Individual liberty, limited government, and free markets in Wichita and Kansas
Tax Fairness for All Wichitans has an information sheet available to help Wichitans learn more about the February 28th election regarding the Ambassador Hotel guest tax rebate.
You can download a printable pdf version of the information sheet by clicking on Tax Fairness for All Wichitans Information Sheet. Or, view the document below. (Hint: Click on “Fullscreen” at the bottom of the document for a larger view.)
Tax Fairness for All Wichitans Information Sheet
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Last night Wichita Mayor Carl Brewer delivered his annual State of the City Address. The text of the address may be read at State of the City Address.
In his speech, Brewer several times criticized those who act on “partisan agendas.” This is quite a remarkable statement for the mayor to make. Partisan usually refers to following a party line or platform. The mayor didn’t mention who he was criticizing, but it’s likely he was referring to myself and others like John Todd, Susan Estes, and Clinton Coen, as we appear regularly before the city council, usually in disagreement with the mayor and his policies.
What’s remarkable is that the council, even though it has four Republican members, almost always votes uniformly with Democrat Brewer and the other two politically liberal members of the council. The only exception is Michael O’Donnell (district 4, south and southwest Wichita), who is often in a minority of one voting in opposition to the other six. The other Republican members — Pete Meitzner (district 2, east Wichita), James Clendenin (district 3, southeast and south Wichita), and Jeff Longwell (district 5, west and northwest Wichita) — routinely vote in concert with the Democrats and liberals on the council.
Remarkable also are the many members of the business community who appeal to the council for subsidies, increased government intervention, and more central planning from city hall: many of these are Republicans. Conservative Republicans, many have personally told me.
This describes a lack of partisanship. Most of the mayor’s critics, such as myself, are more accurately characterized not as acting along party lines, but as acting on their belief in economic freedom, free markets, and limited government.
The mayor said that the city’s efforts in economic development had created “almost 1000 jobs.” While that sounds like a lot of jobs, that number deserves context.
According to estimates from the Kansas Department of Labor, the civilian labor force in the City of Wichita for December 2011 was 192,876, with 178,156 people at work. This means that the 1,000 jobs created accounted for from 0.52 percent to 0.56 percent of our city’s workforce, depending on the denominator used. This miniscule number is dwarfed by the normal ebb and flow of other economic activity.
The mayor did not mention the costs of creating these jobs. These costs have a negative economic impact on those who pay these costs. This means that economic activity — and jobs — are lost somewhere else in order to pay for the incentives.
The mayor’s plan going forward, in his words, is “We will incentivize new jobs.” But under the mayor’s leadership, this “active investor” policy has produced a very small number of jobs, year after year. Doubling down on the present course is not likely to do much better.
But there are those who disagree, despite all evidence to the contrary. Sedgwick County Commissioner Dave Unruh — a conservative Republican, for those keeping track of partisanship — recently called for a “deal-closing” fund of $100 million. A funding source of this magnitude would undoubtedly require a new tax. There are many who feel there should be a new sales tax devoted to economic development and downtown Wichita development. We should not be surprised to see such a proposal emerge, and not be surprised that civic and business institutions will support it.
The mayor repeatedly said that the city has been “courageous.” In reality, Wichita does about the same as everyone else. But there is a way Wichita could distinguish itself among cities.
Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business has made a convincing case that Kansas needs to move away from the “active investor” approach to economic development. This is where government decides which companies will receive special treatment, be it in the form of tax abatements, tax credits, grants, tax increment financing, community improvement district special taxes, and other forms of subsidy. Being an “active investor” has been the approach of the City of Wichita, and according to the mayor’s vision, this plan is to be stepped up in the future.
In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”
Later, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and Kansas rely on for economic development: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”
We need business and political leaders in Wichita and Kansas who can see beyond the simplistic imagery of a groundbreaking ceremony and can assess the effect of our failing economic development policies on the entire community. Unfortunately, we don’t have many of these — and Mayor Brewer leads in the opposite direction.
In his speech, Brewer was critical of those who “spread misinformation.” He was not specific as to who he’s criticizing, and I wouldn’t expect him to name specific people in a speech like this.
But when the mayor criticizes people for being uninformed or misinformed, he needs to look first at himself. He and city staff also need to engage their critics and be responsive to requests for information.
As an example of misinformation, the mayor cited this evidence that city policies are working: “The proposed Ambassador Hotel with a 3-to-1 private to public investment ratio.”
The city arrived at this ratio by employing a very narrow definition of public investment. When tax credits from the State of Kansas and federal government as well as other sources of public subsidy are accounted for, the ratio drops to less than two to one.
It’s true that considering only the city’s artificially narrow definition of public funding, the ratio does reach three to one. But Wichitans also have to pay part of the costs of the tax credits and other subsidies.
The city has also been less than honest in its promotion of the cost-benefit ratio for the Ambassador Hotel project. The city officially cites a cost-benefit study produced by Wichita State University Center for Economic Development and Business Research. Part of that study produced a cost-benefit ratio of 2.63 to one, and that’s what the city uses as justification for its participation in the project.
But the full story of the costs and benefits of this project are contained in these numbers from the WSU analysis:
ROI Cost-benefit ratio
City Fiscal Impacts General Fund 163.2% 2.63
City Fiscal Impacts Debt Service -17.2% 0.83
City Fiscal Impacts -9.8% 0.90
WSU evaluated the impact of the Ambassador Hotel on the City of Wichita’s finances in two areas: The impact on the city’s General Fund, and separately on the city’s Debt Service Fund. The two were combined to produce the total fiscal impact, which is the bottom line in this table.
The City of Wichita cites only the positive impact to the General Fund figure. But the impact on the Debt Service fund is negative, and the impact in total is negative.
It’s true that the ROI and cost-benefit ratio for the General Fund indicate a positive investment return. But the cost of the Ambassador Hotel subsidy program to the General Fund is $290,895, while the cost to the Debt Service Fund is $7,077,831 — a cost factor 23 times as large.
Citizens ought to ask: Who is spreading misinformation?
It is difficult to get a response from city hall regarding questions like these. So far city economic development director Allen Bell has not agreed to meet with representatives of Tax Fairness for All Wichitans, a group opposed to the subsidies for the Ambassador Hotel. (I am part of that group.) The city and its allied economic development groups will not send representatives to participate in a public forum on this matter.
The mayor criticized those who “provide simplistic answers to very complicated challenges.” He may be — we don’t really know — referring to those like myself who advocate for free market solutions to problems rather than reliance on government. Certainly the mayor believes that government must act — “courageously” he said — to confront our problems.
A problem with the mayor’s plan for increased economic interventionism by government is the very nature of knowledge. In a recent issue of Cato Policy Report, Arnold King wrote:
As Hayek pointed out, knowledge that is important in the economy is dispersed. Consumers understand their own wants and business managers understand their technological opportunities and constraints to a greater degree than they can articulate and to a far greater degree than experts can understand and absorb.
When knowledge is dispersed but power is concentrated, I call this the knowledge-power discrepancy. Such discrepancies can arise in large firms, where CEOs can fail to appreciate the significance of what is known by some of their subordinates. … With government experts, the knowledge-power discrepancy is particularly acute.
Relying on free market solutions for economic growth and prosperity means trusting in the concept of spontaneous order. That takes courage. It requires faith in the values of human freedom and ingenuity rather than government control. It requires that government officials let go rather than grabbing tighter the reins of power.
Mayor Brewer, five of six city council members, and the city hall bureaucracy do not believe in these values. Wichita’s mayor is openly dismissive of economic freedom, free markets, and limited government, calling these principles of freedom and liberty “simplistic.” Instead, his government prefers crony capitalism and corporate welfare. This is the troubling message that emerges from Brewer’s State of the City address.
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This Friday (February 3, 2012) the Wichita Pachyderm Club, as part of its regular Friday luncheon series of educational meetings, will conduct a public forum on the February 28th Wichita city election. The subject of the election is a Wichita city charter ordinance that rebates 75 percent of the Ambassador Hotel’s guest tax collection back to the hotel.
John Todd, Vice-President of the Pachyderm Club and in charge of programs, issued invitations to representatives of both sides of the issue. The group Tax Fairness for All Wichitans, of which Todd is part of the leadership team, accepted and is sending Bob Weeks to represent the group.
Todd contacted Paul Coury, one of the developers of the Ambassador Hotel, but he would not appear. David Burk, who is also part of the development group and who has represented the project before the Wichita City Council, also declined.
The Wichita Downtown Development Corporation and the Wichita Chamber of Commerce, while supporting the “Vote Yes” side of the issue, also declined to send someone to speak for the “Vote Yes” campaign. Sheila Tigert, who appears to be managing the “Vote Yes” campaign, also declined to attend or send a representative.
Separate appeals have been made to city council members, Mayor Brewer, and the city manager to send someone to represent the “Vote Yes” side of the issue.
Todd says that democracy is best served when representatives from both sides of an issue participate. He says the invitation to the “Vote Yes” side of the issue is still open. He may be contacted at john@johntodd.net or at 316-312-7335.
The Pachyderm Club is a Republican club. The Wichita branch is notable for the diversity of speakers and educational programs it presents.
The Wichita Pachyderm Club meets at noon Fridays in the Wichita Petroleum Club, on the ninth floor of the Bank of America Center at Douglas and Broadway. The public and news media are invited and encouraged to attend. Video and audio recording are permitted. The program costs $10, which includes lunch and beverage.
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On Friday the Wichita Eagle reported that the involvement of Wichita public relations consultant Beth King in a project seeking city approval was a problem for three members of the Wichita City Council. Not so, however, for the city manager, the mayor, and three other council members.
The crux of the problem is that King is engaged to be married to Wichita City Manager Robert Layton.
But now, as reported in the Wichita Eagle King will step down from her assignment of providing public relations support to the project. With that, the problem is solved, according to city hall standards. The story reports: “About an hour after King announced her resignation, Layton announced that all staff work and recommendations on the STAR bond proposal by GoodSports will be approved by Mayor Carl Brewer in an effort to enhance the project’s transparency.”
So now the issue is put to rest. What have we learned?
In a press release, on comments left on this site, and in personal email correspondence, King says that she has made changes to her business model based on her involvement with the city manager. That’s fine.
But King is not a government employee or elected official. She is not constrained by the special set of ethics rules that should apply to those working in government.
Wichita Mayor Carl Brewer and manager Layton, however, are — or should be — constrained by ethics rules different from the private sector. And while Layton has come around — only after realizing that three city council members were concerned — Mayor Brewer still doesn’t see a problem.
That is the lesson Wichitans need to learn from this episode.
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Reports that the Wichita city manager’s fiancee is involved with a group seeking approval from the city for a project indicate that the city’s perspective on ethics could use reform.
Nearly two years ago Wichita public relations executive Beth King was involved with a group seeking tax increment financing from the city. At the time I met with Wichita Mayor Carl Brewer and expressed my concerns that since King was dating City Manager Robert Layton, there might be a conflict of interest. If not, then at least the appearance of that.
Brewer assured me that there were policies in place to guard against problems, and there was no need to be concerned. During the city council meeting where this issue was discussed, the manager did remove himself, saying that the assistant manager had handled the issue.
But evidently, the mayor’s policies haven’t worked, at least for some council members. According to Wichita Eagle reporting today, three council members believe King’s involvement in the current project is a problem, and the mayor was surprised to learn of King’s involvement.
Brewer and other city council members describe King’s roll as minor — just public relations — and therefore not a problem.
CityEthics.org has a model ethics code that cities and counties might adopt. It states: “An official or employee may not use his or her official position or office, or take or fail to take any action, or influence others to take or fail to take any action, in a manner which he or she knows, or has reason to believe, may result in a personal or financial benefit, not shared with a substantial segment of the city’s population, for any of the following persons or entities …”
Surprisingly, the code does not mention “fiancee” as a person to whom this code should apply. But I think common sense tells us that it should.
The Eagle article described Brewer as “disappointed that council members raised the issue to the media.” If the mayor is concerned that this issue is harming the reputation of the city, there is a solution: Act, Mr. Mayor, as though you are concerned. Establish clear ethics guidelines for the conduct of city employees.
Simply removing one’s self from discussion of, or involvement in, a particular issue isn’t sufficient remedy, however. Most people know where their boss’ interest lie.
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In my coverage of the December 20th, 2011 meeting of the Wichita City Council, I noted the opposition of many council members to the upcoming hotel guest tax election, and how they wanted a quick election date so as to dispose of a citizen uprising as quickly as possible. I had nominated the remarks of Council Member Pete Meitzner (district 2, east Wichita) as perhaps the worst, writing: “Perhaps the worst impression to come out of this meeting is that many Wichita city council members simply don’t care much for what citizens think. It’s hard to pick the most telling example, but Meitzner’s concern that we need to ‘avoid community discourse and debate’ ranks right at the top.” (Wichita City Council sets hotel tax election date, December 26, 2011. The official minutes of the meeting record: “Council Member Meitzner asked if there is any way to have this election moved up to avoid any community discord or debate.”)
At yesterday’s council meeting, Meitzner sought to clarify his remarks in a portion of the meeting where members may offer corrections to the minutes. Meitzner said he didn’t dispute what he actually said at the December 20th meeting, but that what he meant to say was that “I support public debate, including when public discord occurs, as it provides a chance for factual information to be shared about any issue, including this one.”
That’s a good step forward, and I thank Mr. Meitzner for that. Perhaps he can work to change the attitudes of the mayor and some other council members. Then, he and the council can work on their hostility towards the Kansas Open Records Act. See Open records, rights of Kansans disrespected at Wichita City Council and In Wichita, disdain for open records and government transparency.
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Wichita City Council. This week the Wichita City Council will consider the formation of a STAR bond district in northeast Wichita. While this is a complex issue that will take some study to fully understand, the action the council will consider this week is only to set a public hearing for February 14th. A concern is that the developers for the proposed Wichita project are also responsible for the Village West project in Kansas City, Kansas. On November 22, I reported this regarding that project: “The Legends at Village West, a huge shopping development in Kansas City near the Kansas Speedway, has defaulted on its loan. According to reporting in Commercial Real Estate Direct, the property never met its cash flow projections, topping out at $10.3 million per year in 2008. The loan assumed it would generate $11.1 million. Since 2008 cash flow has fallen. The public policy interest is that this facility, along with the nearby racetrack, received millions in sales tax (STAR) bond financing, to be repaid by taxpayers through sales tax collections.”
Kansas House Speaker speaking in Wichita. This Friday (January 13th) the Wichita Pachyderm Club features Speaker of the Kansas House of Representatives Mike O’Neal, speaking on “The untold school finance story.” The public is welcome and encouraged to attend Wichita Pachyderm meetings. For more information click on Wichita Pachyderm Club. Upcoming speakers: On January 20th: Sedgwick County Commissioner Karl Peterjohn. … On January 27, 2012: The Honorable Jennifer Jones, Administrative Judge, Wichita Municipal Court, speaking on “An overview of the Wichita Municipal Court.”
Legislature starts. Today is the first day of the 2012 session of the Kansas Legislature.
State of the State address. Kansas Governor Sam Brownback will deliver the “State of the State” address this Wednesday at 6:30 pm. It appears that public television and radio are the only way to experience this address. A much-anticipated portion of the address is the governor’s plan for tax reform. The plan has been in the works for several months, and requests for information about the process have been refused.
Kansas State Sovereignty Rally. This Friday (January 13th) afternoon is the 4th Annual State Sovereignty Rally, held at the Kansas State Capitol. Topics include constitutional issues, health care reform, and the Kansas budget. A printable flier with details is here. There are transportation opportunities from Wichita; contact Larry Halloran at 316-777-9352 or LarryHalloran@aol.com.
Making Economics Come Alive. Tonight the Americans for Prosperity monthly meeting will feature the topic “Making Economics Come Alive” with a video presentation by John Stossel. Topics include Government Spending, Deficits, and Debt, Are We Heading Toward a Debt Crisis?, Can Government Spending Be Cut?, Growth of Government, Spending, Taxes and the role of Government, International Trade and Trade Barriers, International Trade: Criticisms and Responses, Economics of Trade Deficits, Why Some Nations Prosper and Others Stagnate, Why Do Nations Prosper?, and Economic Freedom and Quality of Life. This meeting is at a different location: Central Branch Wichita Public Library, 223 S. Main (3rd Floor Meeting Room). The meeting starts at 7:00 pm. For more information on this event contact John Todd at john@johntodd.net or 316-312-7335, or Susan Estes, AFP Field Director at sestes@afphq.org or 316-681-4415.
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It is now confirmed: In Wichita, tax increment financing (TIF) leads to taxpayer-funded waste that benefits those with political connections at city hall.
The latest evidence we have is the construction of a downtown parking garage that benefits Douglas Place, especially the Ambassador Hotel, a renovation of a historic building now underway.
The flow of tax dollars Wichita city leaders had planned for Douglas Place called for taxpayer funds to be routed to a politically-connected construction firm. And unlike the real world, where developers have an incentive to build economically, the city created incentives for Douglas Place developers to spend lavishly in a parking garage, at no cost to themselves. In fact, the wasteful spending would result in profit for them.
The original plan for Douglas Place as specified in a letter of intent that the city council voted to support, called for a parking garage and urban park to cost $6,800,000. Details provided at the August 9th meeting of the Wichita City Council gave the cost for the garage alone as $6,000,000. The garage would be paid for by capital improvement program (CIP) funds and tax increment financing (TIF). The CIP is Wichita’s long-term plan for building public infrastructure. TIF is different, as we’ll see in a moment.
At the August 9th meeting it was also revealed that Key Construction of Wichita would be the contractor for the garage. The city’s plan was that Key would not have to bid for the contract, even though the garage is being paid for with taxpayer funds. Council Member Michael O’Donnell (district 4, south and southwest Wichita) expressed concern about the no-bid contract. As a result, the contract was put out for competitive bid.
Now a winning bid has been determined, according to sources in city hall, and the amount is nearly $2 million less than the council was willing to spend on the garage. This is money that otherwise would have gone into the pockets of Key Construction. Because of the way the garage is being paid for, that money would not have been a cost to Douglas Place’s developers. Instead, it would have been a giant ripoff of Wichita taxpayers. This scheme was approved by Mayor Carl Brewer and all city council members except O’Donnell.
Even worse, the Douglas Place developers have no incentive to economize on the cost of the garage. In fact, they have incentives to make it cost even more.
Recall that the garage is being paid for through two means. One is CIP, which is a cost to Wichita taxpayers. It doesn’t cost the Douglas Place developers anything except for their small quotal share of Wichita’s overall tax burden. In exchange for that, they get part of a parking garage paid for.
But the tax increment financing, or TIF, is different. Under TIF, the increased property taxes that Douglas Place will pay as the project is completed won’t go to fund the general operations of government. Instead, these taxes will go to pay back bonds that the city will issue to pay for part of the garage — a garage that benefits Douglas Place, and one that would not be built but for the Douglas Place plans.
Under TIF, the more the parking garage costs, the more Douglas Place property taxes are funneled back to it — taxes, remember, it has to pay anyway. (Since Douglas Place won’t own the garage, it doesn’t have to pay taxes on the value of the garage, so it’s not concerned about the taxable value of the garage increasing its tax bill.)
Most people and businesses have their property taxes go towards paying for public services like police protection, firemen, and schools. But TIF allows these property taxes to be used for a developer’s exclusive benefit. That leads to distortions.
Why would Douglas Place be interested in an expensive parking garage? Here are two reasons:
First, the more the garage costs, the more the hotel benefits from a fancier and nicer garage for its guests to park in. Remember, since the garage is paid for by property taxes on the hotel — taxes Douglas Place must pay in any case — there’s an incentive for the hotel to see these taxes used for its own benefit rather than used to pay for firemen, police officers, and schools.
Second, consider Key Construction, the planned builder of the garage under a no-bid contract. The more expensive the garage, the higher the profit for Key.
Now add in the fact that one of the partners in the Douglas Place project is a business entity known as Summit Holdings LLC, which is composed of David Wells, Kenneth Wells, Richard McCafferty, John Walker Jr., and Larry Gourley. All of these people are either owners of Key Construction or its executives. The more the garage costs, the higher the profit for these people. Remember, they’re not paying for the garage. City taxpayers are.
The sum of all this is a mechanism to funnel taxpayer funds, via tax increment financing, to Key Construction. The more the garage costs, the better for Douglas Place and Key Construction — and the worse for Wichita taxpayers.
It’s no wonder Key Construction principals contributed $13,500 to Wichita Mayor Carl Brewer and four city council members during their most recent campaigns. Council Member Jeff Longwell (district 5, west and northwest Wichita) alone received $4,000 of that sum, and he also accepted another $2,000 from managing member David Burk and his wife.
This scheme — of which few people must be aware as it has not been reported anywhere but here — is a reason why Wichita and Kansas need pay-to-play laws. These laws impose restrictions on the activities of elected officials and the awarding of contracts.
An example is a charter provision of the city of Santa Ana, in Orange County, California, which states: “A councilmember shall not participate in, nor use his or her official position to influence, a decision of the City Council if it is reasonably foreseeable that the decision will have a material financial effect, apart from its effect on the public generally or a significant portion thereof, on a recent major campaign contributor.”
This project also shows why complicated financing schemes like tax increment financing need to be eliminated. Government intervention schemes like this turn the usual economic incentives upside down, and at taxpayer expense.
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The announcement of the departure from Wichita of Boeing presents challenges for the Wichita area and the state of Kansas. The response of government officials over the next few years will need to depart from past and present practice if Wichita wants to build a dynamic and sustainable economy. With a few exceptions, our current elected officials will likely proceed with targeted economic development, and Wichita and Kansas will miss an opportunity to implement meaningful and lasting change.
Boeing has been the recipient of much targeted economic development incentives over the years. From 1979 to 2007, Boeing received tax abatements through the industrial revenue bond process worth $658 million, according to a compilation provided by the City of Wichita.
In his remarks, Kansas Representative Jim Ward said “Boeing is the poster child for corporate tax incentives.” Kansas Legislative Research has compiled a list of legislative measures that benefited Boeing, which may be viewed at Kansas and Boeing. This document contains only those measures passed by the state, not by cities and counties to help Boeing.
Some of the legislation on the list really should not be included, as it benefited all companies, not just Boeing. An example is the 2006 machinery and equipment property tax exemption. The author correctly notes that Boeing often received targeted relief from this tax through the IRB process. Still, this is an example of good economic policy that affects all businesses, which is important.
Similarly, the repeal of the franchise tax — another bill on this list — benefited not only Boeing, but everyone, and should not be on this list.
An example of legislation crafted specifically for Boeing was 2003′s Economic Development and Revitalization Reinvestment Act, which became statute 74-50,136. This law awarded Boeing with $80 million, the money to be repaid by the withholding taxes of Boeing’s employees — in other words, at no cost to Boeing. This bill passed the Kansas House of Representatives by a vote of 107 to 6, with Rep. Ward voting with the majority to pass.
Now, Ward says “We will be less trusting in the future of corporate promises.”
The danger we in Kansas, and specifically the Wichita area, face is the overwhelming urge of politicians to be seen doing something in response to the departure of Boeing. Wichita Mayor Carl Brewer, in his statement, called for the community to “launch an aggressive campaign of job recruitment and retention.”
It is likely that we will become susceptible to large-scale government interventions in an attempt to gain new jobs. Our best course would be to take steps to make Kansas and Wichita an inviting place for all firms to do business. The instinct of politicians such as Brewer, however, is to take action, usually in the form of targeted incentives as a way to spur economic development.
We’ve seen the results of this. Not only with Boeing, but also in a report showing that Wichita has declined in economic performance compared to other areas.
These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This, however, does not stop governments from creating policies for the awarding of incentives. It also doesn’t stop the awarding of incentives willy-nilly without a policy, as the Wichita City Council has done for a hotel.
This “active investor” approach to economic development is what has led to Boeing escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.
Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”
In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita is sure to undertake in response to the loss of Boeing: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”
In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”
There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs is an example of precisely the wrong policy.
We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.
One person reminded me of this: “The real point about Boeing’s departure that no one is discussing is the fact that the positions leaving here are going to three states: Oklahoma, Texas, and Washington. Two of these states have no income tax while the third, Oklahoma, has tight limits on both state and local tax increases while reducing state income tax rates in recent years.”
While Governor Brownback and many members of the legislature want to reduce income rates in Kansas to make our state more competitive for business, there is much opposition. It has been thought that the plan would be to gradually reduce income tax rates over several years. If anything, the departure of Boeing means we should act to reduce tax rates sooner rather than later.
Those who oppose reducing taxes raise the problem of how to replace the income lost due to lower tax rates. They fear that the state will raise the sales tax, or that local governments such as cities, school districts, and counties will raise sales or property taxes.
But the answer should be: Don’t replace the missing income. Instead, spend less at the state level. That will improve the Kansas economy as more money will be left in the private sector instead of being transferred to an unproductive and wasteful government. And if the state can be successful in nurturing a competitive business and economic climate, that will bring more jobs, which will reduce the demand on the state for various social services. More jobs mean more revenue to the state in other forms besides income taxes, too.
Our challenge is this: Boeing said that costs in its San Antonio, Texas facility are 70 percent lower than in Wichita. We need to figure out why this discrepancy — if it is real — exists. We need to eliminate this differential cost of doing business in Kansas. The instinct of politicians and bureaucrats will be to offer targeted relief to the companies they believe deserve it. For those few companies, perhaps this differential can be reduced.
But this is the wrong policy. All business firms deserve relief, and by doing that we can create a dynamic Kansas economy so that we all will prosper.
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Americans for Prosperity Kansas supports limited government and responsible tax and budget policies that force state government to live within its means. Click here to learn more.
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