Tag Archives: Taxation

Wichita commercial property taxes are high … really high

Wichita commercial property tax rates compared to national average
Wichita commercial property tax rates compared to national average
In this excerpt from WichitaLiberty.TV. Wichita commercial property taxes are very high, according to an ongoing study. View below, or click here to view on YouTube. For more on this topic, including a summary of Wichita data compared to other cities, see Wichita property taxes compared.

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Economic development incentives, at the margin

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

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

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

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

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

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

The importance of marginal thinking

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

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

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

Lights of various types turned on in the afternoon, Wichita Transit Center, July 11, 2104.

Waste in Wichita, the seen and probably unseen

When the city of Wichita is not concerned about waste that is easily observed, what about waste that not easily seen by citizens?

Lights on at midday in downtown Wichita. July 11, 2014.
Lights on at midday in downtown Wichita. July 11, 2014.
Yesterday most downtown Wichita street lights were switched off during the day. But not all, as can be seen by the many lights switched on at the Wichita Transit Center. They were on Friday afternoon, just as they are on many days.

Wichita Transit Center, July 11, 2104. Some of the bulbs are apparently burnt out.
Wichita Transit Center, July 11, 2104. Some of the bulbs are apparently burnt out.
While waste like this is unacceptable, it is all the more intolerable considering that Wichita’s transit system is out of money. The city council has recommended that Wichitans vote for higher sales taxes, part of which would fund the transit system. That would include, I suppose, funding the wasteful spending on burning street lights in the middle of the day. This is indicative of the attitude of the city as explained in Forget the vampires. Let’s tackle the real monsters.

You have to wonder: If the city’s transit department is, apparently, not concerned about blatant waste like this — waste that anyone can easily observe — what is it doing about waste that can’t easily be seen?

So before considering any extra funding for Wichita transit, let’s ask that it stop wasteful spending like these lights. Even better, before sending any funding, let’s stop this waste.

Lights of various types turned on in the afternoon, Wichita Transit Center, July 11, 2104.
Lights of various types turned on in the afternoon, Wichita Transit Center, July 11, 2104.
The lights illustrated in these photographs are, undoubtedly, a small portion of the city’s spending. But you don’t have to look very hard to find waste like this, and we know that small examples of waste are multiplied many times. So when city leaders tell us that there is nowhere left to cut in the budget, that everything that can be done to trim the fat has already been done, and that the only thing we can do is raise taxes — well, think of this photograph and others illustrated in Wichita’s monsters on display, again, Forget the vampires. Let’s tackle the real monsters, Wichita advances in the field of cost savings, Another Friday lunch, and even more lights are on, To compensate, Wichita switched on the street lights, In Wichita, the streetside seating is illuminated very well, In Wichita, the rooftops are well-lit and On a sunny day in downtown Wichita you can see the street lights.

This is not to say that waste like this does not occur in the private sector. Of course it does. But businesses and individuals have a powerful incentive to avoid waste that isn’t present in government: Businesses and people are spending their own money. And even if they waste money, it’s their money, not ours.

WichitaLiberty.TV July 2, 2014

WichitaLiberty.TV: Citizen activists and the proposed Wichita sales tax

In this episode of WichitaLiberty.TV: Two activists join host Bob Weeks to discuss activism at the local level. Then, what about the proposed sales tax increase in Wichita? View below, or click here to view at YouTube. Episode 51, broadcast July 13, 2014.

Change in Wichita mill levy rates, year-to-year and cumulative.

Wichita property taxes rise again

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

Wichita mill levy rates. This table holds only the taxes levied by the City of Wichita and not any overlapping jurisdictions.
Wichita mill levy rates. This table holds only the taxes levied by the City of Wichita and not any overlapping jurisdictions.
In 2002 the City of Wichita mill levy rate was 31.845. In 2013 it was 32.509, based on the city’s Comprehensive Annual Financial Report. That’s an increase of 0.664 mills, or 2.09 percent, since 2002. In one year the mill levy rate increased .038 mills, or 0.12 percent. (These are for taxes levied by the City of Wichita only, and do not include any overlapping jurisdictions.)

Recent Wichita mill levy rates.
Recent Wichita mill levy rates.
The Wichita City Council did not take explicit action to raise this rate. Instead, the rate is set by the county based on the city’s budgeted spending and the assessed value of taxable property subject to Wichita taxation.

Change in Wichita mill levy rates, year-to-year and cumulative.
Change in Wichita mill levy rates, year-to-year and cumulative.
While the city doesn’t have control over the assessed value of property, it does have control over the amount it decides to spend.

Despite the data that is readily available in the city’s comprehensive annual financial reports, some choose to remain misinformed and/or uninformed. The video below provides insight into the level of knowledge of some elected officials and city staff.

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Examining Wichita’s water future

From Kansas Policy Institute.

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

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

Click here to register for this event.

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

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

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

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

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

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

In Wichita, gap analysis illustrates our problems

Wichita City Hall.
Wichita City Hall.
Following is testimony provided to the Wichita City Council on July 1, 2014. Background on this issue may be found at In Wichita, a public hearing with missing information and Wichita city council schools citizens on civic involvement.

Thank you for providing the gap analysis that I requested.

If the gap analysis is credible, if it really is true that projects like this are not financially feasible without taxpayer assistance, what does that tell us about Wichita? Shouldn’t we work on fixing these problems for everyone, rather than parceling out business welfare on a piecemeal basis?

The agenda packet material for this item says there is a need for incentives “based on the current market.” But not long ago this council was told that downtown Wichita is booming. So why won’t the market support a project like this without a handout from city taxpayers? And if downtown is truly booming but we’re still giving out incentives, will we ever be able to wean ourselves off?

Based on my reading of the gap analysis document, I see another problem with the facade improvement program. It shifts costs from landlords to commercial tenants. Instead of paying for the facade improvement costs as part of a mortgage or other financing, these costs become additional property taxes that commercial tenants pay in addition to rent.

This is really a problem, as Kansas and Wichita commercial property taxes are high. Each year The Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence survey property taxes. Considering the largest city in each of the states, Wichita property taxes are ninth highest in the nation for commercial property.

Wichita taxes are not just a little higher, but a lot higher. For example, for a commercial property valued at $100,000, Wichita property taxes are 38.5 percent higher than the national average.

Some of the reason why commercial property taxes are so high is due to the difference in assessment rates for various property classes. That’s not set by the City of Wichita. But the overall level of spending, and therefore the level of taxation, is set by this council. Further, the cost of incentives like this raise the cost of government for everyone else. One thing the city could do is to reduce spending somewhere else to offset the cost of this incentive. This would mean that other taxpayers do not have to bear the cost of this incentive.

If we wonder why the Wichita economy is not growing, commercial property tax rates and this council’s policy of targeted reductions are a large part of the problem.

Wichita’s monsters on display, again

While the City of Wichita asks citizens to inconvenience themselves by saving “vampire” electrical waste, the city still lights up its own monsters.

Wichita Transit Center, June 27, 2014, 2:03 pm.
Wichita Transit Center, June 27, 2014, 2:03 pm.
Last Friday afternoon most downtown Wichita street lights were switched off. But not all, as can be seen by the many lights switched on at the Wichita Transit Center. They were on Friday afternoon, just as they are on many days.

While waste like this is not acceptable, it is all the more striking considering that Wichita’s transit system is out of money. The city council has recommended that Wichitans vote for higher sales taxes, part of which would fund the transit system. That would include, I suppose, the wasteful spending on burning street lights in the middle of the day. This is indicative of the attitude of the city as explained in Forget the vampires. Let’s tackle the real monsters.

So before considering any extra funding for Wichita transit, let’s ask that it stop wasteful spending like these lights. Even better, before sending any funding, let’s stop this waste.

Wichita downtown street lights 2014-06-27 11.20.30The lights illustrated in this photograph are, undoubtedly, a small portion of the city’s spending. But you don’t have to look very hard to find waste like this, and we know that small examples of waste are multiplied many times. So when city leaders tell us that there is nowhere left to cut in the budget, that everything that can be done to trim the fat has already been done, and that the only thing we can do is raise taxes — well, think of this photograph and others illustrated in Wichita advances in the field of cost savings, Another Friday lunch, and even more lights are on, To compensate, Wichita switched on the street lights, In Wichita, the streetside seating is illuminated very well, In Wichita, the rooftops are well-lit and On a sunny day in downtown Wichita you can see the street lights.

This is not to say that waste like this does not occur in the private sector. Of course it does. But businesses and individuals have a powerful incentive to avoid waste that isn’t present in government: Businesses and people are spending their own money. And even if they waste money, it’s their money, not ours.

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

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

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

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

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

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

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

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

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

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

Water users, not sales tax, should pay for water

By John Todd. A version of this appeared in The Wichita Eagle.

Wichita Area Future Water Supply: A Model Program for Other Municipalities
Wichita Area Future Water Supply: A Model Program for Other Municipalities
An article in the Wichita Eagle (“City Council OKs four projects for proposed 1-cent sales tax” May 27 Eagle) reports that even with the sales tax water rates would increase 1.3 percent, and without the sales tax, rates would go up 6.2 percent for a net increase of 4.9 percent. This means that my $50 per month average home water bill would increase a total of $2.45 per month to pay for what City Council members have said is the most attractive option for a new water source. I’ll take this type of increase anytime over a 1-cent sales tax on everything I purchase each month including groceries.

It strikes me that people and businesses that use water should pay for the water they use including the costs of needed water resource upgrades in their monthly water bills. A sales tax allows public officials to charge different rates for different groups of water users and is not as transparent and fair. By paying for the water I actually use I can control my individual cost for this valuable resource. Paying for water usage through a sales tax reduces any incentive individual and business users might have to conserve water than if they are writing a monthly check to pay for the water they actually use.

kansas-policy-institute-2014-04-willing-to-fund

To fund government, Wichitans prefer alternatives to raising taxes

In this excerpt from WichitaLiberty.TV: Wichita voters told pollsters they prefer adjusting spending, becoming more efficient, using public-private partnerships, and privatization to raising taxes. View below, or click here to view on YouTube. For more on this topic, see To fund government, Wichitans prefer alternatives to raising taxes.

For Wichita, policies are made to be waived and ignored

The City of Wichita says it wants policies to be predictable and reliable, but finds it difficult to live up to that goal.

From 2009, an example of how the City of Wichita makes policy on the fly to suit the current situation. The policy change benefited a building developed by “The Minnesota Guys,” who, since the time of this article, fell into disfavor with pretty much everyone in Wichita, including the city council.

When the Lofts at St. Francis needed routine repairs, the city waived policies to use special assessment financing.
When the Lofts at St. Francis needed routine repairs, the city waived policies to use special assessment financing.
Regarding public policy, this episode illustrated the city broadening the application of special assessment financing. Traditionally special assessment financing has been limited to instances such as the city building streets and sewers in new areas of town, allowing commercial and residential property owners to repay the costs over 15 years. But the item approved by the council at this meeting was for repair of existing buildings, not construction of new infrastructure. Additionally, the work financed by the special assessment taxes will be owned by the private property owners. When the city uses special assessment financing to build streets and sewers in new neighborhoods the city owns this infrastructure, even though it is paid for by nearby property owners.

To approve this financing, the city had to bend or waive two policies. That’s problematic, as the city tells citizens it wants policies and council behavior to be consistent and predictable. Although this incident is from five years ago, not much has changed since then. See Wichita: No such document for an example from last year. Following is Wichita special assessments for repairs is bad policy. Other articles on this topic are In Wichita, waiving guidelines makes for bad policy and At Wichita city council, special pleading of selfish interests.

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At Tuesday’s meeting (August 18, 2009) of the Wichita City Council, a privately-owned condominium association is seeking special assessment financing to make repairs to its building. In order for the association to succeed in its request, the council will have to waive two guidelines of Wichita’s facade improvement program.

Special assessment financing means that the cost of the repairs, up to $112,620 in this case, will be added to the building’s property taxes. Actually, in this case, to each of the condominium owners’ taxes. They’ll pay it off over the course of 15 years. (A conversation with the president of the homeowners association brought out the possibility that the actual assessment may be in the neighborhood of $75,000.)

So the city is not giving this money to the building’s owners. They’ll have to pay it back. The city is, however, setting new precedent in this action.

Special assessment financing has traditionally been used to fund infrastructure such as streets and sewers, and new infrastructure at that. The city, under its facade improvement program, now allows this type of financing to be used to make repairs and renovations to existing buildings. That’s if the building is located in one of the politically-favored areas of town.

By using special assessment financing in this way, the city seeks to direct investment towards parts of town that it feels doesn’t have enough investment. This form of centralized government planning is bad public policy. The city should stop doing this, and let people freely choose where to invest.

Besides this, two guidelines in the city’s facade improvement program must be waived for this project to obtain special assessment financing.

The first is the private investment match. This is designed to ensure that the property owners have “skin in the game” and that the taxes will be paid back.

Here, the city is proposing that since the building’s owners have made a past investment in this property, there’s no need to require a concurrent investment. It hardly needs to be noted that anyone who has purchased property has made a past investment in that property.

Second, facade improvement projects are required to undergo a gap analysis to “prove” the need for public financing. According to the city’s report: “This project does not lend itself to this type of gap analysis; however, staff believes that conventional financing would be difficult to obtain for exterior repairs to a residential condominium property like this.”

So the city proposes to waive this requirement as well.

There seems to me to be a defect in the manner of ownership of this building. While the homeowners association and the condominium owners might not have anticipated that repairs would be needed so soon after the building’s opening, they must have contemplated that repairs and maintenance — to either exterior or interior common areas — would be needed at some time. How does the association plan to pay for these?

So what will happen if the city council doesn’t approve the special assessment financing? The agenda report states “Each individual condo owner would be required to fund a share of the cost.”

Isn’t that what private property owners do: fund the cost of repairs to their property?

According to the Sedgwick County Treasurer’s office, the appraised values of these condos range from $103,000 to $310,200, with an average value of $201,943. The maximum amount being added to each condo’s assessment is $4,022, although the actual amount may be closer to $3,000.

That’s along the lines of what it might cost to perform a few repairs and paint a house that’s worth what these condos are worth.

Let’s ask that these owners do just what thousands of homeowners in Wichita do every year: take responsibility for the maintenance of their own property without looking to city hall for help.

Lofts at St. Francis Agenda Report 2009-08-18 by Bob Weeks

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Wichita voter opinion on city spending and taxation

In this excerpt from WichitaLiberty.TV: Wichita voters give their opinions on city spending, subsidies for economic development, and their willingness to pay higher taxes for certain services. Since this episode was recorded, the Wichita City Council has given tentative approval for a one cent sales tax to be used for water supply, street maintenance, economic development, and transit. View below, or click here to view on YouTube.

For more from this survey, see

Wichita government prefers rebates to markets

Today the Wichita City Council may decide to revive a program to issue rebates to persons who purchase water-saving appliances. The program was started last summer, but less than half the allocated rebate money was claimed. The city will argue that this program has no cost, as the funds are left over from last year’s program. Except: The city could use the money not spent on rebates to either reduce water rates or retire water system debt. Following is an article from last year on this topic.

Wichita begins rebates and regulation

Instead of relying on market forces, Wichita imposes a new tax and prepares a new regulatory regime.

Equus BedsAt today’s meeting of the Wichita City Council, the city decided to spend up to $1 million this year on rebates to encourage people to buy water-efficient appliances. This will save a vanishingly small amount of water at tremendous cost.

The worst realization from today’s city council meeting is how readily citizens, politicians, and bureaucrats will toss aside economic thinking. The antimarket bias that Bryan Caplan explains in The Myth of the Rational Voter: Why Democracies Choose Bad Policies was in full display — even by the conservative members of the council.

It’s also clear that some council members want to go down the road of austerity rather than abundance.

What did we learn today? Many speakers used the terms “conservation” and “judicious.” Conservation is good. Judicious use is good. But each person applies different meanings to these concepts. A great thing about living in a (relatively) free economy is that each person gets to choose to spend their time and money on the things that are important to them, and in the amounts they want. We make these choices many times each day. Sometimes we’re aware of making them, and sometimes we’re not.

For example: If you’re watching television alone in your home, and you go to the kitchen to get a snack, do you turn off the television for the moment that you’re not watching it? No? Well, isn’t it wasting electricity and contributing to global warming to have a switched-on television that no one is watching, even for just a moment?

Some people may turn off the television in this scenario. But most people probably decide that the effort required to save a minute’s worth of electricity consumption by a television isn’t worth the effort required.

(By the way, the type of television programs you watch each evening: Is it worth burning dirty coal (or running precious water through dams, or splitting our finite supply of uranium atoms, or spoiling landscapes and killing birds with wind turbines) just so you can watch Bill O’Reilly or Rachel Maddow rant? Or prison documentaries? Or celebrity gossip? Reruns of shows you’re already seen? And I’ve seen you fall asleep while watching television! What a monumental waste. We should require sleep sensors on all new televisions and rebates to retrofit old sets.)

But when people leave their homes empty to go to work, almost everyone turns off the television, lights, and other appliances. Many may adjust their thermostats to save energy. People make the choice to do this based on the costs of leaving the lights on all day versus the cost of turning them on and off. No one needs to tell them to do this. The relative prices of things do this.

(You may be noting that children have to be told to turn off televisions and lights. That’s true. It’s true because they generally aren’t aware of the prices of things, as they don’t pay utility bills. But adults do.)

In most areas of life, people use the relative prices of things to make decisions about how to allocate their efforts and consume scarce resources. Wichita could be doing that with water, but it isn’t.

The conservation measures recommended by speakers today all have a cost. Sometimes the cost is money. In some cases the cost is time and convenience. In others the cost is a less attractive city without green lawns and working fountains. In many cases, the cost is shifted to someone else who is unwilling to voluntarily bear the cost, as in the rebate program.

At least we’ll be able to measure the cost of the rebate program. For most of the other costs, we’re pretending they don’t exist.

Instead of relying on economics and markets, Wichita is turning to a regulatory regime. Instead of pricing water rationally and letting each person and family decide how much water to use, politicians and bureaucrats will decide for us.

All city council members and the mayor approved this expansion of regulation and taxation.

(Yes, it’s true that the rebates will be funded from the water department, but that’s a distinction without meaningful difference.)

The motion made by Mayor Carl Brewer contained some provisions that are probably good ideas. But it also contained the appliance rebate measure. Someone on the council could have made a substitute motion that omitted the rebates, and there could have been a vote.

But not a single council member would do this.

It’s strange that we turn over such important functions as our water supply to politicians and bureaucrats, isn’t it?

Wichita City Budget Cover, 1992

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

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

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

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

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

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

City documents give the benefit-cost ratios for the city and overlapping jurisdictions:

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

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

Wichita City Budget Cover, 1992While the City of Wichita insists that projects show a benefit-cost ratio of 1.3 to one or better (although there are many exceptions), it doesn’t apply that standard for overlapping jurisdictions. Here, Sedgwick County experiences a benefit-cost ratio of 1.18 to one, and the Wichita school district (USD 259) 1.00 to one. These two governmental bodies have no input on the decision the city is making on their behalf. The school district’s share of the forgiven taxes is 47.4 percent.

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

Wichita property taxes

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

Targeted economic development incentives

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

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

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

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

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

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

Do incentives work?

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

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

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

No evidence of large firm impacts on local economy”

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

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

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

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

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

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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.

Let’s create something special and unique

Following, Sedgwick County Commissioner Karl Peterjohn explains something that the county could do to boost economic growth that doesn’t require government intervention, doesn’t need fleets of bureaucrats, reduces cronyism and corruption, increases economic freedom, respects property rights, reduces the power of government to control its subjects, and doesn’t give politicians opportunities to inflate their egos and boost their electoral prospects by being photographed at ground-breaking and ribbon-cutting ceremonies taking credit for spending your money on something you don’t want and which does not work to create jobs and prosperity. For these reasons — especially the latter — this won’t be popular with the political class.

I’ve gathered data from the property tax study that Peterjohn mentions and presented data specific to Wichita at Wichita property taxes compared. A version of this commentary appeared in the Wichtia Eagle.

Let’s create something special and unique

By Karl Peterjohn

This community as well as our country is still in an economic crisis. Our community needs a boost, or a comparative growth advantage. Creating a one (1) cent city sales tax in Wichita won’t create economic growth.

In fact, raising taxes would put our community on the same path trail blazed by many other communities across our country. That is the path to fiscal perdition: Detroit.

Sedgwick County Courthouse 2014-03-23This community can create a special and unique comparative advantage by eliminating one of the major disadvantages that this state in general, and Wichita and Sedgwick County face: high property taxes. The high property tax problem for Wichita was once again identified in a national study by the Lincoln Institute on Land Policy and the Minnesota Center for Fiscal Excellence’s, “50 State Property Tax Comparison Study,” issued in March. In this study it identified the fact that Wichita’s property tax on commercial property was 38% above the national average.

High taxes mean less economic growth. This is particularly true for property taxes.

The unique and special approach this community needs is instead of raising the sales tax to expand city spending, the focus should be on eliminating the county’s property tax. Currently the county imposes a 29.3 mill property tax county wide. This mill levy could be eliminated with about a 1.5 cent increase in the sales tax on a revenue neutral basis.

This type of property tax competitiveness would be beneficial on several levels. First, it would provide a unique selling proposition to help attract business to this county and Wichita.

Eliminating the county property tax would provide benefits to all property taxpayers and not just a select few getting special subsidies contained within the city’s sales tax hike plan. Eliminating the county’s property taxes would reduce most county taxpayers’ property tax bills by roughly 25 percent.

Let’s move away from the subsidy model whose odious examples include the failed Solyndra national subsidy boondoggle.

Instead of dangling subsides, which everyone else in the eco-devo game is doing, let’s try a unique incentive: Sedgwick County just eliminated its property tax! We should try this because it can work.

In 1995 Kansas eliminated its state unemployment tax because the fund had developed a large cash balance. This five year tax moratorium created a unique economic advantage for Kansas business. Within a couple of years, the Kansas economy enjoyed a substantial surge in economic growth. Kansas became a leader enjoying some of the fastest economic growth between 1997 to 1999. Eventually, the unemployment fund’s cash balance shrank. By 1999 the unemployment tax was restored. This unique tax advantage was eliminated.

As a county commissioner I am focused on creating a special advantage for everyone in Sedgwick County. Eliminating the county’s property tax is an idea whose time has come.

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WichitaLiberty.TV: Government accounting, Government ownership of infrastructure, and Wichita commercial property taxes

In this episode of WichitaLiberty.TV: Government leaders tell us they want to run government like a business. But does government actually do this, even when accounting for its money? Then, is it best for government to own all the infrastructure? Finally, taxes on Wichita commercial property are high, compared to the rest of the nation. Episode 46, broadcast June 8, 2014. View below, or click here to view at YouTube.

Wichita Chamber of Commerce 2013-07-09 004

A lesson for Wichita in economic development

When a prominent Wichita business executive and civic leader asked for tax relief, his reasoning allows us to more fully understand the city’s economic development efforts and nature of the people city hall trusts to lead these endeavors.

In November 2013 the Wichita City Council granted an exemption from paying property and sales tax for High Touch Technologies, a company located in downtown Wichita. This application is of more than usual interest as the company’s CEO,

High Touch, Wichita, Kansas.
High Touch, Wichita, Kansas.
Wayne Chambers, is now chair of the Wichita Metro Chamber of Commerce. The Chamber, along with its subsidiary Greater Wichita Economic Development Coalition, are the main agencies in charge of economic development for the Wichita area. Under Chambers’ leadership, these organizations are recommending that the city council authorize a vote on raising the Wichita sales tax for the purposes of economic development.

Let’s take a look at some of the aspects of this company’s application and the city’s agenda packet material (available here).

In its application letter, High Touch argues as follows (emphasis added):

To demonstrate our commitment to Wichita, as well as accommodate our expected growth plans, High Touch Technologies would like to purchase a 106,000 sq. ft. building in Downtown Wichita.

At this time, High Touch Technologies is requesting your support for the issuance of approximately $2,000,000 City of Wichita, Kansas, Taxable Industrial Revenue Bonds. High Touch greatly appreciates any support we can receive on the purchase of this office building through the City’s participation of Industrial Revenue Bonds and the property tax savings associated with this financing method. We intend to continue our growth and expansion over the next several years and these benefits would be helpful in offsetting the substantial capital requirements associated with this project.

High Touch Technologies believes in Wichita and support the community and its economy through corporate stewardship programs. We look forward to working with you and Members of the Council on this project and are always available to answer questions regarding this project or any of our business activities.

Later in the letter:

The applicant agrees to enter into an agreement for Payment in Lieu of Taxes (PILOT) equal to the ad valorem property tax payment amount for the 2013 tax year. The applicant respectfully requests that the payments be capped at that rate for a period of ten (10) years. The tax abatement will permit the applicant to proceed with the anticipated project, allow for its anticipated growth, and result in the public benefits otherwise outlined herein.

The issuance of Industrial Revenue Bonds will be used to lower the cost of office space in the acquired building. The lower costs will give High Touch, Inc. incentive to grow its presence in the corporate office in Wichita. New employees will be added to this Wichita office instead of other offices across the U.S. The savings in office space will allow High Touch, Inc. to use those savings for expansion.

Some remarks:

To demonstrate our commitment to Wichita: This is ironic because High Touch is asking to be excused from paying the same property taxes that most other people and business firms have to pay. Instead of commitment, this demonstrates hostility to the taxpayers of Wichita, who will have to pay more so that this company can pay less.

chutzpa definition 2But that irony is surpassed by the spectacle — chutzpa — of the incoming chair of a city’s chamber of commerce threatening to move his company out of the city unless the company receives incentives.

helpful in offsetting the substantial capital requirements: Well. Who wouldn’t appreciate help in offsetting the cost of anything? We should categorize this as unpersuasive.

corporate stewardship programs: Underlying this argument is that because High Touch makes charitable contributions, it should be excused from the same tax burden that most of us face. Here’s a better argument: Be a good corporate citizen by paying your fair share of taxes. Don’t ask for others to pay your share of taxes. That will let citizens make their own charitable contributions, instead of subsidizing what Wayne Chambers want to do.

Cronyism in Wichita - High Touchanswer questions regarding this project or any of our business activities: This refers to how the members of the city council will make a judgment that this business is worthy of subsidy, and that others are not. 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 demonstrated that it is through markets and their coordination of dispersed knowledge that we best learn where to direct capital investment. It is simply impossible for this city government to effectively decide in which companies Wichitans should invest their tax dollars. Nonetheless the city council made the decision, and it wants a larger role.

Payment in Lieu of Taxes (PILOT): High Touch is not proposing to totally escape its tax burden. Only partially so, through the PILOT. But the proposed payment is quite generous to the company. A few quick (and probably imprecise) calculations shows how small the PILOT is compared to what taxes would be. City documents indicate the proceeds of the IRBs will be used to pay for $2,000,000 of improvements. This amount of commercial property times 25% assessment ratio times 120.602 mill levy rate equals $60,301 in taxes. High Touch, through the PILOT, is proposing to pay $33,250, just a little more than half of what the taxes might be.

But the true value of the taxes being avoided is probably much higher. As an example, nearby office space is listed for sale at $28 per square foot, and that’s a distress-level price. Applying that price to this building, its value would be almost $3 million. If we look at market capitalization rates, which are generally given as from nine to eleven percent for class A space, we arrive at a much higher value: If we say $10 per square foot rental rate times 106,000 square feet at nine percent cap rate, the value would be almost $12 million. Taxes on that would be about $300,000 per year.

Wichita Chamber of Commerce 2013-07-09 004These are back-of-the-envelope calculations using assumed values that may not be accurate, but this gives an idea of what’s actually happening in this transaction: High Touch is seeking to avoid paying a lot of taxes, year after year. But by offering to pay a small fraction as PILOT, the company appears magnanimous.

payments be capped at that rate for a period of ten (10) years: High Touch proposed that what it’s paying in lieu of taxes not be subject to increases. Everyone else’s property taxes, of course, are subject to increases due to either assessed value increases or mill rate increases, or both. High Touch requests an exemption from these forces that almost everyone else faces.

lower the cost of office space: Again, who wouldn’t enjoy lower business or personal expenses? The cost of this incentive spreads the cost of government across a smaller tax base than would otherwise be, raising the cost of government for almost everyone else.

added to this Wichita office instead of other offices across the U.S.: The threat of relocation or expansion elsewhere is routinely used to leverage benefits from frightened local governments. These threats can’t be taken at face value. There is no way to know their validity.

use those savings for expansion: Implicit in this argument is that Wichita taxes prevent companies from expanding. True or not, this is a problem: If taxes are too high, we’re missing out on economic growth. If taxes are not too high, but some companies seek exemption from paying them nonetheless, that’s a problem too.

A prosperous company, establishing the template for seeking business welfare

In a December 2011 interview with the Wichita Eagle, the High Touch CEO bragged of how well the company is doing. The newspaper reported “Ask Wayne Chambers how business is, and he’s going to tell you it’s good. Very good. … Chambers said this week that after two years of robust growth, he’s looking for another one in 2012. ‘We have every reason to believe we’ll continue that growth pattern,’ he said.”

In February 2013 the Wichita Business Journal reported “It should be a great year for High Touch Inc. That’s the initial prediction of CEO Wayne Chambers, who says actions the company took during and leading up to 2012 have positioned High Touch to become a true ‘IT solutions provider.’”

If we take Chambers at his word — that his company is successful — why does High Touch need this business welfare? Economic necessity is usually given as the justification of these incentives. Companies argue that the proposed investment is not feasible and uneconomic without taxpayer participation and subsidy. I don’t see this argument being advanced in this case.

Wichita and peer per capita income, Visioneering

Interestingly, at the time of this application Chambers was co-chair of Visioneering Wichita, which advocates for greater government involvement in just about everything, including the management of the local economy. One of the benchmarks of Visioneering is “Exceed the highest of the annual percentage job growth rate of the U.S., Omaha, Tulsa, Kansas City and Oklahoma City.” As shown in this article and this video, Wichita badly lags the nation and our Visioneering peer cities on this benchmark. Visioneering officials didn’t want to present these results to government officials this year, perhaps on the theory that it’s better to ignore problems that to confront them.

Now Wayne Chambers is the chair of the Wichita Metro Chamber of Commerce. Under his leadership, the Chamber of Commerce recommends that Wichitans pay higher sales tax to support the Chambers’ projects.

Will this blatant cronyism be the template for future management of economic development in Wichita? Let’s hope not, as the working people of Wichita can’t tolerate much more of our sub-par economic growth.

Using the visualization.

Tax collections by the states

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

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

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

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

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

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

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

Wind farm near Spearville, Kansas.

Kansas City Star’s dishonest portrayal of renewable energy mandate

Commentary from Kansas Policy Institute.

Kansas City Star’s dishonest portrayal of renewable energy mandate

By Dave Trabert

A recent Kansas City Star editorial criticizing opponents of Kansas’ renewal energy mandate for being disingenuous was itself a fine example of disingenuity.

Kansas law mandates that utility companies purchase specific levels of renewable energy, which means that Kansans are forced to purchase wind energy and pay higher energy prices. The degree to

Wind farm near Spearville, Kansas.
Wind farm near Spearville, Kansas.
which it is more expensive is a matter of dispute, but even the Star admits that wind is more expensive than fossil fuel alternatives. The Star describes this mandate as “consumer-friendly.”

They falsely say “these laws encourage electric facilities to supplement their use of fossil fuels with renewables.” The law does not “encourage;” it requires.

The Star touts economic gains to the wind industry but ignores the reality that those gains come at the expense of everyone else in the form of higher taxes, higher electricity prices and other unseen economic consequences.

They conclude by saying people “deserve a choice”, but mandates are the opposite of choice. Real choice would not only allow citizens to individually decide whether to purchase renewable energy, but to choose their energy supplier as well. Maybe it’s time to look at breaking up the utility monopoly in Kansas as other states have done.

Wichita City Budget Cover, 1994

Wichita property taxes compared

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

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

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

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

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

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

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

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

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WichitaLiberty.TV: Uber not for Wichita, Wichita fails at transparency, and Wichita jobs

In this episode of WichitaLiberty.TV: Uber is an innovative transportation service, but is probably illegal in Wichita. Then, the City of Wichita fails again at basic government transparency. Finally, a look at job growth in Wichita compared to other cities. Episode 45, broadcast June 1, 2014. View below, or click here to view at YouTube.

Wichita City Budget Cover, 1967

In Wichita, everything that can be done has been done, except this

Discussions of Wichita’s deteriorating infrastructure and economy should lead us to ask: Who has been in charge, and is this all we can do?

Recently the City of Wichita decided to use a new method to measure the condition of city streets. The new method is Remaining Service Life (RSL). It’s a measure of the condition of city streets. The city has also used a Pavement Condition index.

A recent white paper from the city held this analysis of the city’s streets and their future condition:

The model demonstrated that, with the current level of $8 million in annual funding, the City’s street network would decline in value from the current $444.9 million to $79.6 million over the 40-year period. In addition, the current RSL value of 42,213 lane mile years would fall to 5,524 lane mile years. In other words, the continuation of past strategies with the current level of funding would result in a deterioration of the Wichita street infrastructure in the long term. However, over the same 40-year period, utilizing new strategies, the current level of funding would result in streets in basically the same condition as today, with the Network Service Value increasing by $14 million (to $458.3 million) and the RSL slightly higher at 42,898.

Wichita Pavement Condition Index, from the city's 2012 Performance Measure Report
Wichita Pavement Condition Index, from the city’s 2012 Performance Measure Report
The takeaway from this passage is that the city has not been maintaining its streets adequately. The city’s analysis finds that at current funding levels, the overall condition of Wichita’s streets will continue to decline. This message is not new. As you can see in this chart from the city, the Pavement Condition Index has been deteriorating, and as of its publication in the 2012 Performance Measures Report was projected to continue to decline. The black line running horizontally near the top of the chart is the city’s benchmark as to where it would like the pavement condition index to be.

In its explanation, the Performance Measure Report says “Because many streets in residential areas have deteriorated significantly, an increased investment in street maintenance will be necessary to raise Wichita’s street condition to the benchmark.” This represents future spending that will be required in order to correct the city’s lack of care for its capital assets.

Political leadership and long-term thinking

On these and other issues, the Wichita Eagle recently quoted Wichita Mayor Carl Brewer: “We’ve put them off for too long. We didn’t want the challenges. We didn’t want the tax bills. But now, to maintain our quality of life, we’ve got to catch up.”

Carl Brewer as bystanderIt’s often said that business is interested only in short term results. Driven by the pressures of profit, business firms can’t invest for the long term. Investments and decisions involving a long time horizon, it is contended, must be left to government.

But here we see the city failing to maintain the assets we need to survive. Instead of proactively managing its assets, we have Wichita’s mayor telling us that we have to raise taxes to “catch up” with what we haven’t been doing. That is lack of long-term thinking and decision making.

When discussing the deteriorating condition of city assets or the city’s poor economy, Mayor Carl Brewer speaks as though he was a bystander. But he’s been mayor for over seven years, and was on the city council before that time. During that time, he and other city leaders have boasted of not increasing property taxes. While the property tax rate has been stable (in fact it has risen slightly), property tax revenue has increased due to development of new property and rising assessment values. Even with this rising revenue, the city has a huge backlog of deferred maintenance. The way to interpret this is that the city has really been engaging in deficit spending under Brewer’s leadership. The city didn’t spend what was needed to maintain its assets — assets like streets, water, and sewer infrastructure — and now the mayor tells us we need to increase taxes and spending to make up for this.

The economist Milton Friedman told us that it’s more important to look at government spending rather than the level of taxation. That’s because spending must eventually be paid for, either through current taxes or future taxation. The federal government generate deficits and can pay for spending through creating inflation. Fortunately, cities and states can’t do that.

But as we’ve seen, cities like Wichita can incur costs without paying for them. This is a form of deficit spending. By deferring maintenance of our infrastructure, the city has pushed spending to future years. The magnitude of this deferred spending is huge.

This form of deficit spending is “off the books” and doesn’t appear in city financial statements. But it’s real, as the mayor now admits.

Everything that can be done, has been done

City leaders often tell us that budgets have been cut, services have been pared, salaries have been frozen, and there’s nothing more the city can do except to raise taxes.

But now and then, the city lets us know that there are alternatives. From the recent white paper: “Using the new model, street maintenance will be done more efficiently, matching treatment options to streets in the most efficient manner possible.”

Can we conclude that everything that can be done has been done, except operating more efficiently?

Wichita area future water supply cover

For Wichita, water supply decisions loom

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

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

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

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

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

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

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

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

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

Economic vs. political thinking

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

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

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

How did Wichita get in this position?

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

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

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

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

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

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

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

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.

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WichitaLiberty.TV: Alternatives to raising taxes, how to become involved in politics, and bad behavior by elected officials

In this episode of WichitaLiberty.TV: Wichita voters tell pollsters that they prefer alternatives to raising taxes. Then, how can you get involved in politics? A deadline is approaching soon. Finally, some examples of why we need to elect better people to office. Episode 44, broadcast May 25, 2014. View below, or click here to view at YouTube.

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Kansas economy has been lagging for some time

Critics of tax reform in Kansas point to recent substandard performance of the state’s economy. The recent trend, however, is much the same as the past.

real-gdp-state-2014-05-19There are a number of ways to measure the performance of an economy. Often the growth of jobs is used. That’s fine. Here I present an alternative: the gross domestic product for a state. As with job growth, it is not the only measure of a state’s economy. It is a comprehensive measure, encompassing changes in population, employment, and productivity. The nearby static illustration from an interactive visualization shows Kansas (highlighted in blue) compared to some neighboring states.

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

Use the visualization below, or click here to open it in a new window, which may work best. Visualization created using Tableau Public.

Wichita City Budget Cover, 1975

To fund government, Wichitans prefer alternatives to raising taxes

Wichita City Budget Cover, 1975Wichita voters prefer adjusting spending, becoming more efficient, using public-private partnerships, and privatization to raising taxes.

In April Kansas Policy Institute commissioned SurveyUSA to conduct a scientific poll concerning current topics in Wichita. The press release from KPI, along with a link to the complete survey results, is available at Poll: Wichitans don’t want sales tax increase.

Question nine asked how Wichita voters preferred paying for new government spending: “To fund existing infrastructure, build new infrastructure, and secure a long-term water source should Wichita fund those items by adjusting spending and being more efficient rather than raising taxes?”

Overall, 78 percent of Wichita voters answered “Yes,” meaning they prefer that Wichita adjust spending and become more efficient. 12 percent answered “No,” meaning they were in favor of raising taxes instead.

A related question was “Should Wichita fund those items through public-private partnerships, or privatization, rather than raising taxes?”

Overall, 65 percent answered “Yes,” meaning they prefer public-private partnerships, or privatization. 25 percent answered “No,” indicating a preference for raising taxes.

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Debunking CBPP on tax reform and school funding — Part 4

From Kansas Policy Institute.

Debunking CBPP on tax reform and school funding — Part 4

By Dave Trabert

kansas-policy-institute-logoWe continue our debunking of the Center on Budget and Policy Priorities (CBPP) latest report entitled “Lessons for Other States from Kansas’ Massive Tax Cuts.” Part 1 dealt with state revenues. Part 2 covered state spending in general and school funding in particular. Part 3 addressed claims that that tax reform hasn’t boosted the economy. Today we tackle their assertion that tax cuts won’t lead to economic growth.

CBPP claim #4 — Little Evidence to Suggest That Tax Cuts Will Improve Kansas’ Economy in the Future

Actually, there is a lot of evidence; CBPP just conveniently avoids it. Instead, they substitute their opinion and employ their standard tactic of making claims without disclosing supporting data; they also reference predictions that Kansas will trail the nation next year in some economic indicators.

We’ll start the debunking with a brief history lesson. Private sector job growth in Kansas trailed the national average in ten of the last fifteen years (1998-2013). Kansas’ private sector gross domestic product trailed eight times (1997-2012) and personal income trailed eleven of the last fifteen years (1998-2013). Indeed, Kansas’ history of economic stagnation was the impetus for tax reform. As we explained in Part 3, the full economic impact of tax reform will take years to unfold. It’s intellectually dishonest of CBPP to imply that tax reform isn’t working because a long term negative trend hasn’t suddenly created tremendous gains.

Now let’s look at the evidence. The adjacent table compares the performance of the ten states with the lowest state and local tax burdens with the ten states with the highest burdens, based on the most recent rankings from the Tax Foundation. The low-burden states are Wyoming, Alaska, South Dakota, Texas, Louisiana, Tennessee, New Hampshire, Nevada, South Carolina and Alabama. The high-burden states are New York, New Jersey, Connecticut, California, Wisconsin, Minnesota, Maryland, Rhode Island, Vermont and Pennsylvania.

The low-burden states increased jobs at twice the rate of high-burden states. Low-burden states have superior growth in Wages and Salaries and Private Sector Gross Domestic Product. Low-burden states have positive domestic migration while high-burden states have negative domestic migration. In other words, US residents are choosing to move to low-burden states and choosing to leave high-burden states.

Tax reform critics like to attribute the superior economic performance of low-burden states to weather and access to ports and natural resources. But you’ll notice that both groups have states with good weather, bad weather, coastal, land-locked and natural resources. But there is one category which really separates the two groups of states — spending. High-burden states spend 40 percent more per resident to provide the same basket of essential services. States with an income tax spend 49 percent more than those without an income tax.

The key to having low taxes is to keep spending under control by providing services at a better price. A state could be awash in oil revenue and still have a high tax burden if it spent more. Texas, by the way, gets less than 3 percent of revenue from oil; they have a low tax burden because they only spent $2,293 per resident to provide the same basic basket of services on which Kansas spent $3,409 (2012 actual per NASBO).

The moral of the story is pretty clear: states that spend less, tax less — and grow more.

Myth: The Kansas tax cuts haven’t boosted its economy

From Kansas Policy Institute.

Debunking CBPP on tax reform and school funding — Part 3

By Dave Trabert

kansas-policy-institute-logoWe continue our debunking of the Center on Budget and Policy Priorities (CBPP) latest report entitled “Lessons for Other States from Kansas’ Massive Tax Cuts.” Part 1 dealt with state revenues and Part 2 covered state spending in general and school funding in particular. Today we debunk their claims that tax reform hasn’t boosted the economy.

CBPP claim #3 – Kansas’ tax cuts haven’t boosted its economy.

While tax reform hasn’t produced the “shot of adrenaline” predicted by Governor Brownback, the problem is one of political enthusiasm rather than economics. Most elected officials are prone to effusive optimism for their ideas, just as opponents to their ideas can often be counted upon to distort and deliberately misstate information in pursuit of their own beliefs.

The data pretty clearly shows that states with lower tax burdens have much stronger economic growth and job creation over time; we’ll review the facts in Part 4. Today’s post covers some of the reasons why the benefits of Kansas’ tax reform will unfold over several years rather than overnight and explain a number of misleading claims by the Center on Budget and Policy Priorities (CBPP).

Many employers are also awareFirst of all, tax reform was implemented while coming out of a recession. It’s impossible to know the extent to which this impacts employers’ decision-making on adding jobs or relocating, but having run a few businesses, I can appreciate how the initial benefits of tax reform might be used to shore up the business while continuing to work through the recession.

Concurrent federal changes are also a factor. Pass-through income on LLCs, Subchapter S corps, partnerships and proprietorships was not subject to state income tax in 2013 but those employers were simultaneously hit with higher federal income taxes (marginal rates and on capital gains) and multiple changes related to Obamacare.

Predictability is an important element of tax policy, and some of the mixed signals coming out of Topeka over the last two years may also be prompting taxpayers to proceed cautiously. The 2012 tax reform legislation would have reduced income taxes by $4.5 billion over the first five years but changes implemented in 2013 took back about $700 million. While still a very positive net effect, the 2013 changes sent a number of mixed signals.

Many employers are also well aware that a majority of legislators and Governor Brownback have not yet made the necessary (and quite feasible) spending reductions that will be required to fully implement tax reform. Kansas’ General Fund budget in 2012 was 25 percent more per-resident than states with no income taxtotal budgeted spending was 39 percent higher on a per-resident basis. Every state provides the same basic services – public education, highways, social services programs, etc. — but some states provide those services at a much better price and keep taxes low.

The fiscal year 2015 General Fund budget of $6.273 billion is a new record for Kansas and is 2.9 percent higher than the 2012 budget. Until government is made to operate more efficiently, taxpayers must consider the possibility of further modifications to the tax plan — and that uncertainty will continue to impact economic growth.

Relocating a business is also not something that happens quickly. For starters, leases might have several years to run before a move is feasible.

CBPP uses a combination of unsubstantiated claims, fails to put a lot of information in context and exploits the unrealistic notion that tax reform would have an immediate, explosive impact on the state’s economy. “Data from” is not how intellectually honest people substantiate a position; they show you all their data or at least tell you exactly what data they used and where to find it. Claiming that a one-year change in jobs or earnings is proof that something as complex as major tax reform failed is just a political statement; it is certainly not an intellectually honest economic analysis.

Yes, private sector job grew a little slower in 2013 than in 2012, but that was not a Kansas phenomenon. In fact, private sector job growth nationwide in 2012 was 2.2% but dipped to 2.1% in 2013.[1] This is a good example of CBPP ignoring context.

It’s also important to examine the underlying factors that contribute to a state average. The adjacent table shows that Kansas did better than all but one adjacent state in 2013. Colorado did better, but then Colorado has historically had a better tax structure than Kansas and also did a better job of controlling spending. Less favorable tax and spending policy has been introduced in Colorado over the last few years but, just as it takes time for upward momentum to build, it does as well for the full measure of bad policy to be seen.

Digging deeper, we find that the Kansas City, Kansas metro area not only outperformed the national average but also grew at five times the rate of the Kansas City, Missouri metro area. The Wichita metro lost jobs in aerospace but that is a reflection of the global economy; the balance of the Wichita metro was almost at the national average.

CBPP dismisses the increase in new business filings but if history is any guide, these gains are quite significant. Research conducted by the Center for Applied Economics at the University of Kansas found that, if not for jobs created by new startups in their first year of existence, Kansas would have only had two years of net job growth between 1997 and 2010.

Dr. Arthur Hall, who conducted the research at KU, says “Economic development is a numbers game. The more that an economic environment motivates entrepreneurs to try new business ideas, the more likely a gazelle will be born.” Dr. Hall cites Garmin Industries as an example of what he calls a “gazelle” — a company founded by two people in Lenexa, Kansas in 1989 that is now a multi-billion dollar company.

Hall’s views are similar to those of Carl Schramm, former CEO of the Ewing Marion Kauffman Foundation, a leading entrepreneurial think tank in Kansas City. In 2010, Schramm told Forbes Magazine “The single most important contributor to a nation’s economic growth is the number of startups that grow to a billion dollars in revenue within 20 years.”[3]

The initial economic signs are encouraging but the true economic impact of tax reform won’t be known for several years. Snap judgments based on partial one-year data are the hallmark of politicians and special interest groups looking for justification to support their beliefs — whether in support of or opposition to tax reform.

[1] Bureau of Labor Statistics, average annual private sector employment not seasonally adjusted.

[2] The Kansas City, Kansas metro is comprised of Franklin, Johnson, Leavenworth, Linn, Miami and Wyandotte counties.  The Kansas City, Missouri metro is comprised of Bates, Caldwell, Cass, Clay, Clinton, Jackson, Lafayette, Platte and Ray counties.

[3] “What Grows an Economy,” Forbes Magazine.

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WichitaLiberty.TV: Examining surveys about the future of Wichita

In this episode of WichitaLiberty.TV: What do Wichitans want for their city’s future? Surveys from the City of Wichita and Kansas Policy Institute are examined. Episode 42, broadcast May 11, 2014. View below, or click here to view at YouTube.

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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.

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Wichitans willing to fund basics

Wichita City Hall SignIn Wichita, voters are willing to pay a higher sales tax for fundamentals like infrastructure and water supply, and less willing for business incentives, downtown development, and convention centers.

In April Kansas Policy Institute commissioned SurveyUSA to conduct a scientific poll concerning current topics in Wichita. The press release from KPI, along with a link to the complete survey results, is available at Poll: Wichitans don’t want sales tax increase.

In a series of questions asking if Wichita voters would be willing to pay a higher sales tax to provide certain services, a pattern appeared: Voters are willing to pay for things that are fundamental in nature, and less willing to pay for others.

As can be seen in the nearby chart, voters are willing to pay for infrastructure, and more willing to pay for maintenance of existing infrastructure than for new infrastructure. Voters are most willing to pay for securing a long-term water source.

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For business incentives, downtown development, and convention centers, Wichita voters express less willingness to pay higher sales tax to fund these items.

For the first three items, the average was 68 percent of voters willing to pay a higher sales tax. For the last three, the average is 30 percent.

Following is the complete text of the questions:

Would you personally be willing to pay a higher sales tax in the city of Wichita to fund incentives to businesses expanding in Wichita or moving here from other states?

Would you personally be willing to pay a higher sales tax in the city of Wichita to fund maintenance work on existing infrastructure, such as sewers and roads?

Would you personally be willing to pay a higher sales tax in the city of Wichita to fund new infrastructure, such as new highways and passenger rail connections?

Would you personally be willing to pay a higher sales tax in the city of Wichita to continue developing downtown Wichita with apartments, businesses, and entertainment destinations?

Would you personally be willing to pay a higher sales tax in the city of Wichita to expand or renovate convention spaces, such as the Hyatt Hotel and Century II?

Would you personally be willing to pay a higher sales tax in the city of Wichita to secure a long-term water source?

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Wichita property tax rate, the history

The City of Wichita is fond of saying that it hasn’t raised its mill levy in many years. But the mill levy has increased in recent years, and the use of the tax revenue has shifted.

wichita-mill-levy-table-2014-05In 2002 the City of Wichita mill levy rate was 31.845. In 2012 it was 32.471, based on the city’s Comprehensive Annual Financial Report. That’s an increase of 0.626 mills, or 1.97 percent. The Wichita City Council did not take explicit action to raise this rate. Instead, the rate is set by the county based on the city’s budgeted spending and the assessed value of taxable property subject to Wichita taxation. While the city doesn’t have control over the assessed value of property, it does have control over the amount it decides to spend.

Although the mill levy has increased slightly, property tax revenue collected has risen faster. From 2002 to 2012 property tax revenue increased from $82.948 to $118.990 million, or 43.5 percent. We didn’t experience anything near that rate of growth in population or inflation. For the same period sales tax revenue to the city rose from $40.982 million to $54.095 million, or 32.0 percent.

wichita-mill-levy-chart-2014-05The allocation of city property tax revenue has shifted in a troubling way. According to the 2010 City Manager’s Policy Message, page CM-2, “One mill of property tax revenue will be shifted from the Debt Service Fund to the General Fund. In 2011 and 2012, one mill of property tax will be shifted to the General Fund to provide supplemental financing. The shift will last two years, and in 2013, one mill will be shifted back to the Debt Service Fund. The additional millage will provide a combined $5 million for economic development opportunities.”

This shift has not caused the city to delay paying off debt. This city is making its scheduled payments. But we need to recognize that approximately 2.5 mills (now about 2 mills) that could have been used to retire debt has instead been shifted to support current spending. Instead of spending this money on current consumption — including economic development spending that has produced little result — we could have, for example, used that money to purchase some of our outstanding bonds.

The video below is of interest as it provides insight into the level of knowledge of some elected officials and city staff.

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Few Wichitans support taxation for economic development subsidies

line-chart-01In Wichita, about one-third of voters polled support local governments using taxpayer money to provide subsidies to certain businesses for economic development.

In April Kansas Policy Institute commissioned SurveyUSA to conduct a scientific poll concerning current topics in Wichita. The press release from KPI, along with a link to the complete survey results, is available at Poll: Wichitans don’t want sales tax increase.

The second question the survey asked was “In general, do you agree? Or disagree? With the idea of local governments using taxpayer money to provide subsidies to certain businesses for economic development?” Following are the results for everyone, and then divided by political party and political ideology.

Overall, 55 percent disagreed with using taxpayer money to provide subsidies to certain businesses for economic development. 34 percent agreed.

The results are fairly consistent across political party and ideology, although Republicans are somewhat more likely to agree with using taxpayer funds for economic development incentives, as are those who self-identify as political moderates.

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Wichita City Budget Cover, 1994

Wichita’s benchmark not applicable to overlapping jurisdictions, it seems

Wichita Economic DevelopmentThe City of Wichita insists on a certain level of return on investment for its economic development incentives, but doesn’t apply that criteria to overlapping jurisdictions.

This week the Wichita City Council will consider an economic development incentive to a company. The council requires that incentive projects show a benefit-cost ratio of 1.3 to one or greater, meaning that the city expects to gain $1.30 or more for every dollar it invests in the incentive program.

For the project the city will consider on May 6, that threshold is met for the city’s general and debt service funds, and also for Sedgwick County and the State of Kansas. But for USD 259, the Wichita public school district, the benefit-cost ratio is 1.23 to one. That’s below the criteria the city requires for itself, although the policy contains many exceptions.

The program used to deliver this incentive is Economic Development Exemption (EDX) . It provides relief from property taxes based on a formula that considers job creation and capital investment. In this case, the company qualifies for a 93.25 percent real property tax exemption for up to ten years. Not 92 percent, and not 94 percent. Instead, the city has determined that precisely 93.25 percent is the correct amount of property tax exemption to be awarded. (Which reminds me of the saying that economists use a decimal point now and then to remind us they have a sense of humor.)

Furthermore, the decision to award the tax exemption is made solely by the City of Wichita. The other taxing jurisdictions have no say in the matter and no ability to object. So while Wichita requires a benefit-cost ratio of 1.3 to one or better, it’s saddling the Wichita school district with a benefit-cost ratio of 1.23 to one.

This is all the more meaningful when we consider that the Wichita school district is the largest participant in the incentive. The amount of tax revenue the school district is giving up — perhaps against its will — is almost as large as the city, county, and state put together. These are the amounts of foregone tax revenue for each jurisdiction, according to city documents.

City $14,096
State $651
County $12,738
USD 259 $24,810

Perhaps it’s time to consider laws in Kansas that would allow counties, school districts, and the state to opt out of economic development incentive decisions made by cities.