In Wichita, campaigning for a tax, then asking for exemption from paying

Having contributed $5,000 to persuade Wichita voters to raise the sales tax, a company now seeks exemption from paying any sales tax.

This week the Wichita City Council will consider an economic development incentive for Foley Industries, Inc. The company is asking to be relieved from paying nearly all property taxes on a proposed expansion, and also asks to avoid sales taxes on purchases related to the expansion.

The action the council will consider is a “letter of intent,” not the actual granting of the incentive. In practice, these letters are as good as having the actual ordinance in hand. Specifically, Foley asks for industrial revenue bonds, which carry a property tax exemption. (The city is not lending any money and has no responsibility to repay the bonds. In fact, Foley itself will purchase the bonds, according to city documents. The bonds are simply a mechanism for receiving tax exemptions.)

In this case, the city has decided Foley qualifies for a 95.5 percent five-year tax exemption on the IRB-financed real property improvements. After five years, the council may approve an additional five years if Foley meets employment targets. Details of the tax forgiveness are at the end of this article.

Foley is also applying for an exemption from paying sales tax on purchases related to the expansion. No dollar amount is given for the value of this. It could easily be worth over a million dollars.

Of note, Foley contributed $5,000 to the “Yes Wichita” group that campaigned in favor of a one cent per dollar sales tax last year. Now, it asks to avoid paying all sales tax.

Also, city policy is that incentives must have a benefit-cost ratio of 1.3 to one or greater, although there are many loopholes the city can use to grant incentives if this benchmark is not met. For the city, this benchmark is met, just barely. For Sedgwick County the ratio is 1.27 to one, and for the Wichita school district, the ratio is 1.05 to one, barely in positive territory. These two local jurisdictions might ask the city why it forces an incentive on them that violates the city’s own policy. The ratio for the school district is especially relevant, as 46 percent of the taxes that will be abated would go to it.

City documents indicate the expansion will allow Foley to add 12 employees over a five year period and retain 153 positions. This is an example of the city using incentives primarily to retain jobs. (Foley has dangled the threat of building its expanded facility in another city.)

It’s likely that Foley has applied to the Kansas Department of Commerce for benefits from programs such as PEAK (or Promoting Employment Across Kansas), HPIP, and others. Inquiry to the department produced this response: “As the Department does not have signed contracts with Foley Industries, we cannot share information about potential incentives.”

This request for property and sales tax relief reveals a problem: If companies can’t afford to make investments in Wichita unless they receive exemptions from paying taxes, we must conclude that taxes are too high. (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. See here.) It’s either that, or this company simply doesn’t want to participate in paying for the cost of government like most other companies and people do.

Civic leaders say that our economic development policies must be reformed. In particular, our leaders say that cash incentives are on the way out. This deal does not include grants of cash, that is true. But forgiveness of taxes is more valuable to business firms than receiving cash. That’s because cash incentives are usually taxable as income, while forgiveness of taxes does not create taxable income. Each dollar of tax that is forgiven adds one dollar to after-tax profits. ^{1 2}

Tax exemptions like this also disrupt the theory of taxation. We’ve often told by civic leaders that we pay taxes in order to receive all the wonderful service the city provides. It’s like paying club dues, they say, or the price of a civilized society. But when someone doesn’t pay, but continues to receive services, is it because they don’t like the services the city provides? Or doesn’t the company like being in the club?

Details

City documents say that the estimated tax value of exempted property for the first full year of the fully completed project would be $448,334, distributed as follows:

City of Wichita: $124,731
Sedgwick County: $112,606
State of Kansas: $5,730
USD 259: $205,267

The benefit-cost ratios are as follows:

City of Wichita General Fund 1.30 to one
City of Wichita Debt Service Fund 1.74 to one
Sedgwick County 1.27 to one
USD 259 1.05 to one
State of Kansas 9.07 to one