Tag Archives: Economic development

Economic incentives and corporate welfare in Wichita

At a Wichita city council meeting, economic development incentives in the form of property tax abatements are discussed.

News coverage: Council to vote on bridge and tax exemptions (Wichita Eagle), Council approves tax exemption for Leading Technology Composites (Wichita Eagle), Tax exemption approved for Leading Technology Composites (Wichita Business Journal).

Economic development planning in Wichita on tap

Tuesday’s meeting of the Wichita City Council features four public hearings concerning Community Improvement Districts. One CID also will have a public hearing on its application for tax increment financing (TIF).

CIDs are a creation of the Kansas Legislature from the 2009 session. They allow merchants in a district to collect additional sales tax of up to two cents per dollar. The extra sales tax is used for the exclusive benefit of the CID.

Under tax increment financing (TIF), developers get to use their property taxes to pay for the same infrastructure (or other costs) that everyone else has to pay for. That’s because in TIF, the increment in property taxes are used to pay off bonds that were issued for the exclusive benefit of a development. Or, as in the case with a new form of TIF called pay-as-you-go, the increment in property taxes are simply given back to the developer. (Which leads to the question: why even pay at all?)

The developments seeking this form of public financing include a grocery story in Plainview, a low-income and, according to the application, underserved area of town. Material on this hearing provided by the city is at Plainview Grocery Store CID and TIF in Wichita, Kansas.

A second applicant asks to charge an extra one cent per dollar sales tax for Central Park Place, a proposed suburban shopping center. Read more here: Community Improvement District at Central Park Place, Wichita, Kansas.

Then the developers of Bowllagio, a proposed bowling alley and entertainment district, will make their pitch to add two cents per dollar sales tax. Read more here: Community Improvement District for Bowllagio (Maize 54 Development).

Finally, the developers of the downtown Wichita Broadview Hotel will ask to add two cents per dollar sales tax on purchases made by the hotel’s visitors. Read more here: Community Improvement District for Broadview Hotel, Wichita, Kansas.

All of these applications should be turned down by the city council, and for a variety of reasons.

For example, the goal of the Plainview grocery store is to serve a low-income area of town. To do that, however, the store will be charging its customers an extra $1 for every $50 spent. Supporters make the case that many of the potential customers presently shop at Quik-Trip, which is not an inexpensive store, so the city is really doing these people a favor. The developer makes the case that he’s just trying to do something for the community, giving back something.

But if the developer really wants to do something for the community, he should agree to pay his share of property taxes like almost everyone else pays. That won’t happen, as most of the taxes he will pay will be routed right back to him through the TIF district.

The extra sales tax is a consumer protection issue, both in the case of the Plainview grocery store and the suburban shopping center. Shoppers won’t have any idea that they’re going to be paying extra sales tax by shopping at these merchants until after they get their receipt. Most people probably won’t notice then.

There are several council members who normally would be in favor of exposing greedy merchants who overcharge people, but they haven’t shown this concern so far regarding Community Improvement Districts.

The Broadview hotel is already the recipient of potentially $4.75 million in Kansas historic preservation tax credits. Despite the name of the program, the tax credits are in effect a grant of money to the developers — the state might as well write the developers a check. The City of Wichita has also assisted the hotel in several ways. But now it’s back at the government trough asking for even more corporate welfare.

We ought to ponder the wisdom of renovating this hotel if it can’t survive without so much government assistance. And having plowed so much into an economically unfeasible project, we can easily see sometime a few years down the road where owner Drury Hotels come to the city saying they can’t make a profit, and they need some other form of assistance.

Having given so much already, the city won’t be able to turn down the request for a little more. It’s happened before.

Even pointing out how the city works at cross-purposes with itself doesn’t impress the council. We spend millions every year subsidizing airlines so that airfares to Wichita are low. Then we turn around and add extra tax to visitors’ hotel bills, with Vice Mayor Jeff Longwell and the Wichita Eagle editorial board approving this as a wise strategy.

People remember high taxes. I don’t think it’s a good strategy to establish high-tax districts designed to capture extra tax revenue from visitors to our city. A good strategy for Wichita to pursue would be to establish itself as a low-cost destination, but we’re going the other way.

Then we must consider: does all this economic development planning work? The answer, emphatically, is: No. City leaders tell us that they do these things to grow Wichita’s economy. The activity of developers who seek subsidy like this is called, in economic terms, rent seeking, and city leaders encourage it. But evidence shows that rent seeking activity harms economic growth.

It’s usually pretty good for the favored developers who receive such economic rents (subsidy). But it’s a bad deal for everyone else. It illustrates one of the primary problems with government taxation and spending. John Stossel explains:

The Public Choice school of economics calls this the problem of concentrated benefits and dispersed costs. Individual members of relatively small interest groups stand to gain huge rewards when they lobby for government favors, but each taxpayer will pay only a tiny portion of the cost of any particular program, making opposition pointless.

We see this in play nearly every week in Wichita as the city seeks to manage economic development. City leaders portray “success stories” (that’s when a company accepts subsidy from the city to build something) as evidence of people having faith in Wichita. Someone has confidence in Wichita because they’re investing here, they say.

But I wonder why these people won’t invest in Wichita unless they receive millions of dollars through preferential tax treatment such as tax abatements, CID, TIF, STAR bonds, forgivable loans, and other forms of local corporate welfare.

These preferential tax treatments increase the cost of government for everyone else in the city. That fuels the cycle of people coming to city council saying their plans are not feasible unless they receive tax breaks. This expanding role of Wichita in centralized economic planning is great if you’re a city hall bureaucrat like Wichita city manager Bob Layton and Wichita economic development director Allen Bell. It satisfies the incentives and motivations of bureaucrats. But it’s bad for economic freedom and the people of Wichita.

Finally, perhaps the simplest public policy issue is this: If merchants feel they need to collect additional revenue from their customers, why don’t they simply raise their prices? Why the roundabout process of the state collecting extra sales tax, only to ship it back to the merchants in the CID?

Wichita economic development incentives to be topic of meeting

This Thursday (September 9) Americans for Prosperity is holding a meeting to discuss a series of economic development incentives that will be considered in an upcoming meeting of the Wichita city council.

John Todd of AFP says:

“On Tuesday, September 14, 2010 the Wichita City Council will be considering the approval of several public economic development incentive programs for private development projects. The City Council meeting starts at 9:00 a.m. Copies of the council agenda detailing these projects is usually available online at Wichita.gov on the Friday prior to the Tuesday city council meeting.

“The purpose of tonight’s meeting is to provide you with the opportunity to discuss and learn more about the incentives used by local government officials in economic development projects so that if you wish, you can get involved in the project vetting process as a more informed citizen.

The meeting, which is open to the public, is from 7:00 pm to 8:30 pm on Thursday, September 9, 2010, at the Wichita Public Library Central Branch (Patio Meeting Room), at 223 S. Main, Wichita, Kansas 67202

For more information on this event contact John Todd at [email protected] or 316-312-7335, or Susan Estes, AFP Field Director at [email protected] or 316-681-4415.

For downtown Wichita, Mayor Brewer has a vision

In Sunday’s Wichita Eagle, Wichita Mayor Carl Brewer penned a piece that states his belief in the importance of downtown and prepares the people of Wichita for the start of a prescriptive planning process, with accompanying subsidy to politically-favored developers willing to fulfill the plan.

The mayor used the word “vibrant” twice. Asking citizens a question like “Would you like to have a vibrant downtown?” is meaningless. Who doesn’t? It’s only when the question is accompanied by context that citizens can start to understand how they should answer.

For example, in the mayor’s article, he mentions the use of special assessment financing that funded suburban infrastructure, and that this is not sufficient for downtown needs. This statement reveals a misunderstanding by the mayor about the various forms of financing that might be used to help development.

Special assessment financing means that the city spends money to build something, like the new street to serve a site where someone wants to build a house or a shopping center. The cost of this street, plus interest, is added to the property’s tax bill over a period of years. The property owner doesn’t get anything for free.

But in the forms of financing that the mayor and city hall planners favor for downtown, developers do get something for free. Under tax increment financing (TIF), developers get to use their property taxes to pay for the same infrastructure that everyone else has to pay for. That’s because in TIF, the increment in property taxes are used to pay off bonds that were issued for the exclusive benefit of a development. Or, as in the case with a new form of TIF called pay-as-you-go, the increment in property taxes are simply given back to the developer. (Which leads to the question: why even pay at all?)

Some deny that TIF directly enriches the developer. They’ll make arguments such as “it’s only used for infrastructure and eligible expenses” or “it’s not lending, it’s bonding” or “it wouldn’t happen but for TIF” or the biggest lie: TIF doesn’t have any cost. But despite these claims, TIF has a cost, and it does directly enrich the developer. That’s its entire purpose; its reason for being. If TIF didn’t enrich the developer, how does it change something that is claimed to be not economically feasible into something that is?

While city leaders say that public participation in the revitalization of downtown is to be limited, we should be cautious and skeptical. Goody Clancy planners have said that public participation will be limited to TIF. This is bad in its own right and should be opposed on its merits.

We need to be skeptical of the mayor and downtown planners because there isn’t enough TIF money available to do what they want to do. I fully expect a citywide sales tax, probably in the amount of one cent per dollar, to be proposed for the benefit of downtown subsidized developers. City leaders speak fondly of such a tax that Oklahoma City has used for many years.

City leaders have already shown themselves to be not averse to imposing additional sales taxes in Wichitans and our visitors, having granted several Community Improvement Districts the ability to charge up to an additional two cents per dollar sales tax. This means that when visitors check out of the Fairfield Inn in downtown Wichita, they’ll be faced with a sales tax rate of 9.3 percent. That’s in addition to the six percent guest tax, which in the case of this hotel is collected for the exclusive benefit of itself, rather than funding general government and tourism activities.

More community improvement districts are in the works. Wichita may soon be peppered with them.

No faith in free markets means no faith in people

The unwillingness of Wichita city leaders to let Wichitans freely decide where they live, and Wichita businesses freely decide where to locate, is a sign of lack of confidence in free markets and the people of Wichita. Because Wichitans do not choose to live and locate their business firms where politicians like Carl Brewer and Janet Miller — to name just two — and city hall bureaucrats like Wichita city manager Bob Layton and Wichita economic development director Allen Bell want them to, they deliver a slap in the face. It appears in the form of a vision backed up by planning, regulation, and the power to dish out favorable tax treatment, as outlined above.

Once formed, a vision is a powerful force. Randal O’Toole, author of The Best-Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future has written about visionaries and government planning:

The worst thing about having a vision is that it confers upon the visionary a moral absolutism: only highly prescriptive regulation can ensure that the vision overcomes an uncaring populace responding to a free market that planners do not really trust. But the more prescriptive the plan, the more likely it is that the plan will be wrong, and such errors will prove extremely costly for the city or region that tries to implement the plan.

An example of planning that many see as having gone wrong is the government planning that led to growth on the city’s fringes. An example that helped make this possible is the government’s decision to build the northeast expressway also known as K-96. Acts of government like this are claimed to have caused the demise of downtown, the very situation that planners now want to correct.

With government making “mistakes” (their claim, not mine) like this on a grand scale, why are we willing to trust that politicians and bureaucrats are making correct decisions now? Especially when you look at the campaign finance reports of most city council members and see the same names giving repeatedly to all council members, with these same names appearing repeatedly before the council asking for their subsidy. This is not a decision making process that gives citizens confidence.

It bears repeating: the existence of the downtown planning process tells Wichitans they’ve made a mistake in where they chose to buy a home or build a business. Not only will Wichitans have to pay for what they freely chose, they’re going to be asked to pay again so that those with purportedly superior vision can have their way.

Kansas airports and their economic impact

Last week’s release by the Kansas Department of Transportation of a study of the economic impact of Kansas airports caused quite a stir, with newspapers such as the Los Angeles Times (at least its online version) carrying the Associated Press coverage.

Perhaps the reason so many distant newspapers were interested in the story is the sensationally large economic impact figures reported. The number of jobs purported to airports is large, by any standard.

But there’s a problem with these numbers. They’re similar to sensational claims made a few years ago when the case for subsidizing airlines in Wichita was made. Those figures were bogus. So are these.

The staggeringly large figures come from two aspects of the study. First, the study counts the economic activity from businesses near the airport as attributable to the airport. In the case of the Wichita airport, this means that the employees of Cessna and Bombardier Learjet, and all the economic activity these companies produce, is credited as economic impact of the airport.

This economic sleight-of-hand allows the study to attribute 22,313 jobs to the Wichita airport. The total economic impact of the Wichita airport is reported as $4.7 billion.

All these employees don’t work for the airport. Almost all of them work at business firms located near the airport. But the study doesn’t really make that distinction. And when you do things like this, you can really pump up some inflated figures.

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

A second problem is the study’s use of economic impact multipliers to pump up the figures. A multiplier reflects the fact that money spent at, say an airport, get spent again. Proponents of multipliers forget that money spent elsewhere get multiplied too. In fact, money that is saved and invested get multiplied, too.

These two factors inspired the Associated Press reporter to lead off a story with “Airports in Kansas support more than 47,000 jobs, generate $2.3 billion in payroll and have an annual economic impact of $10.4 billion …” With numbers so big, you can see why news editors in far-away cities might run the story.

There’s another problem: these studies usually assume that all the activity is the responsibility of the entity being promoted, that none of it would have happened without the celebrated entity, and that since (usually) the promoted entities are government-owned, all this is evidence of the goodness of government.

Another problem is that these economic impact figures get used several times to support various government subsidies to business. Here we have the airport claiming two aircraft manufacturing companies’ employees and their economic impact as the product of the airport.

But when these companies want corporate welfare from the Kansas state government, the economic impact of the companies and their employees will be cited as justification. Politicians, bureaucrats, and the public will believe their case.

Then, the same numbers might be cited again at Wichita city hall, and maybe before the Sedgwick County Commission as the company makes its case for industrial revenue bonds, tax abatements, forgivable loans, and other forms of local corporate welfare.

But this economic impact can’t be recycled like this. It exists only once. If the Wichita airport claims it, then it can’t be used again to justify some other program or request.

Another way the study leaps beyond credibility is its inclusion of the Beech Factory Airport in east Wichita. This is an airport without commercial air service. It exists solely for the convenience of Hawker Beechcraft, and is undoubtedly a necessary component of the capital plant needed to manufacture airplanes.

The study, however, mixes this airport in with all other Kansas airports, so this airport’s claimed $1.8 billion in economic impact is treated the same as any other Kansas airport. But regular people can’t catch a flight at this airport.

When government officials use stretched and inflated figures like these, they diminish their credibility. The Kansas Department of Transportation already snowed the Kansas public earlier this year with their claims of the need for huge spending on Kansas roads and highways.

Now they’re at it again, with claims that simply make no economic sense at all. The fact that news media laps up these figures without any skepticism or critical thought doesn’t help.

Does this mean that Kansas and its local government shouldn’t offer airports and businesses like aircraft manufacturers help from the public treasury? That’s a different question for a different day.

Today, however, we need to realize that accurate, reasonable, and believable information about Kansas airports and other transportation infrastructure isn’t available from the Kansas Department of Transportation.

Kansas tax burdens getting heavier, studies show

While Kansas ranks in the middle of the states in total tax burden, the state’s take is getting larger, compared to other states.

This finding is important as Kansas and its largest city are increasingly using favorable tax treatment to centrally plan and manage economic development. When the state allows a company’s employee withholding taxes to be used for its own exclusive benefit — as outgoing Governor Mark Parkinson recently granted to Wichita’s Bombardier Learjet — it increases the cost of government for everyone else.

The Kansas PEAK bill that the legislature passed this year allows this practice to be extended to more and smaller companies.

In cities like Wichita, the city council routinely grants tax abatements and other favorable tax treatment to companies that it believes are deserving.

The result of all this intervention is that the tax base is narrowed, and the high cost of government is born by a smaller group of taxpayers.

To top it off, the result of this centralized planning and management of economic development is: pretty much zero.

In 2008 the Kansas Legislative Division of Post Audit looked at the use of economic development incentives in Kansas, examining some $1.3 billion in spending over five years. In examining the literature, the auditors found: “Most studies of traditional economic development incentives suggest these incentives don’t have a significant impact on economic growth.”

It also found: “The majority of research concludes there is a lack of demonstrated impact from the typical types of economic development assistance, and that incentives aren’t cost-effective.” The audit can be read at Economic Development: Determining the Amounts the State Has Spent on Economic Development Programs and the Economic Impacts on Kansas Counties. The document has an executive summary.

The concentrating of the cost of government on a shrinking tax base spells trouble. One solution that I proposed to the Wichita city council is that when tax incentives are given, the city reduce its spending by the cost of the incentive: “The harmful effect of this tax abatement is this: When someone escapes paying taxes, someone else has to make up the difference. … As long as this body is willing to grant tax abatements and other special tax favors, I propose this simple pledge: that when the City of Wichita allows a company to escape paying taxes, that it reduce city spending by the same amount. By following this simple rule, the City can be reminded of the cost of granting special tax favors, and the rest of us won’t have to pay for them.”

Kansas tax burdens getting heavier, studies show

By Gene Meyer, Kansas Reporter

(KansasReporter) TOPEKA, Kan. – Kansans’ state and local sales taxes are now 12th highest in the nation, though their total tax burden is nearer the middle of the pack in 24th place, say two new reports released Thursday.

But, as investment companies always remind us when pitching their new products, your actual results may vary.

“Even within a state, it can be difficult to know what the average tax rate is when there can be hundreds of different jurisdictions charging different rates,” said Kail Padgitt, an economist at the Washington, D.C. based Tax Foundation, which calculates Kansas’ 7.95 percent average state and local sales taxes are 12th highest in the nation.

Within that average, though, actual local rates in some 790 different county, local and special tax districts across Kansas vary from 6.3 percent where only the basic state rate is charged to more than 10.5 percent in a few special taxing districts.

The ranking, one of the first nationally to include Kansas’ recently raised 6.3 percent statewide sales tax that became effective July 1, puts the 12th ranked Sunflower state higher than its neighbors in 15th ranked Missouri, 25th ranked Colorado and 29th ranked Nebraska. Only Oklahoma, where an average 8.33 percent sales tax burden clocks in at seventh highest in the nation, comes in higher.

Continue reading at Kansas Reporter

Wichita Community Improvement District approvals signal increased interventionism

Yesterday’s action by the Wichita City Council in approving two Community Improvement Districts signals a new era in increased intervention in free markets by Wichita politicians and bureaucrats.

CIDs are a creation of the Kansas Legislature from the 2009 session. They allow merchants in a district to collect additional sales tax of up to two cents per dollar. The extra sales tax is used for the exclusive benefit of the CID.

Although at past city council meetings some members seemed as though they might view the districts with skepticism, there was little meaningful discussion, and no council members voted against the formation of the districts.

The mayor and city council members are unable — or unwilling — to consider the harmful effects of their interventions in creating special tax districts.

Or, it might be that some strategic campaign contributions helped city council members make up their minds. While I believe that Council Member Lavonta Williams is an honest and honorable council member, we have to be concerned when campaign contributions are made by people who know they will be asking the council for special treatment and favor, as Christian Ablah did yesterday.

He got what he wanted from the council. Wichita taxpayers lost.

The city looks silly when it jumps through hoops to conform to laws that shape the way it conducts economic development. As I urged the council:

Let’s stop distinguishing between “eligible costs” and other costs. When we use a term like “eligible costs” it makes this process seem benign. It makes it seem as though we’re not really supplying corporate welfare and subsidy to the developers.

As long as the developer has to spend money on what we call “eligible costs,” the fact that the city subsidy is restricted to these costs has no economic meaning.

Suppose I gave you $10 with the stipulation that you could spend it only on next Monday. Would you deny that I had enriched you by $10? As long as you were planning to spend $10 next Monday, or could shift your spending, this restriction has no economic meaning.

The issue of high-tax districts being a consumer protection issue didn’t resonate with the council, either. There are several council members who normally would be in favor of exposing greedy merchants who overcharge people, but not in this case. Maybe it’s the campaign contributions again.

Even pointing out how the city works at cross-purposes with itself doesn’t work. We spend millions every year subsidizing airlines so that airfares to Wichita are low. Then we turn around and add extra tax to visitors’ hotel bills, with Vice Mayor Jeff Longwell and the Wichita Eagle editorial board approving this as a wise strategy.

People remember high taxes. I don’t think it’s a good strategy to establish high-tax districts designed to capture extra tax revenue from visitors to our city.

But perhaps the simplest public policy issue is this: If merchants feel they need to collect additional revenue from their customers, why don’t they simply raise their prices? Why the roundabout process of the state collecting extra sales tax, only to ship it back to the merchants in the CID?

No one at Wichita city hall wants to talk about this, at least in public.

Next month the city will hold public hearings for three proposed CIDs in addition to the two approved yesterday. I suspect that the next year will see many more proposed.

With each intervention like this — not to mention each TIF district, STAR bond, industrial revenue bond with accompanying tax abatement, forgivable loan, EDX property tax exemption, historic preservation income tax credit, and other programs — Wichita and Kansas move farther away from the principles of economic freedom that have created prosperity, and move closer to a centrally planned economy. Those have not worked out well.

More Wichita Community Improvement Districts proposed

Tomorrow’s meeting of the Wichita City Council will consider starting the process for the approval of three Community Improvement Districts in Wichita.

CIDs are a creation of the Kansas Legislature from the 2009 session. They allow merchants in a district to collect additional sales tax of up to two cents per dollar. The extra sales tax is used for the exclusive benefit of the CID.

CIDs may work in one of two ways: First, the city might sell special obligation bonds, give the money to the applicant, and pay off the bonds with the extra sales tax that is collected.

The other way is “pay-as-you-go,” in which the extra sales tax is sent to the applicant as it is collected.

Tomorrow’s city council meeting will accept petitions by property owners in the proposed CIDs and set dates for public hearings, usually around 30 days in the future.

The first of the proposed CIDs is the Bowllagio project at Kellogg and Maize Road. This is proposed to be a pay-as-you-go CID, meaning that the city will not issue bonds. The applicant proposes to collect the full two cents per dollar extra tax for up to 22 years.

The second is a development in the 2600 block of north Maize Road titled Central Park Place Development. The applicant proposes collecting an additional one cent per dollar for up to 22 years on a pay-as-you-go basis.

The third project is Planeview Grocery Store Project at George Washington Blvd. and Pawnee in southeast Wichita. This applicant proposed to collect two cents per dollar extra sales tax on a pay-as-you-go basis. This applicant also proposes creating a tax increment financing (TIF) district.

According to city documents, a goal of this project is to provide “affordable access to grocery shopping to the underserved Planeview area.” But if affordability is a goal of this project, we have to question the wisdom of adding two cents per dollar spent to the grocery bills of low income people.

Community Improvement Districts and public policy

There are several public policy issues surrounding Community Improvement Districts that deserve consideration.

First, the extra sales tax collected in these districts needs to be considered from a consumer protection perspective. How will shoppers in these districts learn that they are going to be paying extra sales tax? While some shoppers may not care, certainly low-income shoppers need to stretch their grocery dollars. Asking them to spend two cents extra per dollar doesn’t seem like the city is watching out for the best interests of its citizens.

Then there’s the “tax our visitors” strategy of council member and Vice Mayor Jeff Longwell and some other council members. Since the extra sales taxes in some CIDs like a hotel will largely be paid by visitors, it’s a wise economic development strategy, they say.

We need to consider, however, the effect of these high sales tax districts on visitors to Wichita. Will they be happy with their decision to visit Wichita once they learn of the high taxes on their hotel or restaurant bill? Will they mistakenly assume that these high taxes apply to the entire city? When corporate expense accounting sees the high taxes charged in Wichita, will they want to send business here again?

But perhaps the simplest public policy issue is this: If merchants feel they need to collect additional revenue from their customers, why don’t they simply raise their prices? Why the roundabout process of the state collecting extra sales tax, only to ship it back to the merchants in the CID?

No one at Wichita city hall has an answer for this question.

The ‘tax expenditure’ solution for our national debt

While most critics of government spending focus on entitlements, regular appropriations, and earmarks, there is a category of spending that not many pay much attention to. The spending is called “tax expenditures.”

It’s a big issue. As economist Martin Feldstein writes in the Wall Street Journal, tax expenditures will increase the federal budget deficit by $1 trillion this year.

Tax expenditures are implemented through the tax system. It’s usually the income tax system, especially at the federal level. Taxpayers may receive tax credits, which reduce the tax that must be paid dollar for dollar. Many credits are refundable, meaning that if the taxpayer has no tax liability, the government will send the recipient a check. Examples cited by Feldstein include “$500 million annual subsidy for the rehabilitation of historic structures and a $4 billion annual subsidy of employer-paid transportation benefits.”

While supporters of many of these programs portray them as not costing the government anything, Feldstein writes that they do: “These tax rules — because they result in the loss of revenue that would otherwise be collected by the government — are equivalent to direct government expenditures.”

I argued this in testimony I presented to a committee in the Kansas Legislature this year, when it was considering restoring and expanding the Kansas historic preservation tax credit program. I told committee members: “We must recognize that a tax credit is an appropriation of Kansans’ money made through the tax system. If the legislature is not comfortable with writing a developer a check for over $1,000,000 — as in the case with one Wichita developer — it should not make a roundabout contribution through the tax system that has the same economic impact on the state’s finances.”

In that committee, not one member voted against this program, even though the committee has some members who consider themselves very fiscally conservative and hawks on spending.

Here in Wichita, the city council regularly steers spending to certain companies through the tax system by granting property tax exemptions and tax increment financing.

Feldstein describes problems with spending implemented through the tax system:

  • Politicians use tax expenditures to grow the welfare state. While proposing a freeze on discretionary spending, President Obama at the same time proposed an expansion of a tax credit program for child or elderly care.
  • Once enshrined in the tax law, these appropriations don’t have to be reauthorized each year. They’re on auto-pilot, so to speak.
  • Eliminating tax expenditures is looked on by Republicans as a tax increase, so they are reluctant to support their elimination. Felstein counters: “But eliminating tax expenditures does not increase marginal tax rates or reduce the reward for saving, investment or risk-taking.”
  • Tax expenditures distort the economy in harmful ways: “[Eliminating tax expenditures] would also increase overall economic efficiency by removing incentives that distort private spending decisions.”

Feldstein concludes: “Cutting tax expenditures is really the best way to reduce government spending. And to be politically acceptable, the cuts in tax expenditures must be widespread, requiring most taxpayers to give up something so that the fiscal deficits can decline.”

The ‘Tax Expenditure’ Solution for Our National Debt

The credits and subsidies that make the tax code so complicated cost big bucks. Reduce them by third and the debt will be 72% of GDP in 2020 instead of 90%.

By Martin Feldstein

When it comes to spending cuts, Congress is looking in the wrong place. Most federal nondefense spending, other than Social Security and Medicare, is now done through special tax rules rather than by direct cash outlays. The rules are used to subsidize a wide range of spending including education, child care, health insurance, and a myriad of other congressional favorites.

These tax rules — because they result in the loss of revenue that would otherwise be collected by the government — are equivalent to direct government expenditures. That’s why tax and budget experts refer to them as “tax expenditures.” This year tax expenditures will raise the federal deficit by about $1 trillion, according to estimates by the congressional Joint Committee on Taxation. If Congress is serious about cutting government spending, it has to go after many of them.

Continue reading at the Wall Street Journal (subscription required)

Wichita downtown boom could be over before it starts

As Wichita moves towards the release of the plan for the revitalization of its downtown, urban planners — both local and out-of-town — tell us that there’s a big demand for downtown living. People are tired of suburban living, they say. The recent draft presentation by the city’s planning firm Goody Clancy contained bullet points like “who favor living and working in vibrant downtowns” and “and they are part of broad demographic trends that are much more ‘downtown friendly’ …e.g., almost two-thirds of Wichita’s households include just one or two people.”

Or, as “uber-geographer” Joel Kotkin wrote in the Wall Street Journal this week: “Pundits, planners and urban visionaries — citing everything from changing demographics, soaring energy prices, the rise of the so-called ‘creative class,’ and the need to battle global warming — have been predicting for years that America’s love affair with the suburbs will soon be over.”

But as Kotkin later writes: “But the great migration back to the city hasn’t occurred.”

Kotkin cites some figures showing the decline in the market for downtown condos in a few cities, and concludes “Behind the condo bust is a simple error: people’s stated preferences.” He shows some figures that support his contention that “Demographic trends, including an oft-predicted tsunami of Baby Boom ’empty nesters’ to urban cores, have been misread.”

These demographic trends are behind the analysis that Goody Clancy uses to promote its vision for downtown Wichita. Kotkin’s research ought to give us concern that downtown visionaries are leading Wichita down a path that really isn’t there.

Kotkin issues a note of caution for urban planners: “The condo bust should provide a cautionary tale for developers, planners and the urban political class, particularly those political ‘progressives’ who favor using regulatory and fiscal tools to promote urban densification. It is simply delusional to try forcing a market beyond proven demand.”

What does this mean for Wichita? Wichita’s planners and leaders are promoting a light-handed approach to downtown development, saying, for example, that public financing will be only for public purposes. But Wichita has a history of heavy-handed interventionism in markets, using economic development tools of all types. And as the mayor recently said at a council meeting, he’s recently learned of new types of incentive programs that other cities are using.

So I think Wichita’s leaders definitely will use the “regulatory and fiscal tools” that Kotkin warns of. It’s only without government intervention that we’ll know whether Wichitans really prefer suburban, downtown, or other forms of living. Urban planners and city hall bureaucrats can’t tell us that.

The Myth of the Back-to-the-City Migration

The condo bust should lay to rest the notion that the American love affair with suburbia is over.

Pundits, planners and urban visionaries—citing everything from changing demographics, soaring energy prices, the rise of the so-called “creative class,” and the need to battle global warming—have been predicting for years that America’s love affair with the suburbs will soon be over. Their voices have grown louder since the onset of the housing crisis. Suburban neighborhoods, as the Atlantic magazine put it in March 2008, would morph into “the new slums” as people trek back to dense urban spaces.

But the great migration back to the city hasn’t occurred. Over the past decade the percentage of Americans living in suburbs and single-family homes has increased. Meanwhile, demographer Wendell Cox’s analysis of census figures show that a much-celebrated rise in the percentage of multifamily housing peaked at 40% of all new housing permits in 2008, and it has since fallen to below 20% of the total, slightly lower than in 2000.

Continue reading at the Wall Street Journal (subscription required) or at Kotkin’s website.

In Kansas Legislature, a bad year for freedom and liberty

It was a bad year for economic freedom in the Kansas Legislature. There were the big votes that most people know of — the big-spending budget, the increase in the sales tax, and the statewide smoking ban — but the legislature passed — and the governor signed — many other laws that chip away at personal liberty and economic freedom. The following list contains many of these bills.

This list was produced by Bob Corkins of Kansas Votes, a project of the Kansas Policy Institute. It contains only bills that were enacted into law. There were, of course, some bad bills that didn’t make it all the way through the lawmaking process.

Corkins said that 2010 was the worst session for personal liberty that he could think of in more than two decades of working in the Kansas Statehouse. In many cases these bills had broad support among conservatives.

Some of these bills are concerned with what people might consider to be minor, unimportant matters. But the legislature thought they were important enough to be the subject of legislation. And while some might seem to chip away at personal liberty and economic freedom in small, insignificant ways, taken together over years, it all adds up.

Further, when lawmakers pass laws like this and no one complains, and when they get re-elected year after year, it emboldens them to take on bigger challenges to personal liberty and economic freedom, like increasing sales or other taxes. It hardens their resolve to block expansions of economic freedom like school choice programs.

An example of a bill contrary to personal liberty and economic freedom is House Bill 2130, which requires every occupant of a car to wear a safety belt. Now I happen to think seat belts are a great idea. I always wear mine and ask everyone in my car to wear theirs. But it’s a different matter when the state requires their use. It’s an example of lawmakers trying to protect us from ourselves. Once they start down this road, it’s very difficult for them to stop.

I’m aware of the argument that says because automobile accidents produce serious and costly injuries that drive up the cost of health care for everyone, and seat belt use reduces the severity of these injuries, we ought to regulate the behavior of people by requiring use of seat belts. We can expect to see arguments made like this more often as our nation moves towards greater collectivization of health care and its costs. What we ought to do, however, is reverse this trend in health care.

An example of a move away from a uniform tax system is House Bill 2554, authorizing the PEAK (Promoting Employment Across Kansas) program. This program allows certain employers to keep most of the withholding tax their employees pay. Programs like this are contrary to economic freedom because, in this case, we have the state deciding how to direct resources. An alternative that is in harmony with economic freedom is to rely on free markets for this guidance. Besides being contrary to economic freedom, there is scant evidence that economic development programs like this work, in terms of increasing overall prosperity.

Don’t think for a moment, however, that conservative Kansas legislators rose in opposition to this bill and its intervention into free markets. In the Senate, the bill passed 40 to zero. In the House, the bill passed 109 to 12. Of the 12 votes in opposition, eleven were from Democrats who mostly have far-left voting records. Brenda Landwehr was the only Republican to vote against this bill.

Another example of government intervention in markets is Senate Bill 430, which restored and boosted a historic preservation tax credit program. In my testimony to a House committee on this bill, I said “We must recognize that a tax credit is an appropriation of Kansans’ money made through the tax system. If the legislature is not comfortable with writing a developer a check for over $1,000,000 — as in the case with one Wichita developer — it should not make a roundabout contribution through the tax system that has the same economic impact on the state’s finances.”

Principles of economic freedom and personal liberty contend that the state should not be spending this money, whether through direct appropriations or the tax system. Very few conservatives voted against this bill on these principles.

The following list of enacted bills is ordered, Corkins says, from the “most atrocious to the merely very bad.” Each bill is linked to its page on Kansas Votes.

Senate Bill 572 (Propose state budget for 2011)
to approve a state budget that would authorize total spending for the current 2010 fiscal year of $5.416 billion in State General Fund spending (SGF, that portion of the budget paid primarily with state-imposed sales and income taxes) and $14.414 billion from All Funds (including SGF, federal aid, and state agency fees), and for spending $5.621 billion SGF and $13.685 from All Funds in fiscal year 2011.

House Bill 2360 (Increase state sales, income taxes)
to enact a state sales tax increase from the current 5.3 percent up to 6.3 percent, amend the Kansas Taxpayer Transparency Act, expand the food sales tax rebate program, and expand the state earned income tax credit (EITC) program.

House Bill 2221 (Ban smoking in public and workplaces)
to ban smoking in enclosed areas, including all public places, any placy of employment, taxicabs, hallways and more, but would not apply to outdoor areas, private residences, hotel or motel rooms, tobacco shops, certain private clubs and casino gaming floors.

House Bill 2320 (Impose nursing home tax)
to create a provider assessment tax on nearly all licensed beds within skilled nursing care facilities in the state of Kansas; deem the Kansas Health Policy Authority to be the state agency to calculate and implement the provider assessment; establish a Quality Care Fund where all assessments and penalties collected through the assessment program would be deposited; and, establish a Quality Care Improvement Panel.

House Bill 2356 (Increase state inspections of child care facilities)
to adopt “Lexie’s law” requiring the Department of Health and Environment to inspect every child care facility once every 15 months. The inspection frequency of a family child care home following an initial inspection will be at intervals that the department determines to be appropriate to assess the health, safety and well-being of children being cared for in the family child care home. In addition, to open certain records to the public regarding the identity of maternity center, family day care home, and child care facility licensees, but would allow the state to withhold such information if necessary to protect public health and safety or that of the facility’s patients or children.

House Bill 2130 (Mandate seat belts, allow traffic stops)
to amend state law to require every occupant of a passenger care to wear a safety belt. A law enforcement officer would now be permitted to stop a passenger car for any violation of the seat belt requirement by anyone in the front seat or anyone under 18. The fine for violations would be $5 until July 1, 2011, when it would increase to $10.

House Bill 2650 (Launch new state transportation works program)
to initiate a new state transportation works program, providing for the construction, improvement and maintenance of the state highway system; authorizing financial transfers between the State Highway Fund and the Rail Service Improvement Fund; increasing vehicle registration fees; increasing the borrowing authority of the Kansas Department of Transportation; and, pledging $8 million in transportation projects for each county in Kansas over the next 10 years.

Senate Bill 409 (Development of passenger rail service in Kansas)
to authorize the Kansas Secretary of Transportation to establish and implement a passenger rail service program in the state. To establish the program, the Secretary would enter into agreements with Amtrak and other rail operators to develop passenger rail service serving Kansas and other state. The agreements can include cost-sharing agreements and joint powers agreements. The Secretary should also enter into agreements with local jurisdictions along a proposed route. The bill also gives the Secretary authority to make loans or grants to passenger rail service providers for the purpose of restoring existing rail infrastructure, for rail economic development projects and the cost to initiate and operate passenger rail service. The bill does not specify where program funding would come from.

House Bill 2476 (Extend and increase court fees)
to increase a number of court fees and extend such judicial branch surcharges through fiscal year 2011 to fund non-judicial personnel working in the court system; the compromises recommended would alter specific fee increases for specific court actions with the fees ranging generally between $10 and $20.

Senate Bill 200 (Repeal partial HMO tax, apply full rate to all)
to repeal the partial state tax of 0.5 percent imposed on premiums charged against a few Health Maintenance Organizations so that the full one percent premiums tax would be applied uniformly against all HMOs.

House Bill 2582 (Extend and reallocate e-911 tax revenue to locals)
to delay for one year — until July, 1, 2011 — a provision in current law that discontinues the wireless enhanced 911 grant fee and the VoIP enhanced 911 grant fee, abolishes the wireless enhanced 911 advisory board and the grant fund, and that directs the distribution of the unobligated balance in the grant fund to public safety answering points (PSAPs).

House Bill 2554 (Expand tax incentives for hiring new workers)
expanding the PEAK program (Promoting Employment Across Kansas) by liberalizing its definitions, relaxing its requirements so that a company would be eligible if it relocated or expanded a portion of its business operations into the state, permitting qualified companies to retain 95 percent of the employees’ withholding taxes if the median wage paid to the new employees at least equals that paid throughout the county, and by requiring an independent evaluation of economic development incentives administered by the Kansas Department of Commerce.

House Bill 2226 (Change earmarks of traffic fine revenue, increase fines)
to increase the fine assessed on traffic infractions that are on the uniform fine schedule by $15. The revenue generated by the increased fines would be distributed to several justice related programs, including the Crime Victims Compensation Fund, the Crime Victims Assistance Fund, the Community Alcoholism and Intoxication Programs Fund, the Boating Fee Fund, the Children’s Advocacy Center Fund, and the criminal justice information system line fund.

Senate Bill 430 (Limit use of certain tax credits)
make a 10 percent cut in certain income tax credits permitted under current law; repeal a $3.75 million cap that had been imposed on historic preservation income tax credits; make statutory amendments needed for Kansas to remain in national compliance with the streamlined sales tax act; impose a $10 fee for delinquent taxpayers who enter into an installment payment plan agreement in excess of 90 days from the date of the payment plan agreement; and, people with intangibles tax liability would be required to file their returns with county clerks, rather than the Department of Revenue.

House Bill 2501 (Allow exemption from liability limit on mortgage insurers)
to allow the Kansas Department of Insurance to waive (at the sole discretion of the Commissioner of Insurance) the current requirement that a mortgage guaranty insurance company must have a total liability that does not exceed 25 times its capital, surplus and contingency reserve; to amend the definition of “RBC instruction” to mean risk-based capital instructions promulgated by a specified national insurance association; to prohibit firms that offer health care plans from requiring or requesting genetic tests, and prohibiting insurance companies from charging a higher premium because of any genetic test results; and, to grant rights to insurance customers in seeking special exceptions for cases in which their credit histories may affect their insurance coverage, allowing any such customer who experiences an “extraordinary life circumstance” that hurts their credit, and thereby causes an adverse insurance action, to obtain reasonable exceptions to the insurer’s rates.

House Bill 2485 (Increase evaluation period for trucking licenses)
to increase the time period from the current 12 up to 18 months for the Kansas Corporation Commission to verify a trucking company’s fitness and regulatory compliance for its continued operation.

House Bill 2472 (Specify rights in common interest communities)
to enact a set of rights and duties regarding people who live in common interest communities such as associations of apartment owners, but not owners currently and similarly bound by covenants unless they agree otherwise – setting forth duties in such communities regarding bylaws, owner voting rights, dispute resolutions, access to property, borrowing money, communications with owners, recordkeeping, and other matters; to prohibit until July 1, 2011, any city from adopting or enforcing any rule requiring the installation of a multi-purpose residential fire protection sprinkler system; and, to decrease down to 90 days, but permit a court to extend to up to 180 days, a compliance period for an abandoned property owner to carry out a rehabilitation plan where the property is brought into compliance with fire, housing and building codes and current on all ad valorem property tax owed, and to reduce from three to two years the time a person who purchases a house from an organization that has rehabilitated an abandoned property must occupy the house.

Senate Bill 389 (Compensation to dentists in health insurance plans)
to only permit a health insurance plan — including any individual health insurance policy, the State Children’s Health Insurance Plan and the state Medicaid program — to set fees for covered services (and not for uncovered services)provided by a dentist who is a participating provider in the plan.

Senate Bill 377 (Regulate retainage in construction contracts)
to prohibit an owner, contractor or subcontractor from withholding more than a five percent limit on the contract as retainage (money withheld to ensure proper work performance); to require release of retainage on an undisputed payment within 30 days after substantial completion of the project; to permit no more than 150 percent of the value of incomplete work, due to a contractor or subcontractor, to be withheld by an owner or contractor and require it be paid within 45 after completion of the work; and, to permit a general contractor to request an alternative security in lieu of retainage, such as an irrevocable bank letter or credit, certificate of deposit or cash bond.

Senate Bill 373 (Amending application of municipal court fees)
to require a $19 municipal court fee be imposed uniformly statewide in each case filed in municipal court, other than a nonmoving traffic violation, where there is a finding of guilty, a plea of guilty, a plea of no contest, or a forfeiture of bond or a diversion.

House Bill 2433 (Liberalize school purchasing process, Prison sales)
to allow all state educational institutions more independence in choosing how they acquire goods, supplies, equipment, services and land leases without the need to route acquisitions through the Kansas State Director of Purchases; and, to authorize the Department of Corrections for the next three years to sell prison-made goods to private citizens and businesses in Kansas.

House Bill 2415 (Exempt universities from surplus property law)
to exempt the six Kansas Regents universities from the current duty to dispose of any of their personal property through the terms of the Kansas Surplus Property Act. That law ordinarily makes the goods available for sale to the general public.

House Bill 2411 (Criminalize incense, “K2”)
to criminalize the unauthorized use or possession of certain chemicals known as “K2”, BZP and TFMPP that have been added to herbs and incense to produce hallucinogenic effects when inhaled or consumed.

House Bill 2353 (Ratify local sales tax vote for jail)
to retroactively validate a local election last year in Chautauqua County to impose a countywide sales tax where money raised would pay for a new county jail and law enforcement facility.

House Bill 2160 (Require state workers’ health plan to cover autism)
to require the state employees’ health plan to cover services for the diagnosis and treatment of autism spectrum disorders in any covered person less than 19 years old, and to require health insurance policies include coverage provisions for orally administered anti-cancer medications.

Senate Bill 83 (Require licensure of naturopathic doctors)
to change the regulatory status of naturopathic doctors with the Board of Healing Arts from registrants to licensees and to permit naturopaths to form professional corporations; and, to include two licensure categories — “exempt license” and “federally active license” — in the Physical Therapy Practice Act.

Hayek’s star on the rise, sometimes

Partly due to Glenn Beck’s interest, a book and its ideas is receiving increased attention. F.A. Hayek is the author, and The Road to Serfdom is the book.

Personally, I find the book difficult to read. An example of Hayek’s writing is from the jacket notes prepared by the author himself: “The economic freedom which is the prerequisite of any other freedom cannot be the freedom from economic care which the socialists promise us and which can be obtained only by relieving the individual at the same time of the necessity and of the power of choice: it must be the freedom of economic activity which, with the right of choice, inevitably also carries the risk and the responsibility of that right.”

Someone else might have written: “A socialist government that provides for our needs doesn’t make us free. Freedom, both economic and political, comes from having choices and the power to exercise them. With that comes responsibility and risk.”

I might suggest interested readers look to The Reader’s Digest condensed version of The Road to Serfdom, which may be purchased or read online at the Institute of Economic Affairs. The forward by Walter E. Williams is especially valuable.

(Hayek’s realization of the importance of economic freedom is one of the reasons why I named my analysis of votes of the Kansas Legislature the Kansas Economic Freedom Index.)

This week George Mason University’s Russell Roberts wrote about The Road to Serfdom in the pages of the Wall Street Journal. The article, titled Why Friedrich Hayek Is Making a Comeback and available only to subscribers, lists four of Hayek’s important ideas:

First, “[Hayek] and fellow Austrian School economists such as Ludwig Von Mises argued that the economy is more complicated than the simple Keynesian story.”

Second, Hayek recognized the Federal Reserve’s control of monetary policy as a factor in the business cycle. Applied to current events, Roberts writes: “Former Fed Chairman Alan Greenspan’s artificially low rates of 2002-2004 played a crucial role in inflating the housing bubble and distorting other investment decisions. Current monetary policy postpones the adjustments needed to heal the housing market.”

Third, “political freedom and economic freedom are inextricably intertwined. In a centrally planned economy, the state inevitably infringes on what we do, what we enjoy, and where we live.”

Fourth, “order can emerge not just from the top down but from the bottom up. … Hayek understood that the opposite of top-down collectivism was not selfishness and egotism. A free modern society is all about cooperation. We join with others to produce the goods and services we enjoy, all without top-down direction. The same is true in every sphere of activity that makes life meaningful — when we sing and when we dance, when we play and when we pray. Leaving us free to join with others as we see fit — in our work and in our play — is the road to true and lasting prosperity. Hayek gave us that map.”

In Wichita, we see the importance of economic freedom ignored — trampled upon, I might say — on a regular basis as the City of Wichita seeks to direct economic development in our town from city hall. We are entering an especially dangerous period, as the master plan for the revitalization of downtown Wichita will soon be in place. This form of centralized planning by government is precisely what Hayek warns against.

Why Friedrich Hayek Is Making a Comeback

With the failure of Keynesian stimulus, the late Austrian economist’s ideas on state power and crony capitalism are getting a new hearing.

By Russ Roberts

He was born in the 19th century, wrote his most influential book more than 65 years ago, and he’s not quite as well known or beloved as the sexy Mexican actress who shares his last name. Yet somehow, Friedrich Hayek is on the rise.

When Glenn Beck recently explored Hayek’s classic, “The Road to Serfdom,” on his TV show, the book went to No. 1 on Amazon and remains in the top 10. Hayek’s persona co-starred with his old sparring partner John Maynard Keynes in a rap video “Fear the Boom and Bust” that has been viewed over 1.4 million times on YouTube and subtitled in 10 languages.

Why the sudden interest in the ideas of a Vienna-born, Nobel Prize-winning economist largely forgotten by mainstream economists?

Continue reading at the Wall Street Journal (subscription required)

Wichita downtown master plan meetings scheduled

Recently planning firm Goody Clancy presented the master plan for the revitalization of downtown Wichita. This plan is in “draft” form, meaning that input is being solicited, with revisions appearing in the final version expected to be ready in September.

In order that citizens may become familiar with the draft plan, the Wichita Downtown Development Corporation, the City of Wichita, and Visioneering Wichita will present the plan at a series of community meetings. The schedule is:

July 7: Atwater Neighborhood City Hall (2755 E. 19th St. N.)
July 8: Evergreen Library (2601 N. Arkansas)
July 12: Haysville Public Library (210 S. Hays)
July 13: Bel Aire City Hall (7651 E. Central Park Ave.)
July 14: Derby City Hall (611 Mulberry)
July 19: 1st United Methodist Church (330 N. Broadway) Meredith Room
July 20: WSU Metroplex (5015 E. 29th St. N.) Entrance C
July 21: Sedgwick County Extension (7001 W. 21st St.)

All meetings begin at 7:00 pm.

Wichita should follow Lawrence’s lead in tax warnings

Is there a point where sales taxes become so high that consumers need to be warned?

Sales tax is already high in the northeast Kansas college town of Lawrence, home to the University of Kansas Jayhawks. After July 1, the combined sales tax rate — state, county, and city — will be 8.85 percent.

Lawrence has two districts where an extra one cent per dollar is added to that. Like Wichita, Lawrence is considering creating Community Improvement Districts, where merchants add up to another two cents per dollar in sales tax. The proceeds of that extra sales tax go to the exclusive benefit of the district.

In Lawrence, therefore, the sales tax in some parts of town could reach 10.85 percent. On in round numbers, eleven cents per dollar spent.

That has the mayor and some city council members concerned, according to reporting in the Lawrence Journal-World. According to the article: “Commissioners said they have heard multiple concerns from residents who fear they may buy products at locations without knowing they are paying the extra tax.”

That’s a problem. Most people are generally aware of their state’s sales tax rate, and of that in the city where they live. But shoppers are just starting to realize that different stores in a city may charge different sales tax rates. A Kansas Reporter story has more on this.

So the issue is this: should high-tax zones be required to post signage warning shoppers that they’ll pay more sales tax by shopping there?

Some in Lawrence are worried that the signs are bad for business, both within the high-tax districts, but also for the city as a whole. I think they’re right: taxes — and the realization thereof — are bad for business and consumers.

In Wichita, the only community improvement district approved so far is for a hotel. According to Wichita City Council Member and Vice Mayor Jeff Longwell, the fact that the extra sales tax will be paid almost exclusively by visitors to our city is a wise economic development strategy.

With or without signs warning of high sales tax districts, local shoppers will eventually learn where these districts exist. Our out-of-town visitors, however, probably won’t learn of the high tax rates until they receive their bill. Then, one of two realizations will set in: They’ll either curse themselves for staying at a hotel in a special high-tax district, or they they may form an impression that sales tax is very high in the entire City of Wichita or State of Kansas.

Either way, Longwell’s soak-the-visitors tax strategy isn’t likely to make Wichita many friends.

Letters on Wichita Bowllagio

Letters recently appeared in the Wichita Eagle regarding the proposed Bowllagio project, a west side entertainment destination. Bowllagio is planned to have a bowling and entertainment center, a boutique hotel, and a restaurant owned by a celebrity television chef.

The developers of this project propose to make use of $13 million in STAR bond financing. STAR bonds are issued for the immediate benefit of the developers, with the sales tax collected in the district used to pay off the bonds. The project also proposes to be a Community Improvement District, which allows an additional two cents per dollar to be collected in sales tax, again for the benefit of the district.

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Property rights

Imagine paying your mortgage and taxes for many years, only to get a knock on your door one day. A real estate developer tells you he wants your land.

That’s what happened to a couple on South Maize Road in the boundaries of the proposed Bowllagio sales-tax-and-revenue (STAR) bonds district. They were offered the county-appraised value, plus 10 percent, for their home. But they don’t want to move, as they couldn’t find a comparable property for what the developer offered.

Now the homeowners are concerned they may be forced out of their home through the process of eminent domain. This forceful taking of property by government is one of the worst possible violations of private property rights.

Wichita Mayor Carl Brewer said that the city does not intend to use eminent domain for the proposed Bowllagio entertainment complex.

That’s good news. The city can and should affirm this promise by writing it into the Bowllagio authorizing ordinance. Supporting private property rights is essential; the use of public funds for private projects is bad policy.

Susan Oliver Estes
Wichita

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Let developer fill funding gap

Bowllagio’s representative told the Wichita City Council last week that the developer needed $13 million in public money to fill the projected funding shortfall for the project to be economically feasible. I believe the developer needs to dig deeper into his own pocket to fill this funding gap, or seek private venture capital.

As an experienced real estate practitioner, I am aggrieved that the Wichita mayor and City Council members lack the necessary experience to properly evaluate these projects. They have proved to be little match in protecting the public treasury against sophisticated developers accustomed to using the public purse as part of their real estate funding formulas.

The investment of public money in bowling alleys, restaurants, shops and hotels that compete with existing businesses that offer the same services is not a proper role for government to play and is wrong. It creates an unlevel playing field for those businesses that compete in the same market using their own money.

If the Bowllagio development venture is an economically feasible project, the private developer will find the private money he needs to fund it.

John R. Todd
Wichita

Wichita economic development official to speak

This Friday (June 18) Vicki Pratt Gerbino, president of the Greater Wichita Economic Development Coalition, will address members and guests of the Wichita Pachyderm Club.

The Greater Wichita Economic Development Coalition, also known as GWEDC, is responsible for economic development in the Wichita area, such as recruitment and retention of “economic driver industries” in Wichita and Sedgwick County.

All are welcome to attend Wichita Pachyderm Club meetings. The program costs $10, which includes a delicious buffet lunch including salad, soup, two main dishes, and ice tea and coffee. The meeting starts at noon, although it’s recommended to arrive fifteen minutes early to get your lunch before the program starts.

The Wichita Petroleum Club is on the ninth floor of the Bank of America Building at 100 N. Broadway (north side of Douglas between Topeka and Broadway) in Wichita, Kansas (click for a map and directions). You may park in the garage (enter west side of Broadway between Douglas and First Streets) and use the sky walk to enter the Bank of America building. The Petroleum Club will stamp your parking ticket and the fee will be only $1.00. Or, there is usually some metered and free street parking nearby.

Wichita Bowllagio hearing produces only delay

Yesterday’s meeting of the Wichita City Council featured a lengthy public hearing for a proposed west-side entertainment development known as Bowllagio. Bowllagio is planned to have a bowling and entertainment center, a boutique hotel, and a restaurant owned by a celebrity television chef.

The developers of this project propose to make use of $13 million in STAR bond financing. STAR bonds are issued for the immediate benefit of the developers, with the sales tax collected in the district used to pay off the bonds. The project also proposes to be a Community Improvement District, which allows an additional two cents per dollar to be collected in sales tax, again for the benefit of the district.

The Kansas STAR bond process calls for several steps: First, a local governing body, like the City of Wichita, must approve the concept and set boundaries for the project. This is what yesterday’s agenda item called for. If approved by the council, the Kansas Secretary of Commerce would examine the project to see if it meets statutory criteria. If the Secretary approves the project, the city is then required to prepare a project plan and hold another public hearing concerning whether to adopt the project plan. The project plan must be passed by a two-thirds supermajority of the council.

One of the elements of the project plan, according to the 2010 Kansas Legislator Briefing Book, is a “marketing study conducted to examine the impact of the special bond project on similar businesses in the projected market area.” The effect of Bowllagio on existing Wichita-area businesses was a major source of concern for both council members and citizens speaking at the public hearing.

Speaking during the public hearing, Ray Baty, who is manager of a Wichita bowling center, said Bowllagio is not a new concept, but rather one that would compete with existing programs already in Wichita. The C.A.T.S. system, a training system promoted by Bowllagio developers, is actually a portable system, Baty said.

He contended that introduction of Bowllagio to the market will not grow the market for bowling, but will further divide the existing market, resulting in a loss of revenue and profit for existing bowling centers. He said that bowling centers lose six percent of their customers each year, a trend that he said is national.

Frank DeSocio, owner of several bowling centers in Wichita, told the council that the bowling training promoted by Bowllagio developers already happens in Wichita at the present. He mentioned five full-time bowling teachers and coaches already working in Wichita bowling centers.

He added that Wichita does very well in obtaining and hosting tournaments, mentioning 17 PBA live televised tournaments that took place in Wichita, 10 regional events, a BPA womens’ open, six intercollegiate championships that were televised live, and numerous Kansas state high school championships.

“Everything the Maxwell Group [developer of Bowllagio] claims they want to do is already being done in Wichita by the current bowling centers,” qualifying that he’s speaking only of the bowling side of the Bowllagio proposal, not the restaurants.

In my remarks to the council, I mentioned that Wichita has had examples of restaurants or other establishments being announced — sometimes by the mayor in his annual state of the city address — but then the development failed to materialize. I expressed concern that we might commit to a large amount of STAR bond financing based on big plans that never advance beyond some small initial stage.

Susan Estes told the council that “this is an extremely profound day” for the City of Wichita. She asked will the city help one business owner over another business owner in the same industry? She said that Bowllagio has some unique aspects, but it is a bowling alley. Its other entertainment features are also available in Wichita. We are using tax money to compete against existing businesses, she said.

In response to a question by a homeowner in the project area, the mayor, indicating he believed he speaks for the council, said the council would not support using eminent domain to remove the homeowner from his home.

During discussion by council members, a subject of controversy was whether approving project boundaries and forwarding the application to the Secretary of Commerce constitutes an endorsement of the project by the City of Wichita. Some council members wanted to pass an ordinance that would establish the boundaries of the district, and then have the Secretary decide whether the project meets the statutory requirements for a STAR bond project. Wichita economic development director Allen Bell mentioned that the council’s endorsement of the project might be a factor the Secretary would consider in determining whether to approve the project.

A question from Council Member Lavonta Williams elicited Bell’s further opinion that the Secretary is “looking for a signal from the council” regarding its support for the project. Lack of local support, he added, would be taken in a “negative way.” Council Member Paul Gray agreed with this assessment.

Vice Mayor Jeff Longwell disagreed, saying that all the Secretary needs is a geographic boundary for the proposed project. He contended that the process starts with setting the boundaries, and that other questions are difficult or impossible to answer without doing this. There are too many unknowns, he added, to give this project a formal endorsement at this time.

Longwell also mentioned a report that showed that the south-central region of Kansas, which includes Wichita, receives fewer state economic development funds, relative to population, than the northeast Kansas region. He said we needed to “equal the playing field.”

Longwell said he didn’t want to put together a package that would harm existing businesses, saying he wouldn’t vote for the project if an independent study showed that result would happen.

Council Member Jim Skelton asked about the property taxes the development would pay. Bell replied that the property taxes should increase by a large amount, as the land is vacant now and is planned to receive $95 million of development. He said that while STAR bonds and Community Improvement District financing is proposed for this development, the plan does not include property tax abatements, industrial revenue bonds, tax increment financing, or any other diversion of property taxes.

Council Member Janet Miller asked if the Kansas STAR bond statutes prohibited adding these other types of incentives to the project. The answer, according to Bell, is that these programs could be added on to this development, as has been done in some Kansas STAR bond districts.

Later Miller referred to the “lack of information to make an education decision about the project.” She wondered why the developers would not spend “one-tenth of one percent of their $50 million dollar investment” ($50,000) to produce the studies that would give the council the information it needs to decide whether to send the project to the Secretary of Commerce with its support.

When City Manager Bob Layton suggested a delay to gather more information from the developers, council members readily agreed. Layton said that city staff will visit with the developers, looking for an approach that will make council members comfortable with proceeding, addressing some of the information needs expressed today.

Due to scheduling, Layton said that this matter would need to appear on next week’s agenda, or there would be a one month delay before it could be considered at a council meeting.

The council voted unanimously to defer the item for one week, and to keep open the public hearing.

Analysis

An important issue to many council members is the potential harmful affect of Bowllagio on existing businesses, particularly bowling centers. Miller’s suggestion that the developers spend the money to have an independent assessment of this performed is entirely sensible.

But I don’t think a study of that scope can be performed in one week. As it is now, the city will probably rely on information provided by the developers. It must be recognized that they have a $13 million incentive to produce information favorable to their cause. In his remarks, Gray recognized that proof that Bowllagio will not harm existing businesses will not come from “somebody advocating for the project.” It would require a third-party, independent analysis, he said.

As of now, it is difficult to see how information that will satisfy council members can be produced by next week’s meeting.

In my opinion, the local bowling center operators are justifiably concerned that a subsidized competitor will harm their business. They were able to show that many of the purportedly unique aspects of the Bowllagio concept are already available in Wichita, and have been for some time.

Further, it’s not only direct competitors such as bowling centers that we need to be concerned for. Since the development is proposed to include a Mexican restaurant, what will its impact be on existing Mexican restaurants? And not only restaurants offering that cuisine, but all other restaurants?

In a broader sense, a subsidized business competes with all other businesses in the market for employees and other goods and services that all business firms purchase.

Longwell’s contention that we can still “kill” the project at a later date if reports come back showing negative impact on local businesses is, in my opinion, an empty promise. If the Kansas Secretary of Commerce approves this project, it would be very difficult for the council to vote against Wichita receiving $13 million in state tax dollars, especially in light of Longwell’s argument that the Wichita area doesn’t receive nearly enough of this economic development money.

While council members such as Schlapp say they’re in favor of free markets, she and the other council members nearly always vote in favor of intervention in markets. The fact that the city council members have so many questions about the proposal tells us that this plan is, in fact, a form of centralized planning by government.

As I remarked to the council, developments such as this are portrayed as a success story, in that someone has confidence in Wichita because they’re investing here. But I wonder why these people won’t invest in Wichita unless they receive millions in payments or tax forgiveness from the city, county, school board, and/or state.

Aren’t the real heroes in Wichita the people — many of them small business owners — who invest in Wichita without the benefit of TIF districts, tax abatements, STAR bonds, or other forms of subsidy or incentive?

These people, besides facing subsidized competition, additionally have to pay the taxes that make the subsidies to others possible.

Regarding the mayor’s statement that eminent domain will not be supported for this project: Kansas law does not prohibit the use of eminent domain to acquire property in a STAR bond district (K.S.A. 12-17,172).

If the city wants to assure property owners that their property will not be subject to seizure by eminent domain, the city can add language to that effect in the ordinance. With four city council positions — including the mayorship — up for election next spring, it’s possible that a future city council might not be opposed to the use of eminent domain. This change could take place during the time Bowllagio developers are acquiring property. An ordinance would help prevent this from happening.

Similarly, if it is not the intent of the developers to seek additional forms of subsidy such as tax increment financing or property tax abatements, appropriate language could be added to the authorizing ordinance.

Wichita Warren Theater groundbreaking raises policy issues

Friday’s groundbreaking of a new Warren Theater and renovation of the existing theater in west Wichita provide an opportunity to revisit some of the public policy issues surrounding Wichita city government and its intervention in the economy in the name of economic development.

Wichita Mayor Carl Brewer and Vice Mayor Jeff Longwell claim that the economic development incentives or subsidies offered to Warren do not cost Wichita taxpayers anything.

Reading comments left to stories at various media outlets, there is definitely a problem with citizens understanding the nature of the city’s industrial revenue bond program. There is no money being lent by the city, as many citizens seem to believe. Instead, the benefit of the program is the escape from paying property taxes and possibly sales taxes. The fact that tax forgiveness is mixed in with a private loan or bond purchase is definitely a source of confusion. The city should seek to simplify this program, if it intends to continue this practice.

But what about the claim that tax forgiveness does not cost other taxpayers? Will the new theater make use of city services such as fire and police protection? Will employees of the theater send their children to public schools? Vice mayor Longwell says that the city is not adding new police officers because of the new theater, so there is no additional cost for police protection. At the margin, that may be true — each additional house or building does not require a new policeman be hired. But at some time, additional city services and personnel will be required.

The city’s practice of liberally granting tax abatements goes against the constant refrain that we must “build up the tax base.” The city’s position is that by “investing” in tax breaks, the city will gain more revenue in the future.

The fallacy of the city’s investment philosophy can easily be seen. When the city grants tax abatements, there is a cost-benefit analysis that accompanies the proposal. The rationale of this analysis that by giving up tax revenue now, more will flow in at some future time.

That’s the source of the fallacy. The return to the city and other governmental units is more tax revenue. Is it the purpose of the city to generate more and more tax revenue? Is it productive to grant one taxpayer favored status so that other hapless taxpayers can be soaked instead?

When a business invests, it does so in order to increase its productive capacity so that it can earn higher future profits, those profits — or losses — being the measure of success of the investment. Government has no ability to calculate profit and loss, and therefore has no way to judge whether its investment has been wise and productive.

There is also, of course, the concept that private business investment is voluntary, while the action the city takes is not voluntary. Citizens must comply.

The companies that receive tax breaks are often prominent companies that ask for large tax abatements. It is worth considerable time and effort — and campaign contributions — for these companies to pursue these benefits. Small companies, however, often don’t fit into the various programs the city has. Instead, they face additional taxes to pay for the taxes the city doesn’t collect when it grants incentives and subsidies.

Recently Alan Cobb wrote of the harm that targeted incentives cause, using Detroit as an example: “While state and local government poured incentives into the Big Three’s trough, the marginal costs of doing business for everyone else crept up.” See Wichita targeted economic development should end.

An aspect of the incentive or subsidy package granted in this case is a fixed, negotiated, growth in property taxes the renovated theater will pay. There are a few points that deserve discussion. First, the base taxable value for the theater is the present value. The theater owner, however, is spending several million dollars on a renovation of that theater. This, according to the Sedgwick County Appraisers Office, would increase the taxable value of the theater by a large amount.

But based on the deal struck with the City of Wichita, this increase in value will not figure into the base taxable value and therefore, will not affect the taxes (PILOT, actually) the theater owner will pay.

Further, the rate of growth in value, 2.3 percent per year, is lower than what might be expected for commercial property to increase in value in many years. This fixed, predictable rate of growth is reminiscent of last year’s Proposition K proposal. The Wichita Eagle rejected this proposal, editorializing: “Over time, this system could result in significant disparities and a disconnect from actual market values, thus likely violating the Kansas Constitution’s requirement of a ‘uniform and equal basis of valuation.'”

But in this case one politically-favored business was able to receive this benefit. These special deals breed justifiable cynicism and distrust of not only City Hall politicians and bureaucrats but businesses that seek this form of pork-barrel spending through the tax system.

Finally, the payments the existing theater will make are not taxes, but payment in lieu of taxes, or PILOT. These payments are different in character from regular property taxes. Instead of falling under the Kansas property tax law regarding payment and possible sale of the property to pay taxes if the taxpayer falls behind for long enough, PILOTS are more in the form of a contract between the city and the taxpayer. If the taxpayer were to fail to pay, the city would have to sue for breach of contract. If the city should prevail in such a suit, it would stand in line with other creditors instead of taking a preferred position as in a tax sale.

This is, of course, assuming the city would choose to pursue such a lawsuit. Nothing would require it to do so. As the city has in the past bailed out this theater owner with a no-interest and low-interest loan, we could easily imagine the city deciding to let these missing or late PILOT payments slide by.

This too assumes that failure to pay PILOT payments as agreed would become public knowledge. The Sedgwick County Treasurer’s office prints lists of delinquent property taxpayers. There is no corresponding list of delinquent PILOT payments.

Southwest Airlines topic of Wichita Eagle article

Sunday’s Wichita Eagle carried a story featuring local elected officials’ reaction to the possibility that Southwest Airlines would start service to Wichita. (City, county officials cautiously weigh subsidy for Southwest Airlines, May 30, 2010)

A source of controversy is over the payments of public funds that are thought to be necessary to acquire the service. The Eagle article quotes an unnamed source as saying it would take about $3 million in public funds to “get the service up and running.” It is not disclosed whether this is a one-time requirement, or if this is $3 million per year for some specific period, or perhaps forever.

Wichitans may want to remember that the subsidy paid to AirTran started small and was promoted as a temporary measure until the airline could establish itself in Wichita. The program, however, has grown to a combined $7 million annual payment from the state, county, and city. It seems unlikely that this number will ever drop.

At one time Wichita was a city known for its entrepreneurs. But recently the New York Times noted that Wichita is known as a “pioneer in the business of paying airlines to continue service.”

An interesting tidbit in the Eagle story is Wichita City Council Member Sue Schlapp making a distinction between a “subsidy” and an “incentive.” What we offer to Southwest would be an incentive, not a subsidy, she said.

The overall tone of the article is that Wichita City Council Members and Sedgwick County Commissioners are making a show of concern, wanting to be “realistic,” desiring more details and something “reasonable and feasible.”

Despite this show of concern and prudence, if this matter comes before these bodies, I’ll be surprised if even one member votes against it.

One thing this article did not mention is that Charleston, South Carolina was able to lure Southwest without having to pay a subsidy.

By way of comparison, the Wichita metropolitan area population is 612,683 (2009 estimate), while the Charleston-North Charleston-Summerville, metropolitan area populations is 659,191. In 2008, there were 780,756 enplanements at the Wichita airport, while there were 1,174,667 at the Charleston airport.

According to reports, the Charleston Convention and Visitors Bureau estimates a $139 million economic impact with the arrival of Southwest. An economic impact analysis has been prepared for the City of Wichita, but Wichita officials will not release it, citing an exception in the Kansas Open Records Act (KORA).

Wichita won’t release Southwest Airlines report

Research produced for the City of Wichita by a taxpayer-supported university won’t be made available to the public until a later date.

The report, produced by the Center for Economic Development and Business Research at Wichita State University, may provide analysis of the feasibility and economic impact of Southwest Airlines entering the Wichita market.

An informal request made by myself for this document, which the city escalated to a formal request under the Kansas Open Records Act (KORA), was denied. The reasoning that city legal staff provided is as follows:

“The request is denied pursuant to KSA 45-221(a)(20). The reports have not been distributed to a majority of the quorum of any body, have not been cited in a public meeting. These memoranda contain research data in the process of analysis and contain recommendations in which opinions are expressed or actions proposed.”

The portion of the statute referred to, which is one of many exceptions to the Kansas Open Records Act, reads: “Notes, preliminary drafts, research data in the process of analysis, unfunded grant proposals, memoranda, recommendations or other records in which opinions are expressed or policies or actions are proposed, except that this exemption shall not apply when such records are publicly cited or identified in an open meeting or in an agenda of an open meeting.”

It is important to recognize that the Kansas Open Records Act does not prohibit the City of Wichita from releasing this document. The law simply does not require the city to release the records.

But the city can release the document, if it wanted to. It is within the discretion of the city to do so.

Looking forward, I believe there will be a time when the document will become a public record and the city will have to supply it. I don’t know what the city accomplishes by delaying the release of it until that time. It is true that I am skeptical of the conclusions of the document as reported in the Wichita Eagle, which has obtained a copy of the report through a source other than the city.

Specifically, I would like to see the reasoning or evidence for the reported claim that the entry of Southwest will result in 7,000 additional jobs — direct and indirect — being added to the Wichita area. As I noted in previous articles, our area’s second-largest employer has just 6,000 employees. These grandiose economic development claims are difficult to believe.

Other articles on this topic:
In Wichita, will Southwest save our city?
Wichita economic development claims deserve scrutiny