Tag Archives: Subsidy

Wichita CID illustrates pitfalls of government intervention

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

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

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

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

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

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

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

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

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

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

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

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

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

Wichita property tax delinquency problem not solved

Despite a government tax giveaway program, problems with delinquent special assessment taxes in Wichita have become worse.

It’s surprising to read reporting in the Wichita Eagle that the city is owed millions in delinquent special assessment taxes. (City of Wichita owed $4.8 million in delinquent special assessments, August 15, 2015)

That’s because in 2012 the city adopted a program that rebated property taxes to buyers of new homes. The goal of the program was twofold: To help builders sell homes, and to help the city collect delinquent special assessment taxes.

In February of that year, according to city documents, “Current delinquent specials on vacant lots within the City of Wichita are an estimated $3.3 million.”

Now the delinquent taxes have risen to $4.8 million.

This wasn’t supposed to happen. At the council meeting Wes Galyon, president of the Wichita Area Builders Association, told the council, according to meeting minutes: “This program will also aid in eliminating current delinquencies on lots and new home subdivisions in the City and contribute to the developers and builders being able to keep taxes and specials current on buildable lots that they own and plan to build on.”

The city manager told the council, according to meeting minutes: “The other issue was the ability to collect on delinquent taxes and special assessments. Stated that is becoming a growing problem for us as we look at what is happening with the economy and home builders.”

A program that should not have been adopted

In his remarks to city council members in February 2012, Wichita city manager Robert Layton told the council, according to meeting minutes: “Stated they took a businesslike approach as they went through this and designed the program. Stated they consulted Wichita State University and the report references a 1.48 return on our investment just in terms of the present value of the direct and indirect jobs that are created as well as the construction expenditures, which was important to them.”

The manager was referring to an analysis prepared by Wichita State University Center for Economic Development and Business Research, titled Economic Impact of Proposed WABA Incentives, February 1, 2012.

In these analyses, the city attempts to estimate costs and benefits of a program, and adopt only those programs that have a positive ratio of benefits over costs. (Generally the city requires that the ration be 1.3 to 1 or greater.) Benefits are, according to the study, “sales tax revenues, from construction worker spending and construction material purchases, and property tax revenues.” The costs are the lost revenue due to the tax rebates. Following is an excerpt from a table that presents the results of analysis.

                   No Incentives    Incentives
Public Benefits       $2,364,429    $3,004,315
Public Costs                  $0    $2,032,312
Net Public Benefits   $2,364,429      $730,457
Return on Investment      N/A           1.48

Some, like the Wichita city manager, focused on the return on investment (ROI) ratio of 1.48 if the tax rebate incentive is used. (There is no such ratio if there are no incentives, as there is no investment.) The study explained the ratio this way: “For every dollar invested, the city will receive the initial dollar plus an additional 48 cents in return.”

That sounds like a good deal, and the ratios like this that are calculated by CEDBR are often used by the city to justify incentives.

But there is another way to look at this deal: the net value to the city. In this case, if the city did not offer the incentives, the benefits to the city would be $2,364,429. If incentives were used, the benefits would be $730,457. This means that if the city does nothing, it is $1,633,972 to the better.

That’s right: Even though the city had an opportunity to make an investment with a purportedly high ROI, it would be better off, dollar-wise, if it did not make the investment.

This illustrates the caveats of working with ratios. They are simply “the relation between two similar magnitudes with respect to the number of times the first contains the second.” A ratio says nothing about the absolute magnitude of the numbers.

For more about the problems CEDBR study found with the program, see Wichita new home tax rebate program: The analysis.

Wichita’s WaterWalk apartment deal

From August 2012, an episode of cronyism in Wichita.

On Tuesday the Wichita City Council will consider the type of taxpayer-funded giveaway that voters have shown they don’t like. How council members vote may set the stage for city elections next March and April.

Tuesday’s item involves a proposed apartment development on the west bank of the Arkansas River across from the downtown WaterWalk development. The apartment developer is WaterWalk LLC, whose manager is Jack P. DeBoer.

The highlights of the deal include:

1. The lease of 4.4 acres of city-owned land for $1 per year, for the next 93 years. City documents say the land is valued by Sedgwick County at $479,000. The city paid $919,695 to acquire the land in 1994 and 1995. It’s listed as for sale with an asking price of $1,153,344. The city is, however, asking the apartment developer to pay the full $93 in advance.

2. Development of an amphitheater, which was part of the WaterWalk master plan. Originally planned to be just west of WaterWalk Place, the condominium development on Main Street, the amphitheater will now be implemented as a floating stage in the Arkansas River. A $247,500 Economic Development Initiative (EDI) grant from the U.S. Department of Housing and Urban Development (HUD) will pay for a portion of the cost. Tuesday’s agenda item asks authorization to issue a request for proposal (RFP) for this stage.

Besides the sweetheart land lease, there are two other components of this deal that are troubling. One will undoubtedly be presented to city council members and the public as a big benefit to taxpayers, something that will actually profit the city. This is a provision that requires the apartment developer to pay “Additional Annual Rent.” Under this concept, each year the apartment developer will calculate “Adjusted Net Cash Flow” and remit 25 percent of that to the city.

To the casual observer, this seems like a magnanimous gesture by the apartment developer. It makes it look like the city has been a tough negotiator, hammering out a good deal for the city, letting citizens profit along with the apartment developer.

But the definition of cash flow includes a comprehensive list of expenses the may be deducted, including the cost of repaying any loans. There’s also an allowable expense called “Tenant Development Cost Return,” which is the apartment developer’s profit. The agreement defines this profit as 20 percent, and it’s deducted as part of the computation of “Adjusted Net Cash Flow.”

If there is ever any money left over after the dedication of all these expenses and profit margin, I will be surprised. Shocked, even. Here’s one reason why. One of the allowable deductions that goes into the computation of “Adjusted Net Cash Flow” is, according to city documents: “Amounts paid into any capital, furniture, fixture, equipment or other reserve.” There’s no restriction as to how much can be funneled into these reserve accounts. We can be sure that if this project was ever in the position where it looked like it might have to remit “Additional Annual Rent” to the city, contributions to these reserve funds would rise. Then, no funds paid to the city.

This is an example of the city appearing to be concerned for the welfare of taxpayers. In reality, this concept of “Additional Annual Rent” is worse than meaningless. It borders on deception.

Then, there’s this: The city has agreed to allow its ownership of the land (remember, the city is leasing the land to the apartment developer) to be subordinated to other debt the apartment developer may take on, such as the mortgage that will certainly be obtained. This means that if the apartment complex doesn’t succeed and there is foreclosure, the lender takes ownership of the city’s land.

Last week the city council passed a revision to its economic development policy that states that economic development incentives should have a cost-benefit ratio of at least 1.3 to one. No such number is given for this project.

Waterwalk, a problematic development

This deal is another chapter in the history of the troubled WaterWalk development. So far, WaterWalk has received some $41 million in public spending, and we have little to show for that investment.

Three years ago the Wichita Eagle editorialized: “Seven years into a project that was supposed to give Wichita a grand gathering place full of shops, restaurants and night spots as well as offices and condos, some City Council members and citizens remain skeptical at best about WaterWalk’s ability to deliver on its big promises. … True, the skepticism to date is richly deserved.” When our newspaper’s editorial board is critical of a government spending project in downtown Wichita, that’s a red letter day.

In 2009, after DeBoer took over the management of WaterWalk, the Wichita Eagle reported: “‘I’m not going down to City Hall with my hand out,’ DeBoer said. ‘I can’t. The city has put their money in it, and I’m happy with that. We’ve put a lot of our own money in and that’s OK. Now, time to deliver.'”

Leasing land worth $479,000 or $1,153,344 for one dollar per year: To me, that smells like a handout. It doesn’t sound like delivering on promises.

Around the time DeBoer took over the management of WaterWalk, Wichita city manager Robert Layton said no more public money would be put in to WaterWalk, according to Eagle reporting. Later he said those remarks were misinterpreted, with the Eagle reporting “[Layton] said the city won’t spend more on infrastructure, and that specific developments would be analyzed case by case to make sure they offer a return on investment for taxpayers and fit with the master plan.”

Wichita, home to cronyism

Measures like the city council will consider on Tuesday are what leads to cynicism regarding city government. It reinforces that notion that there is a network of insiders — the “good ol’ boy network” — that gets what it wants from city staff and officeholders. This deal — the sweetheart land giveaway, the deceptive appearance of profit sharing, the subordination of the city’s interests — doesn’t generate prosperity for Wichita and citizen confidence in its government. Instead, this deal contributes to the stench of cronyism that permeates and infests Wichita City Hall.

Two recent elections have shown that Wichitans don’t much care for this culture of giveaways to the politically connected class. People don’t like crony capitalism. They know it doesn’t work. The city defends these giveaways by saying they create jobs. But Wichita economic development is failing. Our city is not doing well, in spite of all the money spent on economic development efforts.

Additionally, when it is apparent that a “good ol’ boy” network of insiders exists at Wichita City Hall, it creates a toxic and corrosive political and business environment. Companies are reluctant to expand into areas where they don’t have confidence in the integrity of local government. Will I find my company bidding against a company that made bigger campaign contributions than I did? If I don’t make the right campaign contributions, will I get my zoning approved? Will my building permits be slow-walked through the approval process? Will my projects face unwarranted and harsh inspections?

Last year Charles Koch, chairman of the board and CEO of Wichita-based Koch Industries, wrote in the pages of the Wall Street Journal this regarding cronyism: “Government spending on business only aggravates the problem. Too many businesses have successfully lobbied for special favors and treatment by seeking mandates for their products, subsidies (in the form of cash payments from the government), and regulations or tariffs to keep more efficient competitors at bay. Crony capitalism is much easier than competing in an open market. But it erodes our overall standard of living and stifles entrepreneurs by rewarding the politically favored rather than those who provide what consumers want.”

WaterWalk and Jack DeBoer have already received generous financial assistance ($41 million) from the taxpayers of Wichita. That the city would consider even one dollar more is a scandal.

Amendments to Wichita WaterWalk Developer Agreements

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.

In Sedgwick County, expectation of government entitlements

In Sedgwick County, we see that once companies are accustomed to government entitlements, any reduction is met with resistance.

When an executive of Spirit Aerosystems accused the Sedgwick County Commission of “working against us,” the company may have forgotten the assistance and special treatment the company has received from local governments and taxpayers. This assistance has amounted to hundreds of millions of dollars over several decades, when we consider both Spirit and its predecessor, Boeing.

Now, Spirit objects to a proposed reduction in funding to Wichita Area Technical College, and also cuts to local attractions such as the zoo. The proposed cut to WATC is less than the cut made the year before, although part of that cut was rescinded, making the proposed cut equal to last year’s cut. These cuts follow a trajectory recommended by the former county manager, who was widely praised as understanding and accommodating the needs of area business firms.

So when Spirit accuses county taxpayers as working against the company, it’s a little hard to stomach. Residents of Sedgwick County pay higher taxes so that Spirit can pay less.

Especially glaring is when companies ask for forgiveness of paying sales tax, as Spirit routinely does. In Kansas, low-income families must pay sales tax on their groceries, and at a rate that is among the highest in the country. Even more difficult to fathom are the companies that campaigned for a higher sales tax in Wichita, but engage in financial maneuvers designed to avoid paying any sales tax. Sometimes companies campaign for higher property taxes, especially school bonds, but then ask for exemption from paying those taxes. 1 2 3

Following, a discussion of a Spirit Aerosystems tax abatement request from 2014.

This week the Wichita City Council will hold a public hearing concerning the issuance of Industrial Revenue Bonds to Spirit AeroSystems, Inc. The purpose of the bonds is to allow Spirit to avoid paying property taxes on taxable property purchased with bond proceeds for a period of five years. The abatement may then be extended for another five years. Additionally, Spirit will not pay sales taxes on the purchased property.

City documents state that the property tax abatement will be shared among the taxing jurisdictions in these estimated amounts:

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

No value is supplied for the amount of sales tax that may be avoided. The listing of USD 259, the Wichita public school district, is likely an oversight by the city, as the Spirit properties lie in the Derby school district. This is evident when the benefit-cost ratios are listed:

City of Wichita: 1.98 to one
General Fund: 1.78 to one
Debt Service: 2.34 to one
Sedgwick County: 1.54 to one
U.S.D. 260: 1.00 to one (Derby school district)
State of Kansas: 28.23 to one

The City of Wichita has a policy where economic development incentives should have a benefit cost ratio of 1.3 to one or greater for the city to participate, although there are many loopholes the city regularly uses to approve projects with smaller ratios. Note that the ratio for the Derby school district is 1.00 to one, far below what the city requires for projects it considers for participation. That is, unless it uses one of the many available loopholes.

We have to wonder why the City of Wichita imposes upon the Derby school district an economic development incentive that costs the Derby schools $143,038 per year, with no payoff? Generally the cost of economic development incentives are shouldered because there is the lure of a return, be it real or imaginary. But this is not the case for the Derby school district. This is especially relevant because the school district bears, by far, the largest share of the cost of the tax abatement.

Of note, the Derby school district extends into Wichita, including parts of city council districts 2 and 3. These districts are represented by Pete Meitzner and James Clendenin, respectively.

The city’s past experience

Wichita Mayor Carl Brewer Facebook 2012-01-04Spirit Aerosystems is a spin-off from Boeing and has benefited from many tax abatements over the years. In a written statement in January 2012 at the time of Boeing’s announcement that it was leaving Wichita, Mayor Carl Brewer wrote “Our disappointment in Boeing’s decision to abandon its 80-year relationship with Wichita and the State of Kansas will not diminish any time soon. The City of Wichita, Sedgwick County and the State of Kansas have invested far too many taxpayer dollars in the past development of the Boeing Company to take this announcement lightly.”

Along with the mayor’s statement the city released a compilation of the industrial revenue bonds authorized for Boeing starting in 1979. The purpose of the IRBs is to allow Boeing to escape paying property taxes, and in many cases, sales taxes. According to the city’s compilation, Boeing was granted property tax relief totaling $657,992,250 from 1980 to 2017. No estimate for the amount of sales tax exemption is available. I’ve prepared a chart showing the value of property tax abatements in favor of Boeing each year, based on city documents. There were several years where the value of forgiven tax was over $40 million.

Boeing Wichita tax abatements, annual value, from City of Wichita.
Boeing Wichita tax abatements, annual value, from City of Wichita.
Kansas Representative Jim Ward, who at the time was Chair of the South Central Kansas Legislative Delegation, issued this statement regarding Boeing and incentives:

Boeing is the poster child for corporate tax incentives. This company has benefited from property tax incentives, sales tax exemptions, infrastructure investments and other tax breaks at every level of government. These incentives were provided in an effort to retain and create thousands of Kansas jobs. We will be less trusting in the future of corporate promises.

Not all the Boeing incentives started with Wichita city government action. But the biggest benefit to Boeing, which is the property tax abatements through industrial revenue bonds, starts with Wichita city council action. By authorizing IRBs, the city council cancels property taxes not only for the city, but also for the county, state, and school district.

Sedgwick County WATC funding trajectory following manager’s recommendations

Sedgwick County taxpayers have been generous with funding for Wichita Area Technical College, and the former county manager has recommended reducing its funding.

During the July 16, 2014 meeting of the Sedgwick County Commission, county manager Bill Buchanan presented the recommended budget for 2015. It included a cut in funding for Wichita Area Technical College in the amount of $150,000. In response to a question, Buchanan told the commissioners:

“The new president has been assertive and aggressive in trying to deal with their financial issues. They have, he has turned that financial, that institution around financially. They are in pretty healthy shape. They have a fund balance that’s relatively strong, and it’s in my opinion that our subsidy, although it was critical in the beginning, is less critical in their operations now, and perhaps it would be time for us, when we face our own fiscal issues, to reduce their funding so we can address some of ours.”

Under the leadership of Chair Dave Unruh, this reduction in funding was approved.

At the January 7, 2015 meeting of the commission, again under the leadership of Unruh, the commission heard an off-agenda item to restore $50,000 of the funding for 2015, making the cut $100,000. That item passed. Being an off-agenda item, there is little or no public notice. Commissioner Karl Peterjohn noted this in his remarks: “I frankly would feel much more comfortable if we postponed this issue until we could get it published in the paper and have at least whatever public attention that that would generate provided, as opposed to taking another Off Agenda item that’s going to increase county spending.”

In support of Peterjohn’s motion to delay the decision for a week, Commissioner Richard Ranzau expressed concern over the lack of financial information made available to commissioners. He also repeated the manager’s recommendation that WATC needs less county funding: “Well, I’d like to have more financial information. It’s my understanding that since the state has increased funding for Vocational Ed, they’re doing very well, their reserves increased significantly, and that’s why, I mean, I was told the reason we could reduce it $150,000 was because they were doing so well. I support what they’re doing out there, but if they’ve had an influx of money from the state, a result of Vocational Ed legislation then I think it’s appropriate to adjust our spending, and I’m not prepared to increase it by $50,000 without more financial information, and that’s why I support Commissioner Peterjohn’s motion to postpone this a week so we can get more information and make a more educated decision on this. There is really no reason for hurry through this in my estimation.”

In summary, the Sedgwick County manager recommended that commissioners reduce funding to WATC, as its need for county funding has declined. Under commission chair Unruh, the commission did so, in the net amount of $100,000. The same amount is proposed for cuts this year. In light of this, the criticism of WATC beneficiaries like Spirit Aerosystems is unfounded.

By the way, the commission has been criticized for considering off-agenda items since Ranzau became chair in January, with the Wichita Eagle editorial board describing one off-agenda vote as “abrupt.” In another op-ed, Rhonda Holman complained that “The move came in an off-agenda item, with little opportunity for GWEDC and the business community to argue against it.”

Whether off-agenda items are good or bad public policy seems to depend on the whim of the Eagle editorial board.

Cash incentives in Wichita

Wichita city leaders are proud to announce the end of cash incentives, but they were only a small portion of the total cost of incentives.

Wichita city leaders say that cash incentives are on the way out. That’s a welcome change. Cash incentives, however, were only a small part of the city’s spending on incentives. Far more costly are property and sales tax abatements, tax increment financing, and various programs at the state level. There seems to be no appetite to reduce reliance on these.

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

Wichita city leaders will take credit for reforming the use of incentives, but cash incentives were only a small portion of the total cost of incentives. It’s up to citizens to be watchful of the total cost of incentives, as the city does not make this data available.

  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/

In Wichita, benefitting from your sales taxes, but not paying their own

A Wichita real estate development benefits from the sales taxes you pay, but doesn’t want to pay themselves.

STAR bonds in Kansas. Click for larger version.
STAR bonds in Kansas. Click for larger version.
In Kansas, the STAR bond program allows cities to issue bonds (that is, to borrow money), give the proceeds (that is, cash) to a private business firm, and then pay off the bonds with the sales taxes paid by the business firm’s customers.

But sometimes this gift by taxpayers isn’t sufficient. In Wichita, despite benefitting from STAR bonds, a company wishes to skip paying sales taxes itself. This is what the Wichita City Council will consider tomorrow.

The Wichita Sports Forum (WSF) project on North Greenwich Road, according to city documents, is a project with a cost of $14,025,000. Of that, $7,525,000 (53.6 percent) may be paid for by the STAR bonds. These bonds will be paid off at no cost to the owners of WSF.

Additionally, according to city documents, the STAR bonds program carries with it a sales tax exemption. That is, if any of the bond proceeds are spent on items subject to sales tax (like building materials), WSF doesn’t pay the sales tax.

There’s another consideration, however. Some of the project is being paid for by the developers themselves rather than by STAR bonds. Stuff purchased with their money will be subject to sales tax. Evidently that is a problem, and the city has a way to step in and solve it.

Through the Industrial Revenue Bonds program, the WSF developers can avoid paying sales tax on $4,500,000 of building materials. City documents don’t mention this number, but with the sales tax rate in Wichita at 7.5 percent, this is a savings of $337,500. It’s as good as a grant of cash. Better, in fact. If the city granted this cash, it would be taxable as income. But forgiveness of taxes isn’t considered income.

In Kansas, low-income families must pay sales tax on their groceries, and at a rate that is among the highest in the country. Is it unseemly that having already benefited from millions in taxpayer subsidy and sales tax exemption, the developers of Wichita Sports Forum seek even more sales tax exemptions?

Kansas senators vote to advance Ex-Im Bank

In a procedural motion, Kansas Senators Pat Roberts and Jerry Moran voted to advance the revival of the Export-Import Bank. The vote was a procedural motion on an amendment to allow a floor vote (invoking cloture). The amendment passed by a vote of 67 to 26.

Among Republicans the vote was 24 to 26 against the measure. All Democrats voted in favor.

The Export-Import Bank failed to be reauthorized by a June 30 deadline. It has not been making new loans since. The current legislation that passed the senate would reauthorize the bank.

Free market groups have long opposed the Ex-Im Bank, while many business interest groups call it vital.

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

A big-picture look at the EDA

While praising the U.S. Economic Development Administration for a small grant to a local institution, the Wichita Eagle editorial board overlooks the big picture.

While praising a grant to Wichita State University from the U.S. Economic Development Administration, the Wichita Eagle editorial board doesn’t waste an opportunity remind us of its big-government, anti-taxpayer ideology. (Pompeo would eliminate source of WSU grants, July 11, 2015)

The op-ed also criticizes U.S. Representative Mike Pompeo, who has sponsored legislation and offered amendments to end the EDA.

While the Eagle op-ed is designed to make us feel happy for Wichita State University (and bad about Rep. Pompeo, especially given the photo the newspaper used to illustrate the story online), the short-sighted and naive reasoning behind it is harmful. The op-ed promotes the impression that federal money is free, a gift from a magical fairy godmother that falls out of the sky in abundance. Anyone who opposes this free stuff must be evil.

But in exchange for the grant to WSU, we have to tolerate grants like these made by the EDA:

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

So in exchange for WSU receiving a million dollars this year and $1.9 million last year, we have to put up with the above. We have to wonder if Harry Reid being the number one Senate Democrat had anything to do with a grant for a facility named in his honor. We have yet another government agency staffed with a fleet of bureaucrats, including a chief who will travel to Wichita to promote and defend his agency. We have another government agency that believes it can better decide how to invest capital than the owners of the capital. We have another example of shipping tax dollars to Washington, seeing a large fraction skimmed off the top, then cities and states begging for scraps from the leftovers.

Often when the Eagle editorial board criticizes conservatives, it does so by using terms like “driven by ideology” or “blind adherence to right-wing ideology.”

But anyone parachuting down from Mars and observing this system for making investment decisions would wonder: Why do they do this? What kind of ideology would result in this nonsense?

You’ll have to ask the Wichita Eagle editorial board.

Rep. Pompeo on the EDA

In January 2012 Pompeo wrote an op-ed which explains the harm of the EDA. Here is an excerpt:

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

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

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

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

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

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

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

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

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

Following, his remarks on the floor.

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

Cash incentives in Wichita still in use

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

We’ve been told that the city is not going to use cash incentives for economic development. But an item the Wichita City Council will consider this week includes a cash grant of $30,000. It follows a similar project the council considered two weeks ago that included a grant of $10,000.

The building at 100 S. Market as it appeared in 2009. This building is slated to receive a grant of $30,000 to improve its exterior.
The building at 100 S. Market as it appeared in 2009. This building is slated to receive a grant of $30,000 to improve its exterior.
These grants are part of the city’s facade improvement program. Under it, properties in certain parts of the city can apply to use special assessment financing to pay for the improvement of their outside appearance. The city borrows the funds and advances them to the property owner. The bonds are repaid through special assessment taxes that are added to the property’s tax bill.

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

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

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.

WichitaLiberty.TV: Arts funding, property taxes, uninformed officials, tax increment financing, and social security

In this episode of WichitaLiberty.TV: Is Wichita risking a Soviet-style future? A look at Wichita property taxes, uninformed and misinformed elected officials, tax increment financing, and social security. View below, or click here to view on YouTube. Episode 86, broadcast June 7, 2015.

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.

Wichita city council member Jeff Longwell should not have voted

A sequence of events involving Jeff Longwell should concern citizens as they select the next Wichita mayor. Based on Wichita law, Longwell should not have voted on a matter involving the Ambassador Hotel, either for or against it.

In 2011 the Wichita City Council voted to award millions of taxpayer subsidy to the developers of the Ambassador Hotel in downtown Wichita. Because of the nature of one of the ordinances the council passed, citizens were able to petition to have it overturned. A successful petition was filed, so there was an election.

Ambassador Hotel sign 2014-03-07A group named “Moving Wichita Forward” was formed to campaign for the Ambassador Hotel for the February 28, 2012 election regarding the repeal of its special guest tax measure. The measure benefited Paul Coury, Dave Burk, and executives of Key Construction. The primary funder of the campaign was this ownership group.

As part of the campaign, on January 30, 2012 Moving Wichita Forward spent money with Luminance Display, a company that sold space on billboards.

Jeff Longwell Luminance Display 2012-01-30 excerpt

Based on a statement of substantial interests that Longwell filed in 2012, you can see that he had an ownership interest in Luminance Display.

Jeff Longwell SSI 2012-05-31 excerpt

So far, nothing contrary to Wichita city code has taken place. Yes, it is sleazy to sell advertising to people who have had business before the council in the past. But there’s nothing in the Wichita city code addressing this.

Then on April 16, 2013 Longwell voted in favor of Industrial Revenue Bonds for the Ambassador Hotel. The bond package allowed the hotel to avoid paying $703,017 in sales tax, according to city documents.

That is where Longwell crossed the line from being merely sleazy to acting contrary to city code. Here’s an excerpt from Section 2.04.050 Code of ethics for council members from the Wichita city code as passed in 2008:

“[Council members] shall refrain from making decisions involving business associates, customers, clients, friends and competitors.”

The owners of the Ambassador Hotel were customers of a company that Jeff Longwell partially owned. Based on the laws of the City of Wichita, Longwell should not have voted on a matter involving the Ambassador Hotel, either for or against it.

Energy subsidies for electricity production, in proportion

To compare federal subsidies for the production of electricity, we must consider subsidy values in proportion to the amount of electricity generated, because the magnitude is vastly different.

Kansas wind turbinesWhen comparing federal subsidies for the production of electricity, it’s important to look at the subsidy values in proportion to the amount of electricity generated. That’s because the scales vary widely. For example, in 2010 for the United States, as can be seen in the accompanying table, coal accounted for the production of 1,851 billion kWh (or megawatt hours) of electricity production. That’s 44.9 percent of all electricity produced. Solar power accounted for the production of 1,851 billion kWh, which is 0.025 percent of all electrical production.

Solar power, however, received 8.2 percent of all federal subsidies, or about 328 times its share of production.

The nearby table and chart are based on data from the Energy Information Administration (EIA), Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2010 through the Congressional Research Service, along with the author’s calculations.

Click table for larger version.
Click table for larger version.

Of particular interest is wind power, as it receives subsidy in the form of cash equivalent tax credits, and many states (including Kansas) have mandates forcing its use. For the year covered in the table, wind accounted for 2.3 percent of U.S. electricity generation. It received 42.0 percent of federal energy subsidies.

Electricity production and subsidy, 2010

Legislation to end Economic Development Administration introduced

U.S. Rep. Mike Pompeo calls for an end to a wasteful federal economic development agency.

economic-development-administrationIf you think a proper function of the federal government is spending your tax dollars to build replicas of the Great Pyramids in Indiana or a gift shop in a winery, you’re not going to like legislation introduced by U.S. Representative Mike Pompeo, a Republican who represents the Kansas fourth district, including the Wichita metropolitan area.

Others, however, will appreciate H.R. 661: EDA Elimination Act of 2015. In the following article from 2012, Pompeo explains the harm of the Economic Development Administration, which he describes as a “politically motivated federal wealth redistribution agency.” Pompeo had introduced similar legislation in the past, and this bill keeps the effort alive in the new Congress.

In his article Pompeo mentions the trip by Assistant Secretary of Commerce for Economic Development John Fernandez to Wichita. This was in conjunction with EDA’s grant to Bombardier, part of which was to facilitate production of a new airplane, the LearJet 85. Since then, Fernandez has moved on to the private sector, working for a law firm in a role that seems something like lobbying.

Unfortunately, earlier this year Bombardier mothballed the LearJet 85 project, with industry observers doubting it will be revived.

For more background on the EDA, see Economic Development Administration at Downsizing the Federal Government.

End the Economic Development Administration — Now

By U.S. Representative Mike Pompeo, January, 2012

As part of my efforts to reduce the size of government, I have proposed to eliminate the Economic Development Administration (EDA), a politically motivated federal wealth redistribution agency. Unsurprisingly, the current leader of that agency, Assistant Secretary of Commerce for Economic Development John Fernandez, has taken acute personal interest in my bill to shutter his agency.

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

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

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

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

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

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

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

WichitaLiberty.TV: A downtown Wichita deal shows some of the problems with the Wichita economy

In this episode of WichitaLiberty.TV: We’ll examine the city council’s action regarding a downtown Wichita development project and how it is harmful to Wichita taxpayers and the economy. View below, or click here to view at YouTube. Episode 77, broadcast March 8, 2015.

Exchange Place incentives, including free sales tax and an ethics bypass

A downtown Wichita project receives free sales taxes and a bypass of Wichita’s code of conduct for city council members. Remarks to the Wichita City Council, March 3, 2015.

Regarding the Exchange Place project in downtown Wichita, I’d like to remind the council of the entire subsidy package offered to the project.

There are historic preservation tax credits, which may amount to 25 percent of the project cost. These credits have the same economic impact as a cash payment, and their cost must be born by taxpayers.

There is $12.5 million in tax increment financing, which re-routes future property tax revenues back to the project for the benefit of its owners. Most everyone else pays property taxes in order to pay for government, not for things that benefit themselves exclusively, or nearly so.

There is a federal loan guarantee, which places the federal taxpayer on the hook if this project isn’t successful.

The owner of this project also seeks to avoid paying sales taxes on the purchase of materials. City documents don’t say how much this sales tax forgiveness might be worth, but it easily could be several million dollars.

Mayor and council, if it in fact is truly necessary to layer on these incentives in order to do a project in downtown Wichita, I think we need to ask: Why? Why is it so difficult to do a project in downtown Wichita?

Other speakers will probably tell you that rehabilitating historic buildings is expensive. If so, working on historic buildings is a choice they make. They, and their tenants, ought to pay the cost. It’s a lifestyle choice, and nothing more than that.

But I’m really troubled about the sales tax exemption. Just a few months ago our civic leaders, including this council, recommended that Wichitans add more to our sales tax burden in order to pay for a variety of things.

Only 14 states apply sales tax to food purchased at grocery stores for home consumption, and Kansas has the second-highest statewide rate. So we in Kansas, and Wichita by extension, require low-income families to pay sales tax on their groceries. But today this council is considering granting an exemption from paying these taxes that nearly everyone else has to pay.

These tax subsidies are not popular with voters. Last year when Kansas Policy Institute surveyed Wichita voters, it found that only 34 percent agreed with the idea of local governments using taxpayer money to provide subsidies to certain businesses for economic development. Then, of course, there is the result of the November sales tax election.

Might I also remind the people of Wichita that some of their taxpayer-funded subsidies are earmarked to fund a bailout for a politically-connected construction company for work done on a different project, one not related to Exchange Place except through having common ownership in the past? I don’t think it is good public policy for this city to act as collection agent for a private debt that has been difficult to collect.

This project is slated to receive many million in taxpayer-funded subsidy. Now this council proposes to wave a magic wand and eliminate the cost of sales tax for its owners. People notice this arbitrary application of the burden of taxation. They see certain people treated differently under the law, rather than all being treated equally under the law. People don’t like this. It breeds distrust in government. This council can help restore some of this trust by not issuing the Industrial Revenue Bonds and the accompanying sales tax exemption.

The ethics problem for the city

Wichita Mayor Carl Brewer with friend and major campaign donor Dave Wells of Key Construction.
Wichita Mayor Carl Brewer with friend and major campaign donor Dave Wells of Key Construction. Today Brewer voted for benefits for Wells, in apparent contradiction of city code.
Although I did not mention this to the council, Mayor Carl Brewer should not have voted on this matter. The politically-connected construction company that benefits from this deal through a taxpayer-funded bailout Key Construction. Its president, Dave Wells, is a friend of the mayor, as well as frequent and heavy campaign financier for the mayor and other council members.

This is a problem, as there is a law in Wichita. Here’s an excerpt from Section 2.04.050 Code of ethics for council members from the Wichita city code as passed in 2008:

“[Council members] shall refrain from making decisions involving business associates, customers, clients, friends and competitors.”

Dave Wells and Carl Brewer are friends. The mayor has said so. But the City of Wichita’s official position is that Section 2.04.050 does not need to be followed. Even children can see that elected officials should not vote economic benefits for their friends — but not the City of Wichita.

WichitaLiberty.TV: Transportation issues in Wichita

In this excerpt from WichitaLiberty.TV: Wichita’s legislative agenda concerning transportation issues is unsound. For airfares, it relies on a questionable presentation, and for passenger rail, it advocates for a system that is costly for taxpayers. View below, or click here to view at YouTube. Originally broadcast December 7, 2014.

For more on this issue, see: City of Wichita State Legislative Agenda: Airfares and City of Wichita State Legislative Agenda: Passenger rail

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.

Community improvement districts in Kansas

Community Improvement Districts are a relatively recent creation of the Kansas Legislature. In a CID, merchants may charge additional sales tax, up to an extra two cents per dollar.

Community improvement district using bonds. Click for larger version.
Community improvement district using bonds. Click for larger version.
There are two forms of CID. Both start with the drawing of the boundaries of a geographical district. In the original form, a city borrows money by selling bonds. The bond proceeds are given to the owners of the district. The bonds are repaid by the extra sales tax collected, known as the CID tax.

In the second form of CID, the extra sales tax is simply given to the owners of property in district as it is collected, after deduction of a small amount to reimburse government for its expenses. This is known as a “pay-as-you-go” CID.

The “pay-as-you-go” CID holds less risk for cities, as the extra sales tax — the CID tax — is remitted to the property owner as it is collected. If sales run below projections, or of the project never materializes, the property owners receive less funds, or no funds. With CID bonds, the city must pay back the bonds even if the CID tax does not raise enough funds to make the bond payments.

Community improvement district using pay-as-you-go. Click for larger version.
Community improvement district using pay-as-you-go. Click for larger version.
Of note is that CID proceeds benefit the owners of the property, not the merchants. Kansas law requires that 55 percent of the property owners in the proposed CID agree to its formation. The City of Wichita uses a more restrictive policy, requiring all owners to consent.

Issues regarding CID

Perhaps the most important public policy issue regarding CIDs is this: If merchants feel they need to collect additional revenue from their customers, why don’t they simply raise their prices? But the premise of this question is not accurate, as it is not the merchants who receive CID funds. The more accurate question is why don’t landlords raise their rents? That puts them at a competitive disadvantage with property owners that are not within CIDs. Better for us, they rationalize, that unwitting customers pay higher sales taxes for our benefit.

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

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

Eligible costs
One of the follies in government economic development policy is the categorization of costs into eligible and non-eligible costs. The proceeds from programs like CIDs and tax increment financing may be used only for costs in the “eligible” category. I suggest that we stop arbitrarily distinguishing between “eligible costs” and other costs. When city bureaucrats and politicians use a term like “eligible costs” it makes this process seem benign. It makes it seem as though we’re not really supplying corporate welfare and subsidy.

As long as the developer has to spend money on what we call “eligible costs,” the fact that the city subsidy is restricted to these costs has no economic meaning. Suppose I gave you $10 with the stipulation that you could spend it only on next Monday. Would you deny that I had enriched you by $10? Of course not. As long as you were planning to spend $10 next Monday, or could shift your spending from some other day to Monday, this restriction has no economic meaning.

Notification and withdrawal
If a merchant moves into an existing CID, how might they know beforehand that they will have to charge the extra sales tax? It’s a simple matter to learn the property taxes a piece of property must pay. But if a retail store moves into a vacant storefront in a CID, how would this store know that it will have to charge the extra CID sales tax? This is an important matter, as the extra tax could place the store at a competitive disadvantage, and the prospective retailer needs to know of the district’s existence and its terms.

Then, if a business tires of being in a CID — perhaps because it realizes it has put itself at a competitive disadvantage — how can the district be dissolved?

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

But CIDs allow taxes to be collected for the benefit of one specific entity. This goes against the principle of broad-based taxation to pay for an array of services for everyone. But in this case, the people who benefit from the CID are quite easy to identify: the property owners in the district.

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.

Wichita city hall falls short in taxpayer protection

An incentives agreement the Wichita city council passed on first reading is missing several items that city policy requires. How the council and city staff handle the second reading of this ordinance will let us know for whose interests city hall works: citizens, or cronies.

This week I presented the Wichita City Council my concerns about an inadequate developer agreement for a TIF district development project, the Mosley Avenue Project.

My presentation centered on the lack of an agreement by the developer to forgo appeals of the tax valuation of the property. The applicant had done this in the past, and it caused a shortfall of TIF revenue that the city had to makeup. The city manager had said that taxpayers would be protected in future deals, but the city did not include this protection in the Mosely agreement.

The omission of this taxpayer protection was not all that was missing. The Downtown Development Incentives Policy, revised by the council on June 10, 2014, calls for several items to be supplied when seeking incentives, including tax increment financing, which was the incentive requested for the Mosely project. As I show below, many significant items related to taxpayer protection were missing.

The council approved the project on first reading, noting that the development agreement would be finalized in time for second reading.

This is insufficient. The second reading of an ordinance is usually handled as part of the consent agenda. This is a grouping of items that are voted on as a group, in bulk. There is no discussion unless a council member specifically requests. The practice of the city is that the text of the ordinances on second reading is not made available in the agenda packet, even though changes may have been made between first reading and second reading. That will certainly be the case with this ordinance, as many things are missing from the development agreement.

It’s not clear why there is a first reading and a second reading of an ordinance. It may be so that details may be corrected. Or, perhaps council members would like to have a chance to reconsider their first vote. City code seems to give no guidance as to how much change to an ordinance is allowable between first and second reading.

The problem we face in Wichita is that the approval of a development plan in a TIF district has a mandated public hearing. It is not optional. But the motion passed by the council this week closed the public hearing. Yet, the city will need to make substantial changes to the ordinance and development agreement if it intends to follow the downtown incentives policy that it created. But the public will have no chance to comment on the new material. If past city practice is followed, the new material will not be made available to the public, and perhaps not to council members.

This is a conflict that I do not believe can be resolved unless the city reopens the public hearing for consideration of the revised ordinance and developer agreement on first reading. Anything else disrespects procedures that are designed to benefit and protect the public.

Except. As with many city council policies, there are loopholes. As outlined below, the council can simply vote to waive the requirements of the downtown incentives policy. That gives the council an easy out. But that makes another mockery of the city’s policies, if the council waives them whenever they are inconvenient.

When I presented the defect in the development agreement to the council I asked: Is this lack of taxpayer protection an oversight, or is it by design? There was no answer.

I did not ask this question, but didn’t any city council member notice the omission of significant items needed to comply with its own policies? What about the city manager? Economic development director? City attorney?

More importantly, who in city hall looking out for the interests of taxpayers? Could the generous campaign contributions of Burk and his wife be a factor in this missing taxpayer protection? Or the generous contributions of Key Construction and its executives? (Key Construction is frequently used by Burk.) This is one more incident illustrating the need for campaign finance reform in Wichita.

Missing items

Section D of the incentives policy states “parties requesting Downtown Development Incentives must submit the information listed below.” Significant missing items included the following:

CEDBR Fiscal Impact Model
The idea behind the city’s use of economic development incentives is that the city receives more than it spends or forgoes in future tax revenue. An analysis performed by the Center for Economic Development and Business Research (CEDBR) at Wichita State University is used to make this decision. This appears to have not been done for this project.

Guarantee for a proportional share of public revenue shortfall
This was not present in the developer agreement.

Economic analysis confirms that the project is infeasible “but for” public investment
This was not present in the developer agreement.

Minimum private to public capital investment ratio of 2 to 1
Information necessary to make this judgment was not included in the agenda presentation.

Pro Forma
The incentives policy states: “Pro Forma — The project pro forma will be evaluated on the following criteria:
a. Rate of private investment return
b. Rents/prices consistent with performance of comparables
c. Projected rate of absorption consistent with performance of comparables
d. Long-term project solvency”
It appears that this analysis was not performed.

“Gap” Financing Requirement
The downtown incentives policy states: “Approval of Downtown Development Incentives will require a financial analysis demonstrating that the project would not otherwise be possible without the use of the requested development incentive (“gap” analysis). Parties requesting Downtown Development Incentives will be required to provide the City pro forma cash flow analyses and sources and uses of funds in sufficient detail to demonstrate that reasonably available conventional debt and equity financing sources are not available to fund the entire cost of the project and still provide the developer a reasonable market rate of return on investment.”

There is no evidence that this analysis was performed and made available to the council.

Waiver
The incentives policy contains a loophole. If the council believes it is “inappropriate to evaluate a particular request for Downtown Development Incentives” using the policy, it may vote to waive the requirements.

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.

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 consideration this week by the Wichita City Council of two project plans in tax increment financing districts offers an opportunity to examine the issues surrounding TIF.

How TIF works

A TIF district is a geographically-defined area. In Kansas cities establish the borders. After the TIF district is defined, cities then approve one or more project plans that authorize the spending of TIF funds in specific ways.

Figure 1.
Figure 1.
Before the formation of the TIF district, the property pays taxes to the city, county, school district, and state as can be seen in figure 1. Because property considered for TIF is purportedly blighted, the amount of tax paid is usually small. Whatever it is, that level is called the “base.”

Figure 2.
Figure 2.
After approval of one or more TIF project plans the city borrows money and gives it to the project or development. The city now has additional debt in the form of TIF bonds that require annual payments. Figure 2 illustrates. (There is now another form of TIF known as “pay-as-you-go” that works differently, but produces much the same economic effect.)

Figure 3.
Figure 3.
Figure 3 shows the flow of tax revenue after the formation of the TIF district and after the completion of a project or development. Because buildings were built or renovated, the property is worth more, and the property tax is now higher. The development now has two streams of property tax payments that are handled in different ways. The original tax — the “base” — is handled just like before, distributed to city, state, school district, and the state, according to their mill levy rates. The difference between the new tax and the base tax — the “increment” — is handled differently. It goes to only two destinations: The State of Kansas, and repayment of the TIF bonds.

Figure 4.
Figure 4.
Figure 4 highlights the difference in the flow of tax revenues. The top portion of the illustration shows development outside of TIF. We see the flows of tax payments to city, county, school district, and the state. In the bottom portion, which shows development under TIF, the tax flows to city, county, and school district are missing. No longer does a property contribute to the support of these three units of government, although the property undoubtedly requires the services of them. This is especially true for a property in Old Town, which consumes large amounts of policing.

(Cities, counties, and school districts still receive the base tax payments, but these are usually small, much smaller than the incremental taxes. In non-TIF development, these agencies still receive the base taxes too, plus whatever taxes result from improvement of the property — the “increment,” so to speak. Or simply, all taxes.)

This rerouting of property taxes under TIF goes against the grain of the way taxes are usually rationalized. We use taxation as a way to pay for services that everyone benefits from, and from which we can’t exclude people. An example would be police protection. Everyone benefits from being safe, and we can’t exclude people from benefiting from police protection.

So when we pay property tax — or any tax, for that matter — people may be comforted knowing that it goes towards police and fire protection, street lights, schools, and the like. (Of course, some is wasted, and government is not the only way these services, especially education, could be provided.)

But TIF is contrary to this justification of taxes. TIF allows property taxes to be used for one person’s (or group of persons) exclusive benefit. This violates the principle of broad-based taxation to pay for an array of services for everyone. Remember: What was the purpose of the TIF bonds? To pay for things that benefited the development. Now, the development’s property taxes are being used to repay those bonds instead of funding government.

One more thing: Defenders of TIF will say that the developers will pay all their property taxes. This is true, but only on a superficial level. We now see that the lion’s share of the property taxes paid by TIF developers are routed back to them for their own benefit.

It’s only infrastructure

In their justification of TIF in general, or specific projects, proponents may say that TIF dollars are spent only on allowable purposes. Usually a prominent portion of TIF dollars are spent on infrastructure. This allows TIF proponents to say the money isn’t really being spent for the benefit of a specific project. It’s spent on infrastructure, they say, which they contend is something that benefits everyone, not one project specifically. Therefore, everyone ought to pay.

This attitude is represented by a comment left at Voice for Liberty, which contended: “The thing is that real estate developers do not invest in public streets, sidewalks and lamp posts, because there would be no incentive to do so. Why spend millions of dollars redoing or constructing public streets when you can not get a return on investment for that”

This perception is common: that when we see developers building something, the City of Wichita builds the supporting infrastructure at no cost to the developers. But it isn’t quite so. About a decade ago a project was being developed on the east side of Wichita, the Waterfront. This project was built on vacant land. Here’s what I found when I searched for City of Wichita resolutions concerning this project:

Figure 5. Waterfront resolutions.
Figure 5. Waterfront resolutions.
Note specifically one item: $1,672,000 for the construction of Waterfront Parkway. To anyone driving or walking in this area, they would think this is just another city street — although a very nicely designed and landscaped street. But the city did not pay for this street. Private developers paid for this infrastructure. Other resolutions resulted in the same developers paying for street lights, traffic signals, sewers, water pipes, and turning lanes on major city streets. All this is infrastructure that we’re told real estate developers will not pay for. But in order to build the Waterfront development, private developers did, with a total cost of these projects being $3,334,500. (It’s likely I did not find all the resolutions and costs pertaining to this project, and more development has happened since this research.)

In a TIF district, these things are called “infrastructure” and will be paid for by the development’s own property taxes — taxes that must be paid in any case. Outside of TIF districts, developers pay for these things themselves.

If not for TIF, nothing will happen here

Generally, TIF is justified using the “but-for” argument. That is, nothing will happen within a district unless the subsidy of TIF is used. Paul F. Byrne explains:

“The but-for provision refers to the statutory requirement that an incentive cannot be awarded unless the supported economic activity would not occur but for the incentive being offered. This provision has economic importance because if a firm would locate in a particular jurisdiction with or without receiving the economic incentive, then the economic impact of offering the incentive is non-existent. … The but-for provision represents the legislature’s attempt at preventing a local jurisdiction from awarding more than the minimum incentive necessary to induce a firm to locate within the jurisdiction. However, while a firm receiving the incentive is well aware of the minimum incentive necessary, the municipality is not.”

It’s often thought that when a but-for justification is required in order to receive an economic development incentive, financial figures can be produced that show such need. Now, recent research shows that the but-for justification is problematic. In Does Chicago’s Tax Increment Financing (TIF) Programme Pass the ‘But-for’ Test? Job Creation and Economic Development Impacts Using Time-series Data, author 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 districts 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 paper reinforces the problem of using tax revenue for private purposes, rather than for public benefit: “Essentially, Chicago’s extensive use of TIF can be interpreted as the siphoning off of public revenue for largely private-sector purposes. Although, TIF proponents argue that the public receives enhanced economic opportunity in the bargain, the findings of this paper show that the bargain is in fact no bargain at all.”

TIF is social engineering

TIF represents social engineering. By using it, city government has decided that it knows best where development should be directed. In particular, the Wichita city council has decided that Old Town and downtown development is on a superior moral plane to other development. Therefore, we all have to pay higher taxes to support this development. What is the basis for saying Old Town developers don’t have to pay for their infrastructure, but developers in other parts of the city must pay?

TIF doesn’t work

Does TIF work? It depends on what the meaning of “work” is.

If by working, do we mean does TIF induce development? If so, then TIF usually works. When the city authorizes a TIF project plan, something usually gets built or renovated. But this definition of “works” must be tempered by a few considerations.

Does TIF pay for itself?
First, is the project self-sustaining? That is, is the incremental property tax revenue sufficient to repay the TIF bonds? This has not been the case with all TIF projects in Wichita. The city has had to bail out two TIFs, one with a no-interest and low-interest loan that cost city taxpayers an estimated $1.2 million.

The verge of corruption
Second, does the use of TIF promote a civil society, or does it lead to cronyism? Randal O’Toole has written:

“TIF puts city officials on the verge of corruption, favoring some developers and property owners over others. TIF creates what economists call a moral hazard for developers. If you are a developer and your competitors are getting subsidies, you may simply fold your hands and wait until someone offers you a subsidy before you make any investments in new development. In many cities, TIF is a major source of government corruption, as city leaders hand tax dollars over to developers who then make campaign contributions to re-elect those leaders.”

We see this in Wichita, where the regular recipients of TIF benefits are also regular contributors to the political campaigns of those who are in a position to give them benefits. The corruption is not illegal, but it is real and harmful, and calls out for reform. See In Wichita, the need for campaign finance reform.

The effect of TIF on everyone
Third, what about the effect of TIF on everyone, that is, the entire city or region? Economists have studied this matter, and have concluded that in most cases, the effect is negative.

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 TIF districts 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.” (emphasis added)

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.” (emphasis added)

The Wichita city council is concerned about creating jobs, and is easily swayed by the promises of developers that their establishments will create jobs. Paul F. Byrne of Washburn University has examined the effect of TIF on jobs. 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:

“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.” (emphasis added)

These studies and others show that as a strategy for increasing the overall wellbeing of a city, TIF fails to deliver prosperity, and in fact, causes harm.

Wichita loan agreement subject to interpretation

In 2009 the City of Wichita entered into an ambiguous agreement to grant a forgivable loan, and then failed to follow its own agreement. Worse yet, there has been no improvement to similar contracts. Such agreements empower the city to grant favor at its discretion.

In 2009 the City of Wichita granted a forgivable loan of $25,000 to a company named Premier Processing. In a separate transaction, Sedgwick County did the same. A forgivable loan starts with a grant of cash to a company. The company agrees to conditions or benchmarks, commonly to employ a certain number of people for the period of the loan, usually five years. If these benchmarks are met, the company does not need to repay the loan or any interest. Hence, “forgivable.” If benchmarks are not met, contracts may have “clawback” provisions that are designed to protect taxpayers from the effects of a bad investment in an economic development incentive.

Unfortunately, Premier Processing was not able to meet the conditions of the loan, and at the end of the five year loan period, it repaid the loan principal to both the city and county. That was due to a clawback provision contained in the loan contract.

But the loan contract is confusing. The loan contract, as explained below, appears to call for the payment of interest in case the company is not able to meet the benchmarks. But the city doesn’t interpret the contract that way.

Further, a person reading the contract could reasonably assume that the performance of the company compared to the benchmarks is evaluated each year, and clawback provisions enforced at that time if needed. But that is not the city’s interpretation of the contract.

Is this confusing? Yes, it is. And things haven’t improved. A forgivable loan made by the city last month holds the same language, and also the same potential for confusion.

Clawbacks are problematic. When a company has not achieved its benchmarks, it is likely because the company is not performing well financially and economically. So the company may not have the capacity to make the clawback payments. If a company is struggling financially, aggressively pursuing clawbacks 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 the city forgo enforcement of clawbacks, even though the company hasn’t met the benchmarks? It is presumably providing some good, after all.

There’s also the consideration that if clawback provisions are strict and cities boast that they will aggressively pursue clawback payments, will companies be discouraged from applying for incentives?

Finally, during the sales tax campaign we were promised greater transparency of economic development activities if the sales tax passed. If transparency would be good in that case, it is also good right now, and should have been provided in the past. But the city made no effort to let citizens know of this episode in our economic development history. In fact, obtaining information about this matter has been difficult.

The confusing loan contract

The relevant pages of the city council agenda packet from August 2009, including the contract controlling the terms of the loan, may be viewed here. Of note is the schedule of forgiveness of debt.

Premier Processing forgiveness of debt schedule.
Premier Processing forgiveness of debt schedule.

Here’s a table of yearly employment benchmarks as supplied by Sedgwick County. (The city was not willing to produce the data it had regarding this.)

Premier Processing schedule of benchmarks from Sedgwick County.
Premier Processing schedule of benchmarks from Sedgwick County.

(Note: In the 2009 agreement, for cumulative wages promised in 2013, the city document has the value $3,618,000. In the data from the county, $2,615,000 is used. The city’s number is probably a typographical error, as the county-supplied number is more in line with a smooth progression from year to year. In either case, actual cumulative wages were less, which is the controlling factor. The amount by which the benchmark was missed does not figure into the calculation.)

In the “FORGIVABLE LOAN AGREEMENT and PROMISSORY NOTE” dated August 11, 2009, Section 2 creates a schedule of employment and wage goals, as shown above. This section also establishes the “first anniversary date” as being August 11, 2010. It also speaks of “each scheduled anniversary thereafter.” Using the customary meaning of “anniversary” that seems to establish August 11 for each succeeding year as an anniversary date.

Section (16) (a) (i) of the agreement holds this language: “If, on the scheduled anniversary, employment levels are below the minimums specified in item (2) of this Agreement, the following repayment is required within thirty (30) days:
a) the outstanding principal balance will be divided by the number of remaining anniversary dates, to produce the principal amount due, plus
b) interest accrued since the previously scheduled anniversary date.”

Looking at the plain meaning of section 16, it seems like for each anniversary date the city would perform this analysis: Based on the calculation specified in section (16) (a) (i), on the 2010 anniversary date, first, calculate “outstanding principal balance will be divided by the number of remaining anniversary dates, to produce the principal amount due.” This calculation is $25,000 / 4 = $6,250.

Then calculate “interest accrued since the previously scheduled anniversary date.” Section 16 (A) (iv) (a) gives 12 percent as the interest rate to be applied in case of default. 12 percent of $6,250 is $750.

Based on the default condition that existed on the first anniversary date, the borrower should have repaid $6,250 + $750 = $7,000. Similar calculations could be made for the following anniversary dates, as on each date the borrower was in default.

But this is not what happened. For one, the city did not collect interest. Correspondence with Tim Goodpasture of the city’s economic development office explained: “The company did not meet the stated objectives. The agreement states that if it does not it may have to repay the principal plus accrued interest. The interest rate defined in this agreement is 0.0% per annum.”

In a telephone call with Goodpasture, I explained my understanding of the contract with payments required on each anniversary date if benchmarks were not met. He said that the clawbacks were enforced. Since the company is still in operation in Wichita, no interest is due.

Goodpasture further explained that the city monitors performance each year. At the end of the loan period, the city looks back at the entire loan, examining year-by-year whether the terms were met. Since the company was not in compliance in any year, it repaid the entire loan. But since the company was still in operation in Wichita, there is no interest due, he explained.

It seems that the confusion derives from the meaning of “anniversary date.” The city seems to follow a policy that at the end of the loan period, which is five years in this case, there will be a retrospective examination that looks at employment levels on each anniversary date.

But the plain language of the contract says “If, on the scheduled anniversary, employment levels are below the minimums specified in item (2) of this Agreement, the following repayment is required within thirty (30) days.” (emphasis added) This seems to establish a yearly examination of the borrowing company, and if the benchmarks are not met, then repayment is required then (within 30 days). Not at the end of the loan term.

But there is this language in section 2 of the contract: “2) Forgiveness of Debt: The Borrower promises to create and maintain minimum employment levels at the Wichita, Kansas facility by August 11, 2014 as shown in the following schedule.” This seems to indicate an examination of the benchmarks at the end of the five-year loan period, which is what the city did. (Except it didn’t charge interest, which it the contract calls for.)

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.

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 nothing 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 TIF districts 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.

Research on economic development incentives

As Wichita considers how to grow its economy, its reliance on targeted economic development incentives should be guided by research, not the grandstanding of politicians and bureaucrats.

symbols-going-upwardsHere’s a summary of the peer-reviewed academic research that examines the local impact of targeted tax incentives from an empirical point of view. “Peer-reviewed” means these studies were stripped of identification of authorship and then subjected to critique by other economists, and were able to pass that review.

Ambrosius (1989). National study of development incentives, 1969 — 1985.
Finding: No evidence of incentive impact on manufacturing value-added or unemployment, thus suggesting that tax incentives were ineffective.

Trogan (1999). National study of state economic growth and development programs, 1979 — 1995.
Finding: General fiscal policy found to be mildly effective, while targeted incentives reduced economic performance (as measured by per capita income).

Gabe and Kraybill (2002). 366 Ohio firms, 1993 — 1995.
Finding: Small reduction in employment by businesses which received Ohio’s tax incentives.

Fox and Murray (2004). Panel study of impacts of entry by 109 large firms in the 1980s.
Finding: No evidence of large firm impacts on local economy.

Edmiston (2004). Panel study of large firm entrance in Georgia, 1984 — 1998
Finding: Employment impact of large firms is less than gross job creation (by about 70%), and thus tax incentives are unlikely to be efficacious.

Hicks (2004). Panel study of gaming casinos in 15 counties (matched to 15 non-gambling counties).
Finding: No employment or income impacts associated with the opening of a large gambling facility. There is significant employment adjustment across industries.

LaFaive and Hicks (2005). Panel study of Michigan’s MEGA tax incentives, 1995 — 2004.
Finding: Tax incentives had no impact on targeted industries (wholesale and manufacturing), but did lead to a transient increase in construction employment at the cost of roughly $125,000 per job.

Hicks (2007a). Panel study of California’s EDA grants to Wal-Mart in the 1990s.
Finding: The receipt of a grant did increase the likelihood that Wal-Mart would locate within a county (about $1.2 million generated a 1% increase in the probability a county would receive a new Wal-Mart), but this had no effect on retail employment overall.

Hicks (2007b). Panel study of entry by large retailer (Cabela’s).
Finding: No permanent employment increase across a quasi-experimental panel of all Cabela’s stores from 1998 to 2003.

(Based on Figure 8.1: Empirical Studies of Large Firm Impacts and Tax Incentive Efficacy, in Unleashing Capitalism: Why Prosperity Stops at the West Virginia Border and How to Fix It, Russell S. Sobel, editor. Available here.)

In discussing this research, the authors of Unleashing Capitalism explained:

Two important empirical questions are at the heart of the debate over targeted tax incentives. The first is whether or not tax incentives actually influence firms’ location choices. The second, and perhaps more important question, is whether, in combination with firms’ location decisions, tax incentives actually lead to improved local economic performance.

We begin by noting that businesses do, in fact, seem to be responsive to state and local economic development incentives. … All of the aforementioned studies, which find business location decisions to be favorably influenced by targeted tax incentives, also conclude that the benefits to the communities that offered them were less than their costs.

References:

Ambrosius, Margery Marzahn. 1989. The Effectiveness of State Economic Development Policies: A Time-Series Analysis. Western Political Quarterly 42:283-300.
Trogen, Paul. Which Economic Development Policies Work: Determinants of State Per Capita Income. 1999. International Journal of Economic Development 1.3: 256-279.
Gabe, Todd M., and David S. Kraybill. 2002. The Effect of State Economic Development Incentives on Employment Growth of Establishments. Journal of Regional Science 42(4): 703-730.
Fox, William F., and Matthew Murray. 2004. Do Economic Effects Justify the Use of Fiscal Incentives? Southern Economic Journal 71(1): 78-92.
Edmiston, Kelly D. 2004. The Net Effects of Large Plant Locations and Expansions on County Employment. Journal of Regional Science 44(2): 289-319.
Hicks, Michael J. 2004. A Quasi-Experimental Estimate of the Impact of Casino Gambling on the Regional Economy. Proceedings of the 93rd Annual Meeting of the National Tax Association.
LeFaivre, Michael and Michael Hicks 2005. MEGA: A Retrospective Assessment. Michigan:Mackinac Center for Public Policy.
Hicks, Michael J. 2007a. The Local Economic Impact of Wal-Mart. New York: Cambria Press.
Hicks, Michael J. 2007b. A Quasi-Experimental Test of Large Retail Stores’ Impacts on Regional Labor Markets: The Case of Cabela’s Retail Outlets. Journal of Regional Analysis and Policy, 37 (2):116-122.

Evaluating economic development incentives

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

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

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

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

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

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

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

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

The importance of marginal thinking

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

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

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

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.

In November 2013 the Wichita City Council granted an exemption from paying property and sales tax for High Touch Technologies, a company located in downtown Wichita. This item was of more than usual interest as the company’s CEO, Wayne Chambers, is now chair of the Wichita Metro Chamber of Commerce.

High Touch Technologies in downtown Wichita, with sign calling for higher sales tax.
High Touch Technologies in downtown Wichita, with sign calling for higher sales tax.
At the same time the city council voted to rent to High Touch up to 180 parking stalls at monthly rent of $35. These are located in the garage at 215 S. Market. The condition of the garage had deteriorated so much that it had been closed. In March 2014 the city council decided to rehabilitate the garage. According to city documents, the cost to rehabilitate the garage is $9,685,000, which creates 550 parking stalls. This is a cost per stall of $17,609.

A question is this: Who was the biggest beneficiary of this transaction: High Touch and its owners, or city taxpayers?

To evaluate real estate investments, a common metric is capitalization rate. The formula is

capitalization rate = annual net operating income / cost (or value)

In its coverage of the rehab of the garage, the Wichita Eagle didn't let taxpayers know how much High Touch benefited from their contributions.
In its coverage of the rehab of the garage, the Wichita Eagle didn’t let taxpayers know how much High Touch benefited from their contributions.
For a parking stall in this garage as rented to High Touch, the capitalization rate is

($35 per stall per month * 12 months per year) / $17,609 cost = 2.4 percent

How do we place this number in context? Is this a good or bad deal for taxpayers? To answer this question, we need to find an appropriate capitalization rate. In major cities the capitalization rate for parking garages is lower than for other types of real estate, perhaps five percent. Local sources say the rate in Wichita for parking garages could be seven or eight percent, but there are no recent parking lot transactions to help gauge what the market wants for a capitalization rate. Taxpayers may remember when the city evaluated the Union Station project in October, part of which is a parking garage, the city used a capitalization rate of nine percent. That’s the capitalization rate the city felt the investor deserved to earn, and the city used that rate to justify taxpayer subsidy.

But on the 215 S. Market garage the city, on behalf of taxpayers, accepted a cap rate of just 2.4 percent.

What if the city wanted to earn a capitalization rate of nine percent for taxpayers? The annual rent for each parking stall would have to be $1,585, or $132 per month. At seven percent capitalization rate, the monthly rent would be $103.

But the city is renting the spaces for just $35, not $132 or $103.

View from parking garage, 215 S. Market, August 2009
View from parking garage, 215 S. Market, August 2009
It’s actually a better deal for High Touch — and a correspondingly worse deal for city taxpayers — than these numbers show. If High Touch was to build a parking garage itself, it would encounter expenses such as insurance, lighting, cleaning and sweeping, repairs and maintenance, and security. Not to mention taxes, which the city does not pay. But the city will pay these other expenses, except for insurance, as the city self-insures. That has an implicit cost that taxpayers bear.

All of these costs are contained in the $35 monthly rent the city will collect from High Touch. It’s a great deal for High Touch, and a bad deal for city taxpayers. It also establishes a template whereby private sector developers are unlikely to develop parking in downtown Wichita when there is a competitor that can undercut their rates, using taxpayer dollars to do so.

Taxpayers might remember that the biggest subsidy for High Touch — the property and sales tax breaks — started when the company CEO dropped hints that the company might add jobs elsewhere than Wichita. Chambers told the Wichita Business Journal that he considered moving the office to another city. All this happened while he was working his way up the leadership ladder to become chair of the Wichita Chamber.

WichitaLiberty.TV: Wichita’s legislative agenda, and a bit of bad news

In this episode of WichitaLiberty.TV: A look at some elements of Wichita’s legislative agenda for state government, in particular special tax treatment for special artists, problems with the city’s numbers regarding airfares, and why we should abandon the pursuit of passenger rail. Then, why are people not more involved in political affairs? View below, or click here to view at YouTube. Episode 67, broadcast December 7, 2014.

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.

Excerpt from Wichita Legislative Agenda, November 2014
Excerpt from Wichita Legislative Agenda, November 2014
As the City of Wichita prepares its legislative agenda for the Kansas Legislature, the first issue gets off to a rocky start with figures that are not aligned with facts. Probably the largest whopper is the claim of how much has been saved in airfares. The Wichita document states this: “Since 2002, Affordable Airfares has provided $1.446 billion in savings for Wichita Mid-Continent air travelers.”

That is a lot of money. It is certainly exaggerated. We don’t really know how much the subsidy program has saved, as we can not know what would have happened had there been no subsidy program. So we estimate, and here two estimates.

A study from Dr. Art Hall contained this: “Combining the estimated aggregate savings for AirTran and Frontier sums to an annual average range of $30.75 to $39.5 million. (An Evaluation of the Kansas Affordable Airfares Program, Arthur P. Hall, Ph.D., February 2013)

Minutes of a July 2011 REAP board meeting hold “This program also saved air travelers out of MidContinent Airport more than $33.2 million in reduced fares in 2010, compared to 2000.”

So if we use, say, $35 million as the annual savings, then for the 12 years from 2002 to 2014 the savings sum to $420 million. The city claims $1,446 million, or 3.4 times as much. Wichitans might want to ask city hall why there is such a large difference.

The city’s legislative agenda also mentions a presentation given by William S. Swelbar, an aviation industry analyst, reporting “The Wichita airport performance is acknowledged for its unique performance in growth and capacity (Bill Swelbar presentation at WSU Economic Conference).” There are several curious aspects of this presentation.

Excerpt from William S. Swelbar presentation, October 2014
Excerpt from William S. Swelbar presentation, October 2014
The slide that shows growth in traffic at the Wichita airport needs to be interpreted with caution. First, note that the scale of the vertical axis does not start with zero. This is something that needs to be recognized. Here’s why: The bars for departures appear to be rapidly rising. The bar for 2013 looks about twice as tall as the bar for 2102. This leads to the impression that whatever it is that these bars represent, it has doubled from 2012 to 2013. That’s because bars on a chart traditionally represent a quantity of something, starting from zero.

When we examine the entire vertical axis of the chart, we see that it does not start with zero. Instead, it starts at the value 12,050, and the entire axis represents a range of 250 passengers per year. This means that the increase in departures from 2012 to 2013, which looks like an impressive jump in Swelbar’s chart — a doubling in value — is an increase from 12,120 to 12,195. This represents a growth of departures of 75 per year, which is 0.62 percent. Or, about 6 flights per month. This is better than a decline, but not by much. (I’m reading the chart and interpreting the height of the bars against the scale, so these numbers could be off a bit.)

It is not deceptive to start a bar chart from a point other than zero, as long as readers are aware of that and interpret the numbers cautiously and appropriately. But that wasn’t made clear in this presentation. These numbers need to be placed in meaningful context. Otherwise, city council members and bureaucrats might jump on this chart and use it as evidence of dramatic changes happening at the Wichita airport when in reality the change is quite mild. This is what has happened.

What about the increase in departures from 2013 to 2014? The presentation by Swelbar was given in October 2014 and would have been based on data available only through June or July. But somehow, Swelbar told the audience how many departures the Wichita Airport would experience in all 2014. I can understand presenting an estimate for 2014, but the number is not presented as such.

The data for the years that are complete also appear to be questionable. For departures, Swelbar shows departures rising from 12,120 for 2012 to 12,195 for 2013 (again, estimating from the heights of bars on the chart). The Bureau of Transportation Statistics shows departures from Wichita in 2012 as 12,037, then declining to 11,984 for 2013. (Click here to view these statistics.) The statistics from the Wichita airport don’t directly report the number of scheduled departures. For what it’s worth, the airport reports passenger count of 1,509,206 in 2012, which fell to 1,508,872 in 2013.

These are problems found on the first page of the city’s presentation. The agenda was presented to the council during a workshop on November 25. The council will vote on adoption of the agenda on December 9, having postponed the vote from December 2.

Wichita economic development items

The Wichita city council has been busy with economic development items, and more are upcoming.

At the November 25 meeting of the Wichita City Council, on the consent agenda, the council passed these items.

Approved a sublease in a warehouse. This action was necessary as the incentivized warehouse pays no property taxes due to a subsidy program. Given tax costs and industrial building rents, this policy gives these incentivized buildings a cost advantage of about 20 to 25 percent over competitors. That’s very high, and makes it difficult for existing buildings to compete. This lease is for 40,500 square feet for annual rent of $196,425.00, which is $4.85 per square foot. Competing warehouse space might be able to charge rent of $4.25 plus property tax of about $1.00, for a total rent of $5.25 per square foot to the tenant. In the case of the subsidized building, the landlord collects $4.85 instead of $4.25, and the tenant pays $4.85 instead of $5.25. Everyone’s happy. Everyone, that is, except for existing industrial landlords in Wichita — especially those with available space to rent — who must be wondering why they attempt to stay in business when city hall sets up subsidized competitors with new buildings and a large cost advantage. Then, other commercial tenants must be wondering why they don’t get discounted rent. Taxpayers must be wondering why they have to make up the difference in taxes that the subsidized tenants aren’t paying. (On second thought, these parties may not be wondering about this, as we don’t have a general circulation newspaper or a business newspaper that cares to explain these things.) See Wichita speculative industrial buildings.

While asking for tax breaks, the owner of this building wanted you to pay higher taxes.
While asking for tax breaks, the owner of this building wanted you to pay higher taxes.
Set January 6 as the date for a public hearing on a TIF district project plan. This is the plan for Union Station in downtown Wichita. The public hearing for the formation of its tax increment financing district has already been held, and it passed. The project plan will consider and authorize the actual project and spending of taxpayer funds to reimburse the developer for various items. Unlike the formation of the TIF district, the county and school district have no ability to object to the project plan.

Set December 16 as the date for the public hearing on the formation of a community improvement district. This district is for the benefit of the River Vista project, the proposed apartments on the west bank of the Arkansas River between Douglas and First streets. CIDs redirect sales tax revenue from general government to the developers of the project. Say, does anyone remember Charter Ordinance No. 144, which says this land “shall be hereafter restricted to and maintained as open space”? See In Wichita, West Bank apartments seem to violate ordinance.

Also on that day, during its workshop, the council heard items for the city’s legislative agenda. I have a several articles covering these topics as they relate to the legislative agenda: Airfares, passenger rail, cultural arts districts, and economic development.

On its December 2 agenda, the council has these items:

Property tax and sales tax exemptions for Bombardier Learjet. The council may grant property tax discounts worth as much as $268,548 per year for up to ten years, according to city documents. This will be split among taxing jurisdictions as follows: City $72,389, State $3,340, County $65,415, and USD 259 $127,404. The purchased items may also receive an exemption from sales tax, but city documents give no amount. Bombardier boasts of “Investing in the communities where we do business to ensure we have strong contexts for our operations” and “We support our home community through donations, sponsorships and our employee volunteering program.” Evidently this commitment to investment and support does not extend to shouldering the same tax burden that everyone else does.

Property tax exemptions for Cessna Aircraft Company. The council may grant property tax discounts worth as much as $302,311 per year for up to ten years, according to city documents. This will be split among taxing jurisdictions as follows: City $81,491, County $73,639, State $3,760, and USD 259 $143,421. Generally, items purchased with proceeds of the IRB program also receive sales tax exemption, but city documents do not mention this. Cessna speaks of its commitment to the communities where it operates, but evidently this commitment does not extend to shouldering the same tax burden that everyone else does.

High Touch Technologies in downtown Wichita, with sign calling for higher sales tax.
High Touch Technologies in downtown Wichita, with sign calling for higher sales tax.
Property tax exemptions for High Touch. This is an extension of tax breaks first granted last year. See In Wichita, the case for business welfare. Did you know the CEO of this company is also chair of the Wichita Metro Chamber of Commerce? And that while campaigning for higher sales taxes in Wichita, including higher taxes on groceries for low-income households, he sought and received a sales tax exemption for his company?

Forgivable loan to Apex Engineering International. The Wichita Eagle reported that this company “has been growing briskly and adding employees.” Still, the company seeks incentives, in this case a forgivable loan from the city of $90,000. It will ask Sedgwick County for the same amount. These loans are grants of cash that do not need to be repaid as long as goals are met. Three years ago Apex received $1,272,000 in tax credits and grants under programs offered by the State of Kansas. It is not known at this time if Apex is receiving additional subsidy from the state. According to a company news release, “AEI was nominated for the Wichita Metro Chamber of Commerce 2012 Small Business Awards. This prestigious award recognizes two companies each year who are selected based on specific criteria including: entrepreneurship, employee relations, diversity, community contribution and involvement, and leadership and performance.” Maybe we can justify this grant as repayment for Apex’s community contribution. This forgivable loan may receive resistance from some council members. Current council member and mayoral candidate Jeff Longwell (district 5, west and northwest Wichita) was recently quoted in the Wichita Eagle as wanting a “moratorium on forgivable loans right now until we can reassess the way that we do economic development.” While campaigning for his current office, Council member Pete Meitzner (district 2, east Wichita) told an audience “I am not for forgivable loans.” He noted the contradiction inherent in the terms “forgivable” and “loan,” calling them “conflicting terms.” Meitzner has said he will run for his current office again.

Set January 6 as the date for the public hearing regarding the project plan for the Mosely Avenue Project TIF district in Old Town. This TIF district is a project of David Burk and Steve Barrett. Burk has received millions of taxpayer dollars in subsidy. But he’s not finished.

Consider whether to raise water bills by about 5 percent.

Consider a new lease agreement with Museum of World Treasures, Inc. which will, among other things, reduce the museum’s rent paid to the city from $60,000 per year to $1.

Consider passing the legislative agenda. See above for more on this topic.

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.

Commerce Street Arts District P9As the City of Wichita prepares its legislative agenda for 2015, an issue arises for the first year. It seems that the success of government spending on development has created rising property values, which creates higher tax bills, and that is a burden for some. Here’s the issue the city has identified: “Cultural arts enterprises in certain areas are threatened by rising property values and the resulting tax burden.”

Here’s the solution the city proposes: “The Wichita City Council supports state legislation that would allow local governments to use innovative measures to protect cultural arts enterprises from circumstantial increases in property taxes. The intent is to nurture and preserve arts activity throughout the City of Wichita and the State of Kansas.”

What are the “innovative measures” the city wants to use? Nothing special; just allowing a special group of people to shirk paying the same taxes that everyone else has to pay. The city wants to be able to use tax abatements for up to ten years. The percentage of taxes that could be forgiven could be as high as 80 percent.

So there’s really nothing innovative to see here. The city merely wants to broaden the application of tax forgiveness. Which means the tax base shrinks, and the people who still find themselves unlucky enough to still be part of the tax base face increasing demands for their tax payments.

The city manager said that artists from Commerce Street came to the city looking for a solution to their problem. Which is about the same problem that everyone else has: high taxes.

Here’s the nub of the problem, as explained by the city manager: “The more successful that we are with the redevelopment, the higher the value of the properties, and therefore harder for them who are on thin margins to begin with to stay in the districts, so they lose their charm of being the artistic or art districts.”

The proposed solution, which will require a change to state law, is that a government bureaucrat will decide the boundaries of one or more cultural arts districts. The bureaucrat will also decide which types of business firms qualify for discounts on their taxes. Besides Commerce Street, the manager identified Delano, Old Town, and the Douglas Design District as possible districts where artists might receive 80 percent discounts on their property taxes.

After this, other taxpayers have to make up the lost tax revenue from the artists. That is, unless the city decides to reduce spending by the amount of the tax discounts. I’ve proposed that to the city in other similar circumstances, and the idea was rejected. I believe council members thought I was delusional.

There are many people and business firms that operate on the same “thin margins” that the city manager wants to help artists escape. We see them come to city hall seeking special treatment. As a result, the city plans and manages an increasing share of the economy, and economic freedom, entrepreneurship, and the potential for a truly dynamic economy decline.

Who will stake out the next frontier?

There are many problems with the idea the city is proposing.

One is that the city is asking poor people to pay their full share of property taxes while granting artists a discount. This is a serious problem of equity, which is that people in similar circumstances should be treated the same. Just because someone chooses art as a business or vocation doesn’t mean they should be treated specially with respect to the taxes they pay.

Bob Weeks and Bill Goffrier in the artist's studio, Flatiron Building, Wichita, 1982
Bob Weeks and Bill Goffrier in the artist’s studio, Flatiron Building, Wichita, 1982
Another problem is that the process of establishing arts districts will interrupt the dynamism of the way cities develop. Arts districts develop because artists want (or need) places with cheap rent. Unless they can persuade city hall to grant property tax discounts, this generally means artists rent space in “bad” parts of town, that is, parts of town that are run down, blighted, and may have high crime rates. Thus, cheap rent.

If things go well, that is, the artists are successful and a community develops, things get fixed up. Rents rise. Taxes rise. The artists can’t afford the higher rent and taxes and have to move on. Which means the cycle repeats. The artists on the cutting edge find other places to move to, and the cycle repeats. Other parts of the city are reborn — organically — through the benefits of markets, not government bureaucracy. This is good.

Except: The City of Wichita is proposing to end the cycle by granting discounts on taxes to artists so they may remain where they are.

We replace dynamism with stagnation by bureaucracy. The city says this is innovative.

City of Wichita State Legislative Agenda: Passenger rail

Instead of calling for the expansion of Amtrak — perhaps the worst of all federal agencies — the City of Wichita should do taxpayers a favor and call for an end to government subsidy of Amtrak everywhere.

Wichita Legislative Agenda, November 2014, page 07, Passenger RailThe City of Wichita’s legislative calls for the pursuit of money to pay for the funding of an environmental study of the proposed passenger rail extension to Oklahoma City. Not an actual rail line, just an environmental study.

Amtrak is very expensive. In most parts of the country it relies on massive taxpayer subsidy. For example, for the line from Fort Worth to Oklahoma City — the line proposed for extension to Wichita – taxpayers pay a subsidy of $26.76 per passenger for the trip. And that’s a short trip.

Being expensive, Amtrak is usually pitched as an economic development driver. Yes, taxpayers pay for passengers to ride, but once in your town they spend money there! Never mind that so few people travel on trains (outside the Northeast Corridor) that they are barely noticed. In 2012 intercity Amtrak accounted for 6,804 million passenger-miles of travel. Commercial air racked up 580,501 million passenger-miles, or 85 times as many.

U.S. Passenger Miles, Air and Amtrak. Note difference in scales.
U.S. Passenger Miles, Air and Amtrak. Note difference in scales.

So some people, like Wichita City Council Member Pete Meitzner (district 2, east Wichita) take a different tack. Passenger rail is about boosting business productivity.

For him and the local business leaders he’s spoken with, it’s all about productive hours. Meitzner says the people who are interested in regional train travel for business are often people who are currently driving to their destinations instead. They’re equipped with smartphones, tablet computers and other technologies, but they can’t use them much, or at all, while they’re driving. Sitting on trains, businesspeople could get work done, he says. He suggests the rise of new mobile technology is one reason passenger rail travel is on the rise. ( Meitzner says there’s a business case for passenger rail in Wichita, Wichita Business Journal, July 18, 2012)

Unfortunately for Meitzner’s business case, at about this time the New York Times published a piece detailing the extreme frustration Amtrak riders had with on-train wi-fi service, reporting “For rail travelers of the Northeast Corridor, the promise of Wi-Fi has become an infuriating tease.” Contemporary new stories report that Amtrak is still planning to upgrade its wi-fi systems.

Considering the speed at which government works, by the time a passenger rail line could be established between Wichita and Oklahoma City, it’s quite likely that driverless cars will be a reality. (Remember, we’ve been trying to raise money just for an environmental impact study for many years.) Then, workers can be in their car, use their computers for business productivity, and travel directly to their destination instead of to a train station. Plus, they will be able to do this on their own schedule, not Amtrak’s schedule. That is invaluable, as only one train each day is contemplated.

Furthermore, if there really is a business case for travel between Wichita and Oklahoma City, I imagine that some of the entrepreneurs who have built a new industry around inter-city bus travel might establish service. These new companies use buses with wi-fi, first class accommodations, and other amenities. Buses are much lower cost than rail, are more flexible, and most importantly, are operated by private sector entrepreneurs rather than government.

I understand that leaders like Pete Meitzner and others in city hall see federal money being spent elsewhere, and they want that money also spent here. It doesn’t really matter to them whether the spending is worthwhile, they just want it spent here. This greed for federal tax dollars contributes to the cycle of rising spending. We end up buying and building a lot of stuff that doesn’t really work except for lining the pockets of special interest groups. And, in the case of Meitzner’s pet project, we do this with borrowed money.

We expect this behavior from the progressive members of the council. But conservatives are supposed to stand for something else.

Those who call for an end to subsidy for one industry are often asked why they don’t oppose subsidy for all industry. It’s a fair question, although it distracts from the main issue, which is why it is raised. So, let’s end subsidies for all forms of transportation. Let’s try to match relevant user fees such as motor fuel taxes as closely as possible with the compatible expenditures.

The scope of Amtrak subsidy

In 2010 I reported that Subsidyscope, an initiative of the Pew Charitable Trusts, published a study about the taxpayer subsidy flowing into Amtrak. For the Heartland Flyer route, which runs from Fort Worth to Oklahoma, and is proposed by taxpayer-funded rail supporters to extend into Kansas through Wichita and Kansas City, we find these statistics about the finances of this operation:

Amtrak reports a profit/loss per passenger mile on this route of $-.02, meaning that each passenger, per mile traveled, resulted in a loss of two cents. Taxpayers pay for that.

But this number, as bad as it is, is not correct. Subsidyscope calculated a different number. This number, unlike the numbers Amrak publishes, includes depreciation, ancillary businesses and overhead costs — the types of costs that private sector businesses bear and report. When these costs are included, the Heartland Flyer route results in a loss of 13 cents per passenger mile, or a loss of $26.76 per passenger for the trip from Fort Worth to Oklahoma City.

Subsidy to Amtrak compared to other forms of transporation

Table 4 Net Federal Subsidies per Thousand Passenger-Miles by Mode FY 1990-2002

From Federal Subsidies to Passenger Transportation, Bureau of Transportation Statistics, December 2004.

From Randal O’Toole Stopping the Runaway Train: The Case for Privatizing Amtrak:

According to the U.S. Bureau of Transportation Statistics, after adjusting for inflation to 2011 dollars, subsidies to domestic air travel averaged about $14 billion a year between 1995 and 2007. Considering that the airlines carried an average of more than 500 billion passenger miles a year during those years, average subsidies work out to about 2.8 cents per passenger mile (see Figure 2).

Using Bureau of Transportation Statistics’ numbers, highway subsidies over the same time period averaged about $48 billion a year. Highways carried about 4.1 trillion passenger miles per year, for an average subsidy of 1.1 cents per passenger mile. While 95 percent of the airline subsidies came from the federal government, all of the highway subsidies came from state and local governments.

By comparison, federal Amtrak subsidies over the same time period averaged 25 cents per passenger mile.11 State subsidies averaged another 2.8 cents. Per-passenger-mile subsidies to Amtrak were nearly times subsidies to air travel and nearly 22 times subsidies to highway travel.

Airline, Highway, and Amtrak Subsidies per Passenger Mile, Cato Institute, 2012

From Amtrak And The Progressive Sleight Of Hand, Competitive Enterprise Institute:

The deficit in what Amtrak collects in revenue and what it spends every year cannot even be taken at face value. Unlike most firms, Amtrak does not count maintenance as an operating cost and instead considers it a capital cost. This allows it to treat routine maintenance like long-term investments in new rail and carrier capacity, pushing these costs off its balance sheet.

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.

When Kansas cities create tax increment financing (TIF) districts, the overlapping county and school district(s) have an opportunity to veto its creation. These other jurisdictions do not formally have to give their consent to its formation; if they do nothing, it is assumed they concur.

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

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

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

Sedgwick County 1.18 to one
USD 259 1.00 to one

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

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

Two examples

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

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

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

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

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

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

The listing of USD 259, the Wichita public school district, is likely an oversight by the city, as the Spirit properties lie in the Derby school district. This is evident when the benefit-cost ratios are listed:

City of Wichita 1.98 to one
General Fund 1.78 to one
Debt Service 2.34 to one
Sedgwick County 1.54 to one
U.S.D. 260 1.00 to one (Derby school district)
State of Kansas 28.23 to one

Note that the ratio for the Derby school district is 1.00 to one, far below what the city requires for projects it considers for participation. That is, unless it uses a loophole.

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.

This week the Wichita City Council will hold a public hearing concerning the issuance of Industrial Revenue Bonds to Spirit AeroSystems, Inc. The purpose of the bonds is to allow Spirit to avoid paying property taxes on taxable property purchased with bond proceeds for a period of five years. The abatement may then be extended for another five years. Additionally, Spirit will not pay sales taxes on the purchased property.

City documents state that the property tax abatement will be shared among the taxing jurisdictions in these estimated amounts:

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

No value is supplied for the amount of sales tax that may be avoided. The listing of USD 259, the Wichita public school district, is likely an oversight by the city, as the Spirit properties lie in the Derby school district. This is evident when the benefit-cost ratios are listed:

City of Wichita: 1.98 to one
General Fund: 1.78 to one
Debt Service: 2.34 to one
Sedgwick County: 1.54 to one
U.S.D. 260: 1.00 to one (Derby school district)
State of Kansas: 28.23 to one

The City of Wichita has a policy where economic development incentives should have a benefit cost ratio of 1.3 to one or greater for the city to participate, although there are many loopholes the city regularly uses to approve projects with smaller ratios. Note that the ratio for the Derby school district is 1.00 to one, far below what the city requires for projects it considers for participation. That is, unless it uses one of the many available loopholes.

We have to wonder why the City of Wichita imposes upon the Derby school district an economic development incentive that costs the Derby schools $143,038 per year, with no payoff? Generally the cost of economic development incentives are shouldered because there is the lure of a return, be it real or imaginary. But this is not the case for the Derby school district. This is especially relevant because the school district bears, by far, the largest share of the cost of the tax abatement.

Of note, the Derby school district extends into Wichita, including parts of city council districts 2 and 3. These districts are represented by Pete Meitzner and James Clendenin, respectively.

The city’s past experience

Wichita Mayor Carl Brewer Facebook 2012-01-04Spirit Aerosystems is a spin-off from Boeing and has benefited from many tax abatements over the years. In a written statement in January 2012 at the time of Boeing’s announcement that it was leaving Wichita, Mayor Carl Brewer wrote “Our disappointment in Boeing’s decision to abandon its 80-year relationship with Wichita and the State of Kansas will not diminish any time soon. The City of Wichita, Sedgwick County and the State of Kansas have invested far too many taxpayer dollars in the past development of the Boeing Company to take this announcement lightly.”

Along with the mayor’s statement the city released a compilation of the industrial revenue bonds authorized for Boeing starting in 1979. The purpose of the IRBs is to allow Boeing to escape paying property taxes, and in many cases, sales taxes. According to the city’s compilation, Boeing was granted property tax relief totaling $657,992,250 from 1980 to 2017. No estimate for the amount of sales tax exemption is available. I’ve prepared a chart showing the value of property tax abatements in favor of Boeing each year, based on city documents. There were several years where the value of forgiven tax was over $40 million.

Boeing Wichita tax abatements, annual value, from City of Wichita.
Boeing Wichita tax abatements, annual value, from City of Wichita.
Kansas Representative Jim Ward, who at the time was Chair of the South Central Kansas Legislative Delegation, issued this statement regarding Boeing and incentives:

Boeing is the poster child for corporate tax incentives. This company has benefited from property tax incentives, sales tax exemptions, infrastructure investments and other tax breaks at every level of government. These incentives were provided in an effort to retain and create thousands of Kansas jobs. We will be less trusting in the future of corporate promises.

Not all the Boeing incentives started with Wichita city government action. But the biggest benefit to Boeing, which is the property tax abatements through industrial revenue bonds, starts with Wichita city council action. By authorizing IRBs, the city council cancels property taxes not only for the city, but also for the county, state, and school district.