Voice For Liberty

Tag: Subsidy

  • More TIF spending in Wichita

    More TIF spending in Wichita

    The Wichita City Council will consider approval of a redevelopment plan in a tax increment financing (TIF) district.

    This week the Wichita City Council will hold a public hearing considering approval of more tax increment financing (TIF) spending in downtown Wichita. The spending is for the second phase of redevelopment of the Union Station property on East Douglas. According to city documents, the total cost of this phase is $31,000,000, with TIF paying for $2,954,734. 1

    This is a pay-as-you-go form of TIF, which means the city does not borrow funds as it would in a traditional TIF district. Instead, the eligible portion of the developer’s property taxes will be rerouted back to the development as they are paid.

    The TIF district was established in 2014. The council this week considers a redevelopment plan, which authorizes spending TIF funds on a specific project. Redevelopment plans must be approved by a two-thirds majority of the council. While overlapping jurisdictions like counties and school districts can block the formation of a TIF district, they have no such role in the approval of a redevelopment plan.

    Of note, this public hearing is being held after the fact, sort of. City documents state: “A development agreement was approved by the City Council on August 7, to allow for the developer to begin non-TIF eligible improvements in order to meet deadlines for a new tenant.” The city documents for the August 7 meeting hold this: 2

    The Developer has requested that the development agreement be approved now, prior to adoption of the project plan, to allow work to begin on the Meade Corridor improvements in order to complete the project in time for the tenant to move in. The Development agreement is drafted to allow for the Meade Corridor improvements to occur following adoption of the agreement, however, any work or reimbursement for TIF is contingent on City Council adoption of the project plan following the September 11 public hearing.

    Citizens have to wonder will the September 11 public hearing have any meaning or relevance, given that on August 7 the city gave its de facto approval of the redevelopment plan.

    Following, more information about tax increment financing.

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

    How TIF works

    A TIF district is a geographically-defined area.

    In Kansas, TIF takes two or more steps. The first step is that cities or counties establish the boundaries of the TIF district. After the TIF district is defined, cities then must approve one or more project plans that authorize the spending of TIF funds in specific ways. (The project plan is also called a redevelopment plan.) In Kansas, overlapping counties and school districts have an opportunity to veto the formation of the TIF district, but this rarely happens. Once the district is formed, cities and counties have no ability to object to TIF project plans.

    Figure 1.
    Figure 1.
    Before the formation of the TIF district, the property pays taxes to the city, county, school district, and state as can be seen in figure 1. Because property considered for TIF is purportedly blighted, the amount of tax paid is usually small. Whatever it is, that level is called the “base.”

    Figure 2.
    Figure 2.
    After approval of one or more TIF project plans the city borrows money and gives it to the project or development. The city now has additional debt in the form of TIF bonds that require annual payments. Figure 2 illustrates. (There is now another form of TIF known as “pay-as-you-go” that works differently, but produces much the same economic effect.)

    Figure 3.
    Figure 3.
    Figure 3 shows the flow of tax revenue after the formation of the TIF district and after the completion of a project. Because buildings were built or renovated, the property is worth more, and the property tax is now higher. The development now has two streams of property tax payments that are handled in different ways. The original tax — the “base” — is handled just like before, distributed to city, state, school district, and the state, according to their mill levy rates. The difference between the new tax and the base tax — the “increment” — is handled differently. It goes to only two destinations (mostly): The State of Kansas, and repayment of the TIF bonds.

    Figure 4.
    Figure 4.
    Figure 4 highlights the difference in the flow of tax revenues. The top portion of the illustration shows development outside of TIF. We see the flows of tax payments to city, county, school district, and the state. In the bottom portion, which shows development under TIF, the tax flows to city, county, and school district are missing. No longer does a property contribute to the support of these three units of government, although the property undoubtedly requires the services of them. This is especially true for a property in Old Town, which consumes large amounts of policing.

    (Cities, counties, and school districts still receive the base tax payments, but these are usually small, much smaller than the incremental taxes. In non-TIF development, these agencies still receive the base taxes too, plus whatever taxes result from improvement of the property — the “increment,” so to speak. Or simply, all taxes.)

    The Kansas law governing TIF, or redevelopment districts as they are also called, starts at K.S.A. 12-1770.

    TIF and public policy

    Originally most states included a “but for” test that TIF districts must meet. That is, the proposed development could not happen but for the benefits of TIF. Many states have dropped this requirement. At any rate, developers can always present proposals that show financial necessity for subsidy, and gullible government officials will believe.

    Similarly, TIF was originally promoted as a way to cure blight. But cities are so creative and expansive in their interpretation of blight that this requirement, if it still exists, has little meaning.

    The rerouting of property taxes under TIF goes against the grain of the way taxes are usually rationalized. We use taxation as a way to pay for services that everyone benefits from, and from which we can’t exclude people. An example would be police protection. Everyone benefits from being safe, and we can’t exclude people from benefiting from police protection.

    So when we pay property tax — or any tax, for that matter — people may be comforted knowing that it goes towards police and fire protection, street lights, schools, and the like. (Of course, some is wasted, and government is not the only way these services, especially education, could be provided.)

    But TIF is contrary to this justification of taxes. TIF allows property taxes to be used for one person’s (or group of persons) exclusive benefit. This violates the principle of broad-based taxation to pay for an array of services for everyone. Remember: What was the purpose of the TIF bonds? To pay for things that benefited the development. Now, the development’s property taxes are being used to repay those bonds instead of funding government.

    One more thing: Defenders of TIF will say that the developers will pay all their property taxes. This is true, but only on a superficial level. We now see that the lion’s share of the property taxes paid by TIF developers are routed back to them for their own benefit.

    It’s only infrastructure

    In their justification of TIF in general, or specific projects, proponents may say that TIF dollars are spent only on allowable purposes. Usually a prominent portion of TIF dollars are spent on infrastructure. This allows TIF proponents to say the money isn’t really being spent for the benefit of a specific project. It’s spent on infrastructure, they say, which they contend is something that benefits everyone, not one project specifically. Therefore, everyone ought to pay.

    This attitude is represented by a comment left at Voice for Liberty, which contended: “The thing is that real estate developers do not invest in public streets, sidewalks and lamp posts, because there would be no incentive to do so. Why spend millions of dollars redoing or constructing public streets when you can not get a return on investment for that”

    This perception is common: that when we see developers building something, the City of Wichita builds the supporting infrastructure at no cost to the developers. But it isn’t quite so. About a decade ago a project was being developed on the east side of Wichita, the Waterfront. This project was built on vacant land. Here’s what I found when I searched for City of Wichita resolutions concerning this project:

    Figure 5. Waterfront resolutions.
    Figure 5. Waterfront resolutions.
    Note specifically one item: $1,672,000 for the construction of Waterfront Parkway. To anyone driving or walking in this area, they would think this is just another city street — although a very nicely designed and landscaped street. But the city did not pay for this street. Private developers paid for this infrastructure. Other resolutions resulted in the same developers paying for street lights, traffic signals, sewers, water pipes, and turning lanes on major city streets. All this is infrastructure that we’re told real estate developers will not pay for. But in order to build the Waterfront development, private developers did, with a total cost of these projects being $3,334,500. (It’s likely I did not find all the resolutions and costs pertaining to this project, and more development has happened since this research.)

    In a TIF district, these things are called “infrastructure” and will be paid for by the development’s own property taxes — taxes that must be paid in any case. Outside of TIF districts, developers pay for these things themselves.

    If not for TIF, nothing will happen here

    Generally, TIF is justified using the “but-for” argument. That is, nothing will happen within a district unless the subsidy of TIF is used. Paul F. Byrne explains:

    “The but-for provision refers to the statutory requirement that an incentive cannot be awarded unless the supported economic activity would not occur but for the incentive being offered. This provision has economic importance because if a firm would locate in a particular jurisdiction with or without receiving the economic incentive, then the economic impact of offering the incentive is non-existent. … The but-for provision represents the legislature’s attempt at preventing a local jurisdiction from awarding more than the minimum incentive necessary to induce a firm to locate within the jurisdiction. However, while a firm receiving the incentive is well aware of the minimum incentive necessary, the municipality is not.”

    It’s often thought that when a but-for justification is required in order to receive an economic development incentive, financial figures can be produced that show such need. Now, recent research shows that the but-for justification is problematic. In Does Chicago’s Tax Increment Financing (TIF) Programme Pass the ‘But-for’ Test? Job Creation and Economic Development Impacts Using Time-series Data, author T. William Lester looked at block-level data regarding employment growth and private real estate development. The abstract of the paper describes:

    “This paper conducts a comprehensive assessment of the effectiveness of Chicago’s TIF program in creating economic opportunities and catalyzing real estate investments at the neighborhood scale. This paper uses a unique panel dataset at the block group level to analyze the impact of TIF designation and investments on employment change, business creation, and building permit activity. After controlling for potential selection bias in TIF assignment, this paper shows that TIF ultimately fails the ‘but-for’ test and shows no evidence of increasing tangible economic development benefits for local residents.” (emphasis added)

    In the paper, the author clarifies:

    “To clarify these findings, this analysis does not indicate that no building activity or job crea-tion occurred in TIFed block groups, or resulted from TIF projects. Rather, the level of these activities was no faster than similar areas of the city which did not receive TIF assistance. It is in this aspect of the research design that we are able to conclude that the development seen in and around Chicago’s TIF districts would have likely occurred without the TIF subsidy. In other words, on the whole, Chicago’s TIF program fails the ‘but-for’ test.

    Later on, for emphasis:

    “While the findings of this paper are clear and decisive, it is important to comment here on their exact extent and external validity, and to discuss the limitations of this analysis. First, the findings do not indicate that overall employment growth in the City of Chicago was negative or flat during this period. Nor does this research design enable us to claim that any given TIF-funded project did not end up creating jobs. Rather, we conclude that on-average, across the whole city, TIF was unsuccessful in jumpstarting economic development activity — relative to what would have likely occurred otherwise.” (emphasis in original)

    The author notes that these conclusions are specific to Chicago’s use of TIF, but should “should serve as a cautionary tale.”

    The paper reinforces the problem of using tax revenue for private purposes, rather than for public benefit: “Essentially, Chicago’s extensive use of TIF can be interpreted as the siphoning off of public revenue for largely private-sector purposes. Although, TIF proponents argue that the public receives enhanced economic opportunity in the bargain, the findings of this paper show that the bargain is in fact no bargain at all.”

    TIF is social engineering

    TIF represents social engineering. By using it, city government has decided that it knows best where development should be directed. In particular, the Wichita city council has decided that Old Town and downtown development is on a superior moral plane to other development. Therefore, we all have to pay higher taxes to support this development. What is the basis for saying Old Town developers don’t have to pay for their infrastructure, but developers in other parts of the city must pay?

    TIF doesn’t work

    Does TIF work? It depends on what the meaning of “work” is.

    If by working, do we mean does TIF induce development? If so, then TIF usually works. When the city authorizes a TIF project plan, something usually gets built or renovated. But this definition of “works” must be tempered by a few considerations.

    Does TIF pay for itself?
    First, is the project self-sustaining? That is, is the incremental property tax revenue sufficient to repay the TIF bonds? This has not been the case with all TIF projects in Wichita. The city has had to bail out two TIFs, one with a no-interest and low-interest loan that cost city taxpayers an estimated $1.2 million.

    The verge of corruption
    Second, does the use of TIF promote a civil society, or does it lead to cronyism? Randal O’Toole has written:

    “TIF puts city officials on the verge of corruption, favoring some developers and property owners over others. TIF creates what economists call a moral hazard for developers. If you are a developer and your competitors are getting subsidies, you may simply fold your hands and wait until someone offers you a subsidy before you make any investments in new development. In many cities, TIF is a major source of government corruption, as city leaders hand tax dollars over to developers who then make campaign contributions to re-elect those leaders.”

    We see this in Wichita, where the regular recipients of TIF benefits are also regular contributors to the political campaigns of those who are in a position to give them benefits. The corruption is not illegal, but it is real and harmful, and calls out for reform. See In Wichita, the need for campaign finance reform.

    The effect of TIF on everyone
    Third, what about the effect of TIF on everyone, that is, the entire city or region? Economists have studied this matter, and have concluded that in most cases, the effect is negative.

    An example are economists Richard F. Dye and David F. Merriman, who have studied tax increment financing extensively. Their article Tax Increment Financing: A Tool for Local Economic Development states in its conclusion:

    “TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable.”

    So TIF districts are good for the favored development that receives the subsidy — not a surprising finding. What about the rest of the city? Continuing from the same study:

    “If the use of tax increment financing stimulates economic development, there should be a positive relationship between TIF adoption and overall growth in municipalities. This did not occur. If, on the other hand, TIF merely moves capital around within a municipality, there should be no relationship between TIF adoption and growth. What we find, however, is a negative relationship. Municipalities that use TIF do worse.

    We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.” (emphasis added)

    In a different paper (The Effects of Tax Increment Financing on Economic Development), the same economists wrote “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not. … These findings suggest that TIF trades off higher growth in the TIF district for lower growth elsewhere. This hypothesis is bolstered by other empirical findings.” (emphasis added)

    The Wichita city council is concerned about creating jobs, and is easily swayed by the promises of developers that their establishments will create jobs. Paul F. Byrne of Washburn University has examined the effect of TIF on jobs. His recent report is Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth, and in its abstract we find this conclusion regarding the impact of TIF on jobs:

    “This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.” (emphasis added)

    These studies and others show that as a strategy for increasing the overall wellbeing of a city, TIF fails to deliver prosperity, and in fact, causes harm.

    —
    Notes

    1. Wichita city council agenda packet for September 11, 2018. ↩
    2. Wichita city council agenda packet for August 7, 2018. ↩
  • WichitaLiberty.TV: Sedgwick County and Wichita issues

    WichitaLiberty.TV: Sedgwick County and Wichita issues

    In this episode of WichitaLiberty.TV: The end of a Sedgwick County Commission election, the Wichita Eagle editorializes on school spending and more taxes, and Wichita Mayor Jeff Longwell seems misinformed on the Wichita economy. View below, or click here to view at YouTube. Episode 207, broadcast August 26, 2018.

    Shownotes

  • Wichita business press needs to step up

    Wichita business press needs to step up

    If a newspaper is going to write a news story, it might as well take a moment to copy and paste information from a city council agenda packet. Especially when what is missing from the story is perhaps the most important information.

    When the Wichita City Council approved an Industrial Revenue Bond issue at its July 10, 2018 meeting, the city’s business press covered the matter. In the Wichita Eagle, the story fails to mention the motivation for the item. 1

    The meeting agenda packet for this item, very near its start, states plainly the benefits of the IRBs: “Cargill Incorporated (Cargill) is requesting a Letter of Intent (LOI) for the issuance of Industrial Revenue Bonds (IRBs) in an amount not to exceed $38,000,000 and an 81.5% five-plus-five-year tax abatement and a sales tax exemption for the construction of a new biodiesel facility in north Wichita.” 2

    There it is, in plain sight and language: Cargill will save a lot of money in taxes by using these bonds. How much? The same city document details some of the savings:

    Based on the current mill levy, the estimated tax value of exempted property for the first full year is $337,904. The value of an 81.5% real property tax exemption (assuming the property is appraised at 80% of the capital investment) as applicable to taxing jurisdictions is:

    City $94,109
    County $84,677
    State $4,321
    USD 259 $154,797

    The agenda packet doesn’t give an amount for the value of the sales tax exemption, but if all $38,000,000 in bond proceeds was spent on taxable items, sales tax would be $2,850,000. The actual sales tax savings will likely be less than that, but still a lot. (We’ll likely never know, as the Kansas Department of Revenue won’t release the value of sales tax exemptions associated with bond issues.)

    Why didn’t the Eagle report this? I don’t know. But the property and sales tax exemptions are the driving motivation behind almost all requests for IRBs. 3

    It’s not the case that the company can’t obtain financing on the market. Many IRBs are purchased by the requesting company, as is the case with these bonds, according to the agenda packet: “The bonds will be privately placed with Cargill.”

    Instead, Kansas law requires, in most cases, that to issue property and sales tax abatements, IRBs must be used. Again, from the agenda packet: “To insure that all of the real property improvements are receiving the tax abatement, the improvements must be bond financed.” 4

    Why can’t the city council simply wave a magic wand and absolve Cargill of paying millions of dollars in property and sales taxes? This is what the city council did, but in a roundabout way.

    But because the tax giveaway is mixed with confusing details of bonds, many citizens don’t notice the giveaway. Especially when our city’s leading newspaper does not report this.

    Wichita Business Journal reporting was a little better, mentioning the property and sales tax exemptions, but not their monetary value. 5

    This article also contains this: “With IRBs, the city serves as a pass-through entity for developers to obtain a lower interest rate on projects. IRBs require no taxpayer commitment.” This is language the newspaper often includes when reporting on IRB issues, and it is simply not true. In this case, a portion of this project qualifies for tax-exempt financing, as it is a solid waste processing facility. 6

    But for the remainder of the project, as is the case for most IRB-funded projects, it is not likely the facility will save on interest costs with IRBs. The article is correct in that IRBs require no taxpayer commitment. The city makes no guarantee as to the bond repayment. If the city did guarantee repayment, that would help the borrower obtain a lower interest rate. But there is no guarantee.

    —
    Notes

    1. Finger, Stan. Wichita City Council approves bonds for Cargill expansion. Available at https://www.kansas.com/news/business/article214622565.html. ↩
    2. Wichita City Council Agenda packet for July, 10, 2017. Item IV-1. ↩
    3. Weeks, Bob. Industrial revenue bonds in Kansas. Available at https://wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/. ↩
    4. As noted below, there is a slight wrinkle in this IRB issue, as some of the financed property is exempt from federal income taxes on interest payments and requires IRBs for that particular property. This is an unusual factor, and does not require that all the plant be financed with IRBs. ↩
    5. Daniel McCoy and Bryan Horwath. City Council approves IRBs for Cargill biodiesel plant. Available at https://www.bizjournals.com/wichita/news/2018/07/10/city-council-approves-irbs-for-cargill-biodiesel.html. ↩
    6. “The solid waste processing component qualifies under Internal Revenue Service (IRS) regulations for tax exempt financing, which can save the company interest expense. Of the total project, approximately $30,000,000 would qualify as a Solid Waste Processing Facility, and therefore, eligible for tax-exempt financing.” Agenda Packet for July 10, 2018. ↩
  • Free standing emergency department about to open in Wichita

    Free standing emergency department about to open in Wichita

    A project in Wichita received substantial subsidy from taxpayers. How have public policy issues been reported?

    Free standing emergency rooms are a recent trend in medical care. This is a facility that has equipment, personnel, and capability like a traditional hospital emergency room, but is not connected to a hospital. The first in Wichita is nearly ready to open, on Twenty-first Street east of Webb Road.

    Regarding the Wichita facility, the Wichita Business Journal quoted Malik Idbeis, chief information officer for Kansas Medical Center: “We see a lot of patients from the northeast side of Wichita. We thought it’d be nice to bring our style of care closer to them. There are a lot of neighborhoods and families in that area.” 1

    Here, the spokesman is promoting that facility is located convenient to (affluent) families in northeast Wichita. That wasn’t the argument made to the Wichita City Council last year when the facility applied for tax relief through the Industrial Revenue Bonds program. At that time, the facility was pitched as an attraction that would serve many out-of-town customers. City documents reported: “The current Economic Development Policy requires medical facilities to attract at least 30% of patients from outside the Wichita MSA. Kansas Medical Center reviewed the location of patients utilizing the emergency room in Andover, which revealed that 37% come from outside the Wichita MSA.” 2

    It seems a stretch to assume that the demographic characteristics of a hospital in Andover would also apply to an emergency room in Wichita, but the city council accepted this reasoning.

    Aside from this, the Wichita Business Journal article contains problems in its reporting of public policy issues. The reporter wrote: “Last summer, the Wichita City Council authorized issuing industrial revenue bonds for the project to help finance land and construction costs. With IRBs, the city serves as a pass-through entity for developers to obtain a lower interest rate on projects. IRBs require no taxpayer commitment.” (For background on IRBs in Kansas, see Industrial revenue bonds in Kansas.)

    It’s not likely the facility will save on interest costs with IRBs. It might save if the bonds were non-taxable, but these bonds are taxable, according to the agenda packet for this item. The article is correct in that IRBs require no taxpayer commitment — at least superficially. Here, I believe the reporter is letting readers know that the city makes no guarantee as to the bond repayment. If the city guaranteed repayment, that would help the borrower obtain a lower interest rate. But there is no guarantee.

    Instead, the benefit of the IRB program is lower taxes. The city estimates the first-year property tax savings to be $61,882, allocated this way: City of Wichita: $17,226. State of Kansas: $792. Sedgwick County: $5,520. USD 259 (Wichita public school district): $28,345. Savings like this would be realized for five years, plus another five years if employment commitments are met.

    This property tax forgiveness is, in many ways, a “taxpayer commitment.” If we don’t recognize that, then we must reconsider the foundation of local tax policy.

    In Wichita, as in most cities, the largest consumers of property tax dollars are the city, county, and school district. All justify their tax collections by citing the services they provide: Law enforcement, fire protection, education, etc. It is for providing these services that we pay local taxes.

    But through the Industrial Revenue Bond program, properties don’t pay property tax. (In the case of this facility, the property tax abatement is limited to 88 percent of the full tax burden.)

    Yet, this new facility will undoubtedly demand and consume the services local government provides — law enforcement, fire protection, and education. But it won’t be paying property tax to support these services (except for the 12 percent not abated). Others will have to pay this cost.

    We’re left with an uncomfortable and awkward circumstance. City officials tell us that we must pay property tax so the city can provide services. (In fact, last year the Wichita city manager recommended increasing property taxes to pay for more police officers.)

    At the same time, however, the city creates special classes of people who use services but don’t pay for them.

    Often the justification for economic development incentives is economic necessity, that is, the project could not be built without the incentive. That argument was not made for this project.

    Free standing emergency rooms

    Free standing emergency departments are controversial. The notes to this article hold references to news articles and academic studies looking at the costs and usage of these facilities. 3 4 5 6 7 8 9 10

    Researchers note that the emergency rooms are much more expensive than traditional doctor offices or urgent care facilities, yet many of the diagnoses made at the ERs are the same as made at non-emergency facilities.

    —
    Notes

    1. Heck, Josh. Medical group sets opening date for free-standing ER. Wichita Business Journal. Available at https://www.bizjournals.com/wichita/news/2018/04/06/medical-group-sets-opening-date-for-free-standing.html. ↩
    2. City of Wichita. Request for Letter of Intent for Industrial Revenue Bonds (E Wichita Properties, LLC/Kansas Medical Center, LLC). City Council agenda packet for June 6, 2017. ↩
    3. NBC News. You Thought It Was An Urgent Care Center, Until You Got the Bill. Available at https://www.nbcnews.com/health/health-care/you-thought-it-was-urgent-care-center-until-you-got-n750906. ↩
    4. Carolyn Y. Johnson. Free-standing ERs offer care without the wait. But patients can still pay $6,800 to treat a cut. Washington Post, May 7, 2017. Available at http://wapo.st/2pUCskD?tid=ss_tw&utm_term=.21bb76a447aa. ↩
    5. Rice, Sabriya.Texans overpaid for some medical services by thousands, study says. Dallas Morning News. Available at https://www.dallasnews.com/business/health-care/2017/03/23/texans-overpaid-medical-services-thousands-study-said. ↩
    6. Blue Cross Blue Shield of Texas. Rice U. Study: Freestanding Emergency Departments In Texas Deliver Costly Care, ‘Sticker Shock’. Available at https://www.bcbstx.com/company-info/news/news?lid=j0s5sm9d. ↩
    7. Alan A. Ayers, MBA, MAcc. Dissecting the Cost of a Freestanding Emergency Department Visit. Available at https://c.ymcdn.com/sites/ucaoa.site-ym.com/resource/resmgr/Alan_Ayers_Blog/UCAOA_Ayers_Blog_FSED_Pricin.pdf. ↩
    8. Michael L. Callaham. Editor in Chief Overview: A Controversy About Freestanding Emergency Departments. Annals of Emergency Medicine, Volume 70, Issue 6, 2017, pp. 843-845. Available at http://www.annemergmed.com/article/S0196-0644(17)31505-6/fulltext. ↩
    9. Ho, Vivian et al. Comparing Utilization and Costs of Care in Freestanding Emergency Departments, Hospital Emergency Departments, and Urgent Care Centers. Annals of Emergency Medicine, Volume 70 , Issue 6 , 846 – 857.e3. Available at http://www.annemergmed.com/article/S0196-0644(16)31522-0/fulltext. ↩
    10. Jeremiah D. Schuur, Donald M. Yealy, Michael L. Callaham. Comparing Freestanding Emergency Departments, Hospital-Based Emergency Departments, and Urgent Care in Texas: Apples, Oranges, or Lemons? Annals of Emergency Medicine, Volume 70, Issue 6, 2017, pp. 858-861. Available at http://www.annemergmed.com/article/S0196-0644(17)30473-0/fulltext. ↩
  • In Wichita, spending semi-secret

    In Wichita, spending semi-secret

    The Wichita City Council authorized the spending of a lot of money without discussion.

    At its March 27, 2018 meeting, the Wichita City Council passed a resolution authorizing the spending of funds for the River Vista development on the west bank of the Arkansas River in downtown.

    The agenda packet for the meeting gave the details: “The overall project budget is $7,862,999 with STAR Bonds financing $4,750,000 of the costs and the City financing $1,050,000. The balance of the project costs will be assessed against the Improvement District.”

    (STAR bonds are a mechanism whereby future sales tax revenue is routed to the project developer, rather than paying for the cost of state and Sedgwick County government. The “Improvement District” is the development itself, and the “City” is, of course, the taxpayers of Wichita.)

    All this was approved by the city council at its meeting on July 21, 2015, under the item “Amendment to Amended and Restated Development Agreement – River Vista, L.L.C. (West Bank Apartments) and issuance of Sales Tax Special Obligation Revenue (STAR) Bonds (District VI).” It appeared on the March 27, 2018 agenda so that a resolution formalizing the arrangement could be passed.

    Was the council’s action of public business and interest? The city council didn’t think so. The item was passed as part of the meeting’s consent agenda. This is a bundle of agenda items that are voted on in bulk, with one single vote, unless a council member requests an item be “pulled” for discussion and possibly a separate vote. If no council member asks to pull an item, there is no discussion.

    No one asked to “pull” this agenda item for a discussion and vote.

    Generally, items on consent agendas are not controversial, at least according to the city’s reasoning. I suppose that applies to this item, as the spending was approved in the past.

    It might have been useful, however, to remind Wichitans of the taxpayer-supplied subsidy going to this project. Just so we’re reminded now and then of where our money is going.

    But: The principals of the apartment project are frequent seekers of taxpayer subsidy, and likely plan to ask for more — much more — in the future. Some are also big funders of campaigns, in particular that of Wichita Mayor Jeff Longwell. We call this cronyism.

    So the consent agenda provides a handy place to pass laws without discussing them, hoping that no one will notice. Semi-secret.

    As it turns out, the Wichita Business Journal noticed this item and wrote the article West bank Arkansas River upgrades on City Council agenda. The article starts with “Wichita’s City Council on Tuesday is scheduled to discuss …” But because of the consent agenda and no council member believing the spending deserved attention, that discussion never happened.

  • Sedgwick County’s David Dennis on economic development

    Sedgwick County’s David Dennis on economic development

    Following the Wichita Mayor, the Chair of the Sedgwick County Commission speaks on economic development.

    Last week Sedgwick County Commissioner David Dennis penned a column for the Wichita Eagle praising the county’s efforts in economic development. 1 Dennis is also chair of the commission this year.

    In his column, the commissioner wrote: “Economic development is a key topic for the Board of County Commissioners and for me in particular. Right now we have a lot of momentum to make our community a more attractive place for people and businesses.”

    This emphasis on the word “momentum” seems to be a fad among Wichita’s government leaders. More about this later.

    Dennis also wrote: “Traditional governmental incentives are a thing of the past. There are no more blank checks from Sedgwick County for businesses.”

    Except: The county participates in incentive programs that allow companies like Spirit to escape paying taxes, and when you don’t have to pay taxes, that’s the same economic effect as someone giving you cash to pay those taxes. Spirit Aerosystems will receive Industrial Revenue Bonds, which are not a loan of money to Spirit, but allow the company to avoid paying property taxes and sales taxes. 2 3 These incentives are a cost to the county and other units of government, and are as good as cash to Spirit. (For this and many other projects the county is not involved in the approval of the IRB program, but it doesn’t object, and it sees its tacit approval as part of its partnership with the City of Wichita.)

    Besides this, the county engages in traditional incentives — almost like a blank check — but disguises them. In this case, for example, the county is contributing $7 million towards the construction of a building exclusively for Spirit’s use. How will the county pay for that? The memorandum that the county agreed to states: “The county participation of $7 million US is anticipated to be available cash.” 4

    You might be wondering if the county is treating this contribution as an investment that a business would make, where it would earn back its investment plus a profit by collecting rent from Spirit. After all, county leaders tell us they want to operate government like a business.

    But, you’d be wrong if you thought that. The memorandum specifies the rent as $1 per year. Not $1 per square foot per year, but $1 per year for the entire building. Furthermore, at the end of 20 years, Spirit will have the option to purchase the property for $1.

    There’s really no way to characterize this transaction other than as a multi-million giveaway to Spirit. Not directly as a blank check or cash, but in a roundabout way that costs the county and benefits Spirit in the same way as cash.

    I can understand how Dennis and others like Wichita Mayor Jeff Longwell want to convince the public that they are no longer dishing out cash. Often, the public doesn’t like that. So instead they do the same thing in roundabout ways like leasing a building for $1 per year or paying millions in cash for a “parking easement” for which the city has no real use. 5 Chairman Dennis and others hope you won’t notice, but these leaders would be more credible if they didn’t try to obfuscate the truth.

    Sedgwick County jobs. Click for larger.
    Sedgwick County jobs, change from prior year. Click for larger.
    At the end of his column, Dennis wrote: “There is a lot of momentum and forward movement in our community right now and I’m encouraged to see what we can achieve as a team.”

    There’s that word again: momentum. Coincidently, shortly after this column was published, the Bureau of Labor Statistics published an update to the Quarterly Census of Employment and Wages. It shows the number of jobs in Sedgwick County declining. This update was released after Dennis wrote his column, but as can be seen from the nearby charts, the slowdown in Sedgwick County jobs and the Wichita-area economy is not a new trend.

    If Dennis really believes our economy has “momentum and forward movement,” it is my sincere hope that he is simply uninformed or misinformed about these statistics. Because if he is aware, we can only conclude that he is something else that is worse than being merely ignorant.

    —
    Notes

    1. David Dennis. Sedgwick County part of drive to strengthen area workforce. Wichita Eagle, March 5, 2018. Available at http://www.kansas.com/opinion/opn-columns-blogs/article203559734.html. ↩
    2. Weeks, Bob. Industrial revenue bonds in Kansas. Available at https://wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/. ↩
    3. Weeks, Bob. Spirit expands in Wichita. Available at https://wichitaliberty.org/wichita-government/spirit-expands-wichita/. ↩
    4. Sedgwick County. RESOLUTION AUTHORIZING THE EXECUTION OF A MEMORANDUM OF UNDERSTANDING WITH THE CITY OF WICHITA AND SPIRIT AEROSYSTEMS, INC. RELATING TO PROJECT ECLIPSE. Available at https://sedgwickcounty.legistar.com/LegislationDetail.aspx?ID=3290907&GUID=E732A9A2-C01A-4ACE-B134-C15E551F989F. ↩
    5. Weeks, Bob. More Cargill incentives from Wichita detailed. Available at https://wichitaliberty.org/wichita-government/cargill-incentives-from-wichita-detailed/. ↩
  • In Wichita, three Community Improvement Districts to be considered

    In Wichita, three Community Improvement Districts to be considered

    In Community Improvement Districts (CID), merchants charge additional sales tax for the benefit of the property owners, instead of the general public. Wichita may have an additional three, contributing to the problem of CID sprawl.

    This week the Wichita City Council will hold public hearings considering the formation of three Community Improvement Districts. In Kansas Community Improvement Districts, merchants charge additional sales tax for the benefit of the property owners, instead of the general public. 1

    Each of these CIDs will charge customers additional sales tax, with a cap on the amount that may be raised, and a separate cap on the length of the CID. For the three projects this week, here are the details: 2

    Delano Catalyst CID: 2% additional tax, raising up to $3,000,000, up to 22 years
    Spaghetti Works CID: 2% additional tax, raising up to $3,118,504, up to 22 years
    Chicken N Pickle CID: 1.5% additional tax, raising up to $2,300,000, up to 15 years

    All these CIDs are of the pay-as-you-go type, which means the city is not borrowing money that would be repaid by the CID tax proceeds. Instead, the CID tax proceeds are periodically sent to the landowners as they are collected. The city retains a 5% administrative fee.

    Additionally, two of these CIDs earmark 10% of the CID tax collections for public benefits, which are extra park maintenance for the Spaghetti Works CID, and street improvements for the Chicken N Pickle CID. While these earmarks may seem magnanimous gestures, they directly work to the developers’ benefit. For Spaghetti Works, Naftzger Park is, in effect, becoming the front yard to a development. It will be of great benefit for it to be maintained well, especially considering that the developers will be able to close the park for private events. For the Chicken N Pickle CID, the street improvements the CID will fund are usually paid for by special tax assessments on the nearby landowners, which in this case is the Chicken N Pickle. This is a large savings.

    By the way, none of the applications for these economic development incentives pleads economic necessity. They simply want more money, and are willing to let government take the blame when customers notice they’re paying 9% or 9.5% sales tax in these districts.

    Of additional note: The Delano and Spaghetti Works developments are receiving many millions of taxpayer-provided subsidy from other economic development incentive programs. 3 4

    It will be interesting to see how the council’s two new members, Brandon Johnson (district 1, northeast Wichita) and Cindy Claycomb (district 6, north central Wichita), will vote in these matters. As Progressives, we might expect them to be opposed to higher sales taxes, which affect low-income households disproportionally. We also might expect them to be opposed to targeted tax incentives for the “wealthy,” such as the now-defunct exemption on pass-through business income in Kansas. Here, they are asked to vote on a highly targeted tax incentive that will benefit identifiable wealthy parties.

    Issues regarding CID

    Perhaps the most 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? But the premise of this question is not accurate, as it is not the merchants who receive CID funds. The more accurate question is why don’t landlords raise their rents? That puts them at a competitive disadvantage with property owners that are not within CIDs. Better for us, they rationalize, that unwitting customers pay higher sales taxes for our benefit.

    Consumer protection
    Customers of merchants in CIDS ought to know in advance that an extra CID 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, or how much extra tax. The city also maintains a website showing CIDs. This form of notification is so weak as to be meaningless. See Wichita community improvement districts should have warning signs and In Wichita, two large community improvement districts proposed. In the latter, future Wichita Mayor Jeff Longwell argued that signs showing different tax rates for different merchants would be confusing. Council Member Sue Schlapp said she supported transparency in government, but informing consumers of extra taxes would make the program “useless.”

    Eligible costs
    One of the follies in government economic development policy is the categorization of costs into eligible and non-eligible costs. The proceeds from programs like CIDs and tax increment financing may be used only for costs in the “eligible” category. I suggest that we stop arbitrarily distinguishing between “eligible costs” and other costs. When city bureaucrats and politicians use a term like “eligible costs” it makes this process seem benign. It makes it seem as though we’re not really supplying corporate welfare and subsidy.

    As long as the developer has to spend money on what we call “eligible costs,” the fact that the city subsidy is restricted to these costs has no economic meaning. Suppose I gave you $10 with the stipulation that you could spend it only on next Monday. Would you deny that I had enriched you by $10? Of course not. As long as you were planning to spend $10 next Monday, or could shift your spending from some other day to Monday, this restriction has no economic meaning.

    Notification and withdrawal
    If a merchant moves into an existing CID, how might they know beforehand that they will have to charge the extra sales tax? It’s a simple matter to learn the property taxes a piece of property must pay. But if a retail store moves into a vacant storefront in a CID, how would this store know that it will have to charge the extra CID sales tax? This is an important matter, as the extra tax could place the store at a competitive disadvantage, and the prospective retailer needs to know of the district’s existence and its terms.

    Then, if a business tires of being in a CID — perhaps because it realizes it has put itself at a competitive disadvantage — how can the district be dissolved?

    The nature of taxation
    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 — and 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.

    —
    Notes

    1. Weeks, Bob. Community improvement districts in Kansas. Available at https://wichitaliberty.org/kansas-government/community-improvement-districts-kansas/. ↩
    2. Wichita City Council Agenda Packet for January 9, 2018. Agenda items IV-1, IV-2, and IV-3. ↩
    3. Weeks, Bob. Naftzger Park project details. Available at https://wichitaliberty.org/wichita-government/naftzger-park-project-details/. ↩
    4. Weeks, Bob. Delano catalyst site. https://wichitaliberty.org/wichita-government/delano-catalyst-site/. ↩
  • Delano catalyst site

    Delano catalyst site

    A development near downtown Wichita may receive subsidy through four different avenues.

    This week the Wichita City Council will consider approval of a development agreement with EPC Real Estate, LLC, for the Delano catalyst site. This is vacant land north of Douglas, between the Advanced Learning Library and the River Vista project.

    Update: The measure passed four votes to three, with Bluebaugh, Frye, and Longwell in the minority.

    Wichita Eagle reporting mentions some of the public subsidy the development will receive: $12 million over a period of years, in the form of Tax Increment Financing and Community Improvement District sales tax. (Delano project looks to add 180 apartments, hotel next to new Wichita library)

    One form of additional subsidy is forgiveness of sales tax on the construction of buildings. The Letter of Intent for Industrial Revenue Bonds the council will consider states: “The City’s governing body has authorized an application for sales tax exemption with an estimated value of $1,611,822.”

    But a really big gift to the developers is the price of the land. City document state the selling price for the 7.2 acre plot is $750,000. That’s about ($750000 / 7.2 acres) = $104,167 per acre. It’s a pretty good deal for the buyers. A look at some current commercial land listings in Wichita finds these:

    1.20 acres at 47th South and Seneca for $425,000, or $354,167 per acre.
    0.50 acres at 140 N. West St. for $225,000, or $450,000 per acre.
    20.00 acres at 1462 S. Maize Road “Great for entertainment, retail, etc.” for $4,251,456, or $212,573 per acre.
    0.52 acres at 640 N. Webb Road for $368,570, or $708,788 per acre.

    It’s clear that the developers are buying the land from the city for a small fraction of its value.

    By the way: Wichita Mayor Jeff Longwell says the city will no longer offer cash incentives for economic development. But selling land a deeply discounted price: Is that different from a cash incentive?

    We might also note that this project will receive millions in benefits from Tax Increment Financing. This was a program born out of a perceived need to help redevelop blighted property. This development site, however, is vacant land.

    Finally: If downtown Wichita is really progressing as well as its boosters say, why is it necessary to offer so much subsidy to develop a project like this?

  • Spirit Aerosystems incentives reported

    Spirit Aerosystems incentives reported

    Opinions vary on economic development incentives, but we ought to expect to be told the truth of the details.

    The Wichita Business Journal has reported on the economic development incentives used to cement the Spirit AeroSystems expansion announced last week. Following are some quotes from its article How Wichita won the battle for Spirit AeroSystems’ expansion. Background on the aspects of the deal can be found at Spirit expands in Wichita.

    Wichita Business Journal: “And many aren’t shy about bringing cash to the table as an incentive. In Wichita, in the wake of the defeat at the polls in 2014 of a sales tax measure that would have been used in part for economic development activities, such a war chest isn’t an option.”

    Wichita and Sedgwick County are contributing cash and cash-equivalents to the deal. See below for more.

    Further, the city has other ways to fund a “war chest” of incentives. While the sales tax failed to pass, there was nothing to prevent the city council from raising other taxes (such as property tax or franchise fees) to raise funds for economic development. Now there is a property tax limitation imposed by the state, but there are many loopholes the council could drive a large truck through, including holding an election asking voters to raise property taxes.

    Also, the city justifies spending on economic development incentives by the positive return to the city. That is, for every dollar the city spends or forgoes in future taxes, it receives a larger amount in return. For this project, the analysis provided by Center for Economic Development and Business Research at Wichita State University reports a benefit/cost ratio of 2.75 to one for the city. That is, the city believes it will receive $2.75 for every $1.00 “invested.” If the city truly believes this, it should have no hesitation to issue bonds to fund this incentive, repaying the bonds with the projected benefits.

    Wichita Business Journal: “‘Here … the state, city and county put together a very creative package focused on infrastructure and training,’ [Spirit CEO Tom] Gentile said.”

    I suppose the innovative aspects of the package are the formation of a new business entity to build and own a large building, funded largely by the city and county. Also, the infrastructure referred to may mean the city’s forgiveness of Spirit’s debt to the city regarding a special water project.

    Wichita Business Journal: “The government investment isn’t cash, but it is a way of helping Spirit grow that Gentile said combined with local training opportunities to make the government involvement important to Spirit’s decision to expand in Wichita.”

    According to the agreement the city and county will consider this week, both Sedgwick County and the City of Wichita are contributing cash. The city will also forgive a large debt owed by Spirit. It’s hard to see how canceling a debt is different from giving cash.

    Also, city, county, state, and school district are canceling millions in property and sales taxes that Spirit would otherwise owe, which is also difficult to distinguish from a cash benefit.

    Finally, the state, under the PEAK problem, will likely refund to Spirit the state income tax withheld from their paychecks (minus a small fee).

    Wichita Business Journal: “‘Because Spirit was willing to look at another way of investing, because this community said it was more important to invest in other ways, they’re allowing us to invest in infrastructure instead of handing Spirit cash,’ Wichita Mayor Jeff Longwell said Wednesday. ‘We believe that our community can rally behind that. We’re investing in Spirit and they’re investing in our community.’”

    I’d really like to know the “another way of investing” the mayor mentions. Plus, contrary to the mayor’s assertion, the city is handing Spirit cash. Well, it’s giving cash to a new business entity whose sole purpose is to provide a new building for Spirit. Perhaps for Jeff Longwell that’s a distinction with a meaningful difference. If so, that’s too bad.

    There are differing opinions as to the necessity and wisdom of economic development incentives. But we ought to expect the unvarnished truth from our mayor and economic development officials. It would be great if the Wichita Business Journal helped report the truth.