A new feature of Wichita’s economic development policy grants property tax and sales tax forgiveness for speculative industrial buildings. These are buildings built without having a tenant in place. The proposed plan had a formula that grants a higher percentage of tax forgiveness as building size increases, but the council eliminated that and voted a 100 percent tax abatement for all buildings larger than 50,000 square feet.
Given tax costs and industrial building rents, this policy gives these incentivized buildings a cost advantage of about 20 percent over competitors. That’s very high, and makes it difficult for existing buildings to compete. Probably no one will build these buildings unless they qualify for and receive this incentive.
The city hopes that these incentivized buildings will generate new jobs in Wichita. But there appears to be nothing in the policy that prevents existing companies in Wichita from moving to these buildings.
Will the owners of speculative buildings rent only to companies newly moving to Wichita, or will they rent to whoever is willing to pay? And will Wichita companies want to move to a new building with cheaper rent? This policy has the risk of simply moving jobs from one location to another, creating no new jobs. All it does is harm landlords with existing buildings.
While the policy was designed to encourage large buildings instead of small, there appears to be no limitation on the size of space landlords can rent. A building 50,000 square feet and larger gets 100 percent tax abatement. But the space could be rented out in smaller parcels to multiple tenants, making it easy to steal local tenants from another landlord.
Existing industrial landlords in Wichita — especially those with available space to rent — must be wondering why they attempt to stay in business when city hall sets up subsidized competitors with new buildings and a large cost advantage. This is what is meant by unintended consequences.
Citizens must wonder about equality. A principle of taxation is that everyone pays equally. Tax policy should be applied uniformly to all citizens. But this program creates a special class of landlords and tenants who do not have to bear their full share of the cost of city, county, school district, and state government.
Then, we must ask ourselves what do we really get for the cost of these incentives. Alan Peters and Peter Fisher wrote an academic paper titled The Failures of Economic Development Incentives, published in Journal of the American Planning Association. A few quotes from the study, with emphasis added:
Given the weak effects of incentives on the location choices of businesses at the interstate level, state governments and their local governments in the aggregate probably lose far more revenue, by cutting taxes to firms that would have located in that state anyway than they gain from the few firms induced to change location.
On the three major questions — Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Are incentives, at worst, only moderately revenue negative? — traditional economic development incentives do not fare well. It is possible that incentives do induce significant new growth, that the beneficiaries of that growth are mainly those who have greatest difficulty in the labor market, and that both states and local governments benefit fiscally from that growth. But after decades of policy experimentation and literally hundreds of scholarly studies, none of these claims is clearly substantiated. Indeed, as we have argued in this article, there is a good chance that all of these claims are false.
The most fundamental problem is that many public officials appear to believe that they can influence the course of their state or 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 their expectations about their ability to micromanage economic growth and making the case for a more sensible view of the role of government — providing the foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.
In 2008 Kansas Legislative Division of Post Audit investigated spending on economic development. It found about the same as did Peters and Fisher.
There is one incentive that can be offered to all firms: Reduce tax costs for all. The Tax Foundation report from earlier this year should be a shrill wake up call to the city and state that we must change our ways.
But the action the council is considering today moves us in the opposite direction. These incentives have a cost. Other businesses have to pay. That only increases the motivation and necessity to seek incentives from the city and state, which in turn raises the cost of government and taxes. It’s a spiral that leads to ever-increasing control of economic activity by city hall.
We in Wichita need to build a dynamic economy in Wichita that is based on free enterprise and entrepreneurship rather than government planning and handouts. This is the way we can have organic and sustainable economic development. We can start on this path today by saying no to this incentive package.