One of the things we’re being told by the mainstream media is that deregulation is the cause of our current economic crisis. If only Bush hadn’t torn up so many regulations, we wouldn’t be in this trouble. Only adding more regulation will save the economy. Free markets — as if our economy is based on anything like that concept — are also blamed.
The most recent Cato Policy Report has an article Are We Ailing from Too Much Deregulation? that shows why these beliefs are incorrect.
At the December 2, 2008 meeting of the Wichita City Council, Jeff Fluhr, the new president of the Wichita Downtown Development Corporation, spoke on behalf of the expansion of the Center City South Redevelopment District, commonly known as the downtown Wichita arena TIF district.
Attending the meeting with him were several members of that organization’s board of directors, headed by Joe Johnson of Schaefer Johnson Cox Frey Architecture. This board, emblematic of the “good ol’ boy” network, is stocked with those who seek to profit in the halls of government power rather than in the marketplace where consumers rule. It’s easier that way — no pesky consumers with their varied wants and desires.
The problem Mr. Fluhr faces is that in order to lure developers to downtown Wichita, incentives must be offered. Now some on the Wichita city council act as though incentives come at no cost. The proceeds from TIF financing, they say, are used only for infrastructure, as though this is something the city is obliged to provide. But as I show in my post Many Wichita Developers Pay for Infrastructure, market-based developers pay for their infrastructure. The city doesn’t give away much to them.
The TIF developers, they being the political entrepreneurs, are privileged to use their own property taxes to pay for their infrastructure, and for other things, too. This sets up a situation where the city, through its attempts at centralized planning, thwarts the will of the people by forcing Wichitans to subsidize developers who are lured — “incentivized,” as one city council member put it — to develop where politicians want them to.
This sets up a tension. Citizens are starting to realize the reality of the transfer of wealth from taxpayers to the political entrepreneurs, and they don’t like it. They’re starting to realize that public/private partnerships mean the public takes the risk, and the “privates” earn the profits. This is far removed from capitalism, which is what we need to build the wealth of our city. “Crony capitalism” is a better term for the relationship between the TIF district developers and local government officials.
Then there’s the defect in the process surrounding the public hearing before the Wichita city council. As Randy Brown wrote about this meeting: “Among other transgressions, we had a mockery of the public hearing process rather than an open and transparent discussion of a contentious public issue.” Mr. Fluhr needs to decide if he’s on the side of open and transparent government, or whether he’s in favor of crony capitalism and the good ol’ boy network. If he would request that the City of Wichita withdraw this TIF district until a proper public hearing is held, we’d get a good indication of his thinking. Of course, if he doesn’t make such a request, we’ll know just as well.
Finally, Mr. Fluhr stated in his presentation to the Wichita city council: “[The TIF district] will greatly contribute to Wichita’s development as a destination river city, which will in turn enhance the economic vitality of downtown and the community at large.” (emphasis added)
I would ask that Mr. Fluhr and the citizens of Wichita familiarize themselves with the research to the contrary. A number of studies tell us that TIF districts, while good for the subsidized developers, are not a good deal for the city as a whole. As economists Dye and Merriman (see below) found out: “We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.”
Kenneth A. Kriz: Tax Increment Financing: Its Effect on Local Government Finances
Dye, Richard and David Merriman: Tax Increment Financing: A Tool for Local Economic Development
Dye, Richard and David Merriman: The Effects of Tax Increment Financing on Economic Development
Danny Santivasci: Tax Increment Financing: Private Investment at the Expense of Local Community
Carrie Rengers’ Wichita Eagle column from yesterday (Warehouse plans near airport are called off) reports on two Wichita real estate developers who have canceled a project that would be a valuable addition to our city. The reason for canceling? Wichita’s property tax environment.
In Wichita, we’re separating real estate development into two classes. There are those who listen to markets and consumers, and try to satisfy the needs that they sense. These are the market entrepreneurs.
Then, there are the political entrepreneurs. These developers make use of devices such as tax increment financing (TIF districts) to offload large portions of the cost of their developments on the public. They do this by pleasing government officials and bureaucrats, not consumers.
As the City of Wichita moves towards more government subsidy and planning instead of entrepreneurship, we should make sure we know what we’re relying on. An article by Steven Greenhut from the July/August issue of The Freeman: Ideas on Liberty provides some useful background and advice.
The article is here: Central Planning Comes to Main Street. Following are a few excerpts:
The theory is that the city deserves the new tax dollars because its efforts are improving the supposedly blighted area. But the reality is quite different. Cities don’t often use TIF to fix up blight, but to increase their tax base. Often they engage in what is called “growth capture” — city planners wait until a stable or depressed area is starting to bounce back on its own. They then brand the area “blighted” and use that as an excuse to capture the new values and transfer the gain from the old owners, who held onto the properties during the lean years, to new developers who savor the prospect of getting prime property for far-below-market rates.
This concept of “growth capture” is what’s happening in Wichita. Assessed valuations of property surrounding the arena have already risen. The area appears on an upward path on its own. Why the need for a TIF district, then?
“Does the tax abatement method meet with success?” asked Michael LaFaive of the Mackinac Center for Public Policy in a 1999 article. “Not as much as if local officials simply would keep taxes low in the first place. CRC [Citizens Research Council of Michigan] found that economic growth takes place in jurisdictions where taxes are low and which consequently grant fewer abatements.”
Yes, let’s have low taxes overall, instead of just for favored developers working in politically-favored areas. Or, as John Todd said, think of what could happen if there was a TIF district city-wide.
Local economic planning, especially the creation of redevelopment project areas, actually slows down neighborhood improvement. Once an area is deemed a redevelopment area, property owners stop investing in their properties because they are not sure that they will ultimately reap the benefit of the investment. They become subjects of the central planners who will make the main decisions that affect the economic vitality of the area.
This is another important point. Individual projects in the TIF district must be planned in a way that will be able to gain approval of government planners. This happened in Tuesday’s Wichita city council meeting, where the first project in a TIF district known as C.O.R.E was brought before the council for approval. How many developers want to work with city bureaucrats looking over their shoulder?
There’s much more valuable insight in this article.
Say no to expansion of the Center City South Redevelopment tax increment financing (TIF) District.
Remarks to be delivered at the December 2, 2008 meeting of the Wichita City Council. Watch the video here.
Mr. Mayor, Members of the Council:
It is the case the the City of Wichita is proposing to limit this TIF district spending to things like streets, intersections, landscaping, and lighting. But these are still things that developers working outside of TIF districts generally have to pay for themselves.
This is the real function of TIF districts: TIF developers get to use their own property taxes to pay for things that non-TIF developers have to pay for out-of-pocket, or through special tax assessments on top of their regular property taxes. This is accomplished through a confusing arrangement that hides the reality and size of the subsidy given to TIF developers. I’ve come to realize that this confusion serves a useful purpose to this council, because if the people of Wichita knew what was really happening, they’d be outraged.
The proposed TIF district, while smaller than previously proposed, is still large. Very large. Has anyone calculated what share of the retail and restaurant trade in Wichita would have to be captured by this district in order for it to be successful?
Has anyone performed a market study to see if obtaining this market share would be feasible? And if feasible, what effect would this have on existing business and development in Wichita? Specifically, what effect would this have on other development in downtown, such as Old Town and Waterwalk? We’ve seen that when city-subsidized business is in financial trouble, this council is willing to fund a bailout.
We’re at a point, Mr. Mayor, where entrepreneurs may not be willing to work in Wichita without a taxpayer subsidy, or at least not in competition with subsidized development. I am aware of a commercial development in Wichita that has been canceled because of Wichita’s tax environment. Some developers have told me that they are reconsidering whether to do any more business in Wichita simply because of our property tax environment. This situation has recently worsened, as we voted ourselves a large tax increase last month. At the state level, spending cuts or tax increases loom as the state’s budget situation deteriorates.
Then, consider reporting in the Wichita Eagle this summer, which found this: “City and county tax records show that nearly $159 million in public money has been spent on Wichita’s tax increment financing districts, to get roughly $150 million worth of new development.” That’s not a good deal for city taxpayers.
Also, evidence of the effectiveness of TIF districts for cities as a whole is not good. A study from the Institute of Government and Public Affairs at the University of Illinois finds that “cities, towns, and villages that had TIF districts actually grew more slowly than municipalities that did not use TIF.”
Finally, Mr. Mayor, you’ve referred to some people as the “naysayers.” I don’t know if you were talking about me. It would be presumptuous of me to think so. But I don’t say “nay” to development, even to downtown development. What I say “no” to is taxpayer-subsidized development, planned and managed by government.
Saying “no” to that, in turn, lets us say “yes” to the rich diversity of human individuality instead of a collectivist vision driven by government bureaucracy. It means saying “yes” to free people cooperating voluntarily through free markets. That is what is disappearing as more and more of our city’s development is subsidized and managed by government.
In This Book is So Me, Walter Block introduces a book that I’ve quoted from and used extensively: Economics in One Lesson by Henry Hazlitt.
Every widespread economic fallacy embraced by pundits, politicians, editorialists, clergy, academics is given the back of the hand they so richly deserve by this author: that public works promote economic welfare, that unions and union-inspired minimum-wage laws actually raise wages, that free trade creates unemployment, that rent control helps house the poor, that saving hurts the economy, that profits exploit the poverty stricken; the list goes on and on. Exhilarating.
No one who digests this book will ever be the same when it comes to public-policy analysis.
This book is available online at the Foundation for Economic Education, and portions are available in audio format at Economics in One Lesson (Audio) Part 1 and Economics in One Lesson (Audio) Part 2.
When the head of a chamber of commerce speaks or writes, it pays to listen or read carefully. While chambers are nominally pro-business, that’s a long way from saying they’re pro-liberty. Instead, they increasingly exist to serve a narrow interest. Using words and language like “pride,” “community,” “investment,” and “economic development” — all words that people can agree with, their flowery messages hide their real agenda.
Here’s an example. In the Wichita Eagle on May 12, 2006, president and CEO of the Wichita Metro Chamber of Commerce Bryan Derreberry wrote as follows:
If we are serious about advancing our community, then we have to invest in it and take pride in who we are. The Sedgwick County arena can boost excitement and economic development in Wichita, Sedgwick County and the region.
The arena initiative was a broad-based decision-making effort that offered everyone an opportunity to weigh in with a vote. Sedgwick County is now carrying out what the voters approved with an open and thoughtful process, allowing much input along the way.
There will always be those who resist change and look for ways to impede progress. But we have an obligation to take care of the community we live in today and make it better for those who come after us.
First, Mr. Derreberry is confused about the meaning of the word “investment.” In a recent article, Chris Brown tells us the true meaning of investment: “Investment signifies an accumulation of savings through lower present consumption, which will then be used to achieve (potential) profitable returns in the future.” None of this applies to the downtown Wichita arena. It was funded by transferring money from taxpayers to the government. Then, government has no ability to measure profitability, as it is not subject to the profit and loss system that private business must live by. Besides, how does government generate revenue? Through taxation, of course.
Then, the “broad-based decision-making effort” is certainly a misnomer. The arena passed with 52% of the vote. That’s hardly a mandate. Many people, seeing how the process has been handled since the election, have said they’d change their “yes” vote to “no.”
Finally, Mr. Derreberry slams those who say “no” to what he wants. That’s a mistake arising from the arrogance of those who believe that they know best how people should spend their money. By saying “no” to these government projects we are saying “yes” to entrepreneurship, limited government, and liberty. These goals, evidently, are not valued by Mr. Derreberry and his organization.
Here’s a message that Bryan Derreberry, president of the Wichita Metro Chamber of Commerce, sent to Chamber members. Note that this message doesn’t mention the role its political action committee played in the third Sedgwick County Commission district. In that race, the PAC spent some $19,000 of its $48,000 in an effort to elect Goddard mayor Marcey Gregory. Her opponent, longtime taxpayer advocate Karl Peterjohn, is just the type of candidate you’d expect chambers of commerce to support.
But that’s changed. Stephen Moore in the article “Tax Chambers” published in The Wall Street Journal on February 10, 2007 wrote this: “In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses — at least those not connected at the hip with government — to prosper.”
Mr. Derreberry’s letter mentions “pro-business values.” At one time this meant something approaching free-market values. But now, Ronald Reagan’s prediction is being fulfilled here in Wichita: “What is euphemistically called government-corporate ‘partnership’ is just government coercion, political favoritism, collectivist industrial policy, and old-fashioned federal boondoggles nicely wrapped up in a bright-colored ribbon. It doesn’t work.”
November 18, 2008
Dear Chamber Members:
This election cycle was a resounding success for the candidates supported by the Wichita Area Business Political Action Committee (WABPAC) as we raised more than $48,000 to support pro-business state and local candidates. The Chamber’s political action committee identified and supported 39 state legislative candidates and three Sedgwick County Commissioner candidates winning 36 of the 39 races in which WABPAC was involved (93% elected).
The litmus test for the PAC’s engagement and support was whether a candidate had demonstrated an ability to listen and work with the business community to assure that your company, or organization, had the most competitive environment possible in which to excel. WABPAC’s Board of Trustees wants to thank every Chamber member who reviewed the PAC’s support recommendations and voted accordingly. The reason behind this appreciation is that the Chamber’s collective voice has its greatest impact when business members engage themselves in the election process and elect candidates who embrace pro-business values and understand the challenges you face daily.
A strong, collective pro-business vote is also an outstanding way to support incumbent state legislators and local elected officials who have successfully advanced our region’s top priorities. Bottom line – we need to effectively support the business-attuned elected officials who support us. Our South Central Kansas state legislative delegation has been an adept and courageous partner in advancing our metro area’s top policy and program goals. Your combined voice, in supporting the PAC and re-electing a majority of this delegation, assures the return of legislators to Topeka willing to champion our most important business priorities.
Respectfully,
Bryan Derreberry
When it comes to government money, there’s no shortage of people who have ideas on how to spend it. One group that has grand ideas of how government should spend your money is the Northern Flyer Alliance. This group promotes passenger train service in our area. Currently they’re promoting extension of rail service from Oklahoma City to Wichita.
The problem with this group, as alluded to above, is that they seek to accomplish their goal by using government. As reported in the Wichita Eagle (Group seeks support for train service through Wichita), “The director of a group seeking expanded passenger rail service through Wichita today asked City Council members to pass a resolution urging the state to include in its upcoming transportation plan a new Amtrak line stretching from Oklahoma City to Wichita and on to Kansas City.”
So this group is asking Wichita (and many other towns and cities) to apply pressure to the State of Kansas to subsidize this rail line. This group is another example of political entrepreneurship in action. Instead of practicing market entrepreneurship — that’s where you develop and deliver services and products that people actually want enough to pay for — this group seeks to accomplish its goals by influencing politicians and bureaucrats. They were successful in Oklahoma.
If we want passenger train service that is truly successful, this group should work to raise private capital rather than seeking government subsidy. This is the only way we’ll know whether this train service is something that truly adds value, or whether it is just another “amenity” the government provides by taxing one person to subsidize someone else.