Voice For Liberty

Tag: Sue Schlapp

  • Wichita Bowllagio hearing produces only delay

    Yesterday’s meeting of the Wichita City Council featured a lengthy public hearing for a proposed west-side entertainment development known as Bowllagio. Bowllagio is planned to have a bowling and entertainment center, a boutique hotel, and a restaurant owned by a celebrity television chef.

    The developers of this project propose to make use of $13 million in STAR bond financing. STAR bonds are issued for the immediate benefit of the developers, with the sales tax collected in the district used to pay off the bonds. The project also proposes to be a Community Improvement District, which allows an additional two cents per dollar to be collected in sales tax, again for the benefit of the district.

    The Kansas STAR bond process calls for several steps: First, a local governing body, like the City of Wichita, must approve the concept and set boundaries for the project. This is what yesterday’s agenda item called for. If approved by the council, the Kansas Secretary of Commerce would examine the project to see if it meets statutory criteria. If the Secretary approves the project, the city is then required to prepare a project plan and hold another public hearing concerning whether to adopt the project plan. The project plan must be passed by a two-thirds supermajority of the council.

    One of the elements of the project plan, according to the 2010 Kansas Legislator Briefing Book, is a “marketing study conducted to examine the impact of the special bond project on similar businesses in the projected market area.” The effect of Bowllagio on existing Wichita-area businesses was a major source of concern for both council members and citizens speaking at the public hearing.

    Speaking during the public hearing, Ray Baty, who is manager of a Wichita bowling center, said Bowllagio is not a new concept, but rather one that would compete with existing programs already in Wichita. The C.A.T.S. system, a training system promoted by Bowllagio developers, is actually a portable system, Baty said.

    He contended that introduction of Bowllagio to the market will not grow the market for bowling, but will further divide the existing market, resulting in a loss of revenue and profit for existing bowling centers. He said that bowling centers lose six percent of their customers each year, a trend that he said is national.

    Frank DeSocio, owner of several bowling centers in Wichita, told the council that the bowling training promoted by Bowllagio developers already happens in Wichita at the present. He mentioned five full-time bowling teachers and coaches already working in Wichita bowling centers.

    He added that Wichita does very well in obtaining and hosting tournaments, mentioning 17 PBA live televised tournaments that took place in Wichita, 10 regional events, a BPA womens’ open, six intercollegiate championships that were televised live, and numerous Kansas state high school championships.

    “Everything the Maxwell Group [developer of Bowllagio] claims they want to do is already being done in Wichita by the current bowling centers,” qualifying that he’s speaking only of the bowling side of the Bowllagio proposal, not the restaurants.

    In my remarks to the council, I mentioned that Wichita has had examples of restaurants or other establishments being announced — sometimes by the mayor in his annual state of the city address — but then the development failed to materialize. I expressed concern that we might commit to a large amount of STAR bond financing based on big plans that never advance beyond some small initial stage.

    Susan Estes told the council that “this is an extremely profound day” for the City of Wichita. She asked will the city help one business owner over another business owner in the same industry? She said that Bowllagio has some unique aspects, but it is a bowling alley. Its other entertainment features are also available in Wichita. We are using tax money to compete against existing businesses, she said.

    In response to a question by a homeowner in the project area, the mayor, indicating he believed he speaks for the council, said the council would not support using eminent domain to remove the homeowner from his home.

    During discussion by council members, a subject of controversy was whether approving project boundaries and forwarding the application to the Secretary of Commerce constitutes an endorsement of the project by the City of Wichita. Some council members wanted to pass an ordinance that would establish the boundaries of the district, and then have the Secretary decide whether the project meets the statutory requirements for a STAR bond project. Wichita economic development director Allen Bell mentioned that the council’s endorsement of the project might be a factor the Secretary would consider in determining whether to approve the project.

    A question from Council Member Lavonta Williams elicited Bell’s further opinion that the Secretary is “looking for a signal from the council” regarding its support for the project. Lack of local support, he added, would be taken in a “negative way.” Council Member Paul Gray agreed with this assessment.

    Vice Mayor Jeff Longwell disagreed, saying that all the Secretary needs is a geographic boundary for the proposed project. He contended that the process starts with setting the boundaries, and that other questions are difficult or impossible to answer without doing this. There are too many unknowns, he added, to give this project a formal endorsement at this time.

    Longwell also mentioned a report that showed that the south-central region of Kansas, which includes Wichita, receives fewer state economic development funds, relative to population, than the northeast Kansas region. He said we needed to “equal the playing field.”

    Longwell said he didn’t want to put together a package that would harm existing businesses, saying he wouldn’t vote for the project if an independent study showed that result would happen.

    Council Member Jim Skelton asked about the property taxes the development would pay. Bell replied that the property taxes should increase by a large amount, as the land is vacant now and is planned to receive $95 million of development. He said that while STAR bonds and Community Improvement District financing is proposed for this development, the plan does not include property tax abatements, industrial revenue bonds, tax increment financing, or any other diversion of property taxes.

    Council Member Janet Miller asked if the Kansas STAR bond statutes prohibited adding these other types of incentives to the project. The answer, according to Bell, is that these programs could be added on to this development, as has been done in some Kansas STAR bond districts.

    Later Miller referred to the “lack of information to make an education decision about the project.” She wondered why the developers would not spend “one-tenth of one percent of their $50 million dollar investment” ($50,000) to produce the studies that would give the council the information it needs to decide whether to send the project to the Secretary of Commerce with its support.

    When City Manager Bob Layton suggested a delay to gather more information from the developers, council members readily agreed. Layton said that city staff will visit with the developers, looking for an approach that will make council members comfortable with proceeding, addressing some of the information needs expressed today.

    Due to scheduling, Layton said that this matter would need to appear on next week’s agenda, or there would be a one month delay before it could be considered at a council meeting.

    The council voted unanimously to defer the item for one week, and to keep open the public hearing.

    Analysis

    An important issue to many council members is the potential harmful affect of Bowllagio on existing businesses, particularly bowling centers. Miller’s suggestion that the developers spend the money to have an independent assessment of this performed is entirely sensible.

    But I don’t think a study of that scope can be performed in one week. As it is now, the city will probably rely on information provided by the developers. It must be recognized that they have a $13 million incentive to produce information favorable to their cause. In his remarks, Gray recognized that proof that Bowllagio will not harm existing businesses will not come from “somebody advocating for the project.” It would require a third-party, independent analysis, he said.

    As of now, it is difficult to see how information that will satisfy council members can be produced by next week’s meeting.

    In my opinion, the local bowling center operators are justifiably concerned that a subsidized competitor will harm their business. They were able to show that many of the purportedly unique aspects of the Bowllagio concept are already available in Wichita, and have been for some time.

    Further, it’s not only direct competitors such as bowling centers that we need to be concerned for. Since the development is proposed to include a Mexican restaurant, what will its impact be on existing Mexican restaurants? And not only restaurants offering that cuisine, but all other restaurants?

    In a broader sense, a subsidized business competes with all other businesses in the market for employees and other goods and services that all business firms purchase.

    Longwell’s contention that we can still “kill” the project at a later date if reports come back showing negative impact on local businesses is, in my opinion, an empty promise. If the Kansas Secretary of Commerce approves this project, it would be very difficult for the council to vote against Wichita receiving $13 million in state tax dollars, especially in light of Longwell’s argument that the Wichita area doesn’t receive nearly enough of this economic development money.

    While council members such as Schlapp say they’re in favor of free markets, she and the other council members nearly always vote in favor of intervention in markets. The fact that the city council members have so many questions about the proposal tells us that this plan is, in fact, a form of centralized planning by government.

    As I remarked to the council, developments such as this are portrayed as a success story, in that someone has confidence in Wichita because they’re investing here. But I wonder why these people won’t invest in Wichita unless they receive millions in payments or tax forgiveness from the city, county, school board, and/or state.

    Aren’t the real heroes in Wichita the people — many of them small business owners — who invest in Wichita without the benefit of TIF districts, tax abatements, STAR bonds, or other forms of subsidy or incentive?

    These people, besides facing subsidized competition, additionally have to pay the taxes that make the subsidies to others possible.

    Regarding the mayor’s statement that eminent domain will not be supported for this project: Kansas law does not prohibit the use of eminent domain to acquire property in a STAR bond district (K.S.A. 12-17,172).

    If the city wants to assure property owners that their property will not be subject to seizure by eminent domain, the city can add language to that effect in the ordinance. With four city council positions — including the mayorship — up for election next spring, it’s possible that a future city council might not be opposed to the use of eminent domain. This change could take place during the time Bowllagio developers are acquiring property. An ordinance would help prevent this from happening.

    Similarly, if it is not the intent of the developers to seek additional forms of subsidy such as tax increment financing or property tax abatements, appropriate language could be added to the authorizing ordinance.

  • Southwest Airlines topic of Wichita Eagle article

    Sunday’s Wichita Eagle carried a story featuring local elected officials’ reaction to the possibility that Southwest Airlines would start service to Wichita. (City, county officials cautiously weigh subsidy for Southwest Airlines, May 30, 2010)

    A source of controversy is over the payments of public funds that are thought to be necessary to acquire the service. The Eagle article quotes an unnamed source as saying it would take about $3 million in public funds to “get the service up and running.” It is not disclosed whether this is a one-time requirement, or if this is $3 million per year for some specific period, or perhaps forever.

    Wichitans may want to remember that the subsidy paid to AirTran started small and was promoted as a temporary measure until the airline could establish itself in Wichita. The program, however, has grown to a combined $7 million annual payment from the state, county, and city. It seems unlikely that this number will ever drop.

    At one time Wichita was a city known for its entrepreneurs. But recently the New York Times noted that Wichita is known as a “pioneer in the business of paying airlines to continue service.”

    An interesting tidbit in the Eagle story is Wichita City Council Member Sue Schlapp making a distinction between a “subsidy” and an “incentive.” What we offer to Southwest would be an incentive, not a subsidy, she said.

    The overall tone of the article is that Wichita City Council Members and Sedgwick County Commissioners are making a show of concern, wanting to be “realistic,” desiring more details and something “reasonable and feasible.”

    Despite this show of concern and prudence, if this matter comes before these bodies, I’ll be surprised if even one member votes against it.

    One thing this article did not mention is that Charleston, South Carolina was able to lure Southwest without having to pay a subsidy.

    By way of comparison, the Wichita metropolitan area population is 612,683 (2009 estimate), while the Charleston-North Charleston-Summerville, metropolitan area populations is 659,191. In 2008, there were 780,756 enplanements at the Wichita airport, while there were 1,174,667 at the Charleston airport.

    According to reports, the Charleston Convention and Visitors Bureau estimates a $139 million economic impact with the arrival of Southwest. An economic impact analysis has been prepared for the City of Wichita, but Wichita officials will not release it, citing an exception in the Kansas Open Records Act (KORA).

  • Wichita city council signals possible change in economic development incentive policy

    At today’s meeting of the Wichita City Council, discussion by council members and their vote may signal a change in the city’s stance toward economic development incentives.

    At issue was a request for extension of economic development incentives for a Wichita company. Five years ago the city council approved an economic development package for the company that included a tax abatement. As is the city’s policy, the council revisits the issue in five years to see if the company has meet its goal commitments. In the case of this company, one commitment — the building of a new facility — was met. The other commitment — creation of a certain number of jobs — was met early on during the period of the tax abatement, but employment has been declining in recent years, and employment is currently 100 jobs below the goal.

    Recently the city council adopted new guidelines for companies that are not meeting their goals at the time of review. These guidelines make it easier for companies to qualify for the extension of the abatement. If the WSU Current Conditions Index has declined since the awarding of the incentives, the company will qualify for an extension if a majority of the goals are met. A company will also qualify for extension if their peak job creation numbers exceeded the goal, even if the number has fallen, as is the case with the company under consideration today.

    Based on the new guidelines, city staff recommended to approve the extension of the incentives.

    Council member Lavonta Williams asked if it was possible if, as an company receiving an incentive, could “I hire five people today and fire them by Friday and then meet my criteria?” The answer by city economic development director Allen Bell is that the policy contains no such guideline as to minimum period of employment.

    Wichita city manager Bob Layton interjected that staff’s recommendation to approve the extension is a difficult one to make, as this company is in a declining pattern of employment. Additionally, the newly calculated benefit-to-cost ratios are low, and he said he is uncomfortable with that: “We’re actually subsidizing this business, so to speak, or others are subsidizing or bearing their load for debt service.”

    Council member Sue Schlapp asked a question not covered by policy: if we deny the extension today, and next year the company improves its situation, could they come back and ask for the extension of the tax abatement then? There is no definitive answer to this question at this time, according to Bell and Layton.

    Schlapp added that it seems like we’re “lowering the bar all the time” as to the granting of incentives.

    Council member Paul Gray remarked that the council makes itself look bad in these situations, as it always grants extensions even though the city has created policies that should hold companies accountable to their committed goals. The reason for awarding the incentives, he said, was for the increase in employment, and that employment level has not been kept. “We need to start taking a harder stand on this, as we’re going to run out of money if we keep giving it all away.” Vice mayor Jim Skelton agreed.

    No one from the public was there to speak on this matter.

    Wichita mayor Carl BrewerWichita Mayor Carl Brewer was on the losing end of a 6 to 1 vote.

    Gray made a motion to deny the staff recommendation of approval of the extension. Mayor Carl Brewer said that this vote, if it proceeds in the direction it appears to be going, will change the direction of many things that affect businesses in Wichita. He said that the intent of the council is to start holding individuals accountable, and there’s not been a track record of that. It’s been worse since the economy entered the recession, he said. He urged council members to make sure they know which way they’re going with this action. “This will be the direction that we’ll be going as we start working on policy, and it will be effective for everyone, whether it be large or whether it be small. … Just making sure that when we press that button and we head down this path, that we know what we’re doing.”

    The vote was 6 to 1 in favor of Gray’s motion, with the mayor being the lone “No” vote.

    Analysis

    This action by the Wichita city council, being nearly unanimous, is very much different from its action just one week ago, when it employed one new method plus several existing methods to heap millions in subsidy on a downtown hotel developer.

    Today’s discussion is another illustration of just how difficult it is to pick winners and losers, and how difficult it is to choose which companies the city should invest in. This is why I have recommended that Wichita grant tax abatements on all new capital investment.

    Today’s action is especially cruel to the subject company. In the past, city staff has argued that withdrawing tax abatements when a company is struggling is harmful. In December 2008, economic development director Bell said this regarding a company that had not met its performance commitments: “I don’t think it would be productive at this time to further penalize them — as the market has already penalized them — by putting them back on the tax roles at this time.” This is further evidence that taxes are harmful to business and economic growth.

    Council member Williams’ question about hiring and then quickly firing employees indicates that she must not be familiar with the costs of hiring and firing. Furthermore, a company’s unemployment insurance premiums are based on its history, and actions like this would certainly raise premiums by a large amount.

    Extension of EDX Tax Exemption (Sharpline Converting, Inc.)

  • Waterwalk hotel issue receives public input

    Tuesday’s meeting of the Wichita city council featured a lengthy discussion of a proposal that in the past, might have been passed without much public discussion. Instead, some useful information emerged, and the meeting opened the possibility of more citizen input not only on this item, but also on future city initiatives.

    The issue is a proposal for a hotel in the city’s WaterWalk district. My preview of the matter, which includes the city-supplied agenda report, is at Waterwalk hotel deal breaks new ground for Wichita subsidies.

    As an example of information that was revealed at this meeting, there was concern expressed by council member Sue Schlapp that the proposed hotel might be granted a period in which it would be the only hotel in WaterWalk. Bell replied that we don’t have the answer to this question, and that this has not been addressed. Later, a representative of WaterWalk revealed that the proposed hotel had an agreement that it would be the only hotel in WaterWalk for three years and possibly up to four years.

    This is an important piece of new information, as downtown boosters continually speak of the idea of “critical mass.” The idea, I believe, is that multiple hotels may feed off the presence of each other, instead of being in competition with each other. Or it might be that if other hoteliers see this proposed hotel doing well, they’ll be induced to build one on their own. But if there will not be another hotel in WaterWalk for at least three years, that puts a damper on the formation of critical mass. Hotels, of course, could be built in other parts of downtown.

    Council member Lavonta Williams asked about the survey the city is conducting to see if the proposed hotel would harm the city-owned Hyatt Hotel: Will it look at nearby hotels that the city doesn’t own? Bell said the consultant may look at those hotels, interview their management, and may be able to offer some information as to that. But Bell said that the present agreement considers only the Hyatt Hotel.

    Council member Jell Longwell said we’re sensitive about the burden on our local taxpayers. But the taxes on the proposed hotel would fall on out-of-area taxpayers, he said. His clear implication was that taxing visitors to our city is okay. The problem is that many visitors to a city pay attention to taxes. When a $100 hotel bill blooms to $114.30 with taxes, people notice, even business travelers whose employers may pay the bill.

    (The taxes are 6% for the transient guest tax or “bed tax,” 6.3% for our present sales tax, and another 2% for the Community Improvement District tax. Then if the governor has his way, there will another 1% in Kansas sales tax, and if some downtown boosters have their way, there will be yet another 1% city sales tax to provide subsidy for downtown.)

    Council member Paul Gray answered his own question with: “why would you?” The question was why would anyone build a hotel downtown privately when there are several subsidized hotels already operating? The unlevel playing field was created long ago, he said, and it’s unlikely that anyone will develop a hotel without receiving similar benefits from the city. He also said that we’re on the hook for the bonds sold for the WaterWalk TIF district. He made reference to the “giant hole that we’ve already created with the financial obligations we’ve placed on that.”

    After citizen John Todd spoke, Longwell asked how much lead time the council should give citizens for matters like this. He said that the Wichita Eagle reported the story, adding “I thought everybody read the Eagle.” (I wonder if Longwell has noticed the layoffs at the Wichita Eagle and the poor financial performance of most newspapers as fewer people read them.)

    A search of the Eagle for stories on this topic shows a blog column from Wednesday January 6, just six days before the city council meeting where the item was to be considered. The Eagle printed stories on Friday and Sunday. These stories, however, don’t report the detailed information that some people would like to have. There’s simply not room in a newspaper, as the agenda report for this item contained ten pages of small print. Not many people are interested in such detail, either.

    (The city’s agenda packet for this meeting, which is the important source of detailed information, became available on the city’s website probably late Thursday. The pdf file indicates that it was created at 4:51 pm that day.)

    Longwell pressed Todd: “How much lead time do we need?” I have an answer for him. After I read the agenda packet Friday afternoon, I emailed Wichita public information officer Van Williams with a few questions. By Monday afternoon I hadn’t received a response. I’m not criticizing Williams, as he might have had any number of valid reasons for not replying to my questions right away. But even if he had replied Monday afternoon, that’s just a few business hours away from the meeting. That is definitely not enough time to digest a project of this scope.

    Gray then asked Todd how much vetting does the public do on a project like this? The answer to this is: not enough, as the city has a recent history of problems with its development partners. In December 2008 the city was about to enter into an agreement with a developer when Dion Lefler of the Eagle uncovered very troubling facts about the developer’s past dealings. See Wichita city hall: more evidence of lax procedures for a summary.

    Then-city council member Sharon Fearey — now a candidate for the Sedgwick County Commission — was disappointed that the Eagle uncovered these facts and reported them. See Sharon Fearey doesn’t appreciate the Wichita Eagle for the story and video.

    Since then Wichita has a new city manager, and the city has said it has new procedures in place for investigation of the backgrounds of potential business partners. Other problems remain, however. Last month Wichita Eagle editorial writer Rhonda Holman wrote about missing or incorrect information provided to the city council:

    Worse, when the council approved the Big Dog deal on a 5-2 vote, its members reportedly were unaware that the company had hired an investment banker to explore a possible sale or merger. Plus, city documents about Big Dog listed its employment at 115 when the number actually has dwindled to 30 to 40 (from a 2005 high of 336).

    A policy meant to guide the use of tax abatements and other tools doesn’t work well if decisions are based on faulty information.

    Going back to 2004, we have evidence that city council members were not familiar with even the most basic facts about our economic development programs. The article “Tax break triggers call for reform” published in the Wichita Eagle on August 1, 2004 reported this:

    Public controversy over the Genesis bond has exposed some glaring flaws in the process used to review industrial revenue bonds and accompanying tax breaks.

    For example, on July 13, Mayans and council members Sharon Fearey, Carl Brewer, Bob Martz and Paul Gray voted in favor of granting Genesis $11.8 million in industrial revenue bond financing for its expansion, along with a 50 percent break on property taxes worth $1.7 million.

    They all said they didn’t know that, with that vote, they were also approving a sales tax exemption, estimated by Genesis to be worth about $375,000.

    It’s not like the sales tax exemption that accompanies industrial revenue bonds was a secret at the time. An easily accessible web page on the City of Wichita’s web site explains it.

    Regarding the present case, Schlapp said she would have liked to have known about the exclusivity period earlier. That’s just one example of something not contained in the agenda packet that is important for citizens and council members to know, and we didn’t know that before this meeting.

    Gray also noted the history of some of the people at the council meeting who opposed the project, adding that he didn’t see them changing their minds. That attitude represents a simplistic view of the way public policy ought to be formed.

    An issue like this has many facets. Some could possibly have merit, and some certainly are harmful. A discussion like what took place at this meeting can provide a forum for exploring these issues, and perhaps eliminating the bad in favor of the good. The fact that some might still be opposed to the project doesn’t negate this.

    In the end, the council voted unanimously to defer this matter until its February 2 meeting.

  • Wichita city council discusses economic development incentives, again

    At this week’s meeting of the Wichita City Council, underperforming companies that have received economic incentives was at issue.

    Wichita grants incentives — usually in the form of an escape from paying property taxes — to companies. Usually there are conditions attached to the incentives, such as a certain amount of capital investment or employment targets. Recently — and in the past two or so years — several companies that received incentives have not met employment goals. Should the city rescind the tax breaks in these cases? Or should there be recognition that there’s a tough economy at the moment, and should the company be excused from meeting the goals it pledged?

    During a period of questions from the bench, council member Sue Schlapp remarked: “We have to be flexible, don’t we? … Especially in today’s economy, we need to be very careful that we’re not too rigid in what we’re doing.”

    Council member Jeff Longwell said he’d like to see something that rewards companies that bring in business from outside our community. Economic development head Allen Bell answered that the policy is limited to companies that bring in wealth from outside. Businesses that are here because their customers are here are not eligible for economic incentives, he said.

    Longwell also expressed concern about companies that use temporary employees. Should that increase in payroll be included as a benefit, even if the employees are only temps? Bell said yes, even though these jobs are not as good as direct hire placements. Wichita City Manager Bob Layton interjected that we shouldn’t count seasonal peak employee ramp-up in benefit calculations.

    Longwell added that we ought to include the fact that some companies drive up hotel occupancy rates due to the nature of their business. Bell said that this is a factor in the WSU analysis.

    Vice-mayor Jim Skelton inquired about details of the model that WSU uses to calculate the economic benefit of incentives. These calculations, Bell said, are required by the Kansas Legislature. The model presently used is unique to WSU. It focuses on the fiscal impact that an economic development project has on cities, counties, school districts, and the state. It takes into account jobs created, capital that is invested, and other factors. It includes such factors as the need for additional police and other government services, additional sales and bed tax, and other revenue sources. It then performs a present value calculation and produces a ratio. A value greater than one means the benefits exceed the costs.

    City manager Layton said that these incentives represent a contract between the business and the city. The business promises to grow the economy, and the city makes an investment in the company. The council presently is struggling with how to judge the performance of companies that have received incentives in a down economy. The WSU index makes sense, he said. If economic conditions are poor, we now have a tool to judge the performance of the companies that received incentives. There are now extenuating circumstances, he said.

    Mayor Carl Brewer said that we recognize there are challenges, and that in an ideal world we shouldn’t have to provide incentives. But he said we have several options: Be competitive and provide incentives and fight to keep what we have, or don’t provide incentives and see what happens. He said we know what would happen in that case. Businesses will go where they can get these incentives, he said, and we can’t argue that. There will always be incentives, he said, and we have to be competitive.

    The council unanimously approved a revision to the policy that recognizes down periods of economic activity. Then, it approved the extension of tax breaks to three companies that had not met all their performance goals. Passage was not unanimous in two cases, with some council members voting against the extension of the incentives. Dion Lefler’s reporting in the Wichita Eagle is at Wichita City Council eases rules on tax abatements.

    Analysis

    Contrary to the belief of the mayor, council members, and city hall bureaucrats, economic development incentives aren’t all they’re promoted to be. The state of Kansas spent some $1.3 billion on incentives over five years. In a recent report produced by the Kansas Legislative Division of Post Audit, one of the summary points is this: “Most studies of economic development incentives suggest these incentives don’t have a significant impact on economic growth.” See In Wichita, let’s have economic development for all for more on this report and a link to the document.

    There is an interesting academic paper titled The Failures of Economic Development Incentives, published in Journal of the American Planning Association. A few quotes from the study, with emphasis added:

    Given the weak effects of incentives on the location choices of businesses at the interstate level, state governments and their local governments in the aggregate probably lose far more revenue, by cutting taxes to firms that would have located in that state anyway than they gain from the few firms induced to change location.

    On the three major questions — Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Are incentives, at worst, only moderately revenue negative? — traditional economic development incentives do not fare well. It is possible that incentives do induce significant new growth, that the beneficiaries of that growth are mainly those who have greatest difficulty in the labor market, and that both states and local governments benefit fiscally from that growth. But after decades of policy experimentation and literally hundreds of scholarly studies, none of these claims is clearly substantiated. Indeed, as we have argued in this article, there is a good chance that all of these claims are false.

    The most fundamental problem is that many public officials appear to believe that they can influence the course of their state or local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering their expectations about their ability to micromanage economic growth and making the case for a more sensible view of the role of government — providing the foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.

    On the surface of things, to the average person, it would seem that spending (or granting tax breaks, it’s the same thing) to attract new businesses makes a lot of sense. It’s a win-win deal, backers say. Everyone benefits. This is why it is so appealing to politicians. It lets them trumpet their achievements doing something that no one should reasonably disagree with. After all, who could be against jobs and prosperity? But the evidence that these schemes work is lacking, as this legislative audit and article show.

    I have suggested to the city council that a broad-based tax abatement on new capital investment could propel economic growth in Wichita. See Wichita universal tax exemption could propel growth.

    But a plan like this doesn’t give bureaucrats much to do, and gives politicians little to crow about to their constituents at election time. All it’s good for is the people who want economic growth.

  • Wichita city council discusses economic development incentives

    Last week a Wichita company that’s expanding made an application for industrial revenue bonds and accompanying property tax abatements. The company’s application wasn’t timely, and for that reason is not likely to receive the requested help. The discussion surrounding the item provides insight into city council members’ ideas about the role of the city in economic development.

    Industrial revenue bonds, or IRBs, are not a loan from the city, and the city does not make any guarantee that the bonds will be repaid. The primary benefit to the recipient of IRBs is that the property purchased with the bonds will generally be exempt, in whole or in part, from property taxes for some period. Also, the company may not have to pay sales tax on the property purchased with the bonds.

    The agenda report for this item is at Request for Letter of Intent for Industrial Revenue Bonds, Michelle Becker, Inc. (District V).

    In introducing the item, the city’s economic development chief Allen Bell said that because the project has already started construction, it falls outside the guidelines for the city’s IRB program. The construction is 85% to 90% complete.

    A question by council member Sue Schlapp established that if the company had made application before the building was started, the application would have been approved as routine.

    She also asked that if we approve this action today, will we have to go back and look at other businesses that are in the same place? Wichita City Manager Bob Layton asked that the council establish guidelines that if a project has already started, a project is not eligible for this type of assistance.

    There was also some discussion about whether this company would move away from Wichita if the tax abatement was not granted. Since the building is already under construction, Bell said this is evidence that the company is intending to stay in Wichita. “It’s difficult to think of an incentive as something that’s given after the fact,” he said.

    A question by council member Paul Gray established that there have not been many cases where companies have asked for tax breaks retroactively, according to Bell’s answer. Bell also said that he didn’t think that approving the current application would spur an avalanche of similar requests.

    Gray also noted that we can create economic disparities between companies by granting incentives, so how do we justify doing this? Bell’s answer was that an important consideration is bringing business from out of state instead of taking business away from other local companies.

    Layton added that an important consideration is whether the project can more forward without public assistance.

    Council member Jeff Longwell remarked that “we really don’t have that many tools in our toolbox for emerging businesses.” Bell agreed.

    In later discussion, Longwell said “I hate to penalize this emerging company … I should have got them in on this process long before we did and we wouldn’t even be having this argument. So I suppose I am at fault in part of this delay.”

    Gray said that because we’re not competing against another community for this company — the normal use of incentives — he can’t support this application.

    Council member Janet Miller said that the appropriate time to look at incentives is, as the manager said, when we think a company can’t move forward without the incentive. She also noted that we’re being asked to approve an action for which we’re going to soon have a policy against.

    Schlapp, indicating a desire to approve the incentive, asked for justification: “We have a company here that doesn’t need an incentive but wants an incentive … can somebody justify that?”

    Longwell said it’s not as simple as a need and a want. He said the applicant is a smart, well-managed company. But we shouldn’t use the qualifier of helping only the companies that couldn’t succeed without the city’s help. “Why not reward some some of those companies that are very well managed and run smart and have the ability to grow even more with our help than without it?” Again he referred to the lack of tools for emerging businesses. “We ought to be helping these types of companies that we think can truly prosper even more with our help … I think they fully warrant our help because they’re successful …”

    Mayor Carl Brewer said that we have a proven track record of trying to help businesses and to get businesses to come to our area. He agreed with Longwell in that we need additional tools to use for economic development, as other communities have been competing successfully. We don’t have the same tools that other communities have, he said.

    Longwell suggested the city visit with the applicant about her financing. He made a motion to defer this item. Council member Williams asked about the impending completion of the project, since it’s scheduled to be completed at the end of December. The answer from the manager was that with regard to IRBs, the project would not be eligible after it’s complete. The motion passed with Council member and Vice-mayor Jim Skelton opposed.

    Analysis

    What’s striking about the discussion are these two things:

    First, many council members and some city staff believe that the city doesn’t have enough “tools in the toolbox” for shoveling incentives on companies for economic development purposes. Evidently the ability to grant exemptions from property taxation — and not only the city’s property tax levy, but also that of the county, school district, and state — along with the ability to make outright gifts of money is not enough.

    Second, many council members and some city staff believe that they can determine which companies are worthy of incentives.

    According to city manager Layton, the city is going to revisit its economic development policies soon. This would be a good time for Wichita to come up with ideas that would benefit all companies, not only those that fall within guidelines that the council or city staff creates. My suggestion, explained in Wichita universal tax exemption could propel growth, is to give all new capital investment a tax abatement for a period of five years.

    At the state level, there has been some discussion about the costs of tax abatements or exemptions. In a recent debate in Wichita, Kansas Secretary of Revenue Joan Wagnon used the term “tax expenditures” to describe these giveaways of the state’s income. The idea is that if the state (or other governmental body) didn’t create tax abatements or exemptions, revenue to the government would be higher. Her debate opponent Alan Cobb said it’s wrong to term these tax giveaways as “expenditures,” as the money belongs to the people first, a position I agree with.

    There is the related issue of these tax abatements or exemptions really being appropriations of money that, if processed through the normal process of legislative hearings, etc., would be noticed for what they are. In Wichita city government we don’t have hearings quite like the Kansas Legislature, but the idea is the same: if this company had asked for a grant from the city for $22,253 (that’s the value of the first year of the requested tax abatement, with a similar figure for the following nine years, less $2,500 a year to the city for administrative fees), citizens — news media too — would quite likely look at this matter differently. Presented as industrial revenue bonds — just what are those anyway? — and a tax abatement, well, it all seems so … so innocent, so municipal.

    A few more observations:

    Council member Jeff Longwell’s confession of being at fault for the lateness of this company’s application should be remembered by voters in the next election, should he decide to seek to retain his current post, or — as some have told me — he seeks the mayorship of the city.

    There’s also Longwell’s use of the term “reward,” in that the city should “reward some some of those companies that are very well managed and run smart.” I’d like to remind him and the rest of the council that the free enterprise system contains a very powerful reward mechanism for companies that do well: profit. That alone is sufficient.

    Coverage from the Wichita Eagle is at Wichita City Council puts off tax breaks for accounting firm.

  • Lord’s Diner debate focused on wrong issues

    At today’s meeting of the Wichita City Council, an item no longer on the agenda still caused some controversy.

    The Lord’s Diner, a charitable organization, had proposed buying a city-owned building at 21st and Grove and making a second site for their effort to feed Wichita’s poor.

    Opposition from community groups, however, drove the Lord’s Diner to withdraw its plans.

    In today’s meeting, council members Sue Schlapp and Paul Gray spoke in favor of the Lord’s Diner’s plans on the basis of its charitable and humanitarian activity.

    Council member Lavonta Williams, who represents the district where the proposed site exists, responded without mentioning the community’s real objection to the plan: they don’t want the type of people the Lord’s Diner serves congregating in the vicinity of the proposed location.

    Mayor Carl Brewer spoke of how this has been a complicated issue. Council members must do the right thing, he said, which may not be the same as what the community wants. He said he recognizes the need to feed everyone, and there are people all over town that need help: “These are people who cannot help themselves.”

    He said that people in key leadership positions said things that were “very bitter, very venomous,” and that citizens should “charge it to the mind and not the heart,” adding that “some people take desperate measures to be able to get what they want.” He asked that citizens not judge an entire community by the actions of a few.

    The mayor said he sees an opportunity, and he urged everyone to work together.

    What hasn’t been mentioned in the debate over this matter is that the proposal by the Lord’s Diner is a lawful use of the property. If we want to have a system that respects private property rights, that’s the only thing that matters.

    Wichita Eagle reporting is at City takes Lord’s Diner proposal off table after diner pulls its offer. An informative blog post by Brent Wistrom is at Council members vent as Lord’s Diner plan sinks.

  • Wichita city council: more travel on tap

    At tomorrow’s meeting of the Wichita City Council, approval of more travel is on the agenda.

    Tomorrow’s agenda item is this: “Approval of travel expenses for Mayor Brewer, Council Member Schlapp, Council Member Gray, and Council Member Williams to attend the NLC Congress of Cities in San Antonio, Texas, November 10-15, 2009.” This is all the information that is available.

    The reaction of citizens to council member Janet Miller’s junketeering to France has been overwhelmingly against this type of wasteful travel. Now we have four members of the council traveling for five days to a National League of Cities event.

    What is the value of this conference? Citizens might be excused for assuming that an organization with such a lofty name acts only in the interest of citizens. In reality, the NLC is a special interest group, and its interests are not always in line with citizen concerns. For example, this position paper outlines its stance on the use of eminent domain for economic development. It’s a position, as you can imagine, in favor of cities’ rights to take property for economic development.