Voice For Liberty

Tag: Subsidy

  • Kansas and Wichita quick takes: Monday May 9, 2011

    Airfares down in Wichita. A city press release announces: “Wichita Mid-Continent Airport had the country’s 11th largest airline fare decrease since 2000 and now ranks 43rd in average fare of the 100 busiest airports, according to research by the federal Bureau of Transportation Statistics (BTS).” The program’s major source of funding is $5 million per year from the state. Currently, it is not known whether this funding will be in the budget the legislature is working on. … The program is controversial for claims of economic benefit that appear overstated. There is a way to pay for the program that shouldn’t be controversial. When government provides services that benefit everyone, such as police protection, most people agree that taxes to pay for these services should be broad-based. But we can precisely identify the people who benefit from cheap airfares: the people who buy tickets. Wichita could easily add a charge to tickets for this purpose. The mechanism is already in place.

    Wichita City Council this week. A speaker on the public agenda will speak about restoring Joyland. Undoubtedly, the goal of the speaker will be to obtain public funds for this project. … City staff is recommending that the council deny a request for Industrial Revenue Bond financing by Pixius Communications LLC. As always, the benefit of the IRB financing to the applicant is the property tax and possible sales tax abatements that accompany the program. The city does not lend money, and does not guarantee that the applicant will repay the bonds. The reason staff is recommending not to approve the application is that Pixius is a service business, and under current policy, a service business must generate a majority of its revenues from outside the Wichita area. Pixius does not, and is asking the city to waive this policy for their benefit. … Separately, Pixius is applying for low-cost financing of renovations to the same building though the facade improvement program. The city has performed its “gap” analysis and has “determined a financial need for incentives based on the current market rates for economic rents.” This is another example of government investing in money-losing businesses. … Then The Golf Warehouse in northeast Wichita asks for a forgivable loan from the city as part of a larger package of incentives and subsidy. This item will prove to be a test for several council members who campaigned against these loans. … Council members will receive a quarterly financial report and view an “artistic concept” for WaterWalk.

    Joyland topic of British tabloid. The British tabloid newspaper Daily Mail, in its online version, has a story and video about Wichita’s closed Joyland amusement park. For those who remember the park in its heyday, this is a fascinating — if not bittersweet — look at the park’s current condition. The headline of the article (“New images of an abandoned theme park reveal desolation in America’s heartland”) makes a connection between the deterioration of Joyland and the economic condition of America, a false impression which several comment writers corrected. … I don’t think the closing of Joyland has anything to do with public policy. Businesses come and go all the time as tastes and generations change.

    Educational freedom to be discussed in Wichita. This week Kansas Policy Institute and The Friedman Foundation for Educational Choice will be discussing what other states have done to increase student achievement through reforms based on educational freedom and creating a student-centric focus. KPI and FFEC recently launched the “Why Not Kansas” initiative to educate Kansans on the need to reform the state’s K-12 educational system to allow Kansas schools to continue to improve. Speakers at the event will be Dave Trabert, president of Kansas Policy Institute, and Leslie Hiner, vice president of programs and state relations at The Foundation for Educational Choice. The event is Thursday, May 12 at 10:30 am, at the Central Wichita Public Library Auditorium. RSVP is requested by email to James Franko or by calling 316-634-0218.

    Do you want to live in the world of Atlas Shrugged? From LearnLiberty.org, a project of Institute for Humane Studies: “In her masterpiece of fiction, Atlas Shrugged, Ayn Rand emphasizes three key classical liberal themes: individualism, suspicion of centralized power, and the importance of free markets. In this video, Prof. Jennifer Burns shows how Rand’s plot and characters demonstrate these themes, principally through innovative entrepreneurs who are stifled by laws and regulations instituted by their competitors. In the world of Atlas Shrugged, free markets and individual liberty have been traded away for equality and security enforced by the government. Burns ends by reviving Rand’s critical question: do you want to live in this kind of world?” … The video is six minutes in length.

    Who are the real robber barons? In summarizing a chapter from his book How Capitalism Saved America: The Untold History of Our Country, From the Pilgrims to the Present, Thomas J. DiLorenzo explains the false lessons of capitalism and government that we have been taught:

    “The lesson here is that most historians are hopelessly confused about the rise of capitalism in America. They usually fail to adequately appreciate the entrepreneurial genius of men like James J. Hill, John D. Rockefeller, and Cornelius Vanderbilt, and more often than not they lump these men (and other market entrepreneurs) in with genuine “robber barons” or political entrepreneurs.

    Most historians also uncritically repeat the claim that government subsidies were necessary to building America’s transcontinental railroad industry, steamship industry, steel industry, and other industries. But while clinging to this “market failure” argument, they ignore (or at least are unaware of) the fact that market entrepreneurs performed quite well without government subsidies. They also ignore the fact that the subsidies themselves were a great source of inefficiency and business failure, even though they enriched the direct recipients of the subsidies and advanced the political careers of those who dished them out.

    Political entrepreneurs and their governmental patrons are the real villains of American business history and should be portrayed as such. They are the real robber barons.

    At the same time, the market entrepreneurs who practiced genuine capitalism, whose genius and energy fueled extraordinary economic achievement and also brought tremendous benefits to Americans, should be recognized for their achievements rather than demonized, as they so often are. Men like James J. Hill, John D. Rockefeller, and Cornelius Vanderbilt were heroes who improved the lives of millions of consumers; employed thousands and enabled them to support their families and educate their children; created entire cities because of the success of their enterprises (for example, Scranton, Pennsylvania); pioneered efficient management techniques that are still employed today; and donated hundreds of millions of dollars to charities and nonprofit organizations of all kinds, from libraries to hospitals to symphonies, public parks, and zoos. It is absolutely perverse that historians usually look at these men as crooks or cheaters while praising and advocating “business/government partnerships,” which can only lead to corruption and economic decline.

  • Forgivable loan a test for new Wichita City Council members

    This week the Wichita City Council will consider a request for a forgivable loan that will put the campaign rhetoric of three newly-elected council members to test.

    At issue is The Golf Warehouse in northeast Wichita. The company proposes to expand its existing facility in Wichita rather than in Indiana, where the company has existing facilities with excess capacity. To lure the company to expand in Wichita, the state of Kansas is offering grants totaling $275,000. The company also seeks a forgivable loan from the City of Wichita for $48,000, and another forgivable loan of the same amount from Sedgwick County for a total package worth $371,000. If the company meets employment and wage goals, the forgivable loans do not need to be repaid. Details of the proposal may be seen at Wichita City Council agenda packet, May 10, 2011, starting on page 40.

    While campaigning for their offices, each of the three candidates — now council members — spoke negatively of forgivable loans. At a campaign event in February (transcripts below), James Clendenin (district 3, south and southeast Wichita) spoke of how the need for a loan to be forgiven reflects poorly on a company’s financial performance. His remarks look more to the past history of a company rather than to the future, and that’s not the focus of the city’s forgivable loan program. It does not forgive loans that were made in the past. Instead, it makes new loans that will not need to be repaid if performance goals are met — in effect, grants of money.

    District 4’s (south and southwest Wichita) new council member Michael O’Donnell spoke plainly against this form of incentive, saying “I do not believe in forgivable loans.” He exhibited insight regarding the spiraling nature of economic development incentives, saying that because the city gives out subsidies and incentives, everyone wants them. It sets a “terrible precedent,” he said, adding that it is “completely irrational.”

    Pete Meitzner, who represents district 2 (east Wichita), said “I am not for forgivable loans.” He noted the contradiction inherent in the terms “forgivable” and “loan,” calling them “conflicting terms.”

    If Meitzner sticks by his campaign rhetoric against forgivable loans, it may make for an awkward moment at Tuesday’s council meeting. That’s because the applicant company is located in Meitzner’s district, and custom dictates that he, as representative for the district the company is located in, make the motion in favor of granting the loan — a forgivable loan that he has said he is “not for.” If Meitzner acts in office as he campaigned, he will make a motion denying the applicant’s request.

    The other four members of the council usually have a favorable attitude toward these forgivable loans and other economic development subsidies and incentives. My suspicion is that at least two of the new members will be persuaded that this loan is necessary, and they will abandon their campaign musings. O’Donnell’s insight will be shown to be true, and more companies will ask for subsidy and incentive from the city, county, and state. Rent seeking — again — will be the economic development policy of the City of Wichita.

    From a meeting of Republican Women United on February 12, 2011, in response to a question about the City of Wichita and forgivable loans:

    James Clendenin: “If a company is not doing well, and they need a loan forgiven, we need to find out why they want this loan forgiven. If we’re gonna forgive a loan, are they going to continue their bad habits, the things that got them in this situation? So we need to examine those things when we’re considering that.”

    Michael O’Donnell: “I do not believe in forgivable loans. I feel that if it wouldn’t pass muster with a financial institution, then the City of Wichita should not take the taxpayers money to give to these companies. That sets a terrible precedent. And once you start, it’s a slippery slope, because everybody’s going to be attracted to it. Because they should. Any businessman should be going to the City of Wichita and asking for loans, because they continue to give it out. It’s completely irrational.”

    Pete Meitzner: “Forgivable loans is kind of a … I’m surprised that’s even a word, it’s kind of a conflicting term anyway. I am not for forgivable loans. I think the city and businesses have a number of tools when they’re challenged. Our city was founded — it’s a great city — based on aircraft manufacturing, oil and energy industries, entrepreneurial spirit that went nationwide and worldwide, and small businesses. If we as a city need to use our tools, but we need to embrace those people to feel accepted, and a freedom to grow their businesses. And if they’re struggling, and struggling with their bank, I don’t mind helping being an advocate to help these businesses do whatever they can to continue to flourish. Some of that might be us getting out of the way. Rewriting regulations, less stringent. It’s okay for us to get out of the way and allow them to flourish. I think we need to use any of the tools that we possibly can have beside a term forgivable loan.”

  • Kansas and Wichita quick takes: Monday April 11, 2011

    Social security entitlement. In today’s Wichita Eagle Opinion Line, this comment was left: “Please stop calling my Social Security an ‘entitlement.’ I paid into it all my working life, and I just want my money back.” Two points: The writer seems to believe that just because people pay into Social Security, they’re entitled to benefits as through there was a contract in place. But there is no contract. Social Security benefits are what Congress says they are, and Congress can make changes at any time. … Second, the writer wants his money back, as though the money was paid onto some sort of investment account and has been working there earning interest. Unfortunately, the Social Security trust fund money has been spent. There’s nothing for the writer to get back except the future taxes to be paid by future workers.

    New York Times may be offended. “The New York Times is carrying out a vendetta against Charles and David Koch, two of the very few rich people who support conservative and libertarian causes. The Times is offended, apparently, that the Left does not quite have a monopoly on big money. The paper’s editorialists flat-out lied about the Koch brothers, and had to issue a retraction.” … Referring to author David Callahan and a recent op-ed: “What is most striking about Callahan’s piece is its rampant hypocrisy. He himself is an employee of a left-wing organization that prefers not to abide by the transparency standards that Callahan advocates.” From Powerline: The Times Vendetta Continues.

    Kansas Legislature website. Kansas Reporter writes: “Most hurdles now behind legislative website update.” The major problems I experience now are reliability issues, where many times clicking on a document produces the dreaded “Error 500 Internal Server Error” message. … The cost of the work, plus a new system for preparing legislative text, is some $11 million.

    General Electric tax bill. The Washington Post looks at the New York Times and its reporting on General Electric and its taxes: “Unfortunately, for all its good work, the article has created at least one major misperception: that GE paid no U.S. income taxes last year and is getting a $3.2 billion refund from the Treasury. … The company says it’s not getting any refund for 2010 — validating [accounting professor Ed] Outslay’s analysis. Its 2010 tax situation? ‘We expect to have a small U.S. income tax liability for 2010,’ said Gary Sheffer, GE’s chief spokesman. How big is small? GE declined to say. The number is unlikely to be disclosed unless GE goes public with it or is forced to do so. One reason the Times was ensnared — and that it took us a while to sort this out — is that the material is confusing. Outslay drew up 10 GE tax metrics for us and could have given us at least six more. None shows what GE’s U.S. income tax bill is for a given year.”

    Sweet deal for big sugar. Senator Dick Lugar, writing in the Washington Times, explains the harm to U.S. consumers from a tariff that benefits a few: “The collapse of communism brought an end to many of the world’s command-and-control economic systems and central planning by government bureaucrats. But a notable exception is the United States government’s sugar program. A complicated system of marketing allotments, price supports, purchase guarantees, quotas and tariffs that only a Soviet apparatchik could love, the U.S. sugar program has actually lasted longer than the Soviet Union itself.” The idea is that by keeping prices high and insulating domestic sugar produces from the world market, jobs are saved. Counters Lugar: “But in 2006, the Commerce Department calculated that for every sugar-growing job saved by artificially high prices, three manufacturing jobs in the confectionery industry are lost. Overall, from 1997 to 2009, more than 111,000 jobs were lost in the sugar-using food sector, according to Commerce data.” This is always the case with protectionist trade tariffs: a small number of highly-visible jobs are saved, at the cost of great economic harm spread across the economy, harm that is difficult to see. Sugar protectionism is only one such example. President Bush’s tax hike and Obama’s tax increase on tires are other examples.

    Williams on role of government. A short lecture by Walter E. WIlliams. “Almost every group in our country has come to feel that the government owes them a special privilege or favor.” Conservatives too, he says. Williams highlights the contradictions of conservatives, who “don’t have a moral leg to stand on,” he says. “They merely prove that it’s a matter of whose ox is being gored.” He quotes H.L. Mencken: “Government is a broker in pillage” and “Every election is an advance auction on the sale of stolen property.” Williams says not to blame the elected officials we send to Washington and local centers of government. They, he says, are doing precisely what we send them there to do: “Namely, to use the power of their office to confiscate the property of one American and bring it back to another American to whom it does not belong.” Politician who say they would not do this — of course, they do not speak so bluntly on the campaign trail — would not be elected.

  • Economic development incentives questioned at Sedgwick County Commission

    Last week’s meeting of the Sedgwick County Commission featured a discussion of economic development incentives unlike the genial rubberstamping these items usually receive. From the bench, Commissioner Richard Ranzau was the driving force in asking the questions.

    The issue was a forgivable loan of $220,000 to be made to Apex Engineering International LLC. The company has already received approval of a forgivable loan of the same amount from the City of Wichita The company will also receive grants and tax credits totaling $1,272,000 from the state of Kansas.

    Apex, a manufacturer of airplane parts, claims it has received an offer from Jacksonville, Florida for the company to move there. The actions by Sedgwick County, Wichita, and Kansas is to persuade Apex to remain in Wichita rather than move to Jacksonville.

    Some interesting points raised by Ranzau:

    Is this an “economic emergency or unique opportunity” as claimed by the county’s economic development staff?

    Ranzau notes that our economic development policies need to address the overall climate for business, instead of picking just a few companies to grant money to.

    Ranzau questions why the county does not require collateral for the loan it is making. The answer given by staff is that this is a standard agreement and is the same that the City of Wichita uses. Staff said that the county considers the forgivable loan to be an investment.

    Financial statements have been reviewed by a CPA on county staff, and also by the Greater Wichita Economic Development Coalition. Other than that, the statements are private and not available to the commissioners for review.

    Ranzau made the point in that if the employees of the company would take a pay cut of $0.07 per hour for the next five years, they could finance the subsidy that the taxpayers are being asked to pay. He asked: “Why are the taxpayers of this community having to bear the burden when the average salary there is $46,000? I find it hard to believe that someone would be willing to lose their job for seven cents per hour. I don’t believe this question was ever asked, but this is the thing that should be asked. There are alternatives to this.”

    Ranzau also laid bare the motivations of politicians: “It does allow politicians to pound their chests and say ‘See, I care about jobs, because I gave your money to this person over here.’ But that’s very shortsighted.”

    The measure passed by a vote of four to one, with Ranzau in the minority.

  • Sedgwick County Commission to consider corporate welfare as economic development

    Ed. note: the two measures discussed below passed.

    Today the Sedgwick County Commission will consider two measures that, if adopted, will further establish corporate welfare and rent-seeking as Wichita’s and Sedgwick County’s economic development strategy.

    When people are living on welfare, we usually see that as a sad state of affairs. We view it as a failure, both for the individual and for the country. We seek ways to help people get off welfare so that they become self-sufficient. We want to help them contribute to society rather than being a drain on its resources.

    But local economic development officials don’t see corporate welfare as a bad thing. Instead, as these two measures — both which will likely pass — illustrate, welfare is good when you’re a business in Sedgwick County. Especially if you can raise speculation that your company might move out of the area.

    The term rent, or more precisely, economic rent is somewhat unfortunate, as the common usage of the term — paying someone money for the use of an asset for a period of time — contains no sinister connotation. But economic rent does carry baggage.

    What is rent seeking? Wikipedia defines it like this: “In economics, rent seeking occurs when an individual, organization or firm seeks to earn income by capturing economic rent through manipulation or exploitation of the economic environment, rather than by earning profits through economic transactions and the production of added wealth.”

    This explanation doesn’t do full justice to the term, because it doesn’t mention the role that government and politics usually play. The Concise Encyclopedia of Economics adds this: “The idea is simple but powerful. People are said to seek rents when they try to obtain benefits for themselves through the political arena. They typically do so by getting a subsidy for a good they produce or for being in a particular class of people, by getting a tariff on a good they produce, or by getting a special regulation that hampers their competitors.”

    The deals the Sedgwick County Commission will consider are both corporate welfare and rent-seeking. Both are harmful to our community.

    The first item concerns Apex Engineering International LLC, which is proposed to receive forgivable loans of $220,000 each from Wichita and Sedgwick County. (The City of Wichita has already approved its loan.) The company will also receive grants and tax credits totaling $1,272,000 from the state. Surprisingly, no property tax exemption is mentioned for this company. The city’s material on this matter may be read at Approval of Forgivable Loan Agreement (Apex Engineering International).

    Apex will also receive $1,272,000 in tax credits and grants under programs offered by the State of Kansas.

    The second item concerns MoJack Distributors, LLC, a company that makes an accessory for riding lawn mowers. It is proposed that the City of Wichita and Sedgwick County each make a forgivable loans of $35,000 to this company. (Again, Wichita has already approved its loan to this company.) If the company maintains a certain level of employment, the loans do not need to be repaid.

    But this is not the only welfare being given to Mojack. The city also proposes a 100% Economic Development Exemption (EDX) property tax exemption. This exemption obliges the county to abate its share of property tax, too. The term would be five years, with renewal for another five years if conditions are met. The city’s material on this matter may be read at Approval of Forgivable Loan Agreement, MoJack.

    For both companies, there was the treat of moving operations elsewhere, and the incentives offered made the difference, say the companies.

    Targeted investment, or welfare

    Government bureaucrats and politicians promote programs like these as targeted investment in our region’s economic future. They believe that they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by city hall that shapes the future direction of Wichita’s economy.

    Arnold King has written about the ability of government experts to decide what investments should be made with public funds. There’s a problem with knowledge and power:

    As Hayek pointed out, knowledge that is important in the economy is dispersed. Consumers understand their own wants and business managers understand their technological opportunities and constraints to a greater degree than they can articulate and to a far greater degree than experts can understand and absorb.

    When knowledge is dispersed but power is concentrated, I call this the knowledge-power discrepancy. Such discrepancies can arise in large firms, where CEOs can fail to appreciate the significance of what is known by some of their subordinates. … With government experts, the knowledge-power discrepancy is particularly acute.

    I emphasized the last sentence to highlight the problem of the dispersed nature of knowledge.

    Yet this week, our Wichita and Sedgwick County bureaucrats feel they have the necessary knowledge to recommend to the commissions that the citizens of Sedgwick County make investments of public funds in these two instances. All Wichita city council members were gullible enough to believe it.

    One thing is for sure: the city and the county have the power to make these investments. They just don’t have — they can’t have — the knowledge as to whether these are wise.

    We need a dynamic job creation engine

    Furthermore, we have to question the wisdom of investing in these established companies, especially a company involved in aviation, as Wichita and Sedgwick County are always seeking to diversify their economies away from dependence on aviation.

    Through research conducted by Dr. Art Hall and others, we now know that it is dynamic young companies that are the main drivers of job creation in Kansas. Hall wrote: “Embracing dynamism starts with a change in vision. Simply stated, the state government of Kansas should abandon its prevailing policy vision of the State as an active investor in businesses or industries and instead adopt the policy vision of the State as a caretaker of a competitive “platform” — a platform that seeks to induce as much commercial experimentation as possible.” (While Hall wrote about the State of Kansas, Sedgwick County is playing the same role at a local level.)

    The “active investor” role that Sedgwick County is about to take with regard to these two companies is precisely the wrong role to take. These actions increase the cost of government for the dynamic small companies we need to nurture. Instead these efforts concentrate and focus our economic development efforts in an unproductive way.

  • Who benefits, loses from regulation?

    A Powerline post discusses the Upton-Imhofe bill, which would bar the EPA from regulating carbon dioxide emissions. The article quotes Ranking Democrat Henry Waxman of the House Committee on Energy and Commerce as stating this bill benefits “big polluters like Koch Industries.”

    But who really benefits from the regulation of greenhouse gases? First, large companies do. They are better able to absorb the costs of regulation than their smaller competitors. This is why we often see big business promoting increased regulation. It places their smaller competitors at a disadvantage. As Koch Industries is a large company, it is in a position to benefit from the proposed regulations relative to their smaller competitors. But, the company does not support the regulations.

    Who will lose from increased regulation of greenhouse gases? Ultimately consumers will, but business is harmed, too. The cost of regulation causes a loss of income, which leads to less of the product (energy) being produced, and a corresponding rise in price. As energy becomes more expensive, it is low-income people that are hurt the most.

    Aside from these market effects, the Powerline piece explains an entire industry that has developed to benefit from government subsidy of green energy sources and producers:

    But there are, in fact, some companies that would benefit from the imposition of CO2 regulations on power plants, refineries and so on. Those companies are the ones that peddle inefficient forms of energy that cannot compete with fossil fuels absent government subsidies. Those subsidies come in two forms. The government can give money and tax breaks to inefficient energy producers like solar and wind, and it has indeed done that. However, those subsidies are relatively transparent and controversial. The second way in which government can help producers of inefficient energy is, therefore, actually better: it can make energy produced with fossil fuels more expensive by imposing needless regulations. And that is exactly what “green” — i.e., inefficient — energy producers lobby for.

    And who are the green energy subsidy-seekers that benefit from increased regulation? Powerline identifies one: Thomas Steyer, a west coast hedge fund manager with investments in green energy companies. He has a personal financial motive, as Powerline describes: “As an investor who has placed a big bet on non-fossil energy, he has an obvious personal interest in the government imposing regulations that make his competitors — producers of fossil fuel energy — more expensive. In fact, without such government action, the ‘green’ projects in which he has invested are likely worthless.”

    It should not be surprising that Steyer makes large campaign contributions to Democrats and is a board member of Center for American Progress, a left-wing think tank closely associated with the Obama Administration.

    A case study in liberal hypocrisy

    By John H. Hinderaker

    On Monday, the House Committee on Energy and Commerce began its consideration of the Upton-Imhofe bill, which would bar the EPA from regulating carbon dioxide emissions. Upton-Imhofe is critical to any effort to restore our economy, so the Democrats are against it. Ranking Democrat Henry Waxman went on a hysterical rant against the legislation:

    This is dangerous legislation. Climate change is real; it is caused by pollution; and it is a serious threat to our health and welfare. We need to confront these realities, not put our head in the sand like an ostrich.

    We have written about this issue many times. Climate change is “real” only in the sense that the climate is always changing. That has been true for millions of years. Climate change is not caused by pollution; history proves that the level of carbon dioxide in the atmosphere does not control worldwide temperatures. Nor is global warming a serious threat to our health and welfare. Humanity has consistently thrived during warmer periods and suffered during colder ones. The Dark Ages were dark largely because they were cold.

    Waxman continued:

    Yet instead of promoting a clean energy future, we are pursuing this partisan bill that benefits no one except big polluters like Koch Industries.

    I suppose Waxman thought he was punching his liberal ticket by mouthing the Democratic Party talking point du jour. Evidently he didn’t get the memo, and hadn’t heard that the Left has backed off on its daily attacks on Koch because those attacks were so over-the-top and so factually deficient that they made laughingstocks of the lefties who asserted them.

    Continue reading at Powerline.

  • Cabela’s CID should not be approved in Wichita

    This week outdoor retailer Cabela’s will ask the Wichita City Council to create a Community Improvement District (CID) for its benefit. Creating the CID would allow Cabela’s — the only store in the proposed CID — to collect tax of an additional 1.2 cents per dollar sales from customers. Proceeds of one cent per dollar, less a handling fee, will be given to Cabela’s for its exclusive use, with 0.2 cents per dollar to be used for street and highway improvements near the proposed CID.

    CIDs should be opposed as they turn over tax policy to the private sector. We should look at taxation as a way for government to raise funds to pay for services that all people benefit from. An example is police and fire protection. Even people who are opposed to taxation rationalize paying taxes that way.

    But CIDs turn tax policy over to the private sector for personal benefit. The money is collected under the pretense of government authority, but it is collected for the exclusive benefit of the owners of property in the CID.

    This is perhaps the worst aspect of CIDs. Landlord and merchants already have a way to generate revenue from their customers under free exchange: through the prices posted or advertised for their products, plus consumers’ awareness of the sales tax rates that prevail in a state, county, and city.

    But the most consumers will never be aware that they paid an extra tax for the exclusive benefit of the CID. (A bill working its way through the Kansas legislature may require detailing of sales taxes on cash register receipts.)

    The Wichita city council had a chance to provide transparency to shoppers by requiring merchants in CIDs to post signs informing shoppers of the amount of extra tax to be changed in the store. But CID advocates got the city council to back down from that requirement. CID advocates know how powerful information is, and they along with their allies on the city council realized that signage with disclosure would harm CID merchants. Council Member Sue Schlapp succinctly summarized the subterfuge that must accompany the CID tax when she said: “This is very simple: If you vote to have the tool, and then you vote to put something in it that makes the tool useless, it’s not even any point in having the vote, in my opinion.” She voted against the signage requirement.

    We should ask Cabela’s why their business model is so flimsy that allowing them to collect one percent additional from their customers makes the difference between feasibility and not. Cabela’s is notorious throughout the country for seeking all sorts of corporate welfare, and the CID is not likely to be the only subsidy the company seeks to extract from the city, county, school district, and/or state. It’s all in their business plan, as revealed in the company’s 2004 IPO filing: “Historically, we have been able to negotiate economic development arrangements relating to the construction of a number of our new destination retail stores, including free land, monetary grants and the recapture of incremental sales, property or other taxes through economic development bonds, with many local and state governments.”

    Cabela’s and its supporters note that part of the 1.2 cents per dollar extra tax to be charged will be used to improve the intersection at Greenwich and K-96. The need of an upgrade there should be questioned. A Cabela’s spokesman told the Wichita Eagle that easy access to the store from the highway is needed because shoppers “come in with the big pickups, the Rvs.” We should note that there exists a full-service intersection with traffic signals less than one mile from the Cabela’s site. For half of the distance, Greenwich road is three lanes in each direction.

    The proposed intersection can be viewed as an unnecessary public improvement — a sweetener to the deal — that doesn’t cost Cabela’s anything. Interestingly, the city’s adopted capital improvement plan for 2009 to 2018 contains “private contributions of $8.4 million for an interchange at K-96 and Greenwich Road.”

    We also have to recognize the harmful effect of a subsidy granted to one company on its competitors. In this case, the city’s response is likely to be “let the competitors apply for a CID.” This pressure — where merchants of all types see other merchants benefiting from the state collecting taxes for their own benefit — is leading to “CID sprawl,” a term coined by Susan Estes. This accurately represents the natural result of the irresistible urge of the CID: charging your customers more and blaming it on the government.

    In particular, a major competitor to Cabela’s is Gander Mountain in the downtown WaterWalk development. This store benefits from taxpayer subsidy, and if it were to close, Wichita taxpayers would be liable for bond payments. Further, the store is considered an anchor for the struggling development. A closed store surely would not be good for WaterWalk’s future.

    Finally, Lynda Tyler, who is running for city council against current council member and Vice Mayor Jeff Longwell, wrote this letter which appeared in the Wichita Eagle. The questions she raises deserve answers.

    Is Cabela’s revenue estimate accurate?

    On the surface, the community improvement district for Cabela’s seems pretty simple: Those who shop at the store will help pay for the store and the K-96 on-ramps through an extra sales tax. But look at the numbers.

    The Eagle reported that the CID is expected to generate $17.2 million over 22 years (Feb. 16 Business Today). That means it would generate an average of $781,818 per year. At 1.2 cents per dollar of sales, the Wichita store would have to have yearly sales of $65.1 million per year.

    Cabela’s does not release its per store sales numbers, but according to an Aug. 23, 2007, Barron’s article, Cabela’s averaged about $348 in sales per square foot. On an 80,000-square-foot store, that would be $27.8 million of sales per year. That is less than half of the amount estimated for the Wichita store.

    If we issue general obligation bonds and build the ramps based on an inflated number, it would be the taxpayer who stands to lose. If the city also issues revenue bonds based on the inflated numbers, there could be a disaster, too, if the store does $26 million instead of $65 million in sales.

  • Wichita should reform its economic development strategy

    Remarks to the Wichita City Council, February 15, 2011.

    Mayor and members of the council, last week Governor Sam Brownback released his plan for economic development in Kansas. While his plan specifically addressed the state and its activities, the principles apply to local government. In fact, we need to harmonize our strategy with the state’s if we are to succeed.

    Besides reorganizing the state’s economic development agencies, the governor’s plan calls for a shift in economic development strategy. Instead of targeting industries or specific companies, Kansas should seek to establish a strategy that is simple, fair, and of high capacity.

    The governor’s plan seeks to promote an economy where a diversity of companies can thrive, each engaging in entrepreneurship or business experimentation. This is the type of environment that creates the conditions where the next Apple Computer, Google, Microsoft, or Pizza Hut might be launched.

    Can we identify the companies that may be — or may not be — future successes? Will they satisfy the city’s criteria for receiving various forms of economic development assistance? Or being of entrepreneurial mind and spirit, will these young companies even consider coming to city hall for assistance?

    There are those on this council and in city hall who believe we can formulate policies that identify these companies. I don’t think that’s possible, and the governor’s economic development plan doesn’t think it’s possible.

    We need an environment that nurtures these unknown futures success stories, and as many as possible. Not only large success stores, but smaller-scale success, too. That’s what we don’t have, and this is what the governor’s plan seeks to create.

    I mentioned capacity. When each economic development deal must pass through city hall bureaucracy, we can have capacity constraints, not to mention high cost. As an example, last April this applicant company received a forgivable loan from the city of just $15,000. How much effort did it take to process that loan? I would suggest it was a sizable fraction of the loan amount. And the same thing happened across the street at the county commission.

    Mayor, you said in your recent State of the City address that in 2010, economic development efforts saved 745 jobs and created 435 jobs, for a total impact of 1,180 jobs. To place those numbers in context, the U.S. Census Bureau indicates the labor force in Wichita is 191,760 persons. This means that the economic development efforts of the City of Wichita and its agencies affected a number of jobs equivalent to 0.6 percent of the city workforce.

    This small number of jobs impacted — representing less than one percent of the city’s labor force — is overwhelmed by the natural flow of economic events. Yet, to accomplish this, we have a large and costly bureaucracy in place. We increase costs for the numerous young companies that we now know are the engine of job growth.

    Mayor and members of the council, we can start moving towards an environment that promotes diverse economic growth by voting against this item and the other targeted economic development incentives on today’s agenda. But if the council decides to approve each item, I would ask that the council identify specific spending somewhere else to cut, so that the cost of these programs are not spread among all the residents and businesses in the city.

  • Affordable Airfares audit embarrassing to Wichita

    Last week’s release of a report produced by the Kansas Legislative Division of Post Audit is an embarrassment to City of Wichita elected officials and staff, the Kansas Regional Area Economic Partnership, and the Wichita State University Center for Economic Development and Business Research. The audit found that economic development claims of the Kansas Affordable Airfares program are significantly overstated. This program pays a subsidy to discount airlines providing service in Kansas, primarily Airtran Airways in Wichita.

    The primary finding of the report is this: “Overall, the program appears to have had the desired effect. Since Wichita’s original affordable airfare program (FairFares) began in 2002, fares have decreased, while the number of passengers and the number of available flights have increased. However, the Regional Economic Area Partnership’s (REAP) annual reports on the program contain numerous inconsistencies and inaccuracies. Further, the economic impact of the program has been significantly overstated. Specifically, the estimated number of jobs created and the State’s return on investment were overstated because of key methodological errors and the use of some inaccurate data. We also found that overall accountability for the State funds is lacking.”

    The audit may be read in its entirety at Affordable Airfares: Reviewing the Benefits Claimed As a Result of State Funding to Lower Airfare. A summary of highlights is here.

    Several news stories provide additional coverage. See Wichita Eagle: Audit: Airfare subsidies’ impact was overstated, Topeka Capital-Journal: Audit: Wichita air subsidy questioned, and Kansas Watchdog: Analysts and Elected Officials Ignored Flaws in Air Subsidy Claims .

    The airline subsidy program in Wichita has a long tradition of overreaching. In 2004, Troy Carlson, who was at the time chairman of Fair Fares, a group that sought to provide a guarantee of business and operating subsidy to a discount airline, wrote that a discount airline’s presence in Wichita had an annual economic impact of $4.8 billion for the state. His claims had their starting point in a WSU CEDBR study, although Carlson extended them in a way I’m sure the study’s authors hadn’t intended.

    In 2005, Sam Williams, who had taken over the role of chairman of Fair Fares from Carlson, testified to the Wichita City Council that Wichita’s leadership in providing subsidies to airlines was just like the role Kansas played when it entered the Union in 1861.

    Fortunately, these ridiculous claims fell by the wayside. Except gullible city council members and legislators believed them.

    Future of targeted economic development subsidies

    The big takeaway from the Affordable Airfares audit is that boosters of state-sponsored and funded economic development rely on figures that often vastly overstate the effect of the programs they’re promoting. Having made a large mistake like this, agencies like REAP and CEDBR need to be watched carefully.

    More fundamentally, we need to question the role of targeted economic development subsidies in Kansas. The day after the Affordable Airfares audit was released, Governor Sam Brownback released his economic development plan for Kansas. This plan calls for an end to present practices, especially the heavy-handed methods cities like Wichita use. While the plan and the governor’s budget include continued funding for Affordable Airfares, this decision was made before the audit’s findings were released to the public.

    There is an alternative method of funding the airline subsidy besides taxing everyone in the state, or City of Wichita for that matter. When government provides services that benefit everyone, such as police protection, most people agree that taxes to pay for these services should be broad-based. But we can precisely identify the people who benefit from cheap airfares: the people who buy tickets. Wichita could easily add a charge to tickets for this purpose. The mechanism is already in place.

    The charge wouldn’t have to be very much, either. With 1,549,395 passengers in 2010, and with the Affordable Airfares program costing $6.67 million, the charge would need to be just $4.30 per passenger, or double that for a round trip ticket.

    City and REAP officials will argue that low airfares benefit everyone. But as we’ve seen, these claims are overstated.