Tag Archives: Economics

The Kansas economy and agriculture

There’s no need for Kansas state government to exaggerate the value of agriculture to the Kansas economy.

A recent press release from the office of Kansas Governor Sam Brownback quoted the governor thusly: “Agriculture is our largest economic driver, bringing more than $63 billion into the Kansas economy.” (Governor Sam Brownback visits will reinforce the importance of Kansas agriculture, August 17, 2015.)

$63 billion is a lot of output. It’s about 43 percent of the Kansas economy. A document supplied by the Kansas Department of Agriculture provides more detail: “As shown in the above table, agriculture, food, and food processing supports 229,934.1 jobs, or 12% of the entire workforce in the county [sic]. These industries provide a total economic contribution of approximately $62.8 billion, roughly 43% of Gross Region Product (GRP).” (Estimated Economic Impact of Agriculture, Food, and Food Processing Sectors, May 7, 2015.)

The document explains how such a large number is obtained. It includes three components, explained here: “Direct, indirect, and induced effects sum together to estimate the total economic contribution in the state. Direct effects capture the contribution from agricultural and food products. Indirect effects capture the economic benefit from farms and agricultural businesses purchasing inputs from supporting industries within the state. Induced effects capture the benefits created when employees of farms, agricultural businesses, and the supporting industries spend their wages on goods and services within the state.”

This method of reckoning economic impact is from a model called IMPLAN. It is a proprietary system with methodology and assumptions not open to inspection. It often used by those who are asking government for money or tax breaks. IMPLAN comes up with some real whoppers as to how important an industry is to the economy. When shown these figures, government officials are usually swayed to grant incentives.

There’s a problem, however. Agriculture cannot possibly be responsible for 43 percent of Kansas GDP. The U.S. Bureau of Economic Analysis (BEA) has figures for each state showing the contribution to GDP for industry categories. I’ve gathered the data and calculated percentages for each industry. As you can see, the category “Agriculture, forestry, fishing, and hunting” accounts for $8,136 million or 5.5 percent of Kansas GDP. There are seven other industry categories that rank above agriculture.

Gross Domestic Product for Kansas by Industry.
Gross Domestic Product for Kansas by Industry.

5.5 percent is a long way from the governor’s claim of 43 percent. It is true that the title of the paper is “Estimated Economic Impact of Agriculture, Food, and Food Processing Sectors.” So consider these industry subsectors:

Food and beverage and tobacco products manufacturing of $3,463 million (2013 value; 2104 not available)
Food services and drinking places $2,776 million (Also 2013 value)

If we add these to agriculture, we have production worth 9.8 percent of Kansas GDP. This is being overly generous to agriculture. It counts all bars and restaurants as part of the agriculture industry, something that makes no sense.

So how do we take these numbers and pump them up to 43 percent? IMPLAN, that’s how. It’s true that when an industry causes economic activity to occur, it spawns other economic activity. These are the indirect and induced effects that IMPLAN produces. But these numbers are hugely inflated. And when we take all industries, economic activity is counted more than once.

Recall there are seven industry categories ranking above agriculture. When it suits its needs, each of these uses IMPLAN to boost its importance to the state. Consider manufacturing, which at 13.1 percent of GDP is the third-largest industry in Kansas. When manufacturing companies appeal to state or local government for subsidies, they use IMPLAN or related mechanisms to inflate their importance. Almost everyone does this. It’s standard procedure.

Except: When everyone claims the same indirect and induced economic activity, such analysis becomes meaningless. If we added up the IMPLAN-calculated value of each industry to the Kansas economy, we’d end up with a value several times larger than the actual value.

This is what the Kansas Department of Agriculture and Governor Sam Brownback have done. We expect this behavior from companies or local economic development agencies when they appeal for economic development incentives. They need to inflate their importance to gullible government bureaucrats and elected officials. But Governor Brownback doesn’t need to do this, and neither does the Kansas Department of Agriculture. From them, all we want is the truth, and nothing more.

Cost of restoring quality of life spending cuts in Sedgwick County: 43 deaths

An analysis of public health spending in Sedgwick County illuminates the consequences of public spending decisions. In particular, those calling for more spending on zoos and arts must consider the lives that could be saved by diverting this spending to public health, according to analysis from Kansas Health Institute.

Kansas Health Institute is concerned about proposed reductions in public health spending in Sedgwick County. Sunday it released a fact sheet titled Decreases in Public Health Spending Associated with More Deaths from Preventable Causes, subtitled “Analysis of how proposed public health funding reductions in Sedgwick County could lead to more preventable deaths over time.”

Kansas Health Institute infographic
Kansas Health Institute infographic
KHI’s analysis is based on the paper “Evidence Links Increases In Public Health Spending To Declines In Preventable Deaths,” Glen P. Mays and Sharla A. Smith, Health Affairs, 30, no.8 (2011):1585-1593, available here. Excerpts from the paper are below. KHI summarizes the findings of the paper as: “In short, the research showed that increased spending by local public health agencies over the thirteen-year period studied was linked to statistically significant declines in deaths from some preventable causes such as infant mortality, heart disease, diabetes and cancer.”

KHI developed a model based on the paper’s findings to conclude that the proposed reductions in spending on public health in Sedgwick County would result in the deaths show in the nearby table from their fact sheet. The total of these numbers is an additional 65 deaths per year.

Perhaps in response to these findings, two Sedgwick County Commissioners have proposed eliminating the proposed cuts. To help understand the effects of this spending, I duplicated the analysis performed by KHI. I took the proposed increases in spending (or reductions in cuts) and subtracted the spending for public health, leaving $1,019,499 in spending that loosely qualifies as “quality of life” spending. It’s for things like the zoo, Exploration Place, economic development, and the like.

Sedgwick County spending analysis based on Kansas Health Institute model. Click for larger version.
Sedgwick County spending analysis based on Kansas Health Institute model. Click for larger version.
As can be seen in the nearby illustration, if this quality of life spending was instead spent on public health, we could save 43 lives per year. Based on the methodology used by KHI, this is the human cost of restoring only the proposed cuts to quality of life spending in Sedgwick County. If we were to use the totality of quality of life spending, or even just a subset like the $5.3 million spent on an elephant exhibit, the cost in human lives is large. This, of course, assumes that the KHI methodology is valid and reliable.

In its summary, the KHI report states: “Budget decisions have real consequences.” Those supporting spending on quality of life issues instead of public health have some explaining to do.

Excerpts from Mays et al.

“On balance, there is very little empirical evidence about the extent to which differences in public health spending levels contribute to differences in population health. Several cross-national studies have found weak and conflicting associations between spending and health outcomes at a national level.”

In a section titled “Limitations” the authors note “Several limitations of this analysis are worthy of emphasis. Although we used strong statistical controls to address possible sources of bias, it remains possible that factors distinct from, but closely correlated with, public health spending may explain some of the observed associations between spending and mortality.”

Also, “Local public health activities may have important and perhaps more immediate effects on these other indicators of health … this analysis may underestimate the health consequences of changes in local public health spending.”

In conclusion, the authors write: “Our analysis supports the contention that spending on local public health activities is a wise health investment. Increasing such investments in communities with historically low levels of spending may provide an effective way of reducing geographic disparities in population health. However, more money by itself is unlikely to generate significant and sustainable health gains.”

In Sedgwick County, a moral crusade

In Sedgwick County the debate over the budget has the dimension of a moral crusade, except for one thing.

As Sedgwick County debates next year’s budget, the arguments against a three percent cut in spending have been heated. Proponents of spending say the commissioners are not honoring commitments (see here and here), the commissioners are being short-sighted and foolish for proposing cuts, the county has a moral obligation to use taxes to care for the needy, and that county spending has a great economic benefit.

But what isn’t often mentioned is the nature of taxation and government spending. A new video from Learn Liberty offers a perspective on the morality of government that seems to be totally missing in the debate. View the video below, or click here.

In summary, the video poses these questions:

1. Is it moral for you to donate your money and time to (the zoo, Exploration Place, arts, health care for the poor, vocational education, payments to companies so they remain in the county instead of moving, a livestock show, the river festival, the sports commission, etc.)?

2. Is it moral for you to force other people to donate their time and money to (same list as in question one)?

3. Is it moral for government to force people to donate their time and money to (same list as in question one)?

If you answer “no” to question two, then how do you justify answering “yes” to question three? All sorts of rationalizations are available to support these two answers, such as:

1. Society is like a club, and taxes are the dues.
2. Taxes are the price we pay for civilization.
3. Government owns the nation (state, county, city, school district), and if you want to live or do business there, you must pay rent.
4. Government gives (most) people back more in services and benefits than they pay in taxes.
5. Government makes investments with our taxes that earn it even more tax revenue.

Some of these have a grain of truth, such as taxes providing for the national defense and a justice system. These two things make it possible for us to be safe from foreign aggressors and to have our rights and property protected. It doesn’t take a whole lot — comparatively speaking — to provide these functions, but government goes way beyond.

In fact, the truth behind number four leads to a most uncivil society, where people spend vast amounts of time and money lobbying for government to take even more time and money away from others and give it to them — or to the things they think your money should be spent on. We end up fighting over things like zoos and arts, instead of cooperating to attain these desirable amenities.

And fight we do. The techniques are known in advance. The book Economics In One Lesson, first published in 1946 and available to read at the Foundation for Economic Education, explains fallacies (false or mistaken ideas) that are particularly common in the field of economics and public policy. At the very start of the book the author Henry Hazlitt explains:

Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics or medicine — the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for then plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.

An example of using the “best buyable minds” is the promotion of government spending on arts as having some magic power not present in other spending. These buyable minds have produced an impressive document titled Arts & Economic Prosperity III: The Economic Impact of the Nonprofit Arts and Culture Industry in the State of Kansas. It explains that when a theater company (presumably operating with a government grant) buys a gallon of paint, it sets off a chain of economic activity that benefits many people. True enough. It’s called commerce. But anyone buying the paint sets off the same chain of activity. The same, that is, except that homeowners spending their own money on paint are doing so voluntarily, while the government-subsidized theater company has used the force of government to take money from others.

That’s a big difference, and one lost on most residents of Sedgwick County. I’m hopeful that the people pleading for more taxation and spending are simply unaware of these considerations, as if so, their minds can change. The alternative is much more bleak.

In Wichita, an incomplete economic development analysis

The Wichita City Council will consider an economic development incentive based on an analysis that is nowhere near complete.

Tomorrow the Wichita City Council will consider granting a sales tax exemption for a real estate development in northeast Wichita. (For background, see In Wichita, benefitting from your sales taxes, but not paying their own.)

As evidence of the goodness of the project and why the city should forego collecting sales tax, the council has been presented with these benefit-cost figures:

City of Wichita General Fund: 44.67 to 1
City of Wichita Debt Service Fund: NA
Sedgwick County: 100.23 to 1
USD 375: NA
State of Kansas: 65.28 to 1

Undoubtedly council members will congratulate themselves on their wisdom and foresight for being able to invest $1.00 and get back $44.67 in return. And look at what a favor the council is doing for the county and state! For an investment of $1.00, they’ll get back $100.23 and $65.28.

If only these numbers were a true and accurate representation.

The source of these numbers is that the city is giving up a relatively small amount of sales tax revenue, but gaining a lot of property tax (and other tax) revenue in the future. This is true, as far as we can predict these things.

The problem is that one of the numbers used to calculate the benefit-cost ratio is incomplete, and far from being complete. (Click here to view the analysis prepared for the city.)

The source of the calculation starts with the city giving up $16,227 of its share of sales tax revenue, based on the action the council will likely approve on August 11. This is the city’s cost, according to city documents. Then, future tax revenues are estimated, discounted to present value, and compared to the cost. The result is the benefit-cost ratio.

This calculation could make sense if the city included all costs in the calculation. But it hasn’t done that. First, the project benefits from STAR bonds. These bonds carry a sales tax exemption on goods purchased with bond proceeds, which means that the city (and other jurisdictions) are forgoing the collection of other sales tax revenue in addition to the sales tax used in the present calculation. This foregone revenue is of precisely the same nature as other foregone sales tax revenue that the city includes in its calculation.

Additionally, the project benefits from up to $7,525,000 in STAR bonds financing. These bonds will be repaid by sales tax collections from the project and surrounding merchants. This represents more sales tax revenue that the city and other jurisdictions will not be able to spend on anything except paying principle and interest in these bonds.

If these costs were included in the benefit-cost ratio calculation, I don’t know what the result would be, except that it would be different, and probably a great deal lower. It might even be below the city’s threshold for projects.

No matter your opinion on the wisdom of the city investing in public-private partnerships, the city council ought to insist on complete information. That hasn’t happened in this case. The city is using only part of its costs, but pretending that these costs are responsible for producing all revenues.

Who do we hold accountable for this? The benefit-cost ratios are computed by the Center for Economic Development and Business Research (CEDBR) at Wichita State University. It uses figures provided by the city. In the past, when results like these have been questioned, the city has cited the economists at CEDBR as evidence that the figures are valid and reliable. By splitting the responsibility for these calculations, accountability is avoided.

Friedman: Laws that do harm

As we approach another birthday of Milton Friedman, here’s his column from Newsweek in 1982 that explains that despite good intentions, the result of government intervention often harms those it is intended to help.

There is a sure-fire way to predict the consequences of a government social program adopted to achieve worthy ends. Find out what the well-meaning, public-interested persons who advocated its adoption expected it to accomplish. Then reverse those expectations. You will have an accurate prediction of actual results.

To illustrate on the broadest level, idealists from Marx to Lenin and the subsequent fellow travelers claimed that communism would enhance both freedom and prosperity and lead to the “withering away of the state.” We all know the results in the Soviet Union and the People’s Republic of China: misery, slavery and a more powerful and all-encompassing government than the world had ever seen.

Continue reading Friedman: Laws that do harm

Friedman: The fallacy of the welfare state

As we approach another birthday of Milton Friedman, here’s an insightful passage from the book he wrote with his wife Rose: Free to Choose: A Personal Statement. It explains why government spending is wasteful, how it leads to corruption, how it often does not benefit the people it was intended, and how the pressure for more spending is always present.

A simple classification of spending shows why that process leads to undesirable results. When you spend, you may spend your own money or someone else’s; and you may spend for the benefit of yourself or someone else. Combining these two pairs of alternatives gives four possibilities summarized in the following simple table:

friedman-spending-categories-2013-07

Category I in the table refers to your spending your own money on yourself. You shop in a supermarket, for example. You clearly have a strong incentive both to economize and to get as much value as you can for each dollar you do spend.

Category II refers to your spending your own money on someone else. You shop for Christmas or birthday presents. You have the same incentive to economize as in Category I but not the same incentive to get full value for your money, at least as judged by the tastes of the recipient. You will, of course, want to get something the recipient will like — provided that it also makes the right impression and does not take too much time and effort. (If, indeed, your main objective were to enable the recipient to get as much value as possible per dollar, you would give him cash, converting your Category II spending to Category I spending by him.)

Category III refers to your spending someone else’s money on yourself — lunching on an expense account, for instance. You have no strong incentive to keep down the cost of the lunch, but you do have a strong incentive to get your money’s worth.

Category IV refers to your spending someone else’s money on still another person. You are paying for someone else’s lunch out of an expense account. You have little incentive either to economize or to try to get your guest the lunch that he will value most highly. However, if you are having lunch with him, so that the lunch is a mixture of Category III and Category IV, you do have a strong incentive to satisfy your own tastes at the sacrifice of his, if necessary.

All welfare programs fall into either Category III — for example, Social Security which involves cash payments that the recipient is free to spend as he may wish; or Category IV — for example, public housing; except that even Category IV programs share one feature of Category III, namely, that the bureaucrats administering the program partake of the lunch; and all Category III programs have bureaucrats among their recipients.

In our opinion these characteristics of welfare spending are the main source of their defects.

Continue reading Friedman: The fallacy of the welfare state

‘Love Gov’ humorous and revealing of government’s nature

A series of short videos from the Independent Institute entertains and teaches lessons at the same time.

Lov Gov trailer exampleThe Independent Institute has produced a series of humorous and satirical videos to present lessons about the nature of government. The Institute describes the series here:

Love Gov depicts an overbearing boyfriend — Scott “Gov” Govinsky — who foists his good intentions on a hapless, idealistic college student, Alexis. Each episode follows Alexis’s relationship with Gov as his intrusions wreak (comic) havoc on her life, professionally, financially, and socially. Alexis’s loyal friend Libby tries to help her see Gov for what he really is — a menace. But will Alexis come to her senses in time?

There are five episode (plus a trailer). Each episode is around five minutes long and presents a lesson on a topic like jobs, healthcare, and privacy. The episodes are satirical and funny. They’d be really funny if the topic wasn’t so serious. I recommend you spend a half-hour or so to view the series.

The link to view the video series is here.

The candlemakers’ petition

The arguments presented in the following essay by Frederic Bastiat, written in 1845, are still in use in city halls, county courthouses, school district boardrooms, state capitals, and probably most prominently and with the greatest harm, Washington.

A PETITION

From the Manufacturers of Candles, Tapers, Lanterns, Sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting.

To the Honourable Members of the Chamber of Deputies.
Open letter to the French Parliament, originally published in 1845

Gentlemen:

You are on the right track. You reject abstract theories and have little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is to reserve the domestic market for domestic industry.

Candle and book candle-681342_1280We come to offer you a wonderful opportunity for your — what shall we call it? Your theory? No, nothing is more deceptive than theory. Your doctrine? Your system? Your principle? But you dislike doctrines, you have a horror of systems, as for principles, you deny that there are any in political economy; therefore we shall call it your practice — your practice without theory and without principle.

We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation.

This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us

Frederic Bastiat
Frederic Bastiat
We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.

Be good enough, honourable deputies, to take our request seriously, and do not reject it without at least hearing the reasons that we have to advance in its support.

First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged?

If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land.

Our moors will be covered with resinous trees. Numerous swarms of bees will gather from our mountains the perfumed treasures that today waste their fragrance, like the flowers from which they emanate. Thus, there is not one branch of agriculture that would not undergo a great expansion.

The same holds true of shipping. Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honour of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc.

But what shall we say of the specialities of Parisian manufacture?Henceforth you will behold gilding, bronze, and crystal in candlesticks, in lamps, in chandeliers, in candelabra sparkling in spacious emporia compared with which those of today are but stalls.

There is no needy resin-collector on the heights of his sand dunes, no poor miner in the depths of his black pit, who will not receive higher wages and enjoy increased prosperity.

It needs but a little reflection, gentlemen, to be convinced that there is perhaps not one Frenchman, from the wealthy stockholder of the Anzin Company to the humblest vendor of matches, whose condition would not be improved by the success of our petition.

We anticipate your objections, gentlemen; but there is not a single one of them that you have not picked up from the musty old books of the advocates of free trade. We defy you to utter a word against us that will not instantly rebound against yourselves and the principle behind all your policy.

Will you tell us that, though we may gain by this protection, France will not gain at all, because the consumer will bear the expense?

We have our answer ready:

You no longer have the right to invoke the interests of the consumer. You have sacrificed him whenever you have found his interests opposed to those of the producer. You have done so in order to encourage industry and to increase employment. For the same reason you ought to do so this time too.

Indeed, you yourselves have anticipated this objection. When told that the consumer has a stake in the free entry of iron, coal, sesame, wheat, and textiles, “Yes,” you reply, “but the producer has a stake in their exclusion.” Very well, surely if consumers have a stake in the admission of natural light, producers have a stake in its interdiction.

“But,” you may still say, “the producer and the consumer are one and the same person. If the manufacturer profits by protection, he will make the farmer prosperous. Contrariwise, if agriculture is prosperous, it will open markets for manufactured goods.” Very well, If you grant us a monopoly over the production of lighting during the day, first of all we shall buy large amounts of tallow, charcoal, oil, resin, wax, alcohol, silver, iron, bronze, and crystal, to supply our industry; and, moreover, we and our numerous suppliers, having become rich, will consume a great deal and spread prosperity into all areas of domestic industry.

Will you say that the light of the sun is a gratuitous gift of Nature, and that to reject such gifts would be to reject wealth itself under the pretext of encouraging the means of acquiring it?

But if you take this position, you strike a mortal blow at your own policy; remember that up to now you have always excluded foreign goods because and in proportion as they approximate gratuitous gifts. You have only half as good a reason for complying with the demands of other monopolists as you have for granting our petition, which is in complete accord with your established policy; and to reject our demands precisely because they are better founded than anyone else’s would be tantamount to accepting the equation: + x + = -; in other words, it would be to heap absurdity upon absurdity.

Labour and Nature collaborate in varying proportions, depending upon the country and the climate, in the production of a commodity. The part that Nature contributes is always free of charge; it is the part contributed by human labour that constitutes value and is paid for.

If an orange from Lisbon sells for half the price of an orange from Paris, it is because the natural heat of the sun, which is, of course, free of charge, does for the former what the latter owes to artificial heating, which necessarily has to be paid for in the market.

Thus, when an orange reaches us from Portugal, one can say that it is given to us half free of charge, or, in other words, at half price as compared with those from Paris.

Now, it is precisely on the basis of its being semigratuitous (pardon the word) that you maintain it should be barred. You ask: “How can French labour withstand the competition of foreign labour when the former has to do all the work, whereas the latter has to do only half, the sun taking care of the rest?” But if the fact that a product is half free of charge leads you to exclude it from competition, how can its being totally free of charge induce you to admit it into competition? Either you are not consistent, or you should, after excluding what is half free of charge as harmful to our domestic industry, exclude what is totally gratuitous with all the more reason and with twice the zeal.

To take another example: When a product — coal, iron, wheat, or textiles — comes to us from abroad, and when we can acquire it for less labour than if we produced it ourselves, the difference is a gratuitous gift that is conferred up on us. The size of this gift is proportionate to the extent of this difference. It is a quarter, a half, or three-quarters of the value of the product if the foreigner asks of us only three-quarters, one-half, or one-quarter as high a price. It is as complete as it can be when the donor, like the sun in providing us with light, asks nothing from us. The question, and we pose it formally, is whether what you desire for France is the benefit of consumption free of charge or the alleged advantages of onerous production. Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron, wheat, and textiles, in proportion as their price approaches zero, how inconsistent it would be to admit the light of the sun, whose price is zero all day long!

Frédéric Bastiat (1801-1850), Sophismes économiques, 1845

National Transit Database, an interactive visualization

An interactive visualization of data over time from the National Transit Database.

The National Transit Database holds data for transit systems in the U.S. I’ve gathered some key statistics and presented them in an interactive visualization.

Some definitions used in the database:

UZA: The name of the urbanized area served primarily by a transit agency.
UPT: Unlinked passenger trips.
PMT: Passenger miles traveled.
OpExp Total: Total operating expense.

There is also a set of cities named “Wichita peers.” These are cities that Wichita has been compared to in a variety of situations. Some I selected because they were of similar size to Wichita.

The visualization holds three tabs or sheets. One is a table of figures. The other two illustrate data for a single year, or a single transit system.

Click here to access the visualization.

Kansas sales tax has disproportionate harmful effects

Kansas legislative and executive leaders must realize that a shift to consumption taxes must be accompanied by relief from its disproportionate harm to low-income households.

While Kansas legislative leaders and the governor praise the shift from income taxes to sales taxes, they ignore the severely regressive effect of sales taxes in Kansas. That is, a sales or consumption tax affects low-income families in greatest proportion relative to their incomes. The primary reason for the harshness of the Kansas sales tax is its application to food purchased in grocery stores. Few states tax food, and many of those that do apply a lower tax rate to food.

During the debate over a proposed sales tax increase in Wichita last year, I gathered data from the U.S. Census Bureau regarding expenditures on various categories for five different levels of household income. My findings were that if the city raised sales tax by one cent per dollar, the lowest income class of families would experience an increase nearly four times the magnitude as would the highest income families, measured as a percentage of after-tax income. Others produced similar results. This is the regressive nature of sales taxes.

At the national level the Fair Tax is a program whereby income taxes are replaced by consumption taxes. Proponents believe it would be a positive factor for economic growth. In recognition of the regressive nature of sales taxes, the Fair Tax plan includes a “prebate” to compensate households for the sales tax paid on necessities like food. In effect, there would be no tax on food and other necessities, up to the poverty level.

During the legislative session this year, Kansas Legislative Research told legislators that increasing the sales tax from 6.15 percent to 6.50 percent would generate $164,200,000 in additional revenue to the state. This implies that a one percent increase in the sales tax rate would generate about $469 million in revenue. (This is based on static analysis, and therefore does not account for the changes in behavior that the higher sales tax would induce, however large or small the effect.)

Effect of sales tax on consumers of different income levels. Click for larger version.
Effect of sales tax on consumers of different income levels. Click for larger version.
It’s thought that the present sales tax on food results in about $390 million in tax collections. While these two values — 469 and 390 — are not equal to each other, the $469 million figure is close to the gap between revenues and expenses. (The tax bill the legislature passed will raise about $400 million, but it is widely believed the governor will have to make an additional $50 million in cuts.)

So what would have happened if the legislature had raised the sales tax by one cent per dollar and eliminated the sales tax on food? The answer is the sales tax in Kansas would be less regressive.

I modified my worksheet to allow for adjustment of the sales tax rate for general purchases, and for food separately. I gathered the results for three scenarios and present the results in a chart. I use the sales tax rates that Sedgwick County residents would experience. This includes a one cent per dollar county-wide tax in addition to the statewide rate. (Most counties and cities add to the statewide rate. The unweighted average sales tax rate for Kansas cities is 7.835 percent, based on Kansas Department of Revenue figures.)

Kansas sales tax effects by income quintile, three scenarios. The vertical distance between the lines is a measure of the degree of regressivity. It is larger for lower income households. Click for larger version.
Kansas sales tax effects by income quintile, three scenarios. The vertical distance between the lines is a measure of the degree of regressivity. It is larger for lower income households. Click for larger version.
The blue line, labeled “Sales tax at 7.15% on all purchases” is the current tax in effect in Sedgwick County. Note that the lowest quintile of households pay nearly seven percent of their after tax income in sales taxes. For the highest quintile the value is less than two percent.

The gold line (“Sales tax at 7.50% on all purchases”) represents the rates that will be in effect after July 1. Note that the vertical distance between the blue and gold lines is larger for low-income households than for high-income households, again illustrating the regressive nature of sales taxes.

The red line (“Sales tax at 8.15%, food at 0%”) illustrates the situation had the legislature raised the sales tax by one cent per dollar and eliminated the sales tax on food. Notice that the vertical distance between the red and gold lines is greatest for lower-income households, and becomes less as income increases. This means that under this policy, the sales tax is less regressive. But the Kansas Legislature did not do this. Instead, it implemented a sales tax changes that increases its regressive nature.

Kansas has a food sales tax refund program. It has been altered several times in recent years. Even if households can — and do — claim it, it doesn’t cover their likely cost of sales tax on food. At a rate of 7.50 percent, the lowest quintile of households pay an estimated $263 in sales tax, which is far above the maximum refund.

Kansas legislative leaders have said that food sales tax could be an issue to tackle next year. One proposal this year had the tax on food falling to 4.90 percent. That is welcome, and would reduce the harsh regressive nature of Kansas taxation. But Kansas would still have a high tax rate on food. Kansas legislative and executive leaders must realize that a shift to consumption taxes must be accompanied by relief from its disproportionate harm to low-income households.

Tax rates and taxes paid

Those who call for a return to 90 percent tax rates should be aware that few people actually paid tax at those rates.

Progressives are calling for higher income tax rates on the rich. The top marginal tax rate — that’s the rate that applies to high income earners on most of their income — was above 90 percent during most of the 1950s. From 2003 to 2012 it was 35 percent, and is now 39.6 percent. Some see that as a lost opportunity. If we could return to the tax rates of the 1950s, they say, we could generate much more revenue for government.

The top marginal tax rate is the rate that applies to income. It’s not the same as what is actually paid. This fact is unknown or ignored by those who clamor for higher taxes on the rich.

The mistake the progressives make is equating tax rates with the tax actually paid. For many people, there is a direct relationship. For workers who earn a paycheck, there’s not much they can do to change the timing of their income, find tax shelters, or shift income to capital gains. When income tax rates rise, they have to pay more. But people with high incomes can use these and other strategies to reduce the taxes they pay. In fact, there is an entire industry of accountants and lawyers to help people reduce their tax. Often — particularly in the past — investments and transactions were made solely for the purpose of avoiding taxes, not for any other economic benefit.

But: High tax rates make the middle class feel better about paying their own taxes. With top tax rates of 90 percent, they may believe that the rich are paying a lot of tax. The middle class may take comfort in the fact that someone else is worse off. But that is based on the misconception that high tax rates mean rich people actually pay correspondingly higher tax.

Top tax rates and taxes actually paid

Figure 1. The top marginal income tax rate has varied widely, but since World War II, tax revenue collected as a percent of GDP is remarkably constant.
Figure 1. The top marginal income tax rate has varied widely, but since World War II, tax revenue collected as a percent of GDP is remarkably constant.
A series of charts illustrate the lack of a relationship between the top marginal income tax rate and the income taxes actually paid. (Click charts for larger versions.)

Figure 1 shows that that top marginal tax rate has varied widely. But since World War II, the taxes actually collected, expressed as a percentage of gross domestic product, has been fairly constant. In 1952 the top tax rate was 92.0 percent, and income taxes paid as a percent of GDP was 13.5 percent. In 2012 the top rate was 35.0 percent, and income taxes paid as a percent of GDP was 11.2 percent.

Figure 2. The top marginal income tax rate has varied widely, but the average federal tax rates paid by top earners has varied less.
Figure 2. The top marginal income tax rate has varied widely, but the average federal tax rates paid by top earners has varied less.
Figure 2 shows how the top marginal income tax rate has varied widely, but the average federal tax rates paid by top earners has varied less. Data for this series is available only back to 1979.

Figure 3. The top marginal income tax rate has varied widely and has mostly fallen, and the share of federal taxes paid by top income earners has risen.
Figure 3. The top marginal income tax rate has varied widely and has mostly fallen, and the share of federal taxes paid by top income earners has risen.
Figure 3 shows how the top marginal income tax rate has varied widely and has mostly fallen, and the share of federal taxes paid by top income earners has risen.

Sources of data for these charts are the Internal Revenue Service, Bureau of Economic Analysis, and Congressional Budget Office.

Hauser’s Law

In 2010 W. Kurt Hauser explained in The Wall Street Journal: “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues. Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this ‘Hauser’s Law.'”

Incentives matter, economists tell us. People react to changes in tax law. As tax rates rise, people seek to reduce their taxable income. A common strategy is to make investments in economically unproductive tax shelters. There is less incentive to work, to save and build up capital stocks, and invest. These are some of the reasons why tax rate hikes usually don’t generate the promised revenue.

The subtitle to Hauser’s article is “Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.” Figure 1 illustrates. The top line, the top marginal tax rate in effect for each year, varies widely. The other two lines show total taxes and federal income taxes as a percent of gross domestic product. Since World War II, these lines are fairly constant, even as the top marginal tax rate varies.

Economic freedom leads to better lives for all

Economic freedom, in countries where it is allowed to thrive, leads to better lives for people as measured in a variety of ways. This is true for everyone, especially for poor people.

This is the message presented in a short video based on the work of the Economic Freedom of the World report, which is a project of Canada’s Fraser Institute. This video is made possible by the Charles G. Koch Charitable Foundation.

One of the findings highlighted in the presentation is that while the average income in free countries is much higher than that in the least-free countries, the ratio is even higher for the poorest people in these countries. This is consistent with the findings that economic freedom is good for everyone, and even more so for those with low incomes.

Civil rights, a clean environment, long life expectancy, low levels of corruption, less infant mortality, less child labor, and lower unemployment are all associated with greater levels of economic freedom.

What are the components or properties of economic freedom? The presentation lists these:

  • Property rights are protected under an impartial rule of law.
  • People are free to trade with others, both within and outside the country.
  • There is a sound national currency, so that peoples’ money keeps its value.
  • Government stays small, relative to the size of the economy.

Over the last ten years, the United States’ ranking has fallen relative to other countries, and the presentation says our position is expected to keep falling. The question is asked: “Will our quality of life fall with it?”

Economic freedom is not necessarily the platform of any single political party. Even with a Republican president and Republican congress, the size of government rose. In 2005 the Cato Institute studied the numbers and found this: “All presidents presided over net increases in spending overall, though some were bigger spenders than others. As it turns out, George W. Bush is one of the biggest spenders of them all. In fact, he is an even bigger spender than Lyndon B. Johnson in terms of discretionary spending.” This was before the spending on the prescription drug program had started.

Critics of economic freedom

The defining of what economic freedom means is important. Sometimes you’ll see people write things like “Bernie Madoff was only exercising his personal economic freedom while he ran his investment firm.” Madoff, we now know, was a thief. He stole his clients’ money. That’s contrary to property rights, and therefore contrary to economic freedom.

Or, you’ll see people say if you don’t like government, go to Somalia. That country, one of the poorest in the world — but not the poorest — is used as an example of how bad a form of government is anarchy. The evidence is, however, that Somalia’s former government was so bad that things improved after the fall of that government. See Peter T. Leeson, Better Off Stateless: Somalia Before and After Government Collapse and History of Somalia (1991–2006).

You’ll also encounter people who argue that some countries are poor because they have no natural resources. But there are many countries with few natural resources that have economic freedom and a high standard of living. Most countries that are poor are that way because they are run by corrupt governments that have no respect for economic freedom.

Some will argue that economic freedom means the freedom to pollute the environment. But it is in wealthy countries that the environment is respected. Poor countries, where people are struggling just to find food for each day, don’t have the time or wealth to be concerned about the environment.

Corporate income tax rates in U.S. and other countries

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 tax exemptions, what message does Wichita send 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. From June 2014.

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.

Taxation in the states

Examining tax collections by the states shows that Kansas collects more tax than many of our neighbors, and should put to rest some common myths.

Tax Collections by the States, Kansas and selected States, total and per capita.
Tax Collections by the States, Kansas and selected States, total and per capita.
Of a selection of nearby states, Kansas collects more taxes than most, on a per-person basis. The nearby table shows total tax collections, and tax collections per person. The chart shows collections grouped by major category, and one special category, which is severance taxes.

Some of the data regarding specific taxes is revealing and should shape the debate over taxes in Kansas. Consider severance taxes, which are taxes levied on extracting materials like oil, gas, and coal. The common narrative in Kansas is that states like Texas are sitting atop a sea of oil, with the severance taxes funding a major portion of state government. The data shows that Texas collected $223 per person in severance taxes in 2014. For Kansas the figure is $43. This difference — $180 — doesn’t account for the difference in total tax collections between the states. Texas collects $2,050 in total taxes per person, while Kansas collects $2,526, a difference of $476.

Tax Collections by the States, Kansas and selected States, 2014. Click for larger version.
Tax Collections by the States, Kansas and selected States, 2014. Click for larger version.
We also commonly hear that Kansas doesn’t have the tourism of states like Florida, and therefore doesn’t have the flood of tourism spending and accompanying sales tax. Again, looking at the data, se see that Florida collected $1,460 in Sales and Gross Receipt Taxes per person for 2014. Kansas collected $1,340. This is a difference of $120, while the difference between total tax collections for Florida ($1,779) and Kansas ($2,526) is $747.

You may use this interactive visualization to customize the table to fit your own needs. Click here to open the visualization. Data is from the U.S. Census Bureau, Survey of State Government Tax Collections and Bureau of Economic Analysis, along with author’s calculations. Visualization developed using Tableau Public. Data is expressed on a per person basis, not adjusted for inflation.

Spending in the states, a visualization

To see how your state compares with others in spending, use the interactive visualization below. The figures presented are per-person, and not adjusted for inflation.

To use the visualization, click the check boxes to add or remove states and years from the chart. Use the visualization below, or click here to open it in a new window. Data is from National Association of State Budget Officers and U.S. Bureau of Economic Analysis (BEA); visualization created by myself using Tableau Public.

Kansas needs low taxes

Two research papers illustrate the need to maintain low taxes in Kansas, finding that high taxes are associated with reduced income and low economic growth.

As Kansas legislators seek to balance the state’s budget, most Kansas opinionmakers are urging higher taxes instead of spending restraint. Many claim that government taxation and spending are the driving forces behind growing the Kansas economy. An example is the motto of the Kansas Economic Progress Council, which is “… because a tax cut never filled a pothole, put out a fire or taught a child to read.”

Two research papers illustrate the need to maintain low taxes in Kansas, finding that high taxes are associated with reduced income and low economic growth. Research such as this rebuts the presumption of government spending advocates that low taxes have killed jobs in Kansas.

One paper is The Robust Relationship between Taxes and U.S. State Income Growth by W. Robert Reed, published in the National Tax Journal in March 2008. The abstract to this paper states:

I estimate the relationship between taxes and income growth using data from 1970 – 1999 and the forty-eight continental U.S. states. I find that taxes used to fund general expenditures are associated with significant, negative effects on income growth. This finding is generally robust across alternative variable specifications, alternative estimation procedures, alternative ways of dividing the data into “five-year” periods, and across different time periods and Bureau of Economic Analysis (BEA) regions, though state-specific estimates vary widely. I also provide an explanation for why previous research has had difficulty identifying this “robust” relationship. (emphasis added)

In his introduction, Reed writes that previous studies had found: “To the extent a consensus exists, it is that taxes used to fund transfer payments have small, negative effects on economic activity.” His paper found a stronger relationship.

Reed issues a caution on the use of his conclusions: “It needs to be emphasized that my claim for robustness should be understood as applying only within the context of U.S. state income growth. It should not be interpreted as being more widely applicable to other contexts, such as employment growth, manufacturing activity, plant locations, etc., or to the relationship between taxes and income growth outside the U.S.”

This illustrates one of the ways we focus on the wrong measure of growth. Politicians focus on jobs. But to business, jobs are a cost. One of the better goals to seek, as Art Hall specifies in his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, is income growth, along with population density and population migration, productivity growth, capital investment, gross business starts and expansions, and customer service and throughput measures of state economic development agencies. Hall writes: “If Kansas performs well in the measures provided, it will also perform well in terms of job count.”

Another example of research finding a negative impact of taxation is State Taxes and Economic Growth by Barry W. Poulson and Jules Gordon Kaplan, published in the Winter 2008 Cato Journal. In the introduction to the paper, the authors write: “The analysis reveals a significant negative impact of higher marginal tax rates on economic growth. The analysis underscores the importance of controlling for regressivity, convergence, and regional influences in isolating the effect of taxes on economic growth in the states.” (emphasis added)

In its conclusion, the paper states:

The analysis reveals that higher marginal tax rates had a negative impact on economic growth in the states. The analysis also shows that greater regressivity had a positive impact on economic growth. States that held the rate of growth in revenue below the rate of growth in income achieved higher rates of economic growth.

The analysis underscores the negative impact of income taxes on economic growth in the states. Most states introduced an income tax and came to rely on the income tax as the primary source of revenue. Jurisdictions that imposed an income tax to generate a given level of revenue experienced lower rates of economic growth relative to jurisdictions that relied on alternative taxes to generate the same revenue. (emphasis added)

Kansas cuts taxes and expands the economy

Ernie Goss is Jack A. MacAllister Chair in Regional Economics and Professor of Economics at Creighton University and an expert on the Midwest economy. Following is his assessment of the Kansas economy in recent years. The full report is here.

Kansas Cuts Taxes and Expands the Economy: Earnings Growth Four Times That of U.S. and Neighbors Since Passage

From the Mainstreet Economy Report, Creighton University, October 2014.

In 2012, Kansas Governor Brownback pushed the Legislature to whack individual tax rates by 25%, to repeal the tax on sole proprietorships, and to increase the standard deduction. In 2013, the Legislature cut taxes again. Since passage in 2012, how has the Kansas economy responded to these dramatic tax cuts? Post Tax-Cut Earnings: Since QIV, 2012, Kansas grew its personal income by 2.92% which was higher than the U.S. gain of 2.85%, and was greater than the growth experienced by each state bordering Kansas, except Colorado. Additionally in terms of average weekly earnings, Kansas experienced an increase of 4.82% which was almost four times that of the U.S., more than four times that of Missouri, approximately seven times that of Nebraska, and nearly four times that of Oklahoma.

Of Kansas’ neighbors, only Colorado with 4.82% average weekly wage growth outperformed Kansas.

Post Tax-Cut Job Performance: Between the last quarter of 2012 and August 2014, the U.S. and each of Kansas’ neighbors, except for Nebraska, experienced higher job growth than Kansas. However, much of Kansas’ lower job growth can be explained by the fact that during this period, Kansas reduced state and local government jobs by 1.4% while all of Kansas’ neighbors and the combined 50 U.S. states increased state and local government employment. In terms of unemployment, Kansas August 2014 joblessness rate was 4.9% compared to rates of 6.1% for the U.S., 5.1% for Colorado, 6.3% for Missouri, 3.6% for Nebraska, and 4.7% for Oklahoma.

Kansas job and income data since the tax cut show that, except for Colorado, the state economy has outperformed, by a wide margin, that of each of its neighbors and the U.S. To remain competitive, expect Kansas’ neighbors to reduce state and local taxes in the years ahead. Ernie Goss.

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. (Starting in 2013, Kansas income tax rates are lower, and we would expect that Kansas would rank somewhat better if the study was updated.)

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 state 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 the rank is 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 2014. GWEDC says its efforts created or retained 424 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 2014 was 247,614 persons. So the jobs created by GWEDC’s actions amounted to 0.14 percent of the labor force. This is a vanishingly small fraction. It is statistical noise. Other economic events overwhelm these efforts.

GWEDC complains of not being able to compete because Wichita has few incentives. This is not true, as Wichita has many incentives to offer. Nonetheless, GWEDC says it could have created or retained another 3,010 jobs if adequate incentives had been available. Adding those jobs to the jobs it claims credit for amounts to 1.39 percent of the labor force, which is still a small number that is overwhelmed by other events.

Our tax costs are high

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.

Kansas Center for Economic Growth: Show us the math

Why won’t Kansas Center for Economic Growth show its calculations and explain its data sources? Dave Trabert of Kansas Policy Institute explains.

KCEG misleads on job growth — again

By Dave Trabert

The latest misleading claim on job growth from the Kansas Center for Economic Growth is loaded with misleading and irrelevant information; they don’t fully disclose their methodology and at this writing they have ignored our request to explain it. Sadly, this is not the first, second or even third time that KCEG has published misleading information and declined to produce documentation.

Here are the questions we posed to Annie McKay, executive director at KCEG:

We received a ‘read’ receipt but no reply, so we attempted to replicate their methodology to arrive at what they call “private sector job growth since tax changes” which they measure between January 2013 and March 2015. Based on tests of Kansas and national data, it appears that KCEG is using seasonally adjusted jobs but we couldn’t find a 6-state region including all of Kansas’ neighbors to match their number.

KCEG has the national average increasing 5.2% and Kansas 3.8%, so we assume they are comparing January 2013 to March 2015. This is not a true measure of post-tax reform activity, however; the base month of a point-to-point comparison should be the last month of the old tax system, which was December 2012. Comparing Kansas to the 5-state region does show that Kansas is slightly behind (4.0% vs. 4.2%) but by not showing the performance of individual states, KCEG hides the fact that Kansas beat three of its four neighbors.   

While Kansas is outperforming three of its neighboring states on this measurement, point-to-point comparisons are problematic; one or both points can be unusual spikes or declines, making the data less reliable.  The Bureau of Labor Statistics also publishes average annual employment, which minimizes the impact of any single data point.

The more stable comparisons of average annual employment show job growth trends for Kansas to be much more competitive since tax reform. Private sector jobs grew just 2.2% between 1998 and 2012, which ranked Kansas at #38, but Kansas moved up to #27 in 2013 and last year moved up again to #21. That’s still not good enough and it will take perhaps another decade to fully understand the impact of tax reform, but the early trend is very encouraging. Kansas still trails Colorado, but has improved its competitive position. The table below shows Kansas trailed Colorado by a factor of five (2.2% vs. 10.6%) between 1998 and 2012 but has since closed the gap to a factor of two.

KCEG noted that Utah and Idaho have higher taxes on “the wealthy” and better job growth than Kansas, but of course they don’t tell the whole story. Kansas does have a lower marginal rate than both states but that is a recent development; Kansas was higher than Utah until 2013 and much closer to Idaho when the marginal was 6.45%. Kansas’ lower rates are helping to reverse trends but it will take much more time to catch up to states that historically grew much faster – like Utah and Idaho.

Here’s the rest of the story that KCEG doesn’t want you to know. According to the Tax Foundation, the corporate income tax rate in Kansas is 40% higher than Utah’s and just slightly below Idaho’s.  State sales tax rates are comparable but Kansas has much higher local sales tax rates. 

Utah and Idaho also have much lower property taxes on commercial and industrial real estate. Kansas has the 10th highest effective tax rate on urban property and the worst in the nation on rural property!   Part of the reason that Kansas has very high effective tax rates is baked into the State Constitution, where Commercial and Industrial property is assessed at 25% of appraised value but Residential is assessed at 11.5%.

The other major factor driving up property taxes is that Kansas has too much government.  Kansas and Utah have about the same population but Kansas has 1,997 cities, counties and townships whereas Utah has only 274.  Idaho has just 244.  Extra government means extra government employees (and higher taxes to pay for all of that government); Kansas is ranked #47 in government employees per 10,000 residents (i.e., the 3rd worst in the nation) but Utah is ranked #15 and Idaho is #9.

These truths about private sector job growth and relevant competitive issues with Utah and Idaho are typical of KCEG efforts to mislead citizens and legislators – and probably explain why they refuse to engage KPI in public debates on tax, spending and education issues.

Wichita area job growth

Private sector job growth in the Wichita area is improving, but lags behind local government employment growth.

Data from the Bureau of Labor Statistics through 2014 allows us to compare trends of employment in the Wichita metropolitan area. Over the past few years we see private sector employment rising. At the same time government employment, particularly state and local government employment, has declined or leveled.

Wichita area employment. Click for larger version.
Wichita area employment. Click for larger version.
Over the 24 years covered by the chart, private sector employment grew by 16 percent. Local government employment grew by 41 percent.

This long-term trend is a problem. It is the private sector that generates the taxes that pay for government. When government grows faster than the private sector, economic activity is shifted away from productive activities to unproductive. The economist Dan Mitchell has proposed what he calls the “Golden Rule of Fiscal Policy,” which is: “The Private Sector should Grow Faster than Government.” This is not happening in the Wichita metropolitan area.

Kansas and U.S. economic dashboard

FREDS exampleHere is a collection of charts comparing aspects of Kansas and its economy to the United States. These charts are from the Federal Reserve Bank of St. Louis, which gathers the data from a variety of sources. The graphs are interactive in a variety of ways and should always be current with the most recent data.

Click here to view the charts.

Wichita economic development, the need for reform

An incentives deal for a Wichita company illustrates a capacity problem and the need for reform.

Next week the Wichita City Council will consider an economic development incentives package intended to enable a local manufacturing company to expand its operations.

R and R Aerospace benefits 2015-05-05City documents give some detail regarding the amounts of property tax to be forgiven on an annual basis, for a period of up to ten years. In the past, city documents have often mentioned other incentive programs that will benefit the company, but that information is missing. Other sources mention two state programs — PEAK and HPIP — the company may benefit from, but amounts are not available.

In order to prepare the incentives package, several events took place. There was a visit to the company. Then another visit and tour. Then economic development officials helped the company apply for benefits from the Kansas Department of Commerce. Then these officials worked closely with Wichita city staff on an incentive package.

City documents state that the expansion will create 28 jobs over the next five years. Obtaining these jobs took a lot of effort from Wichita and Kansas economic development machinery. Multiple agencies and fleets of bureaucrats at GWEDC, the City of Wichita, Sedgwick County, and the State of Kansas were involved. Wichita State University had to be involved. All this to create 5.6 jobs per year for five years.

The jobs are welcome. But this incident and many others like it reveal a capacity problem, which is this: We probably need to be creating 5.6 jobs every working hour of every day in order to make any significant progress in economic growth. If it takes this much effort to create 28 jobs over five years, how much effort will it take to create the many thousands of jobs we need to create every year?

This assumes, of course, that the incentives are necessary to enable the company to expand. City documents state that the tax exemption is necessary to make the project “viable.” It’s likely that the mayor or city council members will say that if we don’t award the incentives, the company won’t be able to expand. Or perhaps the company will expand in some other city. So the incentives really don’t have any cost, they will tell citizens.

This only hints at a larger problem. If companies can’t afford to make investments in Wichita unless they receive exemptions from paying taxes, we must conclude that taxes are too 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. See here.) It’s either that, or this company simply doesn’t want to participate in paying for the cost of government like most other companies and people do.

To top it off, this expansion and the new jobs seem far from certain. City documents state the company is “bidding on a new work package” and the “expansion project would be completed in phases
based upon the timing and demand of the work package.”

Civic leaders say that our economic development policies must be reformed. So far that isn’t happening. Our leaders say that cash incentives are on the way out. This deal does not include grants of cash, that is true. But forgiveness of taxes is more valuable to business firms than receiving cash. That’s because cash incentives are usually taxable as income, while forgiveness of taxes does not create taxable income. Each dollar of tax that is forgiven adds one dollar to after-tax profits. 1

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

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

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

Following is an excerpt from the introduction by James Franko, Vice President and Policy Director at Kansas Policy Institute. It points to a path forward.

Surprising to some, the businesses interviewed did not have as much of a problem with the regulations themselves, or the need for regulations, but with their application and enforcement. Across industries and focus group sessions the key themes were clear — give businesses transparency in what regulations are being applied, how they are employed, provide flexibility in meeting those goals, and allow an opportunity for compliance.

Sometimes things can be said so often as to lose their punch and become little more than the platitudes referenced above. The findings from Hugo Wall are clear that businesses will adapt and comply with regulations if they are transparent and accountable. Many in the public can be forgiven for thinking this was already the case. Thankfully, local and state governments can ensure this happens with minimal additional expense.

A transparent and accountable regulatory regime should be considered the “low hanging fruit” of government. Individuals and communities will always land on different places along the continuum of appropriate regulation. And, a give and take will always exist between regulators and the regulated. Those two truisms, however, should do nothing to undermine the need for regulations to be applied equally, based on clear rules and interpretations, and to give each business an opportunity to comply. (emphasis added)

Creating a dynamic economy and a reformed regulatory regime should cost very little. The benefits would apply to all companies — large or small, startup or established, local or relocations, in any industry.

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

  1. Site Selection magazine, September 2009. 2015. ‘INCENTIVES — Site Selection Magazine, September 2009’. Siteselection.Com. Accessed May 1 2015. http://www.siteselection.com/issues/2009/sep/Incentives/

Intrust Bank Arena loss for 2014 is $5 million

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. But no one wants to talk about this.

The 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.

In February the Wichita Eagle reported: “The arena’s net income for 2014 came in at $122,853, all of which will go to SMG, the company that operates the facility under contract with the county, Assistant County Manager Ron Holt said Wednesday.” A reading of the minutes for the February 11 meeting of the Sedgwick County Commission finds Holt mentioning depreciation expense not a single time. Strike one.

Last December, in a look at the first five years of the arena, its manager told the Wichita Eagle this: “‘We know from a financial standpoint, the building has been successful. Every year, it’s always been in the black, and there are a lot of buildings that don’t have that, so it’s a great achievement,’ said A.J. Boleski, the arena’s general manager.” Strike two.

I didn’t notice the Eagle opinion page editorializing this year on the release of the arena’s profitability figures. So here’s an example of incomplete editorializing from Rhonda Holman, 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 in 2013 did not mention depreciation expense, either.) Strike three in the search for truthful accounting of the arena’s finances.

The problem with the reporting of Intrust Bank Arena profits

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 in her Eagle op-ed, was $255,678. (Presumably that’s after deducting the cost of producing an oversize check for the television cameras.)

For 2014, the arena’s profit was $122,853. All that goes to SMG, based on the revenue-sharing agreement.

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 2014 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 last year. 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. 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, and naming rights fees. The Arena had an operating loss of $5.0 million. The loss can be attributed to $5.2 million in depreciation expense.

Financial statements in the same document show that $5,157,424 was charged for depreciation in 2014, bringing accumulated depreciation to a total of $26,347,705.

Depreciation expense is not something that is paid out in cash. Sedgwick County didn’t write a check for $5,157,424 to pay 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 not many of our public leaders 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.”

Earlier in this article we saw examples of the Sedgwick County Assistant Manager, the Intrust Bank Arena manager, and several Wichita Eagle writers making the same mistake.

Intrust Bank Arena commemorative monument
Intrust Bank Arena commemorative monument
The contention — witting or not — of all these people is that the capital investment of $183,625,241 (not including an operating and maintenance reserve) in 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 this view. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds. Since Kansas is one of the few states that adds sales tax to food, low-income households paid extra sales tax on their groceries to pay for the arena — an arena where they may not be able to afford tickets.

Any honest accounting or reckoning of the performance of Intrust Bank Arena must take depreciation into account. While Unruh is correct 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. The Wichita Eagle aids in promoting this deception.

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.

WichitaLiberty.TV: Wichita Eagle reporting, marijuana laws, and the Kansas economy

In this episode of WichitaLiberty.TV: The Wichita Eagle prints several stories that ought to cause readers to question the reliability of its newsroom. Wichita voters pass a marijuana law that conflicts state law. Performance of the Kansas economy. Finally, some unexplained results in the way people vote. View below, or click here to view at YouTube. Episode 81, broadcast April 19, 2015.

Economic indicators for Kansas

During this century the Kansas economy has not kept up with the national economy and most neighboring states.

The Federal Reserve Bank of Philadelphia calculates two indexes that track and forecast economic activity in the states and the country as a whole.

Coincident Economic Activity Index, Kansas highlighted against neighboring states.
Coincident Economic Activity Index, Kansas highlighted against neighboring states.
The coincident index is a measure of current and past economic activity for each state. This index includes four indicators: nonfarm payroll employment, the unemployment rate, average hours worked in manufacturing, and wages and salaries. July 1992 is given the value 100.

The leading index predicts the six-month growth rate of the state’s coincident index. In addition to the coincident index, “the models include other variables that lead the economy: state-level housing permits (1 to 4 units), state initial unemployment insurance claims, delivery times from the Institute for Supply Management (ISM) manufacturing survey, and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury bill.”

Leading Index, Kansas highlighted against neighboring states.
Leading Index, Kansas highlighted against neighboring states.
Positive values mean the coincident index is expected to rise in the future six months, while negative values mean it is expected to fall.

I’ve created an interactive visualization of these two indexes. Examples appear nearby. Click here to open the visualization in a new window. You may select a range of dates and one or more states to include on the chart. Click on a state’s legend color to spotlight it against other states.

Rich States, Poor States, 2105 edition

In Rich States, Poor States, Kansas continues with middle-of-the-pack performance, and fell in the forward-looking forecast for the second year in a row.

In the 2015 edition of Rich States, Poor States, Utah continues its streak at the top of Economic Outlook Ranking, meaning that the state is poised for growth and prosperity. Kansas continues with middle-of-the-pack performance rankings, and fell in the forward-looking forecast.

Rich States, Poor States is produced by American Legislative Exchange Council. The authors are economist Dr. Arthur B. Laffer, Stephen Moore, who is Distinguished Visiting Fellow, Project for Economic Growth at The Heritage Foundation, and Jonathan Williams, who is vice president for the Center for State Fiscal Reform at ALEC,

Rich States, Poor States computes two measures for each state. The first is the Economic Performance Ranking, described as “a backward-looking measure based on a state’s performance on three important variables: State Gross Domestic Product, Absolute Domestic Migration, and Non-Farm Payroll Employment — all of which are highly influenced by state policy.” The process looks at the past ten years.

Economic Outlook Ranking. Click for larger version.
Economic Outlook Ranking. Click for larger version.
Looking forward, there is the Economic Outlook Ranking, “a forecast based on a state’s current standing in 15 state policy variables. Each of these factors is influenced directly by state lawmakers through the legislative process. Generally speaking, states that spend less — especially on income transfer programs, and states that tax less — particularly on productive activities such as working or investing — experience higher growth rates than states that tax and spend more.”

For economic performance this year, Kansas is twenty-eighth. That’s up from thirty-second last year.

In this year’s compilation for economic outlook, Kansas ranks eighteenth, down from fifteenth last year and eleventh the year before. In 2008, the first year for this measure, Kansas was twenty-ninth.

Kansas compared to other states

A nearby chart shows the Economic Outlook Ranking for Kansas and some nearby states, shown as a trend over time since 2008. The peak of Kansas in 2013 is evident, as is the decline since then.

Why Kansas fell

Rich States Poor States Kansas trends 2015 aloneKansas fell in the Economic Outlook Ranking from 2013 to 2015. To investigate why, I gathered data for Kansas from 2008 to 2015. The nearby table shows the results for 2015 and the rank among the states, with the trend since 2008 shown. A rank of one is the best ranking, so for the trend lines, an upward slope means a decline in ranking.

There are several areas that may account for the difference. One value, “Top Marginal Corporate Income Tax Rate,” did not change from 2013 to 2015, remaining at 7.00%. But the ranking for Kansas fell from 24 to 27, meaning that other states improved in this measure relative to Kansas.

For “Personal Income Tax Progressivity (change in tax liability per $1,000 of Income)” Kansas fell two positions in rank.

In “Property Tax Burden (per $1,000 of personal income)” Kansas fell three spots since 2013.

In “Sales Tax Burden (per $1,000 of personal income)” Kansas fell three spots in rank. The burden is calculated proportional to personal income.

In “Recently Legislated Tax Changes (per $1,000 of personal income)” Kansas fell one position in rank.

Kansas improved six rank positions for “Debt Service as a Share of Tax Revenue.”

Kansas remains one of the states with the most public employees, with 695.4 full-time equivalent employees per 10,000 population. This ranks forty-eighth among the states.

“Average Workers’ Compensation Costs (per $100 of payroll)” rose by one cent, and Kansas fell two spots in ranking.

Kansas has no tax and expenditure limitations, which is a disadvantage compared to other states.

How valuable is the ranking?

Correlation of ALEC-Laffer state policy ranks and state economic performance
Correlation of ALEC-Laffer state policy ranks and state economic performance
After the 2012 rankings were computed, ALEC looked retrospectively at rankings compared to actual performance. The nearby chart shows the correlation of ALEC-Laffer state policy ranks and state economic performance. In its discussion, ALEC concluded:

There is a distinctly positive relationship between the Rich States, Poor States’ economic outlook rankings and current and subsequent state economic health.

The formal correlation is not perfect (i.e., it is not equal to 100 percent) because there are other factors that affect a state’s economic prospects. All economists would concede this obvious point. However, the ALEC-Laffer rankings alone have a 25 to 40 percent correlation with state performance rankings. This is a very high percentage for a single variable considering the multiplicity of idiosyncratic factors that affect growth in each state — resource endowments, access to transportation, ports and other marketplaces, etc.

Rich States, Poor States compilation for Kansas. Click for larger version.
Rich States, Poor States compilation for Kansas. Click for larger version.

The purpose of high tax rates

From February 2014.

“The purpose of high taxes on the rich is not to get the rich to pay money, it’s to get the middle class to feel better about paying high taxes.”

Numbers And Finance, CalculatorThis is what Jim Pinkerton, the journalist, Fox News contributor, and co-founder of the RATE (Reforming America’s Taxes Equitably) Coalition told an audience at a conference titled “The Tax & Regulatory Impact on Industry, Jobs & The Economy, and Consumers” produced by the Franklin Center for Government and Public Integrity.

Pinkerton was referring to the economist F.A. Hayek. Others have also noted that changes to marginal tax rates often have little impact on the amount of taxes actually paid. The top marginal tax rate — that’s the rate that applies to high income earners on most of their income — was above 90 percent during most of the 1950s. From 2003 to 2012 it was 35 percent, and is now 39.6 percent.

The top marginal tax rate is the rate that applies to income. It’s not the same as what is actually paid. This fact is unknown or ignored by those who clamor for higher taxes on the rich. They often cite the rising prosperity of the 1950s as caused by the high marginal tax rate in effect at the time.

The mistake the progressives make is equating tax rates with the tax actually paid. For many people, there is a direct relationship. For workers who earn a paycheck, there’s not much they can do to change the timing of their income, find tax shelters, or shift income to capital gains. When income tax rates rise, they have to pay more. But rich people can use these and other strategies to reduce the taxes they pay.

But as Pinkerton told the conference attendees, the high tax rates make the middle class feel better about paying their own taxes. They may take comfort in the fact that someone else is worse off, at least based on the misconception that high tax rates mean rich people actually pay correspondingly higher tax.

In 2010 W. Kurt Hauser explained in The Wall Street Journal: “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues. Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this ‘Hauser’s Law.'”

Incentives matter, economists tell us. People react to changes in tax law. As tax rates rise, people seek to reduce their taxable income. A common strategy is to make investments in economically unproductive tax shelters. There is less incentive to work, to save and build up capital stocks, and invest. These are some of the reasons why tax rate hikes usually don’t generate the promised revenue.

Click image for larger version
Click image for larger version

The subtitle to Hauser’s article is “Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.” The nearby chart illustrates. The top line, the top marginal tax rate in effect for year year, varies widely. The other two lines show total taxes and federal income taxes as a percent of gross domestic product. Since World War II, these lines are fairly constant, even as the top marginal tax rate varies.

Data is from Bureau of Economic Analysis (part of the U.S. Department of Commerce) along with my calculations.

STAR bonds in Kansas

The Kansas STAR bonds program provides a mechanism for spending by autopilot, without specific appropriation by the legislature.

Under the State of Kansas STAR bonds program, cities sell bonds and turn over the proceeds to a developer of a project. As bond payments become due, incremental sales tax revenue make the payments.

STAR bonds in Kansas. Click for larger version.
STAR bonds in Kansas. Click for larger version.
It’s only the increment in sales tax that is eligible to be diverted to bond payments. This increment is calculated by first determining a base level of sales for the district. Then, as new development comes online — or as sales rise at existing merchants — the increased sales tax over the base is diverted to pay the STAR bonds.

Often the STAR bonds district, before formation, is vacant land, and therefore has produced no sales tax revenue. Further, the district often has the same boundaries as the proposed development. Thus, advocates often argue that the bonds pay for themselves. Advocates often make the additional case that without the STAR bonds, there would be no development, and therefore no sales tax revenue. Diverting sales tax revenue back to the development really has no cost, they say, as nothing was going to happen but for the bonds.

This is not always the case, For a STAR bonds district in northeast Wichita, the time period used to determine the base level of sales tax was February 2011 through January 2012. A new Cabela’s store opened in March 2012, and it’s located in the boundaries of STAR bonds district, even though it is not part of the new development. Since Cabela’s sales during the period used to calculate the base period was $0, the store’s entire sales tax collections will be used to benefit the STAR bonds developer.

(There are a few minor exceptions, such as the special CID tax Cabela’s collects for its own benefit.)

Which begs the question: Why is the Cabela’s store included in the boundaries of the STAR bonds district?

With sales estimated at $35 million per year at this Cabela’s store, the state has been receiving around $2 million per year in sales tax from it. But after the STAR bonds are sold, that money won’t be flowing to the state. Instead, it will be used to pay off bonds that benefit the STAR bond project’s developer — the project across the street.

Taxation for public or private benefit?
STAR bonds should be opposed as they turn over taxation to the private sector. We should look at taxation as a way for government to raise funds to pay for services that all people benefit from. An example is police and fire protection. Even people who are opposed to taxation rationalize paying taxes that way.

But STAR bonds turn tax policy over to the private sector for personal benefit. The money is collected under the pretense of government authority, but it is collected for the exclusive benefit of the owners of property in the STAR bonds district.

Citizens should be asking this: Why do we need taxation, if we excuse some from participating in the system?

Another question: In the words of the Kansas Department of Commerce, the STAR bonds program offers “municipalities the opportunity to issue bonds to finance the development of major commercial, entertainment and tourism areas and use the sales tax revenue generated by the development to pay off the bonds.” This description, while generally true, is not accurate. The northeast Wichita STAR bonds district includes much area beyond the borders of the proposed development, including a Super Target store, a new Cabela’s store, and much vacant ground that will probably be developed as retail. The increment in sales taxes from these stores — present and future — goes to the STAR bond developer. As we’ve seen, since the Cabela’s store did not exist during the time the base level of sales was determined, all of its sales count towards the increment.

STAR bonds versus capitalism
In economic impact and effect, the STAR bonds program is a government spending program. Except: Like many spending programs implemented through the tax system, legislative appropriations are not required. No one has to vote to spend on a specific project. Can you imagine the legislature voting to grant $5 million per year to a proposed development in northeast Wichita? That doesn’t seem likely. Few members would want to withstand the scrutiny of having voted in favor of such blatant cronyism.

But under tax expenditure programs like STAR bonds, that’s exactly what happens — except for the legislative voting part, and the accountability that (sometimes) follows.

Government spending programs like STAR bonds are sold to legislators and city council members as jobs programs. Development and jobs, it is said, will not appear unless project developers receive incentives through these spending programs. Since no politician wants to be seen voting against jobs, many are susceptible to the seductive promise of jobs.

But often these same legislators are in favor of tax cuts to create jobs. This is the case in the Kansas House, where most Republican members voted to reducing the state’s income tax as a way of creating economic growth and jobs. On this issue, these members are correct.

But many of the same members voted in favor of tax expenditure programs like the STAR bonds program. These two positions cannot be reconciled. If government taxing and spending is bad, it is especially bad when part of tax expenditure programs like STAR bonds. And there’s plenty of evidence that government spending and taxation is a drag on the economy.

It’s not just legislators that are holding these incongruous views. Secretary of Commerce Pat George promoted the STAR bonds program to legislators. Governor Sam Brownback supported the program.

When Brownback and a new, purportedly more conservative Kansas House took office, I wondered whether Kansas would pursue a business-friendly or capitalism-friendly path: “Plans for the Kansas Republican Party to make Kansas government more friendly to business run the risk of creating false, or crony capitalism instead of an environment of genuine growth opportunity for all business.” I quoted John Stossel:

The word “capitalism” is used in two contradictory ways. Sometimes it’s used to mean the free market, or laissez faire. Other times it’s used to mean today’s government-guided economy. Logically, “capitalism” can’t be both things. Either markets are free or government controls them. We can’t have it both ways.

The truth is that we don’t have a free market — government regulation and management are pervasive — so it’s misleading to say that “capitalism” caused today’s problems. The free market is innocent.

But it’s fair to say that crony capitalism created the economic mess.

But wait, you may say: Isn’t business and free-market capitalism the same thing? Not at all. Here’s what Milton Friedman had to say: “There’s a widespread belief and common conception that somehow or other business and economics are the same, that those people who are in favor of a free market are also in favor of everything that big business does. And those of us who have defended a free market have, over a long period of time, become accustomed to being called apologists for big business. But nothing could be farther from the truth. There’s a real distinction between being in favor of free markets and being in favor of whatever business does.” (emphasis added.)

Friedman also knew very well of the discipline of free markets and how business will try to avoid it: “The great virtue of free enterprise is that it forces existing businesses to meet the test of the market continuously, to produce products that meet consumer demands at lowest cost, or else be driven from the market. It is a profit-and-loss system. Naturally, existing businesses generally prefer to keep out competitors in other ways. That is why the business community, despite its rhetoric, has so often been a major enemy of truly free enterprise.”

The danger of Kansas government having a friendly relationship with Kansas business is that the state will circumvent free markets and promote crony, or false, capitalism in Kansas. It’s something that we need to be on the watch for. The existence of the STAR bonds program lets us know that a majority of Kansas legislators — including many purported fiscal conservatives — prefer crony capitalism over free enterprise and genuine capitalism.

The problem

Government bureaucrats and politicians promote programs like STAR bonds as targeted investment in our economic future. They believe that they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by the state that shapes the future direction of the Kansas economy.

Arnold King has written about the ability of government experts to decide what investments should be made with public funds. There’s a problem with knowledge and power:

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

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

Despite this knowledge problem, Kansas legislators are willing to give power to bureaucrats in the Department of Commerce and politicians on city councils who feel they have the necessary knowledge to direct the investment of public funds. One thing is for sure: the state and its bureaucrats and politicians have the power to make these investments. They just don’t have — they can’t have — the knowledge as to whether these are wise.

What to do
The STAR bonds program is an “active investor” approach to economic development. Its government spending on business leads to taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

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

In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Kansas and many of its cities employ: “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. Government spending on specific companies through programs like STAR bonds 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 all levels of government 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.

What we can learn from the piano

The purchase of a piano by a Kansas school district teaches us a lesson. Instead of a system in which schools raise money voluntarily — a system in which customers are happy to buy, donors are happy to give, and schools are grateful to receive — we have strife.

A Kansas City, Kansas school has spent $48,000 to purchase a new piano, replacing one in use for many years. Critics of school spending, even Governor Brownback, point to this as an example of school spending out of control. How can schools want more money, they say, if one school can spend $48,000 on a piano?

We can learn a few things about our public schools from this.

Piano piano-558452_1280First, there is no way to tell whether this purchase was wise. There are several reasons. First, the school is not spending its own money. The school is spending other people’s money, and in a near vacuum. It’s spending in circumstances that are not amenable to wise purchases. Milton Friedman has developed a grid of the ways that money may be spent. The purchase of the piano falls into category III, which is spending someone else’s money on yourself.

Second, the school is spending this money in an uncompetitive environment. In Kansas, the public schools have a near-monopoly on the use of public funds for schools. No matter how bad the public schools may be, not matter how wasteful of funds, public schools know that parents have few alternatives. Yes, there are private schools in Kansas, but if parents choose them, they still have to pay the public schools. Who else can do that?

Competition is important because it provides accountability. It provides a framework for making decisions about the allocation of resources. If we see, say, a grocery store spending lavishly on fixtures and furnishings, we may surmise that the store is trying to attract customers. The ultimate test of the strategy is profit. Do customers appreciate the store’s investment enough to shop there? If so, profits may be earned. If not, there will be losses, and store management has learned a lesson.

Similarly, if Kansas public schools faced meaningful competition for students, schools would have a framework for making spending decisions, as well as for making many other decisions. But with no meaningful competition, Kansas schools are operating in the dark. They do not have the benefit of market competition and profit to let them know if they are making wise decisions as to the allocation of resources.

Market competition is not competition like a life-and-death struggle in the jungle or sea, where the winners eat the losers. It is also not a contrived event, as is a sporting event. Instead, market competition refers to a discovery process, where through mountains of voluntary transactions we learn what works and what doesn’t. We don’t have that learning process in Kansas public schools.

Kansas City school district spending. Click for larger version.
Kansas City school district spending. Click for larger version.
The purchase of the piano has also stimulated much rancorous debate. People are yelling at each other, and over the education of children. Instead of fighting and strife, we should be celebrating children, schools, and education. But that’s not the way government works. Money is taken through taxes. (I realize it’s considered impolite in some circles to say this, but taxes are taken by the threat of force.) Then tax money is spent by people who pretty much say “screw you” to taxpayers. That is the tone of an article written by the superintendent of the school district that bought the piano. The real problem, she contends, is that the people of Kansas are not taxed enough.
Employment ratios in Kansas City schools. Click for larger version.
Employment ratios in Kansas City schools. Click for larger version.
No matter that spending per student in this school district is $15,388. That’s down from 2009 when it nearly touched $18,000, but much higher than the early years of this century when it was around $11,000. (These are inflation-adjusted, per student figures.) Employment ratios in this district have improved, and unspent fund balances, not including bond and capital funds, have risen.

Unspent funds in Kansas City schools, not including bond and capital. Click for larger version.
Unspent funds in Kansas City schools, not including bond and capital. Click for larger version.
Despite these improvements, the Kansas City school superintendent says Kansans do not pay enough taxes to her schools. I get the sense that she wants to fight for more.

Do we fight over which grocery store is best? Do we fight over how much to spend on building and operating grocery stores? No. People peacefully and freely choose the store they like. Sometimes they choose several stores at the same time.

Civil society is dying. Instead of a system in which schools raise money voluntarily — a system in which customers are happy to buy, donors are happy to give, and schools are grateful to receive — we have strife. Instead of a Kansas school superintendent saying “thank you” to taxpayers for the new piano and $15,388 to spend each year on each student, we have something else. We have the gnashing of teeth, and that’s a shame.

How do school choice programs affect budgets and performance of school districts?

Opponents of school choice programs argue the programs harm school districts, both financially and in their ability to serve their remaining students. Evidence does not support this position.

If school choice programs — charter schools, vouchers, or tax credit scholarships — harmed the existing public schools, it would be a reasonable argument against school choice. Especially if the students who remain in public schools had less of an opportunity to learn.

The prevalent argument is that charter schools and other public school alternatives drain funds from public schools. That is, if a public school student chooses a charter or private school, and if the money follows the student to the other school, the public school district loses money that it otherwise would have received. Therefore, the public school district is worse off, and so too are its students.

A rebuttal is that since a public school has shed the responsibility for schooling the student, its costs should fall correspondingly. This would be true if all the costs of a public school are variable. Some costs are fixed, however, meaning they can’t be adjusted quickly — in the short run, that is. An example is the cost to maintain a classroom. If a school has one less student than the year before, it still requires the same support for utilities. One or several fewer students doesn’t mean that fewer teachers are needed.

Public schools and their lobbyists, therefore, argue that school choice programs are a financial burden to public schools. Under school choice programs, they say, public schools lose students and their accompanying funding, but the public schools retain their fixed costs.

The Fiscal Effects of School Choice Programs on Public School Districts (cover)The question, then, is what portion of a school’s costs are variable, meaning costs that schools can adjust quickly, and what portion are fixed, meaning they can’t be adjusted quickly? Benjamin Scafidi, professor of economics at Kennesaw State University, has examined schools looking for the answer to this question. His paper The Fiscal Effects of School Choice Programs on Public School Districts, published by The Friedman Foundation for Educational Choice, holds answers to these questions.

The first question is this: What is the relation of school choice programs to school districts’ variable costs? Scafidi has endeavored to determine the breakdown between variable and fixed costs in each state. In Kansas, for the 2008 – 2009 school year, total spending per student was $11,441. Of that, Scafidi estimates $3,749, or 32.8 percent, were fixed costs. Variable costs were $7,692, or 67.2 percent. Since then spending has risen, but there’s no reason to think the allocation of costs between fixed and variable has changed materially. For the school year ending in 2014 total spending per student was $12,960. That implies fixed costs per student of $4,251 and variable costs per student of $8,709.

Now, how much money would a public school lose if a student chose, say, a private voucher school under a voucher program? In Kansas we don’t have vouchers for school choice, so we can’t answer the question directly. We do know that base state aid per pupil in Kansas is $3,852. That is the starting point for state spending per student.

In a recent presentation on this topic, Scafidi said: “Any school choice program where about $8,000 per student or less, on average, follows the child to the school of his or her choice, improves the fiscal situation of the public school district, on average, and students who remain in public schools have more resources available for their education.”

A typical Kansas school district, therefore, with variable costs of $8,709 per student, has its fiscal situation improved when it loses a student and its $3,852 in state funding.

Kansas School Finance Formula, from Kansas Policy Institute, August 2014
Kansas School Finance Formula, from Kansas Policy Institute, August 2014
Many Kansas students, however, trigger much more funding due to weightings that compensate for the purported higher costs of some situations. The largest weighting in Kansas, based on numeric magnitude, is the at-risk weighting. It adds 45.6 percent to base state aid. So if a Kansas public school loses such a student and weighting, it loses $5,608 in funding. That is far less than its variable costs of $8,709. State funding for Kansas schools in the 2013 to 2014 school year was $7,088 per student, still less than school districts’ variable costs.

I asked Scafidi what is the dividing line between variable and fixed costs? The answer is that within two or three years, schools should be able to adjust their fixed costs to be in line with their needs. This is in line with the economic and accounting reality that says in the long run, all costs are variable.

Can school districts adjust their costs quickly in response to changing enrollments? This may be a problem for the very smallest districts, those with just one or two teachers per grade, Scadifi concedes. In his paper, Scafidi illustrates two examples of districts in Georgia with just over 1,000 students making adjustments. In Kansas, there are 286 school districts. Of these, 207 have enrollment of less than 1,000 students, but only 20 percent if the state’s students are in these small districts.

School districts often dispute the contention that they are able to reduce their variable costs rapidly in response to enrollment changes. Scafidi notes that if school districts say they cannot reduce costs when they lose students, the implication is that all of their costs are fixed. If true, then schools should not receive additional funding when enrollment rises. After all, if all their costs are fixed, costs do not change with enrollment — either up or down.

We have seen that school choice programs do not harm the finances of local school districts. The second question concerns the quality of education for the students who remain in public schools.

To answer this question, we must recognize the wide variation of teacher efficacy. Some are very good, and some very poor. Further, the difference between good and bad is large. Eric A. Hanushek and others have found that very good teachers routinely produce 1.5 years of gain in achievement during an academic year. Bad teachers produce 0.5 years of gain. If a student is unfortunate enough to experience ineffective teachers two or three years in a row, the student may be so far behind as to never catch up.

What does this have to do with school choice programs? If public schools have to downsize due to students lost for any reason — including school choice programs — this gives public schools an opportunity to shed their least effective teachers. This means that students who remain in public schools have a higher likelihood of experiencing the most effective teachers.

On Kansas tax experiment, we do know what doesn’t work: High taxes

Those who criticize lower Kansas tax rates tax rates as an experiment that may not work should be aware that we know with certainty what hasn’t worked in Kansas.

There are a number of ways to measure the performance of an economy. Often the growth of jobs is used. That’s fine. Here I present an alternative: the gross domestic product for a state. As with job growth, it is not the only measure of a state’s economy. GDP is a comprehensive measure, encompassing changes in population, employment, and productivity. The nearby static illustration from an interactive visualization shows Kansas (highlighted in blue) compared to some neighboring states.

Real GDP by state, Kansas highlighted, through 2013.
Real GDP by state, Kansas highlighted, through 2013. Click for larger version.
The top chart shows the change in GDP from the previous year. Kansas, highlighted in dark blue, is often near the bottom of a selection of neighboring states. The bottom chart shows growth in GDP since 1997. Again, Kansas is near the bottom of neighboring states.

Neither of these trends is recent. The Kansas economy has been underperforming for many years. We need no experiment to tell us this. It is in our data, and is part of the legacy of decades of moderate Kansas leadership.

real-gdp-state-2014-05-19-instructionsThe visualization holds data from the U.S. Bureau of Economic Analysis. You may click on a state’s name to highlight it. You may choose different industry sectors, such as government or private industry.

Click here to open the visualization in a new window. Visualization created using Tableau Public.

In Kansas, PEAK has a leak

A Kansas economic development incentive program is pitched as being self-funded, but is probably a drain on the state treasure nonetheless.

An economic development incentive program in Kansas is PEAK, or Promoting Employment Across Kansas. This program allows companies to retain 95 percent of the payroll withholding tax of employees.

Flow of tax dollars under normal circumstances, and under PEAK.
Flow of tax dollars under normal circumstances, and under PEAK.
PEAK incentive payments can be a substantial sum. Tables available at the Kansas Department of Revenue indicate that for a single person with no exemptions who earns $40,000 annually, the withholding would be $27 per week (for weekly payroll), or $1,404 annually. For a married person with two children earning the same salary, withholding would be $676 annually. Under PEAK, the company retains 95 percent of these values.

Legislators and public officials like programs like PEAK partly because they can promote these programs as self-financing. That is, the state isn’t subsidizing a company. Instead, the company is paying its own way with its own taxes. The state is not sending money to the company, it’s just holding on to 95 percent of its employees’ withholding taxes instead of sending the funds to the state. Something like that.

Illustration of a shortfall under PEAK
Illustration of a shortfall under PEAK
But here’s a consideration. The amount of money withheld from a worker’s paycheck is not the same as the amount of tax the worker actually owes the state. Withholding is only an approximation, and one that is biased in favor of the state. Many Kansas workers receive an income tax refund from the state. This is in recognition that the sum of the withholding taxes paid by a worker is larger than the actual tax liability. Therefore, the state is returning money that the state was not entitled to.

Now, what about workers who are employed at a company that is in the PEAK program and who receive a state income tax refund? Their withholding taxes — 95 percent, anyway — have already been given back to their employer.

So: What is the source of the money used to pay these refunds? How much money is paid in refunds to employees working at PEAK-participating companies?

We should note that the funds don’t come from the PEAK company’s employees, as the employees receive credit for all their withholding taxes, even though 95 percent never contributed to the state treasury.

Inquiry to the Department of Revenue revealed that there are no statistics on actual income tax liability of PEAK employees vs. the amount of withholding tax credited to that employee that was retained or refunded to the PEAK employer. The Department of Commerce referred inquiries to the Department of Revenue.

If we wanted to know how much money was paid in refunds to PEAK-company employees, I believe we would need to examine the account of each affected employee. I’m sure it’s not possible to come up with an answer by making assumptions, because the circumstances of each taxpayer vary widely.

Whatever the amount, it represents state tax revenue being used to fund an economic development incentive program that is pitched as being self-funded.

Government intervention may produce unwanted incentives

A Kansas economic development incentive program has the potential to alter hiring practices for reasons not related to applicants’ job qualifications.

An economic development incentive program used in Kansas is PEAK, or Promoting Employment Across Kansas. This program allows companies to retain 95 percent of the payroll withholding tax of employees. According to the Kansas Depart of Commerce, “PEAK is intended to encourage economic development in Kansas by incenting companies to relocate, locate or expand business operations and jobs in Kansas. The Secretary of Commerce has discretion to approve applications of qualified companies and determine the benefit period.” Many states have similar programs.

Flow of tax dollars under normal circumstances, and under PEAK.
Flow of tax dollars under normal circumstances, and under PEAK.
PEAK incentive payments can be a substantial sum. Tables available at the Kansas Department of Revenue indicate that for a single person with no exemptions who earns $40,000 annually, the withholding would be $27 per week (for weekly payroll), or $1,404 annually. For a married person with two children earning the same salary, withholding would be $676 annually. Under PEAK, the company retains 95 percent of these values.

There’s the catch. The more tax exemptions a person claims, the lower their taxes, and the lower their payroll withholding. Since PEAK is based directly on the amount of withholding taxes, if less is withheld from employee paychecks, the company receives fewer incentive dollars. In the example above, the single worker generates incentives payments 108 percent greater than does the married worker with two children.

The question is: Does this provide incentives for companies in the PEAK program to adjust their hiring preferences? Is there an incentive for companies in the PEAK program to hire single workers with no dependents, rather than married workers with children?

In theory, yes, the incentive exists. Whether it produces an effect in practice is probably impossible to tell. It does illustrate some of the perverse incentives that can arise from government intervention in the economy.

If government simply paid cash to companies in a fixed amount per worker, the bias in favor of single workers would not exist. But if government paid cash directly to companies, many people would object. When accomplished through the tax system, however, the transactions are less obvious, but the benefits and costs are just as real.

Either way, cronyism exists, especially because the Secretary of Commerce has discretion in the approval of applications to participate in PEAK.

Tax increment financing (TIF) resources

Resources on tax increment financing (TIF) districts.

Tax Increment Financing: A Tool for Local Economic Development. Richard F. Dye and David F. Merriman. Tax increment financing (TIF) is an alluring tool that allows municipalities to promote economic development by earmarking property tax revenue from increases in assessed values within a designated TIF district. Proponents point to evidence that assessed property value within TIF districts generally grows much faster than in the rest of the municipality and infer that TIF benefits the entire municipality. Our own empirical analysis, using data from Illinois, suggests to the contrary that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.

Wichita TIF projects: some background. Tax increment financing disrupts the usual flow of tax dollars, routing funds away from cash-strapped cities, counties, and schools back to the TIF-financed development. TIF creates distortions in the way cities develop, and researchers find that the use of TIF means lower economic growth.

The effects of tax increment financing on economic development. Richard F. Dye and David F. Merriman. Local governments attempt to influence business location decisions and economic development through use of the property tax. Tax increment financing (TIF) sequesters property tax revenues that result from growth in assessed valuation. The TIF revenues are to be used for economic development projects but may also be diverted for other purposes. We have constructed an extensive data set for the Chicago metropolitan area that includes information on property value growth before and after TIF adoption. In contrast to the conventional wisdom, we find evidence that cities that adopt TIF grow more slowly than those that do not. We test for and reject sample selection bias as an explanation of this finding. We argue that our empirical finding is plausible and present a theoretical argument explaining why TIF might reduce municipal growth.

Does Chicago’s Tax Increment Financing (TIF) Programme Pass the ‘But-for’ Test? Job Creation and Economic Development Impacts Using Time-series Data. T. William Lester looked at block-level data regarding employment growth and private real estate development. The abstract of the paper describes:

“This paper conducts a comprehensive assessment of the effectiveness of Chicago’s TIF program in creating economic opportunities and catalyzing real estate investments at the neighborhood scale. This paper uses a unique panel dataset at the block group level to analyze the impact of TIF designation and investments on employment change, business creation, and building permit activity. After controlling for potential selection bias in TIF assignment, this paper shows that TIF ultimately fails the ‘but-for’ test and shows no evidence of increasing tangible economic development benefits for local residents.” (emphasis added)

In the paper, the author clarifies:

“To clarify these findings, this analysis does not indicate that no building activity or job crea-tion occurred in TIFed block groups, or resulted from TIF projects. Rather, the level of these activities was no faster than similar areas of the city which did not receive TIF assistance. It is in this aspect of the research design that we are able to conclude that the development seen in and around Chicago’s TIF dis-tricts would have likely occurred without the TIF subsidy. In other words, on the whole, Chicago’s TIF program fails the ‘but-for’ test.

Later on, for emphasis:

“While the findings of this paper are clear and decisive, it is important to comment here on their exact extent and external validity, and to discuss the limitations of this analysis. First, the findings do not indicate that overall employment growth in the City of Chicago was negative or flat during this period. Nor does this research design enable us to claim that any given TIF-funded project did not end up creating jobs. Rather, we conclude that on-average, across the whole city, TIF was unsuccessful in jumpstarting economic development activity — relative to what would have likely occurred otherwise.” (emphasis in original)

The author notes that these conclusions are specific to Chicago’s use of TIF, but should “should serve as a cautionary tale.”

The Most Popular Tool: Tax Increment Financing and the Political Economy of Local Government. Richard Briffault, University of Chicago Law Review, Winter 2010. “Tax increment financing (TIF) is the most widely used local government program for financing economic development in the United States, but the proliferation of TIF is puzzling. TIF was originally created to support urban renewal programs and was narrowly focused on addressing urban blight, yet now it is used in areas that are plainly unblighted. TIF brings in no outside money and provides no new revenue-raising authority. There is little clear evidence that TIF has done much to help the municipalities that use it, and it is also a source of intergovernmental tension and a site of conflict over the scope of public aid to the private sector.

Yet, the expansion of TIF makes sense in light of the basic structure of American local government law. Studying TIF can illuminate central features of our local government system. TIF succeeds — in the sense of its widespread adoption and use — because it, like local government more generally, is highly decentralized; reflects and reinforces the fiscalization of development policy; plays off the fragmentation of local governments and the resulting interlocal struggle for investment; and fits well with the entrepreneurial spirit characteristic of contemporary local economic development policy. A better understanding of TIF contributes to a better understanding of the political economy of American local government.”

Wichita should reject Bowllagio TIF district. Wichita should reject the formation of a harmful tax increment financing (TIF) district.

Wichita TIF: Taxpayer-funded benefits to political players. It is now confirmed: In Wichita, tax increment financing (TIF) leads to taxpayer-funded waste that benefits those with political connections at city hall.

Tax increment financing (TIF) and economic growth. There is clear and consistent evidence that municipalities that adopt tax increment financing, or TIF, grow more slowly after adoption than those that do not.

Does tax increment financing (TIF) deliver on its promise of jobs? When looking at the entire picture, the effect on employment of tax increment financing, or TIF districts, used for retail development is negative.

Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing. Randal O’Toole, Cato Institute. While cities often claim that TIF is “free money” because it represents the taxes collected from developments that might not have taken place without the subsidy, there is plenty of evidence that this is not true. First, several studies have found that the developments subsidized by TIF would have happened anyway in the same urban area, though not necessarily the same location. Second, new developments impose costs on schools, fire departments, and other urban services, so other taxpayers must either pay more to cover those costs or accept a lower level of services as services are spread to developments that are not paying for them. Moreover, rather than promoting economic development, many if not most TIF subsidies are used for entirely different purposes. First, many states give cities enormous discretion for how they use TIF funds, turning TIF into a way for cities to capture taxes that would otherwise go to rival tax entities such as school or library districts. Second, no matter how well-intentioned, city officials will always be tempted to use TIF as a vehicle for crony capitalism, providing subsidies to developers who in turn provide campaign funds to politicians.

TIF is not Free Money. Randal O’Toole. Originally created with good intentions, tax-increment financing (TIF) has become a way for city officials to enhance their power by taking money from schools and other essential urban services and giving it to politically connected developers. It is also often used to promote the social engineering goals of urban planners. … Legislators should recognize that TIF no longer has a reason to exist, and it didn’t even work when it did. They should repeal the laws allowing cities to use TIF and encourage cities to instead rely on developers who build things that people want, not things that planners think they should have.

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

Tax Increment Financing and Missouri: An Overview Of How TIF Impacts Local Jurisdictions. Paul F. Byrne. Tax Increment Financing (TIF) has become a common economic development tool throughout the United States. TIF takes the new taxes that a development generates and directs a portion of them to repay the costs of the project itself. … Supporters of TIF argue that it is a necessary tool for redevelopment in older communities. Detractors contend that it is used to simply subsidize development, and that variances in tax systems allow some governments to implement and benefit from TIF even if its use harms other levels of government. This study provides an overview of the history and basic structure of TIF. It then analyzes the basic tax components of a TIF plan and compares how various aspects, such as tax capture and tax competition, play out in the standard system of TIF. The study then reviews the economic literature on TIF, and ends with a direct application of how TIF operates within Missouri.

The Right Tool for the Job? An analysis of Tax Increment Financing. Heartland Institute. Tax Increment Financing (TIF) is an economic development tool that uses the expected growth (or increment) in property tax revenues from a designated geographic area of a municipality to finance bonds used to pay for goods and services calculated to spur growth in the TIF district. The analysis performed for this study found TIF does not tend to produce a net increase in economic activity; favors large businesses over small businesses; often excludes local businesses and residents from the planning process; and operates in a manner that contradicts conventional notions of justice and fairness. We recommend seeking alternatives to TIF and reforms to TIF that make the process more democratic and the distribution of benefits more fair to residents of TIF districts.

Giving Away the Store to Get a Store. Daniel McGraw, Reason. Largely because it promises something for nothing — an economic stimulus in exchange for tax revenue that otherwise would not materialize — this tool is becoming increasingly popular across the country. Originally used to help revive blighted or depressed areas, TIFs now appear in affluent neighborhoods, subsidizing high-end housing developments, big-box retailers, and shopping malls. And since most cities are using TIFs, businesses such as Cabela’s can play them off against each other to boost the handouts they receive simply to operate profit-making enterprises. … At a time when local governments’ efforts to foster development, from direct subsidies to the use of eminent domain to seize property for private development, are already out of control, TIFs only add to the problem: Although politicians portray TIFs as a great way to boost the local economy, there are hidden costs they don’t want taxpayers to know about. Cities generally assume they are not really giving anything up because the forgone tax revenue would not have been available in the absence of the development generated by the TIF. That assumption is often wrong.

Do Tax Increment Finance Districts in Iowa Spur Regional Economic and Demographic Growth? David Swenson and Liesl Eathington. We found virtually no statistically meaningful economic, fiscal, and social correlates with this practice in our assessment; consequently, the evidence that we analyzed suggests that net positions are not being enhanced — that the overall expected benefits do not exceed the public’s costs.

No More Secret Candy Store: A Grassroots Guide to Investigating Development Subsidies. From Good Jobs First, a comprehensive guide to researching state and local subsidies, economic development agencies, and companies.

Clawbacks illustrate difficulty of economic development

Politicians and government officials like clawbacks in economic development incentive agreements. But do these provisions have any negative aspects?

When business firms receive economic development incentives from government, the incentives may be given conditionally. That is, there may be benchmarks or conditions that the company has agreed to meet. These benchmarks are most commonly in the form of job counts or payroll value, and sometimes capital investment.

But what happens if the company does not meet the benchmarks? Some agreements have clawback provisions that come into play at this time. Sometime the company may be required to repay all or part of the value of incentives that were received. Or, perhaps the company will not be eligible to receive additional incentives that were planned.

Government officials like the idea of clawbacks. It lets them appear to be responsible in the awarding of incentives. Politicians and bureaucrats tell voters that government is looking out for them. If a company accepts incentives and doesn’t create every last job that was promised, by golly, the politicians say, we’re going to get back the taxpayers’ money for them.

Clawbacks can be useful. If a company fraudulently seeks and receives incentives, it’s good there’s a way to retrieve the money. More commonly, however, the clawbacks are to protect taxpayers in case the business plans do not work out as hoped, and the promised jobs are not delivered.

It’s understandable that taxpayers want to see clawbacks in place to protect their investment. We realize that politicians want to appear to be responsible with taxpayer funds. But there are several problems. When a company has not achieved its benchmarks, it is likely because the company is not performing well financially and economically. The company may not have the capacity to make the clawback payments. This recently happened in Wichita with a company that had received a forgivable loan. The company did not meet the required benchmarks, and was not able to repay the loan. The city is allowing them to make their clawback payments over time.

City diverted funds to Walmart projectSometimes government may choose not to enforce clawbacks that have been agreed to. In the case of a Wichita company that had received a property tax abatement but suffered a downtown in its business and was not able to meet the benchmarks, the city’s economic development director told the city council “I don’t think it would be productive at this time to further penalize them — as the market has already penalized them — by putting them back on the tax rolls at this time.” In another Wichita example, the city had a personal guarantee from a real estate developer to cover shortfalls in a tax increment financing district, But instead of holding the developer to the terms of the contract, the city issued a bailout. I estimated the cost to city taxpayers at about $30,000 per year, or $516,000 over the course of the loan.

These examples reveal a problem with clawbacks. Will struggling companies be able to pay the clawback? If a company is struggling financially and hasn’t met the benchmarks, aggressively pursuing clawback payments might be the factor that forces a company to shut down. That means fewer jobs. Would it be better to let the company retain its incentives and continue to operate, even though it hasn’t met the benchmarks? It is presumably providing some good, after all.

There’s also the consideration that if clawback provisions are too strict, will companies be discouraged from applying for incentives? A recent loan considered by the Sedgwick County Commission contemplated one or more of four different forms of security: a mortgage, a security agreement, a collateral assignment of life insurance, or a corporate guaranty.

friedman-spending-categories-2013-07The issue of clawbacks is a window into the difficulties of economic development incentives. Officials tell us they are making an investment in the community’s future. But it’s a transaction unlike any investment decision made in the private economy. For one, government officials are not spending and investing their own money (or shareholders’ money) for their own benefit (or shareholders’ benefit). Instead, they’re using someone else’s money, and spending it on still someone else. As Milton Friedman has noted, this is absolutely the worst way to spend money. (Click here for an explanation of the diagram.)

When negotiating clawback provisions, similar considerations apply. The government’s economic development officials are not negotiating over the security of their own investment. To them, it’s someone else’s money. They did not earn or raise it, and ultimately they are not responsible for it. But for the party across the table — the business firm — the transaction concerns their own money, and the motivations and responsibilities are very different.

Year in Review: 2014

Here is a sampling of stories from Voice for Liberty in 2014.

January

A transparency agenda for Wichita
Kansas has a weak open records law, and Wichita doesn’t want to follow the law, as weak as it is. But with a simple change of attitude towards open government and citizens’ right to know, Wichita could live up to the goals its leaders have set.

New York Times on Kansas schools, again
The New York Times — again — intervenes in Kansas schools. As it did last October, the newspaper makes serious errors in its facts and recommendations.

Visit Wichita, and pay a tourism fee
The Wichita City Council will consider adding a 2.75 percent tax to hotel bills, calling it a “City Tourism Fee.” Welcome to Wichita!

Wichita’s growth in gross domestic product
Compared to peer areas, Wichita’s record of growth in gross domestic product is similar to that of job creation: Wichita performs poorly.

The death penalty in Kansas, a conservative view
What should the attitude of conservatives be regarding the death penalty? Ben Jones of Conservatives Concerned about the Death Penalty spoke on the topic “Capital Punishment in Kansas from a conservative perspective: Is it a failed policy?”

Kansas school test scores, the subgroups
To understand Kansas school test scores, look at subgroups. Sometimes Kansas ranks very well among the states. In other instances, Kansas ranks much lower, even below the national average. It’s important for Kansans — be they citizens, schoolchildren, parents, education professionals, or (especially) politicians of any party — to understand these scores.

The state of Wichita, 2014
Wichita Mayor Carl Brewer delivered the annual State of the City address. He said a few things that deserve discussion.

February

In Wichita, why do some pay taxes, and others don’t?
A request by a luxury development in downtown Wichita raises issues, for example, why do we have to pay taxes?

Wichita considers policy to rein in council’s bad behavior
he Wichita City Council considers a policy designed to squelch the council’s ability to issue no-bid contracts for city projects. This policy is necessary to counter the past bad behavior of Wichita Mayor Carl Brewer and several council members, as well as their inability to police themselves regarding matters of ethical behavior by government officials.

Our Kansas grassroots teachers union
Letters to the editor in your hometown newspaper may have the air of being written by a concerned parent of Kansas schoolchildren, but they might not be what they seem.

Wichita’s legislative agenda favors government, not citizens
This week the Wichita City Council will consider its legislative agenda. This document contains many items that are contrary to economic freedom, capitalism, limited government, and individual liberty. Yet, Wichitans pay taxes to have someone in Topeka promote this agenda.

Wichita planning documents hold sobering numbers
The documents hold information that ought to make Wichitans think, and think hard. The amounts of money involved are large, and portions represent deferred maintenance. That is, the city has not been taking care of the assets that taxpayers have paid for.

In Wichita, citizens want more transparency in city government
In a videographed meeting that is part of a comprehensive planning process, Wichitans openly question the process, repeatedly asking for an end to cronyism and secrecy at city hall.

March

Special interests struggle to keep special tax treatment
When a legislature is willing to grant special tax treatment, it sets up a battle to keep — or obtain — that status. Once a special class acquires preferential treatment, others will seek it too.

In Wichita, West Bank apartments seem to violate ordinance
Last year the Wichita City Council selected a development team to build apartments on the West Bank of the Arkansas River, between Douglas Avenue and Second Street. But city leaders may have overlooked a Wichita City Charter Ordinance that sets aside this land to be “open space, committed to use for the purpose of public recreation and enjoyment.”

In Wichita, pushing back at union protests
A Wichita automobile dealer is pushing back at a labor union that’s accusing the dealer of unfair labor practices.

Wichita City Council to consider entrenching power of special interest groups
The Wichita City Council will consider a resolution in support of the status quo for city elections. Which is to say, the council will likely express its support for special interest groups whose goals are in conflict with the wellbeing of the public.

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

State and local government employment levels vary
The states vary widely in levels of state government and local government employees, calculated on a per-person basis. Only ten states have total government employee payroll costs greater than Kansas, on a per-person basis.

April

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

Cronyism is welfare for rich and powerful, writes Charles G. Koch
“The central belief and fatal conceit of the current administration is that you are incapable of running your own life, but those in power are capable of running it for you. This is the essence of big government and collectivism,” writes Charles G. Koch in the Wall Street Journal.

Rich States, Poor States for 2014 released
In the 2014 edition of Rich States, Poor States, Utah continues its streak at the top of Economic Outlook Ranking, meaning that the state is poised for growth and prosperity. Kansas continues with middle-of-the-pack performance rankings, and fell in the forward-looking forecast.

Wichita develops plans to make up for past planning mistakes
On several issues, including street maintenance, water supply, and economic development, Wichita government and civic leaders have let our city fall behind. Now they ask for your support for future plans to correct these mistakes in past plans.

May

Poll: Wichitans don’t want sales tax increase
According to a newly released poll from Kansas Policy Institute, Wichitans may want more jobs and a secure water source but they certainly don’t support a sales tax increase as the means to get either. Reporting on this poll is available in these articles: In Wichita, opinion of city spending consistent across party and ideology, Few Wichitans support taxation for economic development subsidies, Wichitans willing to fund basics, and To fund government, Wichitans prefer alternatives to raising taxes.

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

In Wichita, the streetside seating is illuminated very well
Wichita city leaders tell us that the budget and spending have been cut to the bone. Except for the waste, that is.

Wichita seeks to form entertainment district
A proposed entertainment district in Old Town Wichita benefits a concentrated area but spreads costs across everyone while creating potential for abuse.

In Wichita, capitalism doesn’t work, until it works
Attitudes of Wichita government leaders towards capitalism reveal a lack of understanding. Is only a government-owned hotel able to make capital improvements?

Wichita, again, fails at government transparency
At a time when Wichita city hall needs to cultivate the trust of citizens, another incident illustrates the entrenched attitude of the city towards its citizens. Despite the proclamations of the mayor and manager, the city needs a change of attitude towards government transparency and citizens’ right to know.

Wichita per capita income not moving in a good direction
Despite its problematic nature, per capita income in Wichita is used as a benchmark for the economy. It’s not moving in the right direction. As Wichita plans its future, leaders need to recognize and understand its recent history.

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.

For Kansas’ Roberts, an election year conversion?
A group of like-minded Republican senators has apparently lost a member. Is the conservative voting streak by Pat Roberts an election year conversion, or just a passing fad?

June

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.

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.

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.

Wichita city council schools citizens on civic involvement
Proceedings of a recent Wichita City Council meeting are instructive of the factors citizens should consider if they want to interact with the council and city government at a public hearing.

Forget the vampires. Let’s tackle the real monsters.
Public service announcements on Facebook and Wichita City Channel 7 urge Wichitans to take steps to stop “vampire” power waste. But before hectoring people to introduce inconvenience to their lives in order to save small amounts of electricity, the city should tackle the real monsters of its own creation.

July

Wichita property taxes rise again
The City of Wichita is fond of saying that it hasn’t raised its mill levy in many years. But the mill levy has risen in recent years.

For Wichita leaders, novel alternatives on water not welcome
A forum on water issues featured a presentation by Wichita city officials and was attended by other city officials, but the city missed a learning opportunity.

For Wichita’s new water supply, debt is suddenly bad
Wichita city leaders are telling us we need to spend a lot of money for a new water source. For some reason, debt has now become a dirty word.

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

August

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.

Wichita airport statistics updated
As the Wichita City Council prepares to authorize funding for Southwest Airlines, it’s worth taking a look at updated statistics regarding the airport.

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.

Welcome back, Gidget
Gidget stepped away for a few months, but happily she is back writing about Kansas politics at Kansas GOP Insider (wannabe).

September

Wichita planning results in delay, waste
Wichita plans an ambitious road project that turns out to be too expensive, resulting in continued delays for Wichita drivers and purchases of land that may not be needed.

‘Transforming Wichita’ a reminder of the value of government promises
When Wichita voters weigh the plausibility of the city’s plans for spending proposed new sales tax revenue, they should remember this is not the first time the city has promised results and accountability.

Fact-checking Yes Wichita: NetApp incentives
In making the case that economic development incentives are necessary and successful in creating jobs, a Wichita campaign overlooks the really big picture.

Arrival of Uber a pivotal moment for Wichita
Now that Uber has started service in Wichita, the city faces a decision. Will Wichita move into the future by embracing Uber, or remain stuck in the past?

Fact-checking Yes Wichita: Boeing incentives
The claim that the “city never gave Boeing incentives” will come as news to the Wichita city officials who dished out over $600 million in subsidies and incentives to the company.

Beechcraft incentives a teachable moment for Wichita
The case of Beechcraft and economic development incentives holds several lessons as Wichita considers a new tax with a portion devoted to incentives.

For Kansas budget, balance is attainable
A policy brief from a Kansas think tank illustrates that balancing the Kansas budget while maintaining services and lower tax rates is not only possible, but realistic.

To Wichita, a promise to wisely invest if sales tax passes
Claims of a reformed economic development process if Wichita voters approve a sales tax must be evaluated in light of past practice and the sameness of the people in charge. If these leaders are truly interested in reforming Wichita’s economic development machinery and processes, they could have started years ago using the generous incentives we already have.

For Wichita Chamber’s expert, no negatives to economic development incentives
An expert in economic development sponsored by the Wichita Metro Chamber of Commerce tells Wichita there are no studies showing that incentives don’t work.

Water, economic development discussed in Wichita
Dr. Art Hall, Executive Director of the Center for Applied Economics at the University of Kansas School of Business, presented his “Thoughts on Water and Economic Development” at the Wichita Pachyderm Club Friday, September 19, 2014

Stuck in the box in Wichita, part one
To pay for a new water supply, Wichita gives voters two choices and portrays one as bad. But the purportedly bad choice is the same choice the city made over the last decade to pay for the last big water project. We need out-of-the-box thinking here.

October

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.

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.

A simple step towards government transparency in Wichita
Kansas law requires publication of certain notices in newspapers, but cities like Wichita could also make them available in other ways that are easier to use.

While Wichita asks for new taxes, it continues to spend and borrow
The City of Wichita says it doesn’t have enough revenue for things like street maintenance and transit, but continues to borrow for spending on new projects.

Wichita debt levels seen to rise
As part of the campaign for a proposed Wichita sales tax, the city says that debt is bad. But actions the city has taken have caused debt levels to rise, and projections are for further increases.

For Wichita, another economic development plan
The Wichita City Council will consider a proposal from a consultant to “facilitate a community conversation for the creation of a new economic development diversification plan for the greater Wichita region.” Haven’t we been down this road before?

In Wichita, pro-sales tax campaign group uses sales tax-exempt building as headquarters
While “Yes Wichita” campaigns for higher sales taxes, it operates from a building that received a special exemption from paying sales tax.

For Wichita Chamber of Commerce chair, it’s sales tax for you, but not for me
A Wichita company CEO applied for a sales tax exemption. Now as chair of the Wichita Metro Chamber of Commerce, he wants you to pay more sales tax, even on the food you buy in grocery stores.

Should Wichita expand a water system that is still in commissioning stage?
Should we be concerned about rushing a decision to expand a water production system that has not yet proven itself?

Wichita sends educational mailer to non-Wichitans, using Wichita taxes
Why is the City of Wichita spending taxpayer money mailing to voters who don’t live in the city and can’t vote on the issue?

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

November

In election coverage, The Wichita Eagle has fallen short
Citizens want to trust their hometown newspaper as a reliable source of information. The Wichita Eagle has not only fallen short of this goal, it seems to have abandoned it.

Kansas school spending visualization updated
There’s new data available from Kansas State Department of Education on school spending. I’ve gathered the data, adjusted it for the consumer price index, and now present it in this interactive visualization.

In Kansas, school employment rises again
For the fourth consecutive year, the number of teachers in Kansas public schools has risen faster than enrollment, leading to declining pupil-teacher ratios.

Richard Ranzau, slayer of cronyism
In Sedgwick County, an unlikely hero emerges in the battle for capitalism over cronyism.

Kansans still uninformed on school spending
As in the past, a survey finds Kansans are uninformed or misinformed on the level of school spending, and also on the direction of its change.

In Kansas, voters want government to concentrate on efficiency and core services before asking for taxes
A survey of Kansas voters finds that Kansas believe government is not operating efficiently. They also believe government should pursue efficiency savings, focus on core functions, and spend unnecessary cash reserves before cutting services or raising taxes.

Kansas cities should not unilaterally grant tax breaks
When Kansas cities grant economic development incentives, they may also unilaterally take action that affects overlapping jurisdictions such as counties, school districts, and the state itself. The legislature should end this.

City of Wichita State Legislative Agenda: Cultural Arts Districts
Wichita government spending on economic development leads to imagined problems that require government intervention and more taxpayer contribution to resolve. The cycle of organic rebirth of cities is then replaced with bureaucratic management.

December

City of Wichita State Legislative Agenda: Airfares
The City of Wichita’s legislative agenda regarding the Affordable Airfares subsidy program seems to be based on data not supported by facts.

Options for funding Wichita’s future water supply
Now that the proposed Wichita sales tax has failed, how should Wichita pay for a future water supply?

KU records request seen as political attack
A request for correspondence belonging to a Kansas University faculty member is a blatant attempt to squelch academic freedom and free speech.

Why is this man smiling?
In Wichita, the chair of the Wichita Metro Chamber of Commerce crafts a sweetheart deal for his company to the detriment of Wichita taxpayers.

Wichita Metro Chamber of Commerce: What is the attitude towards taxes?
Does the Wichita Metro Chamber of Commerce support free markets, capitalism, and economic freedom, or something else?

Will the next Wichita mayor advocate enforcing our ethics laws?
Wichita has laws that seem clear. But the city attorney said they don’t mean what they seem to say. Will our next mayor stand up for ethics?

Campaign contribution stacking in Wichita
Those seeking favors from Wichita City Hall use campaign contribution stacking to bypass contribution limits. This has paid off handsomely for them, and has harmed everyone else.

Economic development in Wichita: Looking beyond the immediate
Decisions on economic development initiatives in Wichita are made based on “stage one” thinking, failing to look beyond what is immediate and obvious.

Economic development in Sedgwick County
The issue of awarding an economic development incentive reveals much as to why the Wichita-area economy has not grown.

Kansas is not an entrepreneurial state

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.