Voice For Liberty

Author: Bob Weeks

  • Written testimony regarding Senate Bill No. 58 (Wichita downtown arena tax)

    Written testimony of Bob Weeks regarding Senate Bill No. 58, an act concerning sales taxation; relating to countywide retailers’ sales tax in Sedgwick County.

    February 3, 2005

    Members
    Senate Assessment and Taxation Committee
    State Capitol
    Topeka, Kansas 66612

    Honorable Senators:

    Thank you for allowing me to present this written testimony.

    I realize that the voters in Sedgwick County voted for the arena sales tax increase. I believe, however, there is ample reason why you should vote against the tax. The idea of the taxpayer-funded arena came about so fast in the summer of 2004 that there was little thought given to the underlying issues. I wish to present what my research has uncovered.

    WSU Study Not Complete

    On of the main arguments advanced for having all the residents of Sedgwick County pay to build the arena was a study prepared by the Center for Economic Development and Business Research at Wichita State University. The study claimed a large economic benefit from the arena. It is because of this economic benefit that arena supporters say the entire community should pay to build the arena. This study, however, is incomplete in two important areas: its lack of depreciation accounting, and it ignores the substitution effect.

    No Depreciation Accounting

    Government Accounting Standards Board Statement 34 requires governments to account for the cost of their assets, usually by stating depreciation expense each year. Through a series of email exchanges with Mr. Ed Wolverton, President of the Wichita Downtown Development Corporation, I have learned that the WSU Center for Economic Development and Business Research was not aware of this requirement when they prepared their study. Mr. Wolverton admitted this after checking with the study authors. Furthermore, Mr. Chris Chronis, Chief Financial Officer of Sedgwick County, in an email conversation told me that the county will take depreciation expense for the downtown arena. I do not know what a figure for depreciation expense would be, but it would likely be several million dollars per year, and it would materially and substantially change the arena’s financial footing.

    No Substitution Effect Allowed For

    In a television new story reported by Mr. Erik Runge of KWCH Television on October 25, 2004, I was interviewed, and I mentioned the substitution effect. This is the term used to describe what research has found: that much of the new economic activity such as bars and restaurants that might appear around a downtown arena would be bars and restaurants that have moved from other parts of the city. There is little or no new economic activity, just movement of existing activity. Mr. Runge interviewed Mr. Ed Wolverton, President of the Wichita Downtown Development Corporation, who said “In WSU’s report they felt like there definitely could be some substitution effect.” The reporter explained “But how much was never studied. Downtown development backer Ed Wolverton says mostly due to time restraints.”

    These two glaring omissions of materially important facts by the WSU study should warn us to question its other findings. Other than the report on KWCH, I saw no reporting of these two matters.

    Claimed Economic Benefit is Not Realized

    Arena supporters say that everyone should pay to build and operate the arena because it will generate economic impact that everyone will benefit from. The economic benefit claimed by arena supporters, however, has not been found to materialize in other cities. In the March 2001 issue of “FedGazette,” published by the Federal Reserve Bank of Minneapolis, an article titled “Stadiums and convention centers as community loss leaders” contains this quote:

    “Current research indicates that stadiums and arenas have a particularly bad track record when it comes to delivering on promises of community economic windfalls. University researchers Mark Rosentraub and Mark Swindell found that three decades worth of studies ‘lead to the inescapable conclusion that the direct and indirect economic impacts of sports teams and the facilities are quite small’ and do not create much in the way of new jobs or economic development.”

    In a paper titled “Professional Sports Facilities, Franchises and Urban Economic Development” (UMBC Economics Department Working Paper 03-103) by Dennis Coates and Brad R. Humphreys of the University of Maryland, Baltimore County we find this quote:

    “Siegfried and Zimbalist (2000) recently surveyed the growing literature on retrospective studies of the economic impact of sports facilities and franchises on local economies. The literature published in peer-reviewed academic journals differs strikingly from the predictions in ‘economic impact studies.’ No retrospective econometric study found any evidence of positive economic impact from professional sports facilities or franchises on urban economies.”

    Arena Tax Requires Everyone to Subsidize the Interests of a Few

    Since, as current research has found, arenas do not generate the positive economic impact that their supporters claim, the arena tax instead becomes the public as a whole subsidizing the leisure activities of a relatively small number of people. The people who do use the arena, moreover, are quite easy to identify: they purchase tickets to events, or they pay to rent the arena. It is these people who should pay the full cost of the arena construction and operation.

    Local Officials Not Entirely Truthful

    Sedgwick County Commissioners stated that if the downtown arena sales tax did not pass, they would borrow money to renovate the Kansas Coliseum. If we do the math on the figures they quoted, that is to borrow $55 million and pay it back at $6.1 million a year for 20 years, we find that the interest rate is 9.17%, which is a terribly high interest rate for a government to pay. The county commissioners told us they were ready to pay this much if the arena tax didn’t pass.

    I wrote to Sedgwick County Commissioner Tom Winters, asking him for an explanation. He replied that the interest rate is really 7.5% for this reason: To the $55.3 million cost of the renovations, we must add $6.5 million for capitalized interest during the construction period, and $.9 million for debt issuance costs. So yes, Commissioner Winters is correct about the 7.5% rate, but this also means that the cost of the Coliseum renovations should be stated as $62.7 million instead of $55 million. But even 7.5% interest is too high to pay.

    What is troubling is that local government officials are not being truthful with the public.

    Unintended Economic Effects

    A paper titled “An Assessment of the Economic Impact of a Multipurpose Arena” by Ronald John Hy and R. Lawson Veasey, both of the University of Central Arkansas, (Public Administration & Management: An Interactive Journal 5, 2, 2000, pp. 86-98) looked at the effect of jobs and economic activity during the construction of the Alltel Arena in Pulaski County, Arkansas. This arena cost $50 million. It was funded in part by a one percent increase in the county sales tax for one year (1998). The sales tax generated $20 million.

    In the net, considering both jobs lost and jobs gained due to sales tax and construction effects, workers in the wholesale and retail trades lost 60 jobs, and service workers lost 52 jobs. There was a net increase of 198 jobs in construction.

    The fact that jobs were lost in retail should not be a surprise. When a sales tax makes nearly everything sold at retail more expensive, the supply curve shifts to the left, and less is demanded. It may be difficult to estimate the magnitude of the change in demand, but it is certain that it does change.

    Workers in these sectors, should the sales tax increase take effect, may want to reconsider their career plans. How many retail and service workers can make the transition to construction work is unknown. It is certain, however, that when workers lose their jobs it imposes benefits costs on the government — and the taxpayers.

    The population of Pulaski County in 2000 was 361,474, while Sedgwick County’s population at the same time was 452,869, so Sedgwick County is a somewhat larger. Our sales tax will last 2.5 times as long, and our proposed arena is about three times as expensive. How these factors will impact the number of jobs is unknown, but I feel that the number of jobs lost in Sedgwick County in retail and services will be larger that what Pulaski County experienced.

    It is interesting to note that the authors of this study, while measuring a positive net economic impact for the Alltel Arena, make this conclusion:

    “The primary reason for this positive economic impact is that the state of Arkansas contributed $20 million to the construction of the arena. As a result, the economic impact of building the arena in Pulaski County is greater than it would be if the county had funded the arena by itself. A vast majority of the jobs that will be created will be in the service sector that frequently offers lower wages than jobs in other sectors of the economy.”

    The proposed downtown Wichita arena does not have the advantage of having 40% of its cost paid for by outsiders. It may be that we feel even more strongly the negative impacts of the sales tax.

    The Difference Between a Publicly-Owned and Privately-Owned Arena

    Instead of the government building an arena, suppose that arena supporters, along with those who voted yes for the sales tax and anyone else who wants to, formed a corporation to build and own an arena.

    Instead of having paid taxes to the government, arena supporters would be investors and they would own something: their shares in the arena. They would have the pride and responsibility that comes with ownership. They would have a financial stake in its success. Even taxpayer-funded arena opponents might see merit in investing in a local business rather than paying taxes to a government.

    Instead of government bureaucrats deciding what the people of our town want and need, a privately owned arena would be subject to the guidance and discipline of free markets. It would either provide a valuable service to its customers and stay in business, or it would fail to do that and it would go out of business. Governments do not have such a powerful incentive to succeed.

    Instead of the bitter feelings dividing this town over the issue of a taxpayer-funded arena and other perceived governmental missteps, the arena corporation would act in the best interests of its shareholders and customers. Even if it didn’t, it wouldn’t be the public’s business, because after all, the corporation is formed of private individuals investing their own money.

    When individuals invest in an arena they are nurturing the virtues of investment, thrift, industry, risk-taking, and entrepreneurship, Wichita having an especially proud tradition of the last. There is nothing noble about a politician taxing and spending someone else’s money on projects like a downtown arena, or a renovated Kansas Coliseum for that matter.

    At this time in our town we have a chance to let private initiative and free markets work, or we can allow the government to continue to provide for us in ways that few seem truly satisfied with. Writing about a public utility in England that was transferred to private enterprise, economist John Blundell observed:

    “When it was ‘public’ it was very private. Indeed, it was totally captured by a small band of bureaucrats. Even members of Parliament struggled to find out what was going on. No proper accounts were produced, and with a complete lack of market signals, managers were clueless as to the correct course to take. The greatest casualty was a lack of long-term capital investment.

    Now it is ‘private’ and very public. Not just public in the sense of open, but also in the sense of accountable directly to its shareholders and customers. Copious reports and accounts are available and questioning citizens will find their concerns taken very seriously indeed.”

    If we allow the government instead of private enterprise to build a new arena or to renovate the Kansas Coliseum, this is the opportunity we lose.

  • Abuse Of Tax Funds Must Stop

    The following is from the Kansas Taxpayers Network. It shows how government-funded organizations participated in the campaign to increase Sedgwick County taxes.

    Taxpayers’ funds are being used to promote higher taxes in Kansas. Tax funds are also being used to lobby for higher taxes (see VI. and 1. above). This is an egregious mess that the legislature should stop. Tax funds are also used for “informational” campaigns by taxpayer funded groups. This includes a variety of local units like school boards but is not limited to any local units.

    How bad is this problem? Public campaign donation and expense records show that $45,907.85 was contributed to the “Vote Yea” committee from organizations that are partially or fully funded by tax funds. Here’s how the money is broken down in this advisory election:

    1) Greater Wichita Convention and Visitors Bureau contributed $10,000. The Greater Wichita Convention and Visitors Bureau is almost entirely funded by the City of Wichita through its hotel/motel bed tax. In 2004 budgeted expenditures were $1,122,510.

    2) Greater Wichita Sport Commission contributed $25,000. The Sports Commission operates out of the Convention and Visitors Bureau offices. City, county, and state tax funds in the form of $5,000 a year memberships finance this office. The state funds pay for Wichita State University’s membership.

    3) Wichita Downtown Development Corporation contributed $2,324. This city sponsored organization for helping downtown is primarily funded with a four mill city property tax within its downtown area boundaries.

    4) Kansas Turnpike Authority contributed $3,583.85. This contribution by a state organization listed an “Inkind” contribution of a “loaned executive,” for the “vote yea” campaign.

    5) The Hyatt Regency Wichita contributed $5,000. The Hyatt Regency operates this city owned and money losing hotel adjacent to the Wichita Century II complex. Since this corporation has a contract to operate this hotel this is another city related and funded contribution, albeit through this back door donation.

    These five contributions were more than twice the entire amount of the vote no campaign that spent just over $21,000 in their unsuccessful effort to defeat this advisory proposal. This spending does not include $5,000 more in 5016 funds for the tax hike campaign. Similar charitable donations in tax elections have also been reported in northeast Kansas. All these tax and 5016 expenditures should cease. However, these contributions and expenditures were probably a good deal less than the money spent by tax funded organizations to lobby the legislature. Some of these local units register as lobbyists (see lobbyist list for cities, counties, schools, and other entities) and some do not, like lobbyists for Regents Institutions.

    Tax funds are being misused to litigate for higher taxes. School districts that spend tax funds to sue the state over school finance are biting the hand that feeds them and already provides the bulk of their entire budgets. The state school finance formula should have an adjustment to penalize school districts that are suing the state over school finance. The perpetual school litigation machinery needs to be turned off at the statehouse.

  • Letter to Kansas Legislators regarding Sedgwick County arena tax

    January 25, 2005

    Dear Senator or Representative:

    I am writing to express my opposition to the legislature granting Sedgwick County the authority to raise its county-wide sales tax in order to fund the proposed downtown Wichita arena.

    I realize that the voters in Sedgwick County voted for the tax. Still, I believe there is ample reason why you should vote against the tax.

    The primary reason is that the idea of the arena came about so fast in the summer that there was little thought given to the underlying issues. The Center for Economic Development and Business Research at Wichita State University produced a study showing a large positive economic impact for a downtown arena. I found much academic research that showed otherwise, that taxpayer-funded facilities such as the proposed downtown Wichita arena rarely live up to their expectations, and instead become a burden on the taxpayers. I also uncovered the fact that the WSU study was flawed in that it omitted important factors such as depreciation, the accounting for which is now required by Government Accounting Standards Board Statement 34. Incredibly, the CEDBR at WSU was not aware of this requirement when they prepared the study that was used to promote the economic benefit of the proposed arena. They admitted this when I called it to their attention.

    Thus, what is presented as an economic boon for all the people instead becomes the county as a whole subsidizing the interests of a few.

    I presented my findings to many news outlets in Wichita, but there was little interest. Because I experienced such resistance to my message I started a website, the “Voice for Liberty in Wichita.” It is located at wichitaliberty.org. Much of the research I uncovered is posted there. As an example I am enclosing an article that I recently wrote. It is based on what was found to happen in Pulaski County, Arkansas (Little Rock), when they built an arena funded in part by taxpayers.

    I would be happy to provide you with any additional information that I can.

    Thanking you in advance for your time,

    Bob Weeks

  • Open letter to Wichita City Council regarding AirTran subsidy

    January 24, 2005

    Dear Councilmember:

    I am writing to express my concern about the upcoming renewal of the subsidy being paid to AirTran Airways. You may recall that I appeared before the Council last May and spoke in opposition to the subsidy. Since then I have learned more about the Fair Fares program.

    As an example, Mr. Troy Carlson, then Chairman of Fair Fares, wrote a letter that was published on September 16, 2004 in the Wichita Eagle. In that letter he claimed $2.4 billion economic benefit from the Fair Fares program ($4.8 billion for the entire state). I was curious about how these figures were derived. I learned that the basis for them is a study by the Center for Economic Development and Business Research at Wichita State University that estimates the economic impact of the airport at $1.6 billion annually. In this study, the salaries of the employees of Cessna and Bombardier, because these companies use the airport’s facilities, are counted as economic impact dollars that the airport is responsible for generating.

    To me, this accounting doesn’t make sense on several levels. For one thing, if we count the economic impact of the income of these employees as belonging to the airport, what then do we say about the economic impact of Cessna and Bombardier? We would have to count it as very little, because the impact of their employees’ earnings has been assigned to the airport.

    Or it may be that someday Cessna or Bombardier will ask the City of Wichita for some type of economic subsidy, and they will use these same economic impact dollars in their justification. But these dollars will have already been used, as they were attributed to the airport.

    My primary opposition to the AirTran subsidy is based on the superiority of free markets to government subsidies. But I believe that if the Council should consider a subsidy, it should have sensible information at its disposal. The arguments the Fair Fares supporters make seem to be based on an overextended assessment of the airport’s economic impact.

    I have written more about this in on my website “Voice for Liberty in Wichita” at wichitaliberty.org.

    Sincerely,

    Bob Weeks

  • Wichita News Media Coverage of Downtown Arena Issue

    On the November 2, 2004 ballot the voters of Sedgwick County approved an additional one percent sales tax to fund an arena in downtown Wichita.

    I opposed the taxpayers funding an arena for this reason: Proponents claimed that the arena would pay for itself (and be a good ting for Wichita) through various forms of economic benefit, both direct and spillover. But I found no research that supported this claim, except for one report prepared by the Center for Economic Development and Business Research at Wichita State University. I was able to find, however, much research that showed that these facilities rarely provide the promised benefit. Therefore, to ask all the taxpayers to pay for something that benefits just a few is not right.

    The Wichita news media, in my opinion, did a woeful job covering the issues relating to the arena. In particular, it seemed as through the Wichita Eagle had as its corporate mission the passage of the arena tax. The Eagle did print many letters and “Opinion Line” comments that oppose the arena, and they still do even today. But the clear editorial stance was to press for passage of the arena tax.

    As an illustration of the bias on the Eagle’s editorial page, consider this example: Mr. Phillip Brownlee, opinion editor for the Eagle, wrote an editorial that said the true cost of the Kansas Coliseum renovations would be $122 million instead of $55 million because of interest costs. I wrote a letter that said that since some of this money wouldn’t have to be paid until the distant future, we should consider the effects of the time value of money and inflation. Mr. Brownlee wrote to me and said that I was correct, and my letter was published.

    At the time I assumed that Mr. Brownlee, probably having majored in journalism in college, wasn’t aware of the time value of money and things like that. After the election, though, someone told me, and I confirmed by reading his biography on the Eagle’s website, that Mr. Brownlee was a certified public accountant in a previous career. A person with that type of education and experience certainly does know about the time value of money. We have to ask, then, why Mr. Brownlee would disregard such an important factor when editorializing.

    Eagle reporter Mr. Fred Mann, in an article titled “Arena’s financial impact cloudy” published on September 5, 2004, provided good information about the doubts surrounding facilities such as these. This article, however, appeared nearly two months before the election, and I saw little coverage of these issues again. I uncovered much other research (most of it is posted in my blog) and supplied it to reporters at the Eagle, but they didn’t act on it.

    Other people in Wichita’s news business appeared to lack basic factual information about the arena vote. As part of its election night coverage, one prominent Wichita television news anchor interviewed Mr. Karl Peterjohn of the Kansas Taxpayers Network. Mr. Peterjohn mentioned something about how now the story moves to the Kansas Legislature. The news anchor expressed surprise to learn that the ballot issue was merely an advisory referendum instead of a binding resolution, and that the legislature would have to pass a law allowing Sedgwick County to raise its sales tax. A Wichita television news personality being so poorly informed about such a basic factual matter tells us that we shouldn’t expect important news reporting from our television stations.

    KSN Television had a panel show a week before the election. The members of the panel were Wichita Mayor Carlos Mayans, Sedgwick County Commissioner Ben Sciortino, and Wichita Downtown Development Corporation President Ed Wolverton. Each has been quite clear and outspoken in their support of the proposed downtown arena. I do not remember the media panel members asking very many tough questions. I wrote to several people at KSN pleading for some balance either on the guest panel or the media panel.

    I supplied most local television stations and radio stations with some of the research that I found. This was information that could be verified independently if the reporters chose to do so. It made a compelling case against taxpayer-funded facilities like the proposed downtown Wichita arena. Nearly everyone I showed it to wondered why this information wasn’t being reported. But I had difficulty gaining the attention of anyone in the Wichita new business.

    One exception is Mr. Erik Runge of KWCH Television. He interviewed me, independently verified some of my research, interviewed someone else with an opposing view, and prepared three different segments that were broadcast about a week before the election. I thought he did a good job.

    I also appeared as an arena opponent on the radio show “Sports Daily” on KFH Radio. I had heard the hosts advertise for someone to appear on their show as an arena opponent. I applied and appeared for 30 minutes.

    Why did the Wichita news media do such a poor job covering the arena tax issues? I do not know. But it is easy to be swept up in the excitement of a new facility. The arguments that arena supporters used seem to make sense until you investigate their truthfulness. It took a lot of effort to uncover contradictory evidence. I suspect that many didn’t look very hard and therefore never found what I did, or if they did find it, since it said what they didn’t want to hear, they ignored it.

  • The motivations of politicians

    Presently Mr. Bob Knight of Wichita, a private citizen, is promoting the building of a casino in Park City, Kansas. These articles from The Wichita Eagle have reported Mr. Knight’s position on casino gambling in Kansas when he was the mayor of Wichita:

    GOP governor hopefuls stake their positions (July 3, 2002) “Knight and Kerr said they oppose gambling but would consider voter approval.”

    Trump has no plans for local casino (May 9, 2003) “Last year, Ruffin said, he approached former Mayor Bob Knight about the possibility of relocating the track to downtown and adding a casino if lawmakers approved. Knight was not interested, he said.”

    Gambling on the slots (May 22, 2002) “Wichita Mayor Bob Knight, seeking the Republican nomination, said gambling is an unreliable source of revenue. ‘I don’t think it fits my sense of how you build and sustain a strong state,’ he said.”

    The cynic in me imagines Executive Assistant District Attorney Jack McCoy of the television show Law and Order with Mr. Knight on the witness stand asking — justifiably indignant — “Were you lying then, or are you lying now?”

    But I do not know Mr. Knight, and there may be other explanations. It may be that as mayor of Wichita, he wasn’t being very careful or thorough in forming his opinions. A Wichita Eagle editorial Plan requires serious look states in part: “He [Knight] acknowledged that as mayor he had opposed an earlier casino plan for Wichita. But after studying this project, he said, he became convinced that a true destination casino could pay off handsomely for the Wichita area and region.” Mr. Knight has been out of the mayor’s office for less than two years. What about the Wichita area has changed in that time that makes a casino a good bet (so to speak) now?

    Or, has a casino always been a good idea, but Mr. Knight either didn’t know that when he was mayor, or he just didn’t want the citizens of Wichita gambling on his watch?

    I do not know the answer to these questions, and given our collective experience with politicians, I probably wouldn’t believe Mr. Knight if he answered them. Such is the credibility of the motivations of politicians.

    Links referred to:
    GOP governor hopefuls stake their positions http://www.kansas.com/mld/kansas/news/politics/3590300.htm
    Trump has no plans for local casino http://www.kansas.com/mld/kansas/5820055.htm
    Gambling on the slots http://www.kansas.com/mld/eagle/3310716.htm
    Plan requires serious look http://www.kansas.com/mld/eagle/news/editorial/10648925.htm

  • Stretching figures strains credibility

    I recently read that the Wichita Airport’s economic impact was estimated at $1.6 billion per year. I thought this seemed high, so I investigated further.

    I became aware of this study prepared by the Center for Economic Development and Business Research at Wichita State University, available here: Wichita Mid-Continent Airport Economic Impact.

    By reading this study I learned that the employees of Cessna and Bombardier — 12,134 in total — are counted in determining the economic impact of the airport. Why? To quote the study: “While it might appear that manufacturing businesses could be based anywhere in the area, both Cessna and Bombardier require a location with runways and instrumentation structures that allow for flights and flight testing of business jet airplanes.” This is true, but it is quite a stretch to attribute the economic impact of these employees to the airport.

    For one thing, if we count the economic impact of the income of these employees as belonging to the airport, what then do we say about the economic impact of Cessna and Bombardier? We would have to count it as very little, because the impact of their employees’ earnings has been assigned to the airport. This is, of course, assuming that we count the impact of these employees only once.

    Or suppose that Cessna tires of being on the west side of town, so it moves east and starts using Jabara Airport. Would Cessna’s economic impact on Sedgwick County be any different? I think it wouldn’t. But its impact on the Wichita airport would now be zero. Similar reasoning would apply if Cessna built its own runway.

    Or it may be that someday Cessna or Bombardier will ask Sedgwick County for some type of economic subsidy, and they will use these same economic impact dollars in their justification. But these dollars will have already been used, as they were attributed to the airport.

    To its credit, the WSU study does provide some figures with the manufacturing employees excluded. The impact without the manufacturing employees included is estimated at $183 million, or about 11 percent of the $1.6 billion claimed earlier.

    It is a convenient circumstance that these two manufacturers happen to be located near the airport. To credit the airport with the economic impact of these companies — as though the airport was involved in the actual manufacture of airplanes instead of providing an incidental (but important) service — is to grossly overstate the airport’s role and its economic importance.

    Of course the airport is important to Wichita. We should seek to measure its impact sensibly instead of stretching to attribute every dollar possible to it. When advocates of any cause manufacture figures like the $1.6 billion economic impact, it casts doubt on other arguments they advance.

    Links referred to: Wichita Mid-Continent Airport Economic Impact

  • A Taxpayer Bill of Rights for Kansas, Please

    Taxes in Kansas are high, and may increase this year. The recent school finance ruling by the Kansas Supreme Court and the passage of the downtown arena sales tax referendum in Sedgwick County are just two reasons why.

    We should act now to restrain the growth of state government spending. The Taxpayer Bill of Rights, or TABOR, has shown to be effective in Colorado. We in Kansas could have this, too.

    The law is quite simple: state spending and debt could not grow faster than the rate of annual population growth plus inflation. It doesn’t prescribe how the state should raise or spend money, just that real (inflation-adjusted) spending can’t grow faster than the state’s population grows.

    On the Americans for Prosperity web site there is an excellent analysis of what could happen in Kansas if we adopt such a law. You may read about it at this link: A Taxpayer’s Bill of Rights for Kansas.

    Other helpful information is at the Cato Institute: Fiscal Trail Blazer: Colorado’s Taxpayer Bill of Rights is leading the way, Reforming TABOR in Colorado, and States Face Fiscal Crunch after 1990s Spending Surge.

    As our state legislature prepares to start the 2005 session, I urge you to contact your representatives and make them aware of your support for this important law.

  • End Corporate Welfare, Starting with Industrial Revenue Bonds

    “While corporate welfare has attracted critics from both the left and the right, there is no uniform definition. By TIME’s definition, it is this: any action by local, state or federal government that gives a corporation or an entire industry a benefit not offered to others. It can be an outright subsidy, a grant, real estate, a low-interest loan or a government service. It can also be a tax break — a credit, exemption, deferral or deduction, or a tax rate lower than the one others pay.” (Time Magazine, Nov. 9, 1998)

    States and localities aggressively compete with each other to see which can put together the grandest package of benefits to induce companies to locate there. Or, as becoming increasingly common, a company threatens to move away from a city or state unless it receives incentives. Often these incentives are given in the form of industrial revenue bonds. IRB supporters are quick to remind citizens that the local government is merely helping the company to borrow the money — it is not giving the bond money to the company. Therefore, it doesn’t really cost the taxpayers to offer these IRBs.

    In fact, issuing IRBs does cost local taxpayers. Here’s some information about IRBs in the City of Wichita. Quoting from the City of Wichita’s IRB Overview web page, located at http://www.wichitagov.org/Business/EconomicDevelopment/IRB/IRBOverview.htm:

    “IRB’s [sic] require a governmental entity to act as the ‘Issuer’ of the bonds, who will hold an ownership interest in the property for as long as the IRBs are outstanding. The Issuer leases the property to the business ‘Tenant’ on a triple-net basis for a term that matches the term of the IRBs, with lease payments which are sufficient to pay the principal and interest payments on the IRBs.”

    In my analysis, it is the City of Wichita that owns the financed property for the duration of the bond lifetime. What if the business fails? It appears that the city owns the property then, and is responsible for paying the remainder of the bond balance. So, the taxpayers of the city assume credit risk.

    Continuing from the same page: “The issuer can provide property tax abatement for up to ten years for property financed with IRBs.” The city, county, and state don’t receive property taxes from the business, yet they must provide services such as police and fire protection to the business. The cost of these services is born by the rest of the taxpayers.

    Continuing further: “Generally, property and services acquired with the proceeds of IRBs are eligible for sales tax exemption.” Again, the government does not receive tax revenue it would otherwise have received, if not for the IRBs. The remainder of the taxpayers must make up the difference.

    It appears, then, that issuing IRBs costs everyone but the firm that receives the benefits.

    There are other issues with IRBs and other forms of corporate welfare, importantly involving the disruption of the free market allocation of resources. When governments instead of markets act to allocate resources, resources are allocated unproductively. These points come from “Ending Corporate Welfare As We Know It,” a Cato Institute Policy Analysis by by Stephen Moore and Dean Stansel, May 12, 1995, available at this url http://www.cato.org/pubs/pas/pa225.html:

    1. Government is not good at picking winners and losers. “The function of private capital markets is to direct billions of dollars of capital to industries and firms that offer the highest potential rate of return. The capital markets, in effect, are in the business of selecting corporate winners and losers. The underlying premise of federal business subsidies is that the government can direct the limited pool of capital funds more effectively than can venture capitalists and private money managers. But decades of experience prove that government agencies have a much less successful track record than do private money managers of correctly selecting winners.”

    2. Corporate welfare is very expensive considering the few benefits it produces. “Corporate welfare is supposed to offer a positive long-term economic return for taxpayers. But the evidence shows that government “investments” have a low or negative rate of return.”

    3. Corporate welfare rewards those companies who look to government for help, rather than concentrating on satisfying market needs. “Business subsidies, which are often said to be justified because they correct distortions in the marketplace, create huge market distortions of their own. The major effect of corporate subsidies is to divert credit and capital to politically well-connected firms at the expense of their politically less influential competitors. Those subsidies are thus inherently unfair.”

    4. “Corporate welfare fosters an incestuous relationship between business and government.”

    5. Many corporate welfare programs increase the costs to consumers. Trade restrictions do this. Subsidy programs may reduce the cost to a small few at the cost of everyone else. Tax breaks increase the tax burden for those who don’t receive the breaks.

    6. “The most efficient way to promote business in America is to reduce the overall cost and regulatory burden of government. Corporate welfare is predicated on the misguided notion that the best way to enhance business profitability in America is to do so one firm at a time. But a much more effective way to enhance the competitiveness and productivity of American industry is to create a level playing field, which minimizes government interference in the marketplace and substantially reduces tax rates and regulatory burdens.”

    7. “Corporate welfare is anti-capitalist. Corporate welfare converts the American businessman from a capitalist into a lobbyist.” What a sad waste of time and effort — courting politicians instead of developing products and services the market wants.

    I disagree with the Cato analysis on one point. The analysis states: “Nonetheless, we reject the notion that allowing a company to keep its earnings and pay less in taxes is somehow a ‘subsidy.’” I, however, contend that reducing a company’s taxes is the same as giving them money outright, as the impact on the bottom line is the same. I do agree with Cato that it is better if firms and individuals pay less taxes rather than more. But often corporate welfare measures like industrial revenue bonds are given to one company at the exclusion of its competitors. This, whether it is giving money to a company or reducing its taxes, is unfair to the company’s competitors. It is a distortion of the free market allocation of resources.

    Supporters of corporate welfare claim that we in the United States must subsidize our corporations because other countries subsidize theirs. But the more corporate welfare we have, the more we have a socialized economy, and the more we become like European economies. This we do not want.

    Other corporate welfare supporters claim that without incentives, businesses will not invest and create jobs. First, if taxpayers did not have to bear the cost of providing incentives, we would have more money to spend and invest ourselves as we see fit, not as politicians desire. Second, and most important, if a company does not believe in itself strongly enough to invest its own capital in itself, or if the capital markets have decided not to invest in a company, why should the taxpayers then have to invest in the company? It would seem like the taxpayers get to make only the most unproductive investments.

    Finally, if we in Wichita or Kansas were to stop issuing IRBs and other forms of incentives, we would place ourselves at a disadvantage in competing with other states and cities. Therefore, I believe that the leadership to stop these types of corporate welfare incentives must start in Washington, so that it is ended nationwide. Then, localities can compete for jobs in meaningful ways.