Tag Archives: Economic development

Kansas state government

Wichita legislative forum highlights differences in approach to government spending

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Yesterday over 200 people packed a room at Wichita State University to attend a forum of Wichita-area Kansas state legislators. The meeting was chaired by Representative Steve Brunk, a Republican who represents Bel Aire and parts of far northeast Wichita.

One of the topics underlying much of the meeting was the subject of tax cuts to business. Proponents of government spending say the state has given up too much revenue by granting tax cuts.

Sometimes, in case of the business franchise tax, the state levies a tax simply for existing. This tax is being phased out over a five-year period starting in 2007. Government spending interests — including Governor Mark Parkinson — want to reinstate this tax, however.

There are sometimes disagreements as to what a “cut” means. In his opening remarks, Representative Jim Ward, a Democrat who represents parts of southeast Wichita and is also assistant minority leader, referred to a recent $95 million tax cut given to business, saying this is not a good thing to do when the state needs more tax revenue. Representative Brenda Landwehr, a Republican who represents parts of northwest Wichita, disagreed with Ward’s characterization.

The program referred to is an expansion of a program that lets companies keep their employees’ Kansas withholding taxes when new jobs are created. Proponents of these types of economic development incentives that are granted through the tax system argue that without the incentive, no jobs would be created, so there would be no new taxes to collect. Therefore, the program is without cost. They also often argue that the new jobs create other economic activity that is taxed, and this is a source of revenue for the state.

There is ample evidence, however, that these targeted economic development incentives often do not work as intended.

In answering one question, Landwehr referred to the Health Care Freedom Act. This possible amendment to the Kansas Constitution would allow Kansas to opt out of certain areas of possible federal health care legislation, such as the requirement that citizens purchase health insurance. Landwehr said that the issue goes back to what the Constitution and the Bill of Rights really say. Freedom and liberty are two key words, she said. “If government decides that they should be the one dictating to you what company your health issuance should be with, what benefits you should have or not have, we’re going to have less providers. … We need to be able to make these decisions ourselves.”

Addressing the number of uninsured in Kansas, Landwehr said that over half are the “invincibles” — young people 18 to 30 years old who choose not to purchase health insurance. Another segment are the underinsured.

On the recently-passed statewide smoking ban, Brunk read a question that asked “Why is smoking not bad for you in state-owned bars?” Brunk remarked that the questioner probably meant state-owned casinos, to the amusement of the audience. I thought to myself if the state can own casinos, why not bars? And if the state owned bars and taverns, would the smoking ban apply to them?

Rep. Landwehr criticized the smoking ban based on liberty, freedom, and property rights. She also mentioned problems with the bill regarding how the casino floor air — where smoking is allowed — would be kept separate from the air in the rest of the building. Representative Geraldine Flaharty, a Democrat who represents parts of south-central Wichita, said that the health issues of smoking overrode these issues.

Education, however, was the topic of interest to many in the audience.

Representative Joe McLeland, a Republican who represents parts of west Wichita and who is chairman of the House Education Budget Committee, said that education funding is a tough issue. He mentioned the large unencumbered fund balances in Kansas school districts, mentioning specifically that the Wichita school district has $252 million in its fund balances as of December. “Schools have a lot of money,” he said to disapproval of the large number of school spending advocates in the audience.

McLeland said that schools routinely transfer unspent money from the general fund — which can’t be carried forward to the next year — to other funds. These other funds generally fall into the category of restricted funds. Schools continually remind everyone that money in these restricted funds can’t be spent with the same degree of flexibility that money in unrestricted funds can. This is part of an effort by schools to treat restricted funds — which according to recent Wichita school district presentations are 59.5% of the district’s spending — as though they don’t exist and shouldn’t be counted as part of school spending.

McLeland said that this week he will introduce legislation that will reduce the number of funds from 27 to five and will prohibit transferring general fund dollars to restricted funds, including capital building funds.

McLeland also said that state law requires school districts to spend 65% of their budgets in the classroom. Since the state average is about 55%, McLeland said schools are not following this law.

Uniform accounting is a new law passed recently, McLeland said. With 293 school districts in the state, each reporting numbers differently, it is difficult to compare budgets.

McLeland also referred to the voluntary efficiency audits that school districts could participate in. The Derby school district is the only local school district that participated. The audit found that Derby instructional services spending was above average for its peers, but teacher salaries were below the peer average. McLeland said that the reason for this surprising finding couldn’t be determined due to the lack of standard accounting and reporting.

Representative Judy Loganbill, a Democrat who represents parts of east and southeast Wichita and who is also a Wichita school teacher, asked the rhetorical question “how often do you visit a school?” She mentioned the battle between unencumbered and encumbered funds. “Approximately 60 percent of a school’s budget must go to certain places. It has to. … What’s left over is where we get the unencumbered funds. … When you’re looking at your unencumbered funds, that’s where your salaries come from.”

She also mentioned the difficulty of determining what constitutes spending in the classroom. Things like transportation, utilities, books, materials — all are essential to schools, she said. She also mentioned the need to produce highly qualified and educated students to lead us into the next generation. She said that businesses don’t come into our state because of the employee withholding tax break discussed above, but because of quality of life issues like schools, good roads, and safe neighborhoods.

After a short break so that many of the legislators could leave to attend a funeral of a former legislator, Representative Kasha Kelley of Arkansas City gave an overview of the Kansas budget and the budget process.

A question to her referenced the large number of unemployed in Kansas. If tax breaks to business are such a good deal, why are there so many unemployed? Rep. Jim Ward expressed similar sentiment earlier. A proper answer to this question is that yes, there are large numbers of unemployed in Kansas at this time. Our unemployment rate is lower than the nation’s, however, and we should be grateful for that. Furthermore, we don’t know what our jobs situation would be if taxes on business had not been reduced. Since taxes in all forms are a drag on jobs creation, it is certain that there would be fewer jobs in Kansas if not for some tax reductions.

Also, some of the tax breaks given are quite small in relation to the state budget. In 2007, which is when the franchise tax reductions started, that tax brought in about $4.6 million. To place this number in some context, in February alone the state fell $71 million short of projected revenue.

Another questioner who identified himself as a former family business owner and a teacher for 12 years questioned the effectiveness of tax abatements and breaks on job creation.

One questioner criticized the state’s economic forecasts, calling for an honest assessment, perhaps by different company. It has been the case that over the past year or so, actual revenues have been significantly less than forecast. Brunk responded that the projections are developed by economists from state universities. It should be noted that economic forecasting is very difficult, and very few people foresaw the tremendous decline in the nation’s and state’s economies. If someone could forecast these things with certainty, they could make trades in financial markets that would generate very high returns.

Analysis

Regarding the claim that business tax cuts are costing the state too much lost revenue: The problem with this analysis is that it presumes that the government has first claim on the income of businesses — and people too, for that matter. Those who believe in the principle of self-ownership, meaning that people own themselves and the things they produce, have a problem with this attitude.

I fully agree with the critics of targeted tax breaks. The state, as do all governments, has a poor record of being able to choose which companies or class of companies should benefit from special tax treatment and subsidy. A report by the Division of Legislative Post Audit from 2008 found that “it’s difficult to accurately assess the results of economic development expenditures.” Overall, the report was skeptical of the expenditures on economic development and its ability to produce jobs.

The school spending lobby, hungry for more tax dollars, refuses to acknowledge simple facts. The existence of the unspent fund balances is vigorously disputed, even though Kansas Deputy Education Commissioner Dale Dennis has said that schools can use these funds if they want. This is contrary to school spending advocate and Kansas school board member David Dennis in his flawed Wichita Eagle op-ed.

The schools also have no explanation for why the unspent balances in the funds grow rapidly, from $74 million to $94 million over the last four years for the Wichita school district. Instead, the schools would rather be left alone and unaccountable. Hopefully some initiatives in the legislature, such as the common accounting requirements, will lead to greater transparency and accountability.

The school spending lobby must also face the fact that the Kansas state achievement tests, which show large increases in school performance, are almost certainly fraudulent, as is the case in most states. The link between the huge increase in Kansas school spending and these test scores is used as an argument not to cut schools spending.

We also saw again the school spending lobby’s claim that restricted funds don’t count, as though schools are totally hamstrung when it comes to this money.

The contentiousness in the audience between the school spending lobby and the rest of the audience should lead us to question why we turn over such an important matter to government.

Kansas state government

Kansas historic preservation tax credits: the hearing

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On Wednesday, the Taxation Committee of the Kansas House of Representatives heard testimony on HB 2496, which would expand the historic preservation tax credit program. This program provides tax credits to qualified historic preservation projects. I testified at the hearing, and my written testimony is at Kansas historic preservation tax credits should not be expanded.

The idea of tax credits confuses some people. Some may confuse credits with a tax deduction. Some may believe that tax credits are given out at no cost to the state. But in fact, the tax credits are quite costly. As I told the committee members, if the state grants a tax credit, and then does not reduce state spending by the amount of the tax credit, other taxpayers in Kansas have to make up the difference.

That’s one of my core reasons for opposing the tax credits. Since the state does not — and is not likely to — reduce spending by the amount of credits granted, the result is a transfer of money from Kansas taxpayers to the recipients of the credits. But even if the state did reduce its spending, the result would still be a implied decision by the state that it can better decide how to spend money than its citizens can.

Besides this, the arguments of those in favor of the historic preservation tax credits are self-serving and in some cases misleading. Some of the conferees are involved in projects that were to receive tax credits. They are not happy now that they may not get them.

Other conferees were local units of government such as Dale Goter, lobbyist for the City of Wichita. Wichita has a big stake in the tax credits, as the renovation of the Broadview Hotel is on hold because the developers may not receive the tax credits. The developers and the city claim that the project is not economically feasible without the tax credits. We don’t really know whether this is true. When government subsidy is available, people have a way of designing project budgets in a way the requires the subsidy. Why would someone turn down free money?

It should also be noted that the tax credits the Broadview developers are seeking — perhaps $3 million to $4 million — are on top of many millions in subsidy the city has already approved.

The arguments of other conferees must be questioned. Brenda Spencer of Wamego, who owns a preservation consulting business, told of a project in Leavenworth that will house a company employing 400 people. This results, she said, in an annual payroll of $26 million, with resultant tax dollars flowing to the state and local government.

The problems with this illustration of the purported success of the historic preservation tax credit program are these: Would the jobs not have been created unless there was a historic property to house the workers? Could the workers work somewhere that wouldn’t require tax credits? These jobs: are they new jobs? Were the workers formerly unemployed, or did they leave other jobs to work in the historic building? To the extent that happened, the jobs, with their tax payments to the state, can’t be counted as new.

Christy Davis, owner of another preservation consulting firm, testified that since 2001, the tax credit program has leveraged $264 million in private dollars, which she said is a 400% return on investment for the state. The problem with this analysis (it was made by others, too) is that it assumes that none of the projects would have proceeded if not for the tax credits. It credits the program as being the only reason why this activity took place. This is undoubtedly false.

Further, this analysis treats the state as though it were the owner of these properties. That isn’t true, either.

Davis also testified that since work on historic buildings is 50% more labor intensive than new construction, the tax credit program has the effect of a jobs creation program. I doubt that the developers of historic preservation projects see creating a lot of jobs as a benefit. To business, workers are a cost to be controlled, not a benefit to be expanded. If the state wants to view historic preservation as a jobs creation program — meaning that more jobs are better than fewer jobs — let the state mandate that, say, power tools can’t be used on these projects. Then even more workers will be needed.

Can we also agree that owners of firms that profit from a government program qualify as a special interest?

Goter, Wichita’s lobbyist, also stated in his written testimony: “The return on investment for the public dollar spent on historic renovation is totally recovered in a 10 year span from increased property taxes alone. That return is shared by local and state governments through their respective mill levies.”

This statement reveals the flaw in the reckoning used by government in making economic development calculations. To government, the return is in the form of increased tax revenue. Many citizens don’t view things the same way. For government to make an investment of taxpayer funds just so it can receive even more tax revenue is appealing to government bureaucrats and politicians who want to expand their sphere of influence and control. But not so much for everyone else.

For me a lesson I learned from the hearing is how easily those who consider themselves fiscal conservatives can become derailed by programs like this. Olathe Representative Arlen Siegfreid, a member of the Taxation Committee as well as Speaker Pro Tem of the Kansas House of Representatives, offered written and oral testimony in favor of this bill.

Support of this bill is at odds with his stated positions. On his personal website, under the heading “Fiscal Responsibility” appears this sentence: “However, particularly in times of economic peril, sometimes the ‘wants’ we’ve fertilized with ample resources grow to become ‘needs’ and our well intentioned investments in promising ideas and programs become the dangerous government growth that each candidate swears to defend against at all costs on the campaign trail.”

The historic preservation tax credit program, as reported in an audit recently completed by the Legislative Division of Post Audit, has grown tremendously from its initial cost. The audit, titled Kansas Tax Revenues, Part I: Reviewing Tax Credits, identifies the historic preservation tax credit as a program that the legislature may want to re-evaluate, as the program is significantly more expensive than originally planned. The fiscal note that accompanied the tax credit legislation when passed in 2001 and revised in 2002 reported an estimated annual cost of $1 million. In 2007, the actual cost was $8.5 million.

This is an example of a government spending program growing out of control — the type of “dangerous government growth” Siegfreid mentioned above.

Siegfreid’s website also states: “My subsequent re-elections affirm that notion, and I’m now more committed than ever to reducing the strain government and it’s [sic] failed policies are placing on individual taxpayers — and our local businesses.”

As mentioned above, when the state grants tax credits, other Kansas taxpayers have to pay more taxes to make up the shortfall in revenue. This is an example of the type of strain Siegfreid says he is against.

Finally, Siegfreid has authored a tax simplification bill, stating that “Kansas tax policy is too complicated.” Tax credits are an example of increasing complexity of the state’s tax code.

Wichita city government

Detroit, corporate welfare and Wichita’s future

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The following op-ed from Americans for Prosperity Foundation’s Alan Cobb appeared in today’s Wichita Eagle (the unedited version is below).

I agree with Cobb. Wichita definitely has a problem with its economic development strategies. Instead of low taxes that will benefit everyone, the Wichita city council and Wichita city hall bureaucrats insist on dishing out subsidies to companies nearly every week. I’ve shared my ideas with the council in testimony like Wichita universal tax exemption could propel growth and articles like Wichita’s economic development strategy: rent seeking.

Still, there are some council members who, along with Mayor Carl Brewer and some city staff, feel city the doesn’t have enough “tools in the toolbox” for shoveling incentives on companies for economic development purposes.

Recently The Eagle printed an article by Molly McMillin, a well-respected aviation and business reporter.

The question asked throughout the article is one that Wichita leaders and citizens have been asking for some time: What can we do to prevent Wichita from falling into the hole that is Detroit?

A simple answer is to continue throwing money and other goodies to keep the aviation companies. A better answer is we need to get rid of the notion that our elected officials and others have so much forethought to know what will or won’t be successful in 20 or 50 years. They don’t.

Detroit became the modern tragedy it is, not just because of global competition, poor products or poor management at the Big Three. Other sectors of the Michigan economy weren’t there to pick up the slack, when the auto industry floundered. Michigan put too much focus on the auto industry, to the detriment of the overall business and economic climate.

While state and local government poured incentives into the Big Three’s trough, the marginal costs of doing business for everyone else crept up.

It‘s the classic example of the seen vs. the unseen. We see the new factory Pontiac builds. We don’t see the businesses that reduce their size, close or just move. The irony is we will still see the Pontiac factory after it is closed and boarded up.

For each tax dollar given to the auto industry, one is taken one away from entrepreneurs trying to create the next GM, Ford, Google or Apple. This may not be too bad the first time or the second time, but over years and decades, the results can be significant. The “next big thing” will be created in a state with a better tax and regulatory climate.

Cessna, Spirit, Boeing, Learjet and Beechcraft are all great companies that produce great products known throughout the world. Kansans and Wichitans are rightly proud.

Who can predict with any certainty they’ll be in Wichita or even in business in 10 or 30 years? I hope so, and I think they will, but I am not willing to bet Wichita’s future on it.

We shouldn’t give other individual companies state or local funded goodies, either.

Lower the tax rates for everyone. After all, the tax breaks and other prizes handed out are recognition that the cost of doing business in a particular are is too high.

The Kansas Division of Legislative Post Audit last year reported we spent billions of dollars in “economic development” with literally nothing to show for it. Our lawmakers aren’t very good at picking winners and losers.

When Wichita’s aircraft leaders were asked about Detroit, there was a golden opportunity to ask other business leaders in Kansas and Wichita that same question.

It is just as likely and maybe more so, that they will determine if Wichita goes the way of Detroit — or does not.

Wichita city government

Destination ICT rollout presents a look at the future of Wichita

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Destination ICT rollout 2010-02-22Destination ICT presentation.

Yesterday Rebecca Ryan of Next Generation Consulting presented “Destination ICT.” This is a program designed to “attract and retain talent to Wichita.” It’s sponsored by Young Professionals of Wichita which is an initiative of the Wichita Metro Chamber of Commerce.

In her talk, Ryan presented evidence that knowledge workers are highly concentrated, and that a relatively small proportion of workers create much of the economic output. “Some workers have a higher economic impact on an economy than other workers.” She said that Wichita must continue to invest in knowledge-based jobs and knowledge-based occupations.

She said that Wichita employers say that they need 3,000 professional workers over the next six to eight years. But 23 percent of the people Ryan surveyed said they are leaving Wichita in the next four years. She said this would cost Wichita $610 million over the next four years.

Ryan said Wichita needs to use “intentional design” in which we design an ICT that “people are homesick for.”

Ryan presented the seven indexes of a “next city” — referring to attributes, attitudes, and amenities that the “next generation” will get excited about. These are:

  • Cost of lifestyle. Can I afford to live here?
  • Earning opportunities. Many families or couples who locate to a town require two jobs.
  • Vitality. Is this a community that invests in parks, trails, and recreation?
  • Learning. This refers to career education for professionals as well as the K-12 public school system.
  • Around town. This refers both to in-town mobility as well as things like the number of flights.
  • Social capital. Does everyone feel they have a stake and a say in the community? Voting rates and crime count here.
  • After hours. What is there to do after work and on weekends?

Ryan showed a chart, based on a survey of Wichitans, that showed “value vs. perception,” that is, how do Wichitans feel about these indexes as compared to their measured values? Consistently, Wichitans’ perception was lower than the reality.

Wichita scores well in cost of lifestyle. Wichita scored low in “around town.” Wichita also scored low in earning opportunities. In other categories, Wichita scored about the same as its group of peer cities, which for the purposes of this analysis are Denver, Raleigh, Lexington, Kansas City, Omaha, Oklahoma City, Tulsa, Chattanooga, Fort Worth, Salt Lake City, and Richmond.

Ryan said that Wichita’s low cost of lifestyle is “a key strength that can be leveraged, particularly in efforts to attract and retain Millennials who are in their early years of earning.”

Ryan said we need to connect people to Wichita’s career opportunities. She showed two examples — ColumbusTalent.com in Columbus, Indiana, and SmartCareerMove.com in Iowa — of cities or regions that have done this. Also, she said we need to feature employers on high-traffic websites. A “robust internship culture” is valuable, too.

She also recommended that we make Wichita a more attractive place to work and play, and that is sustainable. She mentioned — as do the downtown Wichita planners — “connectedness.” A quote from a survey participant is “There are parks [in Wichita], but there’s no way to get from one to another … there are no arteries linking the green spaces.” She said that Wichita should have many more miles of bike paths. Our bus transit system is a problem, too, as it takes a very long time to get from one place to another on a bus. She recommended a grid system rather than a hub system as Wichita presently uses.

Wichitans also needs to convince themselves that Wichita is a great place to live. She said that most people don’t realize Wichita is as large in population as it is.

She recommended a centralized place for finding information about Wichita such as events. She used OnMilwaukee.com as an example of such a site, noting that Wichita’s UploadWichita.com has not been updated frequently.

She said that we need to make sure that what people are saying about our community matches the reality. Two-thirds of the people who have moved away from Wichita have thought about coming back. These are the “convinceables,” she said.

She recommended that if people care about downtown, they should attend Saturday’s design charrette.

Analysis

Wichita’s advantage of low cost of lifestyle (is this different from a low cost of living?) is something that we must work to maintain. Actions by Wichita’s city council such as the creation of TIF districts make the burden of paying for government more expensive for everyone in the city except those in the TIF district. Other misguided economic development policies such as tax abatements make it more expensive for everyone but the recipient of the incentive.

The emphasis on bicycle paths is misplaced. A recent visitor to Wichita, Randal O’Toole, said that bicycle paths are not nearly as useful as city streets for serious commuting and traveling by bicycle.

With regard to public schools, Wichita is falling behind the rest of the country in educational freedom. Our charter school law gives local boards of education total control over the formation of charter schools, and as a result, there are very few in Kansas. Furthermore, we have no school choice through vouchers or tax credits. Many cities and states are using these programs to implement choice — rather than government monopoly — in education. Wichita lags far behind in this regard. School choice programs, by the way, could be implemented quickly at very low cost, and in fact, could save money.

Ryan’s promotion of the downtown planning process shows a reliance on centralized government planning. This means a loss of economic freedom for Wichitans, as those who chose not to live downtown will subsidize those who do. Reliance on government planning means that more economic activity in Wichita will be controlled by bureaucrats and politicians. These classes of people have motivations different from entrepreneurs, who must meet the demands of consumers or go out of business. Bureaucrats, especially, do not face such a stern taskmaster.

I was also troubled by other reliance on government recommended by Ryan. The parks system — which suffers, according to Ryan, from a lack of connectedness — is a creation of government. So here’s an example of a large government program that has produced something other than what is needed, or at least is not optimal. Now Wichita has a new and ambitious program to create a new generation of parks. But what makes us think that the current generation of parks planners can do better than the past?

Reliance on websites as a way to distribute information and build community in Wichita has been problematic. Ryan noted UploadWichita.com as an example. Its most most recent story is from July 2008, and the most recently uploaded photo is from March 2009.

More recent efforts by government-sponsored enterprises to promote the city through online efforts are sputtering, too. The Wichita Downtown Development Corporation’s blog — ironically titled Momentum — hasn’t had a fresh post since December 17, even though Wichita is in an intense period of downtown planning.

There are some efforts such as RokICT and Naked City Wichita that promote events in Wichita. Both sites seem to be in transition at the moment, however, and are not the fresh and copious sources of information that they once were.

Wichita city government

David Burk, Wichita developer, overreaches

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Today’s Wichita Eagle contains a story about a well-known Wichita real estate developer that, while shocking, shouldn’t really be all that unexpected.

The opening sentence of the article (Developer won tax appeal on city site) tells us most of what we need to know: “Downtown Wichita’s leading developer, David Burk, represented himself as an agent of the city — without the city’s knowledge or consent — to cut his taxes on publicly owned property he leases in the Old Town Cinema Plaza, according to court records and the city attorney.”

Some might say it’s not surprising that Burk represented himself in the way the Eagle article reports. When a person’s been on the receiving end of so much city hall largess, it’s an occupational hazard.

And when you’ve been the beneficiary of so much Wichita taxpayer money, you might even begin to think that you shouldn’t have to pay so much tax anymore.

At the state level, you might seek over a million dollars of taxpayer money to help you renovate an apartment building.

Burk has certainly laid the groundwork, at least locally. A registered Republican voter, Burk regularly stocks the campaign coffers of Wichita city council members with contributions. These contributions — at least for city council candidates — are apparently made without regard to the political leanings of the candidates. How else can we explain recent contributions made to two city council members who are decidedly left of center: Lavonta Williams and Janet Miller? Burk and his wife made contributions to their campaigns in the maximum amount allowed by law.

This is especially puzzling in light of Burk’s contributions to campaigns at the federal level. There, a search at the Federal Election Commission shows a single contribution of $250 to Todd Tiahrt in 2005.

It’s quite incongruous that someone would contribute to Tiahrt, Williams, and Miller. Except Williams and Miller can — and have — cast votes that directly enrich Burk. Politicians at the federal level don’t have the same ability to do that as do Wichita city council members. Well, at least not considering Wichita city business.

So which is it: is Burk a believer in Republican principles, a believer in good government, or someone who knows where his next taxpayer handout will come from?

Burk’s enablers — these include Wichita’s lobbyist Dale Goter, Wichita Downtown Development Corporation president Jeff Fluhr and chairman Larry Weber, Wichita City Manager Robert Layton, Wichita economic development chief Allen Bell, and most importantly Wichita Mayor Carl Brewer and various city council members — now have to decide if they want to continue in their efforts to enrich Burk. Continuing to do so will harm their reputations. The elected officials, should they run for office again, will have to explain their actions to voters.

At the state level, the bill that will enrich Burk will likely be voted on in the Kansas Senate this week. Then, similar action may take place in the Kansas House of Representatives. Let’s hope they read the Wichita Eagle in Topeka.

Wichita city government

Wichita city council signals possible change in economic development incentive policy

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At today’s meeting of the Wichita City Council, discussion by council members and their vote may signal a change in the city’s stance toward economic development incentives.

At issue was a request for extension of economic development incentives for a Wichita company. Five years ago the city council approved an economic development package for the company that included a tax abatement. As is the city’s policy, the council revisits the issue in five years to see if the company has meet its goal commitments. In the case of this company, one commitment — the building of a new facility — was met. The other commitment — creation of a certain number of jobs — was met early on during the period of the tax abatement, but employment has been declining in recent years, and employment is currently 100 jobs below the goal.

Recently the city council adopted new guidelines for companies that are not meeting their goals at the time of review. These guidelines make it easier for companies to qualify for the extension of the abatement. If the WSU Current Conditions Index has declined since the awarding of the incentives, the company will qualify for an extension if a majority of the goals are met. A company will also qualify for extension if their peak job creation numbers exceeded the goal, even if the number has fallen, as is the case with the company under consideration today.

Based on the new guidelines, city staff recommended to approve the extension of the incentives.

Council member Lavonta Williams asked if it was possible if, as an company receiving an incentive, could “I hire five people today and fire them by Friday and then meet my criteria?” The answer by city economic development director Allen Bell is that the policy contains no such guideline as to minimum period of employment.

Wichita city manager Bob Layton interjected that staff’s recommendation to approve the extension is a difficult one to make, as this company is in a declining pattern of employment. Additionally, the newly calculated benefit-to-cost ratios are low, and he said he is uncomfortable with that: “We’re actually subsidizing this business, so to speak, or others are subsidizing or bearing their load for debt service.”

Council member Sue Schlapp asked a question not covered by policy: if we deny the extension today, and next year the company improves its situation, could they come back and ask for the extension of the tax abatement then? There is no definitive answer to this question at this time, according to Bell and Layton.

Schlapp added that it seems like we’re “lowering the bar all the time” as to the granting of incentives.

Council member Paul Gray remarked that the council makes itself look bad in these situations, as it always grants extensions even though the city has created policies that should hold companies accountable to their committed goals. The reason for awarding the incentives, he said, was for the increase in employment, and that employment level has not been kept. “We need to start taking a harder stand on this, as we’re going to run out of money if we keep giving it all away.” Vice mayor Jim Skelton agreed.

No one from the public was there to speak on this matter.

Wichita mayor Carl BrewerWichita Mayor Carl Brewer was on the losing end of a 6 to 1 vote.

Gray made a motion to deny the staff recommendation of approval of the extension. Mayor Carl Brewer said that this vote, if it proceeds in the direction it appears to be going, will change the direction of many things that affect businesses in Wichita. He said that the intent of the council is to start holding individuals accountable, and there’s not been a track record of that. It’s been worse since the economy entered the recession, he said. He urged council members to make sure they know which way they’re going with this action. “This will be the direction that we’ll be going as we start working on policy, and it will be effective for everyone, whether it be large or whether it be small. … Just making sure that when we press that button and we head down this path, that we know what we’re doing.”

The vote was 6 to 1 in favor of Gray’s motion, with the mayor being the lone “No” vote.

Analysis

This action by the Wichita city council, being nearly unanimous, is very much different from its action just one week ago, when it employed one new method plus several existing methods to heap millions in subsidy on a downtown hotel developer.

Today’s discussion is another illustration of just how difficult it is to pick winners and losers, and how difficult it is to choose which companies the city should invest in. This is why I have recommended that Wichita grant tax abatements on all new capital investment.

Today’s action is especially cruel to the subject company. In the past, city staff has argued that withdrawing tax abatements when a company is struggling is harmful. In December 2008, economic development director Bell said this regarding a company that had not met its performance commitments: “I don’t think it would be productive at this time to further penalize them — as the market has already penalized them — by putting them back on the tax roles at this time.” This is further evidence that taxes are harmful to business and economic growth.

Council member Williams’ question about hiring and then quickly firing employees indicates that she must not be familiar with the costs of hiring and firing. Furthermore, a company’s unemployment insurance premiums are based on its history, and actions like this would certainly raise premiums by a large amount.

Extension of EDX Tax Exemption (Sharpline Converting, Inc.)

Wichita city government

Urban planning discussed on Kansas Week

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Economist, author, and Cato Institute Senior Fellow Randal O’Toole discusses urban planning and redevelopment on the KPTS Television public affairs program Kansas Week. Tim Brown is the host.

Coverage of O’Toole’s visit to Wichita is at Randal O’Toole discusses urban planning in Wichita.

Kansas state government

Goal of Kansas tax reform is economic growth

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Dr. Art Hall, who is Director of the Center for Applied Economics at the University of Kansas has proposed a radical change and simplification to the Kansas tax system. Besides simplification of the way the state collects taxes, the major goal of the proposal is to encourage economic growth in Kansas.

The goal of tax policy should be to raise the funds necessary to run government, and to do so in a way that provides the most incentive for economic growth. The accumulation of capital, which comes from savings, is the best way to promote future economic growth. Capital allows companies to expand productive capacity through making investments in machinery and technology. This leads to more jobs and higher-paying jobs. As the economist Walter E. Williams has discussed: “Ask yourself this question: who earns the higher wage: a man digging a ditch with a shovel, or a man digging a ditch using a power backhoe? The difference between the two is that the man with the backhoe is more productive. That productivity is provided by capital — the savings that someone accumulated (instead of spending on immediate consumption) and invested in a piece of equipment that helped workers to increase their output.”

It’s important, then, that tax policy in Kansas generates revenue for the state in a way that doesn’t harm the accumulation of capital. As Hall writes: “Taxation of the resources used for future production may well lead to less future production.”

The solution Hall proposes is a consumption tax — a comprehensive statewide sales tax — that would replace all state-level taxes in Kansas, including the personal and corporate income tax: “Because saving and investment are key elements of the growth process, consumption taxes can better promote economic growth, all else equal.”

He explains in more depth:

A well-crafted retail sales tax has positive attributes from the perspective of economic growth. It represents one form of a consumption tax, a form familiar to most people. Generally, consumption taxes represent a class of taxes that do not tax money used for saving and investment, regardless of the source of that money. This feature of consumption taxation differs from traditional types of income taxation. Income taxes effectively double tax the money used for saving and investment (but tax only once the money used for consumption), thereby producing a tax bias against saving and investment, which generates a disincentive to dedicate money toward future production.

Hall writes that “A well-crafted retail sales tax would also tax all goods and services uniformly.” His proposal even includes taxing the consumption of rented and owner-occupied housing. While true to the goal of uniformity, Hall recognizes the “novelty (and probable unpopularity) of applying the retails sales tax to rented and owner-occupied housing.”

Hall’s paper is comprehensive and includes discussion of technical issues such as “tax cascading,” where taxes on the inputs used by businesses are taxed again as intermediate goods and services make their way through production processes. There is also discussion of what Kansas could do to make the consumption tax progressive, if that is desired. Border considerations are discussed, too.

Currently the statewide sales tax in Kansas is 5.3%. (Counties and cities may impose additional sales tax on top of that. In Wichita the combined rate is 6.3%, for example.) Depending on the details of the consumption tax that Kansas might implement, the rate could range from 6.77% to 9.99% (those figures calibrated to produce the same revenue that the state collected in 2008).

What would be the impact on economic growth in Kansas? Simulations conducted by Hall indicate that growth in private-sector employment could be in the neighborhood of seven to eight percent per year, depending on the type of plan and phase-in period. This is tremendous growth, especially in light of the fact that private-sector job growth in Kansas has been stagnant or declining for many years. Private-sector investment and take-home pay would rise less rapidly, but at a strong rate.

Currently there is no bill in the Kansas Legislature that would implement a plan like this. It’s thought that an amendment to the Kansas Constitution would be necessary to soundly implement this policy. The amendment, ideally, would prohibit any income tax. Without this constitutional protection, lawmakers could reimpose either personal or corporate income taxes at any time.

Dr. Hall’s paper may be read at A Comprehensive Retail Sales Tax as a Single Tax for the State of Kansas.

Wichita city government

Wichita’s pursuit of convention business: a wise strategy?

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One of the reasons Wichita city leaders say we need to provide subsidy to a proposed hotel in the downtown WaterWalk development is that the rooms are needed to support the city’s effort to gain convention business.

On its face, this pursuit of convention business seems like a noble effort by city leaders. Vast streams of economic development will follow if they are successful, they say. Providing subsidy to a hotel in support of this effort, they say, should be a simple decision. Especially when supporters like Wichita city council member Jeff Longwell tell us that much of the subsidy to the hotel will be paid by visitors to Wichita.

But I’ve not seen discussion in Wichita on whether this pursuit of convention business is wise. Heywood T. Sanders, who is professor in the Department of Public Administration at the University of Texas at San Antonio, is a noted critic of public efforts to chase convention business for economic development. His report 2005 Space Available: The Realities of Convention Centers as Economic Development Strategy was published by the left-leaning think tank The Brookings Institution. It provides a look at the realities of the convention trade.

Heywood writes that convention center business has been on the decline, and it started well before the terrorist attacks in 2001. In a section titled “Trends: Portrait of a Faltering Industry” we can read that attendance is down, exhibit space demand is down, and hotel room demand in cities has fallen too.

The author notes that the decline in convention business is a structural decline: “[Reasons for decline] are the product of industry consolidation, particularly in the hardware and home improvement industry, reductions in business travel in the face of increasing cost and difficulty, and alternative means of conveying and gathering information.” These are not cyclical trends that are likely to reverse in the future.

Despite shrinking demand, cities are building more convention space: “Despite diminishing demand, the last few years have seen a remarkable boom in the volume of exhibit space in U. S. convention centers.” The building of larger convention centers in many cities means that more cities are able to host the larger events, or, cities can now host several smaller events simultaneously. The result, says the author, is fierce competition for both large and small events.

Then, what about the costs? The author introduces a section on costs with: “The studies that justify both the new center space and the publicly-owned hotels paint a picture of tens of thousands of new out-of-town visitors and millions of dollars in economic impact. Despite that rhetoric, these projects carry real risks and larger potential costs, particularly in an uncertain and highly competitive environment.”

The convention center is just the start of costs: “A new [convention] center is thus often followed by a subsidized or fully publicly-owned hotel.” Wichita, of course, has a fully publicly-owned hotel, the large 303-room Hyatt. Now Wichita seeks to subsidize a hotel in the WaterWalk development. This proposed hotel does not provide as many rooms as Wichita convention planners say the city needs, so it is likely not to be the last such proposal for a subsidy to hotel developers.

Other things Heywood says that are likely to be proposed are a sports arena. Wichita, of course, just opened a taxpayer-financed and government-owned facility. Entertainment, retail, and cultural attractions are often proposed, he writes, and Wichita downtown planners have indicated their desire for these. Downtown boosters are likely to propose a sales tax to support these efforts.

The conclusion to this paper describes Wichita’s current situation and foreshadows what is likely for the future of Wichita:

But if taxing, spending, and building have been successful, the performance and results of that investment have been decidedly less so. Existing convention centers have seen their business evaporate, while new centers and expansions are delivering remarkably little in terms of attendance and activity.

What is even more striking, in city after city, is that the new private investment and development that these centers were supposed to spur — and the associated thousands of new visitors — has simply not occurred. Rather, city and convention bureau officials now argue that cities need more space, and more convenience, to lure those promised conventions. And so underperforming convention centers now must be redeemed by public investment and ownership of big new hotels. When those hotels fail to deliver the promises, then the excuse is that more attractions, or more retail shops, or even more convention center space will be needed to achieve the goal of thousands of new visitors.

We already see some of this excuse-making taking place: Private investment in downtown Wichita has been weak, it is said, because there’s not yet a critical mass of development. It is promised by downtown boosters that given enough public money critical mass will be achieved, and private investment will rush in. But since there is no definition of what constitutes critical mass, this excuse is always available to justify failure.

Listen to an interview with Sanders from 2009. A transcript of an interview with Sanders from 2004 is at “A Lot of Hooey”: Heywood Sanders on Convention Center Economics.

Wichita news media

Stretching figures strains credibility

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

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

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

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

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

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

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

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

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

Links referred to: Wichita Mid-Continent Airport Economic Impact