Tag Archives: Subsidy

Beware of government arts spending

Art is too important to be dependent on politicians and injecting politics into anything inevitably tarnishes it, writes Lawrence W. Reed of Foundation for Economic Education.

Economist Lawrence W. Reed is president of the Foundation for Economic Education in Atlanta, Georgia. He is the author of the forthcoming book, Real Heroes: Inspiring True Stories of Courage, Character and Conviction. Follow on Twitter and Like on Facebook.

While in Wichita Reed appeared on WichitaLiberty.TV in this episode. An abridged version of the following appeared in the Wichita Eagle.

Beware of Government Arts Spending
By Lawrence W. Reed

While visiting Wichita in October, I learned that city government subsidies for the arts is a local, contentious issue. I’d like to offer a perspective: Don’t do it. Art is too important to be dependent on politicians and injecting politics into anything inevitably tarnishes it.

Proponents of art subsidies argue that because a large majority of people enjoy art and even personally engage in it, it’s therefore a government responsibility. But even larger majorities of people enjoy things like clothing, pets and good movies; this fact is actually an argument for government to butt out and stick to doing its proper duties.

Lawrence W. Reed
Lawrence W. Reed
Those “studies” that purport to show X return on Y amount of government arts spending are a laughingstock among economists. The numbers are cooked and almost never compared to alternative uses of tax money. Even less frequently do subsidy advocates consider what people might choose to do if their earnings weren’t taxed away in the first place.

Every interest group with a claim on the treasury argues that spending for its projects produces some magical “multiplier” effect. Routing other people’s money through politicians and bureaucracy is supposed to somehow magnify wealth, while leaving it in the pockets of those who earned it is somehow a drag. Assuming for a moment that such preposterous claims are correct, wouldn’t it then make sense to direct all income through the government?

What if “public investment” simply displaces a certain amount of private investment? Arts subsidy advocates never raise this issue, but I know that I personally am far less likely to make a charitable donation to something I know is on the dole than to something that depends on the good hearts of willing givers.

What if I, as a taxpayer, could keep what the government would otherwise spend on the arts and invest it in my child’s education and get twice the return than the government would ever get on the arts? The more that government takes, the less we can purchase of the things we value, including tickets to the theatre or a concert.

Money which comes voluntarily from the heart is more meaningful than money that comes at gunpoint (taxes). For that reason I don’t believe in either arts welfare or shotgun marriages. There’s an endless list of desirable, enriching things, very few of which carry a tag that says, “Must be provided by taxes and politicians.”

If we don’t rob Peter the worker to pay Paul the artist, perhaps Paul may have to become a better artist or a better marketer of his art, or perhaps find another profession entirely. Welcome, Paul, to the real world of willing customers and earning an honest living.

WichitaLiberty.TV: Wichita and Kansas economics, and government investment

In this episode of WichitaLiberty.TV: Wichita sells a hotel, more subsidy for downtown, Kansas newspaper editorialists fall for a lobbyist’s tale, how Kansas can learn from Arizona schools, and government investment. View below, or click here to view at YouTube. Episode 131, broadcast October 30, 2016.

Shownotes

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/.

WichitaLiberty.TV: Lawrence Reed of Foundation for Economic Education

In this episode of WichitaLiberty.TV. Lawrence W. Reed, who is president of the Foundation for Economic Education. Topics include free markets, education, trade, and arts.

View below, or click here to view at YouTube. Episode 129, broadcast October 9, 2016.

Shownotes

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/.

Spirit Aerosystems tax relief

Wichita’s largest employer asks 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 consider offering Spirit Aerosystems economic development incentives that will allow the company to avoid paying some $45 million in taxes. This will be accomplished through the authorization of $280 million of Industrial Revenue Bonds. 1

Industrial Revenue Bonds are a vehicle for generating and conveying tax exemptions. 2 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 present case 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 sales taxes.

Cost of Spirit Aerosystems incentives.
Cost of Spirit Aerosystems incentives.
Usually the agenda packet the city prepares for council members and the public contains the amount of tax expected to be foregone. For this item that summary is missing, and the sales tax exemption is not mentioned. I have prepared a table summarizing data from the analysis prepared for the city by the Center for Economic Development and Business Research at Wichita State University.

Of note, the share of the cost of the incentives born by the City of Wichita is small, slightly less than one percent. The bulk of the cost is born by the State of Kansas, with the Derby School District and Sedgwick County facing smaller shares of the cost.

Also, the city 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. 3 The Derby School District is not involved in this action and has no ability to affect the issuance of these bonds, should it desire to.

Besides this, the granting of these tax breaks calls into question the validity of taxation. If a company can be excused from tens of millions of dollars in taxes, can we say there is equal treatment under law?

Effect on young companies

When large companies receive tax abatements and exemptions, others must pay the cost of government. In particular, small and young business firms are usually not eligible for incentive programs like that being offered to Spirit, and therefore must bear a disproportional share of the cost of government. This is an important consideration, as Wichita is relying on entrepreneurship as a principle method of growing its economy.

The cost of these tax abatements burdens 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. This action — the award of incentives to an established company — is harmful to the Wichita economy for its strangling effect on entrepreneurship and young companies. As this company and others receive incentives and escape paying taxes, others have to pay.

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 this action, are definitely stacked against the entrepreneur. As Wichita props up its established industries, it makes it more difficult for young firms to thrive.

Additionally, 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. But as we’ve seen in the unfortunate news emanating from several local companies, this is not the case. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)

Taxes for you, but not for me

Based on documents supplied by the city, Spirit will avoid paying $6,620,025 in sales tax through its participation in the IRB program. Kansans should be aware that our state has one of the highest sales taxes in the nation on groceries. The effect of this falls disproportionally on low-income households. 4

Spirit Aerosystems contribution to Yes Wichita

While Spirit seeks to avoid paying millions in sales tax, it campaigned for ordinary Wichitans to pay more sales tax. When Wichita placed a one cent city sales tax on the ballot in November 2014, Spirit Aerosystems contributed $10,000 to the group campaigning in favor of the sales tax. 5 Spirit’s immediate past president contributed $10,000 to the same effort.

Small business

This week American City Business Journals presented the results of a study of small business vitality in cities. 6 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.

Finally, 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.” 7


Notes

  1. City of Wichita. Agenda for May 3, 2016. Available at wichita.gov/Government/Council/Agendas/05-03-2016%20City%20Council%20Agenda%20Packet.pdf.
  2. Weeks, Bob. Industrial revenue bonds in Kansas. Available at wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/.
  3. Sedgwick County/City of Wichita Economic Development Policy. Available at www.wichita.gov/Government/Departments/Economic/EconomicDevelopmentDocuments/City%20of%20Wichita%20Economic%20Development%20Policy.pdf.
  4. Weeks, Bob. Wichita sales tax hike harms low income families most severely. Available at wichitaliberty.org/wichita-government/wichita-sales-tax-hike-harms-low-income-families-severely/.
  5. YES WICHITA INC. Receipts and Expenditures Report. December 30, 2014. On file at Sedgwick County Election Office.
  6. 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.
  7. 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.

Wichita TIF district disbands; taxpayers on the hook

A real estate development in College Hill was not successful. What does this mean for city taxpayers?

ParkstoneSeeking 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.

ParkstoneCity 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.

ParkstoneCity 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.”


Notes

  1. Wichita City Council Agenda Packet, March 15, 2016. Available here.
  2. 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

Energy subsidies for electricity production

To compare federal subsidies for the production of electricity, we must consider subsidy values in proportion to the amount of electricity generated, because the magnitude is vastly different.

Kansas wind turbinesWhen comparing federal subsidies for the production of electricity, it’s important to look at the subsidy values in proportion to the amount of electricity generated. That’s because the scales vary widely. For example, in 2010 for the United States, as can be seen in the accompanying table, coal accounted for the production of 1,851 billion kWh (or megawatt hours) of electricity production. That’s 44.9 percent of all electricity produced. Solar power accounted for the production of 1,851 billion kWh, which is 0.025 percent of all electrical production.

Solar power, however, received 8.2 percent of all federal subsidies, or about 328 times its share of production.

The nearby table and chart are based on data from the Energy Information Administration (EIA), Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2010 through the Congressional Research Service, along with the author’s calculations.

Click table for larger version.
Click table for larger version.

Of particular interest is wind power, as it receives subsidy in the form of cash equivalent tax credits, and many states (including Kansas) have mandates forcing its use. For the year covered in the table, wind accounted for 2.3 percent of U.S. electricity generation. It received 42.0 percent of federal energy subsidies.

Electricity production and subsidy, 2010

Sedgwick County economic development incentives status report for 2015

Sedgwick County has released its annual report on the performance and status of economic development incentives for 2015.

Section I, titled “Summary Totals for Loans & Grants Executed 2005 — 2015,” holds data that must be interpreted carefully. The report shows a total of $11,682,500 in loans and grants. Of that total, $5,000,000 was advanced to Cessna in 2008 to help with the Columbus jet program. But Cessna canceled that program and repaid the loan. It’s almost as though this activity never took place.

Of particular interest is Section III, titled “Individual Loan & Grant Incentive Results.” These programs are specifically designed to induce the creation of jobs, and in some cases capital investment. This section holds a number of evaluations that read “Not Meeting Commitment.” One example is NetApp. The county reports that “Company Commitment at Compliance Review” is 268 jobs, but the county found that “Company Performance at Compliance Review” is 124 jobs, which is 46 percent of the goal. NetApp is significant as it is one of the larger incentives offered, and the jobs have high salaries.

Another observation is the small amount of the incentives. The majority are for less than $50,000, with one being $10,000. Often these small amounts are promoted as responsible for — or at least enabling — investments of millions of dollars. These incentives come with large costs besides the cash value. Companies must apply for the incentive, county and other agency staff must evaluate the application, there is deliberation by commissioners and council members, and then effort spent producing the thoughtful and thorough report such as this produced by the Chief Financial Officer of Sedgwick County. (The City of Wichita produces no similar report, despite dangling its possibility if voters passed a sales tax. See Wichita can implement transparency, even though tax did not pass.)

Click here to access this report.

Wichita economic development items this week

Two economic development items on tap in Wichita this week illustrate failures or shortcomings of the regime.

Update: Both items passed by seven to zero votes at the March 1, 2016 council meeting.

This week the Wichita City Council will consider two economic development items.

The first item concerns a company named Epic Sports. In 2012 this company received property tax abatements from the City of Wichita in exchange for a 100 percent property tax exemption. The measure passed by a vote of six to one, with former council member Michael O’Donnell voting no.

Now Epic Sports has found greener pastures, it seems. Well, it didn’t just find them, it sought them, according to city documents: “The company approached economic development professionals in Butler County regarding incentives.” The same documents note “[Butler County] professionals did not target Epic Sports as a prospect for relocation.” With the new focus on regionalism, we can’t have one county poaching companies from another, it seems.

The city has negotiated that Epic Sports will repay 55 percent of the forgiven property taxes.

Here’s what is notable about this incident. Epic Sports has 110 employees and says it has outgrown its Wichita facility. City documents state the company has “searched for new facilities or land in the Wichita area but could not find a suitable property.” That is remarkable, if true. Wichita does not have any warehouse space suitable for a company of 110 employees? What, may I ask, have Wichita’s many economic development professionals been doing if we have no space for such a modestly-sized company? (On the other hand, with the focus on regionalism, and with Wichita and Butler County in the same region, why should we care?)

The second item the council will consider concerns a company that received a property tax exemption based on a commitment to invest a certain amount of capital and create a certain number of jobs. While the capital investment was made, the company has not met the jobs goal. In this case the city is invoking a portion of its economic development policy which allows modification of an incentive agreement based on poor economic conditions. If the Current Conditions Index, a product of the Center for Economic Development and Business Research at Wichita State University, drops by five or more points during the term of an incentive agreement, the city can make a modification. Based on this, the city is extending the deadline for the company to meet the jobs goal. Repayment of forgiven property taxes could be required if the company does not meet the deadline.

Cash grants still in use

Wichita is moving away from the use of cash incentives for economic development, except for this.

We’ve been told that the city is not going to use cash incentives for economic development. But an item the Wichita City Council will consider this week includes a cash grant of $10,000.

125 N. Emporia, scheduled to receive economic development incentives.
125 N. Emporia, scheduled to receive economic development incentives. Courtesy Google.
This grant is part of the city’s facade improvement program. Under it, properties in certain parts of the city can apply to use special assessment financing to pay for the improvement of their outside appearance. The city borrows the funds and advances them to the property owner. The bonds are repaid through special assessment taxes that are added to the property’s tax bill.

This process is similar to the way the city finances improvements such as street, water, and sewer infrastructure in new neighborhoods or commercial developments. Except: The infrastructure in new development becomes the property of the city. For a facade improvement project, the improvements remain private property.

Are facade improvement cash grants an exception to the new era of economic development in Wichita? Or when will we start implementing these new policies? Some might say that the grants are not for the purposes of economic development. If not, then how does the city justify these grants?

There is perhaps an even more important question the city needs to recognize and answer, which is this: Why are incentives like this necessary? The city says that without the incentive the project is not economically feasible: “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.”

(In case council members make the argument that the facade improvement is not an incentive, remind them that city economic development officials disagree.)

What is it that makes this project economically unfeasible? Why is investment not possible without taxpayer assistance? These are the questions the city needs to answer before asking taxpayers to make a cash grant to this building’s owners.

Kansas cities force tax breaks on others

When Kansas cities grant economic development incentives, they may also unilaterally take action that affects overlapping jurisdictions such as counties, school districts, and the state itself. The legislature should end this.

When Kansas cities create tax increment financing (TIF) districts, the overlapping county and school district(s) have an opportunity to veto its creation.

But for some other forms of incentives, such as tax increment financing district redevelopment plans, property tax abatements, and sales tax abatements, overlapping jurisdictions have no ability to object. There seems to be no rational basis for not giving these jurisdictions a chance to object to the erosion of their tax base.

This is especially important for school districts, as they are often the largest tax consumer. As an example, when the City of Wichita offered tax abatements to a company in June 2014, 47 percent of the abated taxes would have gone to the Wichita school district. But the school district did not participate in this decision. State law gave it no voice.

Supporters of economic development incentives say that the school district benefits from the incentives. The argument is that even though the district gives up some tax revenue now, it will get more in the future. This is the basis for the benefit-cost ratios Wichita uses to justify incentives. For itself, the City of Wichita requires a benefit-cost ratio of 1.3 to one or better, although there are many loopholes the city can use to grant incentives when this threshold is not met. For the June project, city documents reported these benefit-cost ratios for two overlapping jurisdictions:

Sedgwick County 1.18 to one
USD 259 1.00 to one

In this case, the city forced a benefit-cost ratio on the county that the city would not accept for itself, unless it uses a loophole. For the school district, the net benefit is zero.

The Kansas Legislature should look at ways to make sure that overlapping jurisdictions are not harmed when economic development incentives are granted by cities. The best way would be to require formal approval of the incentives by counties, school districts, and any other affected jurisdictions.

Two examples

In June 2014 the City of Wichita granted tax abatements for a new warehouse. City documents gave the benefit-cost ratios for the city and overlapping jurisdictions:

City of Wichita General Fund 1.30 to one
Sedgwick County 1.18 to one
USD 259 1.00 to one
State of Kansas 12.11 to one

It is not known whether these ratios include the sales tax forgiveness.

While the City of Wichita insists that projects show a benefit-cost ratio of 1.3 to one or better (although there are many exceptions), it doesn’t apply that standard for overlapping jurisdictions. Here, Sedgwick County experiences a benefit-cost ratio of 1.18 to one, and the Wichita school district (USD 259) 1.00 to one. These two governmental bodies have no input on the decision the city is making on their behalf. The school district’s share of the forgiven taxes is 47.4 percent.

In November 2014 a project had these dollar amounts of property tax abatement shared among the taxing jurisdictions in these estimated amounts, according to city documents:

City $81,272
State $3,750
County $73,442
USD 259 $143,038

The listing of USD 259, the Wichita public school district, is likely an oversight by the city, as the subject properties lie in the Derby school district. This is evident when the benefit-cost ratios are listed:

City of Wichita 1.98 to one
General Fund 1.78 to one
Debt Service 2.34 to one
Sedgwick County 1.54 to one
U.S.D. 260 1.00 to one (Derby school district)
State of Kansas 28.23 to one

Note that the ratio for the Derby school district is 1.00 to one, far below what the city requires for projects it considers for participation. That is, unless it uses a loophole.

Historic preservation tax credits, or developer welfare?

A Wichita developer seeks to have taxpayers fund a large portion of his development costs, using a wasteful government program of dubious value.

When you hear of a program titled “historic preservation tax credits” you might find yourself in agreement. Preserving history: Who can be against that? And tax credits: Aren’t those just technical adjustments on someone’s tax form?

The Colorado-Derby Building, now renamed and used by the Wichita public school district.
The Colorado-Derby Building, now renamed and used by the Wichita public school district.
If you look closely, however, you’ll find that the historic preservation tax credits program can include buildings with only the slightest historic significance, and has great cost to taxpayers.

The Colorado-Derby Building at 201 N Water Street in Wichita has been nominated for placement on the Register of Historic Kansas Places. It’s a nondescript building which currently houses administrative offices for the Wichita public school district and is known by a different name. Still, it is eligible for placement on the register for being an “example of this private investment trend,” that being the building of office buildings midcentury. A laudable accomplishment, but hardly notable.

The real reason for seeking placement on the register of historic places is money. By using historic preservation tax credits the developer of this building can get taxpayers to pay for much of the costs of rehabilitation. Almost half, which will be millions in this case.

Under the program this building is entering, its owners will receive 25 percent of rehabilitation expenses. The federal government provides tax credits of 20 percent. It’s likely that the owners of this building will also seek these credits.

So with both tax credit programs, 45 percent of the cost of rehabilitating this building could be paid for by taxpayers. And, given the history of the developer, it’s likely he will find other ways to get taxpayers to pay for even more.

Tax credits

USD 259 Alvin E. Morris Administrative Center 2008-04-07 11Tax credits may be a mystery to many, but there is no doubt as to their harmful effect on state and federal budgets. When using tax credits, the government, conceptually, issues a slip of paper that says something like “The holder of this document may submit it instead of $500,000 when making a tax payment.” So instead of paying taxes with actual money, the holder of the credit pays with, well, a slip of paper worth nothing to the government treasury.

This is a direct cost to the government, according to both reason and the Kansas Division of Legislative Post Audit. Last year, after conducting an audit of Kansas tax credit programs, auditors explained: “Tax credits, which the government offers to try to induce certain actions by the taxpayer, reduce income tax revenues because they are subtracted directly from the amount of taxes due.” (emphasis added)

The confusing nature of tax credits leads citizens to believe that they have no cost to the state or federal government. But tax credits are equivalent to government spending. The problem is that by mixing spending programs with taxation, some are lead to believe that tax credits are not cash handouts. But not everyone falls for this seductive trap. In an article in Cato Institutes’s Regulation magazine, Edward D. Kleinbard explains:

Specialists term these synthetic government spending programs “tax expenditures.” Tax expenditures are really spending programs, not tax rollbacks, because the missing tax revenues must be financed by more taxes on somebody else. … Tax expenditures dissolve the boundaries between government revenues and government spending. They reduce both the coherence of the tax law and our ability to conceptualize the very size and activities of our government. (The Hidden Hand of Government Spending, Fall 2010)

The use of tax credits to pay for economic development incentives leads many to believe that what government is doing is not a direct subsidy or payment. In order to clear things up, perhaps we should require that government write checks instead of issuing credits.

Back to Kansas: The audit of the historic preservation tax credits program found that in 2001, when the program was started, the anticipated cost to the state was about $1 million per year. By 2007, the actual cost to the state was reported at almost $8.5 million.

Further, the audit found what many already knew: tax credit aren’t an efficient way of transferring subsidy to developers. Most of the time, the developers sell the credits to someone else at a discount, as the audit explains: “The Historic Preservation Tax Credit isn’t cost-effective. That credit works differently than the other three because the amount of money a historic preservation project receives from the credit is dependent upon the amount of money it’s sold for. Our review showed that, on average, when Historic Preservation Credits were transferred to generate money for a project, they only generated 85 cents for the project for every dollar of potential tax revenue the State gave up.”

It would be more efficient for everyone if the state would simply write checks to the developers instead of issuing tax credits. But then the actual economic meaning of the transaction would be laid bare for all to see.

Then, what qualifies as historic can change as political conditions require. Earlier this year the Wichita city council reversed a decision by the Historic Preservation Board and allowed a property owner to proceed with the demolition of three formerly historic buildings in southern downtown Wichita.

The historic preservation tax credit program is a government handout mechanism we no longer need. Today, most of the money goes to wealthy developers or corporations that can afford to redevelop downtown hotels and lofts with their own money — instead of asking low-income families to pay sales tax on their groceries to fund their tax credits.

Material from the Kansas State Historical Society
Nomination for listing on Register of Historic Kansas Places

Colorado-Derby Building – 201 N Water St., Wichita, Sedgwick County

Constructed in 1959-1960, the nine-story Colorado-Derby Building is an early example of a Modern Movement speculative office tower erected within a pattern of development that shaped Wichita’s downtown at midcentury. New buildings erected as icons on the skyline were intended to refresh, modernize, and revitalize the downtown core through public and private investment in civic and commercial improvements. Frank and Harvey Ablah recognized the onset of this trend and constructed the Colorado-Derby Building to provide speculative office space, redeveloping the site of the Ablah Hotel Supply Company. Named for its largest and most prominent tenant, the Colorado-Derby Building was fully occupied when it opened in 1960 and maintained high occupancy rates over the following decade. The construction and subsequent occupancy of this building illustrates the continuing importance of manufacturing industries to the economy of Wichita at midcentury and the ability of these industries to contribute to the economic and physical revitalization of downtown. The blocks immediately surrounding the building continued to develop in a similar fashion over the following decade with large-scale modern buildings and parking lots replacing smaller commercial and industrial buildings built a half-century earlier. All of this development activity culminated in a formal Urban Renewal project utilizing federal funds in the late 1960s. In Wichita, private investment focused on providing office space for industrial companies, rather than public funding initiated the revitalization that transformed downtown. The Colorado-Derby Building is nominated under Criterion A an important early example of this private investment trend.

Wichita to consider three tax abatements

When considering whether to grant three property tax abatements, the Wichita city council is unlikely to ask this question: Why can’t these companies expand if they have to pay the same taxes everyone else pays?

This week the Wichita City Council will consider property tax abatements for three different companies.

Wichita Urban DevelopmentOne is a new request for property tax relief under the city’s Economic Development Tax Exemption (EDX) program. The company is a supplier to the aerospace industry.

The second is a request for a five-year extension of a five-year property tax abatement. The company met the goals established five years ago. This company is a supplier to the aerospace industry.

The third is another request for a five-year extension of a five-year property tax abatement. The company met the goals established five years ago. This company is a supplier to the oil and gas industry.

To justify the cost of the tax abatements, the city presents benefit-cost ratio calculations. The city requires that the ratio be at least 1.3 to one, although there are exceptions. In each of these three cases the benefit-cost ratio for the school district is less than 1.3 to one. The city, in other words, is forcing school districts to accept investments that the city itself would not make, unless it invoked an exception. The school districts have no ability to limit their participation in these tax abatements other than lobbying the city.

For all the information provided in city documents, some important questions remain unanswered. Perhaps the most important question is this: Are these tax abatements necessary for these companies to carry out their expansion plans? City documents are silent on this question.

Was it a question of feasibility? Some economic development programs require that the applicant demonstrate the necessity of an incentive. Often the city presents a “gap” analysis that purportedly shows a gap between available financing and what is necessary to make the project feasible. But these arguments were not advanced. If they had — that is, if the companies say that if they have to pay property taxes then they can’t afford to expand — then we would be stuck with this question: Why are Wichita industrial property taxes so high that investments like this are not feasible?

The city presents a benefit-cost ratio showing that by giving up some property taxes, it gains even more tax revenue from other sources. But a positive benefit-cost ratio is not remarkable. Economic activity generally spawns more economic activity, which government then taxes. The question is: Did the city, county, school district, and state need to give up tax revenue in order to make this investment possible? (That’s right. The action by the city affected three other jurisdictions.)

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 took this week works against entrepreneurial firms. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)

The problem with these actions

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 this action, 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 the state 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 used 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.

Bombardier can be a learning experience

The unfortunate news of the cancellation of a new aircraft program can be a learning opportunity for Wichita.

As Wichita seeks to grow its economy, the loss of a new aircraft program at one of the city’s major employers is unwelcome news. Now it is important that our leaders and officials seek to learn lessons from this loss. But first, we must acknowledge the loss. Wichita economic development officials are quick to trumpet successes, but so far there is no mention of this loss from the city or its economic development agencies.

The project received state, local and federal incentives. Lots of incentives. These incentives took the form of cash grants, forgiveness of taxes that would otherwise be due, and the ability to reroute its employee withholding taxes for the company’s exclusive benefit. So one lesson is that when local officials complain of the lack of money available for incentives, they are not being truthful.

A second lesson is the limited ability of incentives to overcome obstacles. In this case, the company said the incentives were necessary to make the project economically feasible. Incentives were awarded, but the project failed.

There are some important public policy issues that should be discussed:

Did the incentives induce Bombardier to take risks that it would not have taken had it been investing its own funds, or funds it had to raise from stockholders and debtholders?

Will the politicians that took credit for landing the Model 85 and its jobs now recognize the futility of their efforts?

Will the government agencies that took credit for creating jobs adjust their records?

Incentives like these are often justified using a benefit-cost ratio. This incident reminds us that these calculations are valid only if the investment works as planned. Will local governments recalculate the benefit-cost ratios based on the new information we now have?

Perhaps most important: Who has to pay the costs of these incentives? Part of the cost of this company’s 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. This action — the award of incentives to an established company — is harmful to the Wichita economy for its strangling effect on entrepreneurship and young companies. As this company and others receive incentives and escape paying taxes, others have to pay.

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 this action, 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. But as we see in the unfortunate news from Bombardier, this is not the case. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)

Does Kansas have its own Solyndra?

Does Kansas have its own version of Solyndra, the politically-connected firm that failed and cost taxpayers some $535 million? We don’t know. But the Abengoa cellulosic ethanol plant near Hugoton received a $132.4 million loan guarantee under the same program that benefited Solyndra.

In January I requested documents regarding the Abengoa loan guarantee and risk assessment from the United States Department of Energy. I had several conversations and emails with a records clerk. We came to agreement as to what I would receive, or at least what I am requesting to receive. But I’ve received nothing so far. I don’t know if the document will be made available to me at no charge, or will I have to pay thousands of dollars. The Department of Energy is working on my request, they say. But after nine months: nothing. Following, from October 2011, more information about this plant.

At this moment, we can’t say that Kansas has its own version of Solyndra, the subsidized and politically-connected solar energy firm that recently shut down its operations and declared bankruptcy. But as far as absorbing the important lessons from Solyndra, we may have another chance to learn them in Kansas.

Solyndra is a failure in several ways. Much money was lost. It may be that corrupt or criminal activity was involved; we don’t know that yet. It appears that Solyndra will be a useful political scandal for Republicans to exploit, especially in the upcoming election campaign against the president. We can be sure that Republicans will keep us informed on this.

But the largest and most important lesson from Solyndra is one that many politicians — Democrats and Republicans both — don’t want to recognize: Government intervention in the economy is wrong for the health of the country.

The problem is that when government intervenes in the economy, it almost always gets it wrong. It’s not that Obama and other politicians aren’t smart. It’s the problems inherent in government interventionism: There will be both routine and spectacular examples of waste, as people — politicians and bureaucrats, especially — are not spending their own money. Decisions will be made to benefit the well-connected and for political, not market-based reasons. Cronyism and corruption flourish, as many will find it easier to compete in the marketplace for politicians rather than in the free market where fickle consumers rule with their fleeting tastes and preferences.

But politicians and bureaucrats love to intervene. For bureaucrats, intervention — government programs, that is — provides jobs, and well-paid jobs, too. Since much government intervention in the economy is in the form of subsidies, it allows politicians to dispense other peoples’ money and take credit for having “created” jobs or having built a bridge, probably to be named for them later on.

Other government intervention is in the form of creating unneeded regulations or tax loopholes that favor politicians’ friends or harm their competition.

All of this means that economic activity is directed according to political, not economic, considerations. It’s wasteful. It’s harmful. It diminishes market-based investment, that is, investment made according to what people really want and need. It reduces the freedom, liberty, and prosperity of everyone.

Back to Kansas: Last week the Department of Energy announced the award of a $132.4 million loan guarantee to Abengoa Bioenergy Biomass of Kansas, LLC. This is the same federal agency and the same loan guarantee program involved in the Solyndra matter. The difference is that it’s an even newer so-called green energy technology involved: cellulosic ethanol production.

The plant in Kansas is to be at Hugoton, in southwest Kansas. The press release from DOE promotes the number of jobs that will be created.

Cellulosic ethanol is produced from plant material that is usually considered waste, such as corn stalks or wheat straw. That’s different from the usual input to ethanol production in America, which is corn that would otherwise be used as animal or human food. Because of this, cellulosic ethanol is thought of by many as the “silver bullet” that will dramatically improve the path of America’s energy future. That may be the case, or it may not be. Because of the reasons listed above, government is particularly unsuited to make that decision and to participate in the scientific and entrepreneurial experimentation that will produce the answer.

At one time President George W. Bush praised the potential of this fuel. A Reuters analysis from July opens with: “The great promise of a car fuel made from cheap, clean-burning prairie grass or wood chips — and not from expensive corn that feeds the world — is more mirage than reality. Despite years of research, testing and some hype, the next-generation ethanol industry is far from the commercial success envisioned by President George W. Bush in 2006, when he pledged so-called cellulosic biofuels would be ‘practical and competitive’ by 2012.”

That hints at the problem: despite much effort, scientists haven’t been able to demonstrate cellulosic ethanol production on a commercially-successful scale. According to the Wall Street Journal, as of this summer, no commercial cellulosic ethanol has been produced.

The loan guarantee is not the only form of government subsidy and boost ethanol producers received. There is a tax credit for each gallon produced and a tariff that protects producers from cheaper imported ethanol.

Despite these very large measures of government intervention, cellulosic ethanol backers blame the government for lack of progress in the industry, citing the government’s failure to mandate production levels and provide assurances that the industry would receive subsidies. And the loan guarantees are not made fast enough, they add to the list of complaints. An analysis by ClimateWire that appeared in the New York Times in January had industry boosters blaming the federal Department of Energy for its slow pace in issuing loan guarantees.

We won’t know the success or failure of the Abengoa plant in Kansas for some time, and now we taxpayers are placed in the position of hoping that it succeeds. But it has the pedigree of a government plan to correct a perceived market failure, and that’s a danger sign.

Both Kansas Senators Pat Roberts and Jerry Moran have spoken approvingly of this plant despite the government intervention involved; Moran in a statement after the announcement, and Roberts in previous years as plans were being made. U.S. Representative Tim Huelskamp, who represents the district where the plant is located, has not commented on this plant, and offered no comment for this story.

In search of a level playing field

A national survey finds that small business leaders overwhelmingly believe that state economic development incentives favor big businesses, that states are overspending on large individual deals, and that state incentive programs are not effectively meeting the needs of small businesses seeking to grow. From Good Jobs First.

Survey: Small Business Group Leaders Say States Favor Big Businesses at the Expense of Small Firms Seeking to Grow

Washington, DC, September 29, 2015 — A national survey of 41 leaders of small business organizations representing 24,000 member businesses in 25 states reveals that they overwhelmingly believe that state economic development incentives favor big businesses, that states are overspending on large individual deals, and that state incentive programs are not effectively meeting the needs of small businesses seeking to grow.

In Search of a Level Playing Field coverA large majority also say small businesses interests in economic development are not well represented in their state capitols. The credit crunch is a critical problem, and many also emphasize that public goods that benefit all employers-such as job training, education, and transportation-deserve to be a higher priority.

The study was funded by the Ewing Marion Kauffman Foundation. It is available on the Good Jobs First website here.

“Our findings are absolutely consistent with what we have heard for years from small business leaders,” said Good Jobs First executive director Greg LeRoy. “Despite their pro-small business rhetoric, state officials’ programs are perceived as biased in favor of large companies that receive big tax-break packages.”

Specifically:

  • 92 percent believe that the spending balance on incentives between small and large businesses in their state is biased toward big businesses (69 percent strongly believe).
  • 79 percent believe that their state is overspending on big incentive deals, hurting state finances (56 percent strongly).
  • 87 percent say that small business interests in economic development issues are not effectively represented in their state’s capital (36 percent strongly).
  • 85 percent believe that economic development incentives in their state are not effectively addressing the current needs of small businesses that are seeking to grow (36 percent strongly).
  • 72 percent do not believe their state’s current incentive policies are effective in promoting economic growth (23 percent strongly).

The respondents lead groups from 25 states, including all but one of the 15 most-populous. They belong to networks formed in the past 15 years, many with economic development missions. None is contracted by state or local governments to perform economic development functions such as outside-firm recruitment.

“Our next study will examine in great detail how well or poorly state incentive programs treat small, local and/or entrepreneurial businesses versus large, multistate companies” added LeRoy.

Good Jobs First is a non-profit, non-partisan resource center on economic development. Founded in 1998, it is based in Washington DC.

WichitaLiberty.TV: Lack of information sharing by government, community improvement districts, and the last episode of “Love Gov”

In this episode of WichitaLiberty.TV: Do our governmental agencies really want to share data and documents with us? Community Improvement Districts and homeowners compared. And, the last episode of “Love Gov” from the Independent Institute. View below, or click here to view in high definition at YouTube. Episode 95, broadcast September 20, 2015.

Sales tax exemptions in Kansas

Can eliminating sales tax exemptions in Kansas generate a pot of gold?

Advocates of eliminating sales tax exemptions in Kansas point to the great amount of revenue that could be raised if Kansas eliminated these exemptions, estimated at some $5.9 billion per year. Analysis of the nature of the exemptions and the amounts of money involved, however, leads us to realize that the additional tax revenue that could be raised is much less than spending advocates claim, unless Kansas was to adopt a severely uncompetitive, and in some cases, unproductive and harshly regressive tax policy.

A recent advocate for eliminating some sales tax exemptions is Phillip Brownlee of the Wichita Eagle editorial board. In a previous op-ed on this topic he wrote ” And with each added exemption, the state is losing out on more revenue — $5.9 billion this fiscal year, according to the Kansas Department of Revenue. That’s money the state could be using to cover its budget shortfalls, increase funding to public schools or further reduce its income-tax rates.” At least he mentioned reducing other tax rates. Usually advocates of closing sales tax exemptions simply want more tax money to spend.

Kansas sales tax exemptions, simplified. Click for larger version.
Kansas sales tax exemptions, simplified. Click for larger version.
$5.9 billion dollars, by the way, is a lot of money, almost as much as the state’s general fund spending. But we need to look at the nature of these exemptions. I’ve prepared a simplified table based on data from the Kansas Department of Revenue. I simplified because there are many deductions that probably should be eliminated, but they represent very small amounts of money.

Some sales tax exemptions are for categories of business activity that shouldn’t be taxed, at least if we want to constrain the state to a retail sales tax only. An example is exemption 79-3606 (m), described as “Property which becomes an ingredient or component part of property or services produced or manufactured for ultimate sale at retail.” The tax that could be collected, should the state eliminate this exemption, is given as $3,083.24 million ($3,083,240,000).

But this exemption isn’t really an “exemption,” at least if the sales tax is a retail sales tax designed to be levied as the final tax on consumption. That’s because these goods aren’t being sold at retail. They’re sold to manufacturers who use them as inputs to products that, when finished, will be sold at retail. Most states don’t tax this type of sales. If Kansas decided to tax these transactions, it would place our state’s manufacturers at a severe disadvantage compared to almost all other states.

There are two other exemptions that fall in this category of inputs to production processes, totaling an estimated $632 million in lost revenue. Another similar exemption is “Machinery and equipment used directly and primarily in the manufacture, assemblage, processing, finishing, storing, warehousing or distributing of property for resale by the plant or facility.” Its value is nearly $159 million.

Together, these exemptions account for $3,874 million of the $5,900 million in total exemptions.

Another big-dollar exemption is “items already taxed” such as motor fuel. This is an estimated $318.90 million loss in revenue. Other exemptions are purchases made by government, or purchase made by contractors on behalf of government. These account for an estimated $624.90 million in lost revenue. If these two exemptions were eliminated, the government would be taxing itself.

Not taxing prescription drugs means lost revenue estimated at $96.49 million. If the state started taxing residential and agricultural use utilities, it could gain an estimated $169.98 million. These taxes, like the sales tax on food and the motor fuel tax, fall hardest on low-income families. As Kansas is one of the few states to tax food, do we want to make life even more difficult for low-income households?

Adding these exemptions comes to about $5,084 million. There are other exemptions for which we could make similar arguments for their retention. What’s left over — the exemptions that really should not exist — isn’t much at all. The entire category of “Exemptions to Charitable Organizations by Name.” amounts to $3.05 million in exempted sales tax. These represent the organizations where a lawmaker has crafted an exemption like “Property and services purchased by Jazz in the Woods and sales made by or on behalf of such organization.”

So when the Eagle’s Brownlee writes “As is, favored groups are saving billions of dollars a year, worsening the tax burden for everybody else” he must be including broad categories of business like “All Kansas manufacturing companies” as a “favored group.” Or maybe he means prescription drug users are a “favored group.” Or families struggling to pay utility bills.

But there are more problems. Brownlee describes these sales tax exemptions as a “cost in lost revenue of $5.9 billion last fiscal year.” The only way this makes sense is if one thinks that our property (our money) first belongs to the state, and that in order to spend it, we have to give the state its cut. That’s an opinion — ideology, if you will — that you may agree with, or you may oppose. What’s remarkable — shocking, really — is that in his previous career Brownlee was a Certified Public Accountant. He ought to understand the nature of sales taxes meant to be applied to retail sales, not components of manufactured goods.

Another week in Wichita, more CID sprawl

Shoppers in west Wichita should prepare to pay higher taxes, if the city approves a Community Improvement District at Kellogg and West Streets.

Next week the Wichita City Council will consider the formation of a Community Improvement District (CID) surrounding the intersection of Kellogg and West Streets.

CIDs are a relatively recent creation of the Kansas Legislature. In a CID, merchants may charge additional sales tax, up to an extra two cents per dollar. For more about their mechanism, see Community improvement districts in Kansas. In the present case, the developer proposes to charge an extra one cent per dollar in tax. This extra sales tax, minus a handling fee, will be periodically remitted to the developer. It’s important to note that CID proceeds do not flow to the merchants who collect them.

This CID is “pay-as-you-go,” meaning the city is not issuing bonds or loaning money.

This CID, should the council approve, will contribute to CID sprawl. This is a condition in which more and more of the city is overtaken by CIDs and their higher taxes. In effect, a sales tax increase is taking effect. Because of the city’s weak protection of shoppers from these CID taxes, many Wichitans and visitors will pay higher taxes than they expected. This harms the reputation of Wichita.

(Of note, Kansas raised the statewide sales tax this year. Because Kansas is one of the few states that tax groceries at the full rate, low-income families are harmed most by the higher sales and CID taxes. See Kansas sales tax has disproportionate harmful effects for analysis.)

This CID is likely to be sold to citizens as contributing to public infrastructure. It’s true that a traffic signal on West Street and widening of that street are listed as uses of CID funds. But the amount budgeted is $350,000, which means that the improvements will not be substantial. This inclusion of public infrastructure is likely part of a strategy of sweetening the deal. It’s not all about greedy developers, the city will say. Some of the funds are going to public infrastructure. This strategy was used to justify the Cabela’s CID, in which part of the CID funds are paying for improvements to the intersection of K-96 and Greenwich Road.

This CID proposal contains two new provisions that may help blunt some of the criticism of CIDs as harmful to other business firms in the city. First is this condition: “Allow the City to review and approve or deny the relocation of any business within three miles of the district, for the first three years, on any property in which the developer requests reimbursement for the land acquisition.” This seems designed to restrict “poaching” of merchants from other nearby landlords who are not being subsidized by a CID. Whether this condition has any real meaning is unknown. In practice, the city has been reluctant to enforce restrictions similar to this.

Some of the first buildings to be demolished on West Street, according to a city schedule of milestones. Click for larger.
Some of the first buildings to be demolished on West Street, according to a city schedule of milestones. Click for larger.
Also there is this condition: “Demolition or rehabilitation of three identified structures and additional investment within the district within the timeframe below.” Following this is a schedule of milestones. This may be in response to instances where the city has authorized a subsidy program, but nothing happened, or happened slowly. The Exchange Place project at Douglas and Market is one example. Another is the CID at Central and Oliver. Principals of the Kellogg and West CID are also involved in the Central and Oliver CID, and little has happened there since its formation.

Another important public policy issue regarding CIDs is this: If merchants feel they need to collect additional revenue from their customers, why don’t they simply raise their prices? We can easily see their rationalization: It’s better for us that unwitting customers pay higher sales taxes rather than higher prices. We can blame government for the taxes, but we get the money. 1

Customers of merchants in CIDS ought to know in advance that an extra tax is charged. Some have recommended warning signage that protects customers from unknowingly shopping in stores, restaurants, and hotels that will be adding extra sales tax to purchases. Developers who want to benefit from CID money say that merchants object to signage, fearing it will drive away customers.

State law is silent on this. The City of Wichita requires a sign indicating that CID financing made the project possible, with no hint that customers will pay additional tax. The city also maintains a website showing CIDs. This form of notification is so weak as to be meaningless, but this was the decision the city council made. 2

CIDs allow property owners to establish their own private taxing district for their exclusive benefit. This goes against the grain of the way taxes are usually thought of. Generally, 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 participating in — benefiting from — police protection.

But CIDs allow taxes to be collected for the benefit of one specific entity. This goes against the principle of broad-based taxation to pay for an array of services for everyone. But in this case, the people who benefit from the CID are quite easy to identify: the property owners in the district. We shouldn’t let private parties use a government function for their exclusive benefit.

  1. The premise of this question is not accurate, as it is not the merchants who receive CID funds. Landlords do. The more accurate question is why don’t landlords raise their rents?
  2. Weeks, B. (2014). Wichita City Council fails to support informing the taxed. Online. Voice For Liberty in Wichita. Available at: https://wichitaliberty.org/wichita-government/wichita-city-council-fails-support-informing-taxed/ Accessed 31 Aug. 2015.