Voice For Liberty

Tag: Tax increment financing

  • Paying taxes, but not quite

    TaxesA complicated economic development mechanism used in Wichita hides the true business welfare transaction.

    In today’s Wichita Eagle “serial entrepreneur” and hotelier Jack DeBoer talks about a new apartment project to be built in downtown Wichita, just across the Arkansas River from the WaterWalk development.

    In the article, the reporter writes:

    The Wichita apartments are expected to be complete by spring 2014, DeBoer said. They will be on 4.4 acres of city-owned land, which Value Place is leasing for $1 a year for 93 years. That agreement was approved by the Wichita City Council last September. DeBoer noted that Value Place is not receiving any other incentives. “We’ll pay full taxes.”

    Two things: First, DeBoer gets to use 4.4 acres of land for 93 years for a total cost of $93.00. The city paid $919,695 to acquire the land in 1994 and 1995. The city did, however, require DeBoer to pay the full $93 in advance.

    Second, the claim of paying full taxes: This project is located within a tax increment financing (TIF) district. The entire purpose of TIF is to capture the property taxes being paid and divert the funds to the benefit of the payer.

    (Strictly, only the increment in property tax is routed back to the payer. Usually almost all the property tax paid falls in the increment. For more about this particular development, see Wichita WaterWalk apartment deal not good for citizens.)

    So, when we narrowly construe DeBoer’s claim, he’s correct. But in the larger context, when we follow the money and look at the true economic transactions, he’s wrong. And the Wichita Eagle doesn’t notice, or doesn’t care.

    TIF is great for those who get it. But what about the rest of us? Regarding the effect of tax increment financing (TIF) districts on economic development, economists 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.

  • Downtown Wichita: What happened?

    Recently commercial real estate agent Patrick Ahern was interviewed by the Wichita Eagle. A few portions of the interview relate directly to public policy.

    How is the downtown market reacting to the slow disappearance of the Minnesota Guys?

    The buildings they condoed, by selling the floors off, has created quite a mess. You have multiple property owners in one building. Some owners have the resources to fix things and others don’t, and the ones who do don’t want to pay for the guy who doesn’t. But that will work itself out through the foreclosure process. And two of their buildings went to auction — Farmers and Bankers, and the Landmark building. Kaufman is being foreclosed on, and it’s no secret that at the Wichita Executive Centre, the lender has taken over operations and is making the decisions now. So, the market is shaking them out. They’re swirling the drain.

    On the condominium ownership of office building floors: Two years ago the Wichita Business Journal reported on this decline: “Prices on two bank-owned floors at the Broadway Plaza building — at the corner of Douglas and Broadway — were reduced last week to just $59,000 apiece. … They are just two of a handful office condo floors that originally were developed by Minnesota-based Real Development Corp. Most of them were sold to California investors, and many of them subsequently landed in foreclosure. Prices since then have plummeted.”

    Some of these floors carried mortgage loans of over $400,000 not long ago.

    Broadway Plaza Building, Wichita, KS

    Tax values on these properties have fallen, too. According to Sedgwick County records, a typical floor in the Broadway Plaza building was appraised at around $387,000 in 2007. In 2013, the same property is appraised at only $92,000. This drop in real estate values is not reflective of the general trend of office values in downtown Wichita. A survey by two real estate firms shows rents for both class A and class B office space holding steady in downtown over the same time period.

    While the floors in question are not currently owned by Real Development, and that company did not default on bank loans, the projects were developed and marketed by Real Development. And at the same time these values were plummeting, the Wichita City Council judged it was wise economic development strategy to award the Minnesota Guys millions in tax increment financing. The developers were never able to tap that financing, however.

    For another downtown building, the Minnesota Guys stopped paying special assessment taxes as part of the city’s facade improvement program. The city says that these loans carry very low risk. In this case, it’s likely the city will get its money, but several years late, and only as part of the building’s foreclosure proceedings. (Bank of Kansas seeks to foreclose on Kaufman Building in downtown Wichita, June 12, 2013 Wichita Eagle)

    Also, Ahern talked about the Intrust Bank Arena in downtown Wichita, which was sold to voters as an engine of economic development.

    Intrust Bank Arena, Wichita, KS

    Nothing has bloomed up around the arena. Why?

    On the nights when you have a major event, say Billy Joel, the restaurants in the area, like Cafe Bel Ami, are sold out. The nights when you have hockey games, not so much. If there was a major event more frequently, maybe stuff would have popped up around it. But there is not enough going on to support a new sports bar across the street.

    So, does that mean we’ll never see any economic overflow from the arena?

    I don’t think so. I see people coming from western Kansas, from Hutch or wherever, coming to country concerts, staying overnight, eating out and whooping it up at Old Town. Even with the smaller stuff, like the hockey games, there is some economic benefit.

    This sober assessment is quite different than from what arena boosters promised.

    The full article is A conversation with Patrick Ahern.

  • Derby forms a TIF district

    The city of Derby, Kansas has formed a tax increment financing (TIF) district. TIF is a method of diverting the normal flow of property tax revenue so that it benefits private interests rather than the public treasury.

    In Kansas, cities form TIF districts. Then, any affected county and school district may vote to veto its formation. They have 30 days to do this. If they take no action, they lose their ability to veto, and the TIF district is created.

    The Sedgwick County Commission will consider whether to veto the formation of this TIF district next Wednesday.

    Here are documents related to this project:

    Derby North Gateway TIF Analysis. Analysis of Derby North Gateway Tax Increment Financing (TIF) District, prepared by Sedgwick County finance department.

    Derby North Gateway TIF District Feasibility Study. Redevelopment Project Financial Feasibility Study, Derby North Gateway TIF District, City of Derby, Kansas, March 29, 2013.

    New city taxing district dependent upon Menards. Derby Informer news article.

    For background on TIF, I’ve prepared a collection of resources at Tax increment financing district (TIF) resources.

  • Ambassador Hotel Industrial Revenue Bonds

    The City of Wichita should not approve a measure that is not needed, that does not conform to the city’s policy (based on relevant information not disclosed to citizens), and which is steeped in cronyism.

    This week the Wichita City Council will consider authorizing industrial revenue bonds (IRB) for the Ambassador Hotel project in downtown Wichita.

    In most cases, the major benefit of IRBs is exemption from paying property taxes. Since the Ambassador Hotel is located within a tax increment financing (TIF) district, it’s not eligible for property tax abatement. (Because of the TIF, the developers have already achieved the diversion of the majority of their property tax payments away from the public treasury for their own benefit.)

    Instead, in this case the benefit of the IRBs, according to city documents, is an estimated $703,017 in sales tax that the hotel won’t have to pay.

    The Ambassador Hotel has benefited from many millions of taxpayer subsidy, both direct and indirect. So it’s a good question as to whether the hotel deserves another $703,017 from taxpayers.

    But if we follow the city’s economic development policy, the city should not authorize the IRBs. Here’s why.

    The Sedgwick County/City of Wichita Economic Development Policy states: “The ratio of public benefits to public costs, each on a present value basis, should not be less than 1.3 to one for both the general and debt service funds for the City of Wichita; for Sedgwick County should not be less than 1.3 overall.”

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

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

    The same 2.62 to one ratio is cited as a positive factor in the material prepared by the city for Tuesday’s meeting.

    So far, so good. 2.62 is greater than the 1.3 that city policy requires. But the policy applies to both the general fund and the debt service fund. So what is the impact to the debt service fund? Here’s the complete story from the WSU CEDBR report (the report may be viewed at Wichita State University Center for Economic Development and Business Research Study of Ambassador Hotel):

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

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

    Furthermore, the cost of the Ambassador Hotel subsidy program to the general fund is $290,895, while the cost to the debt service fund is $7,077,831 — a cost factor 23 times as large. That’s why even though the general fund impact is positive, the negative impact of the much larger debt service fund cost causes the overall impact to be unfavorable.

    The city didn’t make this negative information available to the public in 2011, and it isn’t making it available now. It was made public only after I requested the report from WSU CEDBR. It is not known whether council members were aware of this information when they voted in 2011.

    So the matter before the council this week doesn’t meet the city’s economic development policy standards. It’s not even close.

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

    A note: The policy cited above was passed in August 2012, after the Ambassador Hotel incentives package passed. But the 1.3 to one threshold was de facto policy before then, and whether a proposed incentive package met that standard was often a concern for council members, according to meeting minutes.

    Timing and campaign contributions

    Citizens might wonder why industrial revenue bonds are being issued for a hotel that’s complete and has been operating for over three months. The truly cynical might wonder why this matter is being handled just two weeks after the city’s general election on April 2, in which four city council positions were on the ballot. Would citizens disagree with giving a hotel $703,017 in sales tax forgiveness? Would that have an effect on the election?

    Campaign contributions received by James Clendinin from parties associated with Key Construction. Clendenin will vote tomorrow whether to grant sales tax forgiveness worth $703,017 to some of these donors.Campaign contributions received by James Clendinin from parties associated with Key Construction. Clendenin will vote tomorrow whether to grant sales tax forgiveness worth $703,017 to some of these donors. (Click for larger view.)

    Combine this timing with the practice of part of the hotel’s ownership team of engaging in cronyism at the highest level. Dave Burk and the principals and executives of Key Construction have a history of making campaign contributions to almost all city council candidates. Then the council rewards them with overpriced no-bid contracts, sweetheart lease deals, tax abatements, rebates of taxes their customers pay, and other benefits. The largesse dished out for the Ambassador Hotel is detailed here. This hotel, however, was not the first — or the last time — these parties have benefited from council action.

    Campaign contributions received by Lavonta Williams from parties associated with Key Construction. Williams will vote tomorrow whether to grant sales tax forgiveness worth $703,017 to some of these donors.Campaign contributions received by Lavonta Williams from parties associated with Key Construction. Williams will vote tomorrow whether to grant sales tax forgiveness worth $703,017 to some of these donors. (Click for larger view.)

    Campaign finance reports filed by two incumbent candidates illustrate the lengths to which Key Construction seeks to influence council members. Wichita City Council Member James Clendenin (district 3, southeast and south Wichita) and Wichita City Council Member Lavonta Williams (district 1, northeast Wichita) received a total of $7,000 from Key Construction affiliates in 2012. Williams received $4,000, and $3,000 went to Clendenin. For Williams, these were the only contributions she received in 2012.

    A table of campaign contributions received by city council members and the mayor from those associated with the Ambassador Hotel is available here.

    Wichita mayor Carl Brewer with major campaign donor Dave Wells of Key Construction. Brewer will vote tomorrow whether to grant a company Wells is part owner of sales tax forgiveness worth $703,017.

    This environment calls out for campaign finance reform, in particular laws that would prohibit what appears to be the practice of pay-to-play at Wichita City Hall.

    There was a time when newspapers crusaded against this type of governance. Unfortunately for Wichitans, the Wichita Eagle doesn’t report very often on this issue, and the editorial board is almost totally silent. Television and radio news outlets don’t cover this type of issue. It’s left to someone else to speak out.

  • Wichitans have choices; perhaps not information

    The Wichita Eagle publishes a voter guide before each election. While this is a useful civic service, readers of the newspaper might wonder what is the point of allowing candidates to make statements and claims without being held accountable.

    Here are two examples of candidates responding to the question “Assess the city’s success in downtown revitalization so far. How do you see that role evolving in the future?”

    Council Member Lavonta Williams (district 1, northeast Wichita) responded as follows:

    The trend in downtown redevelopment is showing a definite payoff in private investment exceeding $250 million since 2009. People are moving downtown and more private developers are starting projects in the area all of the time. I think that the city will still need to play a role in assuring that infrastructure, especially public green spaces and strategically placed parking, is in place so that private development can be attracted.

    Council Member Janet Miller (district 6, north central Wichita) answered this way:

    Wichita adopted its Downtown Master Plan in 2010 following an 18-month process involving input from several thousand Wichitans. Since the plan’s adoption, there has been a growing confidence in downtown development, which has resulted in more than $150 million in private investment. The City’s role will be to continue to foster private investment supported by public infrastructure improvements where needed.

    Both incumbent candidates claim a large investment in downtown Wichita. Although they didn’t make this claim in these answers, it’s usually claimed that the taxpayer investment in downtown pays off in the form of increased tax revenues. This is the cost-benefit analysis that the city relies on and uses to justify taxpayer investment in projects.

    Wichita Downtown Self-supporting Municipal Improvement District SSMID Assessed Valuation 2013-02 b

    But evidence of a payoff for the taxpayer is hard to find. At the same time hundreds of millions in investment is claimed, the assessed value of property in downtown Wichita is declining.

    We’re left to wonder whether readers of the Wichita Eagle are aware of the apparent contradiction between candidates’ claims and evidence from the real world.

    On another issue, the influence of campaign contributions, readers of the Eagle will probably also be uninformed about candidates’ actions. In response to the question “How would you handle a vote on an issue involving a campaign contributor?” Council Member James Clendenin (district 3, southeast and south Wichita) supplied this answer:

    No different than any other vote. I will vote for the best interest of the citizens Wichita and District III. I answer directly to the voters.

    Williams answered the same question this way:

    I would continue to handle it the way I always have. The city has good campaign finance laws that make sure no one individual or group can buy a council person’s vote. The law limits the contributions to a low enough amount that no one contribution can make or break a campaign. I treat each donation whether large or small the same and thank the community for their faith and support in what I do.

    The candidates’ lofty claims of independence from campaign contributions are difficult to believe. There is simply too much money given, and the candidates’ actions are too suspect.

    As an example, in 2012, these two candidates received campaign contributions from two sources: A group of principals and executives of Key Construction, and another group associated with theater owner Bill Warren. Except for $1.57 in unitemized contributions to Clendenin, these two groups accounted for all contributions received by these two incumbents.

    Those associated with Key Construction gave a total of $7,000. Williams received $4,000, and $3,000 went to Clendenin.

    Those associated with Warren gave $5,000, all to Clendenin.

    The problem is that both of these groups have benefited from the cronyism of the Wichita City Council, in particular members Williams and Clendenin.

    Here’s one example, perhaps the worst. In August 2011 the council voted to award Key Construction a no-bid contract to build the parking garage that is part of the Ambassador Hotel project, now known as Block One. The no-bid cost of the garage was to be $6 million, according to a letter of intent. Later the city decided to place the contract for competitive bid. Key Construction won the bidding, but for a price $1.3 million less.

    Both Williams and Clendenin voted for this no-bid contract that was contrary to the interests of taxpayers. They didn’t vote for this reluctantly. They embraced it.

    Last summer Williams and Clendenin, along with the rest of the council, participated in a decision to award the large contract for the construction of the new Wichita airport to Key Construction, despite the fact that Key was not the low bidder. The council was tasked to act in a quasi-judicial manner, to make decisions whether discretion was abused or whether laws were improperly applied.

    Judges shouldn’t preside over decisions that hugely enrich their significant campaign contributors. No matter what the merits of the case, this is bad government.

    Williams was also the beneficiary of campaign contributions immediately before a Methodist minister asked the city to approve over two million dollars in tax increment financing. In 2008, the Reverend Dr. Kevass J. Harding wanted to spruce up the Ken-Mar shopping center at 13th and Oliver, now known as Providence Square. Near the end of June, Kevass Harding and his wife contributed a total of $1,000, the maximum allowed by law, to the campaign of Wichita City Council Member Lavonta Williams (district 1, northeast Wichita). This was right before Harding appeared before the city council in July and August as an applicant for tax increment district financing (TIF).

    These campaign contributions, made in the maximum amount allowable, were out of character for the Hardings. They had made very few contributions to political candidates, and they appear not to have made many since then.

    But just before the Ken-Mar TIF district was to be considered for approval, the Hardings made large contributions to Williams, who is the council member representing Ken-Mar’s district. Harding would not explain why he made the contributions. Williams offered a vague and general explanation that had no substantive meaning.

    By the way, this project, under Harding’s management, foundered until the city council offered a bailout. By then Harding had found new partners. No surprise these partners included Key Construction, Williams’ sole source of campaign funds in 2012.

    Wichitans who rely on the Wichita Eagle for advice on voting won’t likely be aware of these facts regarding these candidates.

  • Developer welfare expanded in Kansas

    Money Grabber

    This week the Kansas House of Representatives considered a bill that would expand the application of tax increment financing (TIF) and community improvement district taxes. The bill, HB 2086, is not a major expansion, but is still harmful.

    On Monday the bill failed to pass, with 61 members voting in favor, and 60 against. (63 votes are needed to pass a bill.)

    On the following day, Rep. Scott Schwab made a motion to reconsider. If agreed to, Schwab’s motion would force another vote on the passage of the bill. The motion passed, and when the vote on the bill was tallied, it had passed with 81 votes.

    Democrats who changed their votes from No to Yes are Barbara Ballard, Brandon Whipple, Ed Trimmer, Jerry Henry, Julie Menghini, Nancy Lusk, Patricia Sloop, Paul Davis, Stan Frownfelter, Tom Burroughs and Valdenia Winn.

    Republicans who changed their votes from No to Yes are Dennis Hedke, James Todd, Kelly Meigs, Kevin Jones, Marty Read, Ramon Gonzalez, Scott Schwab, and Vern Swanson.

    One Republican, Marc Rhoades, changed his vote from Yes to No.

    The original coalition of votes that defeated the bill on Monday was a mix of free-market Republicans and Democrats. The free-market members vote against this bill because it is contrary to the principals of capitalism. Many Democrats vote against bills like this because they see it as welfare for greedy developers or other business interests. An example of the latter is Rep. Ed Trimmer, who on the Kansas Economic Freedom Index for last year scored very near the bottom in terms of voting for economic freedom.

    But somehow, he and the other Democrats listed above were persuaded to change their votes.

    (Click here to open spreadsheet in new window.)

  • Carl Brewer: The state of Wichita, 2013

    Wichita Mayor Carl Brewer, State of the City Address, January 29, 2013Much like President Barack Obama in his recent inaugural address, Wichita Mayor Carl Brewer displayed his collectivist instincts in his “State of the City” address for 2013. His speech, as prepared, may be read here.

    Opening, the mayor said “Wichita has overcome great challenges in the past and will overcome these as well, but we’ll need to work together.”

    Near the close, the mayor said “THE TIME FOR ACTION IS NOW! We have reached a point where we MUST come together as a community, and create a plan that defines our priorities and the City we are to become.” And then: “For all of our differences, I have never doubted this community’s ability to come together and protect what matters most.” (The capitalization is in the mayor’s prepared text.)

    But what’s really important to Wichita is economic development. Regarding that, Brewer said this:

    As we struggle to compete for new businesses and new jobs, especially in light of job losses in aviation, we must face the reality that we are competing with other cities that offer economic incentives for business development and expansion. If we want to be IN the game, we need to PLAY the game, but we have no dedicated funding source for economic development. If we’re serious about finding new jobs for our people — and I am — we must change this scenario as soon as possible. Where will those incentive dollars come from? (Capitalization, again, is from the original.)

    The idea of a dedicated funding source for economic development is something that many in Wichita would support. Many would oppose it, too. But instead of just lobbing rhetorical questions (Where will those incentive dollars come from?), the mayor should give us some answers. Or, at least make a specific proposal. Does the mayor recommend a sales tax increase? Or allocating specific levels of property tax to economic development? (The city is doing this on a temporary basis.) Or asking the state legislature to fund Wichita’s economic development, as we insist the legislature fund our airline subsidy program?

    Whatever it is, Mayor Brewer, give us some specific ideas as to how you want to raise this money, and how you would spend it.

    It’s that spending, I think, that people in Wichita have concern over. The cumulative record of Brewer, the city council, and city bureaucratic staff hasn’t inspired trust and confidence. Giving the city additional dollars to spend on economic development is not a wise investment.

    For example, the mayor says that subsidizing downtown development is good economic development strategy. But we see the mayor and nearly all council members voting to give an overpriced no-bid contract to their significant campaign contributors. This happened despite the company’s large cost overruns on previous no-bid contracts awarded by the city. Is that good economic development practice?

    We see the city council sitting in a quasi-judicial role, adjudicating the award of an airport construction contract when one of the parties is a significant campaign contributor. In fact, Key Construction — the company that prevailed in that decision — through its principals and executives, was the sole source of campaign funds raised by Lavonta Williams (district 1, northeast Wichita) in 2012 as she prepared to run for reelection this spring.

    Key’s executives also contributed heavily to James Clendenin (district 3, southeast and south Wichita) last year. He’s running this spring, too.

    At the time this airport contract was being handled, Council Member Jeff Longwell (district 5, west and northwest Wichita) was campaigning for the Sedgwick County Commission. Campaign finance reports revealed contributions from parties associated with Walbridge, a Michigan construction company. Why would those in Michigan have an interest in helping a Wichita City Council member fund his campaign for a county office? Would the fact that Walbridge is a partner with Key Construction on the new airport terminal, and that Longwell would be voting on that contract, provide a clue?

    Or: A movie theater owner and business partners contribute to the mayor’s (and other) campaigns. Mayor and council vote to give a no-interest and low-interest loan and tax breaks to theater owner and his partners. Mayor goes into barbeque sauce business. Mayor’s barbeque sauce is now sold at movie theater.

    Doesn’t Carl Brewer see anything wrong with this? Don’t his advisors tell him that this creates the appearance of impropriety? Does the mayor consider whether these actions make a positive impression on those who might want to invest in Wichita?

    We see the city awarding economic development incentives that were not necessary for the project to proceed. It took a special election to teach the mayor and council that lesson. By the way, that unneeded and rejected incentive was awarded to the significant campaign contributors of Mayor Brewer and most council members.

    We see the city taking credit for building up the tax base, yet giving away tax revenue in the form of property tax abatements, IRBs, tax increment financing, and STAR bonds.

    The bureaucratic missteps: The Southfork TIF district is just the latest example.

    The lack of respect for citizens’ right to know how taxpayer funds are spent is another troubling aspect of Brewer’s tenure as mayor. None of the words “accountability,” “transparency,” or “open government” were mentioned in the mayor’s address this year, as they have been in the past. No sense in calling attention to an area where the city has failed, I suppose.

    All this is done in the name of economic development and jobs. But Wichita is underperforming Kansas and the nation in these areas. Under Brewer’s leadership, however, we are overachieving in the advancement of cronyism and its ills.

    The record indicates that our officeholders, and those who advise them, are not worthy of our trust, and certainly not more taxes for economic development.

    After last year’s State of the City speech, I noted “Wichita’s mayor is openly dismissive of economic freedom, free markets, and limited government, calling these principles of freedom and liberty ‘simplistic.’ Instead, his government prefers crony capitalism and corporate welfare.”

    I also wrote: “Relying on economic freedom, free markets, and limited government for jobs and prosperity means trusting in free people, the energy of decentralized innovation, and spontaneous order. A government plan for economic development is the opposite of these principles.”

    This year, the outlook for economic freedom and limited government in Wichita is gloomier than ever before. The door for those who wish to profit through cronyism is wide open. We’ll have to hope that, somehow, Wichita can learn to thrive under this regime.

  • Economic development in Wichita, the next step

    Critics of the economic development policies in use by the City of Wichita are often portrayed as not being able to see and appreciate the good things these policies are producing, even though they are unfolding right before our very eyes. The difference is that some look beyond the immediate — what is seen — and ask “And then what will happen?” — looking for the unseen.

    Thomas Sowell explains the problem in a passage from the first chapter of Applied economics: thinking beyond stage one:

    When we are talking about applied economic policies, we are no longer talking about pure economic principles, but about the interactions of politics and economics. The principles of economics remain the same, but the likelihood of those principles being applied unchanged is considerably reduced, because politics has its own principles and imperatives. It is not just that politicians’ top priority is getting elected and re-elected, or that their time horizon seldom extends beyond the next election. The general public as well behaves differently when making political decisions rather than economic decisions. Virtually no one puts as much time and close attention into deciding whether to vote for one candidate rather than another as is usually put into deciding whether to buy one house rather than another — or perhaps even one car rather than another.

    The voter’s political decisions involve having a minute influence on policies which affect many other people, while economic decision-making is about having a major effect on one’s own personal well-being. It should not be surprising that the quantity and quality of thinking going into these very different kinds of decisions differ correspondingly. One of the ways in which these decisions differ is in not thinking through political decisions beyond the immediate consequences. When most voters do not think beyond stage one, many elected officials have no incentive to weigh what the consequences will be in later stages — and considerable incentives to avoid getting beyond what their constituents think and understand, for fear that rival politicians can drive a wedge between them and their constituents by catering to public misconceptions.

    The economic decisions made by governing bodies like the Wichita City Council have a large impact on the lives of Wichitans. But as Sowell explains, these decisions are made by politicians for political reasons.

    Sowell goes on to explain the danger of stopping the thinking process at stage one:

    When I was an undergraduate studying economics under Professor Arthur Smithies of Harvard, he asked me in class one day what policy I favored on a particular issue of the times. Since I had strong feelings on that issue, I proceeded to answer him with enthusiasm, explaining what beneficial consequences I expected from the policy I advocated.

    “And then what will happen?” he asked.

    The question caught me off guard. However, as I thought about it, it became clear that the situation I described would lead to other economic consequences, which I then began to consider and to spell out.

    “And what will happen after that?” Professor Smithies asked.

    As I analyzed how the further economic reactions to the policy would unfold, I began to realize that these reactions would lead to consequences much less desirable than those at the first stage, and I began to waver somewhat.

    “And then what will happen?” Smithies persisted.

    By now I was beginning to see that the economic reverberations of the policy I advocated were likely to be pretty disastrous — and, in fact, much worse than the initial situation that it was designed to improve.

    Simple as this little exercise may sound, it goes further than most economic discussions about policies on a wide range of issues. Most thinking stops at stage one.

    We see stage one thinking all the time when looking at government. In Wichita, for example, a favorite question of city council members seeking to justify their support for government intervention such as a tax increment financing (TIF) district or some other form of subsidy is “How much more tax does the building pay now?” Or perhaps “How many jobs will (or did) the project create?”

    These questions, and the answers to them, are examples of stage one thinking. The answers are easily obtained and cited as evidence of the success of the government program.

    But driving by a store or hotel in a TIF district and noticing a building or people working at jobs does not tell the entire story. Using the existence of a building, or the payment of taxes, or jobs created, is stage one thinking, and no more than that.

    Fortunately, there are people who have thought beyond stage one, and some concerning local economic development and TIF districts. And what they’ve found should spur politicians and bureaucrats to find ways to move beyond stage one in their thinking.

    An example are economists Richard F. Dye and David F. Merriman, who have studied tax increment financing extensively. Their article Tax Increment Financing: A Tool for Local Economic Development 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 that receives the subsidy — not a surprising finding. 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.

    In a different paper (The Effects of Tax Increment Financing on Economic Development), the same economists wrote “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not. … 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.”

    Here we have an example of thinking beyond stage one. The results are opposite of what one-stage thinking produces.

    Some city council members are concerned about creating jobs, and are swayed by the promises of developers that their establishments will employ a certain number of workers. Again, this thinking stops at stage one. But others have looked farther, as has Paul F. Byrne of Washburn University. The title of his recent report is Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth, and 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.

    While this research might be used to support a TIF district for industrial development, TIF in Wichita is primarily used for retail development. And, when thinking beyond stage one, the effect on employment — considering the entire city — is negative.

    It’s hard to think beyond stage one. It requires considering not only the seen, but also the unseen, as Frederic Bastiat taught us in his famous parable of the broken window. But over and over we see how politicians at all levels of government stop thinking at stage one. This is one of the many reasons why we need to return as much decision-making as possible to the private sector, and drastically limit the powers of politicians and governments.

  • Americans for Prosperity-Kansas applauds Sedgwick County Commission for rejecting public financing for Bowllagio

    TOPEKA, KAN — The Kansas chapter of the grassroots group Americans for Prosperity applauds the Sedgwick County Commission for rejecting the proposed tax-increment financing (TIF) district for the Bowllagio development in Wichita.

    “We are pleased that Sedgwick County commissioners unanimously voted against public funding for this entertainment development,” said AFP-Kansas grassroots coordinator Susan Estes. “Commissioners apparently realized it wasn’t a good deal for taxpayers in Wichita and Sedgwick County.”

    Estes said this proposed development was another example of a developer receiving several layers of public financing, and that additional public financing would give the Bowllagio developers an unfair advantage over competing businesses.

    “Those who will benefit from today’s vote are the taxpayers and the existing businesses who have worked for years to invest in this community,” she said. “This would have been just another example of government picking winners and losers in the marketplace.”

    Although some may say today’s vote was a “win” for opponents of the TIF district, Estes says it was more of a win for good government.

    “This isn’t a victory in the traditional sense,” she said. “The bottom line is, we believe the Sedgwick County Commissioners today acted in the best interests of their constituents.”

    From Americans for Prosperity-Kansas.