Tag Archives: Tax abatements

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Beechcraft incentives a teachable moment for Wichita

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

In December 2010 Kansas Governor Mark Parkinson announced a deal whereby the state would pay millions to Hawker Beechcraft to keep the company in Kansas. The company had been considering a purported deal to move to Baton Rouge, Louisiana. (Since then the company underwent bankruptcy, emerged as Beechcraft, and has been acquired by Textron.) The money from the state was to be supplanted by grants from the City of Wichita and Sedgwick County.

At the time, the deal was lauded as a tremendous accomplishment. In his State of the City address for 2011, Wichita Mayor Carl Brewer told the city that “We responded to the realities of the new economy by protecting and stabilizing jobs in the aviation industry. … The deal with Hawker Beechcraft announced last December keeps at least 4,000 jobs and all existing product lines in Wichita until at least 2020.”

Kansas Payments to Hawker Beechcraft and Employment

The nearby table shows data obtained from the Kansas Department of Commerce for Hawker Beechcraft. “MPI” means “Major Project Investment,” a class of payments that may be used for a broad range of expenses, including employee salaries and equipment purchases. SKILL is a program whereby the state pays for employee training. The MPI payments have been reduced below the $5 million per year target as the company has not met the commitment of maintaining at least 4,000 employees.

Besides these funds, the City of Wichita and Sedgwick County approved incentives of $2.5 million each, to be paid over five years at $500,000 per year (a total of $1,000,000 per year). The company has also routinely received property tax abatements by participating in an industrial revenue bond program.

It’s unfortunate that Beechcraft employment has fallen. The human cost has been large. But from this, we can learn.

First, we can learn it’s important to keep the claims of economic development officials and politicians in perspective. Mayor Brewer confidently claimed there would be at least 4,000 jobs at Beechcraft and the retention of existing product lines in Wichita. As we’ve seen, the promised employment level has not been maintained. Also, Beechcraft shed its line of business jets. The company did not move the production of jets to a different location; it stopped making them altogether. So “all existing product lines” did not remain in Wichita — another dashed promise.

Second, Wichita officials contend that our city can’t compete with others because our budget for incentives is too small. The figure of $1.65 million per year is commonly cited. As we see, Beechcraft alone received much more than that, and in cash. Local economic development officials are likely to say that the bulk of these funds are provided by the state, not by local government. I doubt it made a difference to Beechcraft. The lesson here is that Wichita officials are not truthful when telling citizens the amounts of incentives that are available.

Third, this incident illuminates how incentives are extorted from gullible local governments. In his 2011 address, the Wichita mayor said “We said NO to the State of Louisiana that tried to lure Hawker Beechcraft.” (Capitalization in original.) But a Baton Rouge television station reported that the move to Louisiana was never a possibility, reporting: “Today, Governor Bobby Jindal said the timing was not right to make a move. He says Hawker could not guarantee the number of jobs it said it would provide.”

The Associated Press reported this regarding the possible move to Louisiana: “They [Hawker Beechcraft] weren’t confident they could meet the job commitments they would have to make to come to Baton Rouge so it just didn’t make sense at this time.”

The threat the mayor said Wichita turned back with tens of millions of dollars? It was not real. This is another lesson to learn about the practice of economic development.

Wichita City Hall

What Boeing received from Wichita was better than cash

Supporters of the proposed Wichita sales tax contend that the millions in incentives Boeing received were not cash. That’s true — they were more valuable than cash.

At a forum on the proposed Wichita sales tax on September 9, 2014, “Yes Wichita” co-chair Jon Rolph told the audience “The Boeing incentive thing? The city never gave Boeing incentives. They didn’t take our incentive money and run.” As explained at Fact-checking Yes Wichita: Boeing incentives, the claim that the “city never gave Boeing incentives” must be astonishing news to the Wichita city officials who dished out over $600 million in subsidies and incentives to the company.

"Yes Wichita" Facebook page.
“Yes Wichita” Facebook page.
In response, “Yes Wichita” posted this on its Facebook page: “Those who were at the event understand that the conversation was about cash incentives not about IRBs. Boeing never received cash incentives from the City.”

First, it’s interesting that the person commenting on behalf of “Yes Wichita” was able to read the minds of the audience members. That’s a neat trick. But let’s talk about something more important — the confusion that often surrounds economic development incentives.

“Yes Wichita” contends that although Boeing received an estimated $657,992,250 in property tax abatements over several decades, this doesn’t count as “cash incentives” because it wasn’t given to Boeing in the form of cash.

“Yes Wichita” is correct, in a way. As a result of the City of Wichita’s issuance of industrial revenue bonds, Boeing didn’t receive cash from the city. Instead, the benefits the city initiated on Boeing’s behalf are more valuable to the company than receiving an equivalent amount of cash.

Internal Revenue Service IRS logoAccording to IRS guidelines, “tax incentives, whether in the form of an abatement, credit, deduction, rate reduction or exemption, simply reduce the tax imposed by state or local governments.” The IRS says these incentives do not count as income. Therefore, Boeing did not pay income taxes on these benefits, as it would have if the city gave the company cash.

The claim by the “Yes Wichita” group — that tax abatements don’t count as cash incentives — is characteristic of the way economic development incentives are justified. Instead of passing out cash, it’s more common that government uses abatements, credits, tax increment financing, investment in training and infrastructure, or exemptions. Many of these programs are confusing to citizens, and perhaps also to the elected officials who approve them. This allows government to shroud the economic realities of the transaction, and “Yes Wichita” is contributing to this confusion.

Coalition for a Better Wichita logo

Fact-checking Yes Wichita: Sales tax cost per household

The cost of the proposed Wichita sales tax to households is a matter of dispute. I present my figures, and suggest that “Yes Wichita” do the same.

At a forum on the proposed Wichita sales tax on September 9, 2014, Jennifer Baysinger told the audience that “the average family bringing in about $50,000 a year would pay about $240 a year tax.” She was speaking on behalf of Coalition for a Better Wichita, a group that opposes the one cent per dollar sales tax that Wichita voters will see on their November ballots.

In his rebuttal, “Yes Wichita” co-chair Jon Rolph disputed these figures, saying that Baysinger’s claim would mean that the average family spends $24,000 per year on “groceries and sweaters and socks.” He said a family would need to make $200,000 per year to spend that much on taxable items.

So who is correct? It’s relatively easy to gather figures about sales taxes and households. Here’s what I found.

According to a report from the Kansas Department of Revenue, in fiscal year 2013 the City of Wichita generated $372,843,844 in retail sales tax collections. With a population of 385,577 (2012 value), the tax collected per Wichita resident was $966.98.

Supporters of the proposed sales tax say that one-third of the sales tax collected in Wichita is paid by non-Wichitans. If true, that leaves $248,562,563 in sales tax paid by 385,577 Wichita residents, or $645 per person. This figure is from sales tax being collected at a rate of 7.15 percent, which implies that one cent per dollar of sales tax generates $90 per person. (This assumes that people do not change their purchases because of higher or lower sales taxes, which does not reflect actual behavior. But this is an estimate.)

According to the U.S. Census Bureau, there are 2.49 persons per household in Wichita. That means that a one cent per dollar sales tax has a cost of $224 per household. That’s close to Baysinger’s figure of $240.

We could also take sales tax collections of $248,562,563 and divide by the 151,309 households in Wichita to get a figure of $1,642.75 in sales tax paid per household. Again, since that is tax paid at the rate of 7.15 percent, it implies that one cent per dollar of sales tax generates $230 per household, subject to the same caveats as above. Again, this is close to Baysinger’s figure.

These results are close to my estimation of the cost of the proposed sales tax derived in an entirely different way. I took Census Bureau figures for the amount spent in various categories by families of different income levels. For each category of spending, I judged whether it was subject to sales tax in Kansas. The result was that the average household spent $22,287 per year on taxable items. One percent of that is $223, which is an estimate of the cost of a one cent per dollar sales tax per household. For households in the middle quintile of income, the value was $194. See Wichita sales tax hike would hit low income families hardest for details and charts.

How can the claims of Baysinger and Rolph be so far apart? I’ve presented my reasoning and calculations. The results are figures very close to what Coalition for a Better Wichita is using. Wichita voters might ask that Jon Rolph or one of the other co-chairs of “Yes Wichita” do the same.

Yes Wichita logo

Fact-checking Yes Wichita: Boeing incentives

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

At a forum on the proposed Wichita sales tax on September 9, 2014, “Yes Wichita” co-chair Jon Rolph told the audience “The main reason I’m here, I need to educate folks on this. There’s been a lot of misinformation out there.”

The proposed one cent per dollar Wichita sales tax will be voted on by Wichita voters in November. The city plans to use the proceeds for four areas: A new water supply, bus transit, street maintenance and repair, and economic development, specifically job creation. It is the last area that is the most controversial. Sales tax boosters make the case that Wichita has a limited budget for incentives, generally pegged at $1.65 million per year. They say that other cities have much larger budgets, and unless Wichita steps up with additional incentives, Wichita will not be able to compete for jobs.

Wichita has, however, many available incentive programs that are worth much more than $1.65 million per year. Just this week the city extended property tax abatements to one company that are valued at $108,541 per year. The company will receive this benefit annually for five years, with a likely extension for another five years. The city will also apply for a sales tax exemption on behalf of the company. City documents estimate its value at $126,347.

None of this money counts against the claimed $1.65 million annual budget for incentives, as these incentive programs have no cash cost to the city. There is a cost to other taxpayers, however, as the cost of government is spread over a smaller tax base. To the recipient companies, these benefits are as good as receiving cash. I’ve detailed other incentive programs and some recent awards at Contrary to officials, Wichita has many incentive programs.

The nature of, and value of, available incentive programs is important to understand. “Yes Wichita” co-chair Jon Rolph is correct. There is much misinformation. Here’s what he told the audience of young Wichitans after warning about misinformation: “The Boeing incentive thing? The city never gave Boeing incentives. They didn’t take our incentive money and run.”

Wichita Mayor Carl Brewer Facebook 2012-01-04The claim that the “city never gave Boeing incentives” will come as news to the Wichita city officials who dished out the subsidies and incentives. In a written statement 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.

We’re left wondering, as we have wondered before, whether the “Yes Wichita” campaign is uninformed, misinformed, or intentionally deceptive in making its case to Wichita voters.

Wichita City Library, 1965

What incentives can Wichita offer?

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

In making the case for an economic development fund paid for by a sales tax, the argument goes like this: “Wichita and Sedgwick County compete conservatively with incentives. The City of Wichita and Sedgwick County have a total of $1.65 million in new uncommitted funds for cash incentives this year with any unused money going back to the general fund.” (Will Wichita Accelerate Competition for Primary Jobs?, presentation made to Wichita city council.)

This statement is true only if we use a very narrow definition of the word “incentive.” By any reasonable definition, Wichita has many incentives worth much more than what is claimed by Wichita economic development officials and politicians.

In fact, the report cited above contains contradictory information about the amounts that are available for economic development incentives in Wichita. Here is an example: “The $4.5 million PEAK program incentive from the Kansas Department of Commerce was an important factor in keeping NetApp in Wichita. Locally we were able to provide $836,000 in incentives.”

So with an incentives budget of $1.65 million, a Wichita company received $5.3 million in incentives. Some of that, like the PEAK incentive, is paid over a period of years. But that amount doesn’t begin to describe the benefits NetApp received.

Available incentive programs

Kansas Department of Commerce logoA letter to NetApp from the Kansas Department of Commerce laid out the potential benefits from the state. As detailed in the letter, the programs with potential dollar amounts are:

  • Promoting Employment Across Kansas (PEAK), up to $7,705,535
  • Kansas Industrial Training with PEAK, up to $160,800
  • sales tax savings of $6,880,000
  • personal property tax exemption, $11,913,682
  • High Performance Incentive Program (HPIP), $8,500,000

The total of these is $35,160,017. Some of these benefits are paid over a period of years. The PEAK benefits are payable over seven years, according to the letter, so that’s about $1.1 million per year. These are potential benefits; the company may not actually qualify for and receive this entire amount. But it’s what the state offered.

It’s true that some of these programs are not cash incentives of the type Wichita complains of lacking. But if a company is going to make purchases, and the state says you can skip paying sales tax on the purchases — well, that’s as good as cash. $6,880,000 in the case of NetApp, according to the Kansas Department of Commerce.

Local tax exemptions

Besides sales tax exemptions, the city has other types of tax exemptions it regularly offers. These exemptions can have substantial value. In 2008 as Drury contemplated Broadview Hotel 2013-07-09 020purchasing the Broadview Hotel, the city allowed the hotel to escape paying much of the taxes that the rest of us have to pay. According to city information, Drury planned to spend $22,797,750 on the hotel. If we use this as the appraised value for the property when it is complete, the annual property taxes due for this property would be $22,797,750 times .25 times 126.323 divided by 1000, or $719,970. This calculation may be rough, but it gives us an approximation of the annual operating subsidy being given to this hotel for the next ten years.

It's important for citizens to know incentivesWhen Boeing announced in 2012 that it was closing its Wichita operations, city leaders complained that Boeing was leaving Wichita even though it had received many incentives. From 1979 to 2007, Boeing received tax abatements through the industrial revenue bond process worth $658 million, according to a compilation provided by the City of Wichita. (This is not money the city lent or gave to Boeing. IRBs provide a vehicle for granting tax abatements or exemptions.) At the time, city officials said the average amount of bonds was $120 million per year. With Wichita commercial property tax rates at 3.008 percent ($30.08 per $1,000 of appraised value), according to GWEDC, that’s a tax savings of around $3.6 million per year. To Boeing, that’s as good as receiving cash year after year.

Tax increment financing

In 2013 Wichita approved a package benefiting Exchange Place in downtown. Here’s what the city council agenda packet gives as the sources of financing for this project.

HUD Loan Amount         $29,087,700
Private Equity            5,652,254
Tax Credit Equity        19,370,395
TIF Proceeds             12,500,000
Total Sources of Funds  $66,610,349

TIF, or tax increment financing, diverts future increased tax revenues away from their normal uses and diverts them back to the project. In this case, the city will borrow $12,500,000 by selling bonds. It will give this money to the developer. Then, TIF proceeds will be used to repay these bonds.

Some will argue that TIF isn’t really an incentive. The owners of the property will have to pay their property taxes, just like any other property owner. But for this project, the property taxes are used for the project’s own benefit instead of funding the costs of city government. This project gets to spend $12.5 million of its property tax payments on itself, rather than funding the costs of Wichita city government.

Tax credits

Ambassador Hotel sign 2014-03-07Note that the sources of financing for the Exchange Place project includes “Tax Credit Equity.” Here’s an example of another downtown project, the Ambassador Hotel, and the incentive package the city prepared:

  • $3,325,000 in tax increment financing.
  • $4,245,000 in city funding under the capital improvement plan (CIP), to build parking for the hotel.
  • $3,800,000 in tax credits from the State of Kansas.
  • $3,500,000 in tax credits from the U.S. government.
  • $537,075 in sales tax exemptions on purchases during the construction and furnishing of the hotel.
  • $60,000 per year in community improvement district (CID) sales tax. The hotel charges an extra two cents per dollar sales tax, which the state returns to the hotel.
  • $127,499 per year (estimated) in rental revenue to the developers from a sweetheart lease deal.
  • Participation in Wichita’s facade improvement program, which provides special assessment financing that is repaid.

All told, this project was slated to receive $15,407,075 in taxpayer funds to get started, with additional funds provided annually.

The tax credits for this project are historic preservation tax credits. They have the same economic impact as a cash payment. The federal tax credits are available across the country, while the Kansas tax credits, of course, are a state program. In this case the hotel developers received an upfront payment of $3.8 million from the state in a form that’s as good as cash.

STAR bonds

Last year a STAR bonds district in northeast Wichita was approved to receive $31,570,785 from these bonds. The STAR bonds are paid off with sales tax revenue that would otherwise go to the state and overlapping jurisdictions. This is sales tax collected from the business’s customers, and doesn’t cost the business anything.

Adding it up

This list is not complete. There are other programs and other beneficiaries of economic development subsidies. With this in mind, it is disingenuous for city and other officials to use the $1.65 million figure as though it was all Wichita had to offer. It’s important for citizens to know that contrary to the claims of officials, Wichita has many economic development incentive programs available, and some have substantial value to the recipients, with corresponding cost to the city and other jurisdictions.

WichitaLiberty.TV set 2014-04-29 01 800

Economic development in Wichita, one tale

In this excerpt from WichitaLiberty.TV: A look at a recent episode of economic development in Wichita, and what can we learn from that. View below, or click here to view at YouTube. Originally broadcast June 15, 2014.

For more on this issue, see A lesson for Wichita in economic development.

Wichita City Hall 2014-08-05 11

What the Wichita city council could do

While the proposed Wichita city sales tax is a bad idea, the city could do a few things that would not only improve its chance of passage, but also improve local government.

This week the Wichita City Council passed an ordinance that starts the process of placing a sales tax measure on the November ballot. The one cent per dollar tax will be used for several initiatives, including an economic development jobs fund.

The city will need to gain the trust of citizens if the measure is to have any chance of passage. While I am personally opposed to the sales tax for some very good reasons, I nonetheless offer this advice to the city on what it could do to help pass the sales tax.

Oversight commissions

Presentations made by city hall state that the city council will appoint a private-sector led jobs commission. It would examine potential projects and make recommendations to the council. There will also be a citizens oversight committee and a jobs commission audit committee.

Wichita Investing in Jobs, How it WorksThe problem is that committees like these are usually stacked with city hall insiders, with people who want to personally gain from cronyism, and with people the city believes will be quietly compliant with what the city wants to do.

As an example, consider my appointment to the Wichita Airport Advisory Board last year. I had to be confirmed by the city council. I’ve been critical of the subsidy paid to airlines at the Wichita airport. I’ve researched airfares, air traffic, and the like. I’ve presented findings to the city council that were contrary to the city’s official position and that discovered a possible negative effect of the subsidy effort. Because of that, the council would not confirm my appointment. The city was not willing to have even one person on the airport board who might say wait, let’s take a look at this in a different way, and would have facts to support an alternative.

At Tuesday’s meeting the council assured citizens that it would not be the same group of city hall insiders serving on these boards. According to meeting minutes, council member James Clendenin (district 3, southeast and south Wichita) said “Over the next few months there is going to be a lot more detail given to the public so that they can make an informed decision at the time this comes up to a vote in November.”

If the council is serious about this it could take a simple step: Appoint the members of these boards well in advance of the November election. Also, define the structure of the boards, such as the number of members, how appointed, term of appointment, and other details.

Transparency

The city says that the operations of the committees and the jobs fund will be transparent. But the city’s record in transparency is poor. For many years the city’s quasi-independent agencies have refused to release spending records. Many, such as I, believe this is contrary to not only the spirit, but the actual language of the Kansas Open Records Act. There is nothing the city has said that would lead us to believe that the city plans to change its stance towards the citizens’ right to know.

If the city wants to convince citizens that it has changed its attitude towards government transparency and citizens’ right to know how tax money is spent, it could positively respond to the records requests made by myself and Kansas Policy Institute.

The city is also likely to engage in an educational and informational campaign on its cable television channel. If it does, a welcome gesture would be to offer time on the channel for citizen groups to present their side of the issues. The city’s cable channel is supposed to be a public access channel, but as of now, citizens have no ability to produce content for that channel.

In presentations to the council, reports released by the Texas Enterprise Fund have been used as examples of what Wichita might do to inform citizens on the economic development activities funded by the sales tax. But many in Texas are critical of the information provided about the fund’s operation.

Even when information is provided, it is subject to different interpretations by self-interested parties. On the Texas Emerging Technology Fund, the Houston Chronicle recently reported “Whether or not the fund has lost taxpayer money depends on which accounting method is applied. The Associated Press says a method common to government entities placed the fund’s value at $175 million, with a loss of $30 million. The governor’s office uses a private accounting standard that places the fund’s value at $230 million, a $25 million profit.”

In 2011 the Wall Street Journal reported on how job creation numbers can be stretched far beyond any sense of reason:

In Texas, Mr. Perry in a 2011 report to the legislature credited the Texas A&M Institute for Genomic Medicine with already producing more than 12,000 additional jobs. That’s ahead of the 5,000 promised by 2015.

According to the institute’s director, however, 10 people currently work in its new building. A Houston-area biotech firm that agreed to produce about 1,600 of the project’s jobs has instead cut its Texas staff by almost 400 people, and currently employs 220 people in the state.

What accounts for the discrepancy? To reach their estimate of 12,000-plus jobs created by the project, officials included every position added in Texas since 2005 in fields related sometimes only tangentially to biotechnology, according to state officials and documents provided by Texas A&M. They include jobs in things ike dental equipment, fertilizer manufacturing and medical imaging.

William Hoyt, an economics professor at the University of Kentucky who studies state economic-incentive programs across the U.S., said similar efforts elsewhere have been dogged by controversy over how many jobs they actually created. Even so, Mr. Hoyt said he hasn’t come across a definition as broad as that employed by Texas. “It’s hard to see jobs in dental supplies in El Paso being related to a genome clinic in College Station,” where Texas A&M’s main campus is located, he said.

A spokeswoman for Mr. Perry’s office in Austin, Texas, said the job totals for the A&M project were provided by the grant recipients, using figures compiled by the Texas Workforce Commission, the state’s labor agency, and hadn’t yet been “verified.” (Behind Perry’s Jobs Success, Numbers Draw New Scrutiny, October 11, 2011)

Locally, Wichita has had difficulty making information available. Last year the Wichita Eagle reported on the problems.

The Eagle asked the city last week for an accounting of the jobs created over the past decade by the tax abatements, a research project that urban development staffers have yet to complete.

“It will take us some time to pull together all the agenda reports on the five-year reviews going back to 2003. That same research will also reveal any abatements that were ‘retooled’ as a result of the five-year reviews,” city urban development director Allen Bell said. “I can tell you that none of the abatements were terminated.” (Wichita doubles property tax exemptions for businesses, October 20, 2013)

wichita-economic-developmentOne might have thought that the city was keeping records on the number of jobs created on at least an annual basis for management purposes, and would have these figures ready for immediate review. But apparently that isn’t the case.

We need to recognize that because the city does not have at its immediate disposal the statistics about job creation, it is evident that the city is not managing this effort. Or, maybe it just doesn’t care. This is a management problem at the highest level.

gwedc-office-operations

In fact, the city and its economic development agencies don’t even keep promotional websites current. GWEDC — that’s the Greater Wichita Economic Development Coalition credited with recruiting a company named InfoNXX to Wichita — doesn’t update its website to reflect current conditions. InfoNXX closed its facility in Wichita in 2012. When I looked at GWEDC’s website in October 2013, I found this on a page titled Office Operations:

Wichita hosts over a dozen customer service and processing centers — including a USPS Remote Encoding Center (985 employees), InfoNXX (950), T-Mobile (900), Royal Caribbean (700), Convergys (600), Protection One (540), Bank of America (315) and Cox Communications (230.) (emphasis added)

Observe that the official Wichita-area economic development agency touted the existence of a company that no longer exists in Wichita, and claims a job count that the company never achieved. Also, at that time the USPS facility was in the process of closing and eliminating all Wichita jobs.

What is Wichita doing to convince citizens that it has moved beyond this level of negligence?

WichitaLiberty.TV set 2014-04-29 01 800

Wichita: We have incentives. Lots of incentives.

In this excerpt from WichitaLiberty.TV: Wichita government leaders complain that Wichita can’t compete in economic development with other cities and states because the budget for incentives is too small. But when making this argument, these officials don’t include all incentives that are available. View below, or click here to view on YouTube. More information on this topic is at Contrary to officials, Wichita has many incentive programs.

Wichita City Budget Cover, 1979

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

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

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

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

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

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

There are more categories. Kansas ranks well in none.

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

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

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

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

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

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

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

The record in Wichita

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

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

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

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

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

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

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

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

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

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

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

Wichita city hall

Contrary to officials, Wichita has many incentive programs

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

The document Will Wichita Accelerate Competition for Primary Jobs? contains contradictory information about money available for economic development incentives in Wichita. The usual argument that officials make is represented by this quotation from the report: “Wichita and Sedgwick County compete conservatively with incentives. The City of Wichita and Sedgwick County have a total of $1.65 million in new uncommitted funds for cash incentives this year with any unused money going back to the general fund.”

But the same report contains this: “The $4.5 million PEAK program incentive from the Kansas Department of Commerce was an important factor in keeping NetApp in Wichita. Locally we were able to provide $836,000 in incentives.”

So with an incentives budget of $1.65 million, a Wichita company received $5.3 million in incentives. Some of that, like the PEAK incentive, is paid over a period of years. But that amount doesn’t begin to describe the benefits NetApp received.

A sample of available incentive programs

Kansas Department of Commerce logoA letter to NetApp from the Kansas Department of Commerce laid out the potential benefits from the state. As detailed in the letter, the programs with potential dollar amounts are: Promoting Employment Across Kansas (PEAK), up to $7,705,535; Kansas Industrial Training with PEAK, up to $160,800; sales tax savings of $6,880,000; personal property tax exemption, $11,913,682; and High Performance Incentive Program (HPIP), $8,500,000. The total of these is $35,160,017. Some of these benefits are paid over a period of years. The PEAK benefits are payable over seven years, according to the letter, so that’s about $1.1 million per year. These are potential benefits; the company may not actually qualify for and receive this entire amount. But it’s what the state offered.

It’s true that some of these programs, strictly speaking, are not “cash incentives” of the type Wichita complains of lacking. But if a company is going to make purchases, and the state says you can skip paying sales tax on the purchases — well, that’s about as good as cash. $6,880,000 in the case of NetApp, according to the Kansas Department of Commerce.

Local tax exemptions

Besides sales tax exemptions, the city has other types of tax exemptions it regularly offers. These exemptions can have substantial value. In 2008 as Drury contemplated Broadview Hotel 2013-07-09 020purchasing the Broadview Hotel, the city allowed the hotel to escape paying much of the taxes that the rest of us have to pay. According to city information, Drury planned to spend $22,797,750 on the hotel. If we use this as the appraised value for the property when it is complete, the annual property taxes due for this property would be $22,797,750 times .25 times 126.323 divided by 1000, or $719,970. This calculation may be rough, but it gives us an idea of the annual operating subsidy being given to this hotel for the next ten years. Remember, city officials complain of an incentives budget of only $1.65 million per year.

It's important for citizens to know incentivesWhen Boeing announced in 2012 that it was closing its Wichita operations, city leaders complained that Boeing was leaving Wichita even though it had received many incentives. From 1979 to 2007, Boeing received tax abatements through the industrial revenue bond process worth $658 million, according to a compilation provided by the City of Wichita. At the time, city officials said the average amount of bonds was $120 million per year. With Wichita commercial property tax rates at 3.008 percent ($30.08 per $1,000 of appraised value), according to GWEDC, that’s a tax savings of around $3.6 million per year. To Boeing, that’s as good as receiving cash year after year. Remember, city officials say the incentives budget is $1.65 million per year.

Tax increment financing

In 2013 Wichita approved a package benefiting Exchange Place in downtown. Here’s what the city council agenda packet gives as the sources of financing for this project.

HUD Loan Amount         $29,087,700
Private Equity            5,652,254
Tax Credit Equity        19,370,395
TIF Proceeds             12,500,000
Total Sources of Funds  $66,610,349

TIF, or tax increment financing, diverts future increased tax revenues away from their normal uses and diverts them back to the project. In this case, the city will borrow $12,500,000 by selling bonds. It will give this money to the developer. Then, TIF proceeds will be used to repay these bonds.

Some will argue that TIF isn’t really an incentive. The owners of the property will have to pay their property taxes, just like any other property owner. But for this project, the property taxes are used for the project’s own benefit instead of paying for city government. This project gets to spend $12.5 million of its property tax payments on itself, rather than funding the costs of Wichita city government.

Tax credits

Ambassador Hotel sign 2014-03-07Note that the sources of financing for the Exchange Place project includes “Tax Credit Equity.” Here’s an example of another downtown project, the Ambassador Hotel, and the incentive package the city prepared:

  • $3,325,000 in tax increment financing.
  • $4,245,000 in city funding under the capital improvement plan (CIP), to build parking for the hotel.
  • $3,800,000 in tax credits from the State of Kansas.
  • $3,500,000 in tax credits from the U.S. government.
  • $537,075 in sales tax exemptions on purchases during the construction and furnishing of the hotel.
  • $60,000 per year in community improvement district (CID) sales tax. The hotel charges an extra two cents per dollar sales tax, which the state returns to the hotel.
  • $127,499 per year (estimated) in rental revenue to the developers from a sweetheart lease deal.
  • Participation in Wichita’s facade improvement program, which provides special assessment financing that is repaid.

All told, this project was slated to receive $15,407,075 in taxpayer funds to get started, with additional funds provided annually.

The tax credits for this project are historic preservation tax credits. They have the same economic impact as a cash payment. The federal tax credits are available across the country, while the Kansas tax credits, of course, are a state program. In this case the hotel developers received an upfront payment of $3.8 million from the state in a form that’s as good as cash. Remember, city officials say the incentives budget is $1.65 million per year.

STAR bonds

There are more programs the city and state use to provide incentives. Last year, according to city documents, a STAR bonds district in northeast Wichita was approved to receive $31,570,785 from these bonds. The STAR bonds are paid off with sales tax revenue that would otherwise go to the state and overlapping jurisdictions. This is sales tax collected from the business’s customers, and doesn’t cost the business anything. Remember, city officials say the incentives budget is $1.65 million per year.

This list is not complete. There are other programs and other beneficiaries of economic development subsidies. It’s important for citizens to know that contrary to the claims of officials, Wichita has many economic development incentive programs available, and some have substantial value to the recipients, with corresponding cost to the city and other jurisdictions.

Wichita City Budget Cover, 1971

Wichita economic development incentives: Do they help?

The Wichita City Council regularly awards economic development incentives. Are these incentives helpful, or not?

Wichita City Budget Cover, 1971In November the Wichita City Council granted Industrial Revenue Bonds to Spirit Aerosystems.

The amount of the proposed bond issue was $49,000,000. The purpose of these IRBs is to allow the recipient to escape the payment of property taxes, and often sales taxes too. This action by the council may exempt up to $49,000,000 of property from taxation, both ad valorem (property) and sales. A 100 percent exemption is proposed for five years, plus a second five years if conditions are met.

The city uses benefit-cost ratios to justify its expenditures on economic development incentives. The reasoning is that by spending cash (such as on a forgivable loan) or forgiving taxes (as in the current case), the city (and county, state, and school district) gain even more than they give up. Generally, Wichita requires a benefit-cost ratio of 1.3 to 1 or better, although there are many exceptions and loopholes that are used if a potential deal doesn’t meet this criteria.

The council’s agenda packet gives benefit-cost ratios for the various taxing authorities, but it doesn’t list the dollar amounts of the tax abatements. Usually these dollar amounts are supplied.

One of the taxing jurisdictions affected by this proposed action is USD 260, the Derby school district, as the property is within its boundaries. In this case, the benefit-cost ratio given for the Derby school district is 1.00 to 1. Since the City of Wichita requires 1.3 to 1 or better for itself, by what right does the city impose a burden on a school district that it would not accept for itself? (The tax rate for Derby schools is 59.3 mills; while for the City of Wichita the rate is 32.5 mills.)

It’s important to note that the benefits claimed from the IRBs are in the form of increased taxes paid.

The harm of this incentive is that the taxes not paid by Spirit Aerosystems are shifted to other taxpayers. The money these taxpayers would have spent or invested is instead spent on taxes. Instead of people and businesses firms deciding how to spend or invest, Wichita City Hall does this for them. This brings into play a whole host of problems. These include the deficit of knowledge needed to make good investment decisions, decisions being made for political rather than economic reasons, and the corrosive influence of cronyism.

There is something the city could to do alleviate this problem. Would the city consider reducing its spending by the amount of tax being abated? In this case, the cost of these tax abatements will not be born by others. So far, the city has not considered this possibility.

Wichita’s management of incentives

Recent reporting told us what some have suspected: The city doesn’t manage its economic development efforts. One might have thought that the city was keeping records on the number of jobs created on at least an annual basis for management purposes, and would have these figures ready for immediate review. But apparently that isn’t the case.

We need to recognize that because the city does not have at its immediate disposal the statistics about job creation, it is evident that the city is not managing this effort. Or, maybe it just doesn’t care. This is a management problem at the highest level. Shouldn’t we develop our management skills of tax abatements and other economic development incentives before we grant new?

Wichita’s results in economic development

Wichita and Peer Job Growth, Total Employment
Despite the complaints of many that Wichita doesn’t have a rich treasure chest of incentives, the city has been granting tax abatements for years. What is the result? Not very good. Wichita is in last place in job creation (and other measures of economic growth) among our Visioneering peer cities. See here Wichita and Visioneering peers job growth.

If we believe that incentives have a place, then we have to ask why Wichita has done so poorly.

Particularly relevant to this applicant today: Boeing, its predecessor, received many millions in incentives. After the announcement of Boeing leaving in 2012, a new report contained this: “‘They weren’t totally honest with us,’ said [Wichita Mayor Carl] Brewer of Boeing, which has benefited from about $4 billion of municipal bonds and hundreds of millions of dollars in tax relief. ‘We thought the relationship was a lot stronger.'” Has anything changed?

A few remarks and questions about incentives

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?

A diversified economy

wichita-detroit-job-industry-concentration
The mayor and council members have said that we need to diversify our economy. The award of incentives to Spirit Aerosystems reduces diversification. It gives special benefits worth millions to the largest company in our most concentrated industry. The costs of these incentives are born by other companies, especially entrepreneurs and start up companies. It’s these entrepreneurs and young companies that must be the source of diversity and dynamism in our economy.

(If we really believe that these incentives have no cost, why don’t we offer them more often? Think of how many companies go out of business each month. Many of them could be saved with just a little infusion of cash. Why doesn’t the city rescue these firms with incentives?)

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.

Can officials manage growth?

Alan Peters and Peter Fisher wrote an academic paper titled The Failures of Economic Development Incentives, published in Journal of the American Planning Association. A few quotes from the study, with emphasis added:

Given the weak effects of incentives on the location choices of businesses at the interstate level, state governments and their local governments in the aggregate probably lose far more revenue, by cutting taxes to firms that would have located in that state anyway than they gain from the few firms induced to change location.

On the three major questions — Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Are incentives, at worst, only moderately revenue negative? — traditional economic development incentives do not fare well. It is possible that incentives do induce significant new growth, that the beneficiaries of that growth are mainly those who have greatest difficulty in the labor market, and that both states and local governments benefit fiscally from that growth. But after decades of policy experimentation and literally hundreds of scholarly studies, none of these claims is clearly substantiated. Indeed, as we have argued in this article, there is a good chance that all of these claims are false.

In 2008 Kansas Legislative Division of Post Audit investigated spending on economic development. It found about the same as did Peters and Fisher.

Going forward

Politicians and bureaucrats promote programs like this tax abatement 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 Wichita and Kansas economy.

These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This lack of knowledge, however, does not stop governments from creating policies and awarding incentives. This “active investor” approach to economic development is what has led to companies receiving grants or escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

Embracing Dynamism: The Next Phase in Kansas Economic Development Policy

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: “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.

Wichita City Hall.

Wichita’s legislative agenda favors government, not citizens

city-council-chambers-sign-smallThis week the Wichita City Council will consider its legislative agenda. This document contains many items that are contrary to economic freedom, capitalism, limited government, and individual liberty. Yet, Wichitans pay taxes to have someone in Topeka promote this agenda. I’ve excerpted the document here, and following are some of the most problematic items.

Agenda: Existing economic development tools are essential for the continued growth and prosperity of our community.

First. The premise of this item is incorrect. We don’t have growth and prosperity in Wichita. Compared to a broad group of peer metropolitan areas, Wichita performs very poorly. See For Wichita’s economic development machinery, failure for details.

Second: In general, these incentives don’t work to increase prosperity. Click here for 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.

Third: Wichita leaders often complain that Wichita doesn’t have enough “tools in the toolbox” to compete effectively in economic development. The city’s document lists the tools the city wants the legislature to protect:

  • GWEDC/GO WICHITA: Support existing statutory records exemptions
  • Industrial Revenue Bond tax abatements (IRBX)
  • Economic Development Exemptions (EDX)
  • Tax Increment Financing (TIF)
  • Sales Tax Revenue (STAR) Bonds
  • Community Improvement Districts (CID)
  • Neighborhood Revitalization Area (NRA) tax rebates
  • Special Assessment financing for neighborhood infrastructure projects, facade improvements and abatement of asbestos and lead-based paint.
  • State Historic Preservation Tax Credits (HPTC)
  • State administration of federal Low Income Housing Tax Credits (LIHTC)
  • High Performance Incentive Program (HPIP) tax credits
  • Investments in Major Projects and Comprehensive Training (IMPACT) grants
  • Promoting Employment Across Kansas (PEAK) program
  • Economic Revitalization and Reinvestment Act bonding for major aviation and wind energy projects
  • Kansas Industrial Training (KIT) and Kansas Industrial Retraining (KIR) grants
  • Network Kansas tax credit funding
  • State support for Innovation Commercialization Centers in Commerce Department budget

That’s quite a list of incentive programs. Some of these are so valuable that Kansas business leaders told the governor that they value these incentives more than they would value elimination of the state corporate income tax.

Agenda: GWEDC/GO WICHITA: Support existing statutory records exemptions

This may refer to the city wanting to prevent these agencies from having to fulfill records requests under the Kansas Open Records Act. (If so, I wonder why the Wichita Downtown Development Corporation was left off.) City leaders say Wichita has an open and transparent government. But Kansas has a weak records law, and Wichita doesn’t want to follow the law, as weak as it is. This is an insult to citizens who are not able to access how their taxes are spent. For more on this issue, see Open Records in Kansas.

Agenda: The Wichita City Council opposes any legislative attempts to restrict the taxing and spending authority of local governments.

As Wichita city leaders prepare to ask for a higher sales tax rate in Wichita, we can hope that the legislature will save us from ourselves. At best, we can hope that the legislature requires that all tax rate increases be put to popular vote.

Agenda: The Wichita City Council opposes any restrictions on the use of state and/or local public monies to provide information to our citizens and to advocate on their behalf.

This is the taxpayer-funded lobbying issue. As you can see in this document, many of the things that Wichita city leaders believe people want, or believe that will be good for their constituents, are actually harmful. Additionally, many of the methods the city uses to engage citizens to determine their needs are faulty. See In Wichita, there’s no option for dissent for an example. Also, see Wichita survey questions based on false premises.

Agenda: The Wichita City Council supports the current framework for local elections, continuing the current February/April schedule of local primary and general elections, as well as the local option allowing non-partisan elections.

The present system of non-partisan elections held in the spring results in low voter turnout that lets special interest groups exercise greater influence than would be likely in fall elections. See my legislative testimony in Kansas spring elections should be moved.

Agenda: The Wichita City Council supports the development of appropriate state and local incentives to nurture and preserve arts activity throughout the City of Wichita and the State of Kansas.

Translation: The city knows better than you how to provide for your entertainment and cultural edification, and will continue to tax you for your own benefit.

Agenda: Public support and awareness of the possibility of passenger rail service connecting Oklahoma City and Wichita/Newton has grown over the past two years.

I’m not sure where the claim of public support and awareness growing comes from, but people are definitely not informed about the economics of passenger rail. In 2010, when the state rolled out several plans for this passenger rail service link, I reported as follows:

Expansion of rail service in Kansas is controversial, at least to some people, in that any form of rail service requires taxpayer involvement to pay for the service. First, taxpayer funding is required to pay for the start-up costs for the service. There are four alternatives being presented for rail service expansion in Kansas, and the start-up costs range from $156 million up to $479 million.

After this, taxpayer subsidies will be required every year to pay for the ongoing operational costs of providing passenger rail service. The four alternatives would require an annual operating subsidy ranging from $2.1 million up to $6.1 million. Taking the operating subsidy and dividing by the estimated number of passengers for each alternative, the per-passenger subsidy ranges from $35 up to $97 for every passenger who uses the service.

It would be one thing if tickets sales and other revenue sources such as sale of food and beverage paid for most of the cost of providing passenger rail service, and taxpayers were being asked to provide a little boost to get the service started and keep it running until it can sustain itself. But that’s not the case. Taxpayers are being asked to fully fund the start-up costs. Then, they’re expected to pay the majority of ongoing expenses, apparently forever.

Also, in Amtrak, taxpayer burden, should not be expanded in Kansas I reported on the Heartland Flyer route specifically. This is from 2010, but I doubt much has changed since then.

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 totally misleading. 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.

Asking the taxpayers of Wichita to pay subsidies each time someone boards an Amtrak train: This doesn’t sound like economic development, much less a program that people living in a free society should be forced to fund.

Wichita City Hall.

Wichita’s legislative agenda favors government, not citizens

city-council-chambers-sign-smallThis week the Wichita City Council will consider its legislative agenda. This document contains many items that are contrary to economic freedom, capitalism, limited government, and individual liberty. Yet, Wichitans pay taxes to have someone in Topeka promote this agenda. I’ve excerpted the document here, and following are some of the most problematic items.

Agenda: Existing economic development tools are essential for the continued growth and prosperity of our community.

First. The premise of this item is incorrect. We don’t have growth and prosperity in Wichita. Compared to a broad group of peer metropolitan areas, Wichita performs very poorly. See For Wichita’s economic development machinery, failure for details.

Second: In general, these incentives don’t work to increase prosperity. Click here for 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.

Third: Wichita leaders often complain that Wichita doesn’t have enough “tools in the toolbox” to compete effectively in economic development. The city’s document lists the tools the city wants the legislature to protect:

  • GWEDC/GO WICHITA: Support existing statutory records exemptions
  • Industrial Revenue Bond tax abatements (IRBX)
  • Economic Development Exemptions (EDX)
  • Tax Increment Financing (TIF)
  • Sales Tax Revenue (STAR) Bonds
  • Community Improvement Districts (CID)
  • Neighborhood Revitalization Area (NRA) tax rebates
  • Special Assessment financing for neighborhood infrastructure projects, facade improvements and abatement of asbestos and lead-based paint.
  • State Historic Preservation Tax Credits (HPTC)
  • State administration of federal Low Income Housing Tax Credits (LIHTC)
  • High Performance Incentive Program (HPIP) tax credits
  • Investments in Major Projects and Comprehensive Training (IMPACT) grants
  • Promoting Employment Across Kansas (PEAK) program
  • Economic Revitalization and Reinvestment Act bonding for major aviation and wind energy projects
  • Kansas Industrial Training (KIT) and Kansas Industrial Retraining (KIR) grants
  • Network Kansas tax credit funding
  • State support for Innovation Commercialization Centers in Commerce Department budget

That’s quite a list of incentive programs. Some of these are so valuable that Kansas business leaders told the governor that they value these incentives more than they would value elimination of the state corporate income tax.

Agenda: GWEDC/GO WICHITA: Support existing statutory records exemptions

This may refer to the city wanting to prevent these agencies from having to fulfill records requests under the Kansas Open Records Act. (If so, I wonder why the Wichita Downtown Development Corporation was left off.) City leaders say Wichita has an open and transparent government. But Kansas has a weak records law, and Wichita doesn’t want to follow the law, as weak as it is. This is an insult to citizens who are not able to access how their taxes are spent. For more on this issue, see Open Records in Kansas.

Agenda: The Wichita City Council opposes any legislative attempts to restrict the taxing and spending authority of local governments.

As Wichita city leaders prepare to ask for a higher sales tax rate in Wichita, we can hope that the legislature will save us from ourselves. At best, we can hope that the legislature requires that all tax rate increases be put to popular vote.

Agenda: The Wichita City Council opposes any restrictions on the use of state and/or local public monies to provide information to our citizens and to advocate on their behalf.

This is the taxpayer-funded lobbying issue. As you can see in this document, many of the things that Wichita city leaders believe people want, or believe that will be good for their constituents, are actually harmful. Additionally, many of the methods the city uses to engage citizens to determine their needs are faulty. See In Wichita, there’s no option for dissent for an example. Also, see Wichita survey questions based on false premises.

Agenda: The Wichita City Council supports the current framework for local elections, continuing the current February/April schedule of local primary and general elections, as well as the local option allowing non-partisan elections.

The present system of non-partisan elections held in the spring results in low voter turnout that lets special interest groups exercise greater influence than would be likely in fall elections. See my legislative testimony in Kansas spring elections should be moved.

Agenda: The Wichita City Council supports the development of appropriate state and local incentives to nurture and preserve arts activity throughout the City of Wichita and the State of Kansas.

Translation: The city knows better than you how to provide for your entertainment and cultural edification, and will continue to tax you for your own benefit.

Agenda: Public support and awareness of the possibility of passenger rail service connecting Oklahoma City and Wichita/Newton has grown over the past two years.

I’m not sure where the claim of public support and awareness growing comes from, but people are definitely not informed about the economics of passenger rail. In 2010, when the state rolled out several plans for this passenger rail service link, I reported as follows:

Expansion of rail service in Kansas is controversial, at least to some people, in that any form of rail service requires taxpayer involvement to pay for the service. First, taxpayer funding is required to pay for the start-up costs for the service. There are four alternatives being presented for rail service expansion in Kansas, and the start-up costs range from $156 million up to $479 million.

After this, taxpayer subsidies will be required every year to pay for the ongoing operational costs of providing passenger rail service. The four alternatives would require an annual operating subsidy ranging from $2.1 million up to $6.1 million. Taking the operating subsidy and dividing by the estimated number of passengers for each alternative, the per-passenger subsidy ranges from $35 up to $97 for every passenger who uses the service.

It would be one thing if tickets sales and other revenue sources such as sale of food and beverage paid for most of the cost of providing passenger rail service, and taxpayers were being asked to provide a little boost to get the service started and keep it running until it can sustain itself. But that’s not the case. Taxpayers are being asked to fully fund the start-up costs. Then, they’re expected to pay the majority of ongoing expenses, apparently forever.

Also, in Amtrak, taxpayer burden, should not be expanded in Kansas I reported on the Heartland Flyer route specifically. This is from 2010, but I doubt much has changed since then.

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 totally misleading. 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.

Asking the taxpayers of Wichita to pay subsidies each time someone boards an Amtrak train: This doesn’t sound like economic development, much less a program that people living in a free society should be forced to fund.

Wichita economic development on tap

Wichita city hall

The role of government in economic development should be limited to that of providing the framework necessary for equally protecting the rights and property of all citizens, through the rule of law, and not by acting as a participant in any activity that places it in a position of granting a competitive advantage to one group of citizens to the exclusion of all others. When government becomes an active participant in economic activity, it abdicates its proper role of providing the legal framework and physical security that is essential for natural coercive-free trade to flourish.
— John Todd

This week the Wichita City Council will consider another economic development incentive in the form of property tax abatements, this time to a company described as a “frequent flyer” in this regard. The council ought to take a few moments to explain to citizens why this action is necessary, if in fact it is.

The company requesting the tax breaks is Hijos, LLC/JR Custom Metal Products, Inc. This company has received several incentives like the one it is requesting this week. The incentive being considered is under the Economic Development Tax Exemption (“EDX”) program, which allows the city to forgive the payment of property taxes. In many instances, the issuance of Industrial Revenue Bonds is required by law in order to achieve tax forbearance. The EDX program does away with the often meaningless issuance of bonds, and lets the city do, in a streamlined fashion, what the applicant company wants: Permission to skip the payment of property taxes.

Based on a formula the city has established to guide the awarding of economic development strategies, this company qualifies to have 46 percent of the property taxes forgiven. Not 45 percent, and not 47 percent. Precisely 46 percent. This reminds me of the old saw that economists use a decimal point to remind us they have a sense of humor.

There are a number of questions that the city council ought to answer and explain to citizens before it grants this special treatment.

1. Since the incentive being considered is in the form of reduced property taxes, does this mean that property taxes in Wichita are a barrier to investment? A related question is whether the tax breaks are required to make the project economically feasible, or does the company simply want to avoid its share of the tax burden?

2. What distinguishes this company and these jobs from others that will be created this month in Wichita? Why do these jobs require a subsidy, and so many others do not?

3. When granting tax breaks like this, how does the city council explain that the tax burden is not being applied fairly and evenly to everyone? Related: If the theory of taxation is ________ (fill in the blank with your favorite theory), how does this tax exemption coexist with that theory?

4. Has the city checked with the overlapping jurisdictions that will be affected by the tax abatements? These would be Sedgwick County, the Wichita school district, and the State of Kansas. When Wichita grants a tax break, it also abates these taxes, without advice or consent. Notice is required, however.

5. If we really believe in this benefit to the city (and similar benefits to the county, school district, and state) as proclaimed by the cost-benefit studies, why doesn’t the city make more investments like this? Surely there are other worthy companies could expand if not for the burden of property taxes. And that’s what this contemplated action means, if we are to believe it is anything but cronyism and business welfare: Property taxes in Wichita are what prevented this company from expanding. Erase 46 percent of the company’s property tax burden, and it is able to make new capital investment and jobs.

If it really is so easy to promote economic growth and job creation, we should be doing things like this at every city council meeting. Several times each meeting, don’t you think?

I also wonder about companies that made expansions as did this applicant company, but did not ask the city for incentives. What is their secret?

The reality is that these economic development incentives don’t work, if we are willing to consider the effect on everyone in the region instead of just this applicant company, and also if we are willing to consider the long-term effects instead of only the immediate.

Peer-reviewed research on economic development incentives — this is the conclusion of all the studies — find business location decisions to be favorably influenced by targeted tax incentives. That’s not a surprise. But the research also finds that the benefits to the communities that offered them were less than their costs.

Wichita and Peer Job Growth, Total Employment

If peer-reviewed research is not convincing, let’s take a look at the record of Wichita.
Here is a chart of job growth for Wichita, the nation, and our Visioneering peers. (Click it for a larger version, or click here for the interactive visualization, or here to watch a video.) The data shows that Wichita hasn’t been doing well.

So if we believe that an active role for government in economic development is best, we have to also recognize that our efforts aren’t working.

Wichita city council advances economic development

city-council-chambers-sign-b

Can you fill in the blank?

Wichita City Council says: “By allowing Cessna to avoid paying property taxes, we are showing our support for the company.”

“By requiring other companies to pay their full share of property taxes, we are showing our ________ for these companies.”

Yesterday’s action taken by the Wichita City Council regarding economic development incentives granted to Cessna Aircraft Company through the Industrial Revenue Bond program may be confusing to some people. The Wichita Eagle is not helping citizens understand what is happening when the city issues IRBs. The headline and lede of the article illustrate: “Wichita approves $40.2 million in industrial revenue bonds for Cessna improvements.”

The bonds are a sideshow and not economically relevant. In fact, Wichita has a related program called EDX that implements the benefits of IRBs without the charade of a company buying its own bonds. The Eagle gets around to this, explaining: “Industrial revenue bonds are issued by governments without any taxpayer liability, a type of municipal bond repaid from the proceeds of bond sales. They do not affect the tax revenue or the credit of the issuing governmental entity. The company will buy its own bonds.”

This explanation isn’t accurate, however. IRBs do affect the tax revenue of the issuing governmental entity, because property purchased under the program is exempt from property taxation, and often sales tax. The article does finally explain why Cessna is applying for the IRBs: “The value of the abated taxes could be as much as $37,197 for the first year.”

That — or something like it — should have been the headline to this article. The fact that Kansas law grants tax abatements for bond-purchased property is the only reason that Cessna applied for the IRB program. As Wichita City Council Member and Vice Mayor Pete Meitzner (district 2, east Wichita) explained from the bench and as quoted by the Wichita Eagle: “I’d like to confirm to the public that what we’re doing is voting to allow Cessna to purchase $40 million of their own bonds for all these improvements.”

I’m glad he understands. We still have to endure the spectacle of a governing body voting to allow a company to issue bonds that the company will purchase from itself. Perhaps someday we will have laws that allow a company to issue debt and purchase that same debt without governmental approval.

In remarks from the bench, several council members thanked Cessna for its commitment to Wichita. Wichita City Council Member James Clendenin (district 3, southeast and south Wichita) thanked Cessna for showing their commitment to Wichita, “as they have for decades.” I wonder: What do other business owners in Wichita who have to pay their full share of taxes think about Cessna’s commitment to Wichita?

Clendenin also expressed appreciation for their charitable nature and their “humongous” heart. I wonder: Why doesn’t Cessna pay the same taxes that everyone else has to pay so that we may keep more of our own money to be charitable as we see fit?

In their remarks, no member of the Wichita City Council made the argument that is often used to justify economic development incentives: economic necessity. No one proffered that absent these tax breaks, Cessna would be unwilling or unable to make this investment. No one wondered that given that Cessna is such a good corporate citizen, why does it ask to be excused from shouldering the same tax burden that almost everyone else has to bear?

No one spoke on behalf of the other business firms in Wichita that, when wanting to make an investment to expand and hire people, are not able to qualify for the type of favored treatment that companies like Cessna receive.

No one offered any evidence that these jobs are somehow different from other jobs in Wichita that area created every day without companies receiving special tax treatment.

No one argued that the tax burden should be applied fairly and evenly to everyone.

No one made the moral case for free enterprise — rather than cronyism and business welfare — as the way to grow and diversify the Wichita economy.

FITB - Cessna property tax abatements

Spirit Aerosystems applies for tax relief

Wichita City HallThe Wichita City Council will consider excepting a large company from property and sales taxation. Is this action wise for the city’s economy?

Tomorrow the Wichita City Council will consider granting Industrial Revenue Bonds to Spirit Aerosystems, the city’s largest employer.

The amount of the proposed bond issue is $49,000,000. The purpose of the IRBs is to allow the recipient to escape the payment of property taxes, and often sales taxes too. This action by the council may exempt up to $49,000,000 of property from taxation, both ad valorem (property) and sales. A 100 percent exemption is proposed for five years, plus a second five years if conditions are met.

The city uses benefit-cost ratios to justify its expenditures on economic development incentives. The reasoning is that by spending cash (such as on a forgivable loan) or forgiving taxes (as in the current case), the city (and county, state, and school district) gain even more than they give up. Generally, Wichita requires a benefit-cost ratio of 1.3 to 1 or better, although there are many exceptions and loopholes that are used if a potential deal doesn’t meet this criteria.

The council’s agenda packet gives benefit-cost ratios for the various taxing authorities, but it doesn’t list the dollar amounts of the tax abatements. Usually these dollar amounts are supplied.

One of the taxing jurisdictions affected by this proposed action is USD 260, the Derby school district, as the property is within its boundaries. In this case, the benefit-cost ratio given for the Derby school district is 1.00 to 1. Since the City of Wichita requires 1.3 to 1 or better for itself, by what right does the city impose a burden on a school district that it would not accept for itself? (The tax rate for Derby schools is 59.3 mills; while for the City of Wichita the rate is 32.5 mills.)

It’s important to note that the benefits claimed from the IRBs are in the form of increased taxes paid.

The harm of this incentive is that the taxes not paid by Spirit Aerosystems are shifted to other taxpayers. The money these taxpayers would have spent or invested is instead spent on taxes. Instead of people and businesses firms deciding how to spend or invest, Wichita City Hall does this for them. This brings into play a whole host of problems. These include the deficit of knowledge needed to make good investment decisions, decisions being made for political rather than economic reasons, and the corrosive influence of cronyism.

There is something the city could to do alleviate this problem. Would the city consider reducing its spending by the amount of tax being abated? In this case, the cost of these tax abatements will not be born by others.

Wichita’s management of incentives

Recent reporting told us what some have suspected: The city doesn’t manage its economic development efforts. One might have thought that the city was keeping records on the number of jobs created on at least an annual basis for management purposes, and would have these figures ready for immediate review. But apparently that isn’t the case.

We need to recognize that because the city does not have at its immediate disposal the statistics about job creation, it is evident that the city is not managing this effort. Or, maybe it just doesn’t care. This is a management problem at the highest level. Shouldn’t we develop our management skills of tax abatements and other economic development incentives before we grant new?

Wichita’s results in economic development

Wichita and Peer Job Growth, Total Employment
Despite the complaints of many that Wichita doesn’t have a rich treasure chest of incentives, the city has been granting tax abatements for years. What is the result? Not very good. Wichita is in last place in job creation (and other measures of economic growth) among our Visioneering peer cities. See here Wichita and Visioneering peers job growth.

If we believe that incentives have a place, then we have to ask why Wichita has done so poorly.

Particularly relevant to this applicant today: Boeing, its predecessor, received many millions in incentives. After the announcement of Boeing leaving in 2012, a new report contained this: “‘They weren’t totally honest with us,’ said [Wichita Mayor Carl] Brewer of Boeing, which has benefited from about $4 billion of municipal bonds and hundreds of millions of dollars in tax relief. ‘We thought the relationship was a lot stronger.'” Has anything changed?

A diversified economy

wichita-detroit-job-industry-concentration
The mayor and council members have said that we need to diversify our economy. This action contemplated this week reduces diversification. It gives special benefits worth millions to the largest company in our most concentrated industry. The costs of these incentives are born by other companies, especially entrepreneurs and start up companies. It’s these entrepreneurs and young companies that must be the source of diversity and dynamism in our economy.

(If we really believe that these incentives have no cost, why don’t we offer them more often? Think of how many companies go out of business each month. Many of them could be saved with just a little infusion of cash. Why doesn’t the city rescue these firms with incentives?)

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

Can officials manage growth?

Alan Peters and Peter Fisher wrote an academic paper titled The Failures of Economic Development Incentives, published in Journal of the American Planning Association. A few quotes from the study, with emphasis added:

Given the weak effects of incentives on the location choices of businesses at the interstate level, state governments and their local governments in the aggregate probably lose far more revenue, by cutting taxes to firms that would have located in that state anyway than they gain from the few firms induced to change location.

On the three major questions — Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Are incentives, at worst, only moderately revenue negative? — traditional economic development incentives do not fare well. It is possible that incentives do induce significant new growth, that the beneficiaries of that growth are mainly those who have greatest difficulty in the labor market, and that both states and local governments benefit fiscally from that growth. But after decades of policy experimentation and literally hundreds of scholarly studies, none of these claims is clearly substantiated. Indeed, as we have argued in this article, there is a good chance that all of these claims are false.

In 2008 Kansas Legislative Division of Post Audit investigated spending on economic development. It found about the same as did Peters and Fisher.

Going forward

Politicians and bureaucrats promote programs like this tax abatement 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 Wichita and Kansas economy.

These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This lack of knowledge, however, does not stop governments from creating policies for the awarding of incentives. This “active investor” approach to economic development is what has led to companies receiving grants or escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

Embracing Dynamism: The Next Phase in Kansas Economic Development Policy

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: “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.

Wichita economic development not being managed

The Wichita Eagle has reported that Wichita has increased its granting of property tax exemptions in recent years. (Wichita doubles property tax exemptions for businesses, October 20, 2013) Buried in the story is the really important aspect of public policy. In his reporting, Bill Wilson wrote:

The Eagle asked the city last week for an accounting of the jobs created over the past decade by the tax abatements, a research project that urban development staffers have yet to complete.

“It will take us some time to pull together all the agenda reports on the five-year reviews going back to 2003. That same research will also reveal any abatements that were ‘retooled’ as a result of the five-year reviews,” city urban development director Allen Bell said. “I can tell you that none of the abatements were terminated.”

wichita-economic-development

One might have thought that the city was keeping records on the number of jobs created on at least an annual basis for management purposes, and would have these figures ready for immediate review. But apparently that isn’t the case.

We need to recognize that because the city does not have at its immediate disposal the statistics about job creation, it is evident that the city is not managing this effort. Or, maybe it just doesn’t care.

This is a management problem at the highest level. In January when the city council awarded city manager Robert Layton a large raise, the praise from council members was effusive. This means one of several things: (a) that the mayor and city council have not asked for these job creation numbers, or (b) city council members don’t care about the numbers, or (c) they’re not interested in knowing the numbers. There could be other explanations, but all point to a lack of bureaucratic management and political oversight.

I wonder why the city officials didn’t explain that according to their analysis and way of thinking, these tax abatements don’t have a cost. When presented to the council, each abatement opportunity is generally accompanied by a benefit-cost analysis that purports to show that the city, county, school district, and state gain more in tax revenue than they forego from the abatement. Does this extra government revenue create jobs?

In any case, the number of jobs stemming from our economic development efforts is small. In his State of the City Address for 2012, Mayor Carl Brewer said that the city’s efforts in economic development had created “almost 1000 jobs.” While that sounds like a lot of jobs, that number deserves context. According to estimates from the Kansas Department of Labor, the civilian labor force in the City of Wichita for December 2011 was 192,876, with 178,156 people at work. This means that the 1,000 jobs created accounted for from 0.52 percent to 0.56 percent of our city’s workforce, depending on the denominator used. This minuscule number is dwarfed by the normal ebb and flow of other economic activity. (The mayor didn’t mention job creation figures in his 2013 address.)

The case of InfoNXX

Here’s an example of property tax abatements granted for which the city received little in return. In 2005, with great fanfare, the city announced that its economic development recruitment efforts had landed InfoNXX, an operator of call centers. The council agenda report of November 15, 2005 recommended that the council approve a letter of intent for tax abatements. The report stated this:

The Greater Wichita Economic Development Coalition has worked with a national site consultant to recruit a new company to Wichita. InfoNXX, Inc., major provider of telephone directory assistance and enhanced information services to leading communications companies, businesses and consumers located principally in the United States, United Kingdom, France, and Italy. As a result of the recruitment effort, InfoNXX will locate a large customer service center in the former MCI Building, near Rock Road and K-96 in northeast Wichita, and hire over 900 customer care representatives. As an economic development incentive, the City offered InfoNXX Industrial Revenue Bonds (IRBs) and property tax abatement on equipment and furnishings, subject to City Council approval.

RECOMMENDED ACTION: Approve a Letter of Intent to InfoNXX Inc. for Industrial Revenue Bonds in an amount not-to-exceed $6 million, subject to the Letter of Intent conditions, for a term of six-months, approve a 100% tax abatement on all bond-financed property for an initial five-year period plus an additional five years following City Council review, and authorize the application for a sales tax exemption on bond-financed property.

On December 13, 2005 the council approved the ordinance granting the tax abatements.

Fast forward to the February 15, 2011 council agenda packet. The five year initial property tax abatement granted in 2005 was over, and the council could extend it for another five years if the committed goals had been met. The agenda report gave this summary for capital investment: “Purchase furniture, fixtures and equipment for a capital investment of $6 million.” Results, according to city documents, were “Invested $7,331,379 million [sic] in FF&E.”

For job creation, the 2005 commitment was “Create 944 new jobs in five years.” Results, according to city documents, were “Created 870 new jobs; current job level is 185.”

InfoNXX was short of its job creation commitments, but the city used a loophole to grant a one-year extension of the tax abatement. That one-year extension was never the subject of further consideration, as InfoNXX changed its name, and in January 2012 closed the Wichita facility that was the subject of these incentives.

It’s unfortunate for Wichita and the InfoNXX employees that the facility closed. The important public policy consideration is that we learn from this. So, when Wichita counts the number of jobs created, does it adjust for short-lived jobs like these?

The answer, I believe, is no. We don’t adjust our job creation statistics, and we don’t learn.

gwedc-office-operations

In fact, we don’t even keep current. GWEDC — that’s the Greater Wichita Economic Development Coalition credited with recruiting InfoNXX to Wichita — doesn’t update its website to reflect current conditions. InfoNXX closed its facility in Wichita in 2012, and as we saw above, city documents said that at its peak the company employed 870 in Wichita. As of today, here’s what GWEDC says on a page titled Office Operations:

Wichita hosts over a dozen customer service and processing centers – including a USPS Remote Encoding Center (985 employees), InfoNXX (950), T-Mobile (900), Royal Caribbean (700), Convergys (600), Protection One (540), Bank of America (315) and Cox Communications (230.) (emphasis added)

So the official Wichita-area economic development agency proclaims the existence of a company that no longer exists in Wichita, and claims a job count that the company never achieved. This is beyond careless negligence. This is malpractice.

The USPS Remote Encoding Center mentioned? It’s being closed this year.

Going forward

In his State of the City address for 2013 the Wichita mayor lamented the fact that Wichita has no dedicated funding source for economic development. It’s likely that Wichitans will be asked to approve increased taxes for economic development, as well as for many other things we want like a new central library, new water and sewer pipes, improved public transit, and downtown development.

But before Wichita officials ask for more taxes so there can be more spending, they need to convince us that they care about measuring and managing results. They haven’t shown this so far.

Research on economic development incentives

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.

Ambassador Hotel Industrial Revenue Bonds

The City of Wichita should not approve a measure that is not needed, that does not conform to the city’s policy (based on relevant information not disclosed to citizens), and which is steeped in cronyism.

This week the Wichita City Council will consider authorizing industrial revenue bonds (IRB) for the Ambassador Hotel project in downtown Wichita.

In most cases, the major benefit of IRBs is exemption from paying property taxes. Since the Ambassador Hotel is located within a tax increment financing (TIF) district, it’s not eligible for property tax abatement. (Because of the TIF, the developers have already achieved the diversion of the majority of their property tax payments away from the public treasury for their own benefit.)

Instead, in this case the benefit of the IRBs, according to city documents, is an estimated $703,017 in sales tax that the hotel won’t have to pay.

The Ambassador Hotel has benefited from many millions of taxpayer subsidy, both direct and indirect. So it’s a good question as to whether the hotel deserves another $703,017 from taxpayers.

But if we follow the city’s economic development policy, the city should not authorize the IRBs. Here’s why.

The Sedgwick County/City of Wichita Economic Development Policy states: “The ratio of public benefits to public costs, each on a present value basis, should not be less than 1.3 to one for both the general and debt service funds for the City of Wichita; for Sedgwick County should not be less than 1.3 overall.”

The policy also states that if the 1.3 to one threshold is not met, the incentive could nonetheless be granted if two of three mitigating factors are found to apply. But there is a limit, according to the policy: “Regardless of mitigating factors, the ratio cannot be less than 1.0:1.”

In September 2011 the city council passed a multi-layer incentive package for Douglas Place, now better known as the Ambassador Hotel and Block One. Here’s what the material accompanying the letter of intent that the council passed on August 9, 2011 held: “As part of the evaluation team process, the WSU Center for Economic Development and Business Research studied the fiscal impact of the Douglas Place project on the City’s General Fund, taking into account the requested incentives and the direct, indirect and induced generation of new tax revenue. The study shows a ratio of benefits to costs for the City’s General Fund of 2.62 to one.

The same 2.62 to one ratio is cited as a positive factor in the material prepared by the city for Tuesday’s meeting.

So far, so good. 2.62 is greater than the 1.3 that city policy requires. But the policy applies to both the general fund and the debt service fund. So what is the impact to the debt service fund? Here’s the complete story from the WSU CEDBR report (the report may be viewed at Wichita State University Center for Economic Development and Business Research Study of Ambassador Hotel):

                                   Cost-benefit ratio
City Fiscal Impacts General Fund         2.63
City Fiscal Impacts Debt Service Fund    0.83
City Fiscal Impacts                      0.90

We can see that the impact on the debt service fund is negative, and the impact in total is negative. (A cost-benefit ratio of less than one is “negative.”)

Furthermore, the cost of the Ambassador Hotel subsidy program to the general fund is $290,895, while the cost to the debt service fund is $7,077,831 — a cost factor 23 times as large. That’s why even though the general fund impact is positive, the negative impact of the much larger debt service fund cost causes the overall impact to be unfavorable.

The city didn’t make this negative information available to the public in 2011, and it isn’t making it available now. It was made public only after I requested the report from WSU CEDBR. It is not known whether council members were aware of this information when they voted in 2011.

So the matter before the council this week doesn’t meet the city’s economic development policy standards. It’s not even close.

There are, however, other factors that may allow the city to grant an incentive: “In addition to the above provisions, the City Council and/or County Commission may consider the following information when deciding whether to approve an incentive.” A list of 12 factors follows, some so open-ended that the city can find a way to approve almost any incentive it wants.

A note: The policy cited above was passed in August 2012, after the Ambassador Hotel incentives package passed. But the 1.3 to one threshold was de facto policy before then, and whether a proposed incentive package met that standard was often a concern for council members, according to meeting minutes.

Timing and campaign contributions

Citizens might wonder why industrial revenue bonds are being issued for a hotel that’s complete and has been operating for over three months. The truly cynical might wonder why this matter is being handled just two weeks after the city’s general election on April 2, in which four city council positions were on the ballot. Would citizens disagree with giving a hotel $703,017 in sales tax forgiveness? Would that have an effect on the election?

Campaign contributions received by James Clendinin from parties associated with Key Construction. Clendenin will vote tomorrow whether to grant sales tax forgiveness worth $703,017 to some of these donors.Campaign contributions received by James Clendinin from parties associated with Key Construction. Clendenin will vote tomorrow whether to grant sales tax forgiveness worth $703,017 to some of these donors. (Click for larger view.)

Combine this timing with the practice of part of the hotel’s ownership team of engaging in cronyism at the highest level. Dave Burk and the principals and executives of Key Construction have a history of making campaign contributions to almost all city council candidates. Then the council rewards them with overpriced no-bid contracts, sweetheart lease deals, tax abatements, rebates of taxes their customers pay, and other benefits. The largesse dished out for the Ambassador Hotel is detailed here. This hotel, however, was not the first — or the last time — these parties have benefited from council action.

Campaign contributions received by Lavonta Williams from parties associated with Key Construction. Williams will vote tomorrow whether to grant sales tax forgiveness worth $703,017 to some of these donors.Campaign contributions received by Lavonta Williams from parties associated with Key Construction. Williams will vote tomorrow whether to grant sales tax forgiveness worth $703,017 to some of these donors. (Click for larger view.)

Campaign finance reports filed by two incumbent candidates illustrate the lengths to which Key Construction seeks to influence council members. Wichita City Council Member James Clendenin (district 3, southeast and south Wichita) and Wichita City Council Member Lavonta Williams (district 1, northeast Wichita) received a total of $7,000 from Key Construction affiliates in 2012. Williams received $4,000, and $3,000 went to Clendenin. For Williams, these were the only contributions she received in 2012.

A table of campaign contributions received by city council members and the mayor from those associated with the Ambassador Hotel is available here.

Wichita mayor Carl Brewer with major campaign donor Dave Wells of Key Construction. Brewer will vote tomorrow whether to grant a company Wells is part owner of sales tax forgiveness worth $703,017.

This environment calls out for campaign finance reform, in particular laws that would prohibit what appears to be the practice of pay-to-play at Wichita City Hall.

There was a time when newspapers crusaded against this type of governance. Unfortunately for Wichitans, the Wichita Eagle doesn’t report very often on this issue, and the editorial board is almost totally silent. Television and radio news outlets don’t cover this type of issue. It’s left to someone else to speak out.

Carl Brewer: The state of Wichita, 2013

Wichita Mayor Carl Brewer, State of the City Address, January 29, 2013

Much like President Barack Obama in his recent inaugural address, Wichita Mayor Carl Brewer displayed his collectivist instincts in his “State of the City” address for 2013. His speech, as prepared, may be read here.

Opening, the mayor said “Wichita has overcome great challenges in the past and will overcome these as well, but we’ll need to work together.”

Near the close, the mayor said “THE TIME FOR ACTION IS NOW! We have reached a point where we MUST come together as a community, and create a plan that defines our priorities and the City we are to become.” And then: “For all of our differences, I have never doubted this community’s ability to come together and protect what matters most.” (The capitalization is in the mayor’s prepared text.)

But what’s really important to Wichita is economic development. Regarding that, Brewer said this:

As we struggle to compete for new businesses and new jobs, especially in light of job losses in aviation, we must face the reality that we are competing with other cities that offer economic incentives for business development and expansion. If we want to be IN the game, we need to PLAY the game, but we have no dedicated funding source for economic development. If we’re serious about finding new jobs for our people — and I am — we must change this scenario as soon as possible. Where will those incentive dollars come from? (Capitalization, again, is from the original.)

The idea of a dedicated funding source for economic development is something that many in Wichita would support. Many would oppose it, too. But instead of just lobbing rhetorical questions (Where will those incentive dollars come from?), the mayor should give us some answers. Or, at least make a specific proposal. Does the mayor recommend a sales tax increase? Or allocating specific levels of property tax to economic development? (The city is doing this on a temporary basis.) Or asking the state legislature to fund Wichita’s economic development, as we insist the legislature fund our airline subsidy program?

Whatever it is, Mayor Brewer, give us some specific ideas as to how you want to raise this money, and how you would spend it.

It’s that spending, I think, that people in Wichita have concern over. The cumulative record of Brewer, the city council, and city bureaucratic staff hasn’t inspired trust and confidence. Giving the city additional dollars to spend on economic development is not a wise investment.

For example, the mayor says that subsidizing downtown development is good economic development strategy. But we see the mayor and nearly all council members voting to give an overpriced no-bid contract to their significant campaign contributors. This happened despite the company’s large cost overruns on previous no-bid contracts awarded by the city. Is that good economic development practice?

We see the city council sitting in a quasi-judicial role, adjudicating the award of an airport construction contract when one of the parties is a significant campaign contributor. In fact, Key Construction — the company that prevailed in that decision — through its principals and executives, was the sole source of campaign funds raised by Lavonta Williams (district 1, northeast Wichita) in 2012 as she prepared to run for reelection this spring.

Key’s executives also contributed heavily to James Clendenin (district 3, southeast and south Wichita) last year. He’s running this spring, too.

At the time this airport contract was being handled, Council Member Jeff Longwell (district 5, west and northwest Wichita) was campaigning for the Sedgwick County Commission. Campaign finance reports revealed contributions from parties associated with Walbridge, a Michigan construction company. Why would those in Michigan have an interest in helping a Wichita City Council member fund his campaign for a county office? Would the fact that Walbridge is a partner with Key Construction on the new airport terminal, and that Longwell would be voting on that contract, provide a clue?

Or: A movie theater owner and business partners contribute to the mayor’s (and other) campaigns. Mayor and council vote to give a no-interest and low-interest loan and tax breaks to theater owner and his partners. Mayor goes into barbeque sauce business. Mayor’s barbeque sauce is now sold at movie theater.

Doesn’t Carl Brewer see anything wrong with this? Don’t his advisors tell him that this creates the appearance of impropriety? Does the mayor consider whether these actions make a positive impression on those who might want to invest in Wichita?

We see the city awarding economic development incentives that were not necessary for the project to proceed. It took a special election to teach the mayor and council that lesson. By the way, that unneeded and rejected incentive was awarded to the significant campaign contributors of Mayor Brewer and most council members.

We see the city taking credit for building up the tax base, yet giving away tax revenue in the form of property tax abatements, IRBs, tax increment financing, and STAR bonds.

The bureaucratic missteps: The Southfork TIF district is just the latest example.

The lack of respect for citizens’ right to know how taxpayer funds are spent is another troubling aspect of Brewer’s tenure as mayor. None of the words “accountability,” “transparency,” or “open government” were mentioned in the mayor’s address this year, as they have been in the past. No sense in calling attention to an area where the city has failed, I suppose.

All this is done in the name of economic development and jobs. But Wichita is underperforming Kansas and the nation in these areas. Under Brewer’s leadership, however, we are overachieving in the advancement of cronyism and its ills.

The record indicates that our officeholders, and those who advise them, are not worthy of our trust, and certainly not more taxes for economic development.

After last year’s State of the City speech, I noted “Wichita’s mayor is openly dismissive of economic freedom, free markets, and limited government, calling these principles of freedom and liberty ‘simplistic.’ Instead, his government prefers crony capitalism and corporate welfare.”

I also wrote: “Relying on economic freedom, free markets, and limited government for jobs and prosperity means trusting in free people, the energy of decentralized innovation, and spontaneous order. A government plan for economic development is the opposite of these principles.”

This year, the outlook for economic freedom and limited government in Wichita is gloomier than ever before. The door for those who wish to profit through cronyism is wide open. We’ll have to hope that, somehow, Wichita can learn to thrive under this regime.

Wichita’s $60 million gift to Spirit Aerosystems — not

When I read that Wichita had invested nearly $60 million in its Spirit AeroSystems plant, I thought I must have been napping during a city council meeting. Instead, the lede of the story in the Tulsa World newspaper was a misstatement of the mechanism of Industrial Revenue Bonds (IRBs).

The News reported “News that the city of Wichita is moving to invest nearly $60 million in its Spirit AeroSystems plant has Vision2 backers warning that Tulsa’s aerospace jobs are at risk of poaching by other cities.”

A Tulsa television news report offered similar reporting: “… after the City of Wichita, Kansas offered roughly $60 million in incentives to try and steal Spirit Aerosystems away from Tulsa.”

When news stories cover IRBs, the stories usually focus on the amount of the bonds, as in these two examples. That’s unfortunate, as the amount of the bonds is really a minor component of the story.

You see this misunderstanding revealed in comments left to newspaper articles reporting the issuance of IRBs, where comment writers complain that the city shouldn’t be in the business of lending companies money.

This confusion hides the reason why IRB transactions take place, which is tax avoidance. That’s the real story of Industrial Revenue Bonds: Companies escape paying the property and sales taxes that you and I — as well as most business firms — must pay.

Reading the city council agenda packet regarding the IRB issue tells the story. The city is not lending Spirit money. In fact, no one is, according to the city document: “Spirit AeroSystems, Inc. intends to purchase the bonds itself, through direct placement, and the bonds will not be reoffered for sale to the public.”

Also, the city has no obligation to pay the bondholders should Spirit default. This is a moot point in this case, as the issue of the bonds is also the buyer. But this is the case with all IRBs.

It’s not uncommon for the issuing company to buy the bonds. So why issue the bonds? The agenda packet has the answer: “The bond financed property will be eligible for sales tax exemption and property tax exemption for a term of ten years, subject to fulfillment of the conditions of the City’s public incentives policy.”

City documents didn’t give the amount of tax Spirit will avoid paying, so we’re left to surmise. Bonds could be issued up to $59.5 million. Taxable business property of that value would generate an annual tax bill of around $1.8 million per year, but Spirit would not pay that for up to ten years. If all the purchased property was subject to sales tax, that one-time tax exemption would be $4.3 million. These are the upper bounds of the tax savings Spirit Aerosystems may receive. Its actual savings will probably be lower, but still substantial.

These numbers are the economic benefit of the bonds to Spirit, and the opportunity cost of the bonds to taxing jurisdictions. The $60 million “investment” or “incentive” reported by two Tulsa news sources is incorrect.

Industrial Revenue Bonds, a confusing program

IRBs are a confusing economic development program. It sounds like a loan from the city or state, but it’s not. The purpose is to convey tax avoidance.

Here’s language from the Wichita ordinance that was passed to implement the bonds: “The Bonds, together with the interest thereon, are not general obligations of the City, but are special obligations payable (except to the extent paid out of moneys attributable to the proceeds derived from the sale of the Bonds or to the income from the temporary investment thereof) solely from the lease payments under the Lease, and the Bond Fund and other moneys held by the Trustee, as provided in the Indenture. Neither the credit nor the taxing power of the State of Kansas or of any political subdivision of such State is pledged to the payment of the principal of the Bonds and premium, if any, and interest thereon or other costs incident thereto.”

So no governmental body has obligations to pay the bondholders in case of default. But this language hints at another complicating factor of IRBs: The city actually owns the property purchased with the bond proceeds, and leases it to Spirit. Here’s the preamble of the ordinance: “An ordinance approving and authorizing the execution of a lease agreement between Spirit Aerosystems, Inc. and the City of Wichita, Kansas.”

Other language in the ordinance is “WHEREAS, the Company will acquire a leasehold interest in the Project from the City pursuant to said Lease Agreement.” There’s other language detailing the lease.

We create this imaginary lease agreement — and that’s what it is, as it doesn’t have the same purpose and economic meaning as most leases — for what purpose? Just so that certain companies can avoid paying taxes.

The city does have another program that allows it to exempt these taxes under some circumstances without having to issue bonds. In this case the goal of the program is laid clear: tax avoidance.

IRBs are a confusing program that obfuscates the actual economic transaction. That’s not good public policy, whether or not you agree with the concept of selective tax abatements as economic development.

Similarly, a principle of good tax policy is that those in similar situations should face the same laws. IRBs are contrary to this.

While we can understand that citizens — with their busy lives — may not be informed or concerned about the complex workings of IRBs, we should expect more from our elected (and paid) officials. But we find often they are not informed.

As an example, in 2004 the Wichita Eagle reported: “In July, the council approved industrial revenue bond financing and a $1.7 million property tax abatement for Genesis Health Clubs. Council members later said they didn’t realize they had also approved a sales-tax break.” (Kolb goal : Full facts in future city deals, September 26, 2004)

Here we see Wichita City Council members not aware of the basic mechanism of a major city program that is frequently used. This is in spite of an informative city web page devoted to IRBs which prominently states: “Generally, property and services acquired with the proceeds of IRBs are eligible for sales tax exemption.”

Yes, that page was active in 2004.

Wichita revises economic development policy

The City of Wichita has passed a revision to its economic development policies. Instead of promoting economic freedom and a free-market approach, the new policy gives greater power to city bureaucrats and politicians, and is unlikely to produce the economic development that Wichita needs. Sedgwick County will also consider adopting this policy.

The city wants to have policies that everyone can understand, but it also wants flexibility to waive policies and guidelines in light of mitigating factors.

Here’s an illustration of how difficult it is to adhere to policies. The draft proposal of the new economic development policy states: “The ratio of public benefits to public costs, each on a present value basis, should not be less than 1.3 to one for both the general and debt service funds for the City of Wichita; for Sedgwick County should not be less than 1.3 overall.”

The policy also states that if the 1.3 to one threshold is not met, the incentive could nonetheless be granted if two of three mitigating factors are found to apply. But there is a limit, according to the policy: “Regardless of mitigating factors, the ratio cannot be less than 1.0:1.”

Last August the city council passed a multi-layer incentive package for Douglas Place, which is better known as the Ambassador Hotel and environs. Here’s what the material accompanying the letter of intent that the council passed on August 9, 2011 held: “As part of the evaluation team process, the WSU Center for Economic Development and Business Research studied the fiscal impact of the Douglas Place project on the City’s General Fund, taking into account the requested incentives and the direct, indirect and induced generation of new tax revenue. The study shows a ratio of benefits to costs for the City’s General Fund of 2.62 to one.

So far, so good. 2.62 is greater than 1.3. But the policy applies to both the general fund and the debt service fund. So what about the impact to the debt service fund? Here’s the complete story from the WSU CEDBR report:

                                   Cost-benefit ratio
City Fiscal Impacts General Fund         2.63
City Fiscal Impacts Debt Service         0.83
City Fiscal Impacts                      0.90

The impact on the debt service fund is negative, and the impact in total is negative. (A cost-benefit ratio of less than one is “negative.”)

Furthermore, the cost of the Ambassador Hotel subsidy program to the general fund is $290,895, while the cost to the debt service fund is $7,077,831 — a cost factor 23 times as large.

So does the city have the wherewithal to stick to the policies it formulates? In my experience, not always. In this case, the city didn’t make this negative information available to the public. It was made public only after I requested the report from WSU CEDBR. It is not known whether council members were aware of this information when they voted.

There are, however, other factors that may allow the city to grant an incentive: “In addition to the above provisions, the City Council and/or County Commission may consider the following information when deciding whether to approve an incentive.” A list of 12 factors follows, some so open-ended that the city can find a way to approve almost any incentive it wants.

At yesterday’s city council meeting, when explaining the policy to the council, Wichita economic development chief Allen Bell said there should be “rational criteria” for when exceptions can be considered. We should also ask for truthfulness and complete disclosure, including negative factors.

When considering cost-benefit ratios, we also need to realize that the “benefits” in the calculation are in the form of increased tax revenue paid to the city, county, etc. There is no consideration of actually rewarding the taxpayers that pay for — and assume the risk of — economic development incentives. Furthermore, these benefits are not like profits that business firms earn. Instead, they are in the form of taxes that government takes.

Speculative industrial buildings

A new feature of the policy implements property tax forgiveness for speculative industrial buildings. The proposed plan had a formula that grants a higher percentage of tax forgiveness as building size increases, but the council eliminated that and voted a 100 percent tax abatement for all buildings larger than 50,000 square feet.

Given tax costs and industrial building rents, this policy gives these incentivized buildings a cost advantage of about 20 percent over competitors. That’s very high, and makes it difficult for existing buildings to compete. Probably no one will build these buildings unless they qualify for and receive this incentive.

While the city hopes that these incentivized buildings will generate new jobs in Wichita, there appears to be nothing in the policy that prevents existing companies in Wichita from moving to these buildings. This simply moves jobs from one location to another, and would harm existing landlords.

While the policy was designed to encourage large buildings instead of small, there appears to be no limitation on the size of space someone can rent. A building 100,000 square feet in size gets 100 percent tax abatement. But the space could be rented out in smaller parcels to multiple tenants, making it easy to steal local tenants from another landlord.

Finally, are pre-built facilities really necessary? Wind energy firms in Newton and Hutchinson built their plants from ground up.

Tax costs

Since many of the economic development incentives involve relief from paying taxes, we have to ask whether our tax levels and tax policies are discouraging business investment. Now we have an answer.

This year the Tax Foundation released a report that examines the tax costs on business in the states and in selected cities in each state. The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms. Wichita was cited in the report, and the city did not do well. See Kansas and Wichita lag the nation in tax costs.

Wichita’s record on economic development

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

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

Rarely mentioned are the costs of creating these jobs — the costs of the incentives and the cost of the economic development bureaucracy. These costs have a negative economic impact on those who pay them, meaning that economic activity and jobs are lost somewhere else in order to pay for the incentives.

Also, at least some of these jobs would have been created without the efforts of GWEDC. All GWEDC should take credit for is the marginal activity that it purportedly created. Government usually claims credit for all that is good, however.

The targeted economic development efforts of governments like Wichita and Sedgwick County 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 and Sedgwick County policy, do we really know which industries should be targeted? Are we sure about the list of eligible business activities that subsidies can be used to pay? Is 1.3 to one really the benchmark we should seek, or we be better off and have more jobs if we insisted on 1.4 to one or relaxed the requirement to 1.2 to one?

This lack of knowledge, however, does not stop governments from creating policies for the awarding of incentives. This “active investor” approach to economic development is what has led to companies escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

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

In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and other cities engage in: “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 and other economic development programs 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. Wichita and Sedgwick County are moving in the wrong direction.

Kansas reasonable: We’re number 47 (and 48)

What is the record of those who promote a reasonable, balanced, and responsible approach to Kansas government? These are terms that Kansas moderate Republicans use as they seek re-election in the August primary election. But this approach has lead to slow economic growth and economic development programs that don’t seem to be producing the results we want. Now we know part of the reason why the “Kansas reasonable” approach hasn’t worked well: Our tax rates are high — way too high.

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

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

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

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

There are more categories. Kansas ranks well in none.

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.”

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

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

Tax costs block progress in Kansas

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

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

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

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

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

There are more categories. Kansas ranks well in none.

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

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

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

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

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

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

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

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

More evidence of failure

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

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

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

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

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

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

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

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

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

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

Kansas and Wichita lag the nation in tax costs

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

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

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

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

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

There are more categories. Kansas ranks well in none.

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

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

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

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

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

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

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

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

More evidence of failure

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

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

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

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

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

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

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

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

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

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

Carl Brewer: State of the City for Wichita, 2012

Last night Wichita Mayor Carl Brewer delivered his annual State of the City Address. The text of the address may be read at State of the City Address.

In his speech, Brewer several times criticized those who act on “partisan agendas.” This is quite a remarkable statement for the mayor to make. Partisan usually refers to following a party line or platform. The mayor didn’t mention who he was criticizing, but it’s likely he was referring to myself and others like John Todd, Susan Estes, and Clinton Coen, as we appear regularly before the city council, usually in disagreement with the mayor and his policies.

What’s remarkable is that the council, even though it has four Republican members, almost always votes uniformly with Democrat Brewer and the other two politically liberal members of the council. The only exception is Michael O’Donnell (district 4, south and southwest Wichita), who is often in a minority of one voting in opposition to the other six. The other Republican members — Pete Meitzner (district 2, east Wichita), James Clendenin (district 3, southeast and south Wichita), and Jeff Longwell (district 5, west and northwest Wichita) — routinely vote in concert with the Democrats and liberals on the council.

Remarkable also are the many members of the business community who appeal to the council for subsidies, increased government intervention, and more central planning from city hall: many of these are Republicans. Conservative Republicans, many have personally told me.

This describes a lack of partisanship. Most of the mayor’s critics, such as myself, are more accurately characterized not as acting along party lines, but as acting on their belief in economic freedom, free markets, and limited government.

Economic development

The mayor said that the city’s efforts in economic development had created “almost 1000 jobs.” While that sounds like a lot of jobs, that number deserves context.

According to estimates from the Kansas Department of Labor, the civilian labor force in the City of Wichita for December 2011 was 192,876, with 178,156 people at work. This means that the 1,000 jobs created accounted for from 0.52 percent to 0.56 percent of our city’s workforce, depending on the denominator used. This miniscule number is dwarfed by the normal ebb and flow of other economic activity.

The mayor did not mention the costs of creating these jobs. These costs have a negative economic impact on those who pay these costs. This means that economic activity — and jobs — are lost somewhere else in order to pay for the incentives.

The mayor’s plan going forward, in his words, is “We will incentivize new jobs.” But under the mayor’s leadership, this “active investor” policy has produced a very small number of jobs, year after year. Doubling down on the present course is not likely to do much better.

But there are those who disagree, despite all evidence to the contrary. Sedgwick County Commissioner Dave Unruh — a conservative Republican, for those keeping track of partisanship — recently called for a “deal-closing” fund of $100 million. A funding source of this magnitude would undoubtedly require a new tax. There are many who feel there should be a new sales tax devoted to economic development and downtown Wichita development. We should not be surprised to see such a proposal emerge, and not be surprised that civic and business institutions will support it.

The mayor repeatedly said that the city has been “courageous.” In reality, Wichita does about the same as everyone else. But there is a way Wichita could distinguish itself among cities.

Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business has made a convincing case that Kansas needs to move away from the “active investor” approach to economic development. This is where government decides which companies will receive special treatment, be it in the form of tax abatements, tax credits, grants, tax increment financing, community improvement district special taxes, and other forms of subsidy. Being an “active investor” has been the approach of the City of Wichita, and according to the mayor’s vision, this plan is to be stepped up in the future.

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.”

Later, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and Kansas rely on for economic development: “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.”

We need business and political leaders in Wichita and Kansas who can see beyond the simplistic imagery of a groundbreaking ceremony and can assess the effect of our failing economic development policies on the entire community. Unfortunately, we don’t have many of these — and Mayor Brewer leads in the opposite direction.

Critical of misinformation campaigns

In his speech, Brewer was critical of those who “spread misinformation.” He was not specific as to who he’s criticizing, and I wouldn’t expect him to name specific people in a speech like this.

But when the mayor criticizes people for being uninformed or misinformed, he needs to look first at himself. He and city staff also need to engage their critics and be responsive to requests for information.

As an example of misinformation, the mayor cited this evidence that city policies are working: “The proposed Ambassador Hotel with a 3-to-1 private to public investment ratio.”

The city arrived at this ratio by employing a very narrow definition of public investment. When tax credits from the State of Kansas and federal government as well as other sources of public subsidy are accounted for, the ratio drops to less than two to one.

It’s true that considering only the city’s artificially narrow definition of public funding, the ratio does reach three to one. But Wichitans also have to pay part of the costs of the tax credits and other subsidies.

The city has also been less than honest in its promotion of the cost-benefit ratio for the Ambassador Hotel project. The city officially cites a cost-benefit study produced by Wichita State University Center for Economic Development and Business Research. Part of that study produced a cost-benefit ratio of 2.63 to one, and that’s what the city uses as justification for its participation in the project.

But the full story of the costs and benefits of this project are contained in these numbers from the WSU analysis:

                                    ROI   Cost-benefit ratio
City Fiscal Impacts General Fund  163.2%        2.63
City Fiscal Impacts Debt Service  -17.2%        0.83
City Fiscal Impacts                -9.8%        0.90

WSU evaluated the impact of the Ambassador Hotel on the City of Wichita’s finances in two areas: The impact on the city’s General Fund, and separately on the city’s Debt Service Fund. The two were combined to produce the total fiscal impact, which is the bottom line in this table.

The City of Wichita cites only the positive impact to the General Fund figure. But the impact on the Debt Service fund is negative, and the impact in total is negative.

It’s true that the ROI and cost-benefit ratio for the General Fund indicate a positive investment return. But the cost of the Ambassador Hotel subsidy program to the General Fund is $290,895, while the cost to the Debt Service Fund is $7,077,831 — a cost factor 23 times as large.

Citizens ought to ask: Who is spreading misinformation?

It is difficult to get a response from city hall regarding questions like these. So far city economic development director Allen Bell has not agreed to meet with representatives of Tax Fairness for All Wichitans, a group opposed to the subsidies for the Ambassador Hotel. (I am part of that group.) The city and its allied economic development groups will not send representatives to participate in a public forum on this matter.

Simplistic answers

The mayor criticized those who “provide simplistic answers to very complicated challenges.” He may be — we don’t really know — referring to those like myself who advocate for free market solutions to problems rather than reliance on government. Certainly the mayor believes that government must act — “courageously” he said — to confront our problems.

A problem with the mayor’s plan for increased economic interventionism by government is the very nature of knowledge. In a recent issue of Cato Policy Report, Arnold King wrote:

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.

Relying on free market solutions for economic growth and prosperity means trusting in the concept of spontaneous order. That takes courage. It requires faith in the values of human freedom and ingenuity rather than government control. It requires that government officials let go rather than grabbing tighter the reins of power.

Mayor Brewer, five of six city council members, and the city hall bureaucracy do not believe in these values. Wichita’s mayor is openly dismissive of economic freedom, free markets, and limited government, calling these principles of freedom and liberty “simplistic.” Instead, his government prefers crony capitalism and corporate welfare. This is the troubling message that emerges from Brewer’s State of the City address.

Boeing departure presents challenge for Wichita and Kansas

The announcement of the departure from Wichita of Boeing presents challenges for the Wichita area and the state of Kansas. The response of government officials over the next few years will need to depart from past and present practice if Wichita wants to build a dynamic and sustainable economy. With a few exceptions, our current elected officials will likely proceed with targeted economic development, and Wichita and Kansas will miss an opportunity to implement meaningful and lasting change.

Aid offered to Boeing

Boeing has been the recipient of much targeted economic development incentives over the years. From 1979 to 2007, Boeing received tax abatements through the industrial revenue bond process worth $658 million, according to a compilation provided by the City of Wichita.

In his remarks, Kansas Representative Jim Ward said “Boeing is the poster child for corporate tax incentives.” Kansas Legislative Research has compiled a list of legislative measures that benefited Boeing, which may be viewed at Kansas and Boeing. This document contains only those measures passed by the state, not by cities and counties to help Boeing.

Some of the legislation on the list really should not be included, as it benefited all companies, not just Boeing. An example is the 2006 machinery and equipment property tax exemption. The author correctly notes that Boeing often received targeted relief from this tax through the IRB process. Still, this is an example of good economic policy that affects all businesses, which is important.

Similarly, the repeal of the franchise tax — another bill on this list — benefited not only Boeing, but everyone, and should not be on this list.

An example of legislation crafted specifically for Boeing was 2003’s Economic Development and Revitalization Reinvestment Act, which became statute 74-50,136. This law awarded Boeing with $80 million, the money to be repaid by the withholding taxes of Boeing’s employees — in other words, at no cost to Boeing. This bill passed the Kansas House of Representatives by a vote of 107 to 6, with Rep. Ward voting with the majority to pass.

Now, Ward says “We will be less trusting in the future of corporate promises.”

The danger going forward

The danger we in Kansas, and specifically the Wichita area, face is the overwhelming urge of politicians to be seen doing something in response to the departure of Boeing. Wichita Mayor Carl Brewer, in his statement, called for the community to “launch an aggressive campaign of job recruitment and retention.”

It is likely that we will become susceptible to large-scale government interventions in an attempt to gain new jobs. Our best course would be to take steps to make Kansas and Wichita an inviting place for all firms to do business. The instinct of politicians such as Brewer, however, is to take action, usually in the form of targeted incentives as a way to spur economic development.

We’ve seen the results of this. Not only with Boeing, but also in a report showing that Wichita has declined in economic performance compared to other areas.

These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This, however, does not stop governments from creating policies for the awarding of incentives. It also doesn’t stop the awarding of incentives willy-nilly without a policy, as the Wichita City Council has done for a hotel.

This “active investor” approach to economic development is what has led to Boeing escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

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

In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita is sure to undertake in response to the loss of Boeing: “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.

Kansas tax policy

One person reminded me of this: “The real point about Boeing’s departure that no one is discussing is the fact that the positions leaving here are going to three states: Oklahoma, Texas, and Washington. Two of these states have no income tax while the third, Oklahoma, has tight limits on both state and local tax increases while reducing state income tax rates in recent years.”

While Governor Brownback and many members of the legislature want to reduce income rates in Kansas to make our state more competitive for business, there is much opposition. It has been thought that the plan would be to gradually reduce income tax rates over several years. If anything, the departure of Boeing means we should act to reduce tax rates sooner rather than later.

Those who oppose reducing taxes raise the problem of how to replace the income lost due to lower tax rates. They fear that the state will raise the sales tax, or that local governments such as cities, school districts, and counties will raise sales or property taxes.

But the answer should be: Don’t replace the missing income. Instead, spend less at the state level. That will improve the Kansas economy as more money will be left in the private sector instead of being transferred to an unproductive and wasteful government. And if the state can be successful in nurturing a competitive business and economic climate, that will bring more jobs, which will reduce the demand on the state for various social services. More jobs mean more revenue to the state in other forms besides income taxes, too.

Our challenge is this: Boeing said that costs in its San Antonio, Texas facility are 70 percent lower than in Wichita. We need to figure out why this discrepancy — if it is real — exists. We need to eliminate this differential cost of doing business in Kansas. The instinct of politicians and bureaucrats will be to offer targeted relief to the companies they believe deserve it. For those few companies, perhaps this differential can be reduced.

But this is the wrong policy. All business firms deserve relief, and by doing that we can create a dynamic Kansas economy so that we all will prosper.

Wichita falls in economic performance ranking

Recently the Milken Institute released a report examining the economic performance of metropolitan areas in the United States. The report, titled Best-Performing Cities 2011, describes itself as “The annual Best-Performing Cities index provides an objective, comprehensive measure of economic performance across metropolitan areas of the country.”

Specifically, this report “measures growth in jobs, wages and salaries, and technology output over a five-year span (2005–2010 for jobs and technology output and 2004-2009 for wages and salaries) to adjust for extreme variations in business cycles.”

On the composition of the index, the report states: “Employment growth is weighted most heavily in the index because of its critical importance to community vitality. Wage and salary growth measures the quality of the jobs being created and sustained. Technology output growth is another key element of economic vibrancy.”

Among the top 200 metropolitan areas, Wichita ranked 104th in overall performance this year, down from 72nd the year before.

In the category of one-year job growth from 2009 to 2010, Wichita ranked 199th out of the 200 largest metropolitan areas. For five-year job growth Wichita did better, ranking 63rd of 200.

Interestingly, Wichita ranks high — ninth out of 200 — in a measure of high-technology industry concentration. The description of this measure in which Wichita ranks highly is: “High-tech location quotients (LQs), which measure the concentration of the technology industry in a particular metro relative to the national average, are included to indicate a metro’s participation in the knowledge-based economy.”

Reports such as these can be useful, but can also be misunderstood or misapplied — or sometimes incorrect. For example, Wichita isn’t usually thought of as a center of concentration in high-tech industry. In a 2011 ranking of the best cities for high tech jobs produced by Joel Kotkin, Wichita didn’t make the list, which included 51 cities. That list was based on “Employment in 45 high technology manufacturing, services, and software industry sectors.”

Some will dismiss Wichita’s fall in rankings because of our heavy reliance on aviation, particularly business aviation, which was hit very hard by the recession.

Wichita — and Kansas — can take note, however, of the high performance by cities in Texas. Four of the top five are in Texas, as are nine of the top 25. There is a movement in Kansas to reduce the state’s income tax rates to make Kansas more attractive to business. Texas has no state income tax.

We should also note that Wichita’s ranking fell at a time of vigorous economic development efforts by Wichita and Sedgwick County, the major components of the Wichita metropolitan area. In his State of the City address this year, Wichita Mayor Carl Brewer spoke about Wichita’s economic development efforts. The mayor said that the city’s efforts saved 745 jobs and created 435 jobs, for a total impact of 1,180 jobs. To place those numbers in context, we note that American Community Survey data from the U.S. Census Bureau indicates the labor force in Wichita is 191,760 persons. This means that the economic development efforts of the City of Wichita affected a number of jobs equivalent to 0.6 percent of the city workforce.

This small number of jobs impacted by the city’s economic development initiatives is dwarfed by other economic events. Additionally, these efforts by the city are counterproductive — if our interest is creating a dynamic economy in Wichita. Analysis by the Kauffman Foundation finds that it is new firms — young firms, in other words — that are the primary drivers of job creation. But the economic development policies of cities like Wichita are definitely biased toward older, established firms. The cost of these economic development efforts, which are paid for by everyone — including young businesses firms struggling to grow — means that we prop up unproductive companies at the expense of the type of firms we need to really grow the Wichita economy.

Wichita is not the only component of the Wichita metropolitan area, but is certainly the driving force in the region’s economy.

Reports such as these are evidence that the economic development policies of Wichita and Sedgwick County are not working well. We need to distinguish ourselves somehow and produce greater economic growth. Kansas Governor Sam Brownback released an economic development plan that sounded some of the right notes, but in practice his administration is relying on more of the same targeted subsidies that most states and cities use.

Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business has made a convincing case that Kansas needs to move away from the “active investor” approach to economic development. This is where government decides which companies will receive special treatment, be it in the form of tax abatements, tax credits, grants, tax increment financing, community improvement district special taxes, and other forms of subsidy. Being an “active investor” is the approach of the City of Wichita.

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.”

Later, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and Kansas rely on for economic development: “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.”

We need business and political leaders in Wichita and Kansas who can see beyond the simple imagery of a groundbreaking ceremony and can assess the effect of our failing economic development policies on the entire community. Unfortunately, we don’t have many of these.

Bombardier Learjet should pay just a little

In a presentation made to economic development officials, aviation manufacturer Bombardier LearJet speaks with pride of its investment in Kansas. But for the present project before the Sedgwick County Commission today, it appears that the company is planning to make no investment at all.

Bombardier LearJet financing plan. Later the document states “Requesting State of Kansas support to help find gap of $16M.”

Taking the total project cost of $52.7 million and subtracting the government funding already secured, there is a gap of $16.1 million. Instead of being grateful for the $36.6 million in subsidy already (or about to be) secured, the company is asking for more: Bombardier LearJet is asking the State of Kansas to fund this gap.

What happened to capitalism?

What happened to companies funding even a portion of their capital requirements?

The proponents of economic development incentives often make their case that the incentives are just a “sweetener” to secure the deal. But in the present case with Bombardier LearJet, local governments — the City of Wichita, Sedgwick County, and the State of Kansas — are being asked to pay for the entire meal.

We in Kansas and Sedgwick County are already doing much for Bombardier LearJet. It is likely that we will agree to let LearJet forgo paying any property tax at all — the same property taxes that other business struggle to pay. These businesses compete with LearJet for labor and other things they need.

The State of Kansas is allowing the income taxes of Lear Jet employees to be used for the exclusive benefit of that company.

Both of these actions call into question the fundamental question of fairness in taxation: that all pay their fair share. When companies like the applicant company ask to be excused from the burden of taxation, others have to pay.

If you are not persuaded by this appeal to principle, there is evidence that chasing the big catch is often counterproductive, and that the net economic effect of these deals is overestimated. One study finds: “Large-employer businesses have no measurable net economic effect on local economies when properly measured.”

Perhaps the worst thing we take away from this episode is that our state is making no progress towards a concept developed by Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business. He has made a convincing case that Kansas needs to move away from the “active investor” approach to economic development. This is where government decides which companies will receive special treatment, be it in the form of tax abatements, tax credits, grants, and other forms of subsidy. This is what we are doing with the present applicant, Bombardier LearJet.

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.”

Later, Hall writes this regarding “benchmarking” — the bidding wars for large employers we are considering today: “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.”

We need to move away from economic development based on this active investor approach. This commission needs to advocate for policies — in this chamber, at Wichita City Hall, and at the Kansas Statehouse — that lead to sustainable economic development. What we’re doing today is not sustainable.

A small and reasonable step towards this goal is to ask Bombardier LearJet to consider paying just $1 million themselves on a project with a cost of $52.7 million.

Wichita property taxes are high, leading to other problems

An ongoing study by the Minnesota Taxpayers Association tells us that Wichita has high business property taxes. This may be a reason why the Wichita City Council feels it is necessary to offer relief from these taxes, but it is not an effective economic development strategy.

The MTA study (50-State Property Tax Comparison Study) finds that for a business consisting of property and fixtures, the effective tax rate of business property in Wichita is 2.914 percent. The average nationwide is 1.940 percent. This means that these taxes in Wichita are 50.2 percent higher than the nationwide average.

The situation isn’t so bad when we consider a different business with machinery and equipment as part of its mix of assets, as Kansas has exempted that property from taxation. In one scenario, the effective tax rate is 1.598 percent, which is still 12.1 percent above the nationwide average of 1.426 percent. In another scenario where the proportion of business property that is machinery and equipment is very high, the effective tax rate for Wichita is only slightly above the national average.

The study finds that Wichita is out-of-step with the rest of the nation when it comes to the ratio of effective tax rates between business and home tax rates. The U.S. average for this value is 1.724, meaning that the effective tax rate for business property is 1.724 times that of residential property. For Wichita, the value is higher at 2.316.

Wichita as active investor

Last week’s grant by the Wichita City Council of tax relief to Pulse Systems in the amount of about $87,000 per year illustrates how the city’s high business property tax rates inhibit business investment. It’s either that, or the city succumbs to simple greed by those who are willing to ask the government for money and make empty threats in pleading their case.

That day the city also started down a path that will lead it to exempting Bombardier LearJet from paying $1,217,000 per year in property taxes.

I can understand that people such as these applicant companies want to escape paying high business property taxes. But the solution is not to do what the Wichita City Council does week after week: grant exemptions on a case-by-case basis. These exemptions amount to the council asking the people of Wichita to make specific investments in these companies. That’s because when the city grants exemptions from paying taxes, others have to pay. This may be a reason why our effective tax rate is so high — for those companies that do pay taxes.

The notion that the City of Wichita can decide which companies are worthy of tax exemptions and investment is an illustration of what economist Frederich Hayek called a “conceit.” It’s so dangerous that his book on the topic is titled “The Fatal Conceit.” The failure of government planning throughout the world has taught that it is through markets and their coordination of dispersed knowledge that we learn where to direct capital investment. It is simply impossible for this city government to effectively decide which companies Wichitans should invest their tax dollars in.

Locally, Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business has made a convincing case that Kansas needs to move away from the “active investor” approach to economic development. This is where government decides which companies will receive special treatment, be it in the form of tax abatements, tax credits, grants, and other forms of subsidy.

While many feel that Wichita and Kansas must offer incentives to be competitive with our cities and states, our leaders, most recently Lynn Nichols, president of the Wichita Metro Chamber of Commerce, routinely complain that Wichita doesn’t have as much incentives and cash to offer as do other locations. The “embracing dynamism” approach advocated by Hall and others provides a way to break out of this rat race and provide a sustainable foundation for economic growth in Wichita and Kansas.

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.”

Later, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and Kansas rely on for economic development: “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.'”

While it’s easy to see people going to work at a new large company, or an existing company that has expanded, we need to look at the effect on everyone in the city, county, or state. And when we do that, the research is not encouraging.

Echoing the findings of Hayek regarding the impossibility of government picking winning companies through its active investor approach, Hall writes: “Embracing dynamism starts with a change in vision. Simply stated, the state government of Kansas should abandon its prevailing policy vision of the State as an active investor in businesses or industries and instead adopt the policy vision of the State as a caretaker of a competitive ‘platform’ — a platform that seeks to induce as much commercial experimentation as possible. By way of analogy, the platform-caretaker vision says: The State of Kansas runs tournaments; it does not field players. Creating a platform to host world-class tournaments will attract world-class players. The platform will endure but players will come and go. The platform-caretaker vision implies that the state government need not commit scarce resources to the enormously difficult task of predicting the outcome of competition if it focuses on the much more manageable task of creating the platform on which competition takes place.”

We need business and political leaders in Wichita and Kansas who can see beyond the simple imagery of a groundbreaking ceremony and can assess the effect of our failing economic development policies on the entire community. Unfortunately, we don’t have many of these.

Paying for incentives

Something the Wichita City Council should consider implementing is a form of “pay-go.” This is where the city would reduce spending by the cost of economic development incentive.

The city, however, believes it has cost-benefit studies that purport that incentives pay for themselves. These studies, provided by Wichita State University Center for Economic Development and Business Research are not of the same type that a business makes, or that people make in their personal lives. There are not legitimate business investments that have a return of what the city council routinely accepts over any reasonable period of time, at least not without accepting huge risks.

The “benefit” that goes into these equations is in the form of future anticipated tax revenues. It simply recognizes that economic activity is good, and since government levies taxes based on economic activity, its tax revenues go up. This happens whether or not government claims responsibility for creating the economic activity.

More taxes being paid to the city doesn’t benefit the people of Wichita, and it’s they who have to pay in order so that the city can have increased tax revenues. It’s not beneficial to take more money out of the productive private sector for the purpose of feeding government.

Sedgwick County, Golf Warehouse, reveal shortcomings in procedure

Wednesday’s decision by the Sedgwick County Commission to grant a forgivable loan of $48,000 to The Golf Warehouse is yet another example of local government relying on corporate welfare as economic development, and exposes how little deliberation is given to making these decisions.

This subsidy was promoted by the county and TGW’s consultant as necessary to persuade the applicant company to expand its operations in Wichita rather than Indiana, where the company has other operations and had also received an offer of subsidy. The same argument had been made to the Wichita City Council in May 10th, and it was successful in persuading all council members but one to vote in favor of granting a forgivable loan of the same amount as the county.

At the county commission meeting, commissioners received a presentation by Leslie Wagner, Director of Project Management and Development for Ginovus, an economic development and site location advisory services firm working on behalf of TGW.

While The Golf Warehouse was started in Wichita by entrepreneurs, Wagner told commissioners that the company is now owned by Redcats, a Paris, France company. That acquisition took place in 2006, she said.

A focus of Wagner’s presentation was how large and successful an enterprise Redcats is, with $4.8 billion in annual sales revenue and over 14,000 employees. As to TGW specifically, Wagner said it offers the largest and broadest selection of golf products in the world, and has expanded to included baseball, softball, and soccer products.

Right away some might be inclined to ask why, with the company so large and successful, local governments find it necessary to prop up this company with public assistance.

According to Wagner, TGW will add 105 new employees by 2015, and the company’s average annual payroll by then will be $9,995,000.

The argument for subsidy

In her presentation, Wagner listed the incentives offered to TGW by both Indiana and Kansas. But she did not supply the value of each incentive, which makes the comparison largely meaningless. Additionally, the list of the incentives and subsidies offered by the State of Kansas was not complete. Further, some of the incentives offered by Indiana are already present in Kansas.

For example, one incentive offered by Indiana was an abatement on personal property tax, which Wagner indicated was a factor in favor of that state. But Kansas does not tax business personal property, that is, business machinery and equipment newly purchased, leased, or moved into Kansas. This ranges from desks, computers, and copiers to large pieces of machinery and equipment. The incentive offered by Indiana, therefore, is already in place in Kansas without companies needing to ask for it, and Wagner should not have included this as a distinguishing factor between Indiana and Kansas.

In addition, Kansas has added “expensing,” which allows businesses to depreciate purchases in one year instead of several, which reduces Kansas state income tax. As TGW expands and makes these purchases, it will be able to take advantage of this new provision in the Kansas tax code.

Wagner also mentioned an Indiana program called EDGE (Economic Development for a Growing Economy), which rebates employees’ state income tax withholding back to the company. We have that in Kansas, too. It’s called Promoting Employment Across Kansas (PEAK), and the range of situations where this program can be applied has been expanded by this year’s legislature. This, again, is an example where an incentive offered by Indiana and promoted by Wagner as a reason as to why the county must grant a subsidy of its own to TGW is already present in Kansas.

Another part of Wagner’s presentation that deserves a second look is her analysis of the economic impact of TGW. Wagner said that over ten years the payroll — the wages paid to its employees in Wichita — of TGW would be $100,623,437, with a “conservative” apportionment to the county of $50,311,718.

She then showed the commission a slide where she computed the return on the county’s investment. For the “return,” she used the $50,311,718 figure of payroll that she attributed to the county. For the “investment,” she used $96,000, which is the sum of the forgivable loans from both Wichita and Sedgwick County. (Why she used both entity’s investment but only county payroll, I don’t know.)

Her calculations from these numbers produced a return on investment of 524 percent. “If I were making an investment, that’s a phenomenal return, and I’d make that one all day long,” she told commissioners.

But her actual calculation should have been as follows ($50,311,718 – $96,000) / $96,000 * 100 = 52,308 percent for the rate of return, if she was looking to fluff up her numbers as much as possible.

But even that calculation wouldn’t make economic or financial sense. The $50,311,718 is returned over a period of 10 years, so the receipt of that money needs to be spread over that time. Then, since long time periods are involved, the returns in future years need to be discounted, because a dollar expected to be received in ten years is not worth as much as a dollar received this year. I made a few other assumptions and used Excel’s internal rate of return function to compute a rate of return of 5,241 percent.

This tremendous rate of return, of course, makes no economic sense either. The $50,311,718 used as the “return” to the county is not that at all. This money is wages paid to workers. It belongs to them, not to the county. True, the county will get some of that in the form of sales taxes these workers pay as they make purchases within the county, and perhaps in other forms of taxes. Using an estimate of that number would make sense on some level, and that is the type of reasoning the Wichita State University Center for Economic Development and Business Research uses to compute the cost-benefit figures the city and county often rely upon in making decisions.

But the figures and calculations Wagner used to make the case for TGW make absolutely no economic or financial sense. Worse than being merely absurd, they are deceptive. Compounding the error, elected officials such as commission chair Dave Unruh cited them as a factor in making his vote in favor of granting the forgivable loan.

Completing her presentation, Wagner said “Perhaps as important, it’s goodwill. … Does the state want us to stay, does the community want us to stay, and are they willing to help us grow?” Brad Wolansky, CEO of TGW, said the loan is part of the “element of partnership” between the county and TGW, which he said was indicative of the county’s support. This is the same attitude expressed at the Wichita City Council meeting: Many of these companies requesting incentives and subsidies believe they deserve some sort of reward for investing in Wichita and creating jobs. The profits of entrepreneurs or capitalists are no longer sufficient, it seems, for some companies.

In remarks from the bench, Sedgwick County Commissioner Richard Ranzau questioned the need for this incentive, citing the recent example of a Save-A-Lot store which will be built by a developer without incentives, after the original developer failed to acquire all the incentive he asked for. Video of his remarks and an exchange with Wagner is below.

In his remarks, Commissioner Jim Skelton said this decision is a “no-brainer,” and that he was proud to do this for the community. Chairman Unruh said “we’re competing with someone else for this company.” He referenced the “great return” on the county’s investment, and that he could not find a reason not to support it.

All commissioners except Ranzau voted to grant the forgivable loan, with Karl Peterjohn absent.

City and county information not complete

The forgivable loan subsidy granted by both Wichita and Sedgwick County is not the only subsidy TGW will receive. An inquiry to the Kansas Department of Commerce indicates that from the state of Kansas, TGW will receive $125,000 from the Kansas Economic Opportunity Initiatives Fund, $125,000 in Kansas Industrial Retraining, $50,000 in Kansas Industrial Training, $96,000 in sales tax savings, $315,918 in personal property tax savings, and $623,796 from the High Performance Incentive Program, for total incentives from the state of $1,310,714.

These state incentives were not mentioned by the county. The value is also much higher than the City of Wichita reported in its material for its May 10th meeting when the city approved its forgivable loan to TGW. At that time, city documents reported the value of state subsidies at $275,000, a figure just 21 percent of the value reported by the Department of Commerce.

Corporate welfare, again

This episode, where subsidy is heaped on a company who presents a threat — real or imagined — of leaving Wichita or expanding elsewhere, represents local officials not grounding a decision on actual facts. The wild claims of return on investment made by the company’s representative simply can’t be believed. Her information about the incentives offered and available, as well as that from the City of Wichita, is incomplete or misleading.

With some time to analyze the claims made by Wagner (and others who appear in similar situations), we can expose them for what they are. But commissioners — city council members too — often don’t have time or expertise to examine the facts. Commissioner Ranzau told me that he did not receive Wagner’s slides before the meeting. The information delivered to the council by Sherdeill Breathett, Economic Development Specialist for the county, did not appear in the new agenda system the county recently implemented. During meetings there is not time to analyze calculations or examine the claims made by presenters.

We have to ask, however, if local government officials have the desire to examine these presentations and claims. Once the veneer of economic development hucksterism — thin as it is — is stripped away, we are left with what Ranzau has stated several times from his position on the commission bench: a simple transfer of one person’s money to another using the force of government as the agent. This reality of corporate welfare is something that officials would rather not recognize, and it’s not economic development in my book.

Kansas needs a dynamic economic growth policy

Note: Since Dr. Hall’s address to the Wichita Pachyderm Club covered below, the business expensing that he proposed has been signed into law by Governor Brownback. The governor also issued an economic development plan that incorporates large portions of Hall’s advice, but legislation expanding some of the present-day “active investor” economic development practices has also been signed into law. The Promoting Employment Across Kansas (PEAK) program, which allows companies to retain their employees’ payroll withholding taxes, has been expanded, but not so that it covers all new business firms, as Hall recommended.

A dynamic market where many new business startups attempt to succeed and thrive while letting old, unproductive firms die is what contributes to productivity and economic growth. But most economic development policies, including those of Kansas and Wichita, do not encourage this dynamism, and in fact, work against it.

That’s the message of Dr. Art Hall, who spoke to the Wichita Pachyderm Club on the topic “Business Dynamics and Economic Development in Kansas.” Hall is Director of the Center for Applied Economics at the Kansas University School of Business.

At the start of his talk, Hall said that economic development has become an industry of its own, a public industry sometimes implemented as public-private partnerships. But its agenda is often not genuine economic development, he said.

In a short history lesson, Hall described how Walter Beech came to Wichita from North Carolina simply because Clyde Cessna was in Wichita. Sprint began in Abilene in 1899. Fred Koch, who founded the company that became Koch Industries, came to Wichita because Lewis Winkler was here. “Serendipity — that’s the theme.”

Hall displayed a map of taxpayer migration. There is a huge and wide swath of deep blue — representing the highest rate of out-migration — stretching north to south through the Great Plains, including much of Kansas. The Plains are urbanizing, Hall said. Pockets are doing well, but generally the rural areas are losing population. Economic development strategies must realize this long-term trend, he said.

A chart showed the geographic distribution of income earned in Kansas. In 1970, 55 percent of income was earned outside the state’s two major urban areas: Wichita and the Kansas City and Lawrence areas. In 2008, that number had declined to 38 percent. The cause of this is people moving to cities from small towns and rural areas.

On a map of Kansas counties, Hall showed how jobs are moving — concentrating — to a few areas of the state. “I think this is a positive development, because density tends to be a precursor to productivity, and productivity — meaning the value of output per worker — is one of the core fundamental definitions of economic growth.” It’s the reason, generally speaking, as to why cities are prosperous.

Hall said that we should care about our rural communities, but if we slow down the process of densification, we may be losing out on productivity growth and its benefit to economic development.

Continuing on this important theme, Hall said that the key to real and sustainable economic development is productivity growth: “Productivity growth happens on the front lines of individual businesses. You cannot will productivity growth. You cannot legislate productivity growth. You must create the conditions under which individual businesspeople, slogging it out on the front lines every day, create prosperity and productivity by trying new things and working hard. That requires a climate in which they feel optimistic enough to try new things, are rewarded for their efforts, and are willing to test new ideas.”

Dynamism is one of the most underappreciated aspects of the U.S. economy among those working in economic development, Hall told the audience. There is a high correlation between the average size of a business and economic growth, and particularly employment growth. In other words, small companies tend to grow faster than large companies. In the chart Hall displayed, there is a clear demarcation at companies with about 20 employees.

But most of our economic development policies have a bias towards big business. Hall said this is understandable. Further, he said that Wichita is a big business town, meaning that statistically, it is not poised to be a fast-growing area. Hall said we should create an atmosphere where we have lots of small businesses, where there is lots of experimentation. “If our economic development policies are biased against that, that is not helpful.”

A chart showed that each year many business firms die or contract, and many others are born or expand. These numbers are large, relatively speaking: in most years, around 150,000 jobs are created through new firms or expansion of existing firms, and about the same number are lost. Given that Kansas has about one million jobs, each year about 30 percent of Kansas jobs are in in play, just as a result of business dynamics.

Hall said that when the Kansas Department of Commerce announces the creation of 80 new jobs in Kansas, we need to remember that the marketplace swamps anything that individual economic development agencies can do. Hall called for policies that can handle a large volume of businesses — 15,000 to 25,000 — in growth mode each year. Our state’s economic development policies can not handle this level of volume, he said.

Another chart of the states illustrated the relationship between job reallocation rate — the “churn” of jobs — and the economic growth rate in a state. States with high growth rates have high turnover rates in jobs. Kansas ranks relatively low in economic growth.

Economic development policy should encourage new business startups, Hall said, although there is a high correlation between newness and death of businesses. “What you’re trying to do is have enough experimentation that enough good experiments take hold, and they grow.” This concept of experimentation is related to serendipity, or “making desirable discoveries by accident” that Hall mentioned earlier.

But much economic development policy focuses on retaining jobs. Hall said that if what we mean by job retention is saving jobs in companies that ought to die, the policy is not productive. Instead, job retainment policies should create a climate where people can find new jobs quickly here in Kansas. Job retention should not mean bailouts, he added.

Hall emphasized that while there is a high correlation between new businesses and being small, he said it is new businesses that are most important to driving economic growth.

Newness of business firms is vitally important, Hall said. Summarizing a chart of Kansas job creating by age of the firm, he told the audience: “Without year-zero businesses [meaning the newest firms], the entire state of Kansas is almost always losing jobs. It’s the same for the United States. It’s the newness that matters. We want new businesses, but new businesses create churn, as there’s a high correlation between birth and death.”

Hall said this is a complicated process, and that most discussions of economic development do not recognize this complexity.

Hall explained that the state, in conducting economic development activity, often acts as an investor in a company. Specifically, he said that the state acts as an “active manager” similar to an actively managed stock mutual fund. The other type of investor or mutual fund is the passively-managed index fund, where the fund invests in all stocks, usually weighted by the size of the firms. Which approach works best: active management, or investing in all companies. This historical record shows that very few actively-managed funds beat index funds, only 2.4 percent from 1994 to 2004.

Hall said the data shows it is very difficult to predict which are the right firms to pick to come to Kansas. Therefore, we need policies that benefit all companies in order to have a dynamic market in new business firms. “Everyone gets the same deal,” he said.

Hall recommended three specific policies: First, universal expensing of all new capital investment made in Kansas, which means that companies can deduct new investment immediately. Second, eliminate the tax on capital gains. Third, automatic property tax abatements for new or improved business investment for a period of five years.

Hall’s talk was based on his paper from earlier this year titled Embracing Dynamism: The Next Phase in Kansas Economic Development Policy. That paper contains the charts referred to, and also more detail, additional information, and policy recommendations.

Wichita forgivable loan action raises and illustrates issues

Today the Wichita City Council decided to grant a forgivable loan of $48,000 to The Golf Warehouse. This subsidy was promoted by the city as necessary to properly incentivize the applicant company to expand its operations in Wichita rather than Indiana, where the company has other operations and had also received an offer of subsidy. For more information, see Forgivable loan a test for new Wichita City Council members.

In presenting the item to the council, Allen Bell, Wichita’s Director of Urban Development said the forgivable loan was a “deal-closing” device intended to “win a competition with other locations.”

Further discussion brought out the fact that companies often “test the waters,” asking for incentives from cities like Wichita as a location they might consider moving to, only to us that as leverage for getting more incentives back home. (Wichita has suffered at the hands of this ruse, most recently granting a large forgivable loan to a company when the city used as leverage says they did not have discussions with the company.)

Council Member Michael O’Donnell asked if there was another form of economic development that The Golf Warehouse could have received. Bell said that in this case there wasn’t, that IRB financing with accompanying tax abatements wasn’t available for this project. As he has in the past, Bell pointed to the lack of tools in the toolbox, or “arrows in our quiver” he said today.

When the CEO of the applicant company spoke to the council, it was easy to get the impression that this company — like the many other companies that plead for incentives and subsidy — feel that because of their past and pending investment in Wichita, they are entitled some form of incentive. When the company’s outside site selection consultant spoke, this sense of entitlement became explicit. She told how the company has made “significant investment and has employed a lot of people and kept a lot of families employed.” She said that instead of forgivable loan, this should be called an “act of goodwill.” She said the company has made a huge investment, never asking for incentives, and that the loan allows the company to continue making investment into the community.

She also said that the offer made by Indiana amounted to twice Wichita’s offer, on a per-job basis.

Citizens spoke against the forgivable loan. John Todd asked if this is the economic formula that has blessed our city and county with the wealth and prosperity we enjoy today.

Clinton Coen told the council that these incentives are a bargaining tool, allowing cities to blackmail each other.

Susan Estes asked a question that built on O’Donnell’s earlier remarks: Why would we see this forgivable loan as egregious? On the surface, we see jobs, which is good, she said. But the money to pay for this loan comes from other taxpayers, she said, and there are many companies that need help, citing the number of companies filing for bankruptcy and having tax liens filed against them. “Why I find it egregious is that we’re doing something that helps one company at a time. We really need to take an overall look at our tax policy and address the tax issue. We have one of the highest tax rates on the Plains, and that’s why we get in these situations where we have to compete. If we had a better competitive tax rate we could spare all of this.”

Of interest for the political theater was the vote of three new council members, based on statements they made regarding forgivable loans on the campaign trail (see Forgivable loan a test for new Wichita City Council members). In making the motion to accept staff recommendation of the forgivable loan, council member Pete Meitzner said of the loan: “It is an investment, incentive, whatever you want to call it. It is not a give-away.”

Meitzner and James Clendenin voted with all the veteran council members to approve the forgivable loan. Only O’Donnell voted consistent with how he campaigned.

Analysis

This item before the Wichita City Council today requires analysis from two levels.

First, the economics and public policy aspects of granting the forgivable loan are this: It is impossible to tell whether The Golf Warehouse would not expand in Wichita if the forgivable loan was not granted. The companies that apply for these subsidies and that cite competitive offers from other states and cities have, in some cases, multi-million dollar motives to make Wichita think they will move away, or not invest any more in Wichita. Most politicians are scared to death of being labeled “anti-job,” and therefore will vote for any measure that has the appearance of creating or saving jobs.

Particularly inappropriate is the attitude of many of these companies in that they deserve some sort of reward for investing in Wichita and creating jobs. First, companies that make investments do, in fact, deserve a reward. That reward is called profit, but it has to be earned in the marketplace, not granted by government fiat. When a company earns profits in free markets, we have convincing evidence that wealth is being created and capital has been wisely invested. Everyone — the investors certainly but also the customers and employees — is better off when companies profit through competition in free markets.

But when government steps in with free capital, as was the case today, markets are no longer free. The benefits of capitalism are no longer available and working for us. The distortion that government introduces interferes with market processes, and we can’t be sure if the profit and loss system that is so important is working. Companies, as we saw today, increasingly revert to what economists call rent seeking — profiting through government rather than by pleasing customers in market competition.

Entrepreneurship, of which Wichita has a proud tradition, is replaced by a check from city hall.

Wichita’s own Charles Koch explained the harm of government interventionism in his recent recent Wall Street Journal op-ed: “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.”

A forgivable loan — despite Council Member Meitzner’s claim to the contrary — is a cash payment to business, which Mr. Koch warns against.

The focus on job creation is also a confounding factor that obscures the path to true wealth and prosperity for Wichita. When companies ask the city, county, and state for subsidy and incentive, they tout the number of jobs and the payroll that will be created. But jobs are a cost, not a benefit, to business and most firms do all they can to minimize their labor costs just as they seek to minimize all costs. For Wichita to prosper, we need to focus on productivity and wealth creation, not merely employment.

The actions of the city council today keep Wichita on its path of piecemeal economic development and growth. Movement to a system that embraces economic dynamism, as advocated by Dr. Art Hall and as part of Governor Sam Brownback’s economic development plan for Kansas, is delayed. Economic development in Wichita keeps its present status as a sort of public utility, subject to policy review from time to time, as was mentioned today by the city manager.

Politically, Wichitans learned today the value of promises or statements made by most candidates while campaigning. Most candidates’ promises along with $3.75 will get you a small cappuccino at Starbucks — if you don’t ask for whipped cream.

Particularly interesting is the inability of politicians to admit they were wrong, or that they made a mistake, or that they were simply uninformed or misinformed when they made a campaign promise or statement. It was refreshing to hear Republican presidential candidate Tim Pawlenty, when he was in Wichita a few weeks ago, forthrightly admit that he was wrong about his initial position on cap-and-trade energy policies. City council members Clendenin and Meitzner could not bring themselves to admit that their votes today were at odds with their statements made while campaigning. This lack of honesty is one of the reasons that citizens tune out politics, why they have such a cynical attitude towards politicians, and perhaps why voter turnout in city elections is so low.

As one young Wichitan said on her Facebook page after sharing video of the three new council members today, obviously referring to city council district 2’s Pete Meitzner: “How to use your mouth: 1. Campaign under the guise that you are a fiscal conservative. 2. Insert foot.”

Kansas and Wichita quick takes: Monday May 9, 2011

Airfares down in Wichita. A city press release announces: “Wichita Mid-Continent Airport had the country’s 11th largest airline fare decrease since 2000 and now ranks 43rd in average fare of the 100 busiest airports, according to research by the federal Bureau of Transportation Statistics (BTS).” The program’s major source of funding is $5 million per year from the state. Currently, it is not known whether this funding will be in the budget the legislature is working on. … The program is controversial for claims of economic benefit that appear overstated. There is a way to pay for the program that shouldn’t be controversial. When government provides services that benefit everyone, such as police protection, most people agree that taxes to pay for these services should be broad-based. But we can precisely identify the people who benefit from cheap airfares: the people who buy tickets. Wichita could easily add a charge to tickets for this purpose. The mechanism is already in place.

Wichita City Council this week. A speaker on the public agenda will speak about restoring Joyland. Undoubtedly, the goal of the speaker will be to obtain public funds for this project. … City staff is recommending that the council deny a request for Industrial Revenue Bond financing by Pixius Communications LLC. As always, the benefit of the IRB financing to the applicant is the property tax and possible sales tax abatements that accompany the program. The city does not lend money, and does not guarantee that the applicant will repay the bonds. The reason staff is recommending not to approve the application is that Pixius is a service business, and under current policy, a service business must generate a majority of its revenues from outside the Wichita area. Pixius does not, and is asking the city to waive this policy for their benefit. … Separately, Pixius is applying for low-cost financing of renovations to the same building though the facade improvement program. The city has performed its “gap” analysis and has “determined a financial need for incentives based on the current market rates for economic rents.” This is another example of government investing in money-losing businesses. … Then The Golf Warehouse in northeast Wichita asks for a forgivable loan from the city as part of a larger package of incentives and subsidy. This item will prove to be a test for several council members who campaigned against these loans. … Council members will receive a quarterly financial report and view an “artistic concept” for WaterWalk.

Joyland topic of British tabloid. The British tabloid newspaper Daily Mail, in its online version, has a story and video about Wichita’s closed Joyland amusement park. For those who remember the park in its heyday, this is a fascinating — if not bittersweet — look at the park’s current condition. The headline of the article (“New images of an abandoned theme park reveal desolation in America’s heartland”) makes a connection between the deterioration of Joyland and the economic condition of America, a false impression which several comment writers corrected. … I don’t think the closing of Joyland has anything to do with public policy. Businesses come and go all the time as tastes and generations change.

Educational freedom to be discussed in Wichita. This week Kansas Policy Institute and The Friedman Foundation for Educational Choice will be discussing what other states have done to increase student achievement through reforms based on educational freedom and creating a student-centric focus. KPI and FFEC recently launched the “Why Not Kansas” initiative to educate Kansans on the need to reform the state’s K-12 educational system to allow Kansas schools to continue to improve. Speakers at the event will be Dave Trabert, president of Kansas Policy Institute, and Leslie Hiner, vice president of programs and state relations at The Foundation for Educational Choice. The event is Thursday, May 12 at 10:30 am, at the Central Wichita Public Library Auditorium. RSVP is requested by email to James Franko or by calling 316-634-0218.

Do you want to live in the world of Atlas Shrugged? From LearnLiberty.org, a project of Institute for Humane Studies: “In her masterpiece of fiction, Atlas Shrugged, Ayn Rand emphasizes three key classical liberal themes: individualism, suspicion of centralized power, and the importance of free markets. In this video, Prof. Jennifer Burns shows how Rand’s plot and characters demonstrate these themes, principally through innovative entrepreneurs who are stifled by laws and regulations instituted by their competitors. In the world of Atlas Shrugged, free markets and individual liberty have been traded away for equality and security enforced by the government. Burns ends by reviving Rand’s critical question: do you want to live in this kind of world?” … The video is six minutes in length.

Who are the real robber barons? In summarizing a chapter from his book How Capitalism Saved America: The Untold History of Our Country, From the Pilgrims to the Present, Thomas J. DiLorenzo explains the false lessons of capitalism and government that we have been taught:

“The lesson here is that most historians are hopelessly confused about the rise of capitalism in America. They usually fail to adequately appreciate the entrepreneurial genius of men like James J. Hill, John D. Rockefeller, and Cornelius Vanderbilt, and more often than not they lump these men (and other market entrepreneurs) in with genuine “robber barons” or political entrepreneurs.

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

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

At the same time, the market entrepreneurs who practiced genuine capitalism, whose genius and energy fueled extraordinary economic achievement and also brought tremendous benefits to Americans, should be recognized for their achievements rather than demonized, as they so often are. Men like James J. Hill, John D. Rockefeller, and Cornelius Vanderbilt were heroes who improved the lives of millions of consumers; employed thousands and enabled them to support their families and educate their children; created entire cities because of the success of their enterprises (for example, Scranton, Pennsylvania); pioneered efficient management techniques that are still employed today; and donated hundreds of millions of dollars to charities and nonprofit organizations of all kinds, from libraries to hospitals to symphonies, public parks, and zoos. It is absolutely perverse that historians usually look at these men as crooks or cheaters while praising and advocating “business/government partnerships,” which can only lead to corruption and economic decline.

Sedgwick County Commission to consider corporate welfare as economic development

Ed. note: the two measures discussed below passed.

Today the Sedgwick County Commission will consider two measures that, if adopted, will further establish corporate welfare and rent-seeking as Wichita’s and Sedgwick County’s economic development strategy.

When people are living on welfare, we usually see that as a sad state of affairs. We view it as a failure, both for the individual and for the country. We seek ways to help people get off welfare so that they become self-sufficient. We want to help them contribute to society rather than being a drain on its resources.

But local economic development officials don’t see corporate welfare as a bad thing. Instead, as these two measures — both which will likely pass — illustrate, welfare is good when you’re a business in Sedgwick County. Especially if you can raise speculation that your company might move out of the area.

The term rent, or more precisely, economic rent is somewhat unfortunate, as the common usage of the term — paying someone money for the use of an asset for a period of time — contains no sinister connotation. But economic rent does carry baggage.

What is rent seeking? Wikipedia defines it like this: “In economics, rent seeking occurs when an individual, organization or firm seeks to earn income by capturing economic rent through manipulation or exploitation of the economic environment, rather than by earning profits through economic transactions and the production of added wealth.”

This explanation doesn’t do full justice to the term, because it doesn’t mention the role that government and politics usually play. The Concise Encyclopedia of Economics adds this: “The idea is simple but powerful. People are said to seek rents when they try to obtain benefits for themselves through the political arena. They typically do so by getting a subsidy for a good they produce or for being in a particular class of people, by getting a tariff on a good they produce, or by getting a special regulation that hampers their competitors.”

The deals the Sedgwick County Commission will consider are both corporate welfare and rent-seeking. Both are harmful to our community.

The first item concerns Apex Engineering International LLC, which is proposed to receive forgivable loans of $220,000 each from Wichita and Sedgwick County. (The City of Wichita has already approved its loan.) The company will also receive grants and tax credits totaling $1,272,000 from the state. Surprisingly, no property tax exemption is mentioned for this company. The city’s material on this matter may be read at Approval of Forgivable Loan Agreement (Apex Engineering International).

Apex will also receive $1,272,000 in tax credits and grants under programs offered by the State of Kansas.

The second item concerns MoJack Distributors, LLC, a company that makes an accessory for riding lawn mowers. It is proposed that the City of Wichita and Sedgwick County each make a forgivable loans of $35,000 to this company. (Again, Wichita has already approved its loan to this company.) If the company maintains a certain level of employment, the loans do not need to be repaid.

But this is not the only welfare being given to Mojack. The city also proposes a 100% Economic Development Exemption (EDX) property tax exemption. This exemption obliges the county to abate its share of property tax, too. The term would be five years, with renewal for another five years if conditions are met. The city’s material on this matter may be read at Approval of Forgivable Loan Agreement, MoJack.

For both companies, there was the treat of moving operations elsewhere, and the incentives offered made the difference, say the companies.

Targeted investment, or welfare

Government bureaucrats and politicians promote programs like these as targeted investment in our region’s 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 city hall that shapes the future direction of Wichita’s 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.

I emphasized the last sentence to highlight the problem of the dispersed nature of knowledge.

Yet this week, our Wichita and Sedgwick County bureaucrats feel they have the necessary knowledge to recommend to the commissions that the citizens of Sedgwick County make investments of public funds in these two instances. All Wichita city council members were gullible enough to believe it.

One thing is for sure: the city and the county have the power to make these investments. They just don’t have — they can’t have — the knowledge as to whether these are wise.

We need a dynamic job creation engine

Furthermore, we have to question the wisdom of investing in these established companies, especially a company involved in aviation, as Wichita and Sedgwick County are always seeking to diversify their economies away from dependence on aviation.

Through research conducted by Dr. Art Hall and others, we now know that it is dynamic young companies that are the main drivers of job creation in Kansas. Hall wrote: “Embracing dynamism starts with a change in vision. Simply stated, the state government of Kansas should abandon its prevailing policy vision of the State as an active investor in businesses or industries and instead adopt the policy vision of the State as a caretaker of a competitive “platform” — a platform that seeks to induce as much commercial experimentation as possible.” (While Hall wrote about the State of Kansas, Sedgwick County is playing the same role at a local level.)

The “active investor” role that Sedgwick County is about to take with regard to these two companies is precisely the wrong role to take. These actions increase the cost of government for the dynamic small companies we need to nurture. Instead these efforts concentrate and focus our economic development efforts in an unproductive way.

Kansas loses chance to improve tax climate

Legislation that would have improved the tax climate in Kansas over time appears dead this year. It’s something that we need in Kansas, but Kansas Senate leadership is not in favor of the bill.

The bill, named the March to Economic Growth, would have used increases in Kansas revenue to reduce state personal and corporate income tax rates. This is something that is needed, as new rankings published by the Tax Foundation indicate that the business tax climate in Kansas is poor. Kansas ranks 35th among the 50 states, just 15 spots from the bottom. In last year’s ranking, Kansas placed 32nd, so our state is slipping relative to other states.

The economic development strategy of Kansas and Wichita has been to offer tax abatements as an inventive to lure or retain industry. The study authors note the problem with this: “State lawmakers are always mindful of their states’ business tax climates but they are often tempted to lure business with lucrative tax incentives and subsidies instead of broad-based tax reform. … Lawmakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a woeful business tax climate. A far more effective approach is to systematically improve the business tax climate for the long term so as to improve the state’s competitiveness.”

New Kansas Governor Sam Brownback has an economic development plan that includes parts of Dr. Art Hall’s “embracing dynamism” strategy. This strategy recognizes the futility of bureaucrats attempting to dish out economic development incentives, and recommends a strategy of creating an environment favorable to all businesses of all sizes. In particular, research has shown that it is new, young firms that are the dynamic driver of growth and innovation, but economic development policies are slanted towards old, established firms.

While it is refreshing to see the governor’s plan recognize the need for an environment that promotes dynamism, the plan still contains mechanisms for targeted economic development, including incentives to retain companies that threaten to leave Kansas. As for Wichita, city council members and bureaucrats yearn for “more tools in the toolbox.” The governor’s message hasn’t quite reached them.

Are taxes and tax policy important? After a review of the literature, the Tax Foundation report concludes: “… the general consensus of the literature has progressed to the view that taxes are a substantial factor in the decision-making process for businesses.” But there are some authors who disagree.

The state business climate index considers these factors: corporate taxes, individual income taxes, sales tax, unemployment tax, and property taxes. Kansas performs best on unemployment taxes, ranking 7th among the states. Our worst raking is 41st in property taxes. In sales tax, Kansas ranks 32nd, and this does take into account the statewide sales tax increase of one cent per dollar that started July 1.

The report recognizes that taxes are only one of many factors that companies use when deciding where to locate facilities. Kansas’ low ranking means we can make large improvements in this area. If we don’t, we are likely to have to keep up our ad hoc approach to economic development, were we craft special deals under the conceited belief that we know which deals to make.

The full report is available at the Tax Foundation by clicking on 2011 State Business Tax Climate Index. An introductory article is at Background paper: 2011 State Business Tax Climate Index (Eighth Edition).

Kansas and Wichita quick takes: Thursday February 10, 2011

Politicians’ Top 10 Promises Gone Wrong. This Monday (February 14) Americans for Prosperity will show the 2010 John Stossel documentary “Politicians’ Top 10 Promises Gone Wrong.” For a preview and interview with Stossel, click here. For my reporting and review of the show, click on Stossel on politicians’ promises. … This event, sponsored by Americans for Prosperity, will be held on Monday, February 14 from 7:00 pm to 8:30 pm at the Lionel D. Alford Library located at 3447 S. Meridian in Wichita. The library is just north of the I-235 exit on Meridian. For more information on this event contact John Todd at john@johntodd.net or 316-312-7335, or Susan Estes, AFP Field Director at sestes@afphq.org or 316-681-4415.

Cabela’s to seek community improvement district tax. It should come as no surprise that when a major retailer comes to Wichita, they will take advantage of the state’s community improvement district law. If approved, formation of the CID would allow Cabela’s to charge an extra tax on its sales. In this case, according to Wichita Eagle reporting, the tax will be 1.2 cents per dollar. … Sources tell me that this is likely not the only special tax treatment Cabela’s will seek. Look for an application for tax abatements through IRBs or the EDX program. This would fit right in with Cabela’s notoriety for squeezing all it can from government. … As these CIDs spread across Wichita, we are, in effect, experiencing a sales tax increase, drip by drip.

Kansas legislature website. The Kansas legislature’s website is improving. A huge irritation remains, however: when pdf documents are presented, they’re in a “fancy” non-standard window that reduces the usability of the site. On an Iphone, the documents can’t be read, as the fancy window wants to do its own scrolling. … Sometimes clicking on a link produces the wrong document, as just now on the house of Representatives page, I clicked on “Session 20 – Wed Feb 09 2011 PDF” and was presented with the Senate’s journal for January 31. … Judging by the log of completed features added each day and by the list of things promised, it’s clear that this site is still in development. Doing this during the session was a terrible lapse of judgment. … Listed are “Special reports for members” such as “House and Senate Subject Index with bill status.” Why, I wonder, should this be available only for members?

Kansas and Wichita quick takes: Sunday January 16, 2011

Wichita swoons over Boston attention. The self-congratulatory back-patting by a group of Wichitans over attention paid by a Boston Globe travel writer is starting to be embarrassing for us. The Wichita Eagle article on this topic mentions chicken-fried steak and biscuits and gravy in its opening sentence, a sure sign that the article will attempt to draw a contrast between our image and our purported reality. Which is, if I understand, mostly street statues, the Old Mill Tasty Shop, and Exploration Place. … As it turns out, Geoff Edgers, the writer, has a financial motive in his praise of Wichita. On his initial visit: “Festival directors put up Edgers, his wife and two small children at the Hotel at Old Town.” Now Wichitans are raising money to help the writer, who is also a filmmaker, get his movie on television, and “the Wichita groups offered to raise money to help Edgers’ get his film shortened and syndicated for public broadcasting. … If he raises $2,500 while in Wichita next month, Edgers intends to include a ‘thank-you’ to Wichita in the credits of his syndicated film.”

Harm of expanding government explained. Introducing his new book Back on the Road to Serfdom: The Resurgence of Statism, Thomas E. Woods, Jr. writes: “The economic consequences of an expanded government presence in American life are of course not the only outcomes to be feared, and this volume considers a variety of them. For one thing, as the state expands, it fosters the most antisocial aspects of man’s nature, particularly his urge to attain his goals with the least possible exertion. And it is much easier to acquire wealth by means of forcible redistribution by the state than by exerting oneself in the service of one’s fellow man. The character of the people thus begins to change; they expect as a matter of entitlement what they once hesitated to ask for as charity. That is the fallacy in the usual statement that ‘it would cost only $X billion to give every American who needs it’ this or that benefit. Once people realize the government is giving out a benefit for ‘free,’ more and more people will place themselves in the condition that entitles them to the benefit, thereby making the program ever more expensive. A smaller and smaller productive base will have to strain to provide for an ever-larger supply of recipients, until the system begins to buckle and collapse.” … Phrases like “smaller and smaller productive base” apply in Wichita, where our economic development policies like tax increment financing, community improvement districts, and tax abatement through industrial revenue bonds excuse groups of taxpayers from their burdens, leaving a smaller group of people to pay the costs of government.

Kansas economic growth policy should embrace dynamism

A dynamic market where many new business startups attempt to succeed and thrive while letting old, unproductive firms die is what contributes to productivity and economic growth. But most economic development policies, including those of Kansas and Wichita, do not encourage this dynamism, and in fact, work against it.

That’s the message of Dr. Art Hall, who spoke to the Wichita Pachyderm Club on the topic “Business Dynamics and Economic Development in Kansas.” Hall is Director of the Center for Applied Economics at the Kansas University School of Business.

At the start of his talk, Hall said that economic development has become an industry of its own, a public industry sometimes implemented as public-private partnerships. But its agenda is often not genuine economic development, he said.

In a short history lesson, Hall described how Walter Beech came to Wichita from North Carolina simply because Clyde Cessna was in Wichita. Sprint began in Abilene in 1899. Fred Koch, who founded the company that became Koch Industries, came to Wichita because Lewis Winkler was here. “Serendipity — that’s the theme.”

Hall displayed a map of taxpayer migration. There is a huge and wide swath of deep blue — representing the highest rate of out-migration — stretching north to south through the Great Plains, including much of Kansas. The Plains are urbanizing, Hall said. Pockets are doing well, but generally the rural areas are losing population. Economic development strategies must realize this long-term trend, he said.

A chart showed the geographic distribution of income earned in Kansas. In 1970, 55 percent of income was earned outside the state’s two major urban areas: Wichita and the Kansas City and Lawrence areas. In 2008, that number had declined to 38 percent. The cause of this is people moving to cities from small towns and rural areas.

On a map of Kansas counties, Hall showed how jobs are moving — concentrating — to a few areas of the state. “I think this is a positive development, because density tends to be a precursor to productivity, and productivity — meaning the value of output per worker — is one of the core fundamental definitions of economic growth.” It’s the reason, generally speaking, as to why cities are prosperous.

Hall said that we should care about our rural communities, but if we slow down the process of densification, we may be losing out on productivity growth and its benefit to economic development.

Continuing on this important theme, Hall said that the key to real and sustainable economic development is productivity growth: “Productivity growth happens on the front lines of individual businesses. You cannot will productivity growth. You cannot legislate productivity growth. You must create the conditions under which individual businesspeople, slogging it out on the front lines every day, create prosperity and productivity by trying new things and working hard. That requires a climate in which they feel optimistic enough to try new things, are rewarded for their efforts, and are willing to test new ideas.”

Dynamism is one of the most underappreciated aspects of the U.S. economy among those working in economic development, Hall told the audience. There is a high correlation between the average size of a business and economic growth, and particularly employment growth. In other words, small companies tend to grow faster than large companies. In the chart Hall displayed, there is a clear demarcation at companies with about 20 employees.

But most of our economic development policies have a bias towards big business. Hall said this is understandable. Further, he said that Wichita is a big business town, meaning that statistically, it is not poised to be a fast-growing area. Hall said we should create an atmosphere where we have lots of small businesses, where there is lots of experimentation. “If our economic development policies are biased against that, that is not helpful.”

A chart showed that each year many business firms die or contract, and many others are born or expand. These numbers are large, relatively speaking: in most years, around 150,000 jobs are created through new firms or expansion of existing firms, and about the same number are lost. Given that Kansas has about one million jobs, each year about 30 percent of Kansas jobs are in in play, just as a result of business dynamics.

Hall said that when the Kansas Department of Commerce announces the creation of 80 new jobs in Kansas, we need to remember that the marketplace swamps anything that individual economic development agencies can do. Hall called for policies that can handle a large volume of businesses — 15,000 to 25,000 — in growth mode each year. Our state’s economic development policies can not handle this level of volume, he said.

Another chart of the states illustrated the relationship between job reallocation rate — the “churn” of jobs — and the economic growth rate in a state. States with high growth rates have high turnover rates in jobs. Kansas ranks relatively low in economic growth.

Economic development policy should encourage new business startups, Hall said, although there is a high correlation between newness and death of businesses. “What you’re trying to do is have enough experimentation that enough good experiments take hold, and they grow.” This concept of experimentation is related to serendipity, or “making desirable discoveries by accident” that Hall mentioned earlier.

But much economic development policy focuses on retaining jobs. Hall said that if what we mean by job retention is saving jobs in companies that ought to die, the policy is not productive. Instead, job retainment policies should create a climate where people can find new jobs quickly here in Kansas. Job retention should not mean bailouts, he added.

Hall emphasized that while there is a high correlation between new businesses and being small, he said it is new businesses that are most important to driving economic growth.

Newness of business firms is vitally important, Hall said. Summarizing a chart of Kansas job creating by age of the firm, he told the audience: “Without year-zero businesses [meaning the newest firms], the entire state of Kansas is almost always losing jobs. It’s the same for the United States. It’s the newness that matters. We want new businesses, but new businesses create churn, as there’s a high correlation between birth and death.”

Hall said this is a complicated process, and that most discussions of economic development do not recognize this complexity.

Hall explained that the state, in conducting economic development activity, often acts as an investor in a company. Specifically, he said that the state acts as an “active manager” similar to an actively managed stock mutual fund. The other type of investor or mutual fund is the passively-managed index fund, where the fund invests in all stocks, usually weighted by the size of the firms. Which approach works best: active management, or investing in all companies. This historical record shows that very few actively-managed funds beat index funds, only 2.4 percent from 1994 to 2004.

Hall said the data shows it is very difficult to predict which are the right firms to pick to come to Kansas. Therefore, we need policies that benefit all companies in order to have a dynamic market in new business firms. “Everyone gets the same deal,” he said.

Hall recommended three specific policies: First, universal expensing of all new capital investment made in Kansas, which means that companies can deduct new investment immediately. Second, eliminate the tax on capital gains. Third, automatic property tax abatements for new or improved business investment for a period of five years.

Hall’s talk was based on his paper from earlier this year titled Embracing Dynamism: The Next Phase in Kansas Economic Development Policy. That paper contains the charts referred to, and also more detail, additional information, and policy recommendations.

Kansas and Wichita quick takes: Wednesday December 1, 2010

Tax incentives questioned. In a commentary in Site Selection Magazine, Daniel Levine lays out the case that tax incentives that states use to lure or keep jobs are harmful, and the practice should end. In Incentives and the Interstate Competition for Jobs he writes: “Despite overwhelming evidence that state and local tax incentives are having little to no positive effect on promoting real economic growth anywhere in the country, states continue to up the ante with richer and richer incentive programs. … there are real questions as to whether the interstate competition for jobs is a wise use of anyone’s tax dollars and, if not, then what can be done to at least slow down this zero sum game?” As a solution, Levine proposes that the Internal Revenue Service classify some types of incentives as taxable income to the recipient, which would reduce the value and the attractiveness of the offer. Levine also correctly classifies tax credits — like the historical preservation tax credits in Kansas — as spending programs in disguise: “Similarly, when a ‘tax credit’ can be sold or transferred if unutilized it ceases to have a meaningful connection to state tax liability. Instead, in such circumstances the award of tax credit is merely a delivery mechanism for state subsidy.” In the end, the problem — when recognized as such — always lies with the other guy: “Most state policy makers welcome an opportunity to offer large cash incentives to out-of-state companies considering a move to their state but fume with indignation when a neighboring state uses the same techniques against them.”

Yoder: No business as usual. Kansas Watchdog reports on a speech by newly-elected U.S. Congressman Kevin Yoder from the Kansas third district. Said Yoder: “Business as usual has to stop in Washington.” They always say this. Let’s hope Yoder and the other new representatives from Kansas mean it, and can resist the inevitable pressures. Remember the assessment of Trent Lott, a former Senate majority leader and now a powerful lobbyist, as reported in the Washington Examiner: “‘We don’t need a lot of Jim DeMint disciples,’ Lott told the Washington Post, referring to the conservative South Carolina senator who has been a gadfly for party leadership and a champion for upstart conservative candidates. ‘As soon as they get here, we need to co-opt them.'”

Kansas revenue outlook was mixed in November . From Kansas Reporter: “Kansas’ economy and the state government’s cash flow continued to struggle in November, preliminary tax revenue numbers indicated Tuesday. A Kansas Department of Revenue calculation of state tax receipts during November showed the state collected $384 million in taxes during the month, a whisker-thin $783,000, or 0.2 percent, less than forecasters calculated just three weeks ago, but nearly $30 million, or 8.5 percent more than in November, 2009.” The 8.5 percent growth from a year ago is partly from the increase in the state’s sales tax. “This suggests that actual retail sales activity, on which state officials are counting to hit future revenue targets, may be trailing year-earlier levels by about 2.4 percent.”

Teacher organization offers alternative to KNEA . “The Kansas Association of American Educators says it offers the benefits of a union membership, but doesn’t involve itself in partisan issues.” More at Kansas Reporter.

Kansas education officials may overstate student performance. Kansas schools claim rapidly rising test scores while other measures of student performance remain largely unchanged, even falling in some years. Kansas Watchdog reports: “There are nagging questions about the validity of claims based on state assessments and the tests are only one measure of the education system’s performance. Several national education watchdogs and the U.S. Department of Education have questioned the rigor of state tests, proficiency standards, graduation rates and graduates preparation for college and the workforce.” The story is Kansas Education Officials May Overstate Student Performance.

Kansas ranks low, says Tax Foundation

New rankings published by the Tax Foundation indicate that the business tax climate in Kansas is poor. Kansas ranks 35th among the 50 states, just 15 spots from the bottom. In last year’s ranking, Kansas placed 32nd, so our state is slipping relative to other states.

The economic development strategy of Kansas and Wichita is to offer tax abatements as an inventive to lure or retain industry. The study authors note the problem with this and what this action tries to cover up: “State lawmakers are always mindful of their states’ business tax climates but they are often tempted to lure business with lucrative tax incentives and subsidies instead of broad-based tax reform. … Lawmakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a woeful business tax climate. A far more effective approach is to systematically improve the business tax climate for the long term so as to improve the state’s competitiveness.”

Are taxes and tax policy important? After a review of the literature, the report concludes: “… the general consensus of the literature has progressed to the view that taxes are a substantial factor in the decision-making process for businesses.” But there are some authors who disagree.

The state business climate index considers these factors: corporate taxes, individual income taxes, sales tax, unemployment tax, and property taxes. Kansas performs best on unemployment taxes, ranking 7th among the states. Our worst raking is 41st in property taxes. In sales tax, Kansas ranks 32nd, and this does take into account the statewide sales tax increase of one cent per dollar that started July 1.

The report recognizes that taxes are only one of many factors that companies use when deciding where to locate facilities. Kansas’ low ranking means we can make large improvements in this area. If we don’t, we are likely to have to keep up our ad hoc approach to economic development, were we craft special deals under the guise that we know which deals to make.

The full report is available at the Tax Foundation by clicking on 2011 State Business Tax Climate Index. An introductory article is at Background paper: 2011 State Business Tax Climate Index (Eighth Edition).