Voice For Liberty

Tag: Tax abatements

  • Wichita’s $60 million gift to Spirit Aerosystems — not

    When I read that Wichita had invested nearly $60 million in its Spirit AeroSystems plant, I thought I must have been napping during a city council meeting. Instead, the lede of the story in the Tulsa World newspaper was a misstatement of the mechanism of Industrial Revenue Bonds (IRBs).

    The News reported “News that the city of Wichita is moving to invest nearly $60 million in its Spirit AeroSystems plant has Vision2 backers warning that Tulsa’s aerospace jobs are at risk of poaching by other cities.”

    A Tulsa television news report offered similar reporting: “… after the City of Wichita, Kansas offered roughly $60 million in incentives to try and steal Spirit Aerosystems away from Tulsa.”

    When news stories cover IRBs, the stories usually focus on the amount of the bonds, as in these two examples. That’s unfortunate, as the amount of the bonds is really a minor component of the story.

    You see this misunderstanding revealed in comments left to newspaper articles reporting the issuance of IRBs, where comment writers complain that the city shouldn’t be in the business of lending companies money.

    This confusion hides the reason why IRB transactions take place, which is tax avoidance. That’s the real story of Industrial Revenue Bonds: Companies escape paying the property and sales taxes that you and I — as well as most business firms — must pay.

    Reading the city council agenda packet regarding the IRB issue tells the story. The city is not lending Spirit money. In fact, no one is, according to the city document: “Spirit AeroSystems, Inc. intends to purchase the bonds itself, through direct placement, and the bonds will not be reoffered for sale to the public.”

    Also, the city has no obligation to pay the bondholders should Spirit default. This is a moot point in this case, as the issue of the bonds is also the buyer. But this is the case with all IRBs.

    It’s not uncommon for the issuing company to buy the bonds. So why issue the bonds? The agenda packet has the answer: “The bond financed property will be eligible for sales tax exemption and property tax exemption for a term of ten years, subject to fulfillment of the conditions of the City’s public incentives policy.”

    City documents didn’t give the amount of tax Spirit will avoid paying, so we’re left to surmise. Bonds could be issued up to $59.5 million. Taxable business property of that value would generate an annual tax bill of around $1.8 million per year, but Spirit would not pay that for up to ten years. If all the purchased property was subject to sales tax, that one-time tax exemption would be $4.3 million. These are the upper bounds of the tax savings Spirit Aerosystems may receive. Its actual savings will probably be lower, but still substantial.

    These numbers are the economic benefit of the bonds to Spirit, and the opportunity cost of the bonds to taxing jurisdictions. The $60 million “investment” or “incentive” reported by two Tulsa news sources is incorrect.

    Industrial Revenue Bonds, a confusing program

    IRBs are a confusing economic development program. It sounds like a loan from the city or state, but it’s not. The purpose is to convey tax avoidance.

    Here’s language from the Wichita ordinance that was passed to implement the bonds: “The Bonds, together with the interest thereon, are not general obligations of the City, but are special obligations payable (except to the extent paid out of moneys attributable to the proceeds derived from the sale of the Bonds or to the income from the temporary investment thereof) solely from the lease payments under the Lease, and the Bond Fund and other moneys held by the Trustee, as provided in the Indenture. Neither the credit nor the taxing power of the State of Kansas or of any political subdivision of such State is pledged to the payment of the principal of the Bonds and premium, if any, and interest thereon or other costs incident thereto.”

    So no governmental body has obligations to pay the bondholders in case of default. But this language hints at another complicating factor of IRBs: The city actually owns the property purchased with the bond proceeds, and leases it to Spirit. Here’s the preamble of the ordinance: “An ordinance approving and authorizing the execution of a lease agreement between Spirit Aerosystems, Inc. and the City of Wichita, Kansas.”

    Other language in the ordinance is “WHEREAS, the Company will acquire a leasehold interest in the Project from the City pursuant to said Lease Agreement.” There’s other language detailing the lease.

    We create this imaginary lease agreement — and that’s what it is, as it doesn’t have the same purpose and economic meaning as most leases — for what purpose? Just so that certain companies can avoid paying taxes.

    The city does have another program that allows it to exempt these taxes under some circumstances without having to issue bonds. In this case the goal of the program is laid clear: tax avoidance.

    IRBs are a confusing program that obfuscates the actual economic transaction. That’s not good public policy, whether or not you agree with the concept of selective tax abatements as economic development.

    Similarly, a principle of good tax policy is that those in similar situations should face the same laws. IRBs are contrary to this.

    While we can understand that citizens — with their busy lives — may not be informed or concerned about the complex workings of IRBs, we should expect more from our elected (and paid) officials. But we find often they are not informed.

    As an example, in 2004 the Wichita Eagle reported: “In July, the council approved industrial revenue bond financing and a $1.7 million property tax abatement for Genesis Health Clubs. Council members later said they didn’t realize they had also approved a sales-tax break.” (Kolb goal : Full facts in future city deals, September 26, 2004)

    Here we see Wichita City Council members not aware of the basic mechanism of a major city program that is frequently used. This is in spite of an informative city web page devoted to IRBs which prominently states: “Generally, property and services acquired with the proceeds of IRBs are eligible for sales tax exemption.”

    Yes, that page was active in 2004.

  • Wichita revises economic development policy

    The City of Wichita has passed a revision to its economic development policies. Instead of promoting economic freedom and a free-market approach, the new policy gives greater power to city bureaucrats and politicians, and is unlikely to produce the economic development that Wichita needs. Sedgwick County will also consider adopting this policy.

    The city wants to have policies that everyone can understand, but it also wants flexibility to waive policies and guidelines in light of mitigating factors.

    Here’s an illustration of how difficult it is to adhere to policies. The draft proposal of the new economic development policy states: “The ratio of public benefits to public costs, each on a present value basis, should not be less than 1.3 to one for both the general and debt service funds for the City of Wichita; for Sedgwick County should not be less than 1.3 overall.”

    The policy also states that if the 1.3 to one threshold is not met, the incentive could nonetheless be granted if two of three mitigating factors are found to apply. But there is a limit, according to the policy: “Regardless of mitigating factors, the ratio cannot be less than 1.0:1.”

    Last August the city council passed a multi-layer incentive package for Douglas Place, which is better known as the Ambassador Hotel and environs. Here’s what the material accompanying the letter of intent that the council passed on August 9, 2011 held: “As part of the evaluation team process, the WSU Center for Economic Development and Business Research studied the fiscal impact of the Douglas Place project on the City’s General Fund, taking into account the requested incentives and the direct, indirect and induced generation of new tax revenue. The study shows a ratio of benefits to costs for the City’s General Fund of 2.62 to one.”

    So far, so good. 2.62 is greater than 1.3. But the policy applies to both the general fund and the debt service fund. So what about the impact to the debt service fund? Here’s the complete story from the WSU CEDBR report:

                                       Cost-benefit ratio
City Fiscal Impacts General Fund         2.63
City Fiscal Impacts Debt Service         0.83
City Fiscal Impacts                      0.90

    The impact on the debt service fund is negative, and the impact in total is negative. (A cost-benefit ratio of less than one is “negative.”)

    Furthermore, the cost of the Ambassador Hotel subsidy program to the general fund is $290,895, while the cost to the debt service fund is $7,077,831 — a cost factor 23 times as large.

    So does the city have the wherewithal to stick to the policies it formulates? In my experience, not always. In this case, the city didn’t make this negative information available to the public. It was made public only after I requested the report from WSU CEDBR. It is not known whether council members were aware of this information when they voted.

    There are, however, other factors that may allow the city to grant an incentive: “In addition to the above provisions, the City Council and/or County Commission may consider the following information when deciding whether to approve an incentive.” A list of 12 factors follows, some so open-ended that the city can find a way to approve almost any incentive it wants.

    At yesterday’s city council meeting, when explaining the policy to the council, Wichita economic development chief Allen Bell said there should be “rational criteria” for when exceptions can be considered. We should also ask for truthfulness and complete disclosure, including negative factors.

    When considering cost-benefit ratios, we also need to realize that the “benefits” in the calculation are in the form of increased tax revenue paid to the city, county, etc. There is no consideration of actually rewarding the taxpayers that pay for — and assume the risk of — economic development incentives. Furthermore, these benefits are not like profits that business firms earn. Instead, they are in the form of taxes that government takes.

    Speculative industrial buildings

    A new feature of the policy implements property tax forgiveness for speculative industrial buildings. The proposed plan had a formula that grants a higher percentage of tax forgiveness as building size increases, but the council eliminated that and voted a 100 percent tax abatement for all buildings larger than 50,000 square feet.

    Given tax costs and industrial building rents, this policy gives these incentivized buildings a cost advantage of about 20 percent over competitors. That’s very high, and makes it difficult for existing buildings to compete. Probably no one will build these buildings unless they qualify for and receive this incentive.

    While the city hopes that these incentivized buildings will generate new jobs in Wichita, there appears to be nothing in the policy that prevents existing companies in Wichita from moving to these buildings. This simply moves jobs from one location to another, and would harm existing landlords.

    While the policy was designed to encourage large buildings instead of small, there appears to be no limitation on the size of space someone can rent. A building 100,000 square feet in size gets 100 percent tax abatement. But the space could be rented out in smaller parcels to multiple tenants, making it easy to steal local tenants from another landlord.

    Finally, are pre-built facilities really necessary? Wind energy firms in Newton and Hutchinson built their plants from ground up.

    Tax costs

    Since many of the economic development incentives involve relief from paying taxes, we have to ask whether our tax levels and tax policies are discouraging business investment. Now we have an answer.

    This year the Tax Foundation released a report that examines the tax costs on business in the states and in selected cities in each state. The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms. Wichita was cited in the report, and the city did not do well. See Kansas and Wichita lag the nation in tax costs.

    Wichita’s record on economic development

    Earlier this year Greater Wichita Economic Development Coalition issued its annual report on its economic development activities for the year. The shows us that power of government to influence economic development is weak. In its recent press release, the organization claimed to have created 1,509 jobs in Sedgwick County during 2011. According to the Bureau of Labor Statistics, the labor force in Sedgwick County in 2011 was 253,940 persons. So the jobs created by GWEDC’s actions amounted to 0.59 percent of the labor force. This is a very small fraction, and other economic events are likely to overwhelm these efforts.

    In his 2012 State of the City address, Wichita Mayor Carl Brewer took credit for creating a similar percentage of jobs in Wichita.

    Rarely mentioned are the costs of creating these jobs — the costs of the incentives and the cost of the economic development bureaucracy. These costs have a negative economic impact on those who pay them, meaning that economic activity and jobs are lost somewhere else in order to pay for the incentives.

    Also, at least some of these jobs would have been created without the efforts of GWEDC. All GWEDC should take credit for is the marginal activity that it purportedly created. Government usually claims credit for all that is good, however.

    The targeted economic development efforts of governments like Wichita and Sedgwick County fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. In the case of the Wichita and Sedgwick County policy, do we really know which industries should be targeted? Are we sure about the list of eligible business activities that subsidies can be used to pay? Is 1.3 to one really the benchmark we should seek, or we be better off and have more jobs if we insisted on 1.4 to one or relaxed the requirement to 1.2 to one?

    This lack of knowledge, however, does not stop governments from creating policies for the awarding of incentives. This “active investor” approach to economic development is what has led to companies escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

    Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and 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 expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

    In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and other cities engage in: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

    In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”

    There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs and other economic development programs is an example of precisely the wrong policy.

    We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances. Wichita and Sedgwick County are moving in the wrong direction.

  • Kansas reasonable: We’re number 47 (and 48)

    What is the record of those who promote a reasonable, balanced, and responsible approach to Kansas government? These are terms that Kansas moderate Republicans use as they seek re-election in the August primary election. But this approach has lead to slow economic growth and economic development programs that don’t seem to be producing the results we want. Now we know part of the reason why the “Kansas reasonable” approach hasn’t worked well: Our tax rates are high — way too high.

    Earlier this year the Tax Foundation released a report that examines the tax costs on business in the states and in selected cities in each state. The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms.

    The report is Location Matters: A Comparative Analysis of State Tax Costs on Business.

    The study is unusual in that it looks at the impact of states’ tax burden on mature and new firms. This, according to report authors, “allows us to understand the effects of state tax incentives compared to a state’s core tax system.” In further explanation, the authors write: “The second measure is for the tax burden faced by newly established operations, those that have been in operation less than three years. This represents a state’s competitiveness after we have taken into account the various tax incentive programs it makes available to new investments.”

    The report also looks at the tax costs for specific types of business firms. For Kansas, some individual results are better than overall, but still not good. For a mature corporate headquarters, Kansas ranks 30th. For locating a new corporate headquarters — one that would benefit from tax incentive programs — Kansas ranked 42nd. For a mature research and development facility, 46th; while new is ranked 49th. For a mature retail store, 38th, while new is ranked 45th.

    There are more categories. Kansas ranks well in none.

    In its summary for Kansas, the authors note the fecklessness of Kansas economic development incentives: “Kansas offers among the most generous property tax abatements and investment tax credits across most firm types, yet these incentives seem to have little impact on the state’s rankings for new operations.”

    While economic development incentives can help reduce the cost of taxes for selected firms, incentives don’t help the many firms that don’t receive them. In fact, the cost of these incentives is harmful to other firms. The Tax Foundation report points to this harm: “While many state officials view tax incentives as a necessary tool in their state’s ability to be competitive, others are beginning to question the cost-benefit of incentives and whether they are fair to mature firms that are paying full freight. Indeed, there is growing animosity among many business owners and executives to the generous tax incentives enjoyed by some of their direct competitors.”

    But there is one incentive that can be offered to all firms: Reduce tax costs for everyone. The policy of reducing tax costs for the selected few is not working. This “active investor” approach to economic development is what has led companies in Wichita and Kansas escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

  • Tax costs block progress in Kansas

    If we in Kansas and Wichita wonder why our economic growth is slow and our economic development programs don’t seem to be producing results, there is now data to answer the question why: Our tax costs are high — way too high.

    Recently the Tax Foundation released a report that examines the tax costs on business in the states and in selected cities in each state. The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms.

    The report is Location Matters: A Comparative Analysis of State Tax Costs on Business.

    The study is unusual in that it looks at the impact of states’ tax burden on mature and new firms. This, according to report authors, “allows us to understand the effects of state tax incentives compared to a state’s core tax system.” In further explanation, the authors write: “The second measure is for the tax burden faced by newly established operations, those that have been in operation less than three years. This represents a state’s competitiveness after we have taken into account the various tax incentive programs it makes available to new investments.”

    The report also looks at the tax costs for specific types of business firms. For Kansas, some individual results are better than overall, but still not good. For a mature corporate headquarters, Kansas ranks 30th. For locating a new corporate headquarters — one that would benefit from tax incentive programs — Kansas ranked 42nd. For a mature research and development facility, 46th; while new is ranked 49th. For a mature retail store, 38th, while new is ranked 45th.

    There are more categories. Kansas ranks well in none.

    The report also looked at two cities in each state, a major city and a mid-size city. For Kansas, the two cities are Wichita and Topeka.

    Among the 50 cities chosen, Wichita ranks 30th for a mature corporate headquarters, but 42nd for a new corporate headquarters.

    For a mature research and development facility, Wichita ranks 46th, and 49th for a new facility.

    For a mature and new retail store, Wichita ranks 38th and 45th, respectively.

    For a mature and new call center, Wichita ranks 43rd and 47th, respectively.

    In its summary for Kansas, the authors note the fecklessness of Kansas economic development incentives: “Kansas offers among the most generous property tax abatements and investment tax credits across most firm types, yet these incentives seem to have little impact on the state’s rankings for new operations.”

    Kansas tax cost compared to neighbors. Click here for a larger version.

    It’s also useful to compare Kansas to our neighbors. The comparison is not favorable for Kansas.

    More evidence of failure

    Recently the Greater Wichita Economic Development Coalition issued its annual report on its economic development activities for the year. This report shows us that power of government to influence economic development is weak. In its recent press release, the organization claimed to have created 1,509 jobs in Sedgwick County during 2011. According to the Bureau of Labor Statistics, the labor force in Sedgwick County in 2011 was 253,940 persons. So the jobs created by GWEDC’s actions amounted to 0.59 percent of the labor force. This is a very small fraction, and other economic events are likely to overwhelm these efforts.

    In his 2012 State of the City address, Wichita Mayor Carl Brewer took credit for creating a similar percentage of jobs in Wichita.

    The report by the Tax Foundation helps us understand why the economic development efforts of GWEDC, Sedgwick County, and Wichita are not working well: Our tax costs are too high.

    While economic development incentives can help reduce the cost of taxes for selected firms, incentives don’t help the many firms that don’t receive them. In fact, the cost of these incentives is harmful to other firms. The Tax Foundation report points to this harm: “While many state officials view tax incentives as a necessary tool in their state’s ability to be competitive, others are beginning to question the cost-benefit of incentives and whether they are fair to mature firms that are paying full freight. Indeed, there is growing animosity among many business owners and executives to the generous tax incentives enjoyed by some of their direct competitors.”

    But there is one incentive that can be offered to all firms: Reduce tax costs for everyone. The policy of reducing tax costs for the selected few is not working. This “active investor” approach to economic development is what has led companies in Wichita and Kansas escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

    Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and 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 expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

    In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and Kansas has been pursuing and which Wichita’s Brewer wants to step up: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

    In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”

    There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs is an example of precisely the wrong policy.

    We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances, except to reduce the cost of government for everyone.

  • Kansas and Wichita lag the nation in tax costs

    If we in Kansas and Wichita wonder why our economic growth is slow and our economic development programs don’t seem to be producing results, there is now data to answer the question why: Our tax rates are high — way too high.

    This week the Tax Foundation released a report that examines the tax costs on business in the states and in selected cities in each state. The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms.

    The report is Location Matters: A Comparative Analysis of State Tax Costs on Business.

    The study is unusual in that it looks at the impact of states’ tax burden on mature and new firms. This, according to report authors, “allows us to understand the effects of state tax incentives compared to a state’s core tax system.” In further explanation, the authors write: “The second measure is for the tax burden faced by newly established operations, those that have been in operation less than three years. This represents a state’s competitiveness after we have taken into account the various tax incentive programs it makes available to new investments.”

    The report also looks at the tax costs for specific types of business firms. For Kansas, some individual results are better than overall, but still not good. For a mature corporate headquarters, Kansas ranks 30th. For locating a new corporate headquarters — one that would benefit from tax incentive programs — Kansas ranked 42nd. For a mature research and development facility, 46th; while new is ranked 49th. For a mature retail store, 38th, while new is ranked 45th.

    There are more categories. Kansas ranks well in none.

    The report also looked at two cities in each state, a major city and a mid-size city. For Kansas, the two cities are Wichita and Topeka.

    Among the 50 cities chosen, Wichita ranks 30th for a mature corporate headquarters, but 42nd for a new corporate headquarters.

    For a mature research and development facility, Wichita ranks 46th, and 49th for a new facility.

    For a mature and new retail store, Wichita ranks 38th and 45th, respectively.

    For a mature and new call center, Wichita ranks 43rd and 47th, respectively.

    In its summary for Kansas, the authors note the fecklessness of Kansas economic development incentives: “Kansas offers among the most generous property tax abatements and investment tax credits across most firm types, yet these incentives seem to have little impact on the state’s rankings for new operations.”

    Kansas tax cost compared to neighbors. Click here for a larger version.

    It’s also useful to compare Kansas to our neighbors. The comparison is not favorable for Kansas.

    More evidence of failure

    Recently the Greater Wichita Economic Development Coalition issued its annual report on its economic development activities for the year. This report shows us that power of government to influence economic development is weak. In its recent press release, the organization claimed to have created 1,509 jobs in Sedgwick County during 2011. According to the Bureau of Labor Statistics, the labor force in Sedgwick County in 2011 was 253,940 persons. So the jobs created by GWEDC’s actions amounted to 0.59 percent of the labor force. This is a very small fraction, and other economic events are likely to overwhelm these efforts.

    In his 2012 State of the City address, Wichita Mayor Carl Brewer took credit for creating a similar percentage of jobs in Wichita.

    The report by the Tax Foundation helps us understand why the economic development efforts of GWEDC, Sedgwick County, and Wichita are not working well: Our tax costs are too high.

    While economic development incentives can help reduce the cost of taxes for selected firms, incentives don’t help the many firms that don’t receive them. In fact, the cost of these incentives is harmful to other firms. The Tax Foundation report points to this harm: “While many state officials view tax incentives as a necessary tool in their state’s ability to be competitive, others are beginning to question the cost-benefit of incentives and whether they are fair to mature firms that are paying full freight. Indeed, there is growing animosity among many business owners and executives to the generous tax incentives enjoyed by some of their direct competitors.”

    But there is one incentive that can be offered to all firms: Reduce tax costs for everyone. The policy of reducing tax costs for the selected few is not working. This “active investor” approach to economic development is what has led companies in Wichita and Kansas escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

    Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and 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 expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

    In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and Kansas has been pursuing and which Wichita’s Brewer wants to step up: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

    In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”

    There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs is an example of precisely the wrong policy.

    We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances, except to reduce the cost of government for everyone.

  • Carl Brewer: State of the City for Wichita, 2012

    Last night Wichita Mayor Carl Brewer delivered his annual State of the City Address. The text of the address may be read at State of the City Address.

    In his speech, Brewer several times criticized those who act on “partisan agendas.” This is quite a remarkable statement for the mayor to make. Partisan usually refers to following a party line or platform. The mayor didn’t mention who he was criticizing, but it’s likely he was referring to myself and others like John Todd, Susan Estes, and Clinton Coen, as we appear regularly before the city council, usually in disagreement with the mayor and his policies.

    What’s remarkable is that the council, even though it has four Republican members, almost always votes uniformly with Democrat Brewer and the other two politically liberal members of the council. The only exception is Michael O’Donnell (district 4, south and southwest Wichita), who is often in a minority of one voting in opposition to the other six. The other Republican members — Pete Meitzner (district 2, east Wichita), James Clendenin (district 3, southeast and south Wichita), and Jeff Longwell (district 5, west and northwest Wichita) — routinely vote in concert with the Democrats and liberals on the council.

    Remarkable also are the many members of the business community who appeal to the council for subsidies, increased government intervention, and more central planning from city hall: many of these are Republicans. Conservative Republicans, many have personally told me.

    This describes a lack of partisanship. Most of the mayor’s critics, such as myself, are more accurately characterized not as acting along party lines, but as acting on their belief in economic freedom, free markets, and limited government.

    Economic development

    The mayor said that the city’s efforts in economic development had created “almost 1000 jobs.” While that sounds like a lot of jobs, that number deserves context.

    According to estimates from the Kansas Department of Labor, the civilian labor force in the City of Wichita for December 2011 was 192,876, with 178,156 people at work. This means that the 1,000 jobs created accounted for from 0.52 percent to 0.56 percent of our city’s workforce, depending on the denominator used. This miniscule number is dwarfed by the normal ebb and flow of other economic activity.

    The mayor did not mention the costs of creating these jobs. These costs have a negative economic impact on those who pay these costs. This means that economic activity — and jobs — are lost somewhere else in order to pay for the incentives.

    The mayor’s plan going forward, in his words, is “We will incentivize new jobs.” But under the mayor’s leadership, this “active investor” policy has produced a very small number of jobs, year after year. Doubling down on the present course is not likely to do much better.

    But there are those who disagree, despite all evidence to the contrary. Sedgwick County Commissioner Dave Unruh — a conservative Republican, for those keeping track of partisanship — recently called for a “deal-closing” fund of $100 million. A funding source of this magnitude would undoubtedly require a new tax. There are many who feel there should be a new sales tax devoted to economic development and downtown Wichita development. We should not be surprised to see such a proposal emerge, and not be surprised that civic and business institutions will support it.

    The mayor repeatedly said that the city has been “courageous.” In reality, Wichita does about the same as everyone else. But there is a way Wichita could distinguish itself among cities.

    Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business has made a convincing case that Kansas needs to move away from the “active investor” approach to economic development. This is where government decides which companies will receive special treatment, be it in the form of tax abatements, tax credits, grants, tax increment financing, community improvement district special taxes, and other forms of subsidy. Being an “active investor” has been the approach of the City of Wichita, and according to the mayor’s vision, this plan is to be stepped up in the future.

    In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and 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 expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

    Later, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and Kansas rely on for economic development: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

    We need business and political leaders in Wichita and Kansas who can see beyond the simplistic imagery of a groundbreaking ceremony and can assess the effect of our failing economic development policies on the entire community. Unfortunately, we don’t have many of these — and Mayor Brewer leads in the opposite direction.

    Critical of misinformation campaigns

    In his speech, Brewer was critical of those who “spread misinformation.” He was not specific as to who he’s criticizing, and I wouldn’t expect him to name specific people in a speech like this.

    But when the mayor criticizes people for being uninformed or misinformed, he needs to look first at himself. He and city staff also need to engage their critics and be responsive to requests for information.

    As an example of misinformation, the mayor cited this evidence that city policies are working: “The proposed Ambassador Hotel with a 3-to-1 private to public investment ratio.”

    The city arrived at this ratio by employing a very narrow definition of public investment. When tax credits from the State of Kansas and federal government as well as other sources of public subsidy are accounted for, the ratio drops to less than two to one.

    It’s true that considering only the city’s artificially narrow definition of public funding, the ratio does reach three to one. But Wichitans also have to pay part of the costs of the tax credits and other subsidies.

    The city has also been less than honest in its promotion of the cost-benefit ratio for the Ambassador Hotel project. The city officially cites a cost-benefit study produced by Wichita State University Center for Economic Development and Business Research. Part of that study produced a cost-benefit ratio of 2.63 to one, and that’s what the city uses as justification for its participation in the project.

    But the full story of the costs and benefits of this project are contained in these numbers from the WSU analysis:

                                        ROI   Cost-benefit ratio
City Fiscal Impacts General Fund  163.2%        2.63
City Fiscal Impacts Debt Service  -17.2%        0.83
City Fiscal Impacts                -9.8%        0.90

    WSU evaluated the impact of the Ambassador Hotel on the City of Wichita’s finances in two areas: The impact on the city’s General Fund, and separately on the city’s Debt Service Fund. The two were combined to produce the total fiscal impact, which is the bottom line in this table.

    The City of Wichita cites only the positive impact to the General Fund figure. But the impact on the Debt Service fund is negative, and the impact in total is negative.

    It’s true that the ROI and cost-benefit ratio for the General Fund indicate a positive investment return. But the cost of the Ambassador Hotel subsidy program to the General Fund is $290,895, while the cost to the Debt Service Fund is $7,077,831 — a cost factor 23 times as large.

    Citizens ought to ask: Who is spreading misinformation?

    It is difficult to get a response from city hall regarding questions like these. So far city economic development director Allen Bell has not agreed to meet with representatives of Tax Fairness for All Wichitans, a group opposed to the subsidies for the Ambassador Hotel. (I am part of that group.) The city and its allied economic development groups will not send representatives to participate in a public forum on this matter.

    Simplistic answers

    The mayor criticized those who “provide simplistic answers to very complicated challenges.” He may be — we don’t really know — referring to those like myself who advocate for free market solutions to problems rather than reliance on government. Certainly the mayor believes that government must act — “courageously” he said — to confront our problems.

    A problem with the mayor’s plan for increased economic interventionism by government is the very nature of knowledge. In a recent issue of Cato Policy Report, Arnold King wrote:

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

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

    Relying on free market solutions for economic growth and prosperity means trusting in the concept of spontaneous order. That takes courage. It requires faith in the values of human freedom and ingenuity rather than government control. It requires that government officials let go rather than grabbing tighter the reins of power.

    Mayor Brewer, five of six city council members, and the city hall bureaucracy do not believe in these values. Wichita’s mayor is openly dismissive of economic freedom, free markets, and limited government, calling these principles of freedom and liberty “simplistic.” Instead, his government prefers crony capitalism and corporate welfare. This is the troubling message that emerges from Brewer’s State of the City address.

  • Boeing departure presents challenge for Wichita and Kansas

    The announcement of the departure from Wichita of Boeing presents challenges for the Wichita area and the state of Kansas. The response of government officials over the next few years will need to depart from past and present practice if Wichita wants to build a dynamic and sustainable economy. With a few exceptions, our current elected officials will likely proceed with targeted economic development, and Wichita and Kansas will miss an opportunity to implement meaningful and lasting change.

    Aid offered to Boeing

    Boeing has been the recipient of much targeted economic development incentives over the years. From 1979 to 2007, Boeing received tax abatements through the industrial revenue bond process worth $658 million, according to a compilation provided by the City of Wichita.

    In his remarks, Kansas Representative Jim Ward said “Boeing is the poster child for corporate tax incentives.” Kansas Legislative Research has compiled a list of legislative measures that benefited Boeing, which may be viewed at Kansas and Boeing. This document contains only those measures passed by the state, not by cities and counties to help Boeing.

    Some of the legislation on the list really should not be included, as it benefited all companies, not just Boeing. An example is the 2006 machinery and equipment property tax exemption. The author correctly notes that Boeing often received targeted relief from this tax through the IRB process. Still, this is an example of good economic policy that affects all businesses, which is important.

    Similarly, the repeal of the franchise tax — another bill on this list — benefited not only Boeing, but everyone, and should not be on this list.

    An example of legislation crafted specifically for Boeing was 2003’s Economic Development and Revitalization Reinvestment Act, which became statute 74-50,136. This law awarded Boeing with $80 million, the money to be repaid by the withholding taxes of Boeing’s employees — in other words, at no cost to Boeing. This bill passed the Kansas House of Representatives by a vote of 107 to 6, with Rep. Ward voting with the majority to pass.

    Now, Ward says “We will be less trusting in the future of corporate promises.”

    The danger going forward

    The danger we in Kansas, and specifically the Wichita area, face is the overwhelming urge of politicians to be seen doing something in response to the departure of Boeing. Wichita Mayor Carl Brewer, in his statement, called for the community to “launch an aggressive campaign of job recruitment and retention.”

    It is likely that we will become susceptible to large-scale government interventions in an attempt to gain new jobs. Our best course would be to take steps to make Kansas and Wichita an inviting place for all firms to do business. The instinct of politicians such as Brewer, however, is to take action, usually in the form of targeted incentives as a way to spur economic development.

    We’ve seen the results of this. Not only with Boeing, but also in a report showing that Wichita has declined in economic performance compared to other areas.

    These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This, however, does not stop governments from creating policies for the awarding of incentives. It also doesn’t stop the awarding of incentives willy-nilly without a policy, as the Wichita City Council has done for a hotel.

    This “active investor” approach to economic development is what has led to Boeing escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

    Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and 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 expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

    In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita is sure to undertake in response to the loss of Boeing: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

    In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”

    There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs is an example of precisely the wrong policy.

    We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.

    Kansas tax policy

    One person reminded me of this: “The real point about Boeing’s departure that no one is discussing is the fact that the positions leaving here are going to three states: Oklahoma, Texas, and Washington. Two of these states have no income tax while the third, Oklahoma, has tight limits on both state and local tax increases while reducing state income tax rates in recent years.”

    While Governor Brownback and many members of the legislature want to reduce income rates in Kansas to make our state more competitive for business, there is much opposition. It has been thought that the plan would be to gradually reduce income tax rates over several years. If anything, the departure of Boeing means we should act to reduce tax rates sooner rather than later.

    Those who oppose reducing taxes raise the problem of how to replace the income lost due to lower tax rates. They fear that the state will raise the sales tax, or that local governments such as cities, school districts, and counties will raise sales or property taxes.

    But the answer should be: Don’t replace the missing income. Instead, spend less at the state level. That will improve the Kansas economy as more money will be left in the private sector instead of being transferred to an unproductive and wasteful government. And if the state can be successful in nurturing a competitive business and economic climate, that will bring more jobs, which will reduce the demand on the state for various social services. More jobs mean more revenue to the state in other forms besides income taxes, too.

    Our challenge is this: Boeing said that costs in its San Antonio, Texas facility are 70 percent lower than in Wichita. We need to figure out why this discrepancy — if it is real — exists. We need to eliminate this differential cost of doing business in Kansas. The instinct of politicians and bureaucrats will be to offer targeted relief to the companies they believe deserve it. For those few companies, perhaps this differential can be reduced.

    But this is the wrong policy. All business firms deserve relief, and by doing that we can create a dynamic Kansas economy so that we all will prosper.

  • Wichita falls in economic performance ranking

    Recently the Milken Institute released a report examining the economic performance of metropolitan areas in the United States. The report, titled Best-Performing Cities 2011, describes itself as “The annual Best-Performing Cities index provides an objective, comprehensive measure of economic performance across metropolitan areas of the country.”

    Specifically, this report “measures growth in jobs, wages and salaries, and technology output over a five-year span (2005–2010 for jobs and technology output and 2004-2009 for wages and salaries) to adjust for extreme variations in business cycles.”

    On the composition of the index, the report states: “Employment growth is weighted most heavily in the index because of its critical importance to community vitality. Wage and salary growth measures the quality of the jobs being created and sustained. Technology output growth is another key element of economic vibrancy.”

    Among the top 200 metropolitan areas, Wichita ranked 104th in overall performance this year, down from 72nd the year before.

    In the category of one-year job growth from 2009 to 2010, Wichita ranked 199th out of the 200 largest metropolitan areas. For five-year job growth Wichita did better, ranking 63rd of 200.

    Interestingly, Wichita ranks high — ninth out of 200 — in a measure of high-technology industry concentration. The description of this measure in which Wichita ranks highly is: “High-tech location quotients (LQs), which measure the concentration of the technology industry in a particular metro relative to the national average, are included to indicate a metro’s participation in the knowledge-based economy.”

    Reports such as these can be useful, but can also be misunderstood or misapplied — or sometimes incorrect. For example, Wichita isn’t usually thought of as a center of concentration in high-tech industry. In a 2011 ranking of the best cities for high tech jobs produced by Joel Kotkin, Wichita didn’t make the list, which included 51 cities. That list was based on “Employment in 45 high technology manufacturing, services, and software industry sectors.”

    Some will dismiss Wichita’s fall in rankings because of our heavy reliance on aviation, particularly business aviation, which was hit very hard by the recession.

    Wichita — and Kansas — can take note, however, of the high performance by cities in Texas. Four of the top five are in Texas, as are nine of the top 25. There is a movement in Kansas to reduce the state’s income tax rates to make Kansas more attractive to business. Texas has no state income tax.

    We should also note that Wichita’s ranking fell at a time of vigorous economic development efforts by Wichita and Sedgwick County, the major components of the Wichita metropolitan area. In his State of the City address this year, Wichita Mayor Carl Brewer spoke about Wichita’s economic development efforts. The mayor said that the city’s efforts saved 745 jobs and created 435 jobs, for a total impact of 1,180 jobs. To place those numbers in context, we note that American Community Survey data from the U.S. Census Bureau indicates the labor force in Wichita is 191,760 persons. This means that the economic development efforts of the City of Wichita affected a number of jobs equivalent to 0.6 percent of the city workforce.

    This small number of jobs impacted by the city’s economic development initiatives is dwarfed by other economic events. Additionally, these efforts by the city are counterproductive — if our interest is creating a dynamic economy in Wichita. Analysis by the Kauffman Foundation finds that it is new firms — young firms, in other words — that are the primary drivers of job creation. But the economic development policies of cities like Wichita are definitely biased toward older, established firms. The cost of these economic development efforts, which are paid for by everyone — including young businesses firms struggling to grow — means that we prop up unproductive companies at the expense of the type of firms we need to really grow the Wichita economy.

    Wichita is not the only component of the Wichita metropolitan area, but is certainly the driving force in the region’s economy.

    Reports such as these are evidence that the economic development policies of Wichita and Sedgwick County are not working well. We need to distinguish ourselves somehow and produce greater economic growth. Kansas Governor Sam Brownback released an economic development plan that sounded some of the right notes, but in practice his administration is relying on more of the same targeted subsidies that most states and cities use.

    Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business has made a convincing case that Kansas needs to move away from the “active investor” approach to economic development. This is where government decides which companies will receive special treatment, be it in the form of tax abatements, tax credits, grants, tax increment financing, community improvement district special taxes, and other forms of subsidy. Being an “active investor” is the approach of the City of Wichita.

    In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and 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 expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

    Later, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and Kansas rely on for economic development: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

    We need business and political leaders in Wichita and Kansas who can see beyond the simple imagery of a groundbreaking ceremony and can assess the effect of our failing economic development policies on the entire community. Unfortunately, we don’t have many of these.

  • Bombardier Learjet should pay just a little

    In a presentation made to economic development officials, aviation manufacturer Bombardier LearJet speaks with pride of its investment in Kansas. But for the present project before the Sedgwick County Commission today, it appears that the company is planning to make no investment at all.

    Bombardier LearJet financing plan. Later the document states “Requesting State of Kansas support to help find gap of $16M.”

    Taking the total project cost of $52.7 million and subtracting the government funding already secured, there is a gap of $16.1 million. Instead of being grateful for the $36.6 million in subsidy already (or about to be) secured, the company is asking for more: Bombardier LearJet is asking the State of Kansas to fund this gap.

    What happened to capitalism?

    What happened to companies funding even a portion of their capital requirements?

    The proponents of economic development incentives often make their case that the incentives are just a “sweetener” to secure the deal. But in the present case with Bombardier LearJet, local governments — the City of Wichita, Sedgwick County, and the State of Kansas — are being asked to pay for the entire meal.

    We in Kansas and Sedgwick County are already doing much for Bombardier LearJet. It is likely that we will agree to let LearJet forgo paying any property tax at all — the same property taxes that other business struggle to pay. These businesses compete with LearJet for labor and other things they need.

    The State of Kansas is allowing the income taxes of Lear Jet employees to be used for the exclusive benefit of that company.

    Both of these actions call into question the fundamental question of fairness in taxation: that all pay their fair share. When companies like the applicant company ask to be excused from the burden of taxation, others have to pay.

    If you are not persuaded by this appeal to principle, there is evidence that chasing the big catch is often counterproductive, and that the net economic effect of these deals is overestimated. One study finds: “Large-employer businesses have no measurable net economic effect on local economies when properly measured.”

    Perhaps the worst thing we take away from this episode is that our state is making no progress towards a concept developed by Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business. He has made a convincing case that Kansas needs to move away from the “active investor” approach to economic development. This is where government decides which companies will receive special treatment, be it in the form of tax abatements, tax credits, grants, and other forms of subsidy. This is what we are doing with the present applicant, Bombardier LearJet.

    In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and 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 expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

    Later, Hall writes this regarding “benchmarking” — the bidding wars for large employers we are considering today: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

    We need to move away from economic development based on this active investor approach. This commission needs to advocate for policies — in this chamber, at Wichita City Hall, and at the Kansas Statehouse — that lead to sustainable economic development. What we’re doing today is not sustainable.

    A small and reasonable step towards this goal is to ask Bombardier LearJet to consider paying just $1 million themselves on a project with a cost of $52.7 million.