Voice For Liberty

Tag: Tax increment financing

  • Downtown Wichita Arena TIF District Still a Bad Idea

    Say no to expansion of the Center City South Redevelopment tax increment financing (TIF) District.

    Remarks to be delivered at the December 2, 2008 meeting of the Wichita City Council. Watch the video here.

    Mr. Mayor, Members of the Council:

    It is the case the the City of Wichita is proposing to limit this TIF district spending to things like streets, intersections, landscaping, and lighting. But these are still things that developers working outside of TIF districts generally have to pay for themselves.

    This is the real function of TIF districts: TIF developers get to use their own property taxes to pay for things that non-TIF developers have to pay for out-of-pocket, or through special tax assessments on top of their regular property taxes. This is accomplished through a confusing arrangement that hides the reality and size of the subsidy given to TIF developers. I’ve come to realize that this confusion serves a useful purpose to this council, because if the people of Wichita knew what was really happening, they’d be outraged.

    The proposed TIF district, while smaller than previously proposed, is still large. Very large. Has anyone calculated what share of the retail and restaurant trade in Wichita would have to be captured by this district in order for it to be successful?

    Has anyone performed a market study to see if obtaining this market share would be feasible? And if feasible, what effect would this have on existing business and development in Wichita? Specifically, what effect would this have on other development in downtown, such as Old Town and Waterwalk? We’ve seen that when city-subsidized business is in financial trouble, this council is willing to fund a bailout.

    We’re at a point, Mr. Mayor, where entrepreneurs may not be willing to work in Wichita without a taxpayer subsidy, or at least not in competition with subsidized development. I am aware of a commercial development in Wichita that has been canceled because of Wichita’s tax environment. Some developers have told me that they are reconsidering whether to do any more business in Wichita simply because of our property tax environment. This situation has recently worsened, as we voted ourselves a large tax increase last month. At the state level, spending cuts or tax increases loom as the state’s budget situation deteriorates.

    Then, consider reporting in the Wichita Eagle this summer, which found this: “City and county tax records show that nearly $159 million in public money has been spent on Wichita’s tax increment financing districts, to get roughly $150 million worth of new development.” That’s not a good deal for city taxpayers.

    Also, evidence of the effectiveness of TIF districts for cities as a whole is not good. A study from the Institute of Government and Public Affairs at the University of Illinois finds that “cities, towns, and villages that had TIF districts actually grew more slowly than municipalities that did not use TIF.”

    Finally, Mr. Mayor, you’ve referred to some people as the “naysayers.” I don’t know if you were talking about me. It would be presumptuous of me to think so. But I don’t say “nay” to development, even to downtown development. What I say “no” to is taxpayer-subsidized development, planned and managed by government.

    Saying “no” to that, in turn, lets us say “yes” to the rich diversity of human individuality instead of a collectivist vision driven by government bureaucracy. It means saying “yes” to free people cooperating voluntarily through free markets. That is what is disappearing as more and more of our city’s development is subsidized and managed by government.

  • Wichita Mayor Carl Brewer’s Reformulated TIF Plan Still a Bad Idea

    Today the Wichita City Council holds a special meeting to consider a reformulated plan to provide tax increment financing (TIF) for the area surrounding the downtown Wichita arena. It’s still a bad idea.

    It appears there are two major changes in the new plan. First, the TIF district is smaller. Second, spending on the district would be 70 percent of the new property taxes — the “increment” — instead of 100 percent.

    Why is this plan a bad idea? Why, you may be asking, aren’t I in favor of development and progress in downtown?

    To me, there’s a difference between entrepreneurs working in markets and government centralized planning. That’s one of the reasons why I oppose this TIF district. It represents government making plans for us, rather than people deciding themselves what they want. It’s the difference between political entrepreneurs — who work to please elected officials — and market entrepreneurs — who work to please customers.

    If it turns out that when people express their preferences freely that they don’t really want much downtown development, that’s okay with me. I, for one, do not feel that I have the superior knowledge needed to tell people where they should go for fun and entertainment. I’d rather let people decide themselves.

    I’m not willing to use the blunt tool of government to direct people and their money to where I think it should go. I wouldn’t do that even if I was convinced I was right.

    But there are people in Wichita who don’t share my view of free people trading freely in free markets. Mayor Carl Brewer and several city council members — Sharon Fearey and Lavonta Williams being most prominent among them — and quasi-governmental organizations such as the Wichita Downtown Development Corporation feel differently. They feel that they know better than Wichitans do where development should be happening, and they’re willing to use the tools of government to force their vision upon you.

    This is what’s happening at this time. This is why Wichitans need to oppose this TIF district.

    Other article about TIF districts in Wichita: Do Wichita TIF Districts Create Value?, Downtown Wichita Arena TIF District, Wichita City Council’s Misunderstanding of Tax Increment Financing, Tax Increment Financing in Wichita Benefits Few, Tiff over Wichita TIFs, and Wichita City Manager’s Warning is Too Late.

  • Wichita School District: Don’t Give Up Your Tax and Revenue Base

    Remarks to be delivered to the Wichita school board on August 25, 2008.

    On August 5, 2008, the Wichita City Council greatly expanded an existing tax increment financing district. This board has 30 days from then to veto the city’s action. I want to explain why this board should do just that.

    The arithmetic behind TIF districts is simple. The city borrows money and spends it on things that the developers need to make their project work financially. Then, as property values in the district rise, the new additional property tax revenue is used to pay back the city.

    Often it is said that what the city spends the TIF money on is infrastructure, the types of things that cities do routinely. But when developers working outside of TIF districts need things like streets, turn lanes, sewers, water supply lines, street lights, landscaping, and new traffic lights, the developers either pay for these things themselves, or the city builds them and assesses special taxes against the property to pay for these items.

    So while a TIF district doesn’t let developers escape paying increased property taxes, it lets them keep these increased taxes within the TIF district for their own benefit. In non-TIF developments, the new taxes are available for the funding of general government, including USD 259. John Todd will talk about the magnitude of these numbers, but in the case of the expansion of the Center City South Redevelopment District, the numbers are large. Very large.

    It is often said that taxing districts like USD 259 aren’t really giving up anything when they agree to the formation of a TIF district. We’re told by developers and politicians that without the benefit of the TIF district there won’t be any new development. But the reality is usually different. As recently reported in the Wichita Eagle, rarely is the choice between all or nothing. The choice between development in a TIF district or nothing is usually false.

    Also, TIF districts are harmful to the overall community and tax base. Economists tell us that cities that use TIF grow slower than cities that don’t, and that there is no evidence of broad economic or social benefits in light of the costs.

    Just a year ago this board raised the property tax rate. Presently the community is being asked to increase tax rates further by investing in a bond issue. When the City of Wichita allows property to escape the tax rolls and this board agrees with that action, it places an even higher burden on those residents and businesses that can’t take advantage of TIF districts. Plus, it gives up a stream of tax revenue. That’s why this board should veto the creation of this, and other, TIF districts.

  • Tiff over Wichita TIFs

    A post titled Keeping TIFs from a public tiff by Wichita Eagle business reporter Bill Wilson on the Eagle’s Business Casual blog reveals his bias in favor of government over individual action and preference.

    My post The Wichita Eagle’s Preference For Government documents one such example from the past. In this blog post Mr. Wilson reveals more of this preference and the faulty assumptions that go along with it.

    For example, he speaks of the need to “incentivize development.” Incentives are designed to get people to do something they wouldn’t do on their own. That pretty much describes downtown development. I’m sure that Mr. Wilson is aware that there’s lots of development going on in Wichita. It’s just not where politicians such as Wichita mayor Carl Brewer and council member Sharon Fearey want it to be. Add journalists like Mr. Wilson to this list, apparently. The Wichita Eagle editorial board has been on this list for a long time.

    There’s nothing magic about downtown. The fact that people, when spending and investing their own funds, overwhelmingly choose to take action somewhere other than downtown is direct evidence of that. How arrogant is it for politicians and bureaucrats to overrule these decisions made freely by people acting in their own best interest?

    In a comment, Mr. Wilson states “I have a hard time equating TIF money with a direct government handout …” I would encourage him to read the post Wichita City Council’s Misunderstanding of Tax Increment Financing, in which the author explains how TIF financing is, in fact, a direct subsidy to developers. I would be interested to see if Mr. Wilson can develop a refutation to this argument.

    Mr. Wilson also writes of the need for “proper analysis and monitoring” of TIF district proposals. But government is ill-suited for either task. Politicians and government bureaucrats face a different set of incentives from private developers. Politicians seek to please their campaign contributers so they can be re-elected. Bureaucrats seek to preserve their own jobs and increase their domain of influence and power.

    Market entrepreneurs, however, are directly accountable to their customers through the profit and loss system. If they do a good job anticipating what customers want, and if they are able to efficiently deliver what customers want, they’ll earn a profit. If not, they either change or go out of business.

    Politicians and bureaucrats do not face such a stern taskmaster. When their decisions turn out to be faulty, the usual response is to pour more money into something that should be allowed to die. An example is the Old Town Warren Theater.

  • Testimony Opposing Tax Increment Financing for the Ken Mar Redevelopment Project

    Testimony of John Todd, opposing the formation of a tax increment financing (TIF) district, delivered to the Wichita City Council on August 12, 2008.

    Mr. Mayor and members of the Wichita City Council, thank you for allowing me this opportunity to speak before you today. My name is John Todd. I stand before you today as a citizen in opposition to the Establishment of a Redevelopment District, Tax Increment Financing for the Ken Mar Redevelopment Project. (District I)

    There are dozens of neighborhood shopping centers across Wichita that have a greater need for redevelopment than the Ken Mar shopping center that you are considering for public taxpayer assistance today.

    The question that needs to be answered today is, “What is the Proper Role of Government Relating to Economic Development Activity?” And the specific question the council needs to answer before granting public money for this project is: “Why is the Ken Mar shopping center being considered for public money, and not the dozens of similar shopping centers across our city, with particular emphasis on those dozens of centers possessing greater redevelopment needs than Ken Mar?”

    It is my understanding that the proposed Ken Mar TIF is $2.5 million dollars. A commercial real estate broker friend of mine advised me that in his opinion, the Ken Mar center redevelopment project would not work without the $2.5 million public cash infusion. My reply to this observation: 1. If the potential owners/buyers for Ken Mar have not closed on their purchase transaction of the shopping center, perhaps as part of their contract “due diligence” clause, they need to negotiate $2.5 million dollars off the purchase price of the Ken Mar center, and in the event they fail to obtain the lower purchase price, they need to either scale back their plans for the redevelopment of the center or to simply walk away from the project since the project is not economically feasible for them. 2. Or, if on the other hand, the current owners of Ken Mar paid $2.5 million dollars more than the shopping center was worth, what makes them immune from taking responsibility for this $2.5 million dollar error in judgment? And 3. If this City Council were truly acting as stewards of the public treasury, why would you even consider using public money to correct this alleged $2.5 million developer-problem?

    In a free-market economic system, private business enterprises should have the opportunity and the freedom to succeed and to enjoy the fruits of their success. By the same token, they should also have the freedom to fail and suffer whatever consequences that brings. Thousands of other businesses enterprises across our city play by these rules every day without the government parachute or the backing of the public treasury that is being considered for this private group. Why should the Ken Mar shopping center group be an exception to these rules?

    Please vote against the proposed TIF.

  • Wichita City Council’s misunderstanding of tax increment financing

    On July 8, 2008 I testified at a public hearing at a Wichita city council meeting. Afterward, a council member told me that I had a “glaring error” in my arguments. I won’t identify this member in order to avoid embarrassing the member. The minutes of the meeting don’t identify the member who said this, but video is available.

    My purpose in testifying that day was not to question the merits of tax increment financing (TIF) districts. Instead, I was identifying an ethics problem that a Wichita school board member has regarding his involvement in a proposed TIF district. (See Reverend Kevass Harding and His Wichita TIF District.) In my testimony I stated, with a qualification, that the applicant for this TIF district was asking for relief from paying some of the property tax for his real estate development. After my testimony, a council member told me that I was wrong, that the TIF district won’t allow someone to avoid paying property taxes. True, I said. It was sloppy for me to have said that without clarification, but it wasn’t the point I was making that day.

    But since the city council member brought up the point, let’s examine how TIF districts work. I am sure you will be able to agree that the use of TIF districts allow developers to effectively avoid paying some of their increased property taxes.

    In material prepared by Wichita’s Office of Urban Development and presented at the March 18, 2008 city council meeting, we may read this: “The developers have identified a financing shortfall of $2.5 million, for which they are seeking tax increment financing assistance. The preliminary project budget presented to City staff indicates that TIF funds would need to be used for site acquisition costs in order to spend $2.5 million on project costs eligible for TIF funding.”

    So without the formation of the TIF district, the developers are $2.5 million short. With the TIF district, they’ve got the money they need. We must conclude, then, that the TIF district financing, no matter what it is used for, is worth $2.5 million to the developers.

    Now if the developers borrowed that money from a bank, they’d pay back the loan over some period of years. Each year, out of the cash flow the project generates, the developers would have to make the loan payments, and also, just like everyone else, they’d have to pay their property taxes. (Those taxes have increased as now the development is worth more due to the improvements made by the developer. That’s the “increment” in TIF.)

    But with a TIF district, the “bank” is the City of Wichita, which issued bonds to pay for the benefits the developers needed to make the project work. So the developers have to pay back the city. But instead of making payments on a loan from a bank and their property taxes, all the TIF developers have to do is pay their property taxes. By merely paying the same taxes that everyone else has to pay, their loan (the bonds issued by the City of Wichita) is repaid.

    That’s why a TIF district allows developers to effectively avoid paying some of the increased property taxes on their development. When a development is undertaken without the benefit of a TIF district, developers have to repay loans and pay higher taxes. With a TIF district, all the developers have to pay is higher taxes.

    It is as simple as this.

  • Reverend Kevass Harding and His Wichita TIF District

    Remarks to be delivered to the Wichita City Council, July 8, 2008.

    Mr. Mayor and members of the council, today I will not discuss the desirability of tax increment financing (TIF) districts in general, or the merits of this one in particular. I’ll leave that for the August 12 public hearing. Instead, I wish to express my concerns about a thorny situation involving the applicant and overlapping governmental jurisdictions.

    In Wichita, Reverend Kevass Harding, a member of the USD 259 (Wichita public school district) board is also a real estate developer. His development group is asking the City of Wichita for the creation of a tax increment financing district (New life for Ken-Mar Shopping Center: Harding plans to revitalize 13th Street mall, March 14, 2008 Wichita Business Journal).

    In Kansas, when a city creates a TIF district, the affected county and school district have 30 days to veto its creation. When Wichita creates TIF districts, the county and school district usually agree. To my knowledge, there has been no veto by either. These overlapping taxing jurisdictions don’t have to pass a resolution to agree to the TIF district. All they have to do is not pass a resolution that vetoes it.

    In this case, Reverend Harding is asking Wichita for relief from paying some of the property tax for his real estate development. (Some might disagree that the TIF district provides relief from paying taxes, but that’s not important for now. It is undoubtedly a benefit of some type, and that’s what matters.) Then the Wichita public school board, Reverend Harding being a member of that, has to give its agreement for the TIF district to proceed.

    The problem is that the way the school board indicates its agreement to the establishment of the TIF district is by doing nothing. Only passive agreement is required. Negative action is what is required. If the school board was required to pass a resolution agreeing to the TIF district, Reverend Harding could declare a conflict of interest and sit out the vote. That’s positive action. That happened last week in this very chamber.

    But since no vote is required by Reverend Harding or his board — only passive assent — how can we ask him to recuse himself? Can we insist that he cease to do nothing? That’s the problem with requiring someone to take negative action.

    So what do we do?

    The best solution is for Reverend Harding to withdraw his request for the creation of the TIF district that benefits his development. Then there is no problem with conflicts of interest. This is also congruent with Reverend Harding’s votes to increase taxes while a member of the school board. His business would pay the same taxes he demands others pay.

    Failing that, one way we could handle this situation is that the city could ask the school board to agree to pass a resolution agreeing to the TIF, even through they aren’t required to do this. Then Reverend Harding could publicly acknowledge his conflict of interest and step aside.

    But should the City of Wichita even care about this? Is it the city’s responsibility to ensure that other governmental entities act ethically and transparently?

    In the end, it may not matter, as to my knowledge, neither Sedgwick County nor the Wichita public school district has vetoed the creation of a TIF district passed by the City of Wichita. But I think the citizens of Wichita and USD 259 would appreciate this situation resolved in a way that avoids all conflicts of interest.

  • In Wichita, is Economic Development Proven Public Policy?

    In a statement read by Wichita Mayor Carl Brewer and released on the city’s website at Mayor Brewer Warren Theatre [sic] Statement, the mayor states “Economic development is proven public policy.” The word “proven” was used several other times in the statement.

    (I don’t know who wrote the title to the statement, but it combines the mayor’s name with theater developer Bill Warren’s name in a way that is, I am sure, unintentionally humorous. Mayor Brewer Warren? Who is he?)

    The Warren Theater economic development project is one example of economic development that has proven not to work, despite the mayor’s claims.

    But that is only my opinion. The definition of success, I realize, could mean different things to different people. To me, I would expect that once a development is given a huge head start with millions of dollars in subsidy provided through tax increment financing, that after a few years it would at least be breaking even. Certainly, I would hope — and I think the people of Wichita agree — that the project does not become a continual drain on the resources of the people of Wichita, as the Old Town Warren Theater has become.

    But it appears that Mayor Brewer and council member Sharon Fearey have a different definition of success. To them, tax increment financing is not a subsidy to a developer. It’s an investment by the city. All it’s used for, according to Fearey, is to pay bonds: “Under a TIF, the additional property taxes generated by new development are used to repay bonds. No dollars go to private developers.” (Sharon Fearey: Warren loan is an investment in future, July 1, 2008 Wichita Eagle)

    Ms. Fearey, may I ask this question: the proceeds from the bonds that were issued: how are they spent?

    An interest-free or reduced-interest loan is not a subsidy according to the mayor, it’s “targeted economic development.” It’s a “public-private partnership.” Without it, our taxpayer dollars would not be protected.

    John Todd tells me that there is a groundswell of resentment building in Wichita over this loan. I hope that in the coming months this increased interest in the economic development activities of the Wichita city government leads to more discussion of what path we want to pursue in Wichita. Do we want more private initiative and entrepreneurship, or do we want more politicians and bureaucrats?

  • The harmful effects of Wichita’s special tax favors

    In the past few weeks a handful of companies in Wichita have asked to be exempted from paying property taxes on investments they have made. This week Wichita may decide to grant special tax treatment to a large development in downtown Wichita.

    Is it wise for the City of Wichita to grant these special tax favors?

    Because capital for investment is in short supply, it is important that our economy allocate it where it does the most good, where it is valued most. Markets do a very good job of this when they operate free of government meddling. When government intervenes, however, decisions about how to allocate investment capital will be made for all sorts of non-economic reasons.

    Here in Wichita, for example, there are some who believe that downtown Wichita suffers from underinvestment when compared to some of the city’s outlying areas. These people — many of them holding political office or a quasi-governmental position — seek to use government and its ability to tax (or not to tax) to achieve their goals. They have passed measures like the sales tax to fund the downtown Wichita arena. Downtown developers and businesses are given tax breaks, tax abatements, and they may obtain low-interest loans backed by the credit of the City of Wichita. A special tax district overlays downtown, with the proceeds being used to promote downtown’s interest in receiving more governmental largesse. Downtown is also filled with special tax increment financing or TIF districts, where property tax revenues that would normally be used to fund the general operations of government are instead diverted to enhance the profitability of the developer’s project.

    All this favorable treatment means that projects that would not be feasible on their own merits are undertaken because they satisfy a political agenda. This results in misallocation of scare capital. It’s also not fair to those who risk their own capital without receiving special government favor, meaning that we may have less investment overall in Wichita because of reluctance to compete with tax-favored investors.

    This interventionism is also harmful in that it creates a special class of firms: those firms who have asked for and received government favor. They gain a competitive advantage over their direct competitors. As Karl Peterjohn of the Kansas Taxpayers Network has taught me, these firms also have a competitive advantage over other firms of all types in Wichita. That’s because firms of all types that don’t receive special tax favors have higher overhead, and therefore may not be able to compete with the tax-favored firms in paying attractive wages to obtain employees.

    This interventionism is harmful again because it creates a class of political entrepreneurs rather than market entrepreneurs. Instead of seeking to create products and services that please customers, they seek to please politicians and bureaucrats. This behavior, called rent-seeking, produces nothing of value to the economy as a whole.

    Furthermore, if what those who seek special tax treatment say is true, that is, that the projects they propose would not be feasible if they had to pay their taxes, we have a serious problem: we have taxes that are so high that they inhibit private investment.

    Finally, when government reduces someone’s tax and doesn’t reduce its own spending, the rest of the taxpayers have to make up the difference.

    I propose a partial solution to this problem that will help our leaders become aware of the cost of this problem, and will also alleviate some of the inequity. When the City of Wichita (or any other taxing authority) grants special tax treatment, it must reduce its spending by the same amount. By following this simple rule, the City can be reminded of the cost of granting special tax favors, and the rest of us won’t have to pay for them.