Voice For Liberty

Tag: Center for Economic Development and Business Research

  • Wichita presents industrial revenue bonds

    Wichita presents industrial revenue bonds

    A presentation by the City of Wichita regarding IRBs is good as far as it goes, which is not far enough.

    Recently the City of Wichita prepared a short video explaining the city’s industrial revenue bonds (IRB) program. The video may be viewed on YouTube by clicking here.

    Several times the presenters emphasized that in the IRB program, the city does not lend money. They properly identify the true purpose of the program, which is to subsidize companies by allowing them to avoid paying property taxes and possibly sales taxes.

    Several times the presenters emphasized that the IRB program has no cost to the city. But that isn’t true. Part of the rationale for taxes, especially the property taxes that cities, counties, and school districts collect, is to pay for services that people and business firms demand. Well, don’t new businesses firms demand or require services from the government? And if a business is not paying its share of taxes, who is paying for the services it consumes?

    If we don’t think that a new or expanded business spurs demand for services, then we need to rethink the basis of taxation.

    The presenters mentioned the benefit-cost analysis produced for the city by Center for Economic Development and Business Research at Wichita State University and concluded that the city profits from the IRB program. This analysis purports that if the city incurs costs — either by spending one dollar or giving up one dollar of tax revenue — it will receive a certain amount in return. City policy requires that the city receive $1.30 or more in benefits for each dollar of cost. But there are issues:

    • The city says IRBs have no cost, but the benefit-cost ratio identifies costs. The city hopes the benefits outweigh these costs.
    • There is no guarantee that the city will receive any benefits, or that the benefits will be close to what the CEDBR model estimates.
    • The CEDBR model asks companies to make projections of economic activity for up to ten years in the future. Especially in the out-years, these estimates are subject to large errors.
    • No effort is made to scrutinize these projections. They are taken at face value, as supplied by the applicant company.
    • The benefits to the city are in the form of taxes paid. Taxes are a burden to those who must pay them.
    • Applicant companies do not have to demonstrate economic necessity.
    • The policy of requiring a benefit of $1.30 for each dollar of cost has many loopholes.

    Perhaps the most important policy issue is that the city realizes the benefits of increased economic activity whether or not the activity is subsidized with IRB tax breaks. The benefit-cost ratio for unsubsidized projects is infinite: All benefit, no cost. Therefore, the benefit-cost ratio is meaningful only for those projects which could not proceed without the subsidy.

    Some incentive programs require the demonstration of economic necessity. That is not the case with IRBs.

    Additionally, when the city issues IRBs and grants tax abatements, other jurisdictions are affected. Both the overlapping county and school district have their property tax collections eliminated. If a sales tax exemption is granted, the state is most prominently affected, as nearly all sales tax paid goes to the state. (For sales tax paid in Sedgwick county, the state’s share is 86.7 percent.) None of these overlapping jurisdictions can opt-out of the tax abatement that the city imposes.

  • Intrust Bank Arena economic impact holds mistake

    Intrust Bank Arena economic impact holds mistake

    A report on the economic impact of the first ten years of operation of the Intrust Bank Arena in downtown Wichita incorrectly reported tax revenue.

    Recently Intrust Bank Arena in downtown Wichita promoted the results of an analysis of the economic impact of the arena through its first ten years of operation. 1 The arena partnered with the Center for Economic Development and Business Research at Wichita State University to conduct the study. 2

    In all, the report claims $2.7 million over ten years in Sedgwick County guest tax revenue paid by out-of-town arena visitors who stayed in local hotels. But while the county has a guest tax, it does not raise nearly the dollars shown in the report.

    The transient guest tax, sometimes called a guest tax or bed tax, is a tax on a hotel bill. It is collected in addition to retail sales tax. In the City of Wichita, hotel guests pay 7.5 percent retail sales tax, an additional six percent guest tax, and an additional 2.75 percent city tourism fee. If the hotel is located within a Community Improvement District, an additional tax of up to two percent is collected.

    The guest tax for Sedgwick County was last revised in 2006. 3 The rate is five percent. The ordinance says that the tax “… shall be levied in the unincorporated area of Sedgwick County, Kansas …”

    The term unincorporated area is key, meaning the portions of the county that are not within an incorporated town or city. Reports from the Kansas Department of Revenue show there is just one establishment in Sedgwick County that files a guest tax report. 4 For comparison, 108 establishments in the City of Wichita file guest tax reports. These are located in the city limits and are not in the unincorporated area of the county, and therefore not subject to the county guest tax.

    How much does Sedgwick County collect in guest tax? The reports from the Kansas Department of Revenue don’t say. The value is suppressed to protect confidentiality, given that there is just one filing establishment in the unincorporated area of the county.

    We do know, according to the economic impact report, that the one hotel in unincorporated Sedgwick County collects $351,656 per year in guest tax (annualized over the period 2015 to 2019.) Since the guest tax rate is five percent, that implies $7 million in annual sales, which would be collected by a hotel selling 191 rooms per day at a rate of $100 per day, 365 days per year.

    Is there such a hotel in unincorporated Sedgwick County? It’s unlikely. Consider this one hotel with $351,656 in guest tax collections by arena visitors compared to the $421,987 reported for all hotels in the City of Wichita, again for arena visitors. (The Wichita guest tax rate is slightly higher at six percent, so the comparison is not strictly equal.)

    Remember: According to the analysis, this level of activity is generated just by visitors attending events at Intrust Bank Arena.

    I think it’s safe to say there is a mistake. Correspondence with CEDBR, the organization that prepared the analysis, confirms that county guest tax was incorrectly estimated, and a new version reports $0 in county guest tax. 5 CEDBR says no numbers were changed other than the county guest tax and totals that included it.

    While it is unfortunate that CEDBR made this mistake, the use of the analysis by downstream consumers teaches us something about economic development, the data supporting it, and its practitioners.

    As an example, the management of Intrust Bank Arena issued a press release touting the analysis and its findings. Regarding tax collections, the announcement reports, “The fiscal impact of visitors to the area for INTRUST Bank Arena events that occurred in 2010-2019 was approximately $12 million in tax revenue generated.”

    What’s interesting is that the release cites only the retail sales tax revenue. It omits the guest tax revenue, which is — according to the analysis that was available at the time of the press release — about $6 million. That’s half as much as the retail sales tax, but it was not included in a press release touting economic impact.

    An excerpt from the first page of the CEDBR analysis. Click for larger.

    Why didn’t the arena use the guest tax collections, thereby reporting $18 million in tax revenue collected from visitors rather than $12 million? It wasn’t due to concern over the accuracy of the guest tax collections, as arena management told me they were not aware of CEDBR’s error. But because the press release did not mention the erroneous guest tax, arena management says there is no need to correct the press release. This is correct, and it reveals the mistake in not including guest tax revenue.

    Adding to our learning about the use of data in economic development is this: Of the sales tax collected by hotels in Wichita, about 87 percent belongs to the State of Kansas, with the remainder shared by Wichita and Sedgwick County. For guest tax, however, all is returned to the city, except for a small administrative fee of two percent. So of the $12 million in retail sales tax revenue promoted by arena management, about $1.5 million was shared by the city and county. 6 For the purported $6 million in guest tax revenue, all went to the city and county, except for the administrative fee.

    We also learn about the diligence of Sedgwick County Commissioner Pete Meitzner (district 1) in examining this data. He is quoted in the arena’s press release. But it’s quite easy to see that the analysis erroneously reports county guest tax revenue.

    Besides this mistake, there are other areas of concern regarding this analysis of the economic impact of the arena. One is that this report mentions revenue but not costs. 7

    The second is that before Intrust Bank Arena opened in downtown, the county owned another arena. That former arena generated economic activity and economic impact, too, including NCAA men’s basketball tournament games. A thorough analysis should look at the marginal activity created by the new arena.

    —
    Notes

    1. INTRUST Bank Arena Reports Economic Impact Study Results Through First 10 Years. February 14, 2020. Available at https://www.intrustbankarena.com/release/366/intrust-bank-arena-reports-economic-impact-study-results-through-first-10-years/. ↩
    2. Analysis by CEDBR, version 2, dated 1/6/2020. The document does not seem to be available online at either the arena website or Sedgwick County, but it has been preserved. Available at https://drive.google.com/file/d/11LZfbEXxYPfjLs02zE2fdUaWrQYJiUzm/view. ↩
    3. Sedgwick County. A charter resolution exempting Sedgwick County, Kansas, from the provisions of k.S.A. 12-1692, 12-1693, 12-1694, 12-1694a, 12-1695, and providing substitute and additional provisions on the same subject relating to the levy of a transient guest tax in the unincorporated area of Sedgwick County and providing for purposes of expenditure of such funds; and repealing charter resolution #32. Available at https://library.municode.com/ks/sedgwick_county/codes/code_of_ordinances?nodeId=SECOKACO_APXACHRE_NO._59. ↩
    4. Kansas Department of Revenue. Transient Guest Tax Rate and Filer Report. Available at https://www.ksrevenue.org/pdf/tgratesfilers.pdf. ↩
    5. Analysis by CEDBR, version 3, dated 2/26/2020. Available at https://drive.google.com/file/d/1uhLJBr5PXJ_Y6RaiP13bHNRAK08fEVg4/view. ↩
    6. Specifically, the analysis reports $983,449 in sales tax to the city and $703,714 to the county, for a total of $1,687,163. ↩
    7. It’s common for officials to talk as though there is no cost or expense in owning the arena, because a sales tax was used to pre-fund the arena. After the funds were in place, the arena was built. But, see Weeks, Bob. The finances of Intrust Bank Arena in Wichita. Available at https://wichitaliberty.org/sedgwick-county-government/the-finances-of-intrust-bank-arena-in-wichita/. For annual expenses, in a presentation to Sedgwick County Commissioners in February, county staff reported $1,991,471.99 in expenses charged to the arena’s reserve fund. This was offset by $722,933.65 in revenue, mostly from a revenue-sharing agreement with the arena’s operator and from the sale of naming rights. The declining balance in the arena’s reserve fund led Commissioner David Dennis to wonder if a special tax district could be established to provide more revenue to cover these expenses. See https://drive.google.com/file/d/1UbAfjQaIWQOzrYzIWqKdBIbrqFMDlfX-/view ↩
  • Missing from Wichita city documents: Sales tax

    Missing from Wichita city documents: Sales tax

    It would be simple for the City of Wichita to include additional relevant information regarding economic development incentive decisions.

    When the Wichita City Council makes decisions regarding economic development incentives, the Center for Economic Development and Business Research at Wichita State University prepares an analysis for the city. The purpose of the analysis is to determine benefit-cost ratios for overlapping governmental jurisdictions, purporting to show that these jurisdictions will receive more in benefits than they pay in costs. An example of the analysis for a large project is here.

    The city does not make this analysis document available to the public. It is a public record, though. Every time I have asked, they have been provided.

    One thing, then, that the city could do to increase transparency is to simply make these analysis documents available. Perhaps not in the agenda packet, but as a supplement, such as the way the city provides Powerpoint presentations for council meetings.

    Another thing the city could do is to include relevant data that would take just a little more effort.

    Consider sales tax exemptions. For a recent industrial revenue bond decision, city documents stated: “The project will also qualify for a sales tax exemption on bond-financed purchases.” 1 But the document doesn’t state the dollar value of the sales tax exemption, even though the CEDBR analysis includes this number. 2 That value, for this recent project, is $1,111,264.

    Is that information relevant to decision-makers? City documents estimate the value of the property tax abatements in the first year as $773,604. So for the total tax forgiveness received in the first year, the sales tax exemption is larger than the property tax abatement, accounting for 59.0 percent of the total. 3 That is relevant.

    Even over the ten-year life of the property tax abatement, the sales tax exemption is still 11.8 percent of the total tax forgiveness. That — the duration of the property tax abatement — is another opportunity to increase transparency. The CEDBR analysis gives the total cost of the incentives for ten years. (A nearby table summarizes.) These totals are speculative, as the city council must revisit the matter in five years to determine whether the company deserves the property tax abatement for an additional five years. (This is known as a “five-plus-five year tax exemption.”)

    But the total value of the exemptions is relevant, as it flows into the benefit-cost ratio calculations.

    Given all the numbers the city presently reports from the CEDBR analysis documents, not including the value of the sales tax exemption is a significant omission, and one easy to correct.

    —
    Notes

    1. Wichita city council agenda packet for January 21, 2020, item V-1 ↩
    2. Center for Economic Development and Business Research. January 8, 2020, version 8. Available at https://drive.google.com/file/d/1Mg3B0sJVy67_r4gNl4NZbclZKZsdgQUx/view. ↩
    3. Assuming all sales taxes are paid during the first year. ↩
  • Wichita jobs and momentum

    Wichita jobs and momentum

    Given recent data and the CEDBR forecasts, Wichita’s momentum is a slowly growing economy, with the rate of growth declining.

    The Center for Economic Development and Business Research at Wichita State University provides forecasts for the Wichita economy. In October, CEDBR wrote, “Total nonfarm employment in the Wichita metropolitan area grew 1.2 percent in 2018, with 3,500 new jobs created to bring the area’s employment to 298,600 workers. This was a turnaround after Wichita’s total employment declined by 2,200 jobs in 2017.” 1

    The October update didn’t forecast employment growth for the remainder of the current year, but in May, the report forecast, “Wichita’s employment expansion is forecast to continue in 2019 with 0.9 percent employment growth, adding more than 2,700 new jobs to the metropolitan area.” 2

    For the first nine months of 2019, Wichita jobs have grown from 301,600 in January to 302,600 in September, using seasonally adjusted data. That’s an increase of 1,000 jobs, or 0.3 percent. If that rate stays unchanged through the end of the year, Wichita jobs will have grown by about 0.4 percent. Given this data, it seems unlikely that the CEDBR forecast of 0.9 percent will be met.

    For 2020, CEDBR wrote in its October forecast, “For 2020, growth is expected to be more modest, as the Wichita economy is projected to add approximately 1,600 new jobs and grow 0.5 percent.”

    Click for larger.
    The reports mention declining unemployment rates. By itself, the unemployment rate tells us little, as it is the ratio of two numbers, the number of unemployed people divided by the labor force. Wichita’s low rate is mostly due to a declining, then slowly growing, labor force.

    To summarize, job growth in 2018 was 1.2 percent, forecast to be 0.9 percent in 2019 (but unlikely to meet that), and forecast to be 0.5 percent in 2020. (Recall that Wichita lost jobs in 2017.)

    Some candidates for local office in Wichita are campaigning on their record while in office, saying Wichita needs to build on its momentum. Given recent data and the CEDBR forecasts, Wichita’s momentum is a slowly growing economy, with the rate of growth declining.

    —
    Notes

    1. Center for Economic Development and Business Research at Wichita State University. Wichita Employment Forecast. October 3, 2019. Available at https://www.cedbr.org/content/2019/eoc/2020-wichita-forecast.pdf. ↩
    2. Center for Economic Development and Business Research at Wichita State University. 2019 Wichita Employment Forecast. May 2019. Available at https://www.cedbr.org/content/2019/2019-ict-forecast-may-revision.pdf. ↩
  • Looking at jobs in Wichita

    Looking at jobs in Wichita

    Examining job creation in Wichita as compared to the state and the nation.

    These charts show job changes in Wichita (Wichita MSA, the metropolitan statistical area, as that is the data that is provided monthly), Kansas, and the nation. Each chart shows the percentage, or relative, changes in nonfarm jobs on a common scale, using seasonally adjusted data. The source of data is Bureau of Labor Statistics, part of the United States Department of Labor. These charts are taken from an interactive visualization of this data, which is available here.

    For the chart starting in May 2015, we can see the loss of jobs in Wichita during 2017. The situation improves after that year. Note also that the Wichita and Kansas lines, broadly speaking, show a similar trend, although the Wichita line has more variation. Also, while Wichita lost jobs in 2017, the national economy was strong and was creating jobs. (Click charts for larger versions.)

    In the chart starting in January 2018, we see Wichita mostly keeping up with the pace set by the nation, and for most of the time, doing better than the state.

    In the chart starting in January 2019, Wichita begins by closely tracking the nation, but stumbles behind in the summer. Kansas does better than the nation.

    For the first nine months of 2019, Wichita jobs have grown from 301,600 in January to 302,600 in September. That’s an increase of 1,000 jobs, or 0.3 percent. If that rate stays unchanged through the end of the year, Wichita jobs will have grown by about 0.4 percent.

    Not shown in these charts is that using not seasonally adjusted data, Wichita jobs have grown by 1.9 percent since January 2019. Using not seasonally adjusted data over a period of less than one year is problematic. For the past 12 months, using not seasonally adjusted data, jobs grew by 0.9 percent from September 2018 to September 2019.

    For reference, the Center for Economic Development and Business Research at Wichita State University forecast Wichita MSA job growth at 0.9 percent for 2019, 1 slowing to 0.5 percent in 2020. 2

    Perhaps the most important chart is the following, which shows job changes starting in 1990. It’s easy to spot the recessions, and also to see that the Wichita economy has higher variability than the state or national economy. Since 1990, the Wichita and national economies were “equal” in terms of job creation as recently as 2009. Before then, if the Wichita economy fell behind, it was able to catch up with the nation. But that hasn’t been the case since the end of the Great Recession in 2009.

    —
    Notes

    1. Center for Economic Development and Business Research at Wichita State University. 2019 Wichita Employment Forecast. May 2019. Available at https://www.cedbr.org/content/2019/2019-ict-forecast-may-revision.pdf. ↩
    2. Center for Economic Development and Business Research at Wichita State University. Wichita Employment Forecast. October 3, 2019. Available at https://www.cedbr.org/content/2019/eoc/2020-wichita-forecast.pdf. ↩
  • Job growth in Wichita: Great news?

    Job growth in Wichita: Great news?

    A tweet from a top Wichita city official promotes great news that really isn’t so great.

    Click for larger.
    The @WichitaEconDev Twitter account is managed by Scot Rigby, who is Assistant City Manager, Director of Development Services for the City of Wichita. Its tagline is “Promoting, building and preserving Wichita’s economic strength to ensure Wichita is the preferred location for new, existing and expanding organizations.”

    The tweet observes “great news” in a Wichita Business Journal article reporting on an employment forecast. Wichita jobs are seen to grow in 2019, according to the forecast.

    But the Business Journal article didn’t provide any useful context. Once we learn more about what the numbers in the forecast mean, we may want to temper our enthusiasm.

    The forecast for Wichita metro area employment in 2019 calls for modest growth of 0.9 percent, according to the Center for Economic Development and Business Research at Wichita State University. 1 This follows growth of 0.8 percent in 2018. 2

    Nationally, the economy is expected to continue strong growth. 3

    The nearby chart illustrates that since the end of the last recession, job growth in Wichita has been below job growth in the nation as a whole. Generally, job growth in Wichita has been at about half the rate of the nation. In 2017, Wichita lost jobs.

    Click for larger.

    Of Wichita job growth in 2018, the CEDBR forecast notes, “This marked a return to the level of growth experienced in the Wichita area from 2012 to 2016, after experiencing a contraction in overall employment in 2017.” The average annual rate of job growth for those years in Wichita was 0.83 percent. It was 1.82 percent for the nation, which is 2.2 times the rate for Wichita.

    CEDBR also notes, “Wichita’s unemployment rate declined throughout 2018 to a low of 3.5 percent in October 2018, the lowest unemployment rate for the area since 1999.” We should note that this decline is primarily due to a declining labor force in Wichita, rather than robust job growth.

    Back to Rigby’s tweet: There is good news — Wichita is not forecast to lose jobs, as it has in the recent past.

    But the rate of growth seen for Wichita is not robust, and that’s a serious problem, especially when our officials think it’s good.

    —
    Notes

    1. Center for Economic Development and Business Research at Wichita State University. Wichita Employment Forecast. January 8, 2019. Available at http://www.cedbr.org/forecast-blog/forecasts-wichita/1558-economic-outlook-wichita-2019-january-revision. ↩
    2. Employment figures are not available for December 2018, so I use a crude estimate for that month. ↩
    3. Minutes of the Federal Open Market Committee. December 18-19, 2018. Available at https://www.federalreserve.gov/monetarypolicy/fomcminutes20181219.htm. ↩
  • Wichita City Council to consider a clawback

    Wichita City Council to consider a clawback

    The unrealized potential of an economic development incentive teaches lessons.

    This week the Wichita City Council will consider an amendment to an economic development incentive agreement. 1

    In 2008 the city awarded an incentive to a company in the form of exemption from paying property taxes, estimated by the city to be $93,175 annually at the time the incentive was awarded. 2

    The incentive was awarded based on the applicant company creating a certain number of jobs and making a certain level of investment. It was rewarded on a five plus five basis, meaning that the city council reviewed the deal after five years. The plan was if the company met goals, the city would extend the incentive for another five years.

    At the five-year review, however, the applicant company had not met the job goals. The city invoked an exception that allowed extension of the incentive based on a downturn in the economy as measured by the Wichita Current Conditions Index, which is produced by the Center for Economic Development and Business Research at Wichita State University. 3

    Now is the end of the second five-year period. The job goals have not been met, and the city has decided the applicant company is in default of the agreement. The city is proposing a clawback, that is, recovery of the value of the incentive for the second five-year period. According to the agenda packet: “The value of the abated taxes for the second five-years is approximately $253,000. The City Council could clawback the entire amount, or some portion, per the incentive agreement.”

    But: The agreement that the council will consider is that the applicant company build an expansion to its facilities at a cost of $2,500,000, using no incentives. Also, the company will repay $100,000 of the abated taxes, in four annual payments of $25,000.

    A few things to learn:

    First, economic development incentives don’t always work. This reflects the uncertainty of business. When the city presents projections like benefit-cost ratios, it might want to remind us that these values will be achieved only if the project targets are reached. When businesses describe their plans, these are called forward-looking statements. They are accompanied by disclaimers like “subject to risks and uncertainties that could cause actual results to differ materially.” Investors and interested parties are “cautioned not to place undue reliance on these forward-looking statements.” The same cautions hold for citizens of Wichita, as they are the investors paying the cost of incentives and expecting to receive the benefits. That is, after all, the foundation of the benefit-cost analysis that accompanies requests for incentives: That by spending now or by giving up future tax collections, the city receives even more in benefits.

    Second, cities often don’t have the fortitude to strictly enforce clawbacks. Here, the company is receiving credit of $153,000 for construction an expansion to its facility, something the company was contemplating anyway. In other words, receiving credit for something it was going to do anyway. This is the usual case. 4

    Third, when the city and its officials say we no longer use cash as an incentive, here’s a case where the city canceled $153,000 of debt the city is entitled to, based on its agreement with the applicant company. That’s just like cash.

    For more on this topic, see Clawbacks illustrate difficulty of economic development and In Wichita, a gentle clawback

    —
    Notes

    1. Wichita City Council Agenda Packet for January 8, 2019. Item V-1. ↩
    2. Wichita City Council Agenda Packet for February 12, 2008. Item No. 34 ↩
    3. See http://kansaseconomy.org/local-indices/wichita-current-index. ↩
    4. Bartik, Timothy J. 2018. “‘But For’ Percentages for Economic Development Incentives: What percentage estimates are plausible based on the research literature?” Upjohn Institute Working Paper 18-289. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research. https://doi.org/10.17848/wp18-289. ↩
  • Wichita jobs up

    Wichita jobs up

    Wichita employment trends are positive for three consecutive months.

    Seasonally adjusted data from the Bureau of Labor Statistics, part of the United States Department of Labor, shows a rise in the Wichita metropolitan area labor force and job count. This data is through May 2018 and shows three consecutive months of rising employment.

    This is a reversal of the long term trend for Wichita, in which the labor force and employment have been falling or trending steady while the nation’s economy has been growing. An interactive visualization of employment data for all metropolitan areas is available here.

    While the upward trend is welcome, it is not known whether Wichita can sustain positive growth.

    In May, the forecast for Wichita from Center for Economic Development and Business Research (CEDBR) at Wichita State University was pessimistic: “The production sectors are projected to remain approximately flat in 2018. Natural resources and construction employment is forecast to increase by less than 100 jobs while manufacturing employment is projected to decline by less than 100 jobs.”

    This decline in manufacturing employment is forecast even after the new Spirit Aerosystems jobs are accounted for. In its reporting on this forecast, the Wichita Eagle wrote:

    Late last year, Spirit, the city’s largest employer, announced plans to hire an additional 1,000 mostly production workers over two years, with the bulk of the hiring expected in 2018. Bombardier announced plans to add 100 jobs when it moves its Global 5000 business jet interior completions work from Canada to Wichita later this year.

    “I’m not so sure all of the positive news means we’re growing,” [CEDBR director Jeremy] Hill said.

    He said the gains at Bombardier and Spirit are offset by contraction and consolidation by smaller manufacturers that supply parts to Spirit and other aircraft manufacturers. In some cases, work the smaller firms have done has been taken back by larger manufacturers, who are now doing it themselves. Retirements in aircraft manufacturing may also be affecting the numbers, Hill said, but he doesn’t have the data to confirm that.

    “It is hard to get your hands on,” he said. “It’s definitely not showing up in the (employment) numbers, not showing up in output in durables manufacturing.”

    Wichita and U.S. employment. Click for larger.
  • How much will this cost Wichita taxpayers?

    How much will this cost Wichita taxpayers?

    How much, if anything, do tax abatements cost?

    Someone asked a question regarding an item on the Wichita City Council agenda today: How much will this cost taxpayers?

    The item in question is agenda item IV-1: Public Hearing and Request for a Letter of Intent to Issue Industrial Revenue Bonds (WAM Investments #6, LLC). 1

    Attached was an article from the Wichita Business Journal previewing the matter. 2

    How much do these bonds cost taxpayers? It’s important to remember that with Industrial Revenue Bonds in Kansas, cities and counties are not the lender. 3 If this company was not able to pay the bond interest or principle, the city would be under no obligation to pay. The city makes no guarantee as to repayment. Bond buyers know this.

    (As an aside, the Business Journal article states: “However, using IRB financing can help the company secure a lower interest rate.” This is simply not true unless the bonds are tax-exempt municipal bonds. Those bonds have a lower interest rate because the interest income is not subject to income tax. But the IRBs considered today are not tax-exempt.)

    So if the city is not lending money, and if the city is not guaranteeing repayment, do these bonds have a cost to taxpayers? The answer depends on which side of the fence you sit.

    The benefit to WAM, today’s applicant, is that IRBs carry with them tax abatements. Specifically, a whole or partial exemption from paying some property taxes. Additionally, IRBs also enable escape from paying sales tax on purchases made with bond proceeds.

    So one way to look at the IRBs is that they do indeed have a cost. The city, county, school district, and state will not receive tax revenue they otherwise would receive.

    Supporters of this incentive make two rebuttals. One is that without the tax abatements, the project would not be built. Therefore, no tax revenue. So by abating taxes for a period of time, the project can be built, and after the abatements expire, it will be paying taxes. (For this project, the property tax abatement is for five or likely ten years, with a reduced rate of abatement in the final five.)

    The second argument is that by building something, new jobs and commerce are created. These new employees and commercial activity pay taxes. The city and other jurisdictions receive more from these new taxes than they gave up in tax abatements. This is called the benefit-cost ratio. It’s computed by Center for Economic Development and Business Research (CEDBR) at Wichita State University. City documents often refer to something like a “1.57:1 benefit-cost ratio,” meaning that for every one dollar foregone in tax revenue, the city expects to gain $1.57 in other tax revenue.

    There are problems with these arguments. For the first: The developer of this project says the incentives are “critical.” If true, this claim exposes a large problem, which is if taxes are so high as to block investment, how are we going to grow as a city and region? Will every project require tax incentives? If not, why do some say they need incentives, and some don’t?

    Second: Remember that government says that with the new project, tax revenue will increase. But this almost always happens regardless of whether the company has received incentives. Therefore, the benefit-cost ratio calculations are valid only if incentives were absolutely necessary.

    Are incentives necessary? The benefiting companies usually make their case with a lot of numbers and projections, most of which are simply guesses. Plus, there is strong incentive to not tell — to not know — the truth. Here’s why. Suppose fictional company XYZ dangles the idea of expanding its presence in Wichita, or maybe in some other city. XYZ cites incentive packages offered by other cities. Wichita comes up with millions in incentives, and XYZ decides to expand in Wichita. Question: Were the incentives necessary? Was the threat to expand elsewhere genuine? If XYZ admits the threat was not real, then it has falsely held Wichita hostage for incentives. If the city or state admits the threat was not real, then citizens wonder why government gave away so much. No one has an incentive to be truthful. 4

    Back to the item on today’s agenda. How much tax revenue is foregone through the abatements? City documents in the agenda packet did not have these numbers, but a presentation made to council members did, as follows:

    Value of one year 95% tax abatement ($6,000,000 at 80%)
    City of Wichita: $37,240
    Sedgwick County: $33,508
    USD 375 (Circle public schools): $61,255
    State of Kansas: $1,710
    Total: $133,713

    These values would apply annually for five years. If occupancy goals are met, the incentives would apply for another five years, at a lower rate. (The values above are 95 percent of the usual taxes. The rate for the second five years would be 50 percent of the usual taxes.)

    (As an aside, the Business Journal should not use headlines like it did in this case: “Wichita City Council to consider $6 million in IRBs for industrial spec building.” A better headline would be something like “Wichita City Council to consider $133,713 in annual tax abatements.” That is the real economic transaction that happened today.)

    But this is not all. The applicant company will almost certainly receive an exemption from paying sales tax on the building. City documents did not provide an estimate for how much sales tax might be abated, but it could be several hundred thousand dollars.

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    Notes

    1. Wichita City Council agenda packet for May 1, 2108. ↩
    2. Daniel McCoy. Wichita City Council to consider $6 million in IRBs for industrial spec building. Wichita Business Journal, April 30, 2018. Available at https://www.bizjournals.com/wichita/news/2018/04/30/wichita-city-council-to-consider-6-million-in-irbs.html. ↩
    3. Weeks, Bob. Industrial revenue bonds in Kansas. Available at https://wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/. ↩
    4. For more on this, see LeRoy, Greg. The Great American Jobs Scam. Especially chapter two, titled Site Location 101: How Companies Decide Where to Expand or Relocate. The entire book may be read online at http://www.greatamericanjobsscam.com/pages/preview-book.html. A relevant excerpt: “These prisoners’ dilemma games also enable companies to create fictions about cause and effect. These fictions can be used to create public versions of how deals happened that no one can credibly contradict, because the company’s real decision-making process will never be revealed. The most important fiction to maintain, of course, is that subsidies matter in deciding where a company expands or relocates. For example, being able to send secret signals to competing cities means companies can tell contradictory stories to different cities and have no fear of being exposed. If a company really has its heart set on City A, it can tell that city that it is in the hunt, but needs to do better. Meanwhile, it can send less urgent signals to Cities B and C, even if they offered bigger packages at first. Eventually, City A offers the biggest package, and the company announces its decision to go there.” ↩