Another week in Wichita, more CID sprawl

Shoppers in west Wichita should prepare to pay higher taxes, if the city approves a Community Improvement District at Kellogg and West Streets.

Next week the Wichita City Council will consider the formation of a Community Improvement District (CID) surrounding the intersection of Kellogg and West Streets.

CIDs are a relatively recent creation of the Kansas Legislature. In a CID, merchants may charge additional sales tax, up to an extra two cents per dollar. For more about their mechanism, see Community improvement districts in Kansas. In the present case, the developer proposes to charge an extra one cent per dollar in tax. This extra sales tax, minus a handling fee, will be periodically remitted to the developer. It’s important to note that CID proceeds do not flow to the merchants who collect them.

This CID is “pay-as-you-go,” meaning the city is not issuing bonds or loaning money.

This CID, should the council approve, will contribute to CID sprawl. This is a condition in which more and more of the city is overtaken by CIDs and their higher taxes. In effect, a sales tax increase is taking effect. Because of the city’s weak protection of shoppers from these CID taxes, many Wichitans and visitors will pay higher taxes than they expected. This harms the reputation of Wichita.

(Of note, Kansas raised the statewide sales tax this year. Because Kansas is one of the few states that tax groceries at the full rate, low-income families are harmed most by the higher sales and CID taxes. See Kansas sales tax has disproportionate harmful effects for analysis.)

This CID is likely to be sold to citizens as contributing to public infrastructure. It’s true that a traffic signal on West Street and widening of that street are listed as uses of CID funds. But the amount budgeted is $350,000, which means that the improvements will not be substantial. This inclusion of public infrastructure is likely part of a strategy of sweetening the deal. It’s not all about greedy developers, the city will say. Some of the funds are going to public infrastructure. This strategy was used to justify the Cabela’s CID, in which part of the CID funds are paying for improvements to the intersection of K-96 and Greenwich Road.

This CID proposal contains two new provisions that may help blunt some of the criticism of CIDs as harmful to other business firms in the city. First is this condition: “Allow the City to review and approve or deny the relocation of any business within three miles of the district, for the first three years, on any property in which the developer requests reimbursement for the land acquisition.” This seems designed to restrict “poaching” of merchants from other nearby landlords who are not being subsidized by a CID. Whether this condition has any real meaning is unknown. In practice, the city has been reluctant to enforce restrictions similar to this.

Also there is this condition: “Demolition or rehabilitation of three identified structures and additional investment within the district within the timeframe below.” Following this is a schedule of milestones. This may be in response to instances where the city has authorized a subsidy program, but nothing happened, or happened slowly. The Exchange Place project at Douglas and Market is one example. Another is the CID at Central and Oliver. Principals of the Kellogg and West CID are also involved in the Central and Oliver CID, and little has happened there since its formation.

Another important public policy issue regarding CIDs is this: If merchants feel they need to collect additional revenue from their customers, why don’t they simply raise their prices? We can easily see their rationalization: It’s better for us that unwitting customers pay higher sales taxes rather than higher prices. We can blame government for the taxes, but we get the money. ¹

Customers of merchants in CIDS ought to know in advance that an extra tax is charged. Some have recommended warning signage that protects customers from unknowingly shopping in stores, restaurants, and hotels that will be adding extra sales tax to purchases. Developers who want to benefit from CID money say that merchants object to signage, fearing it will drive away customers.

State law is silent on this. The City of Wichita requires a sign indicating that CID financing made the project possible, with no hint that customers will pay additional tax. The city also maintains a website showing CIDs. This form of notification is so weak as to be meaningless, but this was the decision the city council made. ²

CIDs allow property owners to establish their own private taxing district for their exclusive benefit. This goes against the grain of the way taxes are usually thought of. Generally, we use taxation as a way to pay for services that everyone benefits from, and from which we can’t exclude people. An example would be police protection. Everyone benefits from being safe, and we can’t exclude people from participating in — benefiting from — police protection.

But CIDs allow taxes to be collected for the benefit of one specific entity. This goes against the principle of broad-based taxation to pay for an array of services for everyone. But in this case, the people who benefit from the CID are quite easy to identify: the property owners in the district. We shouldn’t let private parties use a government function for their exclusive benefit.