In this excerpt from WichitaLiberty.TV: Wichita government leaders complain that Wichita can’t compete in economic development with other cities and states because the budget for incentives is too small. But when making this argument, these officials don’t include all incentives that are available. View below, or click here to view on YouTube. More information on this topic is at Contrary to officials, Wichita has many incentive programs.
Following, Sedgwick County Commissioner Karl Peterjohn explains something that the county could do to boost economic growth that doesn’t require government intervention, doesn’t need fleets of bureaucrats, reduces cronyism and corruption, increases economic freedom, respects property rights, reduces the power of government to control its subjects, and doesn’t give politicians opportunities to inflate their egos and boost their electoral prospects by being photographed at ground-breaking and ribbon-cutting ceremonies taking credit for spending your money on something you don’t want and which does not work to create jobs and prosperity. For these reasons — especially the latter — this won’t be popular with the political class.
I’ve gathered data from the property tax study that Peterjohn mentions and presented data specific to Wichita at Wichita property taxes compared. A version of this commentary appeared in the Wichtia Eagle.
Let’s create something special and unique
By Karl Peterjohn
This community as well as our country is still in an economic crisis. Our community needs a boost, or a comparative growth advantage. Creating a one (1) cent city sales tax in Wichita won’t create economic growth.
In fact, raising taxes would put our community on the same path trail blazed by many other communities across our country. That is the path to fiscal perdition: Detroit.
This community can create a special and unique comparative advantage by eliminating one of the major disadvantages that this state in general, and Wichita and Sedgwick County face: high property taxes. The high property tax problem for Wichita was once again identified in a national study by the Lincoln Institute on Land Policy and the Minnesota Center for Fiscal Excellence’s, “50 State Property Tax Comparison Study,” issued in March. In this study it identified the fact that Wichita’s property tax on commercial property was 38% above the national average.
High taxes mean less economic growth. This is particularly true for property taxes.
The unique and special approach this community needs is instead of raising the sales tax to expand city spending, the focus should be on eliminating the county’s property tax. Currently the county imposes a 29.3 mill property tax county wide. This mill levy could be eliminated with about a 1.5 cent increase in the sales tax on a revenue neutral basis.
This type of property tax competitiveness would be beneficial on several levels. First, it would provide a unique selling proposition to help attract business to this county and Wichita.
Eliminating the county property tax would provide benefits to all property taxpayers and not just a select few getting special subsidies contained within the city’s sales tax hike plan. Eliminating the county’s property taxes would reduce most county taxpayers’ property tax bills by roughly 25 percent.
Let’s move away from the subsidy model whose odious examples include the failed Solyndra national subsidy boondoggle.
Instead of dangling subsides, which everyone else in the eco-devo game is doing, let’s try a unique incentive: Sedgwick County just eliminated its property tax! We should try this because it can work.
In 1995 Kansas eliminated its state unemployment tax because the fund had developed a large cash balance. This five year tax moratorium created a unique economic advantage for Kansas business. Within a couple of years, the Kansas economy enjoyed a substantial surge in economic growth. Kansas became a leader enjoying some of the fastest economic growth between 1997 to 1999. Eventually, the unemployment fund’s cash balance shrank. By 1999 the unemployment tax was restored. This unique tax advantage was eliminated.
As a county commissioner I am focused on creating a special advantage for everyone in Sedgwick County. Eliminating the county’s property tax is an idea whose time has come.
When a prominent Wichita business executive and civic leader asked for tax relief, his reasoning allows us to more fully understand the city’s economic development efforts and nature of the people city hall trusts to lead these endeavors.
In November 2013 the Wichita City Council granted an exemption from paying property and sales tax for High Touch Technologies, a company located in downtown Wichita. This application is of more than usual interest as the company’s CEO,High Touch, Wichita, Kansas.Wayne Chambers, is now chair of the Wichita Metro Chamber of Commerce. The Chamber, along with its subsidiary Greater Wichita Economic Development Coalition, are the main agencies in charge of economic development for the Wichita area. Under Chambers’ leadership, these organizations are recommending that the city council authorize a vote on raising the Wichita sales tax for the purposes of economic development.
Let’s take a look at some of the aspects of this company’s application and the city’s agenda packet material (available here).
In its application letter, High Touch argues as follows (emphasis added):
To demonstrate our commitment to Wichita, as well as accommodate our expected growth plans, High Touch Technologies would like to purchase a 106,000 sq. ft. building in Downtown Wichita.
At this time, High Touch Technologies is requesting your support for the issuance of approximately $2,000,000 City of Wichita, Kansas, Taxable Industrial Revenue Bonds. High Touch greatly appreciates any support we can receive on the purchase of this office building through the City’s participation of Industrial Revenue Bonds and the property tax savings associated with this financing method. We intend to continue our growth and expansion over the next several years and these benefits would be helpful in offsetting the substantial capital requirements associated with this project.
High Touch Technologies believes in Wichita and support the community and its economy through corporate stewardship programs. We look forward to working with you and Members of the Council on this project and are always available to answer questions regarding this project or any of our business activities.
Later in the letter:
The applicant agrees to enter into an agreement for Payment in Lieu of Taxes (PILOT) equal to the ad valorem property tax payment amount for the 2013 tax year. The applicant respectfully requests that the payments be capped at that rate for a period of ten (10) years. The tax abatement will permit the applicant to proceed with the anticipated project, allow for its anticipated growth, and result in the public benefits otherwise outlined herein.
The issuance of Industrial Revenue Bonds will be used to lower the cost of office space in the acquired building. The lower costs will give High Touch, Inc. incentive to grow its presence in the corporate office in Wichita. New employees will be added to this Wichita office instead of other offices across the U.S. The savings in office space will allow High Touch, Inc. to use those savings for expansion.
Some remarks:
To demonstrate our commitment to Wichita: This is ironic because High Touch is asking to be excused from paying the same property taxes that most other people and business firms have to pay. Instead of commitment, this demonstrates hostility to the taxpayers of Wichita, who will have to pay more so that this company can pay less.
But that irony is surpassed by the spectacle — chutzpa — of the incoming chair of a city’s chamber of commerce threatening to move his company out of the city unless the company receives incentives.
helpful in offsetting the substantial capital requirements: Well. Who wouldn’t appreciate help in offsetting the cost of anything? We should categorize this as unpersuasive.
corporate stewardship programs: Underlying this argument is that because High Touch makes charitable contributions, it should be excused from the same tax burden that most of us face. Here’s a better argument: Be a good corporate citizen by paying your fair share of taxes. Don’t ask for others to pay your share of taxes. That will let citizens make their own charitable contributions, instead of subsidizing what Wayne Chambers want to do.
answer questions regarding this project or any of our business activities: This refers to how the members of the city council will make a judgment that this business is worthy of subsidy, and that others are not. The notion that the City of Wichita can decide which companies are worthy of tax exemptions and investment is an illustration of what economist Frederich Hayek called a “conceit.” It’s so dangerous that his book on the topic is titled “The Fatal Conceit.” The failure of government planning throughout the world has demonstrated that it is through markets and their coordination of dispersed knowledge that we best learn where to direct capital investment. It is simply impossible for this city government to effectively decide in which companies Wichitans should invest their tax dollars. Nonetheless the city council made the decision, and it wants a larger role.
Payment in Lieu of Taxes (PILOT): High Touch is not proposing to totally escape its tax burden. Only partially so, through the PILOT. But the proposed payment is quite generous to the company. A few quick (and probably imprecise) calculations shows how small the PILOT is compared to what taxes would be. City documents indicate the proceeds of the IRBs will be used to pay for $2,000,000 of improvements. This amount of commercial property times 25% assessment ratio times 120.602 mill levy rate equals $60,301 in taxes. High Touch, through the PILOT, is proposing to pay $33,250, just a little more than half of what the taxes might be.
But the true value of the taxes being avoided is probably much higher. As an example, nearby office space is listed for sale at $28 per square foot, and that’s a distress-level price. Applying that price to this building, its value would be almost $3 million. If we look at market capitalization rates, which are generally given as from nine to eleven percent for class A space, we arrive at a much higher value: If we say $10 per square foot rental rate times 106,000 square feet at nine percent cap rate, the value would be almost $12 million. Taxes on that would be about $300,000 per year.
These are back-of-the-envelope calculations using assumed values that may not be accurate, but this gives an idea of what’s actually happening in this transaction: High Touch is seeking to avoid paying a lot of taxes, year after year. But by offering to pay a small fraction as PILOT, the company appears magnanimous.
payments be capped at that rate for a period of ten (10) years: High Touch proposed that what it’s paying in lieu of taxes not be subject to increases. Everyone else’s property taxes, of course, are subject to increases due to either assessed value increases or mill rate increases, or both. High Touch requests an exemption from these forces that almost everyone else faces.
lower the cost of office space: Again, who wouldn’t enjoy lower business or personal expenses? The cost of this incentive spreads the cost of government across a smaller tax base than would otherwise be, raising the cost of government for almost everyone else.
added to this Wichita office instead of other offices across the U.S.: The threat of relocation or expansion elsewhere is routinely used to leverage benefits from frightened local governments. These threats can’t be taken at face value. There is no way to know their validity.
use those savings for expansion: Implicit in this argument is that Wichita taxes prevent companies from expanding. True or not, this is a problem: If taxes are too high, we’re missing out on economic growth. If taxes are not too high, but some companies seek exemption from paying them nonetheless, that’s a problem too.
A prosperous company, establishing the template for seeking business welfare
In a December 2011 interview with the Wichita Eagle, the High Touch CEO bragged of how well the company is doing. The newspaper reported “Ask Wayne Chambers how business is, and he’s going to tell you it’s good. Very good. … Chambers said this week that after two years of robust growth, he’s looking for another one in 2012. ‘We have every reason to believe we’ll continue that growth pattern,’ he said.”
In February 2013 the Wichita Business Journal reported “It should be a great year for High Touch Inc. That’s the initial prediction of CEO Wayne Chambers, who says actions the company took during and leading up to 2012 have positioned High Touch to become a true ‘IT solutions provider.’”
If we take Chambers at his word — that his company is successful — why does High Touch need this business welfare? Economic necessity is usually given as the justification of these incentives. Companies argue that the proposed investment is not feasible and uneconomic without taxpayer participation and subsidy. I don’t see this argument being advanced in this case.
Interestingly, at the time of this application Chambers was co-chair of Visioneering Wichita, which advocates for greater government involvement in just about everything, including the management of the local economy. One of the benchmarks of Visioneering is “Exceed the highest of the annual percentage job growth rate of the U.S., Omaha, Tulsa, Kansas City and Oklahoma City.” As shown in this article and this video, Wichita badly lags the nation and our Visioneering peer cities on this benchmark. Visioneering officials didn’t want to present these results to government officials this year, perhaps on the theory that it’s better to ignore problems that to confront them.
Now Wayne Chambers is the chair of the Wichita Metro Chamber of Commerce. Under his leadership, the Chamber of Commerce recommends that Wichitans pay higher sales tax to support the Chambers’ projects.
Will this blatant cronyism be the template for future management of economic development in Wichita? Let’s hope not, as the working people of Wichita can’t tolerate much more of our sub-par economic growth.
A prominent Wichita business uses free markets to justify its request for economic development incentives. A gullible city council buys the argument.
At the December 10, 2013 meeting of the Wichita City Council, Bombardier LearJet received an economic development incentive that will let it avoid paying some property taxes on newly-purchased property. The amount involved in that particular incident is relatively small. According to city documents, “the value of the abated taxes on that investment could be as much as $1,980.”
This week Bombardier was before the council again asking for property tax abatements. City documents estimate the amount of tax to be forgiven as $1,098,294 annually, for up to ten years. The document prepared for council members did not address sales tax, but generally sales taxes are forgiven when using the program Bombardier qualified for.
The December 10 meeting was useful because a representative of Bombardier appeared before the council. His remarks help us understand how some prominent members of Wichita’s business community have distorted the principles of free markets and capitalism. As illustrated by the fawning of Wichita City Council Member and Vice Mayor Pete Meitzner (district 2, east Wichita) and others, elected officials have long forsaken these principles.
Bombardier’s argument
Don Pufahl, who is Director of Finance at Bombardier Learjet, addressed the council regarding this matter. He started his remarks on a positive note, telling the council “There are various aspects to a free-market economy. There’s the rule of law, there’s property rights, and another major aspect is incentives.”
We must be careful when using the term incentive. In a free-market economy or capitalism, incentive refers to the motivation of the possibility of earning profits. Another incentive — the other side of the same coin — is avoiding losses. That’s why capitalism is called a profit-and-loss system. The losses are just as important as profits, as losses are a signal that the economic activity is not valued, and the resources should be shifted to somewhere else where they are valued more highly.
But in the field of economic development as practiced by government, incentive means something given to or granted to a company. That’s what the representative from Bombardier meant by incentive. He explained: “One party, in this case, the local government, uses incentives for another party, in this case our company, to invest in the community.”
A few thoughts: First, Bombardier is not investing in the community. The company is investing in itself. I’m sure Bombardier’s shareholders hope that is true.
Second, the free market system that the speaker praised is a system based on voluntary exchange. That flows from property rights, which is the foundational idea that people own themselves and the product of their labor, and are free to exchange with others. But when government uses incentives, many people do not consent to the exchange. That’s not a free market system.
Third, an important part of a free market system is market competition. That is, business firms compete with others for customers. They also compete with other business firms for resources needed for production, such as capital. When government makes these decisions instead of markets, we don’t have a free market system. Instead, we have cronyism. Charles G. Koch has described the harm of cronyism, recently writing: “The effects on government are equally distorting — and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”
In the same article Koch wrote: “We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.” (Charles G. Koch: Corporate cronyism harms America)
The representative from Bombardier also said that the city’s incentives would reduce Bombardier’s investment risk. There is little doubt this is true. When a company is given money with no strings attached except what the company already intends to do and wants to do, that reduced a company’s risk. What has happened, however, is that risk has not been eliminated or reduced. It has merely been shifted to the people of Wichita, Sedgwick County, the Wichita public school district, and the State of Kansas. When government does this on a piecemeal basis, this is called cronyism. When done universally, we call this socialism.
We can easily argue that actions like this — and especially the large subsidies granted to Bombardier by the state — increase the risk of these investments. Since the subsidies reduce the cost of its investment, Bombardier may be motivated to make risky investments that it might otherwise not make, were it investing its own funds (and that of its shareholders).
The cost of Bombardier’s investments, and 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 these. We don’t know who they are. But we need an economic development strategy that creates an environment where these young entrepreneurial firms have the greatest chance to survive. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)
Now the city and Bombardier will say that these investments have a payoff for the taxpayer. That is, if Bombardier grows, it will pay more in taxes, and that constitutes “profit” for taxpayers. Even if we accept that premise — that the city “profits” from collecting taxes — why do we need to invest in Bombardier in order to harvest its “profits” when there are so many companies that pay taxes without requiring subsidy?
Finally, the representative from Bombardier said that these incentives are not a handout. I don’t see how anyone can say that and maintain a straight face.
It would be one thing if the Wichita area was thriving economically. But it isn’t. We’re in last place among our self-identified peers, as illustrated in Wichita and Visioneering peers job growth. Minutes from a recent meeting of Greater Wichita Economic Development Coalition, the primary organization in charge of economic development, holds this paragraph: “As shown in the Chart below Wichita economy suffered the largest loss of employment among peer cities and has not seen any signs of rebounding as the other communities have. Wichita lost 31,000 jobs during the recession principally due to the down turn in general aviation.”
Following is a fuller representation of the Bombardier representative’s remarks to the council.
There are various aspects to a free-market economy. There’s the rule of law, there’s property rights, and another major aspect is incentives.
One party, in this case, the local government, uses incentives for another party, in this case our company, to invest in the community.
As the company moves forward to invest in the community, those investments are not without risk. … Your incentives allow us to offset some of that risk so that we can move forward with those investments, which hopefully create new jobs and also then also improves the quality of life in our community. … These incentives are not a handout. They are a way that the local government uses such things to offset some of the risk that is involved in local companies as they invest in the community, bring jobs to the community, and improve the community overall.
Kansas City Star’s dishonest portrayal of renewable energy mandate
By Dave Trabert
A recent Kansas City Star editorial criticizing opponents of Kansas’ renewal energy mandate for being disingenuous was itself a fine example of disingenuity.
Kansas law mandates that utility companies purchase specific levels of renewable energy, which means that Kansans are forced to purchase wind energy and pay higher energy prices. The degree toWind farm near Spearville, Kansas.which it is more expensive is a matter of dispute, but even the Star admits that wind is more expensive than fossil fuel alternatives. The Star describes this mandate as “consumer-friendly.”
They falsely say “these laws encourage electric facilities to supplement their use of fossil fuels with renewables.” The law does not “encourage;” it requires.
The Star touts economic gains to the wind industry but ignores the reality that those gains come at the expense of everyone else in the form of higher taxes, higher electricity prices and other unseen economic consequences.
They conclude by saying people “deserve a choice”, but mandates are the opposite of choice. Real choice would not only allow citizens to individually decide whether to purchase renewable energy, but to choose their energy supplier as well. Maybe it’s time to look at breaking up the utility monopoly in Kansas as other states have done.
If we in Kansas and Wichita wonder why our economic growth is slow and our economic development programs don’t seem to be producing results, there is data to tell us why: Our tax rates are too high.
In 2012 the Tax Foundation released a report that examines the tax costs on business in the states and in selected cities in each state. The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms.
The study is unusual in that it looks at the impact of states’ tax burden on mature and new firms. This, according to report authors, “allows us to understand the effects of state tax incentives compared to a state’s core tax system.” In further explanation, the authors write: “The second measure is for the tax burden faced by newly established operations, those that have been in operation less than three years. This represents a state’s competitiveness after we have taken into account the various tax incentive programs it makes available to new investments.”
The report also looks at the tax costs for specific types of business firms. For Kansas, some individual results are better than overall, but still not good. For a mature corporate headquarters, Kansas ranks 30th. For locating a new corporate headquarters — one that would benefit from tax incentive programs — Kansas ranked 42nd. For a mature research and development facility, 46th; while new is ranked 49th. For a mature retail store, 38th, while new is ranked 45th.
There are more categories. Kansas ranks well in none.
The report also looked at two cities in each state, a major city and a mid-size city. For Kansas, the two cities are Wichita and Topeka.
Among the 50 cities chosen, Wichita ranks 30th for a mature corporate headquarters, but 42nd for a new corporate headquarters.
For a mature research and development facility, Wichita ranks 46th, and 49th for a new facility.
For a mature and new retail store, Wichita ranks 38th and 45th, respectively.
For a mature and new call center, Wichita ranks 43rd and 47th, respectively.
Kansas tax cost compared to neighborsIn its summary for Kansas, the authors note the fecklessness of Kansas economic development incentives: “Kansas offers among the most generous property tax abatements and investment tax credits across most firm types, yet these incentives seem to have little impact on the state’s rankings for new operations.”
It’s also useful to compare Kansas to our neighbors. The comparison is not favorable for Kansas.
The record in Wichita
Earlier this year Greater Wichita Economic Development Coalition issued its annual report on its economic development activities for 2013. Its efforts, in its own words, “represent a projected 1,117 new jobs.”
This report shows us that power of government to influence economic development is weak. GWEDC’s information said these jobs were for the geographical area of Sedgwick County. According to the Bureau of Labor Statistics, the labor force in Sedgwick County in 2013 was 242,744 persons. So the jobs created by GWEDC’s actions amounted to 0.46 percent of the labor force. This is a vanishingly small fraction. It is statistical noise. Other economic events overwhelm these efforts.
The report by the Tax Foundation helps us understand one reason why the economic development efforts of GWEDC, Sedgwick County, and Wichita are not working well: Our tax costs are too high.
While economic development incentives can help reduce the cost of taxes for selected firms, incentives don’t help the many firms that don’t receive them. In fact, the cost of these incentives is harmful to other firms. The Tax Foundation report points to this harm: “While many state officials view tax incentives as a necessary tool in their state’s ability to be competitive, others are beginning to question the cost-benefit of incentives and whether they are fair to mature firms that are paying full freight. Indeed, there is growing animosity among many business owners and executives to the generous tax incentives enjoyed by some of their direct competitors.”
It seems in Wichita that the thinking of our leaders has not reached the level of maturity required to understand that targeted incentives have great cost and damage the business climate. Instead of creating an environment in which all firms have a chance to thrive, government believes it can identify firms that are subsidy-worthy — at the exclusion of others.
But there is one incentive that can be offered to all firms: Reduce tax costs for everyone. The policy of reducing tax costs or granting incentives to the selected few is not working. This “active investor” approach to economic development is what has led companies in Wichita and Kansas to escape 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.
Professor 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 that Wichita and Kansas has been pursuing and Wichita’s leaders want to ramp up: “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.’”
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 is an example of such a policy. Abating taxes for specific companies through programs like IRBs is an example of precisely the wrong policy.
We need to move away from economic development based on this active investor approach. 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, except to reduce the cost of government for everyone.
Urbanists, journalists, and academics — not to mention big-city developers — were easily persuaded that shelling out to court “the hip and cool” would benefit everyone else, too. … Florida himself, in his role as an editor at The Atlantic, admitted last month what his critics, including myself, have said for a decade: that the benefits of appealing to the creative class accrue largely to its members — and do little to make anyone else any better off. The rewards of the “creative class” strategy, he notes, “flow disproportionately to more highly-skilled knowledge, professional and creative workers,” since the wage increases that blue-collar and lower-skilled workers see “disappear when their higher housing costs are taken into account.” His reasonable and fairly brave, if belated, takeaway: “On close inspection, talent clustering provides little in the way of trickle-down benefits.”
In this episode of WichitaLiberty.TV: A look at a special district proposed for Old Town, the process of granting economic development incentives and a cataloging of the available tools and amounts, and an example of waste in Wichita. Episode 43, broadcast May 18, 2014. View below, or click here to view on YouTube.
A proposed entertainment district in Old Town Wichita benefits a concentrated area but spreads costs across everyone while creating potential for abuse.
This week the Wichita City Council will consider forming an entertainment district covering greater Old Town. The purpose of the new law, according to city documents, is to help control crime in the area. Current law enforcement efforts are not effective, declares the proposed statute: “WHEREAS, the occurrence of criminal activity in the Old Town Entertainment District and areas adjacent thereto continues to occur despite law enforcement’s increased efforts and presence within this district.”
Some of the features of the proposed law are a mandatory fine of $500 for certain crimes if they occur within the Old Town Entertainment District, and the ability to “map” or prohibit offenders from entering the Old Town Entertainment District. The punishment for repeat offenses escalates rapidly. To be able to control the behavior of Wichitans with fine granularity, the proposed ordinance contains definitions of “art,” “fine art,” and “art gallery.” The capacity of a coffee shop cannot be over 100 people. An “Entertainment Establishment” is not a place that holds book readings and storytelling. (Well, I’ve been to a few book readings that were certainly not entertaining.)
While Wichita civic leaders proclaim this ordinance as a step forward, let’s examine some points.
Costs and subsidy
Recall that Old Town was built using millions in taxpayer subsidy, both on and off the books. Although the tax increment financing district has ended, subsidy still flows to Old Town. An example of off-the-books subsidy is the large police presence required to keep Old Town safe. City documents hint at this, as in this excerpt from the agenda report for Tuesday’s city council meeting: “Crime statistics reveal that crime overall has decreased in Old Town due to higher police presence.”
In 2008 Wichita Police Chief Norman Williams was quoted as saying “As Old Town changed from a warehouse district to an entertainment district, it has presented a ‘tremendous challenge’ to public safety.”
In 2006 the Wichita Eagle reported on the level of policing required in Old Town, noting “Beginning Friday night, police will put two officers on horseback in Old Town and have as many as six more officers walking through the entertainment district, he said. Currently, around the bars’ 2 a.m. closing time, about a dozen officers patrol the area.”
The challenges of policing entertainment districts are well known and not unique to Wichita’s Old Town. See Policing Entertainment Districts for a research report. The extra costs of the policing are known, too. Two examples — others are easy to find — are these:
Policing costs exceed Scottsdale bar district’s revenue. “The annual cost for policing downtown Scottsdale’s entertainment district far exceeds the amount of revenue generated from the high concentration of bars in the area, according to city figures.”
Police Asking Bars To Pay Extra For Security. “Faced with a budget deficit, the Hartford Police Department is asking some downtown bars and restaurants to help pay the overtime costs for police officers assigned to maintain order in the city’s entertainment district during the busiest nights of the week, when large crowds of partygoers pose the most risk for public safety threats.”
Special districts like that proposed for Old Town give police more power. With that comes increased potential for abuse. In Kansas City, the Power & Light District has been involved in lawsuits alleging racial discrimination as reported in Class-action lawsuit alleges racial discrimination at Power & Light. The dress code there is alleged to be targeted against young urban black men.
In Wichita’s Old Town, Mike Shatz has covered past incidents. On the proposed ordinance, he notes that “Like most of the laws in Old Town that govern the behavior of the patrons, it is expected that these new ordinances, if passed, would be primarily enforced outside the few bars that still cater to a primarily minority crowd.”
On the potential for racially discriminatory application of laws, Shatz writes “Anyone familiar with police activity in [this] district knows it will be the black men who are targeted by these new laws, and the arrest statistics will prove it.” Also: “White people, on the other hand, can actually get into full-on fist fights in front of police officers without repercussion, as I and other activists witnessed outside the Pumphouse (a bar in the district) while investigating Old Town policing activities last year.” See Old Town Association seeks to drive minorities out of the district with new laws
What have we done?
Does the need for special police power and special penalties in Old Town demonstrate that we’ve created something we really don’t want? Will Wichitans across the city be forced to pay for extra police that benefit a concentrated area of town, and it alone?
Along with the establishment of the entertainment district with its special laws, we could also ask that the property owners in that district absorb its extra costs. The district is defined in the proposed statute. It would be a simple matter to identify the properties in the district and add something extra to the property tax bills. Something like this is done to support the Wichita Downtown Development Corporation with funds to promote economic development. If that can be done, it’s not unreasonable for Wichitans to ask that Old Town tax itself to pay for its unique costs.
But laws like the entertainment district ordinance are usually tied to powerful economic interests who lobby the government for special protections. It is a problem identified and studied in public choice economics. As the Wichita City Council routinely votes in favor of special interests as opposed to the public good, we can expect that the council will fully embrace this new exemplar of special laws created for special people and special interest groups.
This community can create a special and unique comparative advantage by eliminating one of the major disadvantages that this state in general, and Wichita and Sedgwick County face: high property taxes. The high property tax problem for Wichita was once again identified in a national study by the Lincoln Institute on Land Policy and the Minnesota Center for Fiscal Excellence’s, “50 State Property Tax Comparison Study,” issued in March. In this study it identified the fact that Wichita’s property tax on commercial property was 38% above the national average.
But that irony is surpassed by the spectacle — chutzpa — of the incoming chair of a city’s chamber of commerce threatening to move his company out of the city unless the company receives incentives.
answer questions regarding this project or any of our business activities: This refers to how the members of the city council will make a judgment that this business is worthy of subsidy, and that others are not. The notion that the City of Wichita can decide which companies are worthy of tax exemptions and investment is an illustration of what economist Frederich Hayek called a “conceit.” It’s so dangerous that his book on the topic is titled “The Fatal Conceit.” The failure of government planning throughout the world has demonstrated that it is through markets and their coordination of dispersed knowledge that we best learn where to direct capital investment. It is simply impossible for this city government to effectively decide in which companies Wichitans should invest their tax dollars. Nonetheless the city council made the decision, and it wants a larger role.
These are back-of-the-envelope calculations using assumed values that may not be accurate, but this gives an idea of what’s actually happening in this transaction: High Touch is seeking to avoid paying a lot of taxes, year after year. But by offering to pay a small fraction as PILOT, the company appears magnanimous.
This week Bombardier was before the council again asking for property tax abatements. City documents estimate the amount of tax to be forgiven as $1,098,294 annually, for up to ten years. The document prepared for council members did not address sales tax, but generally sales taxes are forgiven when using the program Bombardier qualified for.
We must be careful when using the term incentive. In a free-market economy or capitalism, incentive refers to the motivation of the possibility of earning profits. Another incentive — the other side of the same coin — is avoiding losses. That’s why capitalism is called a profit-and-loss system. The losses are just as important as profits, as losses are a signal that the economic activity is not valued, and the resources should be shifted to somewhere else where they are valued more highly.
Third, an important part of a free market system is market competition. That is, business firms compete with others for customers. They also compete with other business firms for resources needed for production, such as capital. When government makes these decisions instead of markets, we don’t have a free market system. Instead, we have cronyism. Charles G. Koch has described the harm of cronyism, recently writing: “The effects on government are equally distorting — and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”
The cost of Bombardier’s investments, and 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 these. We don’t know who they are. But we need an economic development strategy that creates an environment where these young entrepreneurial firms have the greatest chance to survive. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)
It would be one thing if the Wichita area was thriving economically. But it isn’t. We’re in last place among our self-identified peers, as illustrated in Wichita and Visioneering peers job growth. Minutes from a recent meeting of Greater Wichita Economic Development Coalition, the primary organization in charge of economic development, holds this paragraph: “As shown in the Chart below Wichita economy suffered the largest loss of employment among peer cities and has not seen any signs of rebounding as the other communities have. Wichita lost 31,000 jobs during the recession principally due to the down turn in general aviation.”
The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms.
This report shows us that power of government to influence economic development is weak. GWEDC’s information said these jobs were for the geographical area of Sedgwick County. According to the Bureau of Labor Statistics, the labor force in Sedgwick County in 2013 was 242,744 persons. So the jobs created by GWEDC’s actions amounted to 0.46 percent of the labor force. This is a vanishingly small fraction. It is statistical noise. Other economic events overwhelm these efforts.
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.”
This week the Wichita City Council will consider forming an entertainment district covering greater Old Town. The purpose of the new law, according to city documents, is to help control crime in the area. Current law enforcement efforts are not effective, declares the proposed statute: “WHEREAS, the occurrence of criminal activity in the Old Town Entertainment District and areas adjacent thereto continues to occur despite law enforcement’s increased efforts and presence within this district.”
involved in lawsuits alleging racial discrimination as reported in Class-action lawsuit alleges racial discrimination at Power & Light. The dress code there is alleged to be targeted against young urban black men.
But laws like the entertainment district ordinance are usually tied to powerful economic interests who lobby the government for special protections. It is a problem identified and studied in public choice economics. As the Wichita City Council routinely votes in favor of special interests as opposed to the public good, we can expect that the council will fully embrace this new exemplar of special laws created for special people and special interest groups.
But that irony is surpassed by the spectacle — chutzpa — of the incoming chair of a city’s chamber of commerce threatening to move his company out of the city unless the company receives incentives.
answer questions regarding this project or any of our business activities: This refers to how the members of the city council will make a judgment that this business is worthy of subsidy, and that others are not. The notion that the City of Wichita can decide which companies are worthy of tax exemptions and investment is an illustration of what economist Frederich Hayek called a “conceit.” It’s so dangerous that his book on the topic is titled “The Fatal Conceit.” The failure of government planning throughout the world has demonstrated that it is through markets and their coordination of dispersed knowledge that we best learn where to direct capital investment. It is simply impossible for this city government to effectively decide in which companies Wichitans should invest their tax dollars. Nonetheless the city council made the decision, and it wants a larger role.
This week Bombardier was before the council again asking for property tax abatements. City documents estimate the amount of tax to be forgiven as $1,098,294 annually, for up to ten years. The document prepared for council members did not address sales tax, but generally sales taxes are forgiven when using the program Bombardier qualified for.
We must be careful when using the term incentive. In a free-market economy or capitalism, incentive refers to the motivation of the possibility of earning profits. Another incentive — the other side of the same coin — is avoiding losses. That’s why capitalism is called a profit-and-loss system. The losses are just as important as profits, as losses are a signal that the economic activity is not valued, and the resources should be shifted to somewhere else where they are valued more highly.
Third, an important part of a free market system is market competition. That is, business firms compete with others for customers. They also compete with other business firms for resources needed for production, such as capital. When government makes these decisions instead of markets, we don’t have a free market system. Instead, we have cronyism. Charles G. Koch has described the harm of cronyism, recently writing: “The effects on government are equally distorting — and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”
The cost of Bombardier’s investments, and 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 these. We don’t know who they are. But we need an economic development strategy that creates an environment where these young entrepreneurial firms have the greatest chance to survive. (See 
This report shows us that power of government to influence economic development is weak. GWEDC’s information said these jobs were for the geographical area of Sedgwick County. According to the Bureau of Labor Statistics, the labor force in Sedgwick County in 2013 was 242,744 persons. So the jobs created by GWEDC’s actions amounted to 0.46 percent of the labor force. This is a vanishingly small fraction. It is statistical noise. Other economic events overwhelm these efforts.
But laws like the entertainment district ordinance are usually tied to powerful economic interests who lobby the government for special protections. It is a problem identified and studied in