In this episode of WichitaLiberty.TV: Dr. James Otteson is executive director of the BB&T Center for the Study of Capitalism, the Thomas W. Smith Presidential Chair in Business Ethics, and Professor of Economics at Wake Forest University in Winston-Salem, North Carolina. He was in Wichita to speak at the Bastiat Society and stopped by the WichitaLiberty.TV studios to discuss capitalism. Thank you to Raul Brito and the Bastiat Society for making him available. View below, or click here to view at YouTube. Episode 140, broadcast February 26, 2017.
Here are highlights from Voice for Liberty for 2016. Was it a good year for the principles of individual liberty, limited government, economic freedom, and free markets in Wichita and Kansas?
Also be sure to view the programs on WichitaLiberty.TV for guests like journalist, novelist, and blogger Bud Norman; Radio talk show host Joseph Ashby; David Bobb, President of Bill of Rights Institute; Heritage Foundation trade expert Bryan Riley; Radio talk show host Andy Hooser; Keen Umbehr; John Chisholm on entrepreneurship; James Rosebush, author of “True Reagan,” Jonathan Williams of American Legislative Exchange Council (ALEC); Gidget Southway, or Danedri Herbert; Lawrence W. Reed, president of the Foundation for Economic Education; and Congressman Mike Pompeo.
Kansas legislative resources. Citizens who want to be informed of the happenings of the Kansas Legislature have these resources available.
School choice in Kansas: The haves and have-nots. Kansas non-profit executives work to deny low-income families the school choice opportunities that executive salaries can afford.
Kansas efficiency study released. An interim version of a report presents possibilities of saving the state $2 billion over five years.
Wichita Eagle Publisher Roy Heatherly. Wichita Eagle Publisher Roy Heatherly spoke to the Wichita Pachyderm Club on January 15, 2016. This is an audio presentation.
Pupil-teacher ratios in the states. Kansas ranks near the top of the states in having a low pupil-teacher ratio.
Kansas highway conditions. Has continually “robbing the bank of KDOT” harmed Kansas highways?
Property rights in Wichita: Your roof. The Wichita City Council will attempt to settle a dispute concerning whether a new roof should be allowed to have a vertical appearance rather than the horizontal appearance of the old.
Must it be public schools? A joint statement released by Kansas Association of School Boards, United School Administrators of Kansas, Kansas School Superintendents’ Association, and Kansas National Education Association exposes the attitudes of the Kansas public school establishment.
Kansas schools and other states. A joint statement released by Kansas Association of School Boards, United School Administrators of Kansas, Kansas School Superintendents’ Association, and Kansas National Education Association makes claims about Kansas public schools that aren’t factual.
After years of low standards, Kansas schools adopt truthful standards. In a refreshing change, Kansas schools have adopted realistic standards for students, but only after many years of evaluating students using low standards.
Brownback and Obama stimulus plans. There are useful lessons we can learn from the criticism of Kansas Governor Sam Brownback, including how easy it is to ignore inconvenient lessons of history.
Spending and taxing in Kansas. Difficulty balancing the Kansas budget is different from, and has not caused, widespread spending cuts.
In Sedgwick County, choosing your own benchmarks. The Sedgwick County Commission makes a bid for accountability with an economic development agency, but will likely fall short of anything meaningful.
This is why we must eliminate defined-benefit public pensions. Actions considered by the Kansas Legislature demonstrate — again — that governments are not capable of managing defined-benefit pension plans.
Kansas transportation bonds economics worse than told. The economic details of a semi-secret sale of bonds by the State of Kansas are worse than what’s been reported.
Massage business regulations likely to be ineffective, but will be onerous. The Wichita City Council is likely to create a new regulatory regime for massage businesses in response to a problem that is already addressed by strict laws.
Inspector General evaluates Obamacare website. The HHS Inspector General has released an evaluation of the Obamacare website HealthCare.gov, shedding light on the performance of former Kansas Governor Kathleen Sebelius.
Kansas highway spending. An op-ed by an advocate for more highway spending in Kansas needs context and correction.
Brookings Metro Monitor and Wichita. A research project by The Brookings Institution illustrates the poor performance of the Wichita-area economy.
Wichita: A conversation for a positive community and city agenda. Wichita City Manager Robert Layton held a discussion titled “What are Wichita’s Strengths and Weaknesses: A Conversation for a Positive Community and City Agenda” at the February 26, 2016 luncheon of the Wichita Pachyderm Club.
In Kansas, teachers unions should stand for retention. A bill requiring teachers unions to stand for retention elections each year would be good for teachers, students, and taxpayers.
In Kansas, doctors may “learn” just by doing their jobs. A proposed bill in Kansas should make us question the rationale of continuing medical education requirements for physicians.
Power of Kansas cities to take property may be expanded. A bill working its way through the Kansas Legislature will give cities additional means to seize property.
Wichita TIF district disbands; taxpayers on the hook. A real estate development in College Hill was not successful. What does this mean for city taxpayers?
Kansas and Colorado, compared. News that a Wichita-based company is moving to Colorado sparked a round of Kansas-bashing, most not based on facts.
In Wichita, the phased approach to water supply can save a bundle. In 2014 the City of Wichita recommended voters spend $250 million on a new water supply. But since voters rejected the tax to support that spending, the cost of providing adequate water has dropped, and dropped a lot.
Wichita Eagle, where are you? The state’s largest newspaper has no good reason to avoid reporting and editorializing on an important issue. But that’s what the Wichita Eagle has done.
Wichita on verge of new regulatory regime. The Wichita City Council is likely to create a new regulatory regime for massage businesses in response to a problem that is already addressed by strict laws.
Wichita economic development and capacity. An expansion fueled by incentives is welcome, but illustrates a larger problem with Wichita-area economic development.
Rich States, Poor States, 2106 edition. In Rich States, Poor States, Kansas continues with middle-of-the-pack performance, and fell sharply in the forward-looking forecast.
In Wichita, revealing discussion of property rights. Reaction to the veto of a bill in Kansas reveals the instincts of many government officials, which is to grab more power whenever possible.
‘Trump, Trump, Trump’ … oops! An event in Wichita that made national headlines has so far turned out to be not the story news media enthusiastically promoted.
Wichita doesn’t have this. A small Kansas city provides an example of what Wichita should do.
Kansas continues to snub school choice reform that helps the most vulnerable schoolchildren. Charter schools benefit minority and poor children, yet Kansas does not leverage their benefits, despite having a pressing need to boost the prospects of these children.
Wichita property tax rate: Up again. The City of Wichita says it hasn’t raised its property mill levy in many years. But data shows the mill levy has risen, and its use has shifted from debt service to current consumption.
AFP Foundation wins a battle for free speech for everyone. Americans for Prosperity Foundation achieves a victory for free speech and free association.
Kansas Center for Economic Growth. Kansas Center for Economic Growth, often cited as an authority by Kansas news media and politicians, is not the independent and unbiased source it claims to be.
Under Goossen, Left’s favorite expert, Kansas was admonished by Securities and Exchange Commission. The State of Kansas was ordered to take remedial action to correct material omissions in the state’s financial statements prepared under the leadership of Duane Goossen.
Spirit Aerosystems tax relief. Wichita’s largest employer asks to avoid paying millions in taxes, which increases the cost of government for everyone else, including young companies struggling to break through.
Wichita mayor’s counterfactual op-ed. Wichita’s mayor pens an op-ed that is counter to facts that he knows, or should know.
Electioneering in Kansas?. An op-ed written under the banner of a non-profit organization appears to violate the ban on electioneering.
Wichita city council campaign finance reform. Some citizen activists and Wichita city council members believe that a single $500 campaign contribution from a corporation has a corrupting influence. But stacking dozens of the same $500 contributions from executives and spouses of the same corporation? Not a problem.
In Wichita, more sales tax hypocrisy. Another Wichita company that paid to persuade you to vote for higher taxes now seeks to avoid paying those taxes.
Wichita student/teacher ratios. Despite years of purported budget cuts, the Wichita public school district has been able to improve its student/teacher ratios.
KPERS payments and Kansas schools. There is a claim that a recent change in the handling of KPERS payments falsely inflates school spending. The Kansas State Department of Education says otherwise.
Regulation in Wichita, a ‘labyrinth of city processes’. Wichita offers special regulatory treatment for special circumstances, widening the gulf between the haves and have-nots.
They really are government schools. What’s wrong with the term “government schools?”
Kansas City Star as critic, or apologist. An editorial in the Kansas City Star criticizes a Kansas free-market think tank.
State and local government employee and payroll. Considering all state and local government employees in proportion to population, Kansas has many, compared to other states, and especially so in education.
Kansas government ‘hollowed-out’. Considering all state and local government employees in proportion to population, Kansas has many, compared to other states, and especially so in education.
In Wichita, Meitzner, Clendenin sow seeds of distrust. Comments by two Wichita city council members give citizens more reasons to be cynical and distrusting of politicians.
David Dennis, gleeful regulatory revisionist. David Dennis, candidate for Sedgwick County Commission, rewrites his history of service on the Kansas State Board of Education.
Say no to Kansas taxpayer-funded campaigning. Kansas taxpayers should know their tax dollars are helping staff campaigns for political office.
Roger Marshall campaign setting new standards. Attacks on Tim Huelskamp reveal the worst in political campaigning.
Wichita Metro Chamber of Commerce on the campaign trail. We want to believe that The Wichita Metro Chamber of Commerce and its PAC are a force for good. Why does the PAC need to be deceptive and untruthful?
Which Kansas Governor made these proposals?. Cutting spending for higher education, holding K through 12 public school spending steady, sweeping highway money to the general fund, reducing aid to local governments, spending down state reserves, and a huge projected budget gap. Who and when is the following newspaper report referencing?
Wichita Business Journal editorial missed the news on the Wichita economy. A Wichita business newspaper’s editorial ignores the history of our local economy. Even the history that it reported in its own pages.
Sedgwick County Health Department: Services provided. Sedgwick County government trimmed spending on health. What has been the result so far?
School staffing and students. Trends for the nation and each state in teachers, administrators, and students, presented in an interactive visualization.
Intrust Bank Arena loss for 2015 is $4.1 million. The depreciation expense of Intrust Bank Arena in downtown Wichita recognizes and accounts for the sacrifices of the people of Sedgwick County and its visitors to pay for the arena.
School spending in the states. School spending in the states, presented in an interactive visualization.
Kansas construction employment. Tip to the Wichita Eagle editorial board: When a lobbying group feeds you statistics, try to learn what they really mean.
Wichita has no city sales tax, except for these. There is no Wichita city retail sales tax, but the city collects tax revenue from citizens when they buy utilities, just like a sales tax.
CID and other incentives approved in downtown Wichita. The Wichita City Council approves economic development incentives, but citizens should not be proud of the discussion and deliberation.
Cost per visitor to Wichita cultural attractions. Wichitans might be surprised to learn the cost of cultural attractions.
GetTheFactsKansas launched. From Kansas Policy Institute and the Kansas Chamber of Commerce, a new website with facts about the Kansas budget, economy, and schools.
The nation’s report card and charter schools.
* An interactive table of NAEP scores for the states and races, broken down by charter school and traditional public school.
* Some states have few or no charter schools.
* In many states, minority students perform better on the NAEP test when in charter schools.
School choice and funding. Opponents of school choice programs argue the programs harm traditional public schools, both financially and in their ability to serve their remaining students. Evidence does not support this position.
Public school experts. Do only those within the Kansas public schooling community have a say?
Kansas and Arizona schools. Arizona shows that Kansas is missing out on an opportunity to provide better education at lower cost.
Video in the Kansas Senate. A plan to increase visibility of the Kansas Senate is a good start, and needs to go just one or two steps farther.
Kansas, a frugal state?. Is Kansas a frugal state, compared to others?
Topeka Capital-Journal falls for a story. The editorial boards of two large Kansas newspapers have shown how little effort goes into forming the opinions they foist upon our state.
Kansas revenue estimates. Kansas revenue estimates are frequently in the news and have become a political issue. Here’s a look at them over the past decades.
Kansas school fund balances.
* Kansas school fund balances rose significantly this year, in both absolute dollars and dollars per pupil.
* Kansans might wonder why schools did not spend some of these funds to offset cuts they have contended were necessary.
* The interactive visualization holds data for each district since 2008.
In Wichita, developer welfare under a cloud. A downtown Wichita project receives a small benefit from the city, with no mention of the really big money.
Wichita, give back the Hyatt proceeds. Instead of spending the proceeds of the Hyatt hotel sale, the city should honor those who paid for the hotel — the city’s taxpayers.
Kansas Democrats: They don’t add it up — or they don’t tell us. Kansas Democrats (and some Republicans) are campaigning on some very expensive programs, and they’re aren’t adding it up for us.
How would higher Kansas taxes help?. Candidates in Kansas who promise more spending ought to explain just how higher taxes will — purportedly — help the Kansas economy.
Decoding the Kansas teachers union. Explaining to Kansans what the teachers union really means in its public communications.
Kansas school spending: Visualization. An interactive visualization of revenue and spending data for Kansas school districts.
Decoding Duane Goossen. The writing of Duane Goossen, a former Kansas budget director, requires decoding and explanation. This time, his vehicle is “Rise Up, Kansas.”
Decoding the Kansas teachers union. Decoding and deconstructing communications from KNEA, the Kansas teachers union, lets us discover the true purpose of the union.
Government schools’ entitlement mentality. If the Kansas personal income grows, should school spending also rise?
Wichita bridges, well memorialized. Drivers on East Twenty-First Street in Wichita are happy that the work on a small bridge is complete, but may not be pleased with one aspect of the project.
Gary Sherrer and Kansas Policy Institute. A former Kansas government official criticizes Kansas Policy Institute.
Wichita to grant property and sales tax relief. Several large employers in Wichita ask to avoid paying millions in taxes, which increases the cost of government for everyone else, including young companies struggling to break through.
Economic development incentives at the margin. The evaluation of economic development incentives in Wichita and Kansas requires thinking at the margin, not the entirety.
The Wichita economy, according to Milken Institute. The performance of the Wichita-area economy, compared to other large cities, is on a downward trend.
State pension cronyism. A new report details the way state pension funds harm workers and taxpayers through cronyism.
In Wichita, converting a hotel into street repairs. In Wichita, it turns out we have to sell a hotel in order to fix our streets.
In Wichita, we’ll not know how this tax money is spent. Despite claims to the contrary, the attitude of the City of Wichita towards citizens’ right to know is poor, and its attitude will likely be reaffirmed this week.
A new report details the way state pension funds harm workers and taxpayers through cronyism.
Updated to accurately reflect the time period of the targeted investments.
American Legislative Exchange Council (ALEC) has released a report detailing the various ways state employee pension funds are harmed by cronyism. The report may be read at Keeping the Promise: Getting Politics Out of Pensions.
The problem, ALEC reports, is: “Unfortunately, many lawmakers and pension plan officials have other priorities besides doing what is best for workers. They see the billions of pension fund dollars they manage as an opportunity to advance their own agendas. Rather than investing to earn the best return for workers, they use pension funds in a misguided attempt to boost their local economies, provide kickbacks to their political supporters, reward industries they like, punish those they don’t and bully corporations into silence and behaving as they see fit.”
One form of pension fund cronyism is Economically Targeted Investments (ETIs). These are local investments “that have been selected for their economic or social benefits in addition to the investment return to the employee benefit plan.” Kansas has its own experience with this type of cronyism. During the first half of the 1980s KPERS, the Kansas Public Employee Retirement System, made numerous targeted investments that led to large losses. One newspaper article reported: 1
It all seemed so easy to many economic development planners.
In an era of hard-to-get money for business start-ups and small business expansion, why not tap into the state’s healthy $3 billion-plus retirement funds as a source for seed capital?
After all, it is there. And much of the profits earned by the Kansas Public Employees Retirement Systems have come from out-of-state investments.
For many Kansas legislators, the lure of using KPERS money for economic development was tempting. So KPERS, under considerable legislative pressure, agreed to target nearly 10 percent of its fund for business expansions in Kansas.
But three years after that decision, it is clear that KPERS money is not a panacea for economic development.
Here is one particularly egregious example of how KPERS did business.2 In this case, the chair of KPERS benefited personally from KPERS investment decisions, and in a brazen manner:
Take, for example, the $7.8 million investment in Emblem Graphic Systems, a company based in Kansas City and Denver that manufactured specialty package labels. According to court documents:
KPERS Chairman Mike Russell was on the Emblem board of directors and had personally guaranteed $200,000 in loans to the company.
Shortly before KPERS invested $5.3 million in Emblem in 1985, Russell resigned from his Emblem seat. The KPERS loan, however, was used to relieve Russell of his obligation to cover the earlier loans totaling $200,000.
KPERS continued to invest in the company until 1988, At one point, KPERS even paid $273,305 to itself to pay back the money it had lent Emblem when the company was sold. KPERS got back only $1.76 million of the $7.8 million it had lent the company.
Russell, however, was able to make a profit on his 3,000 shares in Emblem when the company bought him out for $48,330 — using KPERS money.
KPERS is suing, among others, Russell, the lawyers who approved the transactions, and Kenneth Koger, who managed the Emblem investment and about 70 percent of the investments in question.
Russell was not available for comment.
In 1992, Russell pleaded no contest to one felony count of aiding and abetting securities fraud regarding a different KPERS investment.3
In September 1991 the loss to KPERS was given as $92 million. 4 Lawsuits continued until 2003.
The governor of Kansas during the time of the targeted KPERS investments was John Carlin (1979 to 1987).
- S. Gossett/The Wichita Eagle, F 1989, ‘Disappointing returns the percentage of the KPERS fund given over to new business ventures has been reduced in light of big losses’, Wichita Eagle, The (KS), 16 Oct, p. 7D, (online NewsBank). ↩
- Hobson, G 1996, ‘Full Accountability’, Wichita Eagle, The (KS), 22 Sep, p. 1A, (online NewsBank). ↩
- Press, A 1992, ‘Former KPERS Chief Sentenced To Probation For Securities Fraud’, Wichita Eagle, The (KS), 25 Jun, p. 4D, (online NewsBank).} ↩
- “After six years of investing in small- and medium-sized companies in Kansas, the state pension fund has 87 investments that are worth $231 million less than the fund paid for them, analysts told the fund’s trustees Friday. Considering that KPERS has collected about $139 million from those companies, however, the fund has lost $92 million in cash on its so-called ‘direct placement’ program, according to estimates by the staff of the Kansas Public Employees Retirement System.” Cross/The Wichita Eagle, J 1991, ‘Kpers Losses Put At $92 Million Lawyer Predicts ‘Monumental’ Suit’, Wichita Eagle, The (KS), 14 Sep, p. 2D, (online NewsBank). ↩
Several large employers in Wichita ask to avoid paying millions in taxes, which increases the cost of government for everyone else, including young companies struggling to break through.
This week the Wichita City Council will hold public hearings concerning the issuance of Industrial Revenue Bonds to Spirit AeroSystems, Inc and other companies.1 In the IRB program, government is not lending money, and Wichita taxpayers are not at risk if the bonds are not repaid. In fact, in the case of Spirit, the applicant company plans to purchase the bonds itself, according to city documents. Instead, the purpose of the IRB process is to allow Spirit to escape paying property taxes and, often, sales taxes.
These bonds will allow Spirit to avoid paying property taxes on taxable property purchased with bond proceeds for a period of five years. The abatement may then be extended for another five years. Usually these IRB issues also carry a sales tax exemption, but the agenda packet for this item does not mention such
City documents state that the property tax abatement will be shared among the taxing jurisdictions in these estimated amounts:
USD 259: $731,614
The listing of USD 259, the Wichita public school district, is likely a mistake by the city, as the Spirit properties lie in the Derby school district. This is evident below.
The forgiveness of taxes is justified by the city because it believes it will receive a return that is greater than the foregone taxes. This benefit-cost ratio is calculated by the Center for Economic Development and Business Research (CEDBR) at Wichita State University based on data supplied by the applicant company and the city. The rationale behind these calculations is a matter of debate. Even if valid, calculating the ratio with any degree of precision is folly, reminding us of the old saw “Economists use a decimal point to remind us they have a sense of humor.”
City of Wichita: 5.38 to 1
City General Fund: 2.60 to 1
City Debt Service Fund: NA to 1
Sedgwick County: 2.69 to 1
U.S.D. 260: 1.16 to 1
State of Kansas: 5.51 to 1
These figures reveal that the City of Wichita is forcing a decision on a neighboring jurisdiction that it would not accept for itself, unless it uses one of many exceptions or loopholes. This adverse decision is forced upon the Derby School District. It faces a benefit-cost ratio of 1.16 to 1, which is below the city’s standard of 1.30 to 1, unless an exception is cited. 2 The Derby School District is not involved in this action and has no ability to influence the issuance of these bonds, should it desire to.
We have to wonder why the City of Wichita imposes upon the Derby school district an economic development incentive that costs the Derby schools $731,614 per year, with a substandard payoff?
Of note, the Derby school district extends into Wichita, including parts of city council districts 2 and 3. These districts are represented by Pete Meitzner and James Clendenin, respectively.
In a second agenda item, the city will consider IRBs for a building being developed by Air Capital Flight Line. The beneficiary, however, is Spirit, as city documents state: “The requested sales tax exemption and property tax abatement will be passed on as a benefit to Spirit.”
The annual benefit in tax savings is given by the city as:
USD 259: $506,502
These values are offset by a Payment-In-Lieu-Of-Taxes (PILOT) estimated at $13,251 annually.
For benefit-cost ratios, the city supplies these:
City of Wichita: 3.65 to 1
City of Wichita Gen Fund: 1.83 to 1
City of Wichita Debt Serv: NA to 1
Sedgwick County: 2.09 to 1
USD 260: 1.00 to 1
State of Kansas 2.48: to 1
Here we see the same mistake with the Wichita and Derby school districts. We also see the Derby school district giving up $506,502 in tax revenue, with no positive return.
Spirit is not the only company asking for tax relief through IRBs this week. Three other companies are making similar requests. In none of these cases is economic necessity cited as a reason for escaping taxes. None are threatening to leave Wichita if the relief is not granted.
The problem with these actions
Part of the cost of these companies’ investment, along with the accompanying risk, is spread to a class of business firms that can’t afford additional cost and risk. These are young startup firms, the entrepreneurial firms that we need to nurture in order to have real and sustainable economic growth and jobs. But we can’t identify which firms will be successful. So we need an economic development strategy that creates an environment where these young entrepreneurial firms have the greatest chance to survive. The action the Wichita city council is considering this week works against entrepreneurial firms. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)
A major reason why these tax abatements are harmful to the Wichita economy is its strangling effect on entrepreneurship and young companies. As these companies and others escape paying taxes, others have to pay. This increases the burden of the cost of government on everyone else — in particular on the companies we need to nurture.
There’s plenty of evidence that entrepreneurship, in particular young business firms, are the key to economic growth. But Wichita’s economic development policies, as evidenced by these actions, are definitely stacked against the entrepreneur. As Wichita props up its established industries, it makes it more difficult for young firms to thrive. Wichita relies on targeted investment in our future. Our elected officials and bureaucrats believe they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by government that shapes the future direction of the Wichita economy.
These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This lack of knowledge, however, does not stop governments from creating policies for the awarding of incentives. This “active investor” approach to economic development is what has led to companies receiving grants or escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form. Young entrepreneurial companies are particularly vulnerable.
Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”
In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”
In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.'”
(For a summary of the peer-reviewed academic research that examines the local impact of targeted tax incentives from an empirical point of view, see Research on economic development incentives. A sample finding is “General fiscal policy found to be mildly effective, while targeted incentives reduced economic performance (as measured by per capita income).”)
There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates for everyone is an example of such a policy. Abating taxes for specific companies through programs like the Wichita city council is considering this week is an example of precisely the wrong policy.
In explaining the importance of dynamism, Hall wrote: “Generally speaking, dynamism represents persistent, annual change in about one-third of Kansas jobs. Job creation may be a key goal of economic development policy but job creation is a residual economic outcome of business dynamism. The policy challenge centers on promoting dynamism by establishing a business environment that induces business birth and expansion without bias related to the size or type of business.”
We need to move away from economic development based on this active investor approach, especially the policies that prop up our established companies to the detriment of dynamism. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.
This year American City Business Journals presented the results of a study of small business vitality in cities. 3 Wichita ranked at number 104 out of 106 cities studied. Awarding incentives to large companies places small business at a disadvantage. Not only must small business pay for the cost of government that incentivized companies avoid, small companies must also compete with subsidized companies for inputs such as capital and labor.
Pursuing large companies
Research has found that the pursuit of large companies doesn’t produce the desired growth: “The results show that large firms fail to produce significant net benefits for their host communities, calling into question the high-stakes bidding war over jobs and investment.” 4
This finding is counterintuitive. People can easily see the large companies. They are likely to know someone that works there. But it is the unseen effects that must be considered too, and that is rarely done.
- City of Wichita. City Council agenda packet for December 6, 2016. ↩
- Sedgwick County/City of Wichita Economic Development Policy. Available at www.wichita.gov/Government/Departments/Economic/EconomicDevelopmentDocuments/City%20of%20Wichita%20Economic%20Development%20Policy.pdf. ↩
- Wichita Business Journal. The State of Small Business: Wichita scores low in small biz vitality. Available at www.bizjournals.com/wichita/print-edition/2016/04/29/the-state-of-small-business-wichita-scores-low-in.html. ↩
- William F. Fox and Matthew N. Murray, “Do Economic Effects Justify the Use of Fiscal Incentives?” Southern Economic Journal, Vol. 71, No. 1, 2004, p. 79. ↩
A downtown Wichita project receives a small benefit from the city, with no mention of the really big money.
Today the Wichita City Council approved a subsidy for a project in downtown Wichita.
The city will lend the developer of a project at 303 S. Broadway $620,000 to improve the building’s facade. The property must repay this amount through an assessment on its property tax. The benefit to the property is that the city is able to borrow money at a lower interest rate, and this reduces the cost of borrowing for the project.
The agenda packet for this item states: “The Office of Urban Development has reviewed the economic (“gap”) analysis of the project and determined a financial need for incentives based on the current market.” This stems from the city’s policy on facade improvement projects, which is that the project would not be feasible except for this loan.1
Upon inquiry to the city, I was told that the facade improvement program would increase the developer’s return on investment from 7.06 percent to 8.35 percent. This seemed a stretch; that a small savings on interest costs on a small portion of the project cost could have such a large effect on profitability.
I asked the city for supporting documents that hold the figures used to calculate these amounts, but the city believes the Kansas Open Records Act does not allow it to release the records. In the past, however, I have received this information on request.
So, we’ll have to trust the city on this matter. I’m not comfortable with that. This is another example of the city conducting business within a cloud of secrecy.
Here’s the real money
The cost savings on borrowing $620,000 is just a small portion of subsidy this project will receive. Through tax credits, this project likely will receive over two million dollars in a form equivalent to cash.
The property was listed on the Register of Historic Kansas Places in August. This entitles the project to a tax credit of 25 percent of qualified expenses.2 With a project cost of $5,000,000, according to city documents, this tax credit could be worth $1,250,000.
From the National Park Service, a credit of 20 percent may be awarded.3 With a project cost of $5,000,000, according to city documents, this tax credit could be worth $1,000,000. It is not known at this time whether this project has qualified for this tax credit.
Together, the tax credits are worth potentially $2,250,000. Not all citizens may be aware of the mechanism of tax credits. In the case of the state of Kansas, the Department of Revenue will — figuratively — print a certificate that says the holder of this certificate may use it to pay $1,250,000 of state tax liability. It costs the state nothing to create this certificate. When the Department of Revenue receives the certificate instead of cash, the state gains nothing of economic value. The net economic effect is that the holder of the tax credit has been enriched by $1,250,000, and the state misses out on the same amount of revenue.4 Unless the state reduces its spending by the amount of the tax credit, the taxpayers have to make up the lost revenue.
This is not all. The project may apply for Industrial Revenue Bonds. This is a mechanism whereby a project may avoid paying property taxes and sales taxes.5 This property is located within a TIF district, so it is ineligible for property tax abatements. But, a sales tax exemption could be possible, if the developer applies.
That application is likely, as this developer did just that on another downtown Wichita building, also located in a TIF district, but eligible for sales tax exemption on purchases related to the redevelopment.6
Of note: This developer actively campaigned for the proposed 2014 Wichita city sales tax, offering free office space to the effort.7 Should he apply for a sales tax exemption on this property, this is another example of low-income families in Wichita paying sales tax on groceries, but well-off developers escaping paying that same tax.
The council meeting
At the council meeting, a citizen remarked how this project is good for the tax base. But, being in a TIF district, the incremental property taxes from this property will go to the TIF district, not the city, until the TIF debt is retired.
Council Member Janet Miller (district 6, north central Wichita) noted that the city is not contributing to the project, that the developer pays all the costs of the facade improvement loan. But of a direct contribution to the project, she said “Although I wouldn’t probably complain if that was a request.” I’d suggest that Miller read up on the economics of tax credits, and of a possible sales tax exemption. She might be surprised to learn how much cash this project is receiving.
- “Owner shall provide financial information that substantiates the need for the City’s facade loan in order to complete the redevelopment project, including the overall sources and uses of funds and pro forma cash flow analysis that shows a reasonable return on owner’s investment.” City of Wichita. Facade Improvement Program Policies and Procedures. Available at www.wichita.gov/Government/Departments/Economic/EconomicDevelopmentDocuments/Facade%20Improvement%20Program%20Policy.pdf. ↩
- Kansas Historical Society. State Historic Rehabilitation Tax Credit. Available at www.kshs.org/p/tax-credit-basics/14673. ↩
- National Park Service. Tax Incentives for Preserving Historic Properties. Available at www.nps.gov/tps/tax-incentives.htm. ↩
- Sometime the tax credits are sold to someone else. In this case the seller usually receives less than the face value of the credit. ↩
- Weeks, Bob. Industrial revenue bonds in Kansas. Available at wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/. ↩
- Weeks, Bob. The Lux in Wichita: Taxpayer funding of lifestyle choices. Available at wichitaliberty.org/wichita-government/the-lux-in-wichita-taxpayer-funding-of-lifestyle-choices/. ↩
- Weeks, Bob. In Wichita, pro-sales tax campaign group uses sales tax-exempt building as headquarters. Available at wichitaliberty.org/wichita-government/wichita-pro-sales-tax-campaign-group-uses-sales-tax-exempt-building-headquarters/. ↩
Attacks on Tim Huelskamp reveal the worst in political campaigning.
When the campaign of Roger Marshall accuses Tim Huelskamp of being in favor of abortion, you know his campaign is spiraling out of control. Either that, or the Marshall campaign is deliberately lying about a politician’s record.
Beyond this issue, the Marshall campaign and its surrogates are making arguments that simply have no basis in reality. An example is one radio ad, placed by an independent spending group, that uses the term “Washing-Tim.” The ad tries to persuade voters that Huelskamp has sold out to the Washington establishment. That is a true whopper, as Huelskamp has been anything but an establishment crony.
As an example, Huelskamp opposed the reauthorization of the Export-Import Bank last year. This is an issue that draws a bright line, with progressive Democrats and left-wing Republicans on one side, and free-market, limited government conservatives on the other. The issue truly and precisely sorts politicians into two groups, and Huelskamp is on the right side of this issue. Which is to say, the non-establishment side. Yet, we get “Washing-Tim” from Marshall supporters.
Part of the problem is that officeholders in legislatures, both state and federal, must often vote on bills that contain hundreds of provisions. This bundling of so many often disparate issues into one vote allows unscrupulous campaigns to label someone as a supporter of an issue. That’s what the Marshall campaign and its surrogates are doing.
Mark Holden, a top leader of groups that support free-market causes including Americans for Prosperity, told The Hill this:
I don’t know who is behind [the ESAFund], I’ve heard different rumors about it, but Mr. Singer and the Ricketts family have been good partners of ours in the past and in the present as well. I totally am mystified by Ending Spending and their point of view. I just wonder who could be better [than Huelskamp] on the issues that a group like Ending Spending, I mean their whole name … who could be better on these issues than Tim Huelskamp? If you believe in fiscal responsibility, fiscal conservatism, the proper role of government, particularly on these economic issues that I’m talking about and that our network is focused on; we don’t know of anyone who’s better than Tim Huelskamp.
Huelskamp’s free-market bona fides are buttressed by his lifetime ratings with groups that focus on fiscal conservatism. Club for Growth rates Huelskamp at 100 percent lifetime. Americans for Prosperity scores him at 98 percent.
During election season, especially in close campaigns, we’re accustomed to seeing campaigns paint opponents in unflattering light. The Roger Marshall campaign and its surrogates, however, may be establishing a new standard for deceptive behavior and outright lies.
Campaign finance reports reveal special interest groups working to elect candidates. Their efforts to mold a candidate’s thinking appear to be working.
Why do people make political campaign contributions? I try to be optimistic. I’m willing to believe that people have sincerely-held beliefs.
But when you look under the covers, I find myself in agreement with Lily Tomlin, who quipped “No matter how cynical you become, it’s never enough to keep up.”
A few days ago I showed how the campaign finance report for David Dennis, a candidate for Sedgwick County Commission, was full of contributions from people who regularly ask government for special favors and subsidy, people who campaigned for the Wichita city sales tax, and Democrats who are ideologically presupposed to higher taxes.1 In other words, people who believe they know better than you how to spend your money, and believe David Dennis will give them more to spend.
But I didn’t go far enough. The Wichita Eagle’s Daniel Salazar found this: “He [Dennis] received at least $4,814 in direct donations from board members of the Sedgwick County Zoological Society.”2
This is classic and explicit special interest group behavior. The group members contribute a little bit to a candidate in expectation of reaping big benefits for their special interest.
Economists call this rent seeking, defined as “An attempt to obtain economic rent (i.e., the portion of income paid to a factor of production in excess of what is needed to keep it employed in its current use) by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth.”3 That obscure term has been partially supplanted by a term more readily understood: cronyism.
And it appears to be working. Salazar’s article quotes Dennis: “I don’t think it’s (funding) adequate based on what I’ve learned. I think we’re going to have to do a complete review of what’s required to run the zoo.”4
There it is. I wonder who David Dennis consulted for his research?
- Weeks, Bob. A look at a David Dennis campaign finance report. Available at wichitaliberty.org/sedgwick-county-government/look-david-dennis-campaign-finance-report/. ↩
- Salazar, Daniel. Dennis draws more donations than Peterjohn, including from zoo board members. Wichita Eagle, July 27, 2016. Available at www.kansas.com/news/politics-government/election/article92135002.html. ↩
- Wikipedia, en.wikipedia.org/wiki/Rent-seeking ↩
- ibid. ↩
It’s interesting to look at campaign finance reports. Following, a few highlights on a report from the David Dennis campaign. He’s a candidate for Sedgwick County Commission in the August Republican Party primary election. The report was filed July 25, 2016, covering the period from January 1, 2016 through July 21, 2016. These reports are available online at the Sedgwick County Election Office website.
Keith Stevens, $200
A longtime Democrat community activist, always on the side of higher taxes and more government spending.
Suzanne F. Ahlstrand, $250
Gary & Cathy Schmitt, $100
Jon E. Rosell, $100
Charlie Chandler, Maria Chandler, $1,000 total
Al and Judy Higdon, $500
James & Vera Bothner, $250
Lyndon O. & Marty Wells, $500
All are, or have been, affiliated with the Wichita Metro Chamber of Commerce in various roles, including paid staff and leadership. At one time local chambers of commerce were dedicated to pro-growth economic policies and free markets. But no longer. The Wichita Chamber regularly advocates for more taxes (the 2014 Wichita sales tax campaign was run by the Wichita Chamber), more spending, more cronyism, and less economic freedom. It campaigns against fiscally conservative candidates when the alternative is a candidate in favor of more taxes. The Chamber says it does all this in the name of providing jobs in Wichita. If you’re wondering who ground down the Wichita economy over the past few decades, look no further than the Wichita Chamber of Commerce and its affiliates who have run Wichita’s economic development bureaucracy.
Harvey Sorensen, $500
Sorensen was one of the drivers behind the 2014 one cent per dollar Wichita city sales tax proposal, serving as co-chair of Yes Wichita, the primary group campaigning for the tax. In a public forum Sorensen said, “Koch Industries is going to spend a million dollars to try to kill the future of our community.”1 Wichita voters rejected that sales tax, with 62 percent of voters voting “No.”2 Since the election, we’ve learned that we can satisfy our water future needs by spending much less than Sorensen recommended, at least $100 million less.3 Part of the Wichita Metro Chamber of Commerce cabal, Sorensen has played both sides of the street, having donated $500 to Jeff Longwell and the same amount to his opponent Sam Williams in the 2015 Wichita mayoral election. We might be led to wonder if Sorenson makes contributions based on sincerely held beliefs regarding public policy, or simply for access to officeholders.
Jon, Lauren, David, and Barbara Rolph, $2,000 total
Jon Rolph was another co-chair of Yes Wichita, the primary group campaigning for the 2014 Wichita city sales tax. Since then he’s floated the idea of trying again for a city sales tax.
Plumbers & Pipefitters Local Union No. 441 Political Action Committee, $500
Labor unions rarely — very rarely — make campaign contributions to Republicans. Except for David Dennis.
Bryan K & Sheila R Frye, $50
Bryan Frye is a newly-elected Wichita City Council member who has quickly found a home among the other big-taxing, big-spending council members. He’d very much like a county commissioner who is compliant with more taxes and more spending — like David Dennis.
Lynn W. & Kristine L. Rogers, $50
Lynn Rogers is a Republican-turned-Democrat. As a member of the Wichita public schools board, he is an advocate for more school spending, less school accountability, and no school choice.
Alan J. & Sharon K. Fearey, $100
A Democrat, Sharon Fearey served two terms on the Wichita City Council. She was always an advocate for more taxes and spending, even scolding the Wichita Eagle when it thwarted her spending plans.
Foley Equipment, $500
Ann Konecny, $500
Foley was an advocate for the 2014 Wichita city sales tax, contributing $5,000 to the campaign. The next year, Foley asked for an exemption from property taxes and the sales tax that it campaigned for.4 Foley wanted poor people in Wichita to pay more sales tax on groceries, but didn’t want to pay that same sales tax itself.
BF Wichita, L.L.C., $500
A company affiliated with George Laham. He’s a partner in the taxpayer-subsidized River Vista Apartment project on the west bank of the Arkansas River north of Douglas Avenue. Rumor is that the apartment project will be abandoned in favor of selling the land as the site for an office building.
Automation Plus, $500
Sheryl Wohlford, Vice President, is a longtime progressive activist, a member of Wichita Downtown Vision Team. In short, someone who knows how to spend your money better than you.
Steven E. Cox, Janis E. Cox, $1,000 total
Owners of Cox Machine, this company regularly applies for and receives taxpayer-funded incentives, including the forgiveness of paying sales tax. Yet, this company contributed $2,000 to the campaign for the 2014 Wichita city sales tax.
Leon or Karen Lungwitz, $500
Owner of company where Wichita mayor Jeff Longwell once worked.
Slawson Commercial Properties, LLC, $500
Socora Homes, Inc., $500
New Market 1, LLC, $500
Buildings 22-23-24, LLC, $500
All are Slawson companies, advocates of and beneficiaries of taxpayer-funded subsidies.
Carl & Cathy Brewer, $200
The Democrat former mayor of Wichita. Enough said about that.
Tom Winters, $250
Winters is emblematic of the big-taxing, big-spending Republican officeholder who believes he knows how to spend your money better than you. Karl Peterjohn defeated Winters in the August 2008 primary election.
Timothy R. Austin, $150
We might label Austin as “engineer for the cronies” based on his frequent appearances before governmental bodies advocating for taxpayer-funded subsidy for his clients.
- Ryan, Kelsey. Comment on Koch involvement in sales tax heats up debate. Wichita Eagle, October 29, 2014. Available at www.kansas.com/news/local/article3456024.html. ↩
- Sedgwick County Election Office. November 4th, 2014 General Election Official Results — Sedgwick County. Available at www.sedgwickcounty.org/elections/election_results/Gen14/index.html. ↩
- Weeks, Bob. In Wichita, the phased approach to water supply can save a bundle. wichitaliberty.org/wichita-government/wichita-phased-approach-water-supply-can-save-bundle/. ↩
- Weeks, Bob. In Wichita, campaigning for a tax, then asking for exemption from paying. Available at wichitaliberty.org/wichita-government/campaigning-for-tax-then-asking-for-exemption-from-paying/. ↩
In this episode of WichitaLiberty.TV: Citizen activists were concerned about unleashing a corrupting influence in Wichita City Hall, but they didn’t know it’s already there. Then, the regulatory landscape in Wichita. Finally, what can a pencil teach us about how the world works? View below, or click here to view at YouTube. Episode 121, broadcast June 12, 2016.
Another Wichita company that paid to persuade you to vote for higher taxes now seeks to avoid paying those taxes.
Next week the Wichita City Council will consider issuing industrial revenue bonds to benefit a local company. In Kansas, IRBs are not a loan of money from government. Instead, the bonds are a vehicle for conveying property tax abatements, and often sales tax exemptions. 1 The applicant company is Hijos, LLC/JR Custom Metal Products, Inc.
City documents give the value of abated taxes at $44,900 for the first year. Following years will probably be similar.
Besides property tax breaks, industrial revenue bonds can convey an exemption from paying sales taxes on purchases. City documents don’t state the amount of sales tax the company might avoid paying. But documents state the bonds will be used to fund capital equipment in the amount of $2,686,000. Sales tax on that is $201,450.
City documents also state this expansion will add 13 new jobs over the next five years at an average wage of $41,995.
Like several other companies that have received an exemption on paying sales tax on their purchases, 2 3 4 5 JR Custom Metals advocated for you to pay more sales tax. During the campaign for the one cent per dollar Wichita sales tax in 2014, this company contributed $1,000 to persuade voters to approve the tax.
But now it seeks to avoid paying all sales tax on these purchases. It has done this several times in the recent past.
The jobs are welcome. But this incident and many others like it reveal a capacity problem, which is this: We need to be creating nine jobs every day in order to make any significant progress in economic growth. 6 If it takes this much effort and the forgiveness of hundreds of thousands of dollars in taxes to create 13 jobs over five years, how much effort and subsidy will it take to create the many thousands of jobs we need to create every year?
- Weeks, Bob. Industrial revenue bonds in Kansas. Available at wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/. ↩
- Weeks, Bob. Spirit Aerosystems tax relief. Available at wichitaliberty.org/wichita-government/spirit-aerosystems-tax-relief/. ↩
- Weeks, Bob. In Wichita, campaigning for a tax, then asking for exemption from paying. Available at wichitaliberty.org/wichita-government/campaigning-for-tax-then-asking-for-exemption-from-paying/. ↩
- Weeks, Bob. In Wichita, pro-sales tax campaign group uses sales tax-exempt building as headquarters. Available at wichitaliberty.org/wichita-government/wichita-pro-sales-tax-campaign-group-uses-sales-tax-exempt-building-headquarters/. ↩
- Weeks, Bob. Union Station TIF provides lessons for Wichita voters. Available at wichitaliberty.org/wichita-government/union-station-tif-provides-lessons-wichita-voters. ↩
- Weeks, Bob. Wichita economic development and capacity. Available at wichitaliberty.org/wichita-government/wichita-economic-development-capacity/. ↩
Explaining common economic development programs in Kansas.
TIF projects: Some background
Tax increment financing disrupts the usual flow of tax dollars, routing funds away from cash-strapped cities, counties, and schools back to the TIF-financed development. TIF creates distortions in the way cities develop, and researchers find that the use of TIF means lower economic growth. Click here.
Tax increment financing (TIF) resources
Resources on tax increment financing (TIF) districts. Click here.
STAR bonds in Kansas
The Kansas STAR bonds program provides a mechanism for spending by autopilot, without specific appropriation by the legislature. Click here.
Industrial Revenue Bonds in Kansas
Industrial Revenue Bonds are a mechanism that Kansas cities and counties use to allow companies to avoid paying property and sales taxes. Click here.
Community Improvement Districts in Kansas
In Kansas Community Improvement Districts, merchants charge additional sales tax for the benefit of the property owners, instead of the general public. Click here.
In Kansas, PEAK has a leak
A Kansas economic development incentive program is pitched as being self-funded, but is probably a drain on the state treasure nonetheless. Click here.
Government intervention may produce unwanted incentives
A Kansas economic development incentive program has the potential to alter hiring practices for reasons not related to applicants’ job qualifications. Click here.
State of Kansas
A page at the Kansas Department of Commerce with incentive programs is here.
The effect of a proposed bill to end transfer of Kansas sales tax revenue to the highway fund is distorted by promoters of taxation and spending.
The bill is SB 463. The bill’s fiscal note tells how this bill, if passed, would affect the highway fund: “Beginning in FY 2018, the percentage of state sales tax and compensating use tax distributed to the [State Highway Fund] would be eliminated.” The fiscal note goes on to estimate that the highway fund would receive $553.4 million less sales tax revenue than it would otherwise in fiscal year 2018. (This bill proposed changes to other funds, but here I consider only highways.)
In an email to supporters, Economic Lifelines wrote: “SB 463 would redirect 35% of T-WORKS funding beginning in July of 2017. Passage of this legislation would be a devastating blow to the future of the T-WORKS program.” (Economics Lifelines is a group that lobbies for more spending on highways. Its members are primarily local chambers of commerce, labor unions, construction equipment dealers, and construction material suppliers. In other words, those who benefit from more highway spending, without regard to whether it is needed and wise.)
Former Kansas budget director Duane Goossen was more emphatic, writing: “Watch out! A very dangerous financial bill just surfaced in the Senate Ways and Means Committee, but it was promoted with language that hid the ultimate purpose and effect. Senate Bill 463 permanently transfers more than $500 million annually from the highway fund to the general fund.”1
Goossen has it backwards, however. The proposed bill would transfer nothing from the highway fund to the general fund. It would, however, stop transfers from the general fund to the highway fund.
There’s a difference, and it’s important. The highway fund has no claim on sales tax revenue other than what the legislature decides to send it. That amount has changed over the years. Kansas law specifies how much sales tax revenue is transferred to the highway fund. Here are some recent rates of transfer and dates they became effective:2
July 1, 2010: 11.427%
July 1, 2011: 11.26%
July 1, 2012: 11.233%
July 1, 2013: 17.073%
July 1, 2015: 16.226%
July 1, 2016 and thereafter: 16.154%
(If SB 463 passes as it stands now, on July 1, 2017 the rate would become 0 percent.)
Nearby is a chart showing how many sales tax dollars were transferred to the highway fund. In 2006 the transfer was $98.914 million, and by 2015 it had grown to $511.586 million, an increase of 417 percent. Inflation rose by 18 percent over the same period.3
(It’s important to note that in some years money has been transferred from the highway fund back to the general fund. Worse, in some years KDOT has borrowed money for the highway fund, but it was transferred to the general fund.4)
You’d think that Goossen, a former state budget director, would understand the difference between stopping a flow of funds versus reversing the flow. He claims the latter, and it isn’t surprising to see this mistake. A few sentences in the article let us know Goossen’s ideology, which is that Kansans should be taxed more so that government can continue to spend: “This maneuver does not fix the problem caused by unaffordable income tax cuts, it just makes highways and children pay for it.” First, tax cuts are never unaffordable. It is government that is unaffordable. Tax cuts let people keep more of what is rightly theirs. That is, unless you believe that government has a legitimate claim to your income and assets, as Goossen does. Second, he complains that “recurring revenue does not begin to cover expenses.” That is true. But the proper remedy is to reform and cut spending. Goossen prefers raising taxes.
Economic Lifelines makes the same mistake. We can understand — but not condone — this organization’s motive. It exists for the sole purpose of drumming up support for spending that benefits its members. If its director, who wrote the email cited above, said that Kansas is spending enough or too much on highways, he undoubtedly would be fired.
But what is Duane Goossen’s motivation for twisting the meaning of a bill? That’s a mystery.
To top it off, spending on highways has increased — notwithstanding the transfers from the highway fund — when we look at actual spending on roads. KDOT’s Comprehensive Annual Financial Report shows spending in the categories “Preservation” and “Expansion and Enhancement” has grown rapidly over the past five years. Spending in the category “Maintenance” has been level, while spending on “Modernization” has declined. For these four categories — which represent the major share of KDOT spending on roads — spending in fiscal 2015 totaled $932,666 million, up from a low of $698,770 in fiscal 2010.
- Goossen: High Danger Alert: SB 463. Kansas Center for Economic Growth. Available at: http://realprosperityks.com/goossen-high-danger-alert-sb-463/. ↩
- Kansas Statutes Annotated 79-3620. ↩
- Bureau of Labor Statistics CPI Inflation Calculator. Available at http://www.bls.gov/data/inflation_calculator.htm. ↩
- Voice for Liberty, Kansas transportation bonds economics worse than told. Available at https://wichitaliberty.org/kansas-government/kansas-transportation-bonds-economics-worse-than-told/. ↩
Do corporations prefer the marketplace or a large and powerful government?
A letter in the Wichita Eagle criticized the marketplace and the power that corporations purportedly hold over it. (Government needed, February 28, 2016). This letter refers to an op-ed by Charles Koch (Charles G. Koch: Sanders and I agree on a few issues, February 19, 2016, originally published in the Washington Post)
A few remarks:
The letter-writer states: “It was also no surprise to read that his solution is very small and weak government.” Reading the Koch op-ed to which the letter-writer refers, I didn’t see a call for weak government. Generally, libertarians favor a limited government that is strong in protecting our rights and liberties and exercising the enumerated powers outlined in the Constitution. A limited government is very different from a weak government.
The letter-writer states: “The very, very rich people and corporations do not check themselves. The marketplace system they embrace as the sole solution encourages the accumulation of more and more wealth and power — and using that power to accumulate more wealth.” With a few exceptions, corporations do not embrace the marketplace, if by marketplace the writer means a system of free markets. Instead, as Charles Koch correctly notes, most corporations seek to constrain and limit the power of free markets. Milton Friedman diagnosed the situation correctly: “The great virtue of free enterprise is that it forces existing businesses to meet the test of the market continuously, to produce products that meet consumer demands at lowest cost, or else be driven from the market. It is a profit-and-loss system. Naturally, existing businesses generally prefer to keep out competitors in other ways. That is why the business community, despite its rhetoric, has so often been a major enemy of truly free enterprise.”
It’s difficult to do the things that Friedman says business must do in a market economy — innovate, be customer-focused, and be efficient. It’s far easier to hire lobbyists at the federal, state, and local levels to gain an advantage over your competitors. The harm of this system of cronyism is explained by Koch: “Perversely, this regulatory burden falls hardest on small companies, innovators and the poor, while benefiting many large companies like ours. This unfairly benefits established firms and penalizes new entrants, contributing to a two-tiered society.” It is government, not markets, that are creating two tiers of society.
Another complaint of the writer is that the rich “fund the multitude of foundations and university professors to pitch their philosophy attacking public schools and other public services.” Well, some rich people do, and thank goodness for them. If not for the generosity of Koch and a few others in founding organizations like The Cato Institute, there might be few sources of information besides a self-serving government or those who benefit from an expansive, meddling government. The latter are the corporations that the letter-writer complains use the marketplace to gain more wealth and power, but in reality are using government to do this.
As far as funding university professors, this serves as a useful and valuable check to the multitudes of taxpayer-funded public university professors who indoctrinate and condition students to embrace more government. Shouldn’t college students be exposed to a variety of views? That doesn’t seem to be what students are receiving: “Academics, on average, lean to the left. A survey being released today suggests that they are moving even more in that direction. Among full-time faculty members at four-year colleges and universities, the percentage identifying as ‘far left’ or liberal has increased notably in the last three years, while the percentage identifying in three other political categories has declined.” (Moving Further to the Left, Inside Higher Ed, October 24, 2012)
An op-ed by an advocate for more highway spending in Kansas needs context and correction.
An op-ed in the Wichita Eagle by Bob Totten, executive vice president of the Kansas Contractors Association, makes the case for more spending on Kansas roads and highways. (Bob Totten: State’s road and bridge work is underfunded, February 25, 2016)
Besides lamenting the purportedly poor condition of Kansas roads and bridges, Totten mentions — frequently — the diversion of money from the highway fund to the general fund. While opinions may differ on the wisdom of KDOT borrowing money by selling long-term bonds and transferring those funds to the state’s general fund, that activity is separate from spending money on roads. (The borrowing and transferring is not wise, for both Republican and Democratic administrations. See Kansas transportation bonds economics worse than told.)
When we look at actual spending on roads, we see something different from what is portrayed in this op-ed. KDOT’s Comprehensive Annual Financial Report shows spending in the categories “Preservation” and “Expansion and Enhancement” has grown rapidly over the past five years. Spending in the category “Maintenance” has been level, while spending on “Modernization” has declined. For these four categories — which represent the major share of KDOT spending on roads — spending in fiscal 2015 totaled $932.666 million, up from a low of $698.770 million in fiscal 2010.
In light of this rising spending on roads, we have to wonder what is the point of Mr. Totten’s op-ed. That is self-evident. The purpose of the Kansas Contractors Association is to have the state spend as much as possible on projects that benefit its clients, which include contractors, construction companies, and material suppliers. It matters not whether the spending is needed, wise, or the proverbial “bridge to nowhere” — the goal of Mr. Totten is more spending by Kansas taxpayers to benefit his association’s members.
In this excerpt from WichitaLiberty.TV: How does Tax Increment Financing (TIF) work in Kansas? Is is a good thing, or not? View below, or click here to view at YouTube. Originally broadcast June 7, 2015.
In this excerpt from WichitaLiberty.TV: Can we reform economic development in Wichita to give us the growth we need? View below, or click here to view at YouTube. Originally broadcast May 10, 2015.
In this episode of WichitaLiberty.TV: A look at Wichita community outreach and communications, rewriting city council history, and entrepreneurship. View below, or click here to view at YouTube. Episode 102, broadcast December 6, 2015.
A company that has a taxpayer-guaranteed loan may be entering bankruptcy. Will taxpayers have to pay?
(Updated November 30) Spanish energy giant Abengoa has taken preliminary steps that could lead to bankruptcy filing.
Of relevance to Kansas — and the country at large — is the Abengoa cellulosic ethanol plant near Hugoton. That plant received a $132.4 million loan guarantee from the United States government under the same program that benefited Solyndra. That company cost taxpayers over $500 million when it defaulted on its taxpayer-guaranteed loan.
Does a bankruptcy filing by Abengoa place U.S. taxpayers on the hook for the company’s guaranteed loan? If so, are taxpayers liable for the entire $132.4 million or some smaller portion?
The answer is this: We don’t know. I’ve asked for, and have received the loan guarantee agreement. It’s unclear to me what would happen if Abengoa entered bankruptcy.
Following, reporting from the Wall Street Journal. It mentions “debt-fueled expansion,” some of which is a liability of the U.S. taxpayer.
Spain’s Abengoa Files for Creditor Protection
The company’s debt-fueled expansion in the boom years is handicapping growth today
MADRID — Spanish renewable energy and engineering firm Abengoa SA said on Wednesday that it is filing for preliminary creditor protection, an initial step that could lead to the largest bankruptcy case in the country’s history.
The potential demise of Abengoa is an extreme example of a Spanish company whose debt-fueled expansion during the country’s boom years has handicapped its ambitions for growth today.
The company is one of the world’s top builders of power lines transporting energy across Latin America and a top engineering and construction business, making massive renewable-energy power plants in places from Kansas to the U.K.
Continue reading at Wall Street Journal.
A Wichita developer seeks to have taxpayers fund a large portion of his development costs, using a wasteful government program of dubious value.
When you hear of a program titled “historic preservation tax credits” you might find yourself in agreement. Preserving history: Who can be against that? And tax credits: Aren’t those just technical adjustments on someone’s tax form?
If you look closely, however, you’ll find that the historic preservation tax credits program can include buildings with only the slightest historic significance, and has great cost to taxpayers.
The Colorado-Derby Building at 201 N Water Street in Wichita has been nominated for placement on the Register of Historic Kansas Places. It’s a nondescript building which currently houses administrative offices for the Wichita public school district and is known by a different name. Still, it is eligible for placement on the register for being an “example of this private investment trend,” that being the building of office buildings midcentury. A laudable accomplishment, but hardly notable.
The real reason for seeking placement on the register of historic places is money. By using historic preservation tax credits the developer of this building can get taxpayers to pay for much of the costs of rehabilitation. Almost half, which will be millions in this case.
Under the program this building is entering, its owners will receive 25 percent of rehabilitation expenses. The federal government provides tax credits of 20 percent. It’s likely that the owners of this building will also seek these credits.
So with both tax credit programs, 45 percent of the cost of rehabilitating this building could be paid for by taxpayers. And, given the history of the developer, it’s likely he will find other ways to get taxpayers to pay for even more.
Tax credits may be a mystery to many, but there is no doubt as to their harmful effect on state and federal budgets. When using tax credits, the government, conceptually, issues a slip of paper that says something like “The holder of this document may submit it instead of $500,000 when making a tax payment.” So instead of paying taxes with actual money, the holder of the credit pays with, well, a slip of paper worth nothing to the government treasury.
This is a direct cost to the government, according to both reason and the Kansas Division of Legislative Post Audit. Last year, after conducting an audit of Kansas tax credit programs, auditors explained: “Tax credits, which the government offers to try to induce certain actions by the taxpayer, reduce income tax revenues because they are subtracted directly from the amount of taxes due.” (emphasis added)
The confusing nature of tax credits leads citizens to believe that they have no cost to the state or federal government. But tax credits are equivalent to government spending. The problem is that by mixing spending programs with taxation, some are lead to believe that tax credits are not cash handouts. But not everyone falls for this seductive trap. In an article in Cato Institutes’s Regulation magazine, Edward D. Kleinbard explains:
Specialists term these synthetic government spending programs “tax expenditures.” Tax expenditures are really spending programs, not tax rollbacks, because the missing tax revenues must be financed by more taxes on somebody else. … Tax expenditures dissolve the boundaries between government revenues and government spending. They reduce both the coherence of the tax law and our ability to conceptualize the very size and activities of our government. (The Hidden Hand of Government Spending, Fall 2010)
The use of tax credits to pay for economic development incentives leads many to believe that what government is doing is not a direct subsidy or payment. In order to clear things up, perhaps we should require that government write checks instead of issuing credits.
Back to Kansas: The audit of the historic preservation tax credits program found that in 2001, when the program was started, the anticipated cost to the state was about $1 million per year. By 2007, the actual cost to the state was reported at almost $8.5 million.
Further, the audit found what many already knew: tax credit aren’t an efficient way of transferring subsidy to developers. Most of the time, the developers sell the credits to someone else at a discount, as the audit explains: “The Historic Preservation Tax Credit isn’t cost-effective. That credit works differently than the other three because the amount of money a historic preservation project receives from the credit is dependent upon the amount of money it’s sold for. Our review showed that, on average, when Historic Preservation Credits were transferred to generate money for a project, they only generated 85 cents for the project for every dollar of potential tax revenue the State gave up.”
It would be more efficient for everyone if the state would simply write checks to the developers instead of issuing tax credits. But then the actual economic meaning of the transaction would be laid bare for all to see.
Then, what qualifies as historic can change as political conditions require. Earlier this year the Wichita city council reversed a decision by the Historic Preservation Board and allowed a property owner to proceed with the demolition of three formerly historic buildings in southern downtown Wichita.
The historic preservation tax credit program is a government handout mechanism we no longer need. Today, most of the money goes to wealthy developers or corporations that can afford to redevelop downtown hotels and lofts with their own money — instead of asking low-income families to pay sales tax on their groceries to fund their tax credits.
Material from the Kansas State Historical Society
Nomination for listing on Register of Historic Kansas Places
Colorado-Derby Building – 201 N Water St., Wichita, Sedgwick County
Constructed in 1959-1960, the nine-story Colorado-Derby Building is an early example of a Modern Movement speculative office tower erected within a pattern of development that shaped Wichita’s downtown at midcentury. New buildings erected as icons on the skyline were intended to refresh, modernize, and revitalize the downtown core through public and private investment in civic and commercial improvements. Frank and Harvey Ablah recognized the onset of this trend and constructed the Colorado-Derby Building to provide speculative office space, redeveloping the site of the Ablah Hotel Supply Company. Named for its largest and most prominent tenant, the Colorado-Derby Building was fully occupied when it opened in 1960 and maintained high occupancy rates over the following decade. The construction and subsequent occupancy of this building illustrates the continuing importance of manufacturing industries to the economy of Wichita at midcentury and the ability of these industries to contribute to the economic and physical revitalization of downtown. The blocks immediately surrounding the building continued to develop in a similar fashion over the following decade with large-scale modern buildings and parking lots replacing smaller commercial and industrial buildings built a half-century earlier. All of this development activity culminated in a formal Urban Renewal project utilizing federal funds in the late 1960s. In Wichita, private investment focused on providing office space for industrial companies, rather than public funding initiated the revitalization that transformed downtown. The Colorado-Derby Building is nominated under Criterion A an important early example of this private investment trend.
A change to Wichita city election law is likely to have little practical effect.
Currently Wichita city code prohibits certain entities from making campaign contributions to candidates for city council and mayor: “Contributions by political committees as defined by K.S.A. 25-4143, as amended, corporations, partnerships, trusts, labor unions, business groups or other such organizations are expressly prohibited.”
The intent of this law is to limit the influence of businesses and unions on city elections. This week the Wichita City Council will consider striking this portion of city code. The contribution limit of $500 to a candidate for the primary election, and $500 again for the general election, is proposed to be retained.
The practical effect of removing the restriction on campaign contributions from corporations and other entities is likely to be minor. Here’s why.
Last year, lamenting the role of money in national elections, a Wichitan wrote in the Wichita Eagle “Locally, I understand that elections for the Wichita City Council underwent ideal, nonpartisan campaign-finance reform years ago, and that these limits are scrupulously practiced.” This view is naive and doesn’t reflect the reality of current campaign finance practice in Wichita. That is, the stacking of contributions from multiple members of interested groups. For example, a frequent practice is that a business might have several of its executives and their spouses make contributions to a candidate. Because the contributions are made by multiple people, the money is contributed within the campaign finance limitation framework. But the net effect is a lot of money going to a candidate’s campaign in order to advance the interests of the business, thereby circumventing the intent of campaign finance restrictions.
In 2012 council members James Clendenin (district 3, southeast and south Wichita) and Lavonta Williams (district 1, northeast Wichita) were preparing to run again for their offices in spring 2013. Except for $1.57 in unitemized contributions to Clendenin, two groups of related parties accounted for all contributions received by these two incumbents for an entire year. A group associated with Key Construction gave a total of $7,000 — $4,000 to Williams, and $3,000 to Clendenin. Another group of people associated with movie theater owner Bill Warren gave $5,000, all to Clendenin.
In July 2012, as Wichita Mayor Jeff Longwell (then a city council member) was running for the Sedgwick County Commission, his campaign received a series of contributions from a Michigan construction company. Several executives and spouses contributed. At the time, Longwell was preparing to vote in a matter involving a contract that the Michigan company and its Wichita partner wanted. That partner was Key Construction, a company that actively stacks contributions to city council candidates.
Longwell has also received stacked contributions from Key Construction.
The casual observer might not detect the stacking of campaign contributions by looking at campaign finance reports. That’s because for city offices, the name of the company a contributor works for isn’t required. Industry and occupation are required, but these aren’t of much help. Further, contribution reports are not filed electronically, so the information is not easy to analyze. Some reports are even submitted using handwriting, and barely legible handwriting at that.
The campaign finance reform that Wichita really needs is quite simple. It’s called a pay-to-play law, and it can be a simple as this: “A councilmember shall not participate in, nor use his or her official position to influence, a decision of the City Council if it is reasonably foreseeable that the decision will have a material financial effect, apart from its effect on the public generally or a significant portion thereof, on a recent major campaign contributor.”
In other words, you can make contributions to candidates. You can ask the council to give you contracts and other stuff. But you can’t do both. It’s a reform we need, but our elected officials are not interested.