Voice For Liberty

Tag: Tax increment financing

  • Bowllagio property purchases seem overpriced

    As part of a planned real estate development, taxpayers may be asked to pay property owners much more than the appraised values for the parcels.

    According to documents obtained from the Wichita city manager’s office, developers of Bowllagio have budgeted to pay a collective $1,110,300 over the property’s appraised values. This is 63 percent over the appraised values for the 14 parcels.

    The source of funds for these purchases is a proposed tax increment financing (TIF) district created for the benefit of Maize 54, LLC, the developer of Bowllagio. The Wichita City Council approved the formation of the district on November 20. Now the Goddard School District and Sedgwick County Commission may veto the formation of the district. The approval of these two bodies is not required; but they have the right to cancel the formation of the district.

    A meeting last week with Goddard school officials resulted in learning that it seems unlikely that the school district will take up the matter. The item is on the agenda of the county commission’s Wednesday meeting.

    The Sedgwick County Appraiser’s Office explains appraised values: “The value of property is determined by market transactions. The Appraiser’s office has the responsibility to study those transactions and appraise property accordingly. The Appraiser’s office determines market value through the use of generally accepted appraisal methods.”

    If the appraiser’s valuations are close to the market value of the properties — and we have reason to believe they are — we have to ask why did the Wichita city council approve spending so much taxpayer money on these properties?

    And, will the Sedgwick County Commission give its approval to this waste of taxpayer money?

    Proposed home purchases for Maize 54 / Bowllagio development

  • Economic development incentives questioned

    When the New York Times is concerned about the cost of government spending programs, it’s a safe bet that things are really out of control. Its recent feature As Companies Seek Tax Deals, Governments Pay High Price reports on economic development incentive programs that are costly and produce questionable benefits.

    Do we know the cost of economic development incentives? No, reports the Times: “A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid.”

    Kansas Governor Sam Brownback appears in a video that accompanies the story.

    A concern of the newspaper is that the money spent on incentives could be spent on other government programs, primarily schools. My concern is that government spending on incentives is harmful to the economy. It redirects capital from productive to unproductive uses. Charles Koch recently explained:

    Today, many governments give special treatment to a favored few businesses that eagerly accept those favors. This is the essence of cronyism.

    Many businesses with unpopular products or inefficient production find it much easier to curry the favor of a few influential politicians or a government agency than to compete in the open market.

    After all, the government can literally guarantee customers and profitability by mandating the use of certain products, subsidizing production or providing protection from more efficient competitors.

    Cronyism enables favored companies to reap huge financial rewards, leaving the rest of us — customers and competitors alike — worse off.

    In another article Koch wrote: “Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”

    We must distinguish between business and capitalism and hold business groups accountable when they fail to promote economic freedom and capitalism. An example is the Wichita Metro Chamber of Commerce. Its legislative platform reads “The Wichita Metro Chamber believes the State should practice fiscal discipline.”

    But the Chamber recommends retaining several business welfare programs that are harmful to capitalism and economic freedom.

    Next week the agenda for the meeting of the Wichita City Council contains six items that dish out business welfare and promote cronyism. Another item recommends approval of the city’s legislative agenda, which contains this:

    ISSUE: Existing economic development tools are essential for the continued growth and prosperity of our community.

    RECOMMEND: The Wichita City Council supports continuation of its 2012 legislative agenda item, calling for protection of existing economic development tools for local public-private partnerships. Among those are Tax Increment Financing (TIF) districts, Community Improvement Districts (CIDs), Industrial Revenue Bonds (IRBs) and Sales Tax Revenue (STAR) bonds.

    The premise is false twice: These economic development tools are not “essential,” and Wichita is not growing and prospering, compared to other cities: “The inflation-adjusted gross domestic product for the Wichita metro area declined 0.4 percent in 2010, according to initial estimates from the federal Bureau of Economic Analysis. The decline slowed from the year before, when this measure of economic growth plummeted by 7.7 percent. … Wichita’s decline came even as GDP grew by 2.5 percent nationwide in 2010. GDP increased in 304 of 366 metro areas nationwide.” (Wichita Business Journal, Wichita’s real GDP declined in 2010 amid national recovery, database shows.)

  • Tax increment financing district (TIF) resources

    Resources on tax increment financing (TIF) districts. An updated version of this article is here.

    Wichita should reject Bowllagio TIF district. Wichita should reject the formation of a harmful tax increment financing (TIF) district.

    Wichita TIF: Taxpayer-funded benefits to political players. It is now confirmed: In Wichita, tax increment financing (TIF) leads to taxpayer-funded waste that benefits those with political connections at city hall.

    Tax increment financing (TIF) and economic growth. There is clear and consistent evidence that municipalities that adopt tax increment financing, or TIF, grow more slowly after adoption than those that do not.

    Does tax increment financing (TIF) deliver on its promise of jobs? When looking at the entire picture, the effect on employment of tax increment financing, or TIF districts, used for retail development is negative.

    Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing. Randal O’Toole, Cato Institute. While cities often claim that TIF is “free money” because it represents the taxes collected from developments that might not have taken place without the subsidy, there is plenty of evidence that this is not true. First, several studies have found that the developments subsidized by TIF would have happened anyway in the same urban area, though not necessarily the same location. Second, new developments impose costs on schools, fire departments, and other urban services, so other taxpayers must either pay more to cover those costs or accept a lower level of services as services are spread to developments that are not paying for them. Moreover, rather than promoting economic development, many if not most TIF subsidies are used for entirely different purposes. First, many states give cities enormous discretion for how they use TIF funds, turning TIF into a way for cities to capture taxes that would otherwise go to rival tax entities such as school or library districts. Second, no matter how well-intentioned, city officials will always be tempted to use TIF as a vehicle for crony capitalism, providing subsidies to developers who in turn provide campaign funds to politicians.

    Tax Increment Financing: A Tool for Local Economic Development. Richard F. Dye and David F. Merriman. Tax increment financing (TIF) is an alluring tool that allows municipalities to promote economic development by earmarking property tax revenue from increases in assessed values within a designated TIF district. Proponents point to evidence that assessed property value within TIF districts generally grows much faster than in the rest of the municipality and infer that TIF benefits the entire municipality. Our own empirical analysis, using data from Illinois, suggests to the contrary that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.

    The effects of tax increment financing on economic development. Richard F. Dye and David F. Merriman. Local governments attempt to influence business location decisions and economic development through use of the property tax. Tax increment financing (TIF) sequesters property tax revenues that result from growth in assessed valuation. The TIF revenues are to be used for economic development projects but may also be diverted for other purposes. We have constructed an extensive data set for the Chicago metropolitan area that includes information on property value growth before and after TIF adoption. In contrast to the conventional wisdom, we find evidence that cities that adopt TIF grow more slowly than those that do not. We test for and reject sample selection bias as an explanation of this finding. We argue that our empirical finding is plausible and present a theoretical argument explaining why TIF might reduce municipal growth.

    TIF is not Free Money. Randal O’Toole. Originally created with good intentions, tax-increment financing (TIF) has become a way for city officials to enhance their power by taking money from schools and other essential urban services and giving it to politically connected developers. It is also often used to promote the social engineering goals of urban planners. … Legislators should recognize that TIF no longer has a reason to exist, and it didn’t even work when it did. They should repeal the laws allowing cities to use TIF and encourage cities to instead rely on developers who build things that people want, not things that planners think they should have.

    Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth. Paul F. Byrne. Increasingly, municipal leaders justify their use of tax increment financing (TIF) by touting its role in improving municipal employment. However, empirical studies on TIF have primarily examined TIF’s impact on property values, ignoring the claim that serves as the primary justification for its use. This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.

    Tax Increment Financing and Missouri: An Overview Of How TIF Impacts Local Jurisdictions. Paul F. Byrne. Tax Increment Financing (TIF) has become a common economic development tool throughout the United States. TIF takes the new taxes that a development generates and directs a portion of them to repay the costs of the project itself. … Supporters of TIF argue that it is a necessary tool for redevelopment in older communities. Detractors contend that it is used to simply subsidize development, and that variances in tax systems allow some governments to implement and benefit from TIF even if its use harms other levels of government. This study provides an overview of the history and basic structure of TIF. It then analyzes the basic tax components of a TIF plan and compares how various aspects, such as tax capture and tax competition, play out in the standard system of TIF. The study then reviews the economic literature on TIF, and ends with a direct application of how TIF operates within Missouri.

    The Right Tool for the Job? An analysis of Tax Increment Financing. Heartland Institute. Tax Increment Financing (TIF) is an economic development tool that uses the expected growth (or increment) in property tax revenues from a designated geographic area of a municipality to finance bonds used to pay for goods and services calculated to spur growth in the TIF district. The analysis performed for this study found TIF does not tend to produce a net increase in economic activity; favors large businesses over small businesses; often excludes local businesses and residents from the planning process; and operates in a manner that contradicts conventional notions of justice and fairness. We recommend seeking alternatives to TIF and reforms to TIF that make the process more democratic and the distribution of benefits more fair to residents of TIF districts.

    Giving Away the Store to Get a Store. Daniel McGraw, Reason. Largely because it promises something for nothing — an economic stimulus in exchange for tax revenue that otherwise would not materialize — this tool is becoming increasingly popular across the country. Originally used to help revive blighted or depressed areas, TIFs now appear in affluent neighborhoods, subsidizing high-end housing developments, big-box retailers, and shopping malls. And since most cities are using TIFs, businesses such as Cabela’s can play them off against each other to boost the handouts they receive simply to operate profit-making enterprises. … At a time when local governments’ efforts to foster development, from direct subsidies to the use of eminent domain to seize property for private development, are already out of control, TIFs only add to the problem: Although politicians portray TIFs as a great way to boost the local economy, there are hidden costs they don’t want taxpayers to know about. Cities generally assume they are not really giving anything up because the forgone tax revenue would not have been available in the absence of the development generated by the TIF. That assumption is often wrong.

    Do Tax Increment Finance Districts in Iowa Spur Regional Economic and Demographic Growth? David Swenson and Liesl Eathington. We found virtually no statistically meaningful economic, fiscal, and social correlates with this practice in our assessment; consequently, the evidence that we analyzed suggests that net positions are not being enhanced — that the overall expected benefits do not exceed the public’s costs.

  • Wichita should reject Bowllagio TIF district

    Update: Video of some testimony from the meeting is here.

    This week the Wichita City Council will consider more economic development through the creation of a tax increment financing (TIF) district. For the good of the city, the council should reject this proposal.

    Supporters of TIF — besides the obvious motivations of the developers who are directly enriched by them — point to the jobs and development that they say TIF creates. But there’s plenty of evidence to the contrary, on both jobs and development. Supporters also say TIF has no cost, which, if true, calls into question the entire justification for taxation. This matter also — again — illustrates the need for pay-to-play laws, as some council members will be voting whether to directly enrich their campaign contributors.

    The city documents for this proposal are at Wichita Public Hearing on the Establishment of the Maize 54 Redevelopment District (Tax Increment Financing).

    Effect of TIF on development

    As far as increased development: Yes, that generally happens within the TIF district. But what about the overall city? The answer is that TIF is harmful. Richard F. Dye and David F. Merriman have studied tax increment financing extensively. Their paper The Effects of Tax Increment Financing on Economic Development bluntly states the overall impact of TIF: “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not.”

    Later in the same paper the authors conclude: “These findings suggest that TIF trades off higher growth in the TIF district for lower growth elsewhere. This hypothesis is bolstered by other empirical findings.”

    Summarizing, the authors write:

    In summary, the empirical evidence suggests that TIF adoption has a real cost for municipal growth rates. Municipalities that elect to adopt TIF stimulate the growth of blighted areas at the expense of the larger town. We doubt that most municipal decision-makers are aware of this tradeoff or that they would willingly sacrifice significant municipal growth to create TIF districts. Our results present an opportunity to ponder the issue of whether, and how much, overall municipal growth should be sacrificed to encourage the development of blighted areas.

    In their later article Tax Increment Financing: A Tool for Local Economic Development, Dye and Merriman further explain the results of their research:

    TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable.

    So TIFs are good for the favored development that receives the subsidy — not a surprising finding. It’s what elected officials, bureaucrats, and newspaper editorial writers can see and focus on. But what about the rest of the city? Continuing from the same study:

    If the use of tax increment financing stimulates economic development, there should be a positive relationship between TIF adoption and overall growth in municipalities. This did not occur. If, on the other hand, TIF merely moves capital around within a municipality, there should be no relationship between TIF adoption and growth. What we find, however, is a negative relationship. Municipalities that use TIF do worse.

    We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF. (emphasis added)

    So if we are concerned about overall growth in Wichita, we need to realize that TIF simply shifts development from one place to another. The overall impact, according to uncontroverted research, is negative: less growth, not more.

    TIF and jobs

    When justifying the use of tax increment financing (TIF districts) elected officials, bureaucrats, and newspaper editorial writers often point to the jobs that will be created. Indeed, when a TIF district is created, economic activity usually happens within the district, and it’s easy to observe people working at jobs.

    But when deciding whether TIF is a wise economic development policy, we need to look beyond the boundaries of the TIF district and look at the effect on the entire economy of the city or region.

    One person who has done this is Paul F. Byrne of Washburn University. He authored a recent report titled Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth. In its abstract we find this conclusion regarding the impact of TIF on jobs:

    Increasingly, municipal leaders justify their use of tax increment financing (TIF) by touting its role in improving municipal employment. However, empirical studies on TIF have primarily examined TIF’s impact on property values, ignoring the claim that serves as the primary justification for its use. This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district. (emphasis added)

    While this research might be used to support a TIF district for industrial development, TIF in Wichita is primarily used for retail development. When looking at the entire picture, the effect on employment of tax increment financing used for retail development is negative.

    We must conclude that TIF does not meet the goals of increased development and/or jobs, if we consider the impact on everyone. What we’re left with is the well-known problem that public choice economics — the economics of politics — has described: Concentrated benefits and dispersed costs. It’s the reason why those who seek enrichment at Wichita City Hall and other governments make so many political campaign contributions.

    TIF is not free money

    Supporters of TIF usually contend that TIF has no cost. This is not the case. This new development will consume fire, police, and other governmental services, but will not contribute its share of property taxes to pay for these. Instead, some portion of the property taxes will be redirected back to the TIF district to benefit the developers. Others will have to pay taxes to make up this deficit, or will have to accept a reduced level of service. See Tax increment financing is not free money.

    There’s also the “but-for” argument: without the benefit of TIF, the project will not be built, and therefore no tax revenue would be received. It’s a powerful argument, if it were really true. But those who seek this type of government funding can always find a way to make their financial projections “prove” the need for TIF money. Governments then take them at their word.

    We might ask ourselves this question: If TIF is truly without cost, why not have more TIF districts? Why not offer TIF for all new development?

    Maxwell, in particular

    We also need to look at the characteristics of this applicant. The Wichita Business Journal reported this regarding a company Maxwell owned:

    Pixius proposes to repay, over a 10-year period, $1.3 million of a $6.4 million loan from the U.S. Department of Agriculture’s Rural Utilities Service, according to court documents. The loan was part of a 2002 Farm Bill pilot program that loaned more than $180 million to ISPs to expand Internet service to rural areas.

    “To my memory … Pixius is the only one (to receive a loan) that’s had to file bankruptcy to work out of its situation,” says Claiborn Crain, USDA spokesman.

    When the government helped out Maxwell in the past, it cost taxpayers $5.1 million in a loan discharged in bankruptcy. His company is set apart from other similar companies in that, according to the USDA spokesman, only Maxwell’s declared bankruptcy.

    I suggest that Maxwell has had his turn at the government funding trough. Taxpayers can’t afford to give him another.

    Wichita Public Hearing on the Establishment of the Maize 54 Redevelopment District (TaxIncrement Financing)

  • Wichita waltzing waters dedication a chance to reflect

    This week there will be two dedication ceremonies for the “Waltzing Waters” display at Wichita’s WaterWalk. One is an invitation-only affair for VIPs, while the other is open to the public. While these events are promoted as celebrations, we might use this opportunity to review the history and impact of this project that has absorbed many millions of taxpayer subsidy with few results.

    In 2009 a Wichita Eagle editorial started with this: “Seven years into a project that was supposed to give Wichita a grand gathering place full of shops, restaurants and night spots as well as offices and condos, some City Council members and citizens remain skeptical at best about WaterWalk’s ability to deliver on its big promises. … True, the skepticism to date is richly deserved.”

    The editorial went on to report that public investment in this project has risen to $41 million.

    In any case, there’s little to show for this investment. Even the proposal for the redevelopment of downtown Wichita from the planning firm Goody Clancy realizes that WaterWalk is a failure:

    Indeed, Water Walk might be struggling to fill its space because it has, simply put, hit a ceiling: it is focusing on food and fun, and perhaps there is room for only one such district (Old Town) in Downtown Wichita. The Arena could help in this regard, but until the publicly subsidized Water Walk is a rousing success, it might not make sense to split the pie still further.

    After all the public money put into WaterWalk, in order to get anything else, we’ll probably have to give even more. In 2010, in order to build a Marriott Fairfield Inn and Suites Hotel at WaterWalk, several subsidies were used, including a $2.5 million cash contribution from the City of Wichita. See Waterwalk hotel deal breaks new ground for Wichita subsidies. Will anything else be built at WaterWalk without similar consideration?

    So taxpayers deserve a break and a celebration. Finally, the fountains, purchased in 2008 for $1.6 million, will be working. The entire fountains project cost $3.5 million, says a Wichita city document.

    Waltzing Waters VIP invitation. Click here for a larger version.

    But do VIPs deserve a special celebration? With drinks and hors d’oeuvres, with a desert bar after? Many of these VIPs will be the elected officials and bureaucrats responsible for WaterWalk, a project emblematic of the failure of government planning. Others will be the beneficiaries of Wichita taxpayer subsidies. They should be apologetic, not celebratory. Hopefully the expenses of this event will be borne privately, and not by taxpayers. But that brings up another issue: the pay-to-play environment that exists in Wichita.

    With this glaring example of failure of a public-private partnership staring right at us in downtown Wichita, why do we want to plan for more of this? Shouldn’t we at least wait until WaterWalk is finished (if that ever happens) before we go down the path of throwing more public investment into the hands of subsidy-seeking developers?

    At minimum, we ought to insist that the developers of the WaterWalk project be excluded from any consideration for further taxpayer subsidy. The WaterWalk development team: Dave Burk, Marketplace Properties, LLC; Jack P. DeBoer, Consolidated Holdings, Inc.; Gregory H. Kossover, Consolidated Holdings, Inc.; David E. Wells, Key Construction, Inc.; and Tom Johnson, CRE, WaterWalk LLC need to recognize their failure and the tremendous amount they have cost the Wichita taxpayer. Some of these parties are no longer involved in WaterWalk, but they harm they caused lingers. Some of these parties have received millions in subsidies from the city since then, including a no-bid construction contract awarded to Key Construction. When that contract was put out to public bid, city taxpayers saved $1.3 million on a $6 million project. See No-bid contracts a problem in Wichita.

    Some received a no-interest and low-interest loan from the city to prop up a failing TIF district, and Burk appealed property valuations in a way that caused a tax increment financing district to fall behind.

    The Wichita Eagle reported: “Downtown Wichita’s leading developer, David Burk, represented himself as an agent of the city — without the city’s knowledge or consent — to cut his taxes on publicly owned property he leases in the Old Town Cinema Plaza, according to court records and the city attorney. … Officials in the city legal department said that while Burk was within his rights to appeal taxes on another city-supported building in the Cinema Plaza, he did not have authorization to file an appeal on the city-owned parking/retail space he leases. … As for Burk signing documents as the city’s representative, ‘I do have a problem with it,’ said City Attorney Gary Rebenstorf, adding that he intends to investigate further.”

    In a later story the Eagle reported “A special tax district formed by Wichita to assist in the development of the Old Town cinema project can’t cover its debt payments because the developers — including the city itself — petitioned a state court and got their property taxes reduced, records show. Now, taxpayers could be on the hook for $190,000 that had been projected to have come from within the cinema district.”

    Wichita taxpayers should be relieved that at least they’re finally getting something for their investment. Let’s use this time, however, to learn the lessons of WaterWalk and centralized government planning.

  • Wichita economic development initiatives to be announced

    Tomorrow the Wichita Metro Chamber of Commerce will announce, according to the Wichita Eagle, new economic development initiatives. Said to be the product of months of discussion, past history suggests that the efforts will not be fruitful for the Wichita area. The inclinations of the parties involved in this effort are for more government intervention and less reliance on economic freedom and free markets.

    Do economic development incentives work?

    Judging the effectiveness of economic development incentives requires looking for the unseen effects as well as what is easily seen. It’s easy to see groundbreaking and ribbon cutting ceremonies. It’s more difficult to see that the harm that government intervention causes.

    That’s assuming that the incentives even work as advertised in the first place. Alan Peters and Peter Fisher, in their paper titled The Failures of Economic Development Incentives published in Journal of the American Planning Association, wrote on the effects of incentives. 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.

    Other economists have studied tax increment financing (TIF) and have concluded that it is an overall negative factor for the entire region where it is used. Another study found that TIF districts created for retail use had a negative effect on municipal employment.

    Last week Dave Trabert wrote in the Kansas Policy Institute blog: “There’s a very simple reason that these well-intended initiatives haven’t worked: local government and their public-private partners are offering employers what they want them to have instead of what they need to create jobs. The Wichita Chamber’s own survey of business owners said taxes were too high. WIBA’s member survey identified tax and regulatory issues as their top concerns, as did the US Chamber of Commerce. Yet government and their public-private partners ignore what the customer wants because they don’t want the same things.”

    Wichita’s record on economic development

    Earlier this year Wichita Mayor Carl Brewer 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.

    It’s also likely that the city’s economic development efforts were not responsible for a large proportion of these jobs. But government still takes credit. Also, the mayor did not mention the costs of creating these jobs. These costs have a negative economic impact on those who pay them. 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.

    There’s even confusion over whether our efforts are working. In 2005, a Wichita Eagle editorial commented on a GWEDC report: “Among the points in Thursday’s report worthy of pride was this: the observation by coalition president J.V. Lentell that he’s never seen the cooperation on economic development between the public and private sectors as good as it is now. ‘I’m here to tell you, I think it’s on track,’ Lentell said, emphatically.” (July 29, 2005)

    But in January of this year, an Eagle article listed several things Wichita needs, such as free land and buildings, money for closing deals, and a larger promotions budget. The reporter concluded “The missing pieces have been obvious for years, but haven’t materialized for one reason or another.”

    So even if we believe that an active role for government is best, we have to conclude that our efforts aren’t working. Several long-serving politicians and bureaucrats that have presided over this failure: Mayor Carl Brewer has been on the city council or served as mayor since 2001. Economic development director Allen Bell has been working for the city since 1992. City Attorney Gary Rebenstorf has served for many years. At Sedgwick County, manager William Buchanan has held that position for 21 years. On the Sedgwick County Commission, Dave Unruh has been in office since 2003, and Tim Norton since 2001. (Unruh has said he wants to be Wichita’s next mayor.)

    These people all believe in government-directed economic development. We need to hold them accountable.

    Finally, consider Wichita job growth. As shown in the accompanying chart, the growth in government employees has outstripped private sector job growth. The increase in local government employees is particularly striking.

    Wichita job growthWichita job growth. Data is indexed, with 1990 equal to 1. Source: Bureau of Labor Statistics.

    What our leaders want

    I don’t know what will be in the economic development plan, but it is possible — likely, even — that there will be a call for a tax revenue stream for economic development. In February a company location consultant told Wichita leaders “Successful communities need a dedicated stream of money for economic development.” The news story reported “He was preaching to the choir. GWEDC leaders have been saying for some time that now is the time to go to the business community and the public to make the case for more money and resources.” (Consultant: Wichita needs sites, closing fund to lure business, Wichita Eagle February 16, 2012.)

    Wichita leaders continually call for more “tools in the toolbox” for economic development. They have spoken approvingly of a sales tax for such purposes. Money, of course, is what funds the tools.

    At one time local chambers of commerce would oppose tax increases. They would promote free market principles as the way to create a positive business environment. But this year it was the official position of the Wichita Chamber that eight government subsidy programs was not enough for a downtown hotel, and that there should be a ninth.

    A few years ago Stephen Moore wrote a piece for the Wall Street Journal that that shows how very often, local chambers of commerce support principles of crony capitalism instead of pro-growth policies that support free enterprise and genuine capitalism: “The Chamber of Commerce, long a supporter of limited government and low taxes, was part of the coalition backing the Reagan revolution in the 1980s. On the national level, the organization still follows a pro-growth agenda — but thanks to an astonishing political transformation, many chambers of commerce on the state and local level have been abandoning these goals. They’re becoming, in effect, lobbyists for big government. … In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses — at least those not connected at the hip with government — to prosper. Journalist Tim Carney agrees: All too often, he notes in his recent book, ‘Rip-Off,’ ‘state and local chambers have become corrupted by the lure of big dollar corporate welfare schemes.’”

    Does Wichita have the will?

    Dr. Art Hall, who is Director of the Center for Applied Economics at the Kansas University School of Business has made a convincing case that less government involvement, not more, is needed. He argues that a dynamic economy is what Kansas needs, not one where government directs taxpayer investment for economic growth.

    Hall writes this regarding “benchmarking” — the bidding wars for large employers that are the foundation of Wichita economic development, and the battle for which Wichita is likely preparing: “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.”

    Hall’s paper on this topic is Embracing Dynamism: The Next Phase in Kansas Economic Development Policy.

    We need to recognize that government as active investor doesn’t work. A serious problem with a 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 economic freedom and 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, as will probably be the key feature of Wichita’s new economic development plan.

    But Wichita’s mayor is openly dismissive of economic freedom, free markets, and limited government, calling these principles “simplistic.” Instead, he and most others prefer cronyism and corporate welfare. That hasn’t worked very well so far, and is not likely to work in the future.

  • For Wichita’s Block 1 garage, public allocation is now zero parking spaces

    A downtown Wichita parking garage paid for by taxpayers now offers zero parking spaces to the public.

    That’s one way to interpret information contained in a budget request for the garage located at 123 South Topeka. The block the garage is in is now branded as “Block 1.” It holds the Ambassador Hotel, Kansas Health Foundation, the Henry’s Building under renovation, and the Kansas Leadership Center building under construction.

    The garage is being paid for with a combination of tax increment financing and capital improvement program funds. The original plan called for 282 parking stalls. The Ambassador Hotel would take 125 stalls of the 282. Slawson, for the renovation of the Henry’s building, would take up to 100 stalls. This left 57 stalls for public use, which was promoted as a huge asset to downtown Wichita and justification for building the garage with TIF and CIP funds.

    Now, according to the budget, the plan is for 270 stalls in the garage, less 125 for the hotel, less 100 for Slawson, and now less 45 for the Kansas Leadership Center building. That leaves precisely zero stalls for public use.

    It’s not quite that simple, as Slawson will use its spaces only during the workday, leaving them available to the public evenings and weekends. Probably the same arrangement will be made for the Kansas Leadership Center.

    The city also conducted a parking demand model for the garage. According to the study made available by the city manager’s office, the peak weekday demand for spaces will be 171, leaving 99 spaces available for public use.

    The same study indicates that from 135 to 147 spaces will be available in evenings and on weekends.

    But there’s an agreement the city has with the Ambassador Hotel and Slawson. Section 4 is titled “Parking Arrangements.” It speaks of “guaranteed availability” of the 125 hotel spaces. It repeats the same language for the Slawson spaces.

    What if the hotel and Slawson want to make sure their spaces, 225 in total, are all available for their use? Guaranteed to be available, as specified in the developer agreement? And if the Kansas Leadership Center asks for the same guaranteed availability agreement for their 45 spaces, what then?

    This item is on the consent agenda, where items deemed to be non-controversial are voted on in bulk, perhaps two dozen at a time. Unless a council member asks to have this item “pulled” for discussion and a possible vote separate from the other consent items, there will be no discussion of this issue.

    Finally, the availability of parking spaces for public use evenings and weekends is welcome. As the garage is very close to the Intrust Bank Arena, they will be useful.

    But for long stretches of the year, they won’t be used very often.

    In 2011, there were two events in the month of June at Intrust Bank Arena. There were three in July, three in August, and three in September. This year, according to the event calendar on the arena’s website, there were no events in July and August.

  • In Wichita, a gentle clawback

    Tomorrow’s Wichita City Council meeting will consider a clawback provision for a forgivable loan made by the city. It’s on the consent agenda, so it is unlikely there will be any discussion.

    Clawbacks are mechanisms whereby government can be paid back for the cost of economic development subsidies when companies don’t achieve the promised goals, usually employment levels or capital investment. Officials like to look tough on this issue, so they can say they’re fighting for the interests of the taxpayer. An example is Wichita City Council Member Jeff Longwell, who during his recent campaign was quoted by the Wichita Eagle on this topic: “We need to be consistent with policies that provide a positive return on investment and hold companies accountable with personal guarantees that include claw-back features to protect the taxpayers’ investment.”

    It turns out, however, that clawbacks are often difficult to enforce. The most likely reason a company may not meet employment or investment targets is that the company is not performing well financially. This is the case with a Wichita company that received a forgivable loan of $62,000 from the city five years ago. The company has not met the agreed job levels, so it must repay the loan.

    But, according to city documents: “the severe downturn in the aviation industry prevented the firm from growing its business as projected.” So the city is allowing the company to repay the loan in five annual installments.

    By the way, in 2010 the city granted this company, Burnham Composite Structures, Inc., a property tax exemption worth an estimated $105,746 per year.

    Sometimes the city council simply doesn’t want to enforce clawback agreements. Last year the council granted a bailout to Reverend Kevass Harding and his underperforming tax increment financing (TIF) district. New considerations showed that the project would not generate enough incremental property tax revenue to pay the TIF bonds. This should not have been a problem for the city, as the agreement with Harding contained this provision: “The developer will be required by the development agreement to provide satisfactory guarantees for the payment of any shortfall in TIF revenues available for debt service on all ‘full faith and credit’ TIF bonds issued by the City for this TIF district.”

    So the city could have held Harding to his promise and taxpayers wouldn’t be hurt, at least not any more than the formation of the TIF district itself hurt.

    Despite this provision, the city refinanced the TIF debt using the city’s debt service fund, charging Harding and his partners the same interest rate the city itself pays. See Ken-Mar TIF district, the bailouts.

  • Sedgwick County will hold Southfork TIF hearing

    Since the Wichita City Council passed a resolution authorizing the formation of the Southfork tax increment financing district, the affected county (Sedgwick) and school district (Wichita) have an opportunity to veto the district’s formation. They don’t have to take action to approve the district — only silent assent is required. But they can take action, as Sedgwick County did in January, to cancel the formation of the district.

    At Tuesday’s commission staff meeting, commission chair Tim Norton along with commissioners Dave Unruh and Jim Skelton didn’t believe a public hearing was necessary the matter should not be placed on the agenda. That would mean the county gave its silent consent to the district’s formation.

    But after learning of that action, myself and at least two others contacted the county manager’s office and asked to be placed on the public agenda portion of the meeting, where citizens may address any topic.

    Whether we would be allowed to speak was touch-and-go. County policy is that speakers must “provide your request in writing to the Sedgwick County Manager’s Office at least nine days prior to the meeting date.” The emphasis is in the original. (I wonder if email counts as writing?)

    (That lengthy nine day lead time is a problem in itself. I believe that good public policy requires that the lead time be at least one day less than the period between meetings of the body, which is case of this commission, is normally seven days.)

    But late Tuesday someone at the courthouse had a change of heart or mind, and now there will be a public hearing on Wednesday May 9th on this matter. Strictly speaking, it’s not a public hearing, but the item will be on the agenda, and it’s anticipated that chairman Norton will allow the public to address the commissioners on this issue.

    I can understand (but not approve of) the motives of the three commissioners who approve of this district not wanting to hear members of the public speak against this item and their policies. Especially when the public has shown their skepticism on these matters, an example being the vote turning down an incentive for the Wichita Ambassador Hotel. In that election, voters repudiated the big-spending, big-government programs of the liberal Republicans on the Wichita City Council. If citizens could vote on the formation of this TIF ddistrict, commissioners Skelton and Unruh might find themselves in the same situation.