Interventionism

Tax costs block progress in Kansas

by Bob Weeks on April 28, 2012

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

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

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

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

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

There are more categories. Kansas ranks well in none.

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

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

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

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

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

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

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

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

More evidence of failure

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

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

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

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

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

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

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

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

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

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

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

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In Kansas, STAR bonds vote uplifted cronyism over capitalism

by Bob Weeks on April 24, 2012

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Raising minimum wage not the solution

by Bob Weeks on April 19, 2012

As calls mount to raise the federal minimum wage, we need to remember that this law — as well-intentioned as it may be — is not the solution to unemployment or raising the standard of living of workers.

The great appeal of a higher minimum wage mandated by an act of Congress is that it seems like a wonderfully magical way to increase the wellbeing of low-wage workers. Those who were earning less than the new lawful wage and keep their jobs after the increase are happy. They are grateful to the lawmakers, labor leaders, newspaper editorialists, and others who pleaded for the higher minimum wage. News stories will report their good fortune.

That’s the visible effect of raising the minimum wage. But to understand the entire issue, we must look for the unseen effects. Milton Friedman explained in Capitalism and Freedom:

Minimum wage laws are about as clear a case as one can find of a measure the effects of which are precisely the opposite of those intended by the men of good will who support it. Many proponents of minimum wage laws quite properly deplore extremely low rates; they regard them as a sign of poverty; and they hope, by outlawing wage rates below some specified level, to reduce poverty. In fact, insofar as minimum wage laws have any effect at all, their effect is clearly to increase poverty. The state can legislate a minimum wage rate. It can hardly require employers to hire at that minimum all who were formerly employed at wages below the minimum. … The effect of the minimum wage is therefore to make unemployment higher than it otherwise would be.

The not-so-visible effect of the higher wage law is that demand for labor will be reduced. Those workers whose productivity, as measured by the give and take of supply and demand, lies below the new lawful wage rate are in danger of losing their jobs. The minimum wage law says if you hire someone you must pay them a certain minimum amount. The law can’t compel you to hire someone, nor can it force employers to keep workers on the payroll.

The problem is that people lose their jobs in a dispersed manner. A few workers here; a few there. They may not know who is to blame for their situation. Newspaper and television reporters will not seek these people, as they are largely invisible, especially so in the case of the people who are not hired because of the higher minimum wage level.

If we are truly concerned about the plight of low-wage and low-skilled workers we can face some realities and deal with them openly. The primary reality is that some people are not able to produce output that our economy values highly. These workers are not very productive. Passing a law that requires employers to pay them more doesn’t change the fact that their productivity is low. But there are ways to increase productivity.

One way to increase workers’ productivity is through education. Unfortunately, there is ample evidence that our public education system is not producing graduates with the skills needed for well-paying jobs. But this is a problem that can be fixed.

Another way to increase wages is to encourage more capital investment. But capital is a dirty word to liberals, as it conjures up images of rich people. But as the economist Walter E. Williams says, ask yourself this question: who earns the higher wage: a man digging a ditch with a shovel, or a man digging a ditch using a power backhoe? The difference between the two is that the man using the backhoe is more productive, although the worker using the shovel is undoubtedly working harder. But it is productivity that is valued. That productivity is provided by capital — the savings that someone accumulated (instead of spending on immediate consumption or taxes) and invested in a way that increased the output of workers and our economy.

These savers and investors are not necessarily wealthy people. Anyone who defers current consumption in order to save and invest — no matter how small the amount — provides capital to industry.

Education and capital accumulation are the two best ways to increase the productivity and the wages of workers. Ironically, the people who are most vocal about raising wages through legislative fiat are also usually opposed to meaningful education reform and school choice, insisting on more resources being poured into the present system. They also usually support higher taxes on both individuals and business, which makes it harder to accumulate capital. These people and organizations should examine the effects of the policies they promote, as they are not in alignment with their stated goals.

Tagged as: Capitalism, Interventionism, Minimum wage

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Wichita may choose more centralized planning

by Bob Weeks on April 16, 2012

This Tuesday (April 17th) the Wichita City Council will consider its participation in the REAP sustainable communities planning process. Wichita ought to reject this expansion of centralized planning, as the outcome will likely serve special interests at the expense of economic growth and jobs for everyone else.

The relevant pages from the agenda packet are available at REAP Consortium Agreement for South-Central Kansas Sustainable Communities.

Who makes the plan? And for whom?

Yes, planning is important. It’s likely that several Wichita city council members will use this as a factor in deciding to vote for the sustainable communities planning process. But these members will fail to distinguish between government plans and all others.

They will fail to distinguish that when individuals and businesses plan, they are planning for themselves and no one else. They are engaging in a voluntary act. But when government plans, the plans are drawn for others — whether they want to be in a plan or not, whether they agree with the principles and goals or not.

Furthermore, these members will fail to recognize that when governments plan, special interest groups soon appropriate the plans to benefit themselves. An example is the state’s highway plan, with the campaign for increased highway spending funded by the construction industries. They would lobby to build highways to nowhere, as long as they receive contracts for their construction.

The planners themselves are a special interest group, too. They need jobs. Like most government bureaucrats, they “profit” from increasing their power and influence, and by expansion of their budgets and staffs. So when Sedgwick County Commissioner Jim Skelton asks a professional planner questions about the desirability of planning, what answer does he think he will get? It’s not that the planners are not honest people. But they have a vested economic and professional interest in seeing that we have more government planning, not less.

And we have evidence that planners watch out for themselves. It is not disputed that this planning grant benefits Regional Economic Area Partnership (REAP). Sedgwick County Commissioner Richard Ranzau says that John Schlegel, Wichita’s Director of Planning, told him that “acceptance of this grant will take REAP to another level, because right now they are struggling, and this will help plot the course for REAP.” He said that REAP, which is housed at the Hugo Wall School of Public Affairs at Wichita State University, needs to expand its role and authority in order to give it “something to do.”

So we see that REAP is another special interest group seeking to benefit itself. In this case, our best hope is that REAP engages in merely make-work, that the plan it produces is put on a shelf and ignored, and that the only harm to us is the $1.5 million cost of the plan.

The knowledge problem

There’s also the problem of the knowledge needed to plan. This is enough of a problem when individuals and businesses plan for themselves. It’s a tremendous — and unsolvable — problem when trying to plan for an entire region, even one as small as downtown Wichita. 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.

Another favorite thought from Friedrich Hayek is in his book The Fatal Conceit: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” But they will try.

REAP has much information about the process on its website devoted to the grant, located at Sustainable Communities Grant 2011. I would especially encourage reading the document “Sustainable Communities Work Plan DRAFT.” In there you can learn of the plans to “decrease per capita Vehicle Miles Traveled (VMT).” This plan, if it succeeds, will harm citizens’ mobility and economic opportunities, especially for the people who need jobs most.

Cato Institute Senior Fellow Randal O’Toole, author of The Best-Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future, writes the following regarding the tremendous boost the personal automobile has given Americans: “Since the dawn of the Republic, no invention has enhanced the quality of life of the average American as much as the mass-produced automobile. Americans today are far more mobile, they earn much higher incomes, and they have access to far more consumer goods than a hundred years ago. It is no exaggeration to attribute most of these improvements to the wide availability of automobiles.”

Remember, the sustainable communities planning process is definitely anti-automobile. One of the goals for the plan is: “Regional Transportation Plan: Develop multi-modal transportation options/programs for the region and connects housing options to emerging employment clusters.” This sounds like a good and noble idea. But in practice, government transit systems fail to produce what riders truly need, and are very expensive. The last time I checked, only 22.5 percent of the costs of running the Wichita transit system is paid for by riders through the fare box. Taxpayers — most of whom don’t ride the buses — pay the rest.

But owning an automobile gives people mobility, and that is very important for workers. Some examples:

“Studies show that car ownership is a significant factor in improving the employment status
of welfare recipients.” (Job Access, Commute, and Travel Burden Among Welfare Recipients)

“Raphael and Rice (2002) found in their study that car ownership has a strong effect on the probability of an individual being employed as well as on the number of hours they work per week. Generally, car ownership better enables job seekers to look for jobs. They can consider work outside of regular transit service hours, and they can travel faster, more safely, and more flexibly than with public transportation.” (Transportation & Work: Exploring Car Usage and Employment Outcomes in the LSAL Data)

Also from this study: “Overall, car ownership does appear to have an important relationship to employment status, wages, and weeks worked.” And “Having a car as a primary mode of transportation makes a respondent four times as likely to be employed. Car ownership also improves earnings by several hundred dollars and increases weeks worked by up to eleven weeks.”

In the rankings of factors that are important to obtaining employment, a car was more useful than a high-school-equivalent diploma. We should be working to increase automobile ownership, especially among lower-income people. The planning process Wichita is considering adopting, with its emphasis on government transit rather than private automobiles, will decrease mobility and economic opportunity for everyone.

Finally, consider this from O’Toole on how the planning process ignores reality: “Transit advocates will point out that the autos driving on congested urban highways often have only one occupant. But that is exactly the point: If modern life is so decentralized that carpooling makes no sense for most commuters, how are giant buses and high-capacity trains going to work?” Fortunately, I don’t think high-capacity trains are seriously considered for the Wichita area. But the planners want more government transit and less private automobiles, despite our dectralized lifestyle.

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Last week Wendell Cox appeared on an episode of the Jason Lewis radio program and talked about sustainable communities, etc. Sedgwick County and Wichita were mentioned. His recent piece is the Wall Street Journal is California Declares War on Suburbia: Planners want to herd millions into densely packed urban corridors. It won’t save the planet but will make traffic even worse.

Tagged as: Economics, Government planning, Interventionism, Wichita city council, Wichita city government

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Kansas should improve economic climate, rely less on incentives

by Guest Author on April 12, 2012

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

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

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

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

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

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

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

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

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

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

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Thinking beyond stage one in economic development for Wichita

by Bob Weeks on April 9, 2012

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

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

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

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

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

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

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

“And then what will happen?” he asked.

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

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

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

“And then what will happen?” Smithies persisted.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Southfork TIF should, again, be rejected

by Bob Weeks on April 9, 2012

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

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

TIF is not free money

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

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

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

The role of politics

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

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

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

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

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

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

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

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

Do TIF districts work?

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

But there’s plenty of evidence to the contrary.

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

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

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

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

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

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

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

This particular applicant

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

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

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

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

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

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

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In Kansas, planning will be captured by special interests

by Bob Weeks on April 6, 2012

The government planning process started in south-central Kansas will likely be captured by special interest groups that see ways to benefit from the plan. The public choice school of economics and political science has taught us how special interest groups seek favors from government at enormous costs to society, and we will see this at play again over the next few years.

This week the Sedgwick County Commission voted to participate in a HUD Sustainable Communities Regional Planning Grant. While some justified their votes in favor of the plan because “it’s only a plan,” once the planning process begins, special interests plot how to benefit themselves at the expense of the general public. Then once the plan is formed, it’s nearly impossible to revise it, no matter how evident the need.

An example of how much reverence is given to government plans comes right from the U.S. Supreme Court in the decision Kelo v. New London, in which the Court decided that government could use the power of eminent domain to take one person’s property and transfer it to someone else for the purposes of economic development. In his opinion for the Court, Justice Stevens cited the plan: “The City has carefully formulated an economic development plan that it believes will provide appreciable benefits to the community.” Here we see the importance of the plan and due reverence given to it.

Stevens followed up, giving even more weight to the plan: “To effectuate this plan, the City has invoked a state statute that specifically authorizes the use of eminent domain to promote economic development. Given the comprehensive character of the plan, the thorough deliberation that preceded its adoption, and the limited scope of our review, it is appropriate for us, as it was in Berman, to resolve the challenges of the individual owners, not on a piecemeal basis, but rather in light of the entire plan. Because that plan unquestionably serves a public purpose, the takings challenged here satisfy the public use requirement of the Fifth Amendment.”

To Stevens, the fact that the plan was comprehensive was a factor in favor of its upholding. The sustainable communities plan, likewise, is nothing but comprehensive, as described by county manager Bill Buchanan in a letter to commissioners: “[the plan will] consist of multi-jurisdictional planning efforts that integrate housing, land use, economic and workforce development, transportation, and infrastructure investments in a manner that empowers jurisdictions to consider the interdependent challenges of economic prosperity, social equity, energy use and climate change, and public health and environmental impact.”

That pretty much covers it all. When you’re charged with promoting economic prosperity, defending earth against climate change, and promoting public health, there is no limit to the types of laws you might consider.

Who will plan?

The American Planning Association praised the Court’s notice of the importance of a plan, writing “This decision underscores the importance for a community to have a comprehensive development plan formulated through a democratic planning process with meaningful public participation by everyone.”

But these plans are rarely by and for the public. Almost always the government planning process is taken over and captured by special interests. We see this in public schools, where the planning and campaigning for new facilities is taken over by architectural and construction firms that see school building as a way to profit. It does not matter to them whether the schools are needed.

Our highway planning is hijacked by construction firms that stand to benefit, whether or not new roads are actually needed.

Our planning process for downtown Wichita is run by special interest groups that believe that downtown has a special moral imperative, and another group that sees downtown as just another way to profit at taxpayer expense. Both believe that taxpayers across Wichita, Kansas, and even the entire country must pay to implement their vision. As shown in Kansas and Wichita need pay-to-play laws the special interests that benefit from public spending on downtown make heavy political campaign contributions to nearly all members of the Wichita City Council. They don’t have a political ideology. They contribute only because they know council members will be voting to give them money.

In Wichita’s last school bond election, 72 percent of the contributions, both in-kind and cash, was given by contractors, architects, engineering firms and others who directly stand to benefit from new school construction, no matter whether schools are actually needed. The firm of Schaefer Johnson Cox Frey Architecture led the way in making these contributions. It’s not surprising that this firm was awarded a no-bid contract for plan management services for the bond issue valued at $3.7 million. This firm will undoubtedly earn millions more for those projects on which it serves as architect.

The special interest groups that benefit from highway construction: They formed a group called Economic Lifelines. It says it was formed to “provide the grassroots support for Comprehensive Transportation Programs in Kansas.” Its motto is “Stimulating economic vitality through leadership in infrastructure development.”

A look at the membership role, however, lets us know whose economic roots are being stimulated. Membership is stocked with names like AFL-CIO, Foley Equipment Company, Heavy Constructors Association of Greater Kansas City, Kansas Aggregate & Concrete Associations, Kansas Asphalt Pavement Association, Kansas Contractors Association, Kansas Society of Professional Engineers, and PCA South Central Cement Promotion Association. Groups and companies like these have an economic interest in building more roads and highways, whether or not the state actually needs them.

We see that REAP is another special interest group seeking to benefit itself. In this case, our best hope is that REAP engages in merely make-work, that the plan it produces is put on a shelf and ignored, and that the only harm to us is the $1.5 million cost of the plan.

By the way, did you know that Sedgwick County Commissioner Dave Unruh, who voted in favor of the plan that benefits REAP, is a board member of REAP, and may become the next chairman? Special interest groups know how to play the political game, that’s for sure.

Tagged as: Dave Unruh, Downtown Wichita revitalization, Economic development, Economics, Eminent domain, Environment, Government planning, Interventionism, Jim Skelton, Regulation, Richard Ranzau, Schaefer Johnson Cox Frey, Sedgwick county government, Supreme Court

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Federal, United Nations planning imported to Wichita

by Bob Weeks on April 5, 2012

Yesterday the Sedgwick County Commission voted to participate in a HUD Sustainable Communities Regional Planning Grant.

Republican commissioners Dave Unruh and Jim Skelton joined with Democrat Tim Norton to pass the measure. Below, Paul Soutar of Kansas Watchdog explains why this planning process is a bad idea.

Local Planning Initiative Has Federal Strings, UN Roots

by Paul Soutar, Kansas Watchdog

The Sedgwick County Commission will decide Wednesday whether to give a consortium of South Central Kansas governments and organizations broad control over community planning funded by a federal grant and based on a United Nations agenda.

The Regional Economic Area Partnership (REAP) Consortium for Sustainable Communities seeks to implement a Regional Plan for Sustainable Development (RPSD) for South Central Kansas.

REAP’s application for a federal grant said the plan will “provide an overall vision and commitment for sustainable growth in South Central Kansas. The RSPD will provide goals, strategies, and action steps to support that vision. Specifically, that RPSD will create a regional integrated transportation, housing, air quality and water infrastructure plan that aligns federal resources and provides for sustainable development and resources (fiscal, human and capital) to support our economic centers.‘

Much of the language and goals of sustainable communities grants reflect the goals of the U.N.’s Agenda 21, a global environmental agenda for the 21st century revealed at the 1992 U.N. Conference on Environment and Development in Rio de Janeiro.

Agenda 21 is a comprehensive framework for global, national and local action aimed at improving environmental equality through massive changes in how resources are consumed and allocated.

According to Sustainable Development in the 21st century (SD21), a December 2011 UN review of implementation of Agenda 21, “Achieving greater equity requires a significant reduction in consumption by industrialized countries.”

Continue reading at Local Planning Initiative Has Federal Strings, UN Roots.

Tagged as: Dave Unruh, Government planning, Interventionism, Jim Skelton, Kansas Watchdog, Paul Soutar, Sedgwick county government, Tim Norton

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Kansas and Wichita quick takes: Friday March 30, 2012

March 30, 2012

Today: Lee Fang: wrong again; Action on sustainability; Economic fascism; Immigration.

Tagged as: Americans For Prosperity, Barack Obama, Economics, Interventionism, Koch Industries, Sedgwick county government

Interventionism

More evidence of failure

Who makes the plan? And for whom?

The knowledge problem

TIF is not free money

The role of politics

Do TIF districts work?

This particular applicant

Who will plan?

Local Planning Initiative Has Federal Strings, UN Roots

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