Wichita again to bet on corporate welfare as economic development

This week the Wichita City Council will consider three measures that, if adopted, will further establish corporate welfare and rent-seeking as Wichita’s economic development strategy.

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

But Wichita’s leaders don’t see corporate welfare as a bad thing. Instead, as these three measures — all of which will likely pass unanimously — illustrate, welfare is good when you’re a business in Wichita. Especially if you can raise speculation that your company might move out of Wichita.

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

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

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

The three deals the Wichita City Council will consider tomorrow are both corporate welfare and rent-seeking. All three are harmful to our city.

The three deals

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

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

The company will also receive tax credits and grants under programs offered by the State of Kansas.

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

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

The final action of corporate welfare to be considered is a community improvement district (CID) for the Eastgate shopping center at Kellogg and Rock Road. The CID, if approved, would require merchants to add an additional tax of one cent per dollar on all sales. That money, less a five percent fee, would then be given to the shopping center’s owners for their exclusive use. This could be worth as much as $18,528,596 over 22 years, according to city documents.

The Eastgate item is on the agenda for a second time after being withdrawn in January. At the time, Rhonda Holman of The Wichita Eagle wrote: “As it was, insufficient time had been allowed for staff vetting of the proposals and thorough consideration by the council and public.”

The action the council is asked to take at tomorrow’s meeting is to accept petitions asking for formation of the CID, and to set March 1st as the date of a public hearing.

Targeted investment, or welfare

Government bureaucrats and politicians promote programs like these as targeted investment in our region’s economic future. They believe that they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by city hall that shapes the future direction of Wichita’s economy.

Arnold King has written about the ability of government experts to decide what investments should be made with public funds. There’s a problem with knowledge and power:

As Hayek pointed out, knowledge that is important in the economy is dispersed. Consumers understand their own wants and business managers understand their technological opportunities and constraints to a greater degree than they can articulate and to a far greater degree than experts can understand and absorb.

When knowledge is dispersed but power is concentrated, I call this the knowledge-power discrepancy. Such discrepancies can arise in large firms, where CEOs can fail to appreciate the significance of what is known by some of their subordinates. … With government experts, the knowledge-power discrepancy is particularly acute.

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

Yet this week, our Wichita city bureaucrats feel they have the necessary knowledge to recommend to the city council that the citizens of Wichita make investments of public funds in these three instances. Our city council members are gullible enough to believe it.

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

We need a dynamic job creation engine

Furthermore, we have to question the wisdom of investing in these established companies, especially a company involved in aviation, as Wichita always is seeking to diversify its economy away from dependence on aviation.

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

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

Sales tax increase spreading across Wichita

These proposed Eastgate shopping center CID, and one still likely to be proposed for Westway shopping center, break new ground in that these shopping centers are not tourist destinations or trendy shops. They’re run-of-the mill shopping centers that have stores that Wichitans visit every day. Some council members like Vice Mayor Jeff Longwell have justified past CIDs on the basis that since they are tourist destinations, much of the tax will be paid by visitors to Wichita. This is not a wise policy, but even it it was, it does not apply to these two shopping centers.

Instead, these two applications are more indications that soon Wichita — its major retail centers and destinations, at least — is likely to be blanketed with community improvement districts charging up to an extra two cents per dollar sales tax. Currently, merchants in a CID are running the very real risk that once their customers become aware of the extra sales tax, they will shop somewhere else. But as CIDs become more prevalent in Wichita, this competitive disadvantage will disappear.

Step by step, a sales tax increase is engulfing Wichita, and our city council and mayor are fine with that happening. This is on top of the statewide sales tax increase from last year, which, despite claims of its supporters and opposition by conservatives, is likely a permanent fixture.


12 thoughts on “Wichita again to bet on corporate welfare as economic development”

  1. We need to stop fighting these elected leaders that say one thing and do another. Democrat Mayor Brewer and Council member Longwell need to be replace with new conservative leadership. In addition, we need to elect new members in the open seats that are against corporate welfare.

  2. We don’t want a checker board system of sales taxes! This is just money for special interest pockets and the public gets cheated again by paid for politicans or stupid ones. Please vote for all new persons for city hall, so we can stop the foolishness.

  3. We already have a checker board system for sales tax. It’s easy to editorialize that it’s corporate welfare when the blogger has no concept of what it takes for development to happen.

  4. Hi, why should we care what it takes for development to happen? The city doesn’t(at least shouldn’t) develop areas, private business’s should do that. The COW should basically get out of their way, except to regulate, and they’ve failed miserably at that. Examples would be that there are no parks North of 13th on the East side except for Chisholm Creek and it’s a nature center not a traditional park (swingsets and ball diamonds). There is also too much commercial real estate, much of which is vacant.

    later

  5. Would the blogger that writes these articles please state one city of Wichita’s size, or larger, that does not offer these kind of intensives at all.

  6. Like Momma used to say “Just everyone else is jumping off the cliff, should you follow them?”

    We need to get out of the way but reducing (not doing away with) regulation, reducing taxes for all businesses (not just the ones owned the special people) and allowing entrepreneurs to do what they want to do. There are 500K people here, I’m sure that developers will make an attempt to provide things that those 500K people will pay for even without the taxpayers buying them a store.

    Mike??

  7. Mike, you fail to see the point. Every other city out there offers incentives for businesses to develop, and there is a reason for that. If you considering Wichita among several contenders but every other city is offering a package of incentives but Wichita is not, it seems fairly obvious that this company will not be setting up shop in Wichita. No jobs, and no supporting jobs. But, you can feel pure as Wichita dies.

  8. It’s easy for guys like “Mike” to editorialize on things they know nothing about. Of course, I’m just being elitist. Lol. The fact of the matter is when he says “There is also too much commercial real estate, much of which is vacant.” is just tells me he needs to educate himself on a whole variety of issues from real estate to city finances to property rights, yada, yada.

  9. Hi Everyone
    “It’s easy for guys like “Mike” to editorialize on things they know nothing about. Of course, I’m just being elitist. Lol. The fact of the matter is when he says “There is also too much commercial real estate, much of which is vacant.” is just tells me he needs to educate himself on a whole variety of issues from real estate to city finances to property rights, yada, yada.”

    O.K., how much is there to know? I drive around the old Sears Repair center on the south side and most of the businesses are vacant or employing fewer people (the parking lot is less than 20% full). I drive around the Comatara development at 37th and Rock, and many of the buildings have real estate signs in front of them. Driving West from Rock Road to Broadway, many of those businesses had real estate signs in front of them too. In short, we have too much commercial real estate in Wichita. It might be the WRONG kind, it might have toxic waste under it (like Pizza Hut and Coleman), it might not meet the new ADA standards. Whatever, it’s still vacant, producing no revenue (except to the city in property taxes) and no jobs. Naturally, we’re going to pay Cabela’s to build a whole new building cause you can’t put those silly Deer heads in just any building.

    You’re the “elitist” you tell us what the problem is and how to fix it. We got time, it can’t take that many pages to show how really complicated finance is and how this all works.

    In the interests of full disclosure, I’m an NRA member and long time Cabelas’s customer, but I still ain’t buyin’ them a store.

    Mike??

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