The Lux in Wichita: Taxpayer funding of lifestyle choices

This week the Wichita City Council approved the issuance of industrial revenue bonds to The Lux, a luxury real estate development in downtown Wichita. That action, along with historic preservation tax credits, results in taxpayers paying for the lifestyle choices of a relative few.

IRBs are confusing. Many people criticize them on the basis that the city shouldn’t be lending money. That’s not what happens. Someone else buys the bonds, in effect making the loan. The city is not at risk if the bonds are not repaid.

Instead, the sole purpose of these IRBs is to provide a sales tax exemption on the purchase of construction materials and perhaps other material. City documents didn’t provide an estimate of the tax savings, but it could be hundreds of thousands of dollars.

By exempting this project from paying sales taxes, others have to make up the difference. While we may rationalize this tax forgiveness by saying “look at the nice new building we’re going to have,” the city’s actions will reduce spending and investment elsewhere.

Furthermore, the sales tax exemption is not the only form of taxpayer subsidy this project will receive. The historic preservation tax credits approved for this the project are worth millions. These credits are equal to grants of cash. They are a cost to government that taxpayers must bear.

When other taxpayers have to bear the cost of incentives, other spending and investment is reduced. While the spending on incentives is concentrated and easy to see — there will be groundbreaking and ribbon-cutting ceremonies to make sure we don’t miss it — the missing spending and investment is dispersed. The missing spending and investment is difficult to see. But it is every bit as real as this project.

In fact, this missing spending and investment is more valuable than government spending on this project. That’s because when people spend and invest on their own, they choose what is most important to them, not what is important to politicians and bureaucrats. This is a special problem in Wichita, where the mayor and city council members have a history of awarding over-priced no-bid contracts to their campaign contributors.

Sometimes these subsidies are justified by the claim that renovating historic buildings is more expensive than new construction. If that’s true, we have to recognize that investing in, or living in, a historic building is a choice. The people who make these choices should pay themselves, just like we expect others to pay for the characteristics of the housing they choose. Likewise, building a home with granite kitchen counter tops and marble floors in the bathrooms is more expensive than a plainer home. These premium features are chosen voluntarily by the homeowner, and it is right and just that they alone should pay for them.

We should recognize historic buildings for what they are: a premium feature or amenity whose extra cost should be born solely by those who chose to own them or rent them. There’s no difference between these premium features and choosing to live in a historic building. Those who desire them choose them voluntarily, and should pay their full cost. Forcing everyone to subsidize this choice is wrong. It’s an example of a special interest gone wild.

The nature of tax credits

The confusing nature of tax credits leads citizens to believe that they have no cost to the state or federal government. Tax credits are equivalent to government spending.

By mixing spending programs with taxation, some are lead to believe that tax credits are not cash handouts. But not everyone falls for this seductive trap. In an article in Cato Institute’s Regulation magazine, Edward D. Kleinbard explains:

Specialists term these synthetic government spending programs “tax expenditures.” Tax expenditures are really spending programs, not tax rollbacks, because the missing tax revenues must be financed by more taxes on somebody else. … Tax expenditures dissolve the boundaries between government revenues and government spending. They reduce both the coherence of the tax law and our ability to conceptualize the very size and activities of our government. (The Hidden Hand of Government Spending, Fall 2010)

The use of tax credits to pay for economic development incentives leads many to believe that what government is doing is not a direct subsidy or payment. In order to clear things up, maybe we should require that government write checks instead of issuing credits.

Indeed, if government issued checks to real estate developers, citizens would look at things differently. They’d wonder why they’re subsidizing the construction of expensive apartments and condos. They’d be angry. Using a semi-mysterious mechanism like tax credits shrouds the true economic transaction taking place.

These expenditures of tax money — being issued as credits rather than appropriations — go through a different process than most expenditures of taxpayer money. Recently some have started to use the word “tax appropriations” to describe tax credits. These expenditures don’t go through the normal legislative process as do most appropriations.

It’s time to recognize these historic preservation tax credits as payments to a special interest group. Unfortunately, as with most special interest groups, the group receiving the payment — tax credits in this case — has an extreme interest in the matter. They benefit greatly. But to the rest of the populace — well, does it really matter to them? John Stossel explains the problem like this:

The Public Choice school of economics calls this the problem of concentrated benefits and dispersed costs. Individual members of relatively small interest groups stand to gain huge rewards when they lobby for government favors, but each taxpayer will pay only a tiny portion of the cost of any particular program, making opposition pointless.

That’s the situation we face with the historic preservation tax credits. A few real estate developers will enrich themselves at taxpayer expense. Well-to-do renters will get a better deal. To everyone else, it’s just another way that government nickels and dimes us to death.


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