Voice For Liberty

Tag: Tax abatements

  • Tax increment financing in Iowa

    Writing from Cedar Rapids, Iowa

    Readers of The Voice For Liberty in Wichita are well aware that I believe that when the government provides subsidies to businesses — either in the form of cash payments or preferential tax treatment — we create a corrosive business environment. Government picks winners and losers for political reasons, rather than letting the market decide which companies are doing a good job. Government also spends money inefficiently. Instead of letting the market decide where to best allocate capital, government chooses who receives capital taken from the people through taxation according to the whims of politicians spending other peoples’ money.

    It is no wonder that government-favored enterprises rarely do well. Capital markets are quite efficient, and if there is an unmet need, capital usually flows to fill the need. The fact that capital is not flowing to fill a need strongly suggests that the need is not real. Yet, governments may feel that a need is not being met, and they will allocate taxpayers’ capital to fill it, even though taxpayers on their own do not select to invest in the subject project.

    This practice is not limited to the State of Kansas. There is a paper titled “Do Tax Increment Finance Districts in Iowa Spur Regional Economic and Demographic Growth?” written by two economics professors at Iowa State University. (The paper may be read at http://www.econ.iastate.edu/research/webpapers/paper_4094_N0138.pdf.) This paper shows that despite the claims of politicians and the very obvious benefit to the companies that receive the TIF financing, there is no benefit to the state as a whole.

    Following are some quotes from the paper’s conclusion:

    “There are several issues to consider about TIF ordinances and TIF outcomes in Iowa. From our research here and from our larger study of the topic, it seems apparent that the ease with which TIF district designation can be done in Iowa, along with the multiplicity of uses that TIF districts can be put, that the law now has become a de facto entitlement for new industry and housing development in much of the state with little to no evidence of overall public benefit or meaningful discussion of the mean costs of the practice. It also seems apparent that given the ease with which these districts can be developed that many cities may be preemptively capturing new valuation and tax revenues in the name of economic development, but that in the main, this preemption is likely yielding much more collective fiscal harm across taxing districts in the long run than good.”

    “City officials believe that the TIF action was instrumental in job growth in their town and in their region. How could it not be? We have an investment, and we have a firm with jobs. On net, however, except for the increment to manufacturing jobs, there is no evidence of economy wide benefits (trade, all nonfarm jobs), fiscal benefits, or population gains. There is indirect statistical evidence that this profligate practice is resulting in a direct transfer of resources from existing tax payers to new firms without yielding region-wide economic and social gains to justify the public’s investment.”

    “This analysis suggests that the enabling legislation for tax based incentives deserves revisiting. Though the TIF programs is highly popular among city government officials, and why wouldn’t it be given the growth in property tax yield over the years, there is virtually no evidence of broad economic or social benefits in light of the costs.”

  • Local economic development in Wichita

    Writing from Memphis, Tennessee

    Today’s Wichita Eagle (November 5, 2005) tells us of a new economic development package that our local governments have given to induce a call center to locate in Wichita. The deal is described as “one of the biggest the two-year-old economic development coalition [Greater Wichita Economic Development Coalition] has landed.”

    There is an interesting academic paper titled “The Failures of Economic Development Incentives,” published in Journal of the American Planning Association, and which can be read here: www.planning.org/japa/pdf/04winterecondev.pdf. A few quotes from the study:

    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 to attract new businesses makes a lot of sense. It’s a win-win deal, backers say. Everyone benefits. This is why it appeals so 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 article shows.

    Close to Wichita we have the town of Lawrence, which has recently realized that it as been, well, bamboozled? A September 29, 2005 Lawrence Journal-World article (“Firms must earn tax incentives”) tell us: “Even with these generous standards for compliance, to have 13 out of 17 partnerships fail [to live up to promised economic activity levels] indicates that the city has received poor guidance in its economic development activities.” Further: “The most disconcerting fact is that Lawrence would probably have gained nearly all of the jobs generated by these firms without giving away wasteful tax breaks.”

    On November 6, 2005, an article in the Lexington (Kentucky) Herald-Leader said this:

    The Herald-Leader’s investigation, based on a review of more than 15,000 pages of documents and interviews with more than 100 people, reveals a pattern of government giveaways that, all too often, ends in lost jobs, abandoned factories and broken promises.

    The investigation shows:

    Companies that received incentives often did not live up to their promises. In a 10-year period the paper analyzed, at least one in four companies that received assistance from the state’s main cash-grant program did not create the number of jobs projected.

    A tax-incentive program specifically for counties with high unemployment has had little effect in many of those areas. One in five manufacturing companies that received the tax break has since closed.

    There is spotty oversight of state tax incentives. The state sometimes does not attempt to recover incentives, even when companies don’t create jobs as required.

    …

    Unlike some other states, Kentucky makes little information about incentives public. The Cabinet for Economic Development refuses to release much of the information about its dealings with businesses, citing proprietary concerns. The cabinet has never studied its programs’ effectiveness, and it blocked a legislative committee’s effort to do so.

    The Herald-Leader’s examination of Kentucky’s business-incentive programs comes when, nationally, questions are mounting about the effectiveness and legality of expensive government job-creation efforts. The U.S. Supreme Court is expected to decide by spring whether trading tax breaks for jobs is legal or whether they amount to discrimination against other companies.

    Meanwhile, states continue engaging in costly economic battles for new jobs, even though research strongly suggests that few business subsidies actually influence where a company sets up shop.

    We might want to be optimistic and hope that our local Wichita and Sedgwick County leaders are smarter than those in Lawrence and Lexington. Evidence shows us, however, that this probably isn’t the case. Our own local Wichita City Council members have shown that they aren’t familiar with even the most basic facts about our economic development programs. How do we know this? Consider the article titled “Tax break triggers call for reform” published in the Wichita Eagle on August 1, 2004:

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

    But perhaps there is hope. The Wichita Business Journal has recently reported this: “The city and county are getting $2 back for every dollar they spent over the past 18 months on economic development incentives, according to an analysis of GWEDC-supplied data. The report was presented at Thursday’s GWEDC investor luncheon at the Hyatt Regency by Janet Harrah, director of the Center for Economic Development and Business Research at Wichita State University.” Personally, I am skeptical. I have asked to see these figures and how they are calculated, but I have not been able to obtain them.

  • Tax Abatements For All

    Recently I wrote about the Mississippi Beef Plant (The Mississippi Beef Plant Has a Lesson For Us) and its spectacular costs to the taxpayers of Mississippi. I wondered if there were less spectacular failures that we didn’t know about because they weren’t reported in the news media. Failures in this context could mean a situation where the taxpayers have to make good on a bond or debt that the benefiting company didn’t pay, or it could mean a situation where the company doesn’t default, but fails to deliver on the promised economic development activity.

    In an article in the June 15, 2005 Wichita Eagle titled Stalled Firms Keep Tax Breaks we learn of two failures of the second type. The two companies in question, The Coleman Company and McCormick-Armstrong, failed to deliver on their promises to add jobs in exchange for property tax abatements. Coleman, in fact, employs 114 fewer people than at the time the bonds were issued.

    Why do governments grant companies tax abatements? It’s simple. When companies pay less tax, they have the opportunity to invest more. Tax abatements are tacit recognition that the cost of government is onerous and serves to decrease private economic activity and investment.

    Shouldn’t we lower taxes for everyone, instead of only for the chosen few companies that are in a position to receive political favors from local governments?

  • Let free markets determine downtown Wichita’s viability

    “Wichita’s been an east/west town for as long as I can remember. Obviously, we’re trying to change that,” says Tom Johnson, president of the upcoming downtown project, WaterWalk. (Wichita Business Journal, March 4, 2005)

    A healthy community needs a healthy downtown. … In Downtown, public investment has a proven track record of generating new, private investment. Since 1990, the government’s investment of $165 million has stimulated $248 million in private investment. (Voteyea.com website.)

    “Anything downtown seems to be off-limits for criticism or analysis. I don’t know why it is,” Lambke said. (Council member Phil Lambke, Wichita Eagle, November 14, 2004)

    If you listen to local Wichita news media, our local politicians, and various community advocates, the desirability of downtown development over other development is accepted as a given. But what people actually do with their own money is different.

    Free markets, since they represent people voluntarily entering into transactions that they believe will benefit them, lead to the most equitable and efficient allocation of scarce resources. When left to their own free will, most people and businesses in Wichita have decided to purchase property somewhere other than downtown. I don’t know why people have made this choice, and that’s really not important to me. What is important to me is that people and businesses make the choice of where to invest voluntarily. By investing in parts of town other than downtown, they are assigning a higher value to non-downtown property. As far as I know, no one is forcing this decision. People and businesses make it of their own free will.

    As it happens, some people don’t agree with the choices that most people and businesses have made. They believe that people and businesses should have purchased property downtown. They are, in effect, telling us that we have made a poor decision. They propose, and are in the process of doing just this, to trump the decisions of individuals and businesses with their own. They do this through the political process and the tax system. They take tax money and give it to businesses to induce them to locate downtown.

    Why don’t businesses voluntarily locate downtown, using their own money? There can only be one answer to this question: When spending their own money, most businesses have decided that the most productive use of it is to invest it somewhere other than downtown Wichita.

    It is adding insult to injury when we realize that the tax money given away comes largely from people who have voted — with their own dollars — not to do what these tax dollars are used to promote. It is a further blow when we realize that the money given to downtown businesses in the form of incentives makes our town poorer as a whole. Why is that? It’s because that most people and businesses, when exercising their own best judgment, have decided that investing in downtown Wichita is not the most productive use of their resources. When the government, using its power to tax, makes a different decision for us, resources are not allocated as efficiently and productively. Therefore, we are poorer.

    The result of all this is that we have the spectacle of the people of Wichita, voting with their own dollars, making one choice. Then the politicians and various quasi-public organizations say, “No, citizens of Wichita, you are wrong,” and impose their will on the people of Wichita through their power to tax. How arrogant is that?

  • The Real Scandal at City Hall

    In 2003, local Wichita news media devoted extensive news coverage to two officials in the City of Wichita’s finance department. They were accused of improperly spending between $52,000 and $73,800 on travel. While I don’t condone this waste and I’m glad that our local news media uncovered it, the amount involved is relatively small. Furthermore, the people who wasted this money are no longer in a position to repeat.

    The real scandal, however, is the ongoing lack of care exercised when spending our money. Time and time again we read in the newspaper how the mayor or city council members are surprised by facts and circumstances arising after a decision has been made.

    For example, in an article titled “Kolb goal: full facts in future city deals” (Wichita Eagle, September 26, 2004) we read this:

    “Due diligence should have been done,” Mayor Carlos Mayans said when he learned of the losses: “We expect the staff to provide us with information that helps us make sound decisions.”

    In the same article, council member Paul Gray, upon hearing of bad financial news at the city-owned ice rink, is quoted as saying “Why is it just now coming to us?”

    Continuing in the same article, council members were described as being surprised upon learning that the industrial revenue bonds and property tax abatement awarded to a local business also included a sales tax break. How could they be surprised? The City of Wichita website contains a nicely-done page titled “Industrial Revenue Bonds” (located at http://www.wichitagov.org/Business/EconomicDevelopment/IRB) (This is the first result that appears when you use the wildly popular Google search engine and search for “Wichita IRB.”) The first link on this page is titled “IRB Overview: Industrial Revenue Bond Issuance in the State of Kansas,” and you don’t have to read very far before you come to the sentence reading “Generally, property and services acquired with the proceeds of IRBs are eligible for sales tax exemption.”

    Is it asking too much that someone at City Hall read the City’s own website? Or, is it possible that they knew this, but decided to overlook inconvenient facts?

    Recently, in an article titled “Plaza falls short” (Wichita Eagle, November 14, 2004), we read this:

    The cinema plaza is the latest in a series of public and public-private projects that have underperformed compared with projections. Others include the Hyatt Regency Wichita, Ice Sports Wichita and Auburn Hills Golf Course.

    Mayans said he’s getting tired of such surprises and is working with City Manager George Kolb to make changes.

    “We need to find out why we have so many projects (from) previous years that are having financial difficulties,” he said. “From now on, we have to make sure that we are not using anyone else’s numbers and we are doing our own due diligence.”

    In fairness to Mayor Mayans, I emphasize that these decisions were made before he took office.

    Now as we undertake spending even more money on projects such as the Waterwalk and the downtown Wichita arena, how can we restore confidence in our local government officials?

    The best thing to do would be to stop spending on projects that are better handled by the private sector. It seems like the City of Wichita, when partnering with private developers, often assumes most of the risk but is not in position to received the rewards the private developers earn (and rightly deserve to earn) if the project succeeds.

    A recent editorial by Phillip Brownlee in the November 21, 2004 Wichita Eagle illustrates the risk involved in these dealings. The editorial, when recommending how to avoid future mistakes like the Old Town Square tax shortfall, states there should be “Better communication between the developers and the city, especially if the project changes.” The key idea in this sentence is change. Things always seem to change. Private developers, being close to the ground and having their own money at risk, sense the need for change earliest. If they are spending their own money, they have the perfect right to change as they see fit. But if they have agreed with the government on a course of action, and now that course needs correction, they have to go back to the government and ask permission to change. That can take a long time — maybe too long to respond adequately to the changing markets.

    The editorial also recommends “Clearer expectations (and in writing) about what the developers will build and what occupancy rates likely will be.” First, this sentence illustrates the element of risk again, what the rates likely will be. No one knows. There is risk in developing a business of any type. It seems like the City assumes the risk, however. Also, I am wondering why Mr. Brownlee seems to imply that expectations have not been given in writing. Furthermore, what recourse does the City have if expectations are not met?

    Finally, the editorial reads “Closer City Council scrutiny before projects are approved (members at the time now say they didn’t know who all the Old Town development partners were, and they seemed to accept on faith the assurances by city staff that the project would exceed revenue projections).” I first note that it seems like city staff are acting as cheerleaders for these projects, when they should provide a sober assessment. Furthermore, if the project would exceed revenue projections, why not adjust the projections so that they accurately reflect what we believe the future will hold?

    The City of Wichita can do a better job. At one time it seemed like our mayor would be better. From an article titled “Mayans takes on WaterWalk” (May 30, 2003 Wichita Business Journal):

    One area Mayans says he’s concerned about is a “leasehold mortgage” referred to in the agreement. That means the city is allowing the developer to place a first lien on the ground owned by the city and leased to the developers for the project, Mayans says. Later, the agreement specifies that the city agrees that their ownership of the ground is to be “subordinated” to a loan obtained by the developer to build the improvements.

    “If the project is unsuccessful, the lender then has the right to take not only the improvements, but also the city’s land,” Mayans says.

    This is the type of thorough analysis and due diligence needed before the City enters into agreements of any type. Why is the city staff not providing this, and why are the Mayor and City Council members not demanding it?