In Kansas, a company seeks to avoid paying property taxes, again.
In a bill presented in the Kansas Legislature, the owner of health clubs seeks to avoid paying property taxes. The same company and its owner have tried this before. In 2014, I explained how granting this exemption was a bad idea.
What has changed since then? This exemption is still a bad idea for reasons of public policy. Additionally, Brandon Steven, the owner of the health clubs, plead guilty to a gambling charge and forfeited one million dollars in earnings. The companies also owe a lot of the tax it seeks to avoid.
Following, my article from March 2014.
Special interests struggle to keep special tax treatment
When a legislature is willing to grant special tax treatment, it sets up a battle to keep — or obtain — that status. Once a special class acquires preferential treatment, others will seek it too.
When preferential tax treatment is granted, that is, when government says someone doesn’t have to pay taxes, it’s usually the case that someone else has to pay. That’s because governmental bodies usually don’t reduce their spending in response to the tax breaks they give. Spending stays the same (or rises), but someone isn’t paying their share. Therefore, others have to make up the missing tax revenue.
In Kansas, SB 72 has been passed by the Senate and may be considered by the House of Representatives. This bill would, according to its supplemental note “provide a property or ad valorem tax exemption on all property owned and operated by a health club.” In effect, this bill would give all health clubs the same property tax exemption that the YMCA enjoys on its fitness centers.
When the legislature uses tax law to achieve goals, the statute book becomes complicated as illustrated by the many special sales tax exemptions in Kansas. K.S.A. 79-3606 details the special sales tax exemptions that the legislature has granted. In order to list them all, the statute has sections labeled from (a) through (z), then from (aa) through (zz), then from (aaa) through (zzz), and finally from (aaaa) through (gggg).
Some of these sections are needed and valuable, such as the section that exempts manufacturers from paying sales tax on component parts and ingredients used to build final products. It is supposed to be a retail sales tax, after all.
But then there are sections like this: “(vv) (18) the Ottawa Suzuki Strings, Inc., for the purpose of providing students and families with education and resources necessary to enable each child to develop fine character and musical ability to the fullest potential.”
I have no doubt that this organization is engaged in useful work and that there should be more of this. But what about all the other organizations engaged in similar activities, and which are undoubtedly as deserving of the same tax break? Should they be penalized because they did not have the temerity to ask?
In the area of property taxation, we find many similar circumstances, where two businesses that seem to be similarly situated are treated very differently by the tax collector.
For example, Wesley Medical Center, one of Wichita’s principal hospitals, is Wichita’s second-largest property taxpayer, with taxable assessed value representing 0.90 percent of the total of such property in Wichita.
One hospital has many millions in property, but is not taxed on that property.
But another large Wichita Hospital, Via Christi Hospital on St. Francis, has assets valued at over $115 million, yet pays no property tax. For the mill levy rate that applies to its address, this represents about $3.5 million in property tax savings. (It did pay a Sedgwick County Solid Waste User Fee of $8.91.)
How can we meaningfully distinguish between Wesley and St. Francis Hospitals? Does one provide more charity care than the other? Does the non-profit hospital charge lower rates? (I’d be surprised if so.) Does St. Francis impose less of a burden on city and county resources such as fire and police protection than does Wesley? Since Wesley attempts to earn a profit and St. Francis purportedly does not, does that make Wesley evil and St. Francis saintly? Why do we exempt St. Francis from millions of property tax, yet insist it pay $8.91 in solid waste user fees?
A scene from a non-profit retirement living center.
We find other examples: A luxury retirement community (Larksfield Place) with real property valued at $27,491,440 pays no property tax, except for $5.95 in the solid waste user fee. Less than a mile away, Sedgwick Plaza, a senior living center, has a valuation of $5,067,350 for its real property, and was billed $70,080.51 in property tax, including its solid waste user fee of $972. Despite — or perhaps due to — its non-profit status, Larksfield Place is able to provide its president a salary of over $130,000.
A Goodwill thrift store on West Central in Wichita has real property valued at $696,600, but paid no property taxes except for $5.94 solid waste user fee. On the other side of town, a small thrift store on East Douglas has real property valued at $113,800. It pays $3,437 in property tax, including its solid waste user fee.
These differences in what seem to be properties in similar situations are not justifiable under any theory of taxation, one of which is that similar situations are taxed similarly. The YMCA’s fitness centers are difficult to distinguish from others in Wichita — except for the YMCA’s rarefied tax-exempt status.
The slippery slope
Here’s the danger: Should SB 72 pass and all health clubs start enjoying the same tax privileges as the YMCA, shouldn’t we then expect to see for-profit hospitals like Wesley Medical Center ask to be relieved of their tax burden, using the same logic? If the legislature were to deny that request, how could it possibly explain its reasoning to citizens?
In defense of its tax exempt status, the YMCA says it engages in many charitable activities. I’m sure that’s true, and we’d like to keep those activities. Perhaps the YMCA would consider separating its fitness centers from the rest of its operations. Separate the business-like activities from the charitable. The YMCA can use the “profits” from its fitness centers to finance its charitable activities. To the extent it does that, it will avoid paying state and federal income tax on its profits.
But property taxes are something different from income taxes. The YMCA benefits from all the things the city (and other taxing jurisdictions) provide, ranging from public safety to schools to security for the mayor’s trip to Ghana. When it doesn’t pay its share, others have to pay. That means that others — you and me, for example — have less money available for the charitable (and other) activities they feel important. Even worse, I am forced to subsidize the charitable activities that the YMCA (or the Methodist Church, Boy Scouts, Girl Scouts, etc.) chooses to fund. This is especially true in Kansas, where low-income households pay a regressive sales tax on food.
When the YMCA — or any non-profit, for that matter — escapes taxation that other similar organizations must pay, it means that we all subsidize the charitable activities of these non-profits. It sustains a system in which special interest groups lobby to keep their advantages, and those who are not similarly blessed spend lavishly on campaign contributions and other lobbyists. Even when the organization is widely respected, as is the YMCA, this is wrong. It leads to cynicism as citizens realize that our laws are not applied uniformly, and that special interests feel they can buy their way to special treatment.
For their business-like activities, the YMCA, Larksfield Place, and Goodwill thrift stores should pay property taxes so they shoulder the same burden that the rest of us struggle under. That will spread the cost of government fairly, and let ordinary people themselves decide how to contribute their after-tax dollars.
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.
The City of Wichita will consider canceling an economic development incentive for a firm that no longer meets policy requirements.
Two years ago the Wichita City Council granted an economic development incentive for a freestanding emergency department in northeast Wichita. The incentive was in the form of property tax relief. The firm would be exempt from paying 88 percent of its property taxes for five years, with the possibility of renewal for another five years. 1
At the time, the city estimated the first-year property tax savings to be $61,882, allocated this way: City of Wichita: $17,226. State of Kansas: $792. Sedgwick County: $5,520. USD 259 (Wichita public school district): $28,345.
The facility closed earlier this year, and will be converted to a cardiology office. This change means the facility no longer meets the criteria in the city’s economic development policy in two ways. First, the city’s policy requires medical facilities to attract at least 30 percent of its patients from outside the Wichita MSA, and the city says the new use of the facility does not meet this requirement.
Second, the new use of the facility is not the use that was approved by the council two years ago.
The city’s office of economic development recommends canceling the tax incentive after this year. This item appears on the meeting’s consent agenda, which means there will be no discussion or individual vote on this matter unless a council member requests.
I hope that a council member asks that this item receive discussion and perhaps an individual vote. This is a positive moment for the city. Not that a business failed to survive — that is unfortunate — but that the city is applying policy as designed.
Freestanding emergency departments are controversial. The notes to this article hold references to news articles and academic studies looking at the costs and usage of these facilities. 23456789
Researchers note that the emergency rooms are much more expensive than traditional doctor offices or urgent care facilities, yet many of the diagnoses made at the ERs are the same as made at non-emergency facilities.
Ho, Vivian et al. Comparing Utilization and Costs of Care in Freestanding Emergency Departments, Hospital Emergency Departments, and Urgent Care Centers. Annals of Emergency Medicine, Volume 70 , Issue 6 , 846 – 857.e3. Available at http://www.annemergmed.com/article/S0196-0644(16)31522-0/fulltext. ↩
Jeremiah D. Schuur, Donald M. Yealy, Michael L. Callaham. Comparing Freestanding Emergency Departments, Hospital-Based Emergency Departments, and Urgent Care in Texas: Apples, Oranges, or Lemons? Annals of Emergency Medicine, Volume 70, Issue 6, 2017, pp. 858-861. Available at http://www.annemergmed.com/article/S0196-0644(17)30473-0/fulltext. ↩
A presentation by the City of Wichita regarding IRBs is good as far as it goes, which is not far enough.
Recently the City of Wichita prepared a short video explaining the city’s industrial revenue bonds (IRB) program. The video may be viewed on YouTube by clicking here.
Several times the presenters emphasized that in the IRB program, the city does not lend money. They properly identify the true purpose of the program, which is to subsidize companies by allowing them to avoid paying property taxes and possibly sales taxes.
Several times the presenters emphasized that the IRB program has no cost to the city. But that isn’t true. Part of the rationale for taxes, especially the property taxes that cities, counties, and school districts collect, is to pay for services that people and business firms demand. Well, don’t new businesses firms demand or require services from the government? And if a business is not paying its share of taxes, who is paying for the services it consumes?
If we don’t think that a new or expanded business spurs demand for services, then we need to rethink the basis of taxation.
The presenters mentioned the benefit-cost analysis produced for the city by Center for Economic Development and Business Research at Wichita State University and concluded that the city profits from the IRB program. This analysis purports that if the city incurs costs — either by spending one dollar or giving up one dollar of tax revenue — it will receive a certain amount in return. City policy requires that the city receive $1.30 or more in benefits for each dollar of cost. But there are issues:
The city says IRBs have no cost, but the benefit-cost ratio identifies costs. The city hopes the benefits outweigh these costs.
There is no guarantee that the city will receive any benefits, or that the benefits will be close to what the CEDBR model estimates.
The CEDBR model asks companies to make projections of economic activity for up to ten years in the future. Especially in the out-years, these estimates are subject to large errors.
No effort is made to scrutinize these projections. They are taken at face value, as supplied by the applicant company.
The benefits to the city are in the form of taxes paid. Taxes are a burden to those who must pay them.
Applicant companies do not have to demonstrate economic necessity.
The policy of requiring a benefit of $1.30 for each dollar of cost has many loopholes.
Perhaps the most important policy issue is that the city realizes the benefits of increased economic activity whether or not the activity is subsidized with IRB tax breaks. The benefit-cost ratio for unsubsidized projects is infinite: All benefit, no cost. Therefore, the benefit-cost ratio is meaningful only for those projects which could not proceed without the subsidy.
Some incentive programs require the demonstration of economic necessity. That is not the case with IRBs.
Additionally, when the city issues IRBs and grants tax abatements, other jurisdictions are affected. Both the overlapping county and school district have their property tax collections eliminated. If a sales tax exemption is granted, the state is most prominently affected, as nearly all sales tax paid goes to the state. (For sales tax paid in Sedgwick county, the state’s share is 86.7 percent.) None of these overlapping jurisdictions can opt-out of the tax abatement that the city imposes.
The City of Wichita plans subsidized development of a sports facility as an economic driver. Originally published in July 2017.
West Bank Redevelopment District. Click for larger.This week the Wichita City Council will consider a project plan for a redevelopment district near Downtown Wichita. It is largely financed by Tax Increment Financing and STAR bonds. Both divert future incremental tax revenue to pay for various things within the district.12
City documents promise this: “The City plans to substantially rehabilitate or replace Lawrence-Dumont Stadium into a multi-sport athletic complex. The TIF project would allow the City to make investments in Lawrence-Dumont Stadium, construct additional parking in the redevelopment district, initiate improvements to the Delano multi-use path and make additional transportation improvements related to the stadium project area. In addition to the stadium work, the City plans to construct, utilizing STAR bond funds, a sports museum, improvements to the west bank of the Arkansas River and construct a pedestrian bridge connecting the stadium area with the Century II block. The TIF project is part of the overall plan to revitalize the stadium area and Delano Neighborhood within the district.”3
We’ve heard things like this before. Each “opportunity” for the public to invest in downtown Wichita is accompanied by grand promises. But actual progress is difficult to achieve, as evidenced by the examples of Waterwalk, Kenmar,and Block One.4
Trends of business activity in downtown Wichita. Click for larger.In fact, change in Downtown Wichita — if we’re measuring the count of business firms, jobs, and payroll — is in the wrong direction, despite large public and private investment. 5
Perhaps more pertinent to a sports facility as an economic growth driver is the Intrust Bank Arena. Two years ago the Wichita Eagle noted the lack of growth in the area. 6 Since then, not much has changed. The area surrounding the arena is largely vacant. Except for Commerce Street, that is, and the businesses located there don’t want to pay their share of property taxes. 7
I’m sure the city will remind us that the arena was a Sedgwick County project, not a City of Wichita project, as if that makes a difference. Also, the poor economic performance cited above is for Downtown Wichita as delineated by zip code 67202, while the proposed baseball stadium project lies just outside that area, as if that makes a difference.
By the way, this STAR bonds district is an expansion of an existing district which contains the WaterWalk development. That development has languished, with acres of land having been available for development for many years. We’ve also found that the city was not holding the WaterWalk developer accountable to the terms of the deal that was agreed upon, to the detriment of Wichita taxpayers. 8
Following, selected articles on the economics of public financing of sports stadiums.
The Economics of Subsidizing Sports Stadiums
Scott A. Wolla, “The Economics of Subsidizing Sports Stadiums,” Page One Economics, May 2017. This is a project of the Federal Reserve Bank of St. Louis. Link.
“Building sports stadiums has an impact on local economies. For that reason, many people support the use of government subsidies to help pay for stadiums. However, economists generally oppose such subsidies. They often stress that estimations of the economic impact of sports stadiums are exaggerated because they fail to recognize opportunity costs. Consumers who spend money on sporting events would likely spend the money on other forms of entertainment, which has a similar economic impact. Rather than subsidizing sports stadiums, governments could finance other projects such as infrastructure or education that have the potential to increase productivity and promote economic growth.”
What economists think about public financing for sports stadiums
Jeff Cockrell, Chicago Booth Review, February 01, 2017. Link.
“But do the economic benefits generated by these facilities — via increased tourism, for example — justify the costs to the public? Chicago Booth’s Initiative on Global Markets put that question to its US Economic Experts Panel. Fifty-seven percent of the panel agreed that the costs to taxpayers are likely to outweigh benefits, while only 2 percent disagreed — though several panelists noted that some contributions of local sports teams are difficult to quantify.”
Publicly Financed Sports Stadiums Are a Game That Taxpayers Lose
Jeffrey Dorfman. Forbes, January 31, 2015. Link.
“Once you look at things this way, you see that stadiums can only justify public financing if they will draw most attendees from a long distance on a regular basis. The Super Bowl does that, but the average city’s football, baseball, hockey, or basketball team does not. Since most events held at a stadium will rely heavily on the local fan base, they will never generate enough tax revenue to pay back taxpayers for the cost of the stadium.”
Sports Facilities and Economic Development
Andrew Zimbalist, Government Finance Review, August 2013. Link.
“This article is meant to emphasize the complexity of the factors that must be evaluated in assessing the economic impact of sports facility construction. While prudent planning and negotiating can improve the chances of minimizing any negative impacts or even of promoting a modest positive impact, the basic experience suggests that a city should not expect that a new arena or stadium by itself will provide a boost to the local economy.
Instead, the city should think of the non-pecuniary benefits involved with a new facility, whether they entail bringing a professional team to town, keeping one from leaving, improving the conveniences and amenities at the facility, or providing an existing team with greater resources for competition. Sports are central to cultural life in the United States (and in much of the world). They represent one of the most cogent ways for residents to feel part of and enjoy belonging to a community. The rest of our lives are increasingly isolated by modern technological gadgetry. Sport teams help provide identity to a community, and it is this psychosocial benefit that should be weighed against the sizeable public investments that sports team owners demand.”
Professional Sports as Catalysts for Metropolitan Economic Development
Robert A. Baade, Journal of Urban Affairs, 1996. Link.
“To attract or retain a team, cities are offering staggering financial support and rationalize their largesse on economic grounds. Do professional sports increase income and create jobs in amounts that justify the behavior of cities? The evidence detailed in this paper fails to support such a rationale. The primary beneficiaries of subsidies are the owners and players, not the taxpaying public.”
“Ten years ago, Elizabeth Stevenson looked out at the neighborhood where a downtown arena would soon be built and told an Eagle reporter that one day it could be the ‘Paris of the Midwest.’ What she and many others envisioned was a pedestrian and bike-friendly neighborhood of quaint shops, chic eateries and an active arts district, supported by tens of thousands of visitors who would be coming downtown for sporting events and concerts. It hasn’t exactly turned out that way. Today, five years after the opening of the Intrust Bank Arena, most of the immediate neighborhood looks much like it did in 2004 when Stevenson was interviewed in The Eagle. With the exception of a small artists’ colony along Commerce Street, it’s still the same mix of light industrial businesses interspersed with numerous boarded-up buildings and vacant lots, dotted with ‘for sale’ and ‘for lease’ signs.” Lefler, Dion. 5 years after Intrust Bank Arena opens, little surrounding development has followed.Wichita Eagle. December 20, 2014. Available at http://www.kansas.com/news/local/article4743402.html. ↩
In this episode of WichitaLiberty.TV: A look at some economic development incentive programs in Wichita and Kansas. Second in a series. Tax increment financing (TIF) is prominent in this episode. View below, or click here to view at YouTube. Episode 219, broadcast November 25, 2018.
Shownotes
Wichita 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.
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.
Wichita employment, September 2018. For the Wichita metropolitan area in September 2018, jobs are up, the labor force is up, and the unemployment rate is down, compared to the same month one year ago.
In this episode of WichitaLiberty.TV: A look at some economic development incentive programs in Wichita and Kansas. First in a series. View below, or click here to view at YouTube. Episode 218, broadcast November 18, 2018.
Shownotes
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.
Wichita employment, September 2018. For the Wichita metropolitan area in September 2018, jobs are up, the labor force is up, and the unemployment rate is down, compared to the same month one year ago.
A look at some of the large economic development programs in Wichita and Kansas.
Here’s video of a presentation I gave at the Wichita Pachyderm Club this week on economic development incentives. The video was produced by Paul Soutar of Graphic Lens. View below, or click here to view at YouTube.
Following, articles that address some of the topics I presented:
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.
Wichita 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.
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.
STAR bonds in Kansas: The Kansas STAR bonds program provides a mechanism for spending by autopilot, without specific appropriation by the legislature.
