Voice For Liberty

Tag: Tax increment financing

  • Wichita’s Jeff Longwell on TIF districts, tax abatements

    Is a tax increment financing (TIF) district a tax abatement? Wichita city council member Jeff Longwell, now Wichita’s vice mayor, doesn’t think so. During this week’s city council meeting, Longwell said this in explaining his support of a TIF district created for the benefit of Real Development: “One of the things that people I think need to understand is that this is not a tax abatement.”

    He said tax revenues will increase from $28,000 to half a million dollars, repeating that it is not a tax abatement.

    So is it true that TIF is not a tax abatement?

    A little background: The Wichita City council grants property tax abatements regularly as part of its Industrial Revenue Bond program. In the IRB program, the city is not the lender of funds, and it does not guarantee that the bonds will be repaid. Instead, the benefit of the IRB program is that the applicant won’t have to pay property tax on property purchased with the bond money. This abatement is generally granted for a period of ten years, although it is reviewed after five years to see if the company is fulfilling the promises it made to justify the tax abatement. In addition, a sales tax exemption may be granted on the property purchased with the bond money.

    Confused? Many people are. A few weeks ago the city issued IRBs to a Wichita movie theater operator. Comments left at various online forums often argued that the city should not be lending money to the theater and its controversial ownership group. But as we’ve seen, the city is not making a loan. Instead, the IRB program is simply a vehicle that is used to grant relief from paying property taxes to the city, county, and school district.

    So the IRB program, despite its name, is a tax abatement program. What about tax increment financing, then?

    Under TIF, a district is formed. The property taxes being paid by a property in the district at the time of formation is noted and called the base. Usually this property is blighted or run-down, so this base is a very low value.

    Then a development plan is created, perhaps to build apartments or a shopping center. Based on that plan and the property taxes that the completed project will likely pay, the city will borrow money and give it to the developers.

    After the project is completed, the tax appraiser notices that there’s something new and valuable where there wasn’t before, and he levies a higher tax bill on the property. The difference between the original taxes — the base — and the new taxes is called the increment.

    Under normal conditions when new property comes on the tax rolls, the tax revenue is used to provide public services such as police and fire protection. The school district is usually a recipient of a large portion of the new tax revenue, which might be used to pay for the schooling of residents of the new apartments, for example.

    But in a TIF district, what happens to this new tax revenue — the increment?

    Recall that the city borrowed money and gave it to the developers. The new property taxes — the increment — is used to pay off these bonds.

    So council member Longwell is correct, in a way. Real Development will pay increased property taxes.

    But when these increased taxes are used to pay off bonds that exclusively benefit Real Development, how is this any different from not paying property taxes?

    Consider development not in a TIF district. Developers generally borrow money. Then they have to make loan payments and higher tax payments.

    But TIF developers pay only higher taxes. There are no loan payments, as their increased property tax payments are used to pay off the loan.

    So when considering the total economic reality, council member Longwell is wrong. Several other council members have the same mistaken belief.

    Tax increment financing is a tax abatement in disguise. Actually, it’s worse than that. Tax abatements granted in the IRB program don’t require the city to be on the hook for a loan. But in a TIF district, the city is the lender, and city taxpayers are liable if the TIF district doesn’t perform up to projections. This has happened in Wichita, and taxpayers had to pay in one way or another.

    Why is Longwell, now Wichita’s vice mayor, unable to grasp these facts? Perhaps he does but chooses to ignore them. He has a reason to do so. Downtown Wichita real estate developers — let’s be clear: developers who seek public subsidy instead of working to meet market demand — are generous with campaign contributions, funding both political liberals like Wichita city council member Janet Miller and self-styled fiscal conservatives such as Longwell.

    Longwell’s term expires next spring, and he may choose to run for his same office or even the mayor’s office, as some political observers have speculated.

    Longwell has already drawn one challenger for his city council position, tea party activist Lynda Tyler. While lacking experience holding elective office, Tyler has well-established conservative credentials and can be expected to run a vigorous and well-funded campaign.

    Longwell, who along with Wichita Mayor Carl Brewer complains that Wichita doesn’t have enough “tools in the toolbox” for dishing out economic development incentives to politically-connected city hall insiders, will have to explain his actions to voters in his largely conservative west-side district.

    Someone should ask him if he really understands the economic reality of tax increment financing districts.

  • Tax increment financing is not free money

    Cato Institute Senior Fellow Randal O’Toole has written extensively on the subject of urban planning, development, and tax increment financing (TIF) districts. The following article contains many points that the Wichita City Council may wish to consider as it considers expansion of a downtown Wichita TIF district at tomorrow’s council meeting.

    O’Toole was in Wichita earlier this year. Coverage of a lecture he delivered at that time is Randal O’Toole discusses urban planning in Wichita.

    The author of The Best-Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future, O’Toole’s latest book is Gridlock: Why We’re Stuck in Traffic and What to Do About It.

    TIF is Not “Free Money”

    By 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.

    TIF is based on the idea that public improvements to a neighborhood or district will lead developers to invest in that district. To finance such public improvements, cities are allowed to keep the “increment” or increased property taxes collected from the area. Typically, planners estimate in advance how much new property tax the city can collect and then sell bonds that will be repaid out of those taxes. The revenues from the bonds are used to pay for the improvements.

    Read the rest of the article at the North Dakota Policy Council.

  • Wichita proposed tax increment financing district subject of news

    Today’s Wichita Eagle carries two news stories regarding the proposed expansion of a downtown Wichita tax increment financing (TIF) district. The front-page story Condo vote key to downtown Wichita growth and the additional story Owners report mixed views of developers provided background on the vote the Wichita City Council may make at Tuesday’s 9:00 am meeting.

    The second article provides insight into Real Development’s track record in Wichita. While success in any real estate venture is not guaranteed, certain types of arrangements seem to have a high likelihood of problems, and these are reported on in the article.

    Not mentioned is the problems at the Lofts at St. Francis, a Real Development residential condominium project. Last summer I reported on how this building’s facade needed repair, and the city needed to intervene in order to finance the repairs. I wrote, and testified in front of the city council, that the inability of the homeowners association to deal on its own with such a simple matter indicated a defect somewhere: “While the homeowners association and the condominium owners might not have anticipated that repairs would be needed so soon after the building’s opening, they must have contemplated that repairs and maintenance — to either exterior or interior common areas — would be needed at some time.”

    The city waived two guidelines in its facade improvement program so that special assessment financing could be granted to the owners of condominiums in this building.

    Some private parties have an interest in seeing Real Development — the “Minnesota Guys” — continue to receive subsidy from the City of Wichita. At Tuesday’s city council meeting, several businessmen testified on behalf of Real Development on the basis that this company is good for the future of downtown Wichita. Some of these, such as a current Key Construction executive, have an obvious financial motive for wanting the project to proceed with city subsidy.

    Others, such as a former Key Construction company executive, may also have financial motives that are not immediately obvious. In particular, two tenants of Real Development buildings testified. Joe Tigert, the manager of the New York Life office in Wichita, spoke on behalf of Real Development. He didn’t reveal that he’s a tenant of Real Development at 125 N. Market. Joe Lloyd of Liebherr-Aerospace also spoke in favor of Real Development. His office is at 105 S. Broadway, another Real Development property.

    Those who speak at Wichita City Council meetings are not required to disclose their motivations for speaking. And unlike the requirement at the federal and state level, those who are being paid to lobby the council are not required to disclose the fact that they are being paid, or who is paying them, or how much they spend lobbying.

    An underlying current of thought that is emerging is that because of its extensive holdings in downtown Wichita, Real Development is too big to fail. If the city doesn’t grant their request for expansion of the amount of the TIF district, the future of downtown Wichita is in doubt.

    Citizens ought to reject this argument. If we want to have a robust downtown Wichita, we need development that is grounded in solid free-market fundamentals. Development propped up with subsidy will not have the solid foundation that downtown needs if it is to be successful over the long term.

  • Taxpayer-funded development in Wichita opposed

    Following is the tesimony of John Todd before the Wichita City Council on April 13, 2010.

    Good morning Mayor and members of the Wichita City Council. My name is John Todd. I oppose the expansion of the Exchange Place TIF and incentive package you are considering today that benefits Real Development, a group of downtown developers commonly known by many people as the “Minnesota Guys.”

    Shortly after the Minnesota Guys arrived in Wichita a few short years ago, they were invited to address the Wichita Independent Business Association to share their development plans for downtown Wichita. A Real Development partner indicated to me that the first building they purchased in downtown Wichita was in the $0.81 per square foot range and that after renovation the housing units they were creating were selling in the $200 per square foot range. Their plan for downtown Wichita was exciting and I complemented them for their insight in recognizing the opportunity they had discovered and seized upon in our downtown area.

    After the formal presentation I personally complemented the Minnesota Guys and thanked them for what they were doing downtown. They assured me that their redevelopment work in our downtown would be completed without government incentives, and I assured them that they would have my support as long as they stayed out of the public treasury.

    Well, so much for that dialogue. Now they are asking for a bigger bite from the public apple.

    The 2007 TIF financing plan provided for a $6 million dollar tax funded parking garage, and now they need a $9.3 million dollar facility? The 2007 agreement provided for a $3 million dollar “City Improvement Expenditure” as city reimbursement to the developers for land acquisition, demolition, site preparation and such other “redevelopment project costs” as permitted by Kansas law. That number has grown to $3.325 million dollars under today’s proposal. Where does this money come from under this proposal? Please ask Allen Bell to explain.

    Please refer to page 37 of today’s proposal, “Projected Debt Service Schedule” for the Tax Increment Financing Bonds needed to finance this project. Using data that was available to the public last Friday, the principal amount for this project is shown as $10.6 million dollars plus $5.2 million dollars in interest for a total principal and interest projected total cost of $15.8 million dollars.

    Based on the 2009 Mill levy of 120.360, Wichita Public Schools would forgo an estimated $7.5 million dollars in tax revenues for this project over the course of the project bonds, with Sedgwick County taxpayers participating at an estimated $3.9 million and the City of Wichita taxpayers at $4.2 million. Since this TIF expansion involves taxes from other government entitles, this TIF expansion should require the approvals of the Wichita Public Schools and the Sedgwick County Board of County Commissioners.

    Cato Institute Senior Fellow Randal O’Toole has written about tax increment financing. “TIF does not increase the total amount of development that takes place in a city or region, it merely transfers development from one part of the region (or the city) to another. … The new developments in the TIF districts consume fire, police, and other (city) services, but since they don’t pay for those services, people in the rest of the city either have to pay higher taxes or accept a lower level of services. This means people outside the district lose twice: first when developments that might have enhanced their property values are enticed into the TIF district and second when they pay more taxes or receive less services because of the TIF district.”

    A TIF study by economists Richard Dye and David Merriman concludes that while TIF’s are good for the favored development, they may actually reduce the rate of economic growth in the rest of the city.

    Today, this council along with our mayor has the opportunity to say no to the expansion of this tax-funded project.

  • Topeka tax increment financing project struggles

    In Topeka, a residential and retail project funded with $5 million of tax increment financing (TIF) is in trouble, as the following story from the Topeka Capital-Journal describes.

    The project is titled the “College Hill Redevelopment District.” Wichita has its own College Hill neighborhood, and a residential project funded by tax increment financing there has not done well, either.

    Both of these projects are residential, and recent times have not been kind to residential real estate. Taxpayers are at risk when TIF districts do not meet their projections. Developers have the opportunity to earn profits to offset the losses they may incur from time to time. Taxpayers, like government, have no ability to profit from successful projects to make up for losses.

    College Hill project pushes on
    All 25 townhomes, 24,000 square feet of retail space remain unoccupied

    All 25 relatively new townhomes in Topeka’s College Hill Redevelopment District stand unoccupied.

    So does its 24,000 square feet of retail space.

    But developers behind the $30 million project to revitalize central Topeka’s College Hill business district say they remain committed. This month, they entered into a contract with a large retail brokerage firm that will work to bring in retail businesses.

    Read the rest of the story at the Topeka Capital-Journal.

  • Tax increment financing questions topic at Wichita city council meeting

    On Tuesday the Wichita city council heard a request by Real Development for a $2.5 million increase in tax increment financing on a downtown project. Discussion during the meeting revealed how little is known about the numbers that the city uses in deciding whether to participate in the project. Numbers that don’t make sense, plus the fact that the applicant has not responded to the city’s request for new numbers, indicate that this proposal should be rejected.

    A question that I asked referred to some numbers presented by in the materials supplied to council members in the public, specifically the total investment and market value for the project. When the project was revised for the first time in 2008, the plan called for total investment of $27,800,000, producing a project with market value of $33,803,000. In this plan the market value is greater than investment, which seems like a good thing.

    In the second revision presented to the council this week, here are the values: Total investment is $46,491,728, while the market value is $41,695,000. Now the market value is less than investment. In fact, it is ten percent less than the amount invested.

    I asked how are these market values determined, and is it wise to have investment that is so much greater than market value? In the video below, I think we can agree that a satisfactory answer was not provided.

    In particular, the city’s economic development chief Allen Bell said that he had asked the applicants for updated information on these figures, but had not received it. This was revealed at the time the council was being asked to make an investment of some ten million dollars of taxpayer funds.

    The fact that there was confusion, and data not made available to the city, at the time the council is being asked to make a decision casts quite a bit of doubt on the entire decision-making process.

    A second question I asked had to do with the fact that the TIF district is quite a bit larger than the specific buildings that are the subject of the TIF financing request, and not all the property in the district is owned by the applicants. I asked that as property values — and therefore tax payments — in the other property in the district rises, does its increased valuation go towards paying off the TIF bonds? The answer from Bell was no.

    A second question was what if these other property owners in the TIF district wanted to obtain TIF financing of their own. Does the fact that their property is already in a TIF district prevent them from receiving TIF financing? The answer from Bell was no.

  • Wichita Exchange Place TIF should be rejected

    Tomorrow’s meeting of the Wichita city council will feature a public hearing as to whether a tax increment financing district that benefits Real Development should be modified. The TIF district is already approved in the amount of $9.3 million. The applicants are asking that the city’s contribution be increased to $11.8 million, plus approval of changes to the project plan.

    The first issue we should address is the purpose of these public hearings. Presumably notice of their existence is given not only so citizens and interested parties can plan to attend, but also so that there can be discussion of the details of the issue. This second reason is not fulfilled to any meaningful extent. There just isn’t time for anything to happen. The agenda report for this matter did not appear on the city’s website until around noon Friday, just two business days before the hearing.

    Furthermore, the plan may be revised as late as today — the day before the public hearing — according to reporting in today’s Wichita Eagle.

    There needs to be more time if these public hearings are to be anything but a sham. The city approved April 13 as the date for the public hearing on March 23. So the public hearing is announced, but details of the project are not known. How will the public — much less city council members — become aware of the final plan?

    The plan to be heard tomorrow is the second revision of the original plan, which was first approved in 2007. Some may criticize Real Development for the shifting plan. But this is the nature of business. Change, however, is something that government bureaucracy is particularly ill-equipped to deal with.

    There are reasons to be concerned with these particular applicants. Several floors in buildings they own in Wichita have been subject of foreclosure actions. While it is not Real Development that failed to pay the loans that were foreclosed on, this happened in buildings Real Development owns and developed with a condominium-style of ownership.

    There is also issue of allegations made by tenants of Real Development that it is not performing on its obligations. These tenants will not come forward in public, as they are afraid that if the city stops subsidizing Real Development, the tenants will suffer.

    But the largest and overriding issue is that the city should not be directing taxpayer investment outside the market process. It is an undeniable fact that the city is considering forcing Wichita taxpayers to risk an investment of around $10 million in this project. And if the investment doesn’t work out, the city is likely to force Wichitans to spend even more money on this project, as the city did when it made a no-interest and low-interest loan to a downtown theater that was underperforming in its TIF district.

    It would be one thing if TIF districts were good for the city, but there is no such evidence. There is evidence that TIF districts are great for the developers — after all, wouldn’t like to have their increase in property taxes spent for their exclusive benefit, which is the purpose of a TIF district — but not so good for the rest of the city. The article Tax Increment Financing: A Tool for Local Economic Development by economists Richard F. Dye and David F. Merriman states, in its conclusion:

    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 — not a surprising finding. What about the rest of the city? Continuing from the same study:

    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.

    So TIF districts may actually reduce the rate of economic growth in the rest of the city.

    Cato Institute Senior Fellow Randal O’Toole has written this about tax increment financing:

    TIF does not increase the total amount of development that takes place in a city or region; it merely transfers development from one part of the region to another. … The new developments in the TIF districts consume fire, police, and other services, but since they don’t pay for those services, people in the rest of the city either have to pay higher taxes or accept a lower level of services. This means people outside the district lose twice: first when developments that might have enhanced their property values are enticed into the TIF district and second when they pay more taxes or receive less services because of the TIF district.

    Similar findings apply to the issuance of industrial revenue bonds, as the city issued last week and issues frequently.

    Finally, I have a simple question for the mayor, city council, and city staff: Will any downtown development occur without public subsidy?

    Resources on tax increment financing:

    Exchange Place Redevelopment Plan April 13, 2010

  • Wichita economic development incentives discussed

    At today’s meeting of the Wichita city council, economic development incentives were a topic of discussion.

    In his remarks, Wichita Mayor Carl Brewer ignores evidence that targeted economic development incentives — the type being considered — don’t produce economic growth for the community. He also expresses his disdain for free market concepts and those who believe in them.

    It was a bad day for economic freedom in Wichita. Not a single council member voted in favor of economic freedom over corporate welfare.

    Related: Wichita targeted economic development should end, Wichita Warren Theater IRB a TIF district in disguise.

  • Wichita targeted economic development should end

    Is the City of Wichita able to choose which companies are worthy of taxpayer assistance for the purposes of economic development?

    This week and next, the Wichita City Council will attempt to do this several times. It starts tomorrow with a theater owner’s request to avoid paying millions in property taxes. A food processing company is asking for similar treatment.

    Several downtown buildings are receiving special assessment financing for improvements. An ordinance allowing a downtown hotel to keep its guest tax collections for its own exclusive benefit will be voted on.

    The city will also decide whether to implement community improvement districts. These districts let a business add up to two cents on the dollar of sales tax, and keep that extra revenue for its own benefit. (One wonders why the business doesn’t simply increase its prices by two percent.)

    That’s all in one day’s work.

    The question Wichitans need to ask is simply this: Do these targeted economic development incentives work? The answer is, almost always, no.

    In 2008 the Kansas Legislative Division of Post Audit looked at the use of economic development incentives in Kansas, examining some $1.3 billion in spending over five years. In examining the literature, the auditors found: “Most studies of traditional economic development incentives suggest these incentives don’t have a significant impact on economic growth.”

    It also found: “The majority of research concludes there is a lack of demonstrated impact from the typical types of economic development assistance, and that incentives aren’t cost-effective.” The audit can be read at Economic Development: Determining the Amounts the State Has Spent on Economic Development Programs and the Economic Impacts on Kansas Counties.

    Recently Alan Cobb wrote of the harm that targeted incentives cause, using Detroit as an example: “While state and local government poured incentives into the Big Three’s trough, the marginal costs of doing business for everyone else crept up.”

    Wichita is taking the same path. Instead of competing in the market, businesses look to city hall for special treatment. When applicants ask government for special treatment at the expense of others, the economic term for that activity is rent seeking.

    The term rent, or more precisely, economic rent is somewhat unfortunate, as the common usage of the term — paying someone money for the use of an asset for a period of time — contains no sinister connotation. But economic rent does carry baggage.

    So what is rent seeking? Wikipedia defines it like this: “In economics, rent seeking occurs when an individual, organization or firm seeks to earn income by capturing economic rent through manipulation or exploitation of the economic environment, rather than by earning profits through economic transactions and the production of added wealth.”

    This explanation doesn’t do full justice to the term, because it doesn’t mention the role that government and politics usually play. The Concise Encyclopedia of Economics adds this: “The idea is simple but powerful. People are said to seek rents when they try to obtain benefits for themselves through the political arena. They typically do so by getting a subsidy for a good they produce or for being in a particular class of people, by getting a tariff on a good they produce, or by getting a special regulation that hampers their competitors.”

    It’s thought that Wichita needs to dish out economic development subsidies so that we can attract new companies to our town, or, as is often the case, retain existing companies. So we grant special tax treatment — usually through industrial revenue bonds, but also in other ways such as tax increment financing — to these companies. Or sometimes we may dispense with these cumbersome processes and simply give companies money or make loans that don’t need to be repaid.

    These benefits — representing economic rent and rent seeking behavior — are great for the lucky companies that received them. But what about considering the city or region as a whole? In that case, something different emerges. Here’s an excerpt from “Rent Seeking and Economic Growth: Evidence From the States,” Harold J. Brumm, Cato Journal, Vol. 19, No. 1 (Spring/Summer 1999):

    The present study finds the growth rate of real gross state product (GSP) per capita to be negatively correlated with the initial level of real GSP per capita, the burden of state tax structure, and — most notably — the level of rent-seeking activity in the state. On the basis of the estimates obtained for the standardized coefficients of the explanatory variables in the growth rate equation, the conclusion reached here is that rent-seeking activity has a relatively large negative effect on the rate of state economic growth. An implication of this finding is that a state government which promulgates policies that foster sustained artificial rent seeking does so at considerable expense to its economic growth.

    In simple terms, rent seeking activity harms economic growth.

    This study also states: “The private returns of rent seekers come from the redistribution of wealth, not from wealth creation. The tax that rent seeking imposes on the productive sector reduces the output growth rate by reducing the incentives of entrepreneurs to produce and innovate.”

    This study looked at state governments and their activities, but there’s reason to suspect that the findings apply to cities and counties, too.

    So should we simply give up and not grant preferential tax treatment and other subsidies to companies to induce them to locate in Wichita? No. Instead, as I’ve outlined in Wichita universal tax exemption could propel growth, we should offer preferential tax treatment to all new investment in Wichita.

    A broad policy like this, where everyone benefits, eliminates the harmful effects of rent seeking. All companies can benefit, not only those that fit into certain categories or make special pleadings to politicians or bureaucrats. All companies can plan with certainty on receiving the benefit — there won’t be the risk whether the city council and bureaucrats will approve the benefit.

    This is the type of policy we should follow to increase economic growth in Wichita.