spend large sums on lobbying for special privileges — an activity known as “rent seeking.”
  • Interest groups can increase their effect still further by “logrolling” — agreeing to trade votes and support each other’s favoured initiatives. These factors make interest group minorities particularly powerful in systems of representative democracy, such as legislatures.
  • In direct democracy, using mechanisms such as referenda, the majority voting rule that is commonly adopted allows just 51 per cent of the population to exploit the other 49 per cent — as in the old joke that “democracy is two wolves and a sheep deciding who shall eat whom for dinner.” In representative democracies, much smaller proportions of the electorate can have undue influence.
  • Because of the problem of minorities being exploited — or minorities exploiting majorities — many Public Choice theorists argue that political decision-making needs to be constrained by constitutional rules.

The book may be purchased, or downloaded at no cost in several formats.

Wichita sales tax hike harms low income families most severely

Analysis of household expenditure data shows that a proposed sales tax in Wichita affects low income families in greatest proportion, confirming the regressive nature of sales taxes.

One of the criticisms of a sales tax is that it is regressive. That is, it affects low-income families in greatest proportion. This is an important consideration to explore, because in November Wichita voters will decide whether to create a new city sales tax of one cent per dollar. If enacted, the sales tax in Wichita would rise from 7.15 percent to 8.15 percent.

It’s an important issue because to hear some people talk, it seems as though they are saying the proposed tax is “one penny.” Anyone can afford that, they say. But the tax is an extra penny on each dollar spent, meaning that the cost of, say, fifty dollars of food at the grocery store increases by fifty cents, not one penny.

Further, we hear the sales tax spoken of as being a one percent increase. That’s true, if we mean a one percent increase in the cost of most things we buy. And one percent, after all, is just one percent. Not a big deal, people say. But considering the sales tax we pay, a relevant calculation is this: (8.15 – 7.15) / 7.15 = 14 percent. Which is to say, the amount of sales tax we pay will rise by 14 percent.

Click the table for a larger version.
Click the table for a larger version.
To explore the effect of the proposed sales tax on families of different incomes, I gathered data from the U.S. Census Bureau, specifically table 1101, which is “Quintiles of income before taxes: Annual expenditure means, shares, standard errors, and coefficient of variation, Consumer Expenditure Survey, 2012, (Selected Values).” This table divides families into five quintiles. It gives annual expenditures for each quintile in various categories. For each category, I judged whether it is subject to sales tax. For example, for housing, I indicated it is not subject to sales tax. This is not totally accurate, as some of the spending in this category may be for taxable items like maintenance and repair supplies. Food is subject to sales tax in Kansas, although low-income families may apply for a rebate of the tax. Despite these shortcomings, I feel this data gives us an approximation of the effect of the sales tax. (Click on the table to view a larger version, or see below for how to obtain the data.)

As you might imagine, as income rises, so does total taxable expenditures. Of interest, the percent of expenditures that are taxable is relatively constant across income levels.

Additional cost of proposed Wichita sales tax as percent of after-tax income, by income quintile. Click for larger version.
Additional cost of proposed Wichita sales tax as percent of after-tax income, by income quintile. Click for larger version.
An important finding is the bottom line of the table, which shows the increase in cost due to the proposed sales tax as percent of income after taxes. This calculates the relative impact of the proposed sales tax increase as a percent of income. It is here that we expect to see the regressive nature of a sales tax appear. For all consumers, the increase in cost is 0.35 percent. For the lowest class of income, the increase in cost is 0.97 percent of income. It falls to 0.26 percent for the highest income class.

This means that the lowest income class of families experience an increase nearly four times the magnitude as do the highest income families, as a percentage of after-tax income. This is the regressive nature of sales taxes illustrated in numbers, and is something that Wichita policy makers and voters should consider.

I’ve made the data available as a Google Docs spreadsheet. Click here for access.

Kansas sales tax on groceries is among the highest

Kansas has nearly the highest statewide sales tax rate for groceries. Cities and counties often add even more tax on food.

Additional cost of proposed Wichita sales tax as percent of after-tax income, by income quintile. Click for larger version.
Additional cost of proposed Wichita sales tax as percent of after-tax income, by income quintile. Click for larger version.
Only 14 states apply sales tax to food purchased at grocery stores for home consumption. This is generally in recognition that sales taxes are highly regressive. My research shows that the lowest income class of families experience a cost nearly four times the magnitude as do the highest income families, as a percentage of after-tax income. See Wichita sales tax hike would hit low income families hardest.

When we look at statewide sales tax rates applied to food, we see that Mississippi has the highest sales tax rate for food at 7.00 percent. Kansas is next at 6.15 percent, then Idaho at 6.00 percent.

Cities and counties often have additional sales taxes. Sedgwick County adds one percent for a total sales tax rate of 7.15 percent. If the proposed Wichita sales tax succeeds, the sales tax in Wichita, including on groceries, will be 8.15 percent.

It could be that some cities in other states have combined sales tax rates higher than what Wichita currently has, and what Wichita will have if the proposed sales tax passes. As an example, Oklahoma has a statewide sales tax of 4.5 percent that applies to groceries. With city and county taxes added, the rate in Oklahoma City is 8.375 percent. If the proposed sales tax passes, Wichita would be right behind at 8.15 percent.

Of note, those in Kansas have the possibility of receiving a food sales tax credit of $125. But this is something that must be applied for, and qualifying conditions must be met. Also, the credit is nonrefundable, meaning that applicants must have income tax liability of at least $125 to receive the full credit.

The following table shows the sales tax rate for states that apply sales tax to food. All other states have either no sales tax, or no sales tax on groceries. View below, or click here to open in a new window.

Wichita water rates seen as not encouraging conservation

Wichita water rates are about average for households using modest amounts of water. But households using a lot of water pay much less than average, leading us to wonder if Wichita could adjust its rates to encourage conservation and/or generate more revenue.

Data from a 2012 Black & Veatch survey of water and sewer rates in 50 large cities reveals an interesting characteristic of water rates.

Many cities have tiered water rates, where as a household uses more water, the marginal cost per gallon rises. This is the case in Wichita. Each household has its average winter consumption (AWC) as measured during the winter months. Presumably this is the water that is used for cooking, cleaning, flushing, bathing, and other indoor household needs. For Wichita city customers, for usage up to 110 percent of this value, or AWC, the rate is $1.77 per thousand gallons. For water used from 111 percent to 310 percent of AWC, the rate is $6.25 per thousand gallons. For use over this level, the rate is $9.13 per thousand gallons.

This means that water used inside the house — the presumed basis of AWC — has a low price in both winter and other seasons. But water used much above that value is more expensive. This is probably water used for swimming pools, irrigation of lawns, and other outside summer uses.

(The water usage is not the only cost that appears on Wichitans’ water bills. There is a minimum monthly charge and a charge for sewer service, and others.)

Water bills for different levels of usage. Average of 50 cities on top; Wichita on bottom. Click for larger version.
Water bills for different levels of usage. Average of 50 cities on top; Wichita on bottom. Click for larger version.
Back to the Black & Veatch survey. For the 50 cities in the survey, considering only the water portion of bills, the average cost for using 3,750 gallons per month is $19. For using 15,000 gallons, the cost is $65. That’s a ratio of 3.4 to 1.

For Wichita, the survey reported costs of $18 and $36, for a ratio of 2.0 to 1.

These are two important numbers: 3.4 and 2.0. They mean that while Wichita water becomes marginally more expensive as more is used, the slope is not nearly as steep as the average. It means that households that use low amounts of water pay about average rates, but those using a lot of water pay rates much less than average.

Does this mean that if Wichita is serious about conservation of water, that it could ramp up summer water rates more in like with other cities? It looks that way.

And would this provide the revenue the city says it needs to develop a new water supply?

Union Station TIF provides lessons for Wichita voters

A proposed downtown Wichita development deserves more scrutiny than it has received, as it provides a window into the city’s economic development practice that voters should peek through as they consider voting for the Wichita sales tax.

Next week a Wichita real estate developer will ask the Wichita City Council to approve a package of incentives for the redevelopment of Union Station in downtown Wichita. The proposal contains many facets that citizens need to understand. Additionally, the city’s handling of this matter is something that voters will want to keep in mind as they make their decision on the proposed Wichita sales tax in November.

The city’s documents on this matter are available at Resolution Considering the Establishment of the Union Station Redevelopment District (Tax Increment Financing).

Tax increment financing

Union Station LLC is asking for TIF, or tax increment financing. Most commonly, TIF works like this: A city borrows money (by issuing bonds) and gives the cash to a development. After the project is built and has a higher assessed value, the city uses the increased property tax payments (the “increment” in TIF) from the development to pay off the bonds. This obviously is risky for cities, because if the development doesn’t generate sufficient increment in tax payments to cover the bond payments, the city will have to make up the difference. This has happened in Wichita.

In recent years a new type of TIF has been created by statute, the “pay-as-you-go” TIF. Here, instead of issuing bonds and paying off the bonds with the incremental taxes, the city simply refunds the incremental taxes to the development. City documents describe: “The TIF statute also allows for projects to be financed on a pay-as-you-go basis, to reimburse the developer for eligible costs as TIF funds are received.”

This has less risk for cities, because if the hoped-for incrementally higher property taxes don’t materialize, the development doesn’t receive TIF proceeds. There are no bonds that must be paid. The developer just doesn’t receive what was projected. This is why the city claims that pay-as-you-go TIF has no risk to the city.

(Under pay-as-you-go TIF, since the city is essentially refunding nearly all property tax payments back to the development, we have to wonder why the city requires the taxes be paid at all. Also, there is the charade of spending TIF money only on “eligible” project costs. But the criteria for eligibility is broad, and we can be sure that developers will do all they can to make sure costs are characterized as eligible. But the eligibility criteria allows cities to appear to be fiscally prudent. Cities say they don’t allow TIF proceeds to be spent on just anything, but only on eligible costs.)

Here’s what the agenda packet says about this TIF: “Union Station LLC proposes to combine pay-as-you-go TIF with private financing to finance the proposed redevelopment project. The developer will finance through private sources all costs of the redevelopment project, including TIF-eligible project costs. Pay-as-you-go TIF revenue will be used to reimburse the developer on an annual basis with proof of expenditure of TIF-eligible redevelopment project costs.”

Buried in this paragraph is some financial slight-of-hand. Wichitans need to understand this so that they can be fully informed on this proposed transaction.

The problem lies is the meanings of the terms “to finance” and “to pay for.” Financing is the process of securing money to pay the costs of acquiring something. If financing is in the form of a loan, the economics of the transaction is that the borrower receives cash (assets go up) but also incurs an obligation to pay back the cash (liabilities go up by the same amount).

Then, when the borrower uses this cash to buy something — like a historic train station — one form of asset is exchanged for another. Cash is exchanged for title to the property.

It’s in the future, as the loan is repaid, that needs examination. The goal of real estate development is that the developer creates a project that generates more money coming in than loan payments going out. If this happens, it is a signal that the developer has met customer needs and has used capital in a way that makes everyone better off.

But there’s a confounding factor involved in the “pay for” part of the transaction that the city council will consider next week. The burden of some of the loan repayments will be born by the taxpayer. We don’t know for sure, but undoubtedly Union Station LLC will borrow money to make the project work. Proceeds from the TIF will be used to make at least some of the loan payments.

This is where the slight-of-hand comes in. The city says “The developer will finance through private sources …” That much is true. The city is not loaning any money. But some of the money used to pay back the private loans will come from TIF proceeds. So it is property tax payments being re-routed back to the developer that actually pays for part of the development: “Pay-as-you-go TIF revenue will be used to reimburse the developer on an annual basis …”

This is the heart of the transaction. It’s what citizens need to understand. Instead of Union Station LLC’s property taxes being used to pay the cost of government, nearly all of these taxes will pay off the owner’s loans.

The purchase of the property

Here’s what city documents state regarding the purchase of the property: “The $6,226,156 in equity is proposed to be in the form of $1,500,000 from the purchase of the property that will be contributed as collateral, $3,766,156 in monetized historic tax credits, and $960,000 in cash.”

It’s the “purchase of the property” that needs scrutiny. More from the city documents: “The developer would be compensated for the fair market value of the land where public access improvements would be located, not to exceed the $1,500,000 actual site acquisition cost. The Public Access Easement attachment illustrates that the portions of the site where a public access easement would be acquired is 274,059 square feet and that the average land acquisition cost of 10 comparable downtown properties is $6.71 per square foot, placing the fair market value of the land where the public access improvements would be located at $1,839,147.”

What’s happening is that part of the land area of the project is being called “public access improvements.” These are things like, according to city documents, “parking structure, pedestrian boardwalk, paving, utilities, and landscaping.” The city is proposing to pay the developer $1,500,000 for these areas.

If the council agrees to this, new avenues will have been opened for spending taxpayer funds. It places other commercial developers and landlords at a disadvantage. Consider, say, the recent Whole Foods Market that opened in Wichita. What Union Station LLC wants is like that developer asking to be reimbursed for the shrubs and grass that was planted, or the parking spaces that are provided. The public will, after all, view the sunlight reflected from the grass and breathe the oxygen generated by the shrubs. And, the public will park in the spaces. These “public access improvements” are part of what is necessary to provide an attractive and desirable development. It’s part of what businesses do to attract customers and earn profits. But the Union Station developer is asking that the city pay him for providing these things. If the council agrees to this, we can expect to see this template applied repeatedly in the future.

The missing tax credits

City documents state this regarding the sources of funds for the project: “Private to Public Investment Ratio — The proposed private capital investment is $36,578,000, and the proposed public capital investment is $17,321,000, resulting in a private to public capital investment ratio of 2.1 to 1.” But missing from this calculation is the contribution of taxpayers in the form of historic preservation tax credits. As reported above, the city reports the project will receive $3,766,156 in monetized historic tax credits.

(Tax credits are economically equivalent to a grant of cash from government. Commonly their value is used to boost the “private” equity contribution to the project. But since the tax credits come from government, we ought to call it the “peoples’ equity.”)

I inquired of city officials whether the historic preservation tax credits are federal, state, or both. The answer I received: “The Developer has not yet provided the City with details on the tax credits. However, staff analyzed the project to ascertain a ballpark estimate of how much it could generate in both state and federal tax credits and came up with a similar amount. We assume that $3,766,156 is the amount of net proceeds to be injected into the project from the sale of tax credits and that it is discounted from the face value of the credits.”

So it seems like the city is surmising things that may or may not be part of the developer’s plan.

False sales tax exemption applied

There’s another level of uncertainty in the city documents. In the analysis performed by Center for Economic Development and Business Research at Wichita State University, about $1.8 million in sales tax exemptions are included in the analysis. In my reading of the project documents, I didn’t see the project qualifying for sales tax exemptions. Upon inquiry to the city, I received this response: “The only incentive program available to Union Station that would provide a sales tax exemption is IRBs. The Developer did not request IRBs or a sales tax exemption. I would guess that CEDBR factored it into the cost-benefit analysis to be extra conservative.”

It appears there is a lack of communication between the city and CEDBR. More surmising. Exactly which incentives are available to be tapped by this project, and in what amount? Can we trust the analysis from CEDBR if it includes incentives that the project has not requested and is not eligible to receive?

Benefit-cost ratios

Benefit-cost ratios of Union Station LLC project for City of Wichita. Click for larger version.
Benefit-cost ratios of Union Station LLC project for City of Wichita. Click for larger version.
The city has a policy that economic development projects should have a benefit-cost ratio of 1.3 to 1 or greater. For this project, CEDBR reports these ratios:

City General Fund, 1.04
City Debt Service Fund, 1.15
Total City, 1.08
Sedgwick County, 1.06
State of Kansas, 1.66
School district, 7.19

For the city and county, the ratios are far below 1.3 to 1. There are many exceptions and loopholes in the incentive policy that allows the city to participate in projects with less than the 1.3 ratio.

The (un)certainty of city policies

For this project we see that city policy is being modified on the fly to meet the circumstances of a particular project. This is not necessarily bad. Entrepreneurship demands flexibility. But the city promises certainty in its standards, and city officials say Wichita has a transparent, open government. The Public-Private Partnership Evaluation Criteria for the redevelopment of downtown Wichita states “The business plan recommends public-private partnership criteria that are clear, predictable, and transparent.”

But as in the past, we find the city’s policies are anything but predictable and transparent. City documents state: “In the opinion of the evaluation team, the established criteria do not adequately address projects such as Union Station where the requested incentives do not involve City debt.” So we see the “clear, predictable, and transparent” policies discarded and reformulated. How are future developers supposed to know which policies can be waived or rewritten? How are citizens supposed to trust that city hall is looking out for their interests when policies are so fluid?

Kansas personal income grows

A recent spurt of growth of personal income in Kansas is welcome, considering the history of Kansas in this regard.

Kansas personal income grew in the quarter ending in June, with the Wichita Business Journal reporting “Kansas ranked 14th among states for second-quarter personal income growth.” The article also noted “According to data released Tuesday by the Bureau of Economic Analysis, personal income grew by 1.7 percent in the second quarter of 2014, faster than the national growth rate of 1.5 percent.”

Strong growth in personal income is good. But strong growth is not the norm for Kansas. The nearby chart shows cumulative growth of personal income in the states since 1990, with Kansas highlighted. Total growth for Kansas is 190 percent. For the entire county, it is 198 percent. For Plains states, 196 percent.

This is relevant to the decision Kansans will make in November when deciding their vote for governor. Progressive voices urge a return to the policies of Kathleen Sebelius and her successor (2003-2011), and Bill Graves (1995-2003). Sebelius, a Democrat, and Graves, a Republican, are seen by Progressives as paragons of “moderate,” “common-sense” leadership that is now — they say — missing.

An interactive visualization of personal income data is available for use here. You may select different time periods and any grouping of states. One of more states may be highlighted. There are similar charts in the visualization that show change in personal income year-over-year, and change from previous quarter.

Personal Income Growth in the States, Kansas highlighted. Click for larger version.
Personal Income Growth in the States, Kansas highlighted. Click for larger version.

Kansas economy has been underperforming

Those who call for a return to the economic policies of past Kansas gubernatorial administrations may not be aware of the performance of the Kansas economy during those times.

There are a variety of ways to measure the economic performance of states and countries. Job growth is one. Output, or gross domestic product, is another.

Real GDP by state, Kansas highlighted, through 2013.
Real GDP by state, Kansas highlighted, through 2013. Click for larger version.

The nearby chart contains two views of GDP for Kansas and nearby states. Kansas is the dark line. The charts shows GDP for private industries only. (By using the interactive visualization, you can show other industries, time periods, and states.)

The top chart shows the percentage change in GDP from the previous year. The bottom chart shows the cumulative growth in GDP since 1997. Both charts illustrate that the performance of the Kansas economy is nothing to crow about, and it’s been that way for a long time.

You may use the visualization yourself. Click here to open it in a new window. There are other visualizations of data, including jobs creation by states, available here.

WichitaLiberty.TV: Economist Art Hall on Wichita’s water and economic development

In this episode of WichitaLiberty.TV: Economist Dr. Art Hall of the Center for Applied Economics at The University of Kansas talks about issues relevant to the proposed Wichita sales tax, particularly water and economic development. View below, or click here to view on YouTube. Episode 60, broadcast September 28, 2014.

Is Kansas a rural, agriculture state?

One of the most-often repeated themes heard during the Kansas Governor debate at the Kansas State Fair is that Kansas is a rural state, and that agriculture is vital to our state’s economy. It’s not just gubernatorial candidates that say this. It seems to be common knowledge.

Rural populations of the states. Click for larger version.
Rural populations of the states. Click for larger version.
There may be several ways to measure the “ruralness” of a state. One way is the percent of the state’s people that live in rural areas. The U.S. Census Bureau has these statistics. In the chart made from these statistics, Kansas is right in the middle of the states. 25.80 percent of Kansans live in rural areas.

As for the importance of agriculture to the Kansas economy, figures from the Bureau of Economic Analysis (part of the U.S. Department of Commerce) tell us that in 2013 agriculture contributed $6,914 million to the Kansas GDP. Total GDP in Kansas that year was $144,062 million, meaning that agriculture accounted for 4.8 percent of total Kansas economic production. That is a pretty high number; only six states have a higher percentage of GDP from agriculture.

Do these numbers mean anything? It’s common for Kansas politicians to emphasize — and perhaps exaggerate — whatever connections they may have to a family farm. It’s part of a nostalgic and romanticized view of Kansas, the Kansas of Home on the Range. We are the “Wheat State” and “Breadbasket of the World,” and “One Kansas farmer feeds 128 people (plus you).”

So while Kansas is in the middle in the ranking of percent of population living in rural areas, agriculture is a larger component of state income than all but a few states. Still, agriculture is less than five percent of Kansas income. Policymakers should keep this in mind, although politicians may not.

Labor unions have harmed our standard of living

This Labor Day, as progressives promote their protection and advancement of workers, let’s become aware of the harm that labor unions have caused. George Reisman summarizes:

Far from being responsible for improvements in the standard of living of the average worker, labor unions operate in more or less total ignorance of what actually raises the average worker’s standard of living. In consequence of their ignorance, they are responsible for artificial inequalities in wage rates, for unemployment, and for holding down real wages and the average worker’s standard of living. All of these destructive, antisocial consequences derive from the fact that while individuals increase the money they earn through increasing production and the overall supply of goods and services, thereby reducing prices and raising real wages throughout the economic system, labor unions increase the money paid to their members by exactly the opposite means. They reduce the supply and productivity of labor and so reduce the supply and raise the prices of the goods and services their members help to produce, thereby reducing real wages throughout the economic system.

The full article is Labor Unions Are Anti-Labor.

Wichita arena sales tax not a model of success

Supporters of a new sales tax in Wichita use the Intrust Bank Arena as an example of successful application of a sales tax.

As Wichita debates the desirability of a sales tax, a former sales tax is used as a model of success. Let’s take a look at a few of the issues.

Ongoing vs. capital expenses

A portion of the proposed sales tax will be used for operational expenses, and the demand for this spending will not end when the sales tax ends.

The sales tax for the Intrust Bank Arena was used to build a capital asset and establish a small reserve fund. Spending on capital assets is characterized by a large expense in a short period of time as the asset is constructed. Then, the spending is over — sort of.

For the proposed Wichita sales tax, 63 percent is scheduled for capital asset spending on an enhanced water supply. The remainder, 37 percent, is for operation of the bus transit system, street repair, and economic development. These three items are operational in nature, meaning they are ongoing expenses. It’s not likely that after five years the bus system will be self-sustaining, or that streets will no longer need repair, or that there will be no more clamoring for economic development.

There is a large difference, then, between the arena sales tax and the proposed Wichita sales tax. While sales tax boosters say the tax will end in five years, the likelihood is that because much of it will have been paying for operational expenses, there will be great pressure to continue the tax and the spending it supports. That’s because the appetite for tax revenue by government and its cronies is insatiable. An example: As the arena sales tax was nearing its end, Sedgwick County Commissioner Tim Norton “wondered … whether a 1 percent sales tax could help the county raise revenue.” (“Norton floats idea of 1 percent county sales tax,” Wichita Eagle, April 4, 2007)

Intrust Bank Arena economics

Having promoted a false and incomplete picture of the economics of the Intrust Bank Arena, civic leaders now use it as a model of success.

The building of a new arena in downtown Wichita was promoted as an economic driver. So far, that hasn’t happened. There have been spurts of development near the arena. But the arena is also surrounded by empty lots and empty retail space, and there have been months where no events took place at the arena.

Regarding the accounting of the profits earned by the arena, we need to realize that civic leaders are not telling citizens the entire truth. If proper attention was given to the depreciation expense of Intrust Bank Arena, that would recognize and account for the sacrifices of the people of Sedgwick County and its visitors to pay for the arena. This would be a business-like way of managing government — something we’re promised. But that hasn’t happened.

Civic leaders and arena boosters promote a revenue-sharing arrangement between the county and the arena operator, referring to this as profit or loss. But this arrangement is not an accurate and complete accounting, and it hides the true economics of the arena. An example of the incomplete editorializing comes from Rhonda Holman of the Wichita Eagle, who earlier this year wrote “Though great news for taxpayers, that oversize check for $255,678 presented to Sedgwick County last week reflected Intrust Bank Arena’s past, specifically the county’s share of 2013 profits.”

There are at least two ways of looking at the finances of the arena. Most attention is given to the “profit” (or loss) earned by the arena for the county according to an operating and management agreement between the county and SMG, a company that operates the arena.

This agreement specifies a revenue sharing mechanism between the county and SMG. For 2103, the accounting method used in this agreement produced a profit of $705,678, to be split (not equally) between SMG and the county. The county’s share, as Holman touted, was $255,678. (Presumably that’s after deducting the cost of producing an oversize check for television cameras.)

The Operations of Intrust Bank ArenaWhile described as “profit” by many, this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations and are not intended to be a presentation in conformity with accounting principles generally accepted in the United States of America.”

That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid, and how the county participates.

A much better reckoning of the economics of the Intrust Bank Arena can be found in the 2013 Comprehensive Annual Financial Report for Sedgwick County. The CAFR, as described by the county, “… is a review of what occurred financially at Sedgwick County in 2013. In that respect, it is a report card of our ability to manage our financial resources.” Regarding the arena, the CAFR states:

The Arena Fund represents the activity of the INTRUST Bank Arena that opened on January 9, 2010. The facility is operated by a private company; the county incurs expenses only for certain capital improvements or major repairs and depreciation, and receives as revenue only a share of profits earned by the operator, if any. The Arena had an operating loss of $4.7 million. The loss can be attributed to $5.3 million in depreciation expense.

Financial statements in the same document show that $5,295,414 was charged for depreciation in 2013, bringing accumulated depreciation to a total of $21,190,280.

Depreciation expense is not something that is paid out in cash. Sedgwick County didn’t write a check for $5,295,414 in depreciation expense. Instead, depreciation accounting provides a way to recognize the cost of long-lived assets over their lifespan. It provides a way to recognize opportunity costs, that is, what could be done with our resources if not spent on the arena.

Any honest reckoning of the economic performance of Intrust Bank Arena must include depreciation expense. We see our governmental and civic leaders telling us that we must “run government like a business.” Without frank and realistic discussion of numbers like these and the economic facts they represent, we make decisions based on incomplete and false information.

Effect on sales and jobs

Taxes have an impact. Definitely.

Boosters of the proposed Wichita sales tax say that since it is so small — “just one cent,” they say — its effect won’t be noticed. I wonder: If increasing prices by one percent has no effect, why don’t merchants raise their prices by one percent right now and pocket the profit?

Taxes have an impact. The problem with assessing the impact is that the results of the tax are usually concentrated and easy to see — a new arena, water supply, repaved streets, more buses, etc. But the consequences of the tax are usually spread out over a large number of people and collected in small amounts. The costs are dispersed, and therefore more difficult to detect. But there has been an analysis performed of a situation parallel to the Intrust bank Arena tax.

A paper titled “An Assessment of the Economic Impact of a Multipurpose Arena” by Ronald John Hy and R. Lawson Veasey, both of the University of Central Arkansas, (Public Administration & Management: An Interactive Journal 5, 2, 2000, pp. 86-98) looked at the effect of jobs and economic activity during the construction of the Alltel Arena in Pulaski County, Arkansas. This arena cost $50 million. It was funded in part by a one percent increase in the county sales tax for one year (1998). The sales tax generated $20 million.

In the net, considering both jobs lost and jobs gained due to sales tax and construction effects, workers in the wholesale and retail trades lost 60 jobs, and service workers lost 52 jobs. There was a net increase of 198 jobs in construction.

The fact that jobs were lost in retail should not be a surprise. When a sales tax makes nearly everything sold at retail more expensive, less is demanded. It may be difficult to estimate the magnitude of the change in demand, but it is certain that it does change.

The population of Pulaski County in 2000 was 361,474, while Sedgwick County’s population at the same time was 452,869, so Sedgwick County is somewhat larger. The sales tax for the arena lasted 2.5 times as long, and our arena was about three times as expensive. How these factors affected the number of jobs is unknown, but it’s likely that the number of jobs lost in Sedgwick County in retail and services was larger that what Pulaski County experienced.

Employment in the states

There are dueling claims and controversy over employment figures in Kansas and our state’s performance relative to others. I present the actual data in tables and interactive visualizations that you can use to make up your own mind.

(Let’s keep in mind that jobs are not necessarily the best measure of economic growth and prosperity. Russell Roberts relates an anecdote: “The story goes that Milton Friedman was once taken to see a massive government project somewhere in Asia. Thousands of workers using shovels were building a canal. Friedman was puzzled. Why weren’t there any excavators or any mechanized earth-moving equipment? A government official explained that using shovels created more jobs. Friedman’s response: ‘Then why not use spoons instead of shovels?'”)

It’s important to note there are two series of employment data provided by the U.S. Bureau of Labor Statistics, which is part of the U.S. Department of Labor. The two series don’t measure exactly the same thing. A document from BLS titled Employment from the BLS household and payroll surveys: summary of recent trends explains in brief: “The Bureau of Labor Statistics (BLS) has two monthly surveys that measure employment levels and trends: the Current Population Survey (CPS), also known as the household survey, and the Current Employment Statistics (CES) survey, also known as the payroll or establishment survey. … These estimates differ because the surveys have distinct definitions of employment and distinct survey and estimation methods.”

Employment in the States, Year-Over-Year Change, Private Industries, Kansas Highlighted
Employment in the States, Year-Over-Year Change, Private Industries, Kansas Highlighted
Importantly, since the CES gets its data from employers, it reports on jobs located in the state where the company is located, not where workers live. Similarly, the CPS reports data based on where people live, not where they work. For areas that straddle state lines — like the Kansas City Metropolitan Area — this is an important factor.

Another BLS document explains in detail the differences between the CPS and CES data. For example: CES: “Designed to measure employment, hours, and earnings with significant industrial and geographic detail” CPS: “Designed to measure employment and unemployment with significant demographic detail.”

Another difference: CES: “Self-employed persons are excluded.” CPS: “Self-employed persons are included.” (See Understanding the employment measures from the CPS and CES survey.)

Employment Levels, Year-Over-Year Change, Kansas Highlighted
Employment Levels, Year-Over-Year Change, Kansas Highlighted
I’ve gathered data from BLS and made it available in two interactive visualizations. One presents CPS data; the other holds CES data. You can compare states, select a range of dates, and choose seasonally-adjusted or not seasonally-adjusted data. I’ve create a set that allows you to easily choose Kansas and our nearby states, since that seems to be relevant to the current discussion. (I included Texas in this set, as we often compare ourselves to that state.) The visualizations show indexed data, meaning that we see the relative change in values from the first date shown. There is also year-over-year changes illustrated.

Here is the visualization for Current Establishment Survey data, and here is visualization for Current Population Survey data.

Quarterly state GDP data released

A new series of GDP data shows government growing faster in Kansas than in most states, with private sector growth near the middle of the states.

From the Bureau of Economic Analysis (part of the U.S. Department of Commerce):

Today, the U.S. Bureau of Economic Analysis released prototype statistics of quarterly gross domestic product (GDP) by state for 2005–2013. These new statistics provide a more complete picture of economic growth across states that can be used with other regional data to gain a better understanding of regional economies as they evolve from quarter to quarter.

The new data provide a fuller description of the accelerations, decelerations, and turning points in economic growth at the state level, including key information about changes in the distribution of industrial infrastructure across states. These prototype statistics are released for evaluation and comment by data users.

I gathered data from this new series of data and present it in an interactive visualization. You may view the data in tabular form, or in charts that show cumulative growth, change from previous quarter, and change from previous year. You may choose to display one or more industries, and one or more states. Click here to use the visualization.

Growth of Quarterly Gross Domestic Product by State, Government, Kansas highlighted
Growth of Quarterly Gross Domestic Product by State, Government, Kansas highlighted
Growth of Quarterly Gross Domestic Product by State, Private Industries, Kansas highlighted
Growth of Quarterly Gross Domestic Product by State, Private Industries, Kansas highlighted

Wichita sales tax hike would hit low income families hardest

Analysis of household expenditure data shows that a proposed sales tax in Wichita affects low income families in greatest proportion, confirming the regressive nature of sales taxes.

One of the criticisms of a sales tax is that it is regressive. That is, it affects low-income families in greatest proportion. This is an important consideration to explore, because in November Wichita voters will decide whether to create a new city sales tax of one cent per dollar. If enacted, the sales tax in Wichita would rise from 7.15 percent to 8.15 percent.

It’s an important issue because to hear some people talk, it seems as though they are saying the proposed tax is “one penny.” Anyone can afford that, they say. But the tax is an extra penny on each dollar spent, meaning that the cost of, say, fifty dollars of food at the grocery store increases by fifty cents, not one penny.

Further, we hear the sales tax spoken of as being a one percent increase. That’s true, if we mean a one percent increase in the cost of most things we buy. And one percent, after all, is just one percent. Not a big deal, people say. But considering the sales tax we pay, a relevant calculation is this: (8.15 – 7.15) / 7.15 = 14 percent. Which is to say, the amount of sales tax we pay will rise by 14 percent.

Click the table for a larger version.
Click the table for a larger version.
To explore the effect of the proposed sales tax on families of different incomes, I gathered data from the U.S. Census Bureau, specifically table 1101, which is “Quintiles of income before taxes: Annual expenditure means, shares, standard errors, and coefficient of variation, Consumer Expenditure Survey, 2012, (Selected Values).” This table divides families into five quintiles. It gives annual expenditures for each quintile in various categories. For each category, I judged whether it is subject to sales tax. For example, for housing, I indicated it is not subject to sales tax. This is not totally accurate, as some of the spending in this category may be for taxable items like maintenance and repair supplies. Food is subject to sales tax in Kansas, although low-income families may apply for a rebate of the tax. Despite these shortcomings, I feel this data gives us an approximation of the effect of the sales tax. (Click on the table to view a larger version, or see below for how to obtain the data.)

As you might imagine, as income rises, so does total taxable expenditures. Of interest, the percent of expenditures that are taxable is relatively constant across income levels.

Additional cost of proposed Wichita sales tax as percent of after-tax income, by income quintileAn important finding is the bottom line of the table, which shows the increase in cost due to the proposed sales tax as percent of income after taxes. This calculates the relative impact of the proposed sales tax increase as a percent of income. It is here that we expect to see the regressive nature of a sales tax appear. For all consumers, the increase in cost is 0.35 percent. For the lowest class of income, the increase in cost is 0.97 percent of income. It falls to 0.26 percent for the highest income class.

This means that the lowest income class of families experience an increase nearly four times the magnitude as do the highest income families, as a percentage of after-tax income. This is the regressive nature of sales taxes illustrated in numbers, and is something that Wichita policy makers and voters should consider.

I’ve made the data available as a Google Docs spreadsheet. Click here for access.

Charles Koch: How to really turn the economy around

Writing in USA Today, Charles Koch offers insight into why our economy is sluggish, and how to make a positive change.

Charles Koch: How to really turn the economy around

For years, Washington politicians have said that our economy is turning the corner. They said it in 2011, in 2013 and again last week — every time they report a quarter with 4% economic growth. But each time, the economy has turned sluggish again.

Like most Americans, I am deeply concerned about our weak economic recovery and its effects on millions of families. Opportunity, especially for the young and disadvantaged, is declining. High underemployment has become our new norm.

The effects of underemployment are not just economic, they are also social and psychological. Real work is an important part of how we define ourselves. Meaningful work benefits both us and others. Those who lack real jobs often end up depressed, addicted or aggressive.

Today, opportunities for such work are not what they should be. We need a different approach, focused less on politics and more on basic principles.

Continue reading at Charles Koch: How to really turn the economy around.

Economic development incentives in Wichita: A few questions

Wichita justifies its use of targeted economic development incentives by citing benefit-cost ratios that are computed for the city, county, school district, and state. If the ratio exceeds a threshold, the project is deemed worthy of investment.

Wichita City Budget Cover, 1962The process assumes that these benefit-cost ratios are valid. This is far from certain, as follows:

1. The benefits in the calculation are not really benefits. Instead, they’re in the form of projected higher tax revenues collected by governments. This is very different from the profits that private sector companies earn from their customers in voluntary market transactions.

2. Even if government collects more tax by offering incentives, it should not be the goal of government to grow just for the sake of growing.

3. Government claims that in order to get these “benefits,” incentives are necessary. But often the new economic activity (relocation, expansion, etc.) would have happened without the incentives.

4. Why is it that most companies are able to grow without incentives, but only a few companies require incentives? What is special about these companies? Why do some companies receive incentives year after year?

5. If the relatively small investment the city makes in incentives is responsible for such wonderful outcomes in terms of jobs, why doesn’t the city do this more often? If the city has such power to create economic growth, why is anyone unemployed?

Economic development incentives, at the margin

visualization-exampleThe evaluation of economic development incentives requires thinking at the margin, not the entirety.

When considering the effect of economic development incentives, cities like Wichita use a cost-benefit analysis to determine whether the incentive is in the best interests of the city. The analysis usually also considers the county, state, and school districts, although these jurisdictions have no say over whether the incentive is granted, with a few exceptions. The basic idea is that by paying money now or forgiving future taxes, the city gains even more in increased tax collections. This is then pitched as a good deal for taxpayers: The city gets more jobs (usually) and a profit, too.

Economic activity generates tax revenue flowing to governmental agencies. When people work, they pay income taxes. When they buy stuff, they pay sales taxes. When they create new property or upgrade existing property, it is taxed.

In the calculation of cost-benefit ratios, when a company receives economic development incentives, government takes credit for the increase in tax revenue. Government often says that without the incentive, the company would not have located in Wichita. Or, it might not have expanded in Wichita. Or these days, it is claimed that incentives are necessary to persuade companies to consider remaining in Wichita rather than moving somewhere else.

But there are a few problems with the arguments that cities and their economic development agencies promote. One is that the increase in tax revenue happens regardless of whether the company has received incentives. What about all the companies that locate to or expand in Wichita without receiving incentives?

Related is that jurisdictions may grant relatively small incentives and then take credit for the entire deal. I’ve been told that when economic development agencies learn of a company moving to an area or expanding, they swoop in with small incentives and take credit for the entire deal. The agency is then able to point to a small incentive that enabled a huge deal. As you can imagine, it’s difficult to get the involved parties to speak on the record about this.

The importance of marginal thinking

Here’s an example of the importance of looking at marginal gains rather than the whole enchilada. In 2012, the City of Wichita developed a program called New HOME (New Home Ownership Made Easy). The crux of the program is to rebate Wichita city property taxes for five years to those who buy newly-built homes in certain neighborhoods under certain conditions.

Wichita City HallThe important question is how much new activity this program will induce. Often government takes credit for all economic activity that takes place. This ignores the economic activity that was going to take place naturally — in this case, new homes that are going to be built even without this subsidy program. According to data compiled by Wichita Area Builders Association and the WSU Center for Economic Development and Business Research — this is the data that was current at the time the Wichita city council made its decision to authorize the program — in 2011 462 new homes were started in the City of Wichita. The HOME program contemplated subsidizing 1,000 homes in a period of 22 months. That’s a rate of 545 homes per year — not much more than the present rate of 462 per year. But, the city has to give up collecting property tax on all these homes — even the ones that would be built anyway.

What we’re talking about is possibly inducing a small amount of additional activity over what would happen naturally and organically. But we have to subsidize a very large number of houses in order to achieve that. The lesson is that we need to evaluate the costs of this program based on the marginal activity it may induce, not all activity. For more, see Wichita new home tax rebate program: The analysis.

Job growth in the states and Kansas

Let’s ask critics of current Kansas economic policy if they’re satisfied with the Kansas of recent decades.

Critics of Kansas Governor Sam Brownback and his economic policies have pounced on slow job growth in Kansas as compared to other states.

Private sector employment growth in the states, Kansas highlighted. Click for larger version.
Private sector employment growth in the states, Kansas highlighted. Click for larger version.
The nearby illustration shows private sector job growth in the states during the period of the Graves/Sebelius/Parkinson regimes. This trio occupied the governor’s office from 1994 to 2011. Kansas is the dark line.

At the end of this period, Kansas is just about in the middle of the states. But notice that early in this period, the line for Kansas is noticeably nearer the top than the bottom. As time goes on, however, more states move above Kansas in private sector job creation.

Private sector employment growth in the states, year-over-year change, Kansas highlighted. Click for larger version.
Private sector employment growth in the states, year-over-year change, Kansas highlighted. Click for larger version.
The second illustration shows the one-year change in private sector job growth, Kansas again highlighted. Note there are some years during the first decade of this century where Kansas was very near the bottom of the states in this measure.

Some Kansas newspaper editorialists and candidates for office advocate for a return to the policies of Graves/Sebelius/Parkinson. Let’s ask them these questions: First, are you aware of the poor record of Kansas? Second, do you want to return to job growth like this?

How to use the visualization.
How to use the visualization.
I’ve gathered and prepared jobs data in an interactive visualization. You may click here to open the visualization in a new window and use it yourself. Data is from Bureau of Labor Statistics, U.S. Department of Labor. This data series is the Current Employment Statistics (CES), which is designed to measure employment, hours, and earnings with significant industrial and geographic detail. More information about his data series is at Understanding the employment measures from the CPS and CES survey.

Examining Wichita’s water future

From Kansas Policy Institute.

water fountain gargoyles fountain-197334_640A proposal before the Wichita City Council would raise the sales tax in the city by 1% to fund several projects. The biggest piece of the proposal would be to fund additional water capacity for users of the city water system.

On Thursday 17 July, come hear from the City of Wichita and others on the scope of the problems, possible solutions, and the perspectives of several experts in the debate.

Click here to register for this event.

Date: Thursday 17 July
When: 7:30 a.m. registration and 8:00 a.m. start to presentations
Where: Wichita State University MetroPlex Room 132 ( 29th and Oliver)
Cost: Free with Advance Registration

A light breakfast will be served. The session will conclude by 12:15 p.m.

Speaker Line-up and Agenda:
7:30 a.m. — Registration and Breakfast
8:00 a.m. — Kansas Water Office on scope of water usage/needs in SCKS
9:00 a.m. — City of Wichita Proposal: Alan King, Dir. of Public Works, accompanied by Councilman Pete Meitzner
10:00 a.m. — Are Water Markets Applicable in Kansas?: Dr. Art Hall, executive director of the Center for Applied Economics at the University of Kansas
11:00 a.m. — Wichita Chamber of Commerce Water Task Force Findings: Karma Mason, president of iSi Environmental

KPI is not taking a position of the water proposal before the City Council. This event is to provide a forum for relevant parties to present their perspective on the issue with the public. Each presenter will have 30 minutes for a presentation followed by an Q&A.

This is the first in a series of KPI-sponsored forums of this nature on the different aspects of the sales tax proposal. Future forums will be held on the economic development and street and transit proposals.

For more information about this event contact Kansas Policy Institute at 316.634.0218. To register, click here.

Corporate income tax rates in U.S. are self-defeating

Over the past two decades most large industrial countries have reduced their corporate income tax rates. Two countries, however, stand out from this trend: France and The United States.

In Abolish the Corporate Income Tax economist Laurence J. Kotlikoff writes “I, like many economists, suspect that our corporate income tax is economically self-defeating — hurting workers, not capitalists, and collecting precious little revenue to boot.”

Top Marginal Corporate Income Tax Rate in G7 CountriesHigh taxes in America cause companies to invest overseas in order to escape these high American taxes. For example, Apple takes steps to minimize the income tax it pays, as do most companies. In Calculating Apple’s True U.S. Tax Rate law professor Victor Fleischer explains and estimates what rate Apple pays:

The whole point of the Senate hearing was to show how Apple shifts substantial amounts of its economic profits from the United States to Ireland, where they are taxed at a rate close to zero. Those profits are then sheltered in Ireland and untaxed unless Apple decides to bring the cash back to the United States.

These overseas profits create deferred tax liabilities that will not be taxed until the cash is repatriated. But Apple is reluctant to repatriate its overseas cash; it would rather lobby for another tax holiday and bring the cash back tax-free. An added benefit of a tax holiday for Apple is that it would provide a quick jump in reported earnings when the accounting entry for the deferred tax liability is reversed. …

Thus, Apple’s “true U.S. tax rate,” according to my own calculation, was 8.2 percent.

The corporate income tax rate in the United States is 35 percent. So how does Apple pay such a lower rate to the U.S? It locates operations overseas. It earns profits overseas, and pays taxes there.

Using the visualization.
Using the visualization.
If corporate tax rates were lowered, we’d see more economic activity here rather than overseas. That would help workers in America, as they can’t easily move their capital and investments overseas to take advantage of lower tax rates. But the wealthy — like Apple’s shareholders — can do that, and they have.

Using data gathered by Tax Policy Center at Brookings Institution, I’ve prepared an interactive visualization of corporate income tax rate trends over time. Click here to open the visualization in a new window.

With new tax exemptions, what is the message Wichita sends to existing landlords?

As the City of Wichita prepares to grant special tax status to another new industrial building, existing landlords must be wondering why they struggle to stay in business when city hall sets up subsidized competitors with new buildings and a large cost advantage.

Tomorrow the Wichita City Council considers whether to grant property and sales tax exemptions to a proposed speculative industrial building in north central Wichita. If approved, this will be the second project undertaken under new economic development policies that allow for this type of tax exemption.

Those with tax abatementsCity documents estimate that the property tax savings for the first year will be $312,055. This exemption will be granted for five years, with a second five year period possible if performance goals are met.

The city documents also state that the project will also apply for a sales tax exemption, but no estimate of these tax savings are given. It’s common for a project of this type to have about half its cost in purchases subject to sales tax. With “site work and building” at $10,350,000, sales tax in Wichita on half that amount is $370,012. Undoubtedly a rough estimate, it nonetheless gives an idea of how much sales tax the developers will avoid paying.

(If city hall has its way, the sales tax in Wichita will soon increase by one cent per dollar, meaning the developers of this project would save $421,762 in sales tax. While others will hurry to make purchases before the higher sales tax rate takes effect — if it does — these developers will be in no hurry. Their sales tax is locked in at zero percent. In fact, once having a sales tax or property tax exemption, these developers are now in a position to root for higher sales and property tax rates, as that increases costs for their competitors, thereby giving these tax-exempt developers a competitive advantage.)

City documents give 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’s not known whether these ratios include the sales tax forgiveness.

Wichita City Budget Cover, 1992While 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.

When the city granted a similar tax exemption to a speculative warehouse in southwest Wichita, my estimates were that its landlord has a cost advantage of about 20 percent over other property owners. Existing industrial landlords in Wichita — especially those with available space to rent and those who may lose tenants to this new building — must be wondering why they struggle to stay in business when city hall sets up subsidized competitors with new buildings and a large cost advantage.

Wichita property taxes

Property taxes in Wichita are high for industrial buildings, and even higher for commercial buildings. See Wichita property taxes compared. So it’s difficult to blame developers for seeking relief. But instead of offering tax relief to those who ask and to those city hall approves of, it would be better to have lower taxes for everyone.

Targeted economic development incentives

The targeted economic development efforts of governments like Wichita fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. In the case of the Wichita, do we really know which industries should be targeted? Is 1.3 to one really the benchmark we should seek, or would we be better off by insisting on 1.4 to one? Or should we relax the requirement to 1.2 to one so that more projects might qualify?

This assumes that these benefit-costs ratios have validity. This is far from certain, as follows:

1. The benefits that government claims are not really benefits. Instead, they’re in the form of higher tax revenue. This is very different from the profits companies earn in voluntary market transactions.

2. Government claims that in order to get these “benefits,” the incentives must be paid. But often the new economic activity (expansion, etc.) would have happened anyway without the incentives.

3. Why is it that most companies are able to grow without incentives, but only a few companies require incentives? What is special about these companies?

4. If the relatively small investment the city makes in incentives is solely responsible for such wonderful outcomes in terms of jobs, why doesn’t the city do this more often? If the city has such power to create economic growth, why is anyone unemployed?

Do incentives work?

The uncontroverted peer-reviewed research tells us that targeted economic development incentives don’t work, if we consider the entire economy. See: Research on economic development incentives. Some of the conclusions of the studies listed there include:

No evidence of incentive impact on manufacturing value-added or unemployment”

Small reduction in employment by businesses which received Ohio’s tax incentives”

No evidence of large firm impacts on local economy”

No permanent employment increase across a quasi-experimental panel of all Cabela’s stores”

“Employment impact of large firms is less than gross job creation (by about 70%)”

These research programs illustrate the fallacy of the seen and the unseen. It is easy to see the jobs being created by economic development incentives. It’s undeniable that jobs are created at firms that receive incentives, at least most of the time. But these jobs are easy to see. It’s easy for news reporters to find the newly-hired and grateful workers, or to show video footage of a new manufacturing plant.

But it’s very difficult to find specific instances of the harm that government intervention produces. It is, generally, dispersed. People who lose their jobs usually don’t know the root cause of why they are now unemployed. Businesses whose sales decline often can’t figure out why.

But evidence tells us this is true: These incentives, along with other forms of government interventionism, do more harm than good.

Government employee costs in the states

The states vary widely in levels of state government and local government employees and payroll costs, calculated on a per-person basis. Kansas ranks high in these costs, nationally and among nearby states.

Two states have annual payroll costs of over $4,000, calculated by taking the total payroll cost and dividing by population. Many states operate on little more than half that. Only ten states have total government employee payroll costs greater than Kansas, on a per-person basis. (This does not include federal government employees.)

State and Local Government Employees, Kansas and Nearby States 2014-06When looking at a selection of nearby states, we see that only Nebraska has higher payroll costs for state and local government employees, when calculated on a per-person basis using the state’s population.

This data is from the U.S. Census Bureau for 2012, the most recent year available. Using Tableau Public, I created an interactive visualization. I show the full-time equivalent employees divided by the population for each state. Also, the annual payroll divided by population. (The Census Bureau supplies payroll data for only one month, the month of March, so I multiply by 12 to produce an approximation of annual payroll cost.)

Using the visualization: Sorting and selecting.
Using the visualization: Sorting and selecting.
There are two series of data, “Local government” and “State government.” The first series refers to the number of local government employees in each state, such as city and county employees. The second series refers to the number of state government employees in each state. Check boxes allow you to include either or both series in the chart.

By clicking on column headers or footers (“State,” “Annual payroll per person,” Full-time equivalent employees per person”) you can sort by these values.

Click here to open the visualization in a new window. Data is from United States Census Bureau, Government Employment & Payroll, released March 2014.

Tax collections by the states

Kansas state government collects more tax revenue than most surrounding states. Additionally, severance taxes are a minor contribution to collections, even in Texas.

The United States Census Bureau conducts an Annual Survey of State Government Tax Collections. It’s useful to gather figures for Kansas and some nearby states.

The data considers only tax collections by state government. It does not include cities, counties, school districts, or the many other taxing jurisdictions that states may have formed. I have computed this data on a per-person basis. Data is for 2013.

State tax collections for Kansas and some nearby states. Click for a larger version.
State tax collections for Kansas and some nearby states. Click for a larger version.
Considering total tax collections by state governments, note that Kansas, at $2,633 per person per year, is only slightly below the average for all states. For a group of nearby states, Arkansas and Iowa have higher state tax collections than Kansas. Nebraska, Oklahoma, Colorado, Texas, and Missouri are lower.

In some cases, state tax collections are substantially lower. Texas collects $1,955 per person per year, which is 25.75 percent less than Kansas.

Using the visualization.
Using the visualization.
Of note are severance taxes, which are taxes collected based on the extraction of oil, gas, and sometimes minerals. Kansas has a severance tax that produces, on a per person basis, $26 per year. In Texas the same tax produces $176 per person per year, and in Oklahoma, $134.

I’ve created an interactive visualization of this data that you may use. Click here to open the visualization in a new window.

Wichita property taxes compared

An ongoing study reveals that generally, property taxes on commercial and industrial property in Wichita are high. In particular, taxes on commercial property in Wichita are among the highest in the nation.

The study is produced by Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence. It’s titled “50 State Property Tax Comparison Study, March 2014″ and may be read here. It uses a variety of residential, apartment, commercial, and industrial property scenarios to analyze the nature of property taxation across the country. I’ve gathered data from selected tables for Wichita. A pdf version of the table is available here.

A pdf version of this table is available.
A pdf version of this table is available; click here.
In Kansas, residential property is assessed at 11.5 percent of its appraised value. (Appraised value is the market value as determined by the assessor. Assessed value is multiplied by the mill levy rates of taxing jurisdictions in order to compute tax.) Commercial property is assessed at 25 percent of appraised value, and public utility property at 33 percent.

This means that commercial property pays 25 / 11.5 or 2.18 times the property tax rate as residential property. (The study reports a value of 2.263 for Wichita. The difference is likely due to the inclusion on utility property in their calculation.) The U.S. average is 1.716.

Whether higher assessment ratios on commercial property as compared to residential property is good public policy is a subject for debate. But because Wichita’s ratio is high, it leads to high property taxes on commercial property.

For residential property taxes, Wichita ranks below the national average. For a property valued at $150,000, the effective property tax rate in Wichita is 1.324 percent, while the national average is 1.508 percent. The results for a $300,000 property were similar.

Wichita commercial property tax rates compared to national average
Wichita commercial property tax rates compared to national average
Looking at commercial property, the study uses several scenarios with different total values and different values for fixtures. For example, for a $100,000 valued property with $20,000 fixtures (table 25), the study found that the national average for property tax is $2,591 or 2.159 percent of the property value. For Wichita the corresponding values are $3,588 or 2.990 percent, ranking ninth from the top. Wichita property taxes for this scenario are 38.5 percent higher than the national average.

In other scenarios, as the proportion of property value that is machinery and equipment increases, Wichita taxes are lower, compared to other states and cities. This is because Kansas no longer taxes this type of property.

Krugman on solutions to health care

Following are excerpts from New York Times columns by economist and Nobel Laureate Paul Krugman. You may tweet your reaction to him at @NYTimeskrugman.

Well, I know about a health care system that has been highly successful in containing costs, yet provides excellent care. And the story of this system’s success provides a helpful corrective to anti-government ideology. For the government doesn’t just pay the bills in this system — it runs the hospitals and clinics.

No, I’m not talking about some faraway country. The system in question is our very own Veterans Health Administration, whose success story is one of the best-kept secrets in the American policy debate. (Health Care Confidential, January 27, 2006)

“You see, we actually have a real live case of impressive cost control in health care: the VA system.” (Medicare and the VA, May 27, 2009)

What Mr. Romney and everyone else should know is that the V.H.A. is a huge policy success story, which offers important lessons for future health reform.

Many people still have an image of veterans’ health care based on the terrible state of the system two decades ago. Under the Clinton administration, however, the V.H.A. was overhauled, and achieved a remarkable combination of rising quality and successful cost control. Multiple surveys have found the V.H.A. providing better care than most Americans receive, even as the agency has held cost increases well below those facing Medicare and private insurers. Furthermore, the V.H.A. has led the way in cost-saving innovation, especially the use of electronic medical records.

What’s behind this success? Crucially, the V.H.A. is an integrated system, which provides health care as well as paying for it. So it’s free from the perverse incentives created when doctors and hospitals profit from expensive tests and procedures, whether or not those procedures actually make medical sense. And because V.H.A. patients are in it for the long term, the agency has a stronger incentive to invest in prevention than private insurers, many of whose customers move on after a few years. (Vouchers for Veterans, November 13, 2011)

For Wichita, water supply decisions loom

Now that the Wichita City Council has all but recommended that voters raise taxes in order to spend $250 million for water supply enhancements, citizens need to consider recent history and how current decisions are made.

Through the Community Investments Plan process and by other means, citizens have told the City of Wichita they’re concerned about future water supply.

Those who have been paying attention might be surprised that there is a water crisis. That’s because when Bob Knight was mayor, he was told that Wichita had sufficient water for the next 50 years. That was about eleven years ago.

Wichita area future water supply coverMore recently, the city prepared a document in March 2013 titled Wichita Area Future Water Supply: A Model Program for Other Municipalities. It touts an expensive investment that is part of a “plan to ensure that Wichita has the water it needs through the year 2050 and beyond.”

The project boasted of is the City of Wichita Aquifer Storage and Recovery Program or ASR. Its cost, so far for Phases I and II, is $247 million. According to the document, two more phases are contemplated.

City of Wichita Aquifer Storage and Recovery Program schematic diagram.
City of Wichita Aquifer Storage and Recovery Program schematic diagram.

Reading the document, published just last spring, one might be led to believe that everything is fine, water-wise: “In 1993 the Wichita City Council adopted an Integrated Local Water Supply Plan that identified cost effective water resources that would be adequate to meet Wichita’s water supply needs through the year 2050.”

But earlier this year the Wichita Eagle reported “Wichita’s $240 million aquifer storage and recovery program — promoted to taxpayers in the early 1990s as a way to supply the city with water for 50 years — could soon be relegated to serving as a bit player in the city’s long-term water future.”

Later in the same article, the newspaper reported “The ASR project has been plagued by problems, city officials said, including equipment failures and a significant drought that idled the project because of low water levels in the Little Arkansas River.”

Economic vs. political thinking

It appears the plan the city council favors is to expand the ASR project at a cost of $250 million, thereby doubling the amount spent on this project. Some council members have noted the low utilization of the ASR and see its expansion as a way to wring greater efficiency from the plant.

But this mode of thinking is not rational. What has been spent on the ASR is now properly classified as sunk costs. These are costs that have been spent and can’t be recovered. Sunk costs are not relevant to future decisions. Instead, the city needs to focus on the marginal improvements that can be made, and how to get the best value for these future costs.

That’s the economic way of making decisions. But, of course, decisions on Wichita’s future water supply are being made in the political sphere.

How did Wichita get in this position?

It’s vitally important that Wichita develop a plan for an abundant water supply. At the same time, we ought to be asking, as does Johnny Stevens, how this problem developed. The Wichita Business Journal reported this last summer:

Wichita officials — thanks to a couple of weeks of rain — said they were able this week to dodge possible water restrictions and punitive measures as a means of coping with the ongoing drought.

But Wichita developer Johnny Stevens voiced to me today something I have heard from others in the community recently.

“How did it even get to this point?” Stevens said. “It shouldn’t have gotten this far.”

Stevens thinks poor leadership is to blame and can’t understand how elected officials ever let the community seemingly come so close to the edge of such a critical issue.

He said long-term solutions are needed, but he also warns that they have to be made using solid data. Continue reading at Developer Johnny Stevens on water issue: How did it get to this?

Long-term thinking: This is not characteristic of political leaders, whose time horizon rarely extends beyond the next election season. Are there other ways to secure water for Wichita? Is Wichita considering private-sector solutions?

In Kansas and Wichita, there’s a reason for slow growth

If we in Kansas and Wichita wonder why our economic growth is slow and our economic development programs don’t seem to be producing results, there is data to tell us why: Our tax rates are too high.

In 2012 the Tax Foundation released a report that examines the tax costs on business in the states and in selected cities in each state. Location Matters Tax Foundation coverThe news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms.

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

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

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

There are more categories. Kansas ranks well in none.

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

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

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

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

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

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

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

The record in Wichita

Earlier this year Greater Wichita Economic Development Coalition issued its annual report on its economic development activities for 2013. Its efforts, in its own words, “represent a projected 1,117 new jobs.”

gwedc-office-operationsThis report shows us that power of government to influence economic development is weak. GWEDC’s information said these jobs were for the geographical area of Sedgwick County. According to the Bureau of Labor Statistics, the labor force in Sedgwick County in 2013 was 242,744 persons. So the jobs created by GWEDC’s actions amounted to 0.46 percent of the labor force. This is a vanishingly small fraction. It is statistical noise. Other economic events overwhelm these efforts.

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

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

It seems in Wichita that the thinking of our leaders has not reached the level of maturity required to understand that targeted incentives have great cost and damage the business climate. Instead of creating an environment in which all firms have a chance to thrive, government believes it can identify firms that are subsidy-worthy — at the exclusion of others.

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

Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is Embracing Dynamism: The Next Phase in Kansas Economic Development Policycritical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

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

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

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

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

Uber, not for Wichita

A novel transportation service worked well for me on a recent trip to Washington, but Wichita doesn’t seem ready to embrace such innovation.

Have you heard of Uber and similar services? Uber says it is “… evolving the way the world moves. By seamlessly connecting riders to drivers through our [smartphone] apps, we make cities more accessible, opening up more possibilities for riders and more business for drivers. From our founding in 2009 to our launches in over 70 cities today, Uber’s rapidly expanding global presence continues to bring people and their cities closer.”

Uber works like this: Riders use their smartphones and the Uber app to request a ride. Drivers — who have undergone an application process and background check — acknowledge the request and pick up the rider. When the dropoff is made, payment is handled through the Uber app.

Being driven by Uber on the Washington Beltway.
Being driven by Uber on the Washington Beltway.
My first trip using Uber was from Dulles International Airport to my hotel in downtown Washington, a pretty long trip at nearly 27 miles. My Uber fare was $59.50. While that is expensive, my hotel’s website listed cab fare as $60. A private sedan would be $90, with reservations required.

So it seems like Uber is priced about the same as a regular taxicab. But: There’s a big difference. The Uber fare is all-inclusive. The way I elected to pay with Uber — which I suspect is probably the easiest way — was to store my credit card with the Uber system. As we approached my destination, I asked my driver if I could add a tip through the Uber app. He said no, there’s no need to. As he transferred my luggage to the bellman, it seemed awkward to not offer a tip. But I confirmed with DC natives that’s the way it is with Uber: No tipping.

No tipping! That’s refreshing. I’m tired of cab drivers extorting tips. But you may be asking: What motivates Uber drivers to offer good service? One factor is that customers rate their drivers through the smartphone app. An intriguing factor is that Uber drivers rate their passengers. Also, a customer service representative followed up regarding my trip. Another thing: My drivers seemed to like their job. They took pride in their clean cars and amenities.

And what service it was. There are several levels of Uber service. I used UberX, which is the least expensive. Other Uber services available in some cities include luxury cars or SUVs. The three cars I rode in were a Toyota Prius, a Lexus, and a Volvo. All were impeccably clean — both the cars and the polite drivers. On all three rides I was offered a bottle of water. Two cars had magazines for me to read. One had a bowl of wrapped candy on the seat next to me. Drivers asked if I was comfortable with the setting of the air conditioning. They were not blasting their radios, as has been the case with some of my cab trips.

In short, the service was great. While the Uber fare was the same as what my hotel estimated for a taxi fare, there was an important difference — no tip to the Uber driver. No need for cash, no need for a taxi driver to fumble with an awkward method of accepting credit cards.

A receipt from a trip using Uber. Click for larger version.
A receipt from a trip using Uber. Click for larger version.
And … a neat receipt available on the Uber website or in my email. When I’ve asked a cab driver for a receipt, I’ve received a blank form.

And … I had an estimate of the fare before I requested a driver. In my case, the estimate was $60.00, with the actual fare at $59.50. Remember, no tipping.

Uber in Wichita?

Recently Uber and Lyft (a similar service) started operations in Kansas City, Missouri. Nearly immediately the city council passed additional regulations that make it tougher — or impossible — for these services to operate.

Requesting an Uber driver.
Requesting an Uber driver.
In Wichita, it’s certain that Uber would be in violation of city ordinances. In 2012 the city passed new taxi regulations which erect and enforce substantial barriers to entering the taxicab market. Some of the most restrictive include these: Drivers must work for a company that has a central office staffed at least 40 hours per week; a taxicab company must have a dispatch system operating 24 hours per day, seven days per week; it must have enough cabs to operate city-wide service, which the city has determined is ten cabs; and a supervisor must be on duty at all times cabs are operating.

A dispatch system. That’s 1950s technology. Uber and similar services use smartphones. No dispatcher needed. No central office required. When you request a ride with the Uber app, you see a screen showing the available drivers nearby, along with an estimate of when the driver will arrive. You can watch the driver’s progress towards your pickup location. Can you do that with Wichita’s cab companies with their supervisors and dispatch systems?

Requesting a driver in Wichita using Uber. It's not available.
Requesting a driver in Wichita using Uber. It’s not available.
Wichita has implemented regulations regarding the hygiene and local knowledge of taxi drivers, enforced by bureaucrats. How is Uber regulated? First, there are the customer ratings, a powerful force. Then, provided with Uber receipts is a map of the route the driver took to deliver riders to their destinations. If riders are concerned that drivers are padding fares by taking roundabout routes, that’s easy to see and resolve, and the Uber dashboard lets riders request a fare review. Can you imagine how difficult that would be in Wichita, to prove that your driver padded your fare or extorted a tip?

Regulation by bureaucrats, or regulation by customers. There’s a difference, and Wichita is served by the least effective, thanks to our city council.

To top it off, while Wichita has regulations regarding the personal hygiene of drivers and the cleanliness of their vehicles, the city fell short in protecting drives from something really important, like violent crime. After the city passed the new regulations, a passenger was raped by a driver. The Wichita Eagle reported “[the driver] shouldn’t have received a taxi license but did because the new change banning registered sex offenders wasn’t communicated to staff members doing background checks on taxi driver applicants, city officials told The Eagle on Friday. The city has fixed the problem that led to the oversight in Spohn’s case, they said.” (See Regulation failure leads to tragedy in Wichita.)

wichita-taxi regulationsThe regulations regarding customer service training were implemented. But the really important regulations? Lack of oversight, says the city. Which leads us to wonder: Who is regulating the regulators? If an Uber driver committed such a crime, the company would undoubtedly be held liable and experience a loss of reputation. But how do we hold city bureaucrats accountable for their regulatory failures?

Going forward

Will Wichita consider relaxing taxicab regulations so that Wichitans might be served by a superior service like Uber? Not likely, I would say. The city council is proud of the new and restrictive regulations. The city is served by three taxi companies, two having the same owner. These companies are likely to lobby aggressively against allowing Uber and similar services in Wichita, just as taxi companies have done in other cities.

Recent discussion about the future of transit in Wichita have not included services like Uber. At last week’s city council meeting Council Member Janet Miller (district 6, north central Wichita) spoke about baby boomers who may soon be aging and either can’t drive, or don’t want to drive. Yet, she said, they have disposable income and want to spend it. These are ideal customers for Uber.

Uber and the like might not be a total replacement for traditional city bus transit. But it could help many people, and it could provided needed competition to the city’s taxicab fleet. But it doesn’t seem likely that we’ll see Uber in Wichita soon, if at all.

Intrust Bank Arena: Not accounted for like a business

Proper attention given to the depreciation expense of Intrust Bank Arena in downtown Wichita recognizes and accounts for the sacrifices of the people of Sedgwick County and its visitors to pay for the arena. It’s a business-like way of accounting, but a well-hidden secret.

Sedgwick County Working for YouThe true state of the finances of the Intrust Bank Arena in downtown Wichita are not often a subject of public discussion. Arena boosters promote a revenue-sharing arrangement between the county and the arena operator, referring to this as profit or loss. But this arrangement is not an accurate and complete accounting, and hides the true economics of the arena. What’s missing is depreciation expense.

An example of the incomplete editorializing comes from Rhonda Holman of the Wichita Eagle, who opined “Though great news for taxpayers, that oversize check for $255,678 presented to Sedgwick County last week reflected Intrust Bank Arena’s past, specifically the county’s share of 2013 profits.”

Earlier reporting on this topic in the Eagle did not mention depreciation expense, either.

There are at least two ways of looking at the finance of the arena. Most attention is given to the “profit” (or loss) earned by the arena for the county according to an operating and management agreement between the county and SMG, a company that operates the arena.

This agreement specifies a revenue sharing mechanism between the county and SMG. For 2103, the accounting method used in this agreement produced a profit of $705,678, to be split (not equally) between SMG and the county. The county’s share, as Holman touted, was $255,678. Presumably that’s after deducting the cost of producing an oversize check for the television cameras.

The Operations of Intrust Bank ArenaWhile described as “profit” by many, this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations and are not intended to be a presentation in conformity with accounting principles generally accepted in the United States of America.”

That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid, and how the county participates.

A much better reckoning of the economics of the Intrust Bank Arena can be found in the 2013 Comprehensive Annual Financial Report for Sedgwick County. This document holds additional information about the finances of the Intrust Bank Arena. The CAFR, as described by the county, “… is a review of what occurred financially at Sedgwick County in 2013. In that respect, it is a report card of our ability to manage our financial resources.”

Regarding the arena, the CAFR states:

The Arena Fund represents the activity of the INTRUST Bank Arena that opened on January 9, 2010. The facility is operated by a private company; the county incurs expenses only for certain capital improvements or major repairs and depreciation, and receives as revenue only a share of profits earned by the operator, if any. The Arena had an operating loss of $4.7 million. The loss can be attributed to $5.3 million in depreciation expense.

Financial statements in the same document show that $5,295,414 was charged for depreciation in 2013, bringing accumulated depreciation to a total of $21,190,280.

Depreciation expense is not something that is paid out in cash. Sedgwick County didn’t write a check for $5,295,414 in depreciation expense. Instead, depreciation accounting provides a way to recognize and account for the cost of long-lived assets over their lifespan. It provides a way to recognize opportunity costs, that is, what could be done with our resources if not spent on the arena.

But some don’t recognize this. In years past, Commissioner Dave Unruh made remarks that show the severe misunderstanding that he and almost everyone labor under regarding the nature of the spending on the arena: “I want to underscore the fact that the citizens of Sedgwick County voted to pay for this facility in advance. And so not having debt service on it is just a huge benefit to our government and to the citizens, so we can go forward without having to having to worry about making those payments and still show positive cash flow. So it’s still a great benefit to our community and I’m still pleased with this report.”

Intrust Bank Arena commemorative monument
Intrust Bank Arena commemorative monument
The contention of Unruh and other arena boosters such as the Wichita Eagle editorial board is that the capital investment of $183,625,241 (not including an operating and maintenance reserve) on the arena is merely a historical artifact, something that happened in the past, something that has no bearing today. There is no opportunity cost, according to his view. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds.

Any honest accounting or reckoning of the performance of Intrust Bank Arena must take depreciation into account. While Unruh is correct in that depreciation expense is not a cash expense that affects cash flow, it is an economic fact that can’t be ignored — except by politicians, apparently.

We see our governmental and civic leaders telling us that we must “run government like a business.” Without frank and realistic discussion of numbers like these and the economic facts they represent, we make decisions based on incomplete and false information.

Kauffman index of entrepreneurial activity

The performance of Kansas in entrepreneurial activity is not high, compared to other states.

The Ewing Marion Kauffman Foundation prepares the Kauffman Index of Entrepreneurial Activity. According to the Foundation, “The Kauffman Index of Entrepreneurial Activity is a leading indicator of new business creation in the United States. Capturing new business owners in their first month of significant business activity, this measure provides the earliest documentation of new business development across the country.”

Kauffman Index of Entrepreneurial Activity, showing Kansas highlighted against neighboring states. Click for larger version.
Kauffman Index of Entrepreneurial Activity, showing Kansas highlighted against neighboring states. Click for larger version.
As shown by the data, Kansas ranks low in entrepreneurial activity. This is true when Kansas is compared to the nation, and also when compared to a group of nearby states.

I’ve prepared two visualizations that present this data. One holds data for all states. Click here to open it in a new window.

Instructions for using the visualization of Kauffman data. Click for larger version.
Instructions for using the visualization of Kauffman data. Click for larger version.
A second visualization presents the data for Kansas and some nearby states. Click here to open it in a new window.

Visualization created using Tableau Public.