Although there has been progress, cronyism and the swamp may be renewed in Washington.
Right under the nose of a president who promised to drain the swamp, one of the government’s shadiest handouts to large banks and big companies looks like it will be renewed for another 25 years. It will not get adequate oversight and congressional review. All it will take is the approval of two out of three U.S. Export-Import Bank directors, who are political appointees.
That entity is called the Private Export Funding Corporation, or PEFCO.
Veronique de Rugy is a Senior Research Fellow at the Mercatus Center at George Mason University. She goes on to explain that PEFCO acquires Export-Import Bank loans from private lenders. (The Ex-Im Bank is its own universe of cronyism.) It gets complicated, but the upshot is that many people are earning fees and interest without assuming risk, as taxpayers assume all the risk.
Many government programs guarantee loans. But as de Rugy notes: “The Export-Import Bank has been criticized for its cronyism, but PEFCO adds insult to injury because most of its shareholders are also its customers.”
Click for largerPEFCO and the Export-Import Bank represent cronyism — the swamp — at its height. In her commentary, she notes: “Although PEFCO is ostensibly a private institution, its activities incur no risks for itself or its private shareholders.” In the nearby chart from PEFCO’s 2019 annual report, we can see that the country with the largest balance of loans is China. In other words, U.S. taxpayers are on the hook should China default on these loans.
In the commentary, de Rugy closes with these recommendations:
In light of the current economic crisis, some may feel that now is not the time to reconsider or even reform PEFCO. But not even the most pessimistic economic scenarios assume that the current crisis will last 25 years. Assuming that the liquidity argument holds, if the guarantee agreement between the Ex-Im Bank and PEFCO is renewed again, it should be renewed for only one year, at the end of which the need for, or appropriate role of, PEFCO should be revisited in light of prevailing economic conditions. In the meantime, the Ex-Im Bank should review the appropriateness of its exclusive relationship with PEFCO.
In addition, PEFCO should under no circumstances be allowed to pay dividends to its shareholders, since they have zero capital at risk.
Finally, to signal a ceiling on the level of support that US taxpayers will provide to PEFCO’s shareholders, the Ex-Im Bank should not expand its guarantee for the interest payments that PEFCO owes on its secured notes, as has been proposed.
We should be wary of government planning in general. But when those who have been managing and planning the foundering Wichita-area economy want to step up their management of resources, we risk compounding our problems.
As announced by the City of Wichita, “In response to recent recommendations from Project Wichita and the Century II Citizens Advisory Committee, community organizations and their leadership are stepping forward to take the next step to create a comprehensive master plan and vision that connects projects and both banks of the Arkansas River.”
The city says these organizations will be involved:
We should note that these organizations have been responsible for developing the Wichita-area economy for many years. Despite recent developments like Cargill and Spirit Aerosystems, the Wichita economy has performed below the nation. While improving, our economic growth is perhaps half the national rate, and just two years ago Wichita lost jobs and population, and economic output fell.
Thus, the question is this: Why these organizations?
Then, recent behavior by the city, specifically surrounding the new ballpark, has resulted in a loss of credibility. Few seem happy with the city’s conduct. To this day, we still do not know the identities of the partners except for one.
In the future, can we trust the city and its partners are telling us the truth, and the whole truth?
Planning seems like a good thing. But O’Toole tells us the problem with government plans: “Everybody plans. But private plans are flexible, and we happily change them when new information arises. In contrast, special interest groups ensure that the government plans benefiting them do not change — no matter how costly.”
He continues: “Like any other organization, government agencies need to plan their budgets and short-term projects. But they fail when they write comprehensive plans (which try to account for all side effects), long-range plans (two to 50 years or more), or plans that attempt to control other people’s land and resources. Many plans try to do all three.”
Other problems with government planning as identified by O’Toole (and many others):
Planners have no better insight into the future than anyone else
Planners will not pay the costs they impose on other people
Unlike planners, markets can cope with complexity
Some will argue that the organizations listed above are not government entities and shouldn’t exhibit the problems inherent with government planning. But their plans will undoubtedly need to be approved by, and enforced by, government.
Further, some of these organizations are funded substantially or nearly entirely by government, are in favor of more government (such as higher taxation and regulation), and campaign vigorously for candidates who support more taxes and planning.
Following, from Randal O’Toole as published in 2007.
Government Plans Don’t Work
By Randal O’Toole
Unlike planners, markets can cope with complexity and change.
After more than 30 years of reviewing government plans, including forest plans, park plans, watershed plans, wildlife plans, energy plans, urban plans, and transportation plans, I’ve concluded that government planning almost always does more harm than good.
Most government plans are so full of fabrications and unsupportable assumptions that they aren’t worth the paper they are printed on, much less the millions of dollars taxpayers spend to have them written. Federal, state, and local governments should repeal planning laws and shut down planning offices.
Everybody plans. But private plans are flexible, and we happily change them when new information arises. In contrast, special interest groups ensure that the government plans benefiting them do not change — no matter how costly.
Like any other organization, government agencies need to plan their budgets and short-term projects. But they fail when they write comprehensive plans (which try to account for all side effects), long-range plans (two to 50 years or more), or plans that attempt to control other people’s land and resources. Many plans try to do all three.
Comprehensive plans fail because forests, watersheds, and cities are simply too complicated for anyone to understand. Chaos science reveals that very tiny differences in initial conditions can lead to huge differences in outcomes — that’s why megaprojects such as Boston’s Big Dig go so far over budget.
Long-range plans fail because planners have no better insight into the future than anyone else, so their plans will be as wrong as their predictions are.
Planning of other people’s land and resources fails because planners will not pay the costs they impose on other people, so they have no incentive to find the best answers.
Most of the nation’s 32,000 professional planners graduated from schools that are closely affiliated with colleges of architecture, giving them an undue faith in design. This means many plans put enormous efforts into trying to control urban design while they neglect other tools that could solve social problems at a much lower cost.
For example, planners propose to reduce automotive air pollution by increasing population densities to reduce driving. Yet the nation’s densest urban area, Los Angeles, which is seven times as dense as the least dense areas, has only 8 percent less commuting by auto. In contrast, technological improvements over the past 40 years, which planners often ignore, have reduced the pollution caused by some cars by 99 percent.
Some of the worst plans today are so-called growth-management plans prepared by states and metropolitan areas. They try to control who gets to develop their land and exactly what those developments should look like, including their population densities and mixtures of residential, retail, commercial, and other uses. “The most effective plans are drawn with such precision that only the architectural detail is left to future designers,” says a popular planning book.
About a dozen states require or encourage urban areas to write such plans. Those states have some of the nation’s least affordable housing, while most states and regions that haven’t written such plans mostly have very affordable housing. The reason is simple: planning limits the supply of new housing, which drives up the price of all housing and leads to housing bubbles.
In states with growth-management laws, median housing prices in 2006 were typically 4 to 8 times median family incomes. In most states without such laws, median home prices are only 2 to 3 times median family incomes.
Few people realize that the recent housing bubble, which affected mainly regions with growth-management planning, was caused by planners trying to socially engineer cities. Yet it has done little to protect open space, reduce driving, or do any of the other things promised.
Politicians use government planning to allocate scarce resources on a large scale. Instead, they should make sure that markets — based on prices, incentives, and property rights — work.
Private ownership of wildlife could save endangered species such as the black-footed ferret, North America’s most-endangered mammal. Variably priced toll roads have helped reduce congestion. Pollution markets do far more to clean the air than exhortations to drive less. Giving people freedom to use their property, and ensuring only that their use does not harm others, will keep housing affordable.
Unlike planners, markets can cope with complexity. Futures markets cushion the results of unexpected changes. Markets do not preclude government ownership, but the best-managed government programs are funded out of user fees that effectively make government managers act like private owners. Rather than passing the buck by turning sticky problems over to government planners, policymakers should make sure markets give people what they want.
The Wichita City Council will consider approval of a redevelopment plan in a tax increment financing (TIF) district.
This week the Wichita City Council will hold a public hearing considering approval of more tax increment financing (TIF) spending in downtown Wichita. The spending is for the second phase of redevelopment of the Union Station property on East Douglas. According to city documents, the total cost of this phase is $31,000,000, with TIF paying for $2,954,734. 1
This is a pay-as-you-go form of TIF, which means the city does not borrow funds as it would in a traditional TIF district. Instead, the eligible portion of the developer’s property taxes will be rerouted back to the development as they are paid.
The TIF district was established in 2014. The council this week considers a redevelopment plan, which authorizes spending TIF funds on a specific project. Redevelopment plans must be approved by a two-thirds majority of the council. While overlapping jurisdictions like counties and school districts can block the formation of a TIF district, they have no such role in the approval of a redevelopment plan.
Of note, this public hearing is being held after the fact, sort of. City documents state: “A development agreement was approved by the City Council on August 7, to allow for the developer to begin non-TIF eligible improvements in order to meet deadlines for a new tenant.” The city documents for the August 7 meeting hold this: 2
The Developer has requested that the development agreement be approved now, prior to adoption of the project plan, to allow work to begin on the Meade Corridor improvements in order to complete the project in time for the tenant to move in. The Development agreement is drafted to allow for the Meade Corridor improvements to occur following adoption of the agreement, however, any work or reimbursement for TIF is contingent on City Council adoption of the project plan following the September 11 public hearing.
Citizens have to wonder will the September 11 public hearing have any meaning or relevance, given that on August 7 the city gave its de facto approval of the redevelopment plan.
Following, more information about tax increment financing.
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.
How TIF works
A TIF district is a geographically-defined area.
In Kansas, TIF takes two or more steps. The first step is that cities or counties establish the boundaries of the TIF district. After the TIF district is defined, cities then must approve one or more project plans that authorize the spending of TIF funds in specific ways. (The project plan is also called a redevelopment plan.) In Kansas, overlapping counties and school districts have an opportunity to veto the formation of the TIF district, but this rarely happens. Once the district is formed, cities and counties have no ability to object to TIF project plans.
Figure 1.Before the formation of the TIF district, the property pays taxes to the city, county, school district, and state as can be seen in figure 1. Because property considered for TIF is purportedly blighted, the amount of tax paid is usually small. Whatever it is, that level is called the “base.”
Figure 2.After approval of one or more TIF project plans the city borrows money and gives it to the project or development. The city now has additional debt in the form of TIF bonds that require annual payments. Figure 2 illustrates. (There is now another form of TIF known as “pay-as-you-go” that works differently, but produces much the same economic effect.)
Figure 3.Figure 3 shows the flow of tax revenue after the formation of the TIF district and after the completion of a project. Because buildings were built or renovated, the property is worth more, and the property tax is now higher. The development now has two streams of property tax payments that are handled in different ways. The original tax — the “base” — is handled just like before, distributed to city, state, school district, and the state, according to their mill levy rates. The difference between the new tax and the base tax — the “increment” — is handled differently. It goes to only two destinations (mostly): The State of Kansas, and repayment of the TIF bonds.
Figure 4.Figure 4 highlights the difference in the flow of tax revenues. The top portion of the illustration shows development outside of TIF. We see the flows of tax payments to city, county, school district, and the state. In the bottom portion, which shows development under TIF, the tax flows to city, county, and school district are missing. No longer does a property contribute to the support of these three units of government, although the property undoubtedly requires the services of them. This is especially true for a property in Old Town, which consumes large amounts of policing.
(Cities, counties, and school districts still receive the base tax payments, but these are usually small, much smaller than the incremental taxes. In non-TIF development, these agencies still receive the base taxes too, plus whatever taxes result from improvement of the property — the “increment,” so to speak. Or simply, all taxes.)
The Kansas law governing TIF, or redevelopment districts as they are also called, starts at K.S.A. 12-1770.
TIF and public policy
Originally most states included a “but for” test that TIF districts must meet. That is, the proposed development could not happen but for the benefits of TIF. Many states have dropped this requirement. At any rate, developers can always present proposals that show financial necessity for subsidy, and gullible government officials will believe.
Similarly, TIF was originally promoted as a way to cure blight. But cities are so creative and expansive in their interpretation of blight that this requirement, if it still exists, has little meaning.
The rerouting of property taxes under TIF goes against the grain of the way taxes are usually rationalized. We use taxation as a way to pay for services that everyone benefits from, and from which we can’t exclude people. An example would be police protection. Everyone benefits from being safe, and we can’t exclude people from benefiting from police protection.
So when we pay property tax — or any tax, for that matter — people may be comforted knowing that it goes towards police and fire protection, street lights, schools, and the like. (Of course, some is wasted, and government is not the only way these services, especially education, could be provided.)
But TIF is contrary to this justification of taxes. TIF allows property taxes to be used for one person’s (or group of persons) exclusive benefit. This violates the principle of broad-based taxation to pay for an array of services for everyone. Remember: What was the purpose of the TIF bonds? To pay for things that benefited the development. Now, the development’s property taxes are being used to repay those bonds instead of funding government.
One more thing: Defenders of TIF will say that the developers will pay all their property taxes. This is true, but only on a superficial level. We now see that the lion’s share of the property taxes paid by TIF developers are routed back to them for their own benefit.
It’s only infrastructure
In their justification of TIF in general, or specific projects, proponents may say that TIF dollars are spent only on allowable purposes. Usually a prominent portion of TIF dollars are spent on infrastructure. This allows TIF proponents to say the money isn’t really being spent for the benefit of a specific project. It’s spent on infrastructure, they say, which they contend is something that benefits everyone, not one project specifically. Therefore, everyone ought to pay.
This attitude is represented by a comment left at Voice for Liberty, which contended: “The thing is that real estate developers do not invest in public streets, sidewalks and lamp posts, because there would be no incentive to do so. Why spend millions of dollars redoing or constructing public streets when you can not get a return on investment for that”
This perception is common: that when we see developers building something, the City of Wichita builds the supporting infrastructure at no cost to the developers. But it isn’t quite so. About a decade ago a project was being developed on the east side of Wichita, the Waterfront. This project was built on vacant land. Here’s what I found when I searched for City of Wichita resolutions concerning this project:
Figure 5. Waterfront resolutions.Note specifically one item: $1,672,000 for the construction of Waterfront Parkway. To anyone driving or walking in this area, they would think this is just another city street — although a very nicely designed and landscaped street. But the city did not pay for this street. Private developers paid for this infrastructure. Other resolutions resulted in the same developers paying for street lights, traffic signals, sewers, water pipes, and turning lanes on major city streets. All this is infrastructure that we’re told real estate developers will not pay for. But in order to build the Waterfront development, private developers did, with a total cost of these projects being $3,334,500. (It’s likely I did not find all the resolutions and costs pertaining to this project, and more development has happened since this research.)
In a TIF district, these things are called “infrastructure” and will be paid for by the development’s own property taxes — taxes that must be paid in any case. Outside of TIF districts, developers pay for these things themselves.
If not for TIF, nothing will happen here
Generally, TIF is justified using the “but-for” argument. That is, nothing will happen within a district unless the subsidy of TIF is used. Paul F. Byrne explains:
“The but-for provision refers to the statutory requirement that an incentive cannot be awarded unless the supported economic activity would not occur but for the incentive being offered. This provision has economic importance because if a firm would locate in a particular jurisdiction with or without receiving the economic incentive, then the economic impact of offering the incentive is non-existent. … The but-for provision represents the legislature’s attempt at preventing a local jurisdiction from awarding more than the minimum incentive necessary to induce a firm to locate within the jurisdiction. However, while a firm receiving the incentive is well aware of the minimum incentive necessary, the municipality is not.”
“This paper conducts a comprehensive assessment of the effectiveness of Chicago’s TIF program in creating economic opportunities and catalyzing real estate investments at the neighborhood scale. This paper uses a unique panel dataset at the block group level to analyze the impact of TIF designation and investments on employment change, business creation, and building permit activity. After controlling for potential selection bias in TIF assignment, this paper shows that TIF ultimately fails the ‘but-for’ test and shows no evidence of increasing tangible economic development benefits for local residents.” (emphasis added)
In the paper, the author clarifies:
“To clarify these findings, this analysis does not indicate that no building activity or job crea-tion occurred in TIFed block groups, or resulted from TIF projects. Rather, the level of these activities was no faster than similar areas of the city which did not receive TIF assistance. It is in this aspect of the research design that we are able to conclude that the development seen in and around Chicago’s TIF districts would have likely occurred without the TIF subsidy. In other words, on the whole, Chicago’s TIF program fails the ‘but-for’ test.
Later on, for emphasis:
“While the findings of this paper are clear and decisive, it is important to comment here on their exact extent and external validity, and to discuss the limitations of this analysis. First, the findings do not indicate that overall employment growth in the City of Chicago was negative or flat during this period. Nor does this research design enable us to claim that any given TIF-funded project did not end up creating jobs. Rather, we conclude that on-average, across the whole city, TIF was unsuccessful in jumpstarting economic development activity — relative to what would have likely occurred otherwise.” (emphasis in original)
The author notes that these conclusions are specific to Chicago’s use of TIF, but should “should serve as a cautionary tale.”
The paper reinforces the problem of using tax revenue for private purposes, rather than for public benefit: “Essentially, Chicago’s extensive use of TIF can be interpreted as the siphoning off of public revenue for largely private-sector purposes. Although, TIF proponents argue that the public receives enhanced economic opportunity in the bargain, the findings of this paper show that the bargain is in fact no bargain at all.”
TIF is social engineering
TIF represents social engineering. By using it, city government has decided that it knows best where development should be directed. In particular, the Wichita city council has decided that Old Town and downtown development is on a superior moral plane to other development. Therefore, we all have to pay higher taxes to support this development. What is the basis for saying Old Town developers don’t have to pay for their infrastructure, but developers in other parts of the city must pay?
TIF doesn’t work
Does TIF work? It depends on what the meaning of “work” is.
If by working, do we mean does TIF induce development? If so, then TIF usually works. When the city authorizes a TIF project plan, something usually gets built or renovated. But this definition of “works” must be tempered by a few considerations.
Does TIF pay for itself?
First, is the project self-sustaining? That is, is the incremental property tax revenue sufficient to repay the TIF bonds? This has not been the case with all TIF projects in Wichita. The city has had to bail out two TIFs, one with a no-interest and low-interest loan that cost city taxpayers an estimated $1.2 million.
The verge of corruption
Second, does the use of TIF promote a civil society, or does it lead to cronyism? Randal O’Toole has written:
“TIF puts city officials on the verge of corruption, favoring some developers and property owners over others. TIF creates what economists call a moral hazard for developers. If you are a developer and your competitors are getting subsidies, you may simply fold your hands and wait until someone offers you a subsidy before you make any investments in new development. In many cities, TIF is a major source of government corruption, as city leaders hand tax dollars over to developers who then make campaign contributions to re-elect those leaders.”
We see this in Wichita, where the regular recipients of TIF benefits are also regular contributors to the political campaigns of those who are in a position to give them benefits. The corruption is not illegal, but it is real and harmful, and calls out for reform. See In Wichita, the need for campaign finance reform.
The effect of TIF on everyone
Third, what about the effect of TIF on everyone, that is, the entire city or region? Economists have studied this matter, and have concluded that in most cases, the effect is negative.
“TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable.”
So TIF districts are good for the favored development that receives the subsidy — not a surprising finding. What about the rest of the city? Continuing from the same study:
“If the use of tax increment financing stimulates economic development, there should be a positive relationship between TIF adoption and overall growth in municipalities. This did not occur. If, on the other hand, TIF merely moves capital around within a municipality, there should be no relationship between TIF adoption and growth. What we find, however, is a negative relationship. Municipalities that use TIF do worse.
We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.” (emphasis added)
In a different paper (The Effects of Tax Increment Financing on Economic Development), the same economists wrote “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not. … These findings suggest that TIF trades off higher growth in the TIF district for lower growth elsewhere. This hypothesis is bolstered by other empirical findings.” (emphasis added)
“This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.” (emphasis added)
These studies and others show that as a strategy for increasing the overall wellbeing of a city, TIF fails to deliver prosperity, and in fact, causes harm.
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Notes
Wichita city council agenda packet for September 11, 2018. ↩
Wichita city council agenda packet for August 7, 2018. ↩
Here’s evidence of a government program that, undoubtedly, was started with good intentions, but hasn’t produced the intended results.
Tax season ended last week. Taxpayers have filed for over $30 billion in credits and deductions for college expenses they paid in 2017.
Evidence now clearly shows that these credits have zero effect on college attendance. The tax credits surely make those who get them better off, but they do nothing to increase education. If their intent is to increase schooling, they are a failure.
PEAK, a Kansas economic development incentive program, redirects employee income taxes back to the employing company.
An economic development incentive program in Kansas is PEAK, or Promoting Employment Across Kansas. This program allows companies to retain 95 percent of the payroll withholding tax of employees.
Flow of tax dollars under normal circumstances, and under PEAK.PEAK incentive payments can be a substantial sum. Tables available at the Kansas Department of Revenue indicate that for a single person with no exemptions who earns $40,000 annually, the withholding would be $27 per week (for weekly payroll), or $1,404 annually. For a married person with two children earning the same salary, withholding would be $676 annually. Under PEAK, the company retains 95 percent of these values. (These illustrations are based on 2016 tax rates.)
There are requirements regarding the minimum number of jobs to be created or retained. Also, companies must pay wages greater than or equal to the median county wage. 1
Then, the Secretary of Commerce has “discretion to approve applications of qualified companies and determine the benefit period.”
Legislators and public officials like programs like PEAK partly because they can promote these programs as self-financing. That is, the state isn’t subsidizing a company. Instead, the company is paying its own way with its own taxes (actually, its employees’ taxes). PEAK supporters say the state is not sending money to the company. Instead, the company is just holding on to 95 percent of its employees’ withholding taxes instead of sending the funds to the state.
Schemes like PEAK call into question one of the fundamental principles of taxation: That tax funds be used to fund the operations of government, not to enrich one particular person or company. But continually, states and local government use programs like PEAK — and others like tax increment financing (TIF) districts, Community Improvement Districts (CIDs), Industrial Revenue Bonds, and others — that turn over a public function to private interests.
Illustration of a shortfall under PEAKHere’s another consideration regarding the PEAK program. The amount of money withheld from a worker’s paycheck is not the same as the amount of tax the worker actually owes the state. Withholding is only an approximation, and one that is biased in favor of the state. Many Kansas workers receive an income tax refund from the state. This is in recognition that the sum of the withholding taxes paid by a worker is larger than the actual tax liability. Therefore, the state is returning money that the state was not entitled to.
Now, what about workers who are employed at a company that is in the PEAK program and who receive a state income tax refund? Their withholding taxes — 95 percent, anyway — have already been given back to their employer.
So: What is the source of the money used to pay these refunds? How much money is paid in refunds to employees working at PEAK-participating companies?
We should note that the funds don’t come from the PEAK company’s employees, as the employees receive credit for all their withholding taxes, even though 95 percent never contributed to the state treasury.
Inquiry to the Department of Revenue revealed that there are no statistics on actual income tax liability of PEAK employees vs. the amount of withholding tax credited to that employee that was retained or refunded to the PEAK employer. The Department of Commerce referred inquiries to the Department of Revenue.
If we wanted to know how much money was paid in refunds to PEAK-company employees, I believe we would need to examine the account of each affected employee. I’m sure it’s not possible to come up with an answer by making assumptions, because the circumstances of each taxpayer vary widely.
Whatever the amount, it represents state tax revenue being used to fund an economic development incentive program that is pitched as being self-funded.
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Notes
“PEAK requires the qualified company to commit to creating five new jobs in non-metropolitan counties or ten (10) new jobs in the metropolitan counties of Shawnee, Douglas, Wyandotte, Johnson, Leavenworth and Sedgwick over a two-year period. The qualified company must also pay wages to the PEAK jobs/employees, that when aggregated, meet or exceed the county median wage or North American Industry Classification System (NAICS) average wage for their industry.” Kansas Department of Commerce. Promoting Employment Across Kansas (PEAK) Program. Available at http://kansascommerce.gov/141/Promoting-Employment-Across-Kansas-Progr. ↩
In Rich States, Poor States, Kansas improves its middle-of-the-pack performance, but continues with a mediocre forward-looking forecast.
In the 2017 edition of Rich States, Poor States, Utah continues its streak at the top of Economic Outlook Ranking, meaning that the state is poised for growth and prosperity. Kansas continues with middle-of-the-pack performance rankings, and after falling sharply in the forward-looking forecast, continues at the same level.
Rich States, Poor States is produced by American Legislative Exchange Council. The authors are economist Dr. Arthur B. Laffer, Stephen Moore, who is Distinguished Visiting Fellow, Project for Economic Growth at The Heritage Foundation, and Jonathan Williams, who is vice president for the Center for State Fiscal Reform at ALEC.
In addition to the printed and pdf versions of Rich States, Poor States there is now an interactive web site at www.richstatespoorstates.org.
Rich States, Poor States computes two measures for each state. The first is the Economic Performance Ranking, described as “a backward-looking measure based on a state’s performance on three important variables: State Gross Domestic Product, Absolute Domestic Migration, and Non-Farm Payroll Employment — all of which are highly influenced by state policy.” The process looks at the past ten years.
Looking forward, there is the Economic Outlook Ranking, “a forecast based on a state’s current standing in 15 state policy variables. Each of these factors is influenced directly by state lawmakers through the legislative process. Generally speaking, states that spend less — especially on income transfer programs, and states that tax less — particularly on productive activities such as working or investing — experience higher growth rates than states that tax and spend more.”
Economic outlook ranking for Kansas and nearby states. Click for larger.For economic performance (the backward-looking measure), Kansas ranks twentieth. That’s up from twenty-seventh last year.
In this year’s compilation for economic outlook, Kansas ranks twenty-sixth, up one position from the previous year, but down from eighteenth and fifteenth the years before. In 2008, the first year for this measure, Kansas was twenty-ninth.
Kansas compared to other states
A nearby chart shows the Economic Outlook Ranking for Kansas and some nearby states, shown as a trend over time since 2008. The peak of Kansas in 2013 is evident, as is the decline since then.
Why Kansas fell
Kansas fell in the Economic Outlook Ranking from 2013 to 2016 and moved by just one position in 2017. To investigate why, I gathered data for Kansas from 2008 to 2017. The nearby table shows the results for 2017 and the rank among the states, with the trend since 2008 shown. A rank of one is the best ranking. For the trend lines, an upward slope means a decline in ranking, meaning the state is performing worse.
There are several areas that account for the difference.
The most notable change is in the measure “Recently Legislated Tax Changes (per $1,000 of personal income)” Kansas fell four positions in rank. By this measure, Kansas added $2.66 in taxes per $1,000 of personal income, which ranked forty-sixth among the states. This is a large change in a negative direction, as Kansas had ranked seventh two years before.
For the state liability system, Kansas ranks nineteenth, when it was fifth two years ago.
Kansas remains one of the states with the most public employees, with 669.8 full-time equivalent employees per 10,000 population. This ranks forty-eighth among the states.
Kansas has no tax and spending limits, which is a disadvantage compared to other states. These limitations could be in the form of an expenditure limit, laws requiring voter approval of tax increases, or supermajority requirements in the legislature to pass tax increases.
How valuable is the ranking?
Correlation of ALEC-Laffer state policy ranks and state economic performanceAfter the 2012 rankings were computed, ALEC looked retrospectively at rankings compared to actual performance. The nearby chart shows the correlation of ALEC-Laffer state policy ranks and state economic performance. In its discussion, ALEC concluded:
There is a distinctly positive relationship between the Rich States, Poor States’ economic outlook rankings and current and subsequent state economic health.
The formal correlation is not perfect (i.e., it is not equal to 100 percent) because there are other factors that affect a state’s economic prospects. All economists would concede this obvious point. However, the ALEC-Laffer rankings alone have a 25 to 40 percent correlation with state performance rankings. This is a very high percentage for a single variable considering the multiplicity of idiosyncratic factors that affect growth in each state — resource endowments, access to transportation, ports and other marketplaces, etc.
Rich States, Poor States compilation for Kansas. Click for larger version.
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.
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.
In Rich States, Poor States, Kansas continues with middle-of-the-pack performance, and fell sharply in the forward-looking forecast.
In the 2016 edition of Rich States, Poor States, Utah continues its streak at the top of Economic Outlook Ranking, meaning that the state is poised for growth and prosperity. Kansas continues with middle-of-the-pack performance rankings, and fell sharply in the forward-looking forecast.
Rich States, Poor States is produced by American Legislative Exchange Council. The authors are economist Dr. Arthur B. Laffer, Stephen Moore, who is Distinguished Visiting Fellow, Project for Economic Growth at The Heritage Foundation, and Jonathan Williams, who is vice president for the Center for State Fiscal Reform at ALEC.
Rich States, Poor States computes two measures for each state. The first is the Economic Performance Ranking, described as “a backward-looking measure based on a state’s performance on three important variables: State Gross Domestic Product, Absolute Domestic Migration, and Non-Farm Payroll Employment — all of which are highly influenced by state policy.” The process looks at the past ten years.
Looking forward, there is the Economic Outlook Ranking, “a forecast based on a state’s current standing in 15 state policy variables. Each of these factors is influenced directly by state lawmakers through the legislative process. Generally speaking, states that spend less — especially on income transfer programs, and states that tax less — particularly on productive activities such as working or investing — experience higher growth rates than states that tax and spend more.”
For economic performance, Kansas is twenty-seventh. That’s up from twenty-eighth last year.
In this year’s compilation for economic outlook, Kansas ranks twenty-seventh, down from eighteenth last year and fifteenth the year before. In 2008, the first year for this measure, Kansas was twenty-ninth.
Kansas compared to other states
Kansas and nearby states Economic Outlook Ranking. Click for larger version.A nearby chart shows the Economic Outlook Ranking for Kansas and some nearby states, shown as a trend over time since 2008. The peak of Kansas in 2013 is evident, as is the decline since then.
Why Kansas fell
Kansas fell in the Economic Outlook Ranking from 2013 to 2016. To investigate why, I gathered data for Kansas from 2008 to 2016. The nearby table shows the results for 2016 and the rank among the states, with the trend since 2008 shown. A rank of one is the best ranking, so for the trend lines, an upward slope means a decline in ranking, meaning the state is performing worse.
There are several areas that may account for the difference.
The most notable change is in the measure “Recently Legislated Tax Changes (per $1,000 of personal income)” Kansas fell four positions in rank. By this measure, Kansas added $2.67 in taxes per $1,000 of personal income, which ranked forty-seventh among the states. This is a large change in a negative direction, as Kansas had ranked seventh the year before.
In “Property Tax Burden (per $1,000 of personal income)” Kansas improved one position in the rankings, despite the tax burden rising.
In “Sales Tax Burden (per $1,000 of personal income)” Kansas fell one spot in rank. The burden is calculated proportional to personal income. The sales tax burden, as measured this way, fell slightly in Kansas, but the ranking fell in comparison to other states. (Although the Kansas sales tax rate rose in 2015, this report uses data from 2013, which is the most recent data available from the U.S. Census Bureau. It’s likely that the 2015 sales tax hike will increase this burden, but whether the ranking changes depends on actions in other states.)
Kansas improved six rank positions for “Debt Service as a Share of Tax Revenue.”
Kansas remains one of the states with the most public employees, with 672 full-time equivalent employees per 10,000 population. This ranks forty-eighth among the states.
Kansas has no tax and spending limits, which is a disadvantage compared to other states. These limitations could be in the form of an expenditure limit, laws requiring voter approval of tax increases, or supermajority requirements in the legislature to pass tax increases.
How valuable is the ranking?
Correlation of ALEC-Laffer state policy ranks and state economic performanceAfter the 2012 rankings were computed, ALEC looked retrospectively at rankings compared to actual performance. The nearby chart shows the correlation of ALEC-Laffer state policy ranks and state economic performance. In its discussion, ALEC concluded:
There is a distinctly positive relationship between the Rich States, Poor States’ economic outlook rankings and current and subsequent state economic health.
The formal correlation is not perfect (i.e., it is not equal to 100 percent) because there are other factors that affect a state’s economic prospects. All economists would concede this obvious point. However, the ALEC-Laffer rankings alone have a 25 to 40 percent correlation with state performance rankings. This is a very high percentage for a single variable considering the multiplicity of idiosyncratic factors that affect growth in each state — resource endowments, access to transportation, ports and other marketplaces, etc.
Rich States, Poor States compilation for Kansas. Click for larger version.
A real estate development in College Hill was not successful. What does this mean for city taxpayers?
Seeking to promote the redevelopment of land northeast of Douglas and Hillside, the City of Wichita entered into agreements with Loveland Properties, LLC, College Hill Urban Village LLC, and CHUV Inc. The original plans were grand: A Northeast Brownstone Complex located at the northeast corner of Victor and Rutan, a Condominium Tower and Brownstone Complex, a West Brownstone Complex, and the South Retail/Residential Complex. A city analysis in 2007 projected that by 2010 the value of these projects would be $61,817,932.
Unfortunately, this project did not proceed as planned. The Northeast Brownstone Complex was built, and nothing else. Those brownstone condominiums proved difficult to sell. The project held great promise, but for whatever reasons things did not work as planned, and the city has lost an opportunity for progress.
The questions now are: What is the impact on taxpayers? Is there anything to learn as the city moves forward with other public-private partnerships?
City documents tell the story of this project, if you know how to read between the lines. 1
City document says: “The City financed $3,685,000 in TIF bonds in 2014.”
What it means to you: Tax increment financing, or TIF, is a method of economic development financing whereby additional property taxes (the “increment”) are redirected back to a real estate development. In this case, the city sold these bonds and gave the proceeds to the developer. Then — according to plan — as property values rose, the correspondingly higher property taxes generated by the development would pay off the bonds. Except, property values did not rise. So who pays? According to the bond documents, 2 “The full faith, credit and resources of the Issuer are hereby pledged for the payment of the principal of and interest on this Bond.” The Issuer is the City of Wichita, and the resources the city has to pledge are taxes it collects from its taxpayers.
City document says: “An additional amount of tax exempt expenses related to the project, totaling $1,785,000, were paid off by the Finance Department using cash from the Debt Service Fund.”
What it means to you: These costs were to be paid by the developer, but the developer did not pay. So, the city’s Debt Service Fund was used. The Debt Service Fund gets its money from taxpayers, and this money is being used to pay off a debt owed by a private person. This is necessary because the debt payment is guaranteed by the city, which in turns means it is guaranteed by the taxpayers. If not spent to satisfy the debt for this project, this money might have been used to pay off other city debt, reduce taxes, pay for more police and firemen, fix streets, and satisfy other needs.
City document says: “The City will be responsible for maintenance and property taxes for the property until the property can be sold.”
What it means to you: More expense for city taxpayers.
City document says: “Any tax increment generated from existing and future development will be used to repay TIF bonds. Staff does not expect remaining TIF revenue to be sufficient to repay the outstanding debt.”
What it means to you: As explained above, taxpayers are on the hook for these bonds.
The original agreement with the developer says: “In addition to all the terms, conditions and procedures for fulfilling these obligations, the Development Agreement also provides for a Tax Increment Shortfall Guaranty in which the developer and other private entities with ownership interest in the project are required to pay the City any shortfall in TIF revenue available to pay debt service on TIF bonds.”
What it means to you: Nothing. It should mean something. The city tells us its participation in these ventures is free of risk to citizens. That’s because recipients of incentives like TIF pledge to hold the city harmless if things don’t work out as planned. In this case, if the TIF district revenue is not enough to pay the TIF district bonds, the developer has pledged to pay the difference. But it is unlikely that the city will be able to collect on the promise made by this developer.
But there may be good news: The first phase of the project, the brownstones, is now owned by Legacy Bank. Hopefully, the city will be able to collect the TIF shortfall from this new owner so that taxpayers don’t have to pay.
The project plan formulated by the city says: “Net tax increment revenue is available to pay debt service on outstanding general obligation bonds issued to finance eligible project costs.” This statement is true if everything works as planned. But real estate development is risky. Things may not work out as planned. City documents don’t tell taxpayers this. Instead, city leaders present these projects as though everything will work out as planned.
There is some undeveloped land that was to be used in future phases of the project. But even empty land is harmful to city taxpayers, as city documents state: “The developer has not paid property taxes on the parcels from 2010 to 2015, resulting in $400,080 in current and delinquent taxes owed. The City will now be responsible for the taxes.”
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Notes
Wichita City Council Agenda Packet, March 15, 2016. Available here. ↩
From the Additional Provisions of the series 813 bonds: General Obligations. The Bonds constitute general obligations of the Issuer payable as to both principal and interest, in part from special assessments levied upon the property benefited by the construction of the Improvements (as said term is described in the Bond Resolution), in part from incremental property tax revenues derived in certain tax increment financing districts within the Issuer and, if not so paid, from ad valorem taxes which may be levied without limitation as to rate or amount upon all the taxable tangible property, real and personal, within the territorial limits of the Issuer, the balance being payable from ad valorem taxes which may be levied without limitation as to rate or amount upon all the taxable tangible property, real and personal, within the territorial limits of the Issuer. The full faith, credit and resources of the Issuer are hereby pledged for the payment of the principal of and interest on this Bond and the issue of which it is a part as the same respectively become due ↩
