Voice For Liberty

Tag: Tax abatements

  • 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.)

  • Arizona case rules on economic development subsidy

    In its press release titled Arizona Supreme Court Strikes Down Future Taxpayer Subsidies, the Goldwater Institute reports on a ruling by the Arizona Supreme Court that dealt a blow to government subsidies for the purpose of economic development.

    This is an important topic in Wichita, as city leaders nearly every week grant some form of subsidy in the name of economic development. Presently the city council is considering subsidy of over $2.5 million to a developer of a downtown hotel. The planning for the revitalization of downtown Wichita, also currently underway, is likely to require massive subsidy, too

    In the release, the Goldwater Institute explains the ruling:

    A Maricopa County Superior Court judge upheld the $97.4 million subsidy of the CityNorth shopping center by the City of Phoenix, basing his decision on “indirect benefits” such as jobs, sales tax revenues, and the creation of an urban core. But such indirect benefits “are not consideration under contract law,” the Supreme Court concluded in its opinion written by Justice Andrew Hurwitz. In reality, the only tangible benefit received by the City, the Court ruled, was 200 parking spaces, which the Court found unlikely to be worth $97.4 million.

    The Institute’s Clint Bolick said “The ruling should stop schemes that government concocts to subsidize developers based on grandiose promises that often fail to materialize.”

    Jobs, sales tax (and other tax) revenues, urban core. That’s just what Wichita is trying to create.

    Grandiose promises failing to materialize? What, in Wichita? Do we have these?

    What would happen in Kansas if such a suit was filed?

  • Wichita makes case for tax credits

    At yesterday’s meeting of the South-central Kansas legislative delegation with government officials, the City of Wichita spent most of its time presenting the case that cuts made to a program of tax credits for historic buildings should be restored.

    Initially Mayor Carl Brewer asked legislators for continued funding for the affordable airfares effort, for the National Institute for Aviation Research, and the aquifer recharge project.

    But the primary focus of the city’s requests became clear when Jeff Fluhr of the Wichita Downtown Development Corporation introduced Christy Davis, a historical preservation consultant who operates a company that assists property owners and governments in obtaining funding for historic preservation projects.

    She said that there is public policy in Kansas that supports historic preservation, and that the tax credit program has been a great success. In particular, she said the tax credits leverage the financing necessary for historic preservation projects.

    She said that every dollar in tax credits supports an additional three dollars of private investments. Rehabilitation of existing structures is 50 percent more labor intensive than new construction, so more jobs are created. Since 2002, $66.4 million in Kansas tax credits have been issued, and Davis said this has leveraged over $260 million in private investment, also creating jobs and income.

    Returning to the podium, Fluhr said that tax credit program needs to be predictable, so that the private sector knows they can depend on it. Also the transferability of the credits is important, so that developers can sell them to raise capital.

    Fluhr presented examples of several buildings in Wichita that have been rehabilitated, including the Wichita High Apartments, which he said will rent for $1,000 to $2,000. He mentioned condos in the Grant Telegraph building, which he said range in price from $300,000 to $950,000. Davis presented examples of rehabbed buildings whose property owners said the projects would not have been possible without the tax credits.

    In 2009, the legislature placed a cap or lid on the amount of tax credits. Davis said that it was intended to be a 10 percent cut, but it turned out to be a 70 percent cut.

    Both Fluhr and Davis presented the case of the Broadview Hotel in downtown Wichita. That project, already receiving various forms of subsidy from the City of Wichita, requires historic tax credits for its financial viability, according to the developers and the city. (Uncertainty over Broadview’s future doesn’t bother Wichita)

    Analysis

    The city’s quest for more tax credits is likely to face a rough road in the statehouse.

    Spending advocates, especially schools, want the legislature to close tax exemptions. Generally, these are sales tax exemptions, so that organizations such as the Girl Scouts (expect them to make several field trips to the statehouse soon) don’t have to pay sales tax.

    Kansas Secretary of Revenue Joan Wagnon says that repealing these sales tax breaks could generate $200 million per year in revenue. She also wants a three-year moratorium on new tax breaks.

    These sales tax exemptions are “passive” from the standpoint of the legislature, in that the legislature created them, and then people have to initiate economic activity in order to benefit. The only involvement of the state in the transaction is that it doesn’t collect tax that it would have. For believers in limited government, that’s good.

    But tax credits are active. When an applicant qualifies, the state, in essence, pays money to the applicant. While some may disagree that tax credits are in fact a payment by the state, Fluhr mentioned the transferability of the tax credits and the ability to sell them as important to developers. Recently some have started to use the word “tax appropriations” to describe tax credits. These expenditures don’t go through the normal legislative process that most appropriation do.

    Indeed, if the state issued checks to real estate developers, citizens would look at things differently. They’d wonder why they’re subsidizing the construction of apartments that rent for up to $2,000 monthly, or condos worth nearly a million dollars. These aren’t low-income housing tax credits, after all.

    By characterizing subsidies to developers as tax credits, it seems much less benign, although the economic effect is the same.

    For believers in the collective wisdom of free people trading voluntarily in markets — instead of government intervention — making grants to favored developments through tax credits is one of the most harmful things that government can do. In the case of historic building credits, it represents the desires of a relatively small band of enthusiasts. As John W. Sommer wrote in The Cato Journal:

    With few exceptions, historic or landmark preservation illustrates the powerful force of cultural elites who impose their tastes on the landscape at the expense of the general public. City after city has been confronted by small groups of architectural aesthetes who are as highly organized as they are both righteous and wealthy. In city after city these groups have succeeded in stalling, or permanently freezing, the pace of physical and functional change. In the name of “heritage” or “culture” or “a livable city,” and invariably “in the public interest,” preservationists seek to legislate “charm” for others.

    We’d be better off with requiring that preservationists rely on the market for the financing and success of their projects.

  • 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.

  • Uncertainty over Broadview’s future doesn’t bother Wichita

    Yesterday the Wichita City Council approved plans for riverbank improvements that would benefit the Broadview Hotel in downtown Wichita. The cost is $2,200,000.

    One of the problems with this action is that the renovation of the hotel is on hold, according to recent reporting. The reason given by the hotel’s owners, Drury Southwest Inc., is a problem with tax credits issued by the State of Kansas.

    These tax credits, which are in effect a free grant of money to the hotel’s owner that does not need to be repaid, could potentially be worth 25% of the renovation project’s budget of $19 million. That’s up to $4,750,000 that the taxpayers of the state would be giving to the hotel owners.

    This year the Kansas legislature realized that these tax credits are costly to the state, and facing a very tight budget, it placed a cap on the amount of tax credits that could be given.

    By all accounts, the legislature will be facing an even tougher situation in January when it returns to the statehouse for its 2009 session. With everyone scrambling to find cost savings (and new sources of revenue), the tax credits for historic renovation could face an uncertain future.

    How does the uncertainty surrounding the tax credits affect the plans for the Broadview’s renovation? I don’t know. A telephone call and email message to Drury Southwest Inc. seeking an update on its plans was not returned.

    In his remarks after the unanimous vote passing the improvements, Mayor Carl Brewer thanked representatives from Drury for attending the meeting. He noted the budget challenges at the state level, and pledged that the city will continue to work with them on the tax credits. He said he appreciates the work they’re doing and thanked them for their commitment to the city. The hotel is important to the city, he said, as commitments have already been made to lease rooms in the Broadview.

    Analysis

    Because of the uncertainty surrounding the future plans for the Broadview Hotel’s renovation, the city should have delayed these riverbank improvements.

    A problem is the shaky economics surrounding this hotel. Besides the tax credits, the hotel received a 10-year exemption from paying property taxes and a sweetheart deal on a parking garage across the street. It’s little wonder representatives from Drury traveled to Wichita for the council meeting. They have a lot of taxpayer subsidies to protect.

    If we want a thriving and vibrant downtown Wichita — including a convention hotel that can be relied on — we need to rely on something more than massive taxpayer subsidies and the mayor’s appreciation to those who receive them.

  • Wichita universal tax exemption could propel growth

    Remarks to the Wichita City Council, October 20, 2009.

    Mr. Mayor, members of the council,

    I’m not here to speak as much to the specifics of the current case, but to the city’s policy of granting property tax exemptions and abatements, whether they are implemented through the economic development exemption program or through industrial revenue bonds.

    At the same time we’re told we must build up our tax base, we tear it down. Nearly every week this council grants tax exemptions or abatements to companies that meet the criteria of the several programs the city uses.

    These tax breaks are justified by benefit-to-cost analysis. I’ve been told that the modeling tools used to perform this type of analysis have no negative numbers in them, and that many people, myself included, believe that these tools are suspect.

    But there’s also the simple recognition that when companies make capital investment, more economic activity happens. In the case before you today, benefit-to-cost ratios range from a scant 1.06 to one up to 9.70 to one, depending on the local governmental unit.

    These numbers — especially the larger ones — sound like a good deal for citizens. But I think that what a lot of people may not realize is that the benefits to the various units of local government are in the form of the taxes they collect. After all, taxes are what constitute revenue to government. It’s not like a business making a capital investment and then gaining additional sales revenue. That represents, of course, voluntary transactions with their customers.

    Or if a business makes a capital investment and becomes more efficient, its increased productivity is a benefit. More capital will be available for investment somewhere else.

    Instead, the benefit to government is more tax revenue. That’s not really a benefit to citizens.

    The broader question is this: If it’s good for the city and other local governmental units to give tax exemptions or abatements to Company A, what about granting them to Company B? And Companies C, D, E, and F? It’s almost like a perpetual motion machine: The more taxes we forgive, the more we gain.

    Actually, the reality is not far removed. I spoke with Art Hall, Executive Director of the Center for Applied Economics at the University of Kansas. He suggested that we should grant all businesses an automatic property tax exemption for five years on new capital investment. That would generate a lot of new economic activity and jobs.

    The city’s own analysis hints at this when it states “Granting an ad valorem property tax exemption will encourage the business to create new job opportunities and stimulate economic growth for the City of Wichita and Sedgwick County.”

    The problem now is that a business and its capital investment must fit into a set of criteria in order to qualify for an exemption. There is a lengthy list of criteria. Some are objective. I am concerned that companies may find themselves formulating their capital investment plans so that they qualify for the tax exemption, rather than doing what makes the most sense economically for their unique situations.

    Other criteria are subjective, and that opens the door for decisions to be made for political rather than economic reasons.

    We have to wonder if these are the correct criteria. Are we smart enough to recognize the types of capital investment we want in Wichita? Have companies made investments, only to find they don’t qualify for tax breaks? Can very small businesses qualify? They create a lot of jobs, too.

    There also the issue that the city has not always applied its own policies. There have been several cases where a company did not meet the promised performance goals at the five year review time, but the city continued the tax exemption contrary to policy. In the case of one company last year, Mr. Bell said “I don’t think it would be productive at this time to further penalize them … by putting them back on the tax roles at this time.”

    In any case, if the city decides to forgo property taxes, the rest of the taxpayers in the city must step up to make the difference. This leads to resentment.

    A solution is this: If the city grants a tax exemption of a certain amount, it should, at the same time, cut city spending by the same amount.

    This would accomplish two goals. First, we’d be aware of the cost of granting these exemptions. Second, the rest of the taxpayers in the city — businesses, utilities, and homeowners — wouldn’t have to step up and pay the taxes that are exempted or abated.

    That’s important because these parties engage in economic activity too. When they have to pay more tax, they have less to spend and invest.

    Mr. Mayor and members of the council, instead of this city granting tax exemptions and abatements company by company, week by week, I urge that we consider a broad revision to our property tax policy that will stimulate investment across the city, for all businesses.

  • Wichita covered with tax-advantaged districts

    Here’s a map of improvement and development districts in Wichita and Sedgwick County.

    Sometimes critics of tax increment financing districts (TIF districts) say things like “If TIF districts are good for development, why not make the entire city a TIF district?” Maybe we’re headed that way.

    Wichita Improvement and Redevelopment Districts, April 2009

  • In Wichita, let’s have economic development for all

    GWEDC crucial to attracting, retaining jobs, says a post by Phillip Brownlee on the Wichita Eagle Editorial Blog. (GWEDC is the Greater Wichita Economic Development Coalition.)

    There’s probably little doubt that offering incentives to companies to move to Wichita results in some that do. And, as we’ve seen, some Wichita companies are adept at inciting rumors they might move or locate new facilities somewhere else in order to gain some advantage or incentive from local or state (or sometimes both) government.

    Whether these economic development policies are wise is far from settled. Last year the Kansas Legislative Division of Post Audit released a study examining economic develompent efforts at the state level. This report may be read at Economic Development: Determining the Amounts the State Has Spent on Economic Development Programs and the Economic Impacts on Kansas Counties Executive Summary.

    Some conclusions of interest are these:

    First: “There are a number of problems in trying to assess the effectiveness of economic development programs and activities.” The document elaborates, but the important thing is that when organizations like the GWEDC make grandiose claims, realize that many are only crude estimates formulated to produce the best possible numbers,.

    Second: “Most studies of economic development incentives suggest these incentives don’t have a significant impact on economic growth. The literature we reviewed concluded that, thus far, negative and inconclusive findings are far more numerous than positive findings. Most reviews of economic development assistance find few results are achieved — a theme that audits in Kansas and other states commonly find, as well. Findings of ineffectiveness include promised jobs weren’t created, return on investment is low or negative, and incentives offered weren’t a determining factor.”

    This paragraph hardly requires comment, except to note that professionals in the field of economic development, politicians, and government bureaucrats don’t believe this.

    Third: “The literature also suggests that economic development incentives must be offered to remain competitive with other states.”

    Because the parties identified above believe that incentives work, they want to offer them and will continue to do so. This is true, I believe, in all states.

    So it’s a terrible situation to be in. We have expensive programs that don’t produce their intended goal, but because some very self-interested parties believe they do, we’re stuck with it.

    If Kansas and Wichita wanted to really do something to get noticed, let’s lower taxes for everyone, not just those companies who seek political favor and happen to fit into a situation where they are eligible for one or more of the various incentive plans we have. If we could do this, all companies would benefit.

    Consider the case of Steve Compton, owner of the Eaton Steakhouse in downtown Wichita, as described in my post (with video) At Wichita City Council, Why Are Some Doors Open, and Others Closed?

    Here we have an established Wichita company that is, apparently, facing tough economic conditions. What could help this company? Lower taxes would, without a doubt.

    There would be no need for an organization like GWEDC to tell us this. We wouldn’t need an army of bureaucrats to administer a program to deliver the benefit. There would be no need for Mr. Compton to make campaign contributions to the right politicians. There would be no need to have a debate in city council chambers over the merit of incentives offered to individual firms, one at a time.

    Let’s have a simple policy of lower taxes, and, of course, lower government spending. This will provide immense economic development benefits to everyone.