Tag Archives: Industrial Revenue Bonds

Wichita Business Journal grants city council excess power

The Wichita Business Journal and the City of Wichita team to provide incorrect coverage and missing analysis.

Today the Wichita Business Journal reported: “An $11.5 million expansion of the Wichita operations of BG Products has been given the go-ahead. The Wichita City Council on Tuesday approved the expansion plan and issued industrial revenue bonds for the project.” 1

The problem with this reporting is that BG Products was not asking for the city’s permission to expand its operations, as the first sentence implies. Nor did the council approve an expansion plan, as the second sentence plainly states.

Instead, today the council granted BG Products an exemption from paying property taxes estimated at $204,280 per year for the next five years, and possibly another five years. This is how the industrial revenue bond program works in Kansas. Cities do not lend money. Instead, they grant exemptions from paying taxes. 2

(BG has agreed to pay $5,143 per year, the present taxes on a building being razed.)

While the agenda packet for the meeting specified BG’s plans for the bond proceeds, the proposed uses of the funds have little — nothing, really — to do with qualifying for IRBs. 3

So it’s curious as to why the agenda packet details the company’s plans for the bond proceeds. It’s even more curious why city economic development analyst Tim Goodpasture spent quite a bit of time briefing council members on these plans. Except: His Twitter handle is @goodybagict.

While the agenda packet supplies the estimated amount of property tax exemption granted to BG products, the city’s analysis makes no mention of the amount of sales tax BG may escape paying. Sales tax exemptions are another feature of IRBs in addition to property tax exemptions. While the city’s analysis doesn’t mention sales tax, section 5 of the ordinance passed by the council states the city has determined BG is entitled to a sales tax exemption of unspecified amount.

Since the city’s analysis of the proposal did not include mention of sales tax, we’re left to wonder whether the Wichita State University Center for Economic Development and Business Research incorporated the sales tax exemption in the analysis it performs for the city.


Notes

  1. Heck, Josh. Council green-lights company’s $11.5M expansion. Wichita Business Journal, September 12, 2017. Available at https://www.bizjournals.com/wichita/news/2017/09/12/council-green-lights-companys-11-5m-expansion.html.
  2. Weeks, Bob. Industrial revenue bonds in Kansas. Available at https://wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/.
  3. “The percentage of taxes abated is based on capital investment and job creation. Majority of goods or services sold must be destined for customers outside of the Wichita Metropolitan Statistical Area (MSA). Company must pay average wages equal to or greater than the industry or Wichita MSA wage rate. City benefit/cost ration must be at least 1.3 to 1.” City of Wichita, Economic Development Incentives. Available at http://www.wichita.gov/Economic/Pages/Incentives.aspx.

More Cargill incentives from Wichita detailed

More, but likely not all, of the Cargill incentives will be before the Wichita City Council this week.

A division of Cargill, Cargill Meat Solutions Corporation, is moving from an office on North Main Street in downtown Wichita to the site of the former Wichita Eagle building, also in downtown Wichita. Last year it was widely reported that Cargill was considering moving this division to another city. Reports of incentives offers to Cargill from other cities spurred the City of Wichita to offer its own incentives if Cargill would remain in Wichita. This week the city council will consider additional subsidies and incentives besides those already offered. 1

As summarized in the agenda packet:

“In exchange for Cargill’s commitment, the City has negotiated the following:

  • Issue Industrial Revenue Bonds (Letter of Intent approved April 18, 2017) 100% property tax abatement; 5+5 year basis
  • Sales tax exemption
  • Acquisition of a 15 year parking easement for public access to the garage in the evenings and on weekends (estimated cost of $6,500,000)
  • Expedited plan review (50% reduction in time)
  • Reduced permitting fees (50%) (estimated savings of $85,000)
  • Assign a project manager/ombudsman for a single point of contact for the company”

Industrial Revenue Bonds

In April the city council approved a letter of intent regarding Cargill’s participation in the Industrial Revenue Bond program. 2 The city won’t be lending Cargill money. Instead, IRBs are a (convoluted) method whereby local governments are able to forgive the payment of property taxes. For the case of Cargill, city documents from April state the tax forgiveness could be worth $1,359,531 per year. 3 This would be shared by these taxing jurisdictions in these annual amounts, again according to city documents:

  • City of Wichita: $378,450
  • Sedgwick County: $340,958
  • USD 259, the Wichita Public School District: $622,723
  • State of Kansas: $17,400

Cargill has agreed to make an annual Payment-In-Lieu-Of-Taxes (PILOT) of $413,900, according to city documents.

In addition to the property tax exemption, the IRBs also carry a sales tax exemption for purchases related to construction. City documents give an estimated value of $2,026,291 for the sales tax Cargill will not have to pay. 4

Parking easement

At one time, it was thought that the city would build a parking garage and let Cargill use it an no cost, or at a greatly reduced cost. Instead, the city now proposes that Cargill build the garage and the city will acquire an easement. This has sounded almost benign, but now we realize that the city will pay Cargill an estimated $6.5 million. In return, the city will be able to use up to approximately 700 parking spaces outside of Cargill business hours for a period of 15 years.

Is this a good deal for the city? The city has agreed to pay $9,286 for the use of each parking space for 15 years during non-business hours. 5 For comparison, recently the city rehabilitated the parking garage at 215 S. Market at a cost of $17,609 per parking space. The city rents 180 of these to a nearby company at the rate of $35 per month, which is $420 per year. 6 In the case of Cargill, the city is paying — effectively — $619 dollars per parking spot per year, and for off-hours use only.

It is not known whether the city will charge fees to the public to use the garage. It is also unknown whether there is much demand for public parking at the Cargill location, but present market conditions would suggest there is not much additional demand.

Expedited plan review, reduced fees, and ombudsman

The city has agreed to cut permit fees and speed response time for approvals. 7

This incentive — the need for it and its value to Cargill — is an explicit admission that City of Wichita regulations are burdensome. If not, why would the city devote time and expense to helping Cargill obtain relief from these regulations?

Consider this aspect of public policy: Cargill is a large company with — presumably — fleets of bureaucrats and lawyers trained to deal with burdensome government regulation. These costs can be spread across a large company, meaning that Cargill can afford to overcome burdensome regulations.

But what about the small companies that don’t have fleets of bureaucrats and lawyers? What about the young or small companies that can’t spread the costs of regulation across a large volume of business? What will the city do for these companies? This is especially important because the spirit of entrepreneurship the city wants to cultivate is most commonly found in small, young, companies — the type of company without fleets of bureaucrats and lawyers.

The city says it would do for any company what it is doing for Cargill. Except: How are companies supposed to know to ask for regulatory relief, streamlining, and a discount on fees?

If the city really wants to help all companies, it would — at its own initiative — cut fees and reduce response time across the board, for everyone. Until then Wichita offers special regulatory treatment for special circumstances, which widens the gulf between the haves and have-nots. 8

Other subsidy programs

The agenda packet for the city council meeting doesn’t mention this, but from the State of Kansas Cargill is likely to receive PEAK benefits. Under this program, the Kansas state withholding tax deducted from Cargill employees’ paychecks will be routed back to Cargill. 9 (Not all; only 95 percent.) Some very rough calculations show that PEAK benefits might be worth some $2 million annually to Cargill. 10

Ironically, with the recent increases in Kansas income taxes, PEAK is even more valuable to Cargill.

Is this needed?

In the past, economic development subsidies of this type were justified by local governments as necessary to recruit new companies to the area. These subsidies, however, are used simply to retain a company that is already located in downtown Wichita.

The city has asked Wichita State University’s Center for Economic Development and Business Research to produce benefit/cost ratios. They show that the costs the city, county, and state incur will generate benefits that exceed these costs. For the school district, costs exactly equal benefits — a remarkable coincidence.

The reasoning and calculation behind these benefit/cost ratios is opaque. The general idea is that spending by a company spawns other spending that results in economic benefit and growth. That’s true. It’s important to know, however, that this benefit also occurs when companies move to Wichita or expand in Wichita, without the benefit of economic development subsidies.

The question, then, becomes are these incentives necessary? Would Cargill have moved to another city if not for these incentives? It’s only if Cargill would have left Wichita that the benefit/cost ratios have any meaning.

The City of Wichita says Cargill received lucrative offers from other cities. But these offers have not been seen, to my knowledge. We’re left to take the word of Cargill that it received offers from other cities, and that it would have moved from Wichita if not for Wichita’s incentives.

Cargill, as we’ve seen, has a multi-million dollar motive. City of Wichita officials also have a large motive, as do officials and politicians at the state level. The politicians and bureaucrats want to — need to — be seen as doing something to improve the economy. It costs none of them one dime to pay these incentives. But the Cargill building will fulfill their ediface complex when they preside at groundbreaking and ribbon-cutting ceremonies.

If Wichita leaders wanted to gain the trust of Wichitans, to have us believe and understand that these incentives are necessary to keep Cargill in Wichita, the city could reveal the other offers Cargill received. Cargill itself could reveal offers it received from other cities. These actions would help Wichitans understand whether these incentives are truly needed. But the world of economic development incentives is a murky swamp.

Finally, Mayor Jeff Longwell, other council members, and city hall bureaucrats tell us that the city has moved beyond cash incentives. Cash will not be paid for jobs, they say.

But forgiving a tax bill is just like paying cash. Discounting the cost of permits is just like paying cash. Paying $6.5 million to use a company’s parking garage during hours the company has no use for it: How is that different from simply paying the company a cash incentive?

Perhaps the mayor and others have a different understanding of the economics of transactions than I.


Notes

  1. City of Wichita. Agenda Packet for July 18, 2017. Approval of Development Agreement with Cargill Meat Solutions Corporation.
  2. Weeks, Bob. Industrial revenue bonds in Kansas. https://wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/.
  3. City of Wichita. Council agenda packet for April 18, 2017.
  4. Weeks, Bob. Cargill subsides start forming. Available at https://wichitaliberty.org/wichita-government/cargill-subsides-start-forming/.
  5. $6,500,000 / 700.
  6. Weeks, Bob. Why is this man smiling? Available at https://wichitaliberty.org/wichita-government/man-smiling/.
  7. “Section 4.03. Approvals. The City agrees to provide a 50% reduction in the fees charged by the City for permits and approvals, including plan review, utility and building permitting fees, for all matters related to the Project. The City also agrees to reduce the response time for approval of building plans from the standard 30 days to 15 days for all matters related to the Project.” Also: “The reduction in the permitting fees will be paid from the Economic Development fund.”
  8. Weeks, Bob. Regulation in Wichita, a ‘labyrinth of city processes.’ Available at https://wichitaliberty.org/regulation/regulation-wichita-labyrinth-city-processes/.
  9. Weeks, Bob. In Kansas, PEAK has a leak. https://wichitaliberty.org/kansas-government/kansas-peak-leak/.
  10. For the first year of the agreement, Cargill is expected to have 750 or more employees at an average salary of $66,814. That annual salary / 26 pay periods = $2,570 biweekly. For a family with two children (this is just a guess and could be way off), there are two withholding allowances, so $2,570 – ($86.54 x 2) = $2,397. Using the new withholding tables for married workers (another assumption), bi-weekly withholding is $48.17 + 5.7% x ($2,397 – $1,298) = $48.17 + $62.64 = $110.81. That means $2,881 annual withholding, so Cargill’s 95% share is $2,737. For 750 employees, this is an annual subsidy to Cargill of $2,052,750.

Cargill subsides start forming

Details of the subsidy programs used to keep Cargill in Wichita are starting to take shape.

This week the Wichita City Council will consider one of the (potentially many) subsidy programs offered to keep Cargill in Wichita.

Cargill Protein Group is currently located at 151 N. Main. The plan is for Cargill to purchase and demolish the Wichita Eagle building at 825 E. Douglas, then build a new office building in its place. The subsidy program to be considered this week is the Industrial Revenue Bond program1. The city won’t be lending Cargill money. Instead, IRB’s are a (convoluted) method whereby local governments are able to forgive the payment of property taxes. For the case of Cargill, city documents state the tax forgiveness could be worth $1,359,531 per year.2 This would be shared by these taxing jurisdictions, again according to city documents.

  • City of Wichita: $378,450
  • Sedgwick County: $340,958
  • USD 259, the Wichita Public School District: $622,723
  • State of Kansas $17,400

Of note, the city is in a hurry to handle this matter. Pending legislation would reduce the amount of property tax able to be exempted.3

In addition to the property tax exemption, the IRBs also carry a sales tax exemption for purchases related to construction. City documents give an estimated value of $2,026,291 for the sales tax Cargill will not have to pay.

Not the entire subsidy package

The action to be considered this week is likely just a portion of total subsidy package. For example, at one time it was speculated that the City of Wichita would build a parking garage and let Cargill use it as their own. With a proposed capacity of 750 parking spots, this would cost many millions.4

Now, the city plans to let Cargill construct the garage, and the city will, according to city documents, “purchase a parking easement from Cargill to obtain public access to the parking structure Cargill will complete as part of this project.” It sounds like the city will rent spaces in the garage. It will be interesting to see the rate the city will agree to pay.

From the state of Kansas Cargill is likely to receive PEAK benefits. Under this program, the Kansas state withholding tax deducted from Cargill employees’ paychecks will be routed back to Cargill.5 (Well, only 95 percent goes back to Cargill. The state keeps five percent.)


Notes

  1. Weeks, Bob. Industrial revenue bonds in Kansas. https://wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/.
  2. City of Wichita. Council agenda packet for April 18, 2017.
  3. Kansas Legislature. SB 146: Continuation of 20 mill statewide levy for schools and property tax exemption of certain portion of property used for residential purposes from such levy. http://www.kslegislature.org/li/b2017_18/measures/sb146/.
  4. Recently the city paid $4.73 million (not including change orders) to build a downtown garage with 270 parking spaces, a cost of about $17,500 per stall. Applying that to a 750 stall garage results in a cost of $13.1 million).
  5. Weeks, Bob. In Kansas, PEAK has a leak. https://wichitaliberty.org/kansas-government/kansas-peak-leak/.

Cash incentives in Wichita, again

The City of Wichita says it does not want to use cash incentives for economic development. But a proposal contains just that.

Update: The council did not approve this project, by a vote of four to three.

This week the Wichita City Council will consider a package of incentives for the developer of a large downtown building, the Finney State Office Center. While the city has said that it does not want to use cash incentives, they are proposed for this project.1

Finney State Office Building environs
Elements of the proposal are these:

The Wichita Public Building Commission will sell the building for $100,000.

The project is also asking for the city to issue Industrial Revenue Bonds. Despite the use of the term “bond,” the city is not lending money to anyone. Someone else will purchase the bonds. Instead, the IRBs are a vehicle for conveying property tax abatements and sales tax exemptions.

In this case, the developer requests a sales tax exemption for purchases during the renovation. City documents don’t give a value for the sales tax that might be exempted. But the developer has requested IRBs for an amount up to $35,000,000. Therefore, a sales tax exemption might be worth up to $2,625,000, depending on the price of taxable products and services purchased, and the sales tax rate at the time.

If someone excuses you from paying millions in sales tax, that’s better than receiving cash. But cash incentives are proposed, too. The city proposes a grant of up to $2,000,000, although the city calls this an “investment.”2

Whatever it is called, this is a cash incentive.

Also, the Wichita Public Building Commission will pay up to $1,000,000 for improvements to the building.3

This proposed payment from the WPBC seems to be in violation of the city statutes governing the commission, which read: “Under no circumstances shall any income of the public building commission inure to the benefit of any private person.”4

I’m sure the city will characterize its $2 million “investment” in some way other than a cash incentive. The city will also say the $1 million from the WPBC is not from the city, which is true. But the city will have to rationalize allowing the commission to violate the clear language of its statutes.

There are some good aspects of this agreement with the developer, such as a timeline and performance bond requirement. But the cash incentives are against stated city policy and its laws.


Notes

  1. Wichita City Council agenda packet for April 11, 2017.
  2. ibid. “The City proposes to invest up to $2,000,000 to be used to modernize the building. The investment would only be paid upon completion of the entire building renovation project.”
  3. ibid. “On April 5, 2017, the WPBC approved the Development Agreement/Purchase and Sale Agreement and agreed to commit up to $1,000,000 for building improvements as well.”
  4. Wichita Municipal Code. Sec. 2.12.640 (i). Under no circumstances shall any income of the public building commission inure to the benefit of any private person. https://www.municode.com/library/ks/wichita/codes/code_of_ordinances?nodeId=TIT2ADPE_CH2.12BOAGCO_S2.12.640SAUNCO.

Won’t anyone develop in downtown Wichita without incentives?

Action the Wichita City Council will consider next week makes one wonder: If downtown Wichita is so great, why does the city have to give away so much?

Next week the Wichita City Council will consider a package of incentives for the developer of a large downtown building, the Finney State Office Center.

The building has an appraised value of $7,902,570, per the Sedgwick County Treasurer. The city will sell it for $100,000. That’s a mere 1.3 cents per dollar, if the county’s valuation is reasonable.

(But, the $100,000 is non-refundable, should the purchaser decide not to close on the building.)

Finney State Office Building environs. Click for larger.
The project is also asking for the city to issue Industrial Revenue Bonds. Despite the use of the term “bond,” the city is not lending money to anyone. Someone else will purchase the bonds. Instead, the IRBs are a vehicle for conveying property tax abatements and sales tax exemptions.

In this case, the developer requests a sales tax exemption for purchases during the renovation. City documents don’t give a value for the sales tax that might be exempted. But the developer has requested IRBs for an amount up to $35,000,000. So a sales tax exemption might be worth up to $2,625,000, depending on how much taxable products and services are purchased.

IRBs also carry the possibility of a property tax abatement. Granting of the abatement is routine in most areas of the city. But, this property is located within a tax increment financing (TIF) district. That means, according to Kansas law, that a property tax abatement may not be awarded. That is, unless the property is removed from the TIF district, which is what the city proposes.

What is the value of the tax abatement? City documents don’t say. But if the developer spends $35 million on the project, it ought to carry something near that appraised value when complete. So its annual property tax bill would be ($35,000,000 * 25 percent assessment rate for commercial property = $8,750,000 assessed value * 124.341 mill rate) $1,087,984.

There’s another exception the city will probably make for this project. According to the city’s economic development incentives policy, the city must receive a payoff of at least 1.3 times its investment. That benchmark isn’t met in this case, with Wichita State University’s Center for Economic Development and Business Research reporting a benefit-cost ratio of 1.04 to the city. Nonetheless, city staff recommends the city approve the incentives, citing several loopholes to the policy.

There’s also a parking agreement to consider. Given the city’s past practice, the city will lease parking stalls at rates below market rate or the city’s cost to provide.

No cash incentives

The city, in particular Wichita Mayor Jeff Longwell, have prominently and proudly touted the end of cash incentives. But, this project is receiving benefits better than cash: An $8 million building for a song, no sales tax, and no property tax for ten years. Let’s ask the city to be honest and give us dollar values for these incentives.

Why?

A second question is this: Why is it necessary to provide all these incentives in order to induce someone to develop in downtown Wichita? The cost of these incentives increases the cost of government for everyone else — that is, everyone else except all the other incentive-receivers.

Wichita to grant property and sales tax relief

Several large employers in Wichita ask to avoid paying millions in taxes, which increases the cost of government for everyone else, including young companies struggling to break through.

This week the Wichita City Council will hold public hearings concerning the issuance of Industrial Revenue Bonds to Spirit AeroSystems, Inc and other companies.1 In the IRB program, government is not lending money, and Wichita taxpayers are not at risk if the bonds are not repaid. In fact, in the case of Spirit, the applicant company plans to purchase the bonds itself, according to city documents. Instead, the purpose of the IRB process is to allow Spirit to escape paying property taxes and, often, sales taxes.

These bonds will allow Spirit to avoid paying property taxes on taxable property purchased with bond proceeds for a period of five years. The abatement may then be extended for another five years. Usually these IRB issues also carry a sales tax exemption, but the agenda packet for this item does not mention such

City documents state that the property tax abatement will be shared among the taxing jurisdictions in these estimated amounts:

City: $424,918
State: $19,500
County: $381,979
USD 259: $731,614

The listing of USD 259, the Wichita public school district, is likely a mistake by the city, as the Spirit properties lie in the Derby school district. This is evident below.

The forgiveness of taxes is justified by the city because it believes it will receive a return that is greater than the foregone taxes. This benefit-cost ratio is calculated by the Center for Economic Development and Business Research (CEDBR) at Wichita State University based on data supplied by the applicant company and the city. The rationale behind these calculations is a matter of debate. Even if valid, calculating the ratio with any degree of precision is folly, reminding us of the old saw “Economists use a decimal point to remind us they have a sense of humor.”

City of Wichita: 5.38 to 1
City General Fund: 2.60 to 1
City Debt Service Fund: NA to 1
Sedgwick County: 2.69 to 1
U.S.D. 260: 1.16 to 1
State of Kansas: 5.51 to 1

These figures reveal that the City of Wichita is forcing a decision on a neighboring jurisdiction that it would not accept for itself, unless it uses one of many exceptions or loopholes. This adverse decision is forced upon the Derby School District. It faces a benefit-cost ratio of 1.16 to 1, which is below the city’s standard of 1.30 to 1, unless an exception is cited. 2 The Derby School District is not involved in this action and has no ability to influence the issuance of these bonds, should it desire to.

We have to wonder why the City of Wichita imposes upon the Derby school district an economic development incentive that costs the Derby schools $731,614 per year, with a substandard payoff?
Of note, the Derby school district extends into Wichita, including parts of city council districts 2 and 3. These districts are represented by Pete Meitzner and James Clendenin, respectively.

In a second agenda item, the city will consider IRBs for a building being developed by Air Capital Flight Line. The beneficiary, however, is Spirit, as city documents state: “The requested sales tax exemption and property tax abatement will be passed on as a benefit to Spirit.”

The annual benefit in tax savings is given by the city as:

City: $294,174
State: $13,500
County: $264,447
USD 259: $506,502

These values are offset by a Payment-In-Lieu-Of-Taxes (PILOT) estimated at $13,251 annually.

For benefit-cost ratios, the city supplies these:

City of Wichita: 3.65 to 1
City of Wichita Gen Fund: 1.83 to 1
City of Wichita Debt Serv: NA to 1
Sedgwick County: 2.09 to 1
USD 260: 1.00 to 1
State of Kansas 2.48: to 1

Here we see the same mistake with the Wichita and Derby school districts. We also see the Derby school district giving up $506,502 in tax revenue, with no positive return.

Spirit is not the only company asking for tax relief through IRBs this week. Three other companies are making similar requests. In none of these cases is economic necessity cited as a reason for escaping taxes. None are threatening to leave Wichita if the relief is not granted.

The problem with these actions

Part of the cost of these companies’ investment, along with the accompanying risk, is spread to a class of business firms that can’t afford additional cost and risk. These are young startup firms, the entrepreneurial firms that we need to nurture in order to have real and sustainable economic growth and jobs. But we can’t identify which firms will be successful. So we need an economic development strategy that creates an environment where these young entrepreneurial firms have the greatest chance to survive. The action the Wichita city council is considering this week works against entrepreneurial firms. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)

A major reason why these tax abatements are harmful to the Wichita economy is its strangling effect on entrepreneurship and young companies. As these companies and others escape paying taxes, others have to pay. This increases the burden of the cost of government on everyone else — in particular on the companies we need to nurture.

There’s plenty of evidence that entrepreneurship, in particular young business firms, are the key to economic growth. But Wichita’s economic development policies, as evidenced by these actions, are definitely stacked against the entrepreneur. As Wichita props up its established industries, it makes it more difficult for young firms to thrive. Wichita relies on targeted investment in our future. Our elected officials and bureaucrats believe they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by government that shapes the future direction of the Wichita economy.

These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This lack of knowledge, however, does not stop governments from creating policies for the awarding of incentives. This “active investor” approach to economic development is what has led to companies receiving grants or escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form. Young entrepreneurial companies are particularly vulnerable.

Embracing Dynamism: The Next Phase in Kansas Economic Development PolicyProfessor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.'”

(For a summary of the peer-reviewed academic research that examines the local impact of targeted tax incentives from an empirical point of view, see Research on economic development incentives. A sample finding is “General fiscal policy found to be mildly effective, while targeted incentives reduced economic performance (as measured by per capita income).”)

There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates for everyone is an example of such a policy. Abating taxes for specific companies through programs like the Wichita city council is considering this week is an example of precisely the wrong policy.

In explaining the importance of dynamism, Hall wrote: “Generally speaking, dynamism represents persistent, annual change in about one-third of Kansas jobs. Job creation may be a key goal of economic development policy but job creation is a residual economic outcome of business dynamism. The policy challenge centers on promoting dynamism by establishing a business environment that induces business birth and expansion without bias related to the size or type of business.”

We need to move away from economic development based on this active investor approach, especially the policies that prop up our established companies to the detriment of dynamism. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.

Small business

This year American City Business Journals presented the results of a study of small business vitality in cities. 3 Wichita ranked at number 104 out of 106 cities studied. Awarding incentives to large companies places small business at a disadvantage. Not only must small business pay for the cost of government that incentivized companies avoid, small companies must also compete with subsidized companies for inputs such as capital and labor.

Pursuing large companies

Research has found that the pursuit of large companies doesn’t produce the desired growth: “The results show that large firms fail to produce significant net benefits for their host communities, calling into question the high-stakes bidding war over jobs and investment.” 4

This finding is counterintuitive. People can easily see the large companies. They are likely to know someone that works there. But it is the unseen effects that must be considered too, and that is rarely done.


Notes

  1. City of Wichita. City Council agenda packet for December 6, 2016.
  2. Sedgwick County/City of Wichita Economic Development Policy. Available at www.wichita.gov/Government/Departments/Economic/EconomicDevelopmentDocuments/City%20of%20Wichita%20Economic%20Development%20Policy.pdf.
  3. Wichita Business Journal. The State of Small Business: Wichita scores low in small biz vitality. Available at www.bizjournals.com/wichita/print-edition/2016/04/29/the-state-of-small-business-wichita-scores-low-in.html.
  4. William F. Fox and Matthew N. Murray, “Do Economic Effects Justify the Use of Fiscal Incentives?” Southern Economic Journal, Vol. 71, No. 1, 2004, p. 79.

In Wichita, developer welfare under a cloud

A downtown Wichita project receives a small benefit from the city, with no mention of the really big money.

Today the Wichita City Council approved a subsidy for a project in downtown Wichita.

The city will lend the developer of a project at 303 S. Broadway $620,000 to improve the building’s facade. The property must repay this amount through an assessment on its property tax. The benefit to the property is that the city is able to borrow money at a lower interest rate, and this reduces the cost of borrowing for the project.

The agenda packet for this item states: “The Office of Urban Development has reviewed the economic (“gap”) analysis of the project and determined a financial need for incentives based on the current market.” This stems from the city’s policy on facade improvement projects, which is that the project would not be feasible except for this loan.1

Upon inquiry to the city, I was told that the facade improvement program would increase the developer’s return on investment from 7.06 percent to 8.35 percent. This seemed a stretch; that a small savings on interest costs on a small portion of the project cost could have such a large effect on profitability.

I asked the city for supporting documents that hold the figures used to calculate these amounts, but the city believes the Kansas Open Records Act does not allow it to release the records. In the past, however, I have received this information on request.

So, we’ll have to trust the city on this matter. I’m not comfortable with that. This is another example of the city conducting business within a cloud of secrecy.

Here’s the real money

The cost savings on borrowing $620,000 is just a small portion of subsidy this project will receive. Through tax credits, this project likely will receive over two million dollars in a form equivalent to cash.

The property was listed on the Register of Historic Kansas Places in August. This entitles the project to a tax credit of 25 percent of qualified expenses.2 With a project cost of $5,000,000, according to city documents, this tax credit could be worth $1,250,000.

From the National Park Service, a credit of 20 percent may be awarded.3 With a project cost of $5,000,000, according to city documents, this tax credit could be worth $1,000,000. It is not known at this time whether this project has qualified for this tax credit.

Together, the tax credits are worth potentially $2,250,000. Not all citizens may be aware of the mechanism of tax credits. In the case of the state of Kansas, the Department of Revenue will — figuratively — print a certificate that says the holder of this certificate may use it to pay $1,250,000 of state tax liability. It costs the state nothing to create this certificate. When the Department of Revenue receives the certificate instead of cash, the state gains nothing of economic value. The net economic effect is that the holder of the tax credit has been enriched by $1,250,000, and the state misses out on the same amount of revenue.4 Unless the state reduces its spending by the amount of the tax credit, the taxpayers have to make up the lost revenue.

This is not all. The project may apply for Industrial Revenue Bonds. This is a mechanism whereby a project may avoid paying property taxes and sales taxes.5 This property is located within a TIF district, so it is ineligible for property tax abatements. But, a sales tax exemption could be possible, if the developer applies.

That application is likely, as this developer did just that on another downtown Wichita building, also located in a TIF district, but eligible for sales tax exemption on purchases related to the redevelopment.6

Of note: This developer actively campaigned for the proposed 2014 Wichita city sales tax, offering free office space to the effort.7 Should he apply for a sales tax exemption on this property, this is another example of low-income families in Wichita paying sales tax on groceries, but well-off developers escaping paying that same tax.

The council meeting

At the council meeting, a citizen remarked how this project is good for the tax base. But, being in a TIF district, the incremental property taxes from this property will go to the TIF district, not the city, until the TIF debt is retired.

Council Member Janet Miller (district 6, north central Wichita) noted that the city is not contributing to the project, that the developer pays all the costs of the facade improvement loan. But of a direct contribution to the project, she said “Although I wouldn’t probably complain if that was a request.” I’d suggest that Miller read up on the economics of tax credits, and of a possible sales tax exemption. She might be surprised to learn how much cash this project is receiving.


Notes

  1. “Owner shall provide financial information that substantiates the need for the City’s facade loan in order to complete the redevelopment project, including the overall sources and uses of funds and pro forma cash flow analysis that shows a reasonable return on owner’s investment.” City of Wichita. Facade Improvement Program Policies and Procedures. Available at www.wichita.gov/Government/Departments/Economic/EconomicDevelopmentDocuments/Facade%20Improvement%20Program%20Policy.pdf.
  2. Kansas Historical Society. State Historic Rehabilitation Tax Credit. Available at www.kshs.org/p/tax-credit-basics/14673.
  3. National Park Service. Tax Incentives for Preserving Historic Properties. Available at www.nps.gov/tps/tax-incentives.htm.
  4. Sometime the tax credits are sold to someone else. In this case the seller usually receives less than the face value of the credit.
  5. Weeks, Bob. Industrial revenue bonds in Kansas. Available at wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/.
  6. Weeks, Bob. The Lux in Wichita: Taxpayer funding of lifestyle choices. Available at wichitaliberty.org/wichita-government/the-lux-in-wichita-taxpayer-funding-of-lifestyle-choices/.
  7. Weeks, Bob. In Wichita, pro-sales tax campaign group uses sales tax-exempt building as headquarters. Available at wichitaliberty.org/wichita-government/wichita-pro-sales-tax-campaign-group-uses-sales-tax-exempt-building-headquarters/.

CID and other incentives approved in downtown Wichita

The Wichita City Council approves economic development incentives, but citizens should not be proud of the discussion and deliberation.

Today’s meeting of the Wichita City Council saw the council discuss and approve economic development incentives for a project in downtown Wichita.

The item contemplated economic development incentives for redevelopment of an empty building in downtown Wichita to become a Hilton Garden Inn Hotel. The incentives being considered were a Community Improvement District (CID), Industrial Revenue Bonds (IRB), a parking agreement, and a skywalk easement. The discussion by the council was useful for revealing two members who are opposed to some targeted economic development incentives, but it also showed a troubling lack of knowledge and consideration by others.

Property tax

The hotel is requesting industrial revenue bonds. These bonds do not mean the city is lending any money. Instead, IRBs in Kansas are a mechanism to convey property tax abatements and sales tax exemptions.

The agenda packet for this item states: “[Hotel developer] WDH is not requesting abatement of property taxes in conjunction with the IRBs.”1 This is presented as a magnanimous gesture, as something the hotel developers (WDH) could have requested, but did not, presumably out of some sort of civic duty.

But: Property tax abatements may not be granted within the boundaries of a TIF district, which this hotel is located within.2 3 So the developers did not request something that they are not entitled to request. This is not news. Nonetheless, several council members were grateful.

As to property taxes, Wichita City Council Member James Clendenin (district 3, southeast and south Wichita) asked what would be the increase in value in the building, once finished. Later Wichita City Council Member Jeff Blubaugh (district 4, south and southwest Wichita) praised the property taxes that will be paid. He also mentioned the “nearly-empty parking garage.” When the city built this garage and accompanying retail space it was to be a showpiece, but has been suffering from blight and lack of tenants paying market rates for rent.4

Asking about tax abatements, Wichita City Council Member Pete Meitzner (district 2, east Wichita) asked “They didn’t apply for other …” His voice trailed off before finishing the question, but the “other” tax abatement that could be applied for is the property tax abatement. Except, the law does not allow for a property tax abatement for this project.

All these questions alluded to the increased property taxes the renovated building will pay. Except, being within a TIF district, property taxes may not be abated. So where will the hotel’s property taxes go?

First, the property tax generated by the present value of the property (the “base”) will be distributed as before. But the increment — which will be substantial — will go to the TIF district, not the city, county, and school district. Except: This is an unusual TIF district, in that an agreement between the city and county provides that only 70 percent of the incremental property taxes will go to the TIF district, with the remainder being distributed as usual. This was not mentioned during today’s discussion.

There was talk about a “gap.” Some economic development incentives require documenting of a “financing gap” that makes the project not economically feasible. But that is not required for the incentives considered for this hotel.

Sales tax

Regarding the sales tax exemption: City document do not state how much sales tax will be forgiven, so we’re left to speculate. Previous city documents5 indicate spending $3,000,000 on furniture and fixtures, which is taxable. Sales tax on this is $225,000.

The same city document mentioned spending of $6,250,000 on construction of the hotel, and of $1,000,000 for construction of retail space. Sales tax on this combined total is $543,750. Based on material from the Kansas Department of Revenue, these amounts would be due if not for the action of the city council.6

In total, the development of this hotel will escape paying $768,750 in sales tax. It should be noted that Kansas is one of the few states that charges sales tax on groceries at the same rate as other purchases, making Kansas food sales tax among the highest in the nation.7

Curiously, council members Clendenin and Williams, who represent low-income districts where families may be struggling to buy groceries — and the sales tax on them — did not object to this special sales tax treatment for a commercial developer.

No more cash?

In his remarks, the mayor talked about how we can continue with economic development “without handing cash to corporations.” But when a project is going to buy materials and services on which $768,750 in sales tax is normally due, and the city council takes action to extinguish that liability, well, that’s better than cash to the receiver.

Good news

Kudos to Wichita City Council Member Bryan Frye (district 5, west and northwest Wichita), who actually cited the United States Constitution in his statement from the bench. He said that the issues surrounding this project are a far cry from what our Founding Fathers envisioned as the role of government, saying “I struggle with using city resources to collect and distribute sales tax for the sole benefit of one commercial entity.” He offered a substitute motion which would have approved all the parts of the agreement except for the CID tax. His motion failed, with only he and Wichita Mayor Jeff Longwell voting in favor.

On the original motion, which was to approve all parts of the incentive agreement, Longwell and Frye voted in opposition, with everyone else voting in favor.


Notes

  1. City of Wichita. Agenda packet for September 6, 2016. Available here.
  2. “Certain property, even though funded by industrial revenue bonds, does not qualify for exemption: … property located in a redevelopment project area established under K.S.A. 12-1770 et seq. cannot be exempt from taxation.” Kansas Department of Revenue. Property Tax Abatements. Available at www.ksrevenue.org/taxincent-proptaxabate.html. Also, Kansas Department of Commerce. Industrial Revenue Bond Exemptions. Available at www.kansascommerce.com/DocumentCenter/Home/View/1082.
  3. Gilmore & Bell PC. Economic Development tools. Available here.
  4. Weeks, Bob. As landlord, Wichita has a few issues. Available at https://wichitaliberty.org/wichita-government/landlord-wichita-issues/.
  5. Wichita City Council Agenda packet for August 16, 2016. Available at wichita.gov/Government/Council/Agendas/08-16-2016%20City%20Council%20Agenda%20Packet.pdf.
  6. “General rule: Materials are taxable.” (p. 4) Also: “Taxable labor services in Kansas are the services of installing, applying, servicing, repairing, altering, or maintaining tangible personal property performed on real property projects in the general category of commercial remodel work.” (p. 8) Kansas Department of Revenue. Sales & Use Tax for Contractors, Subcontractors, and Repairmen. Available at www.ksrevenue.org/pdf/pub1525.pdf.
  7. Food sales tax a point of shame for Kansas. Wichita Eagle. January 25, 2016. Available at http://www.kansas.com/opinion/editorials/article56532903.html.

CID and other incentives proposed in downtown Wichita

A proposal for a community improvement district in downtown Wichita includes a public hearing, but much information the public needs is missing.

This week the Wichita City Council will consider starting the process of creating a community improvement district and other economic development incentives. The action the council will consider Tuesday is to accept the petition of the property owners and set September 6 as the date for the public hearing. Also, on September 6, “a development agreement defining the City and Developer’s responsibilities will be presented to the City Council.”1

A community improvement district, or CID, is a geographical district in which merchants add extra sales tax, known as the CID tax. This extra tax is then routed to the property owners. CIDs may be of two types. In one, the city borrows money to give to the developers, and the CID tax repays the bonds. In the second, no money is borrowed. Instead, the CID tax is periodically remitted to the developers as it is collected. The proposed CID is of the latter type. It is proposed to collect a CID tax of 1.5 percent for up to ten years, with a limit of $930,000. (For more information about how CIDs work, see Community improvement districts in Kansas.)

City documents also state the developers will request industrial bond financing. In this case, according to city documents, the purpose of the IRBs is to avoid paying sales tax on property purchased. The developers are also requesting use of the nearby state office building parking garage, but no details are given.

A public hearing?

The September 6th meeting will include a public hearing regarding the CID, industrial revenue bonds, parking agreement, and development agreement. As of today, we have information about the CID. But we have little or no information about the other items to be considered that day, which is billed as a public hearing.

If a public hearing is to include meaningful input from the public, the city needs to provide citizens with information about these items, and soon.

Rationale

What is the need for these economic development incentives? No reason is given. Some incentive programs require that the applicant demonstrate financial necessity. In other words, if the incentive is not given, it is impossible to proceed. No such argument has been advanced for this project. And if such an argument were to be made, we have to ask why are incentives needed to develop in downtown Wichita?

Since these incentives are proposed for a hotel, supporters argue that the cost of the incentives — at least the CID — will be borne by visitors to Wichita. This development, however, will contain a rooftop bar and ground floor commercial space. To the extent that Wichitans patronize these business firms, they will pay the CID tax. Even considering only the hotel, there are many Wichita-based companies whose employees travel to Wichita, staying in hotels at their companies’ expense. Wichita companies will be paying the CID tax in these cases. They will also pay the tourism fee, even though their employees are not tourists.

Besides, we shouldn’t view visitors to Wichita as a cash cow. Visitors staying in this hotel will pay these taxes:

State of Kansas sales tax, 6.5%
Sedgwick County sales tax, 1.0%
Wichita hotel tax, 6%
City tourism fee, 2.75%2
CID tax, 1.5%

The total of these taxes is 17.75%. (Yes, Wichita does charge visitors a “tourism fee.” If Wichita voters had followed the recommendation of the city, its bureaucrats, and the political class, there would be an additional tax of one percent.3)

Finally: As with all CIDs, why don’t the merchants simply raise their prices? Part of the answer is that the CID tax goes to benefit the landowners, which may not be the same party as the merchants who collect the tax.

Other than that, it’s convenient to have someone to blame higher prices on.


Notes

  1. Wichita City Council Agenda packet for August 16, 2016. Available at wichita.gov/Government/Council/Agendas/08-16-2016%20City%20Council%20Agenda%20Packet.pdf.
  2. Weeks, Bob. Wichita seeks to add more tax to hotel bills. Available at wichitaliberty.org/wichita-government/wichita-seeks-add-tax-hotel-bills/.
  3. Ballotpedia. City of Wichita Sales Tax Measure (November 2014). Available at ballotpedia.org/City_of_Wichita_Sales_Tax_Measure_(November_2014).

In Wichita, more sales tax hypocrisy

Another Wichita company that paid to persuade you to vote for higher taxes now seeks to avoid paying those taxes.

Next week the Wichita City Council will consider issuing industrial revenue bonds to benefit a local company. In Kansas, IRBs are not a loan of money from government. Instead, the bonds are a vehicle for conveying property tax abatements, and often sales tax exemptions. 1 The applicant company is Hijos, LLC/JR Custom Metal Products, Inc.

City documents give the value of abated taxes at $44,900 for the first year. Following years will probably be similar.

Besides property tax breaks, industrial revenue bonds can convey an exemption from paying sales taxes on purchases. City documents don’t state the amount of sales tax the company might avoid paying. But documents state the bonds will be used to fund capital equipment in the amount of $2,686,000. Sales tax on that is $201,450.

City documents also state this expansion will add 13 new jobs over the next five years at an average wage of $41,995.

Like several other companies that have received an exemption on paying sales tax on their purchases, 2 3 4 5 JR Custom Metals advocated for you to pay more sales tax. During the campaign for the one cent per dollar Wichita sales tax in 2014, this company contributed $1,000 to persuade voters to approve the tax.

JR Custom Metals contribution to Yes Wichita, the group that campaigned for the Wichita sales tax.
JR Custom Metals contribution to Yes Wichita, the group that campaigned for the Wichita sales tax.

But now it seeks to avoid paying all sales tax on these purchases. It has done this several times in the recent past.

The jobs are welcome. But this incident and many others like it reveal a capacity problem, which is this: We need to be creating nine jobs every day in order to make any significant progress in economic growth. 6 If it takes this much effort and the forgiveness of hundreds of thousands of dollars in taxes to create 13 jobs over five years, how much effort and subsidy will it take to create the many thousands of jobs we need to create every year?

  1. Weeks, Bob. Industrial revenue bonds in Kansas. Available at wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/.
  2. Weeks, Bob. Spirit Aerosystems tax relief. Available at wichitaliberty.org/wichita-government/spirit-aerosystems-tax-relief/.
  3. Weeks, Bob. In Wichita, campaigning for a tax, then asking for exemption from paying. Available at wichitaliberty.org/wichita-government/campaigning-for-tax-then-asking-for-exemption-from-paying/.
  4. Weeks, Bob. In Wichita, pro-sales tax campaign group uses sales tax-exempt building as headquarters. Available at wichitaliberty.org/wichita-government/wichita-pro-sales-tax-campaign-group-uses-sales-tax-exempt-building-headquarters/.
  5. Weeks, Bob. Union Station TIF provides lessons for Wichita voters. Available at wichitaliberty.org/wichita-government/union-station-tif-provides-lessons-wichita-voters.
  6. Weeks, Bob. Wichita economic development and capacity. Available at wichitaliberty.org/wichita-government/wichita-economic-development-capacity/.

Kansas economic development programs

Explaining common economic development programs in Kansas.

TIF projects: Some background
Tax increment financing disrupts the usual flow of tax dollars, routing funds away from cash-strapped cities, counties, and schools back to the TIF-financed development. TIF creates distortions in the way cities develop, and researchers find that the use of TIF means lower economic growth. Click here.

Tax increment financing (TIF) resources
Resources on tax increment financing (TIF) districts. Click here.

STAR bonds in Kansas
The Kansas STAR bonds program provides a mechanism for spending by autopilot, without specific appropriation by the legislature. Click here.

Industrial Revenue Bonds in Kansas
Industrial Revenue Bonds are a mechanism that Kansas cities and counties use to allow companies to avoid paying property and sales taxes. Click here.

Community Improvement Districts in Kansas
In Kansas Community Improvement Districts, merchants charge additional sales tax for the benefit of the property owners, instead of the general public. Click here.

In Kansas, PEAK has a leak
A Kansas economic development incentive program is pitched as being self-funded, but is probably a drain on the state treasure nonetheless. Click here.

Government intervention may produce unwanted incentives
A Kansas economic development incentive program has the potential to alter hiring practices for reasons not related to applicants’ job qualifications. Click here.

City of Wichita
City of Wichita’s economic development page is here. The Sedgwick County/City of Wichita Economic Development Policy is here.

State of Kansas
A page at the Kansas Department of Commerce with incentive programs is here.